Exhibit 10.1


 


ASSET PURCHASE
AGREEMENT


by and among


ZALE CORPORATION,


ZALE DELAWARE,
INC.,


TXDC, L.P.,


FINLAY FINE
JEWELRY CORPORATION


and, for limited
purposes,


FINLAY
ENTERPRISES, INC.


September 27, 2007


 

















 


TABLE OF CONTENTS


	
   

  	
  Page

  
	
  ARTICLE I

  	
  Purchase and Sale of Acquired Assets; Assumption of Assumed
  Liabilities

  	
  1

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 1.1

  	
  Purchase and
  Sale

  	
  1

  
	
   

  	
  SECTION 1.2

  	
  Acquired Assets
  and Excluded Assets

  	
  1

  
	
   

  	
  SECTION 1.3

  	
  Assumption of
  Liabilities

  	
  6

  
	
   

  	
  SECTION 1.4

  	
  Purchase Price

  	
  8

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  The Closing

  	
  9

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 2.1

  	
  Closing Date

  	
  9

  
	
   

  	
  SECTION 2.2

  	
  Transactions to
  be Effected at the Closing

  	
  9

  
	
   

  	
  SECTION 2.3

  	
  Inventory
  True-Up

  	
  10

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  Representations and Warranties of Parent and Sellers

  	
  11

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 3.1

  	
  Organization,
  Standing and Power

  	
  11

  
	
   

  	
  SECTION 3.2

  	
  Authority

  	
  11

  
	
   

  	
  SECTION 3.3

  	
  No Conflicts.

  	
  12

  
	
   

  	
  SECTION 3.4

  	
  Compliance with
  Applicable laws

  	
  12

  
	
   

  	
  SECTION 3.5

  	
  Financial
  Statements, Books and Records

  	
  13

  
	
   

  	
  SECTION 3.6

  	
  Absence of
  Certain Changes

  	
  13

  
	
   

  	
  SECTION 3.7

  	
  Litigation;
  Decrees

  	
  14

  
	
   

  	
  SECTION 3.8

  	
  Title to
  Acquired Assets

  	
  14

  
	
   

  	
  SECTION 3.9

  	
  Real Property

  	
  15

  
	
   

  	
  SECTION 3.10

  	
  Personal
  Property

  	
  15

  
	
   

  	
  SECTION 3.11

  	
  Advertising

  	
  15

  
	
   

  	
  SECTION 3.12

  	
  Intellectual
  Property

  	
  15

  
	
   

  	
  SECTION 3.13

  	
  Insurance

  	
  16

  
	
   

  	
  SECTION 3.14

  	
  Contracts

  	
  16

  
	
   

  	
  SECTION 3.15

  	
  Sufficiency of
  Acquired Assets

  	
  18

  
	
   

  	
  SECTION 3.16

  	
  Environmental
  Matters

  	
  18

  
	
   

  	
  SECTION 3.17

  	
  Taxes

  	
  20

  
	
   

  	
  SECTION 3.18

  	
  Labor Matters

  	
  20

  
	
   

  	
  SECTION 3.19

  	
  Brokers;
  Transaction Bonuses

  	
  20

  
	
   

  	
  SECTION 3.20

  	
  Employee
  Benefits

  	
  21

  
	
   

  	
  SECTION 3.21

  	
  Certain Payments

  	
  21

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
  Representations and Warranties of Purchaser

  	
  21

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 4.1

  	
  Organization,
  Standing and Power

  	
  21

  
	
   

  	
  SECTION 4.2

  	
  Authority

  	
  21

  
	
   

  	
  SECTION 4.3

  	
  No Conflicts

  	
  22

  
	
   

  	
  SECTION 4.4

  	
  Financial
  Ability

  	
  22

  
	
   

  	
  SECTION 4.5

  	
  Litigation

  	
  23

  
	
   

  	
  SECTION 4.6

  	
  Brokers

  	
  23

  
					



 


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  ARTICLE V

  	
  Covenants

  	
  23

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 5.1

  	
  Conduct of
  Business

  	
  23

  
	
   

  	
  SECTION 5.2

  	
  Access to
  Information

  	
  25

  
	
   

  	
  SECTION 5.3

  	
  Inventory

  	
  26

  
	
   

  	
  SECTION 5.4

  	
  Third Party
  Consents

  	
  26

  
	
   

  	
  SECTION 5.5

  	
  Expenses

  	
  27

  
	
   

  	
  SECTION 5.6

  	
  No Additional Representations

  	
  27

  
	
   

  	
  SECTION 5.7

  	
  Certain
  Information

  	
  28

  
	
   

  	
  SECTION 5.8

  	
  Bulk Transfer
  laws

  	
  30

  
	
   

  	
  SECTION 5.9

  	
  Cooperation of
  the Parties; Further Assurances

  	
  30

  
	
   

  	
  SECTION 5.10

  	
  Allocation; Tax
  Matters

  	
  30

  
	
   

  	
  SECTION 5.11

  	
  Proration of
  Certain Assets and Liabilities

  	
  32

  
	
   

  	
  SECTION 5.12

  	
  Supplemental
  Disclosure

  	
  33

  
	
   

  	
  SECTION 5.13

  	
  Parent
  Trademarks

  	
  33

  
	
   

  	
  SECTION 5.14

  	
  Insurance

  	
  34

  
	
   

  	
  SECTION 5.15

  	
  Guarantees of
  Parent and Sellers

  	
  34

  
	
   

  	
  SECTION 5.16

  	
  Governmental
  Approval

  	
  35

  
	
   

  	
  SECTION 5.17

  	
  Commitment
  Letter

  	
  36

  
	
   

  	
  SECTION 5.18

  	
  Nonsolicitation

  	
  36

  
	
   

  	
  SECTION 5.19

  	
  Confidential
  Information

  	
  36

  
	
   

  	
  SECTION 5.20

  	
  True-up for Gift
  Cards and Deposits for Special Orders

  	
  37

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
  Employees

  	
  39

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 6.1

  	
  General

  	
  39

  
	
   

  	
  SECTION 6.2

  	
  Employee
  Benefits

  	
  40

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
  Merchandise

  	
  41

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 7.1

  	
  Merchandise Returns

  	
  41

  
	
   

  	
  SECTION 7.2

  	
  Merchandise Repairs

  	
  42

  
	
   

  	
  SECTION 7.3

  	
  Merchandise Consignments

  	
  42

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  	
  Conditions Precedent

  	
  42

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 8.1

  	
  Conditions to
  Each Party’s Obligation

  	
  42

  
	
   

  	
  SECTION 8.2

  	
  Conditions to
  Obligation of Purchaser

  	
  43

  
	
   

  	
  SECTION 8.3

  	
  Conditions to
  Obligation of Sellers

  	
  44

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IX

  	
  Termination, Amendment and Waiver

  	
  44

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 9.1

  	
  Termination

  	
  44

  
	
   

  	
  SECTION 9.2

  	
  Amendments and
  Waivers

  	
  46

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE X

  	
  Indemnification

  	
  46

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 10.1

  	
  Indemnification
  by Parent and Sellers

  	
  46

  
	
   

  	
  SECTION 10.2

  	
  Indemnification
  by Purchaser and Finlay

  	
  48

  
	
   

  	
  SECTION 10.3

  	
  Losses Net of
  Insurance; No Punitive Damages; Etc.

  	
  49

  
	
   

  	
  SECTION 10.4

  	
  Termination of
  Indemnification

  	
  49

  
						



 


ii

















 


	
   

  	
  SECTION 10.5

  	
  Procedures
  Relating to Third-Party Claims

  	
  50

  
	
   

  	
  SECTION 10.6

  	
  Procedures
  Relating to Non-Third-Party Claims

  	
  51

  
	
   

  	
  SECTION 10.7

  	
  Acknowledgment

  	
  52

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XI

  	
  General Provisions

  	
  52

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 11.1

  	
  Notices

  	
  52

  
	
   

  	
  SECTION 11.2

  	
  Severability

  	
  53

  
	
   

  	
  SECTION 11.3

  	
  Counterparts

  	
  53

  
	
   

  	
  SECTION 11.4

  	
  Entire
  Agreement; No Third Party Beneficiaries

  	
  53

  
	
   

  	
  SECTION 11.5

  	
  Attachments

  	
  53

  
	
   

  	
  SECTION 11.6

  	
  Governing Law

  	
  53

  
	
   

  	
  SECTION 11.7

  	
  Consent to
  Jurisdiction; Waiver of Jury Trial

  	
  54

  
	
   

  	
  SECTION 11.8

  	
  Publicity

  	
  54

  
	
   

  	
  SECTION 11.9

  	
  Assignment

  	
  54

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XII

  	
  Definitions

  	
  55

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 12.1

  	
  Definitions

  	
  55

  
	
   

  	
  SECTION 12.2

  	
  Construction and
  Interpretation of Certain Terms and Phrases

  	
  62

  
	
   

  	
   

  
	
   

  	
   

  
	
  EXHIBITS

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Exhibit A

  	
  Form of Transition Services Agreement

  	
   

  
						



 


 


 


iii
















 


ASSET PURCHASE AGREEMENT


 


This Asset Purchase
Agreement (this “Agreement”) is made and entered into as of September
27, 2007, by and among Zale Corporation, a Delaware corporation (“Parent”),
Zale Delaware, Inc., a Delaware corporation (“Opco”), TXDC, L.P., a
Texas limited partnership (“Inventory Company,” and, together with Opco,
“Sellers”), Finlay Fine Jewelry Corporation, a Delaware corporation (“Purchaser”)
and, for limited purposes, Finlay Enterprises, Inc., a Delaware corporation (“Finlay”).


PRELIMINARY
STATEMENT


WHEREAS, Sellers
currently own certain assets that are operated as a division known as the
Bailey Banks & Biddle brand (the “Business”);


WHEREAS, the Business is
engaged in the business of operating as a specialty retailer of fine jewelry;
and


WHEREAS, Sellers and
Purchaser wish to provide for the sale to Purchaser of the Acquired Assets and
the assumption by Purchaser of the Assumed Liabilities (as such terms are
hereinafter defined), upon the terms and subject to the conditions set forth in
this Agreement.


NOW, THEREFORE, in
consideration of the mutual representations, warranties, covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties,
intending to be legally bound, agree as follows:


ARTICLE I

Purchase and Sale of Acquired Assets; Assumption of Assumed Liabilities


SECTION 1.1  Purchase and Sale.  Upon the terms and subject to the conditions
of this Agreement, at the Closing and for the consideration specified in this
Article I, Sellers agree to sell, assign, transfer, convey and deliver to
Purchaser all of their right, title and interest in, to and under the Acquired
Assets free and clear of all Liens, other than Permitted Liens and the Assumed
Liabilities as of the Effective Time, and Purchaser agrees to purchase, acquire
and accept from Sellers all such right, title and interest in, to and under the
Acquired Assets free and clear of all Liens, other than Permitted Liens and to
assume, be responsible for and perform when due all the Assumed Liabilities.


SECTION 1.2  Acquired Assets and Excluded Assets


(a)  Except as set forth below or in Section
1.2(b), the term “Acquired Assets” shall mean all right, title and
interest of Sellers as of the Effective Time in, to and under all of Sellers’
assets, privileges, claims, rights and properties of whatever kind or nature,
real and personal, tangible and intangible, absolute or contingent, owned, held
or leased by Sellers exclusively related to or primarily used in the operation
of the Business, 


 

















 


including, but not
limited to, the following assets (even if they are not exclusively related to
or primarily used in the Business):


(i)  subject to
the terms of Sections 1.3(c) and 5.4 all leaseholds and other interests in real
property of Sellers listed on Schedule 1.2(a)(i), together with Sellers’
right, title and interest in and to all improvements, facilities, fixtures and
all other appurtenances thereto (the “Real Property”);


(ii)  all
furniture, machinery, equipment, and personal property owned by Sellers that is
located at the Real Property, including without limitation, all counters,
countertops, tables, chairs, shelving, countertop fixtures, showcases, case
elements, display equipment, jewelry fixtures, mirrors, floors, floor
coverings, signholders and signs, lamps, chandeliers and special lighting
fixtures, wall coverings, diamond/cz checkers, safes and associated
combinations, locks and associated keys, alarm system equipment, telephone
equipment, calculators, point of sale terminals, photocopy and facsimile
equipment, repair and other tools, other movable personal property and special
décor (the “Personal Property”);


(iii)  all fine
jewelry, watches, giftware, raw materials, work in process, and other
merchandise that are held for or in connection with the Business and that are
located in Sellers’ central office and distribution center in Dallas/Fort
Worth, Texas (the “Distribution Center”) or at the Real Property or are
in transit to either, but excluding merchandise held on consignment (the “Inventory”);


(iv)  all of
Sellers’ and Parent’s store-level data, including all data relating to the
Leases (as hereinafter defined) used in connection with Accruent Retail Lease
Administration software as well as any documentation relating to Lease
extensions, renewals, proposed modifications, store relocations and closures
(the “Seller Data”);


(v)  all
goodwill relating to the operation of the Business, if any, and all advertising
and promotional materials and all other printed or other written materials
exclusively related to or primarily used in connection with the operation of
the Business;


(vi)  subject to
the terms of Sections 1.3(c) and 5.4, the contracts, distribution arrangements,
vendor, sales, purchase, advertising and similar agreements, equipment leases,
Leases, gift cards, layaway arrangements, independent contractor agreements,
consignment agreements and arrangements transferred in accordance with Section
7.3 hereof, other agreements and business arrangements (written or oral) to
which either Seller or Parent is a party and that are exclusively related to or
primarily used in connection with the operation of the Business (the “Contracts”);


(vii)  the
trademarks, service marks and trade names owned by Sellers or Parent and listed
on Schedule 1.2(a)(vii), and any registrations or applications therefor
and the goodwill appurtenant thereto (the “Specified Marks”);


 


2

















 


(viii)  the
domain names, copyrights, copyright registrations, and copyright licenses
listed on  Schedule 1.2(a)(viii)
and all inventions, trade secrets, confidential know-how, formulae, processes
and procedures exclusively related to or primarily used in connection with the
Business; provided, however, that Sellers shall retain a perpetual, royalty
free non-exclusive right and license to use, sell, lease, license, reproduce,
distribute and modify all trade secrets, confidential know-how, formulae,
processes and procedures which are also currently being used by Sellers in its
other businesses, which license shall be transferable in the event of the sale
or transfer of part or all the assets or stock of Sellers;


(ix)  the
permits, certifications, franchises, licenses, consents, approvals and
authorizations and all pending applications therefor, whether federal, state or
local, held by Sellers or Parent relating exclusively to or primarily used in
connection with the operation of the Business (“Permits”) that are
listed on Schedule 1.2(a)(ix), to the extent their transfer is
permitted under applicable laws;


(x)  all product
packagings, bags, watch and jewelry boxes, cases, packing materials, sales
checks and other forms, paper products, business cards and thank you notes,
cleaning and polishing materials and cloths and other supplies located at the
Real Property or that otherwise are exclusively related to or primarily used in
connection with the operation of the Business (the “Supplies”);


(xi)  copies  of Sellers’ and Parent’s books and records
that are exclusively related to or primarily used in the operation of the
Business including inventory records and lists, price lists, maintenance files,
customer complaints and inquiry files, marketing information, sales records,
records (if any) pertaining to customers (including purchase histories) and
accounts, and lists and records pertaining to suppliers;


(xii)  to the
extent assignable, any telephone lines at the Real Property;


(xiii)  any cash
in the form of legal currency of the United States on hand at any of the
locations of the Business that is used as petty cash in the ordinary course of
the operation of the Business (“Petty Cash”);


(xiv)  any
deposits related exclusively to the Real Property and, subject to the proration
provisions contained in Section 5.11, any current prepaid expenses or other
similar assets exclusively related to the operation of the Business;


(xv)  (A)  all rights, claims, causes of action,
recoveries and rights of reimbursement (whether known or unknown) arising out
of or primarily related  to the Business
or the Acquired Assets or, except as set forth in Section 1.3(b)(x), the
Assumed Liabilities, and (B) all claims and proceeds under Sellers’ or Parent’s
insurance policies arising from or relating to the Acquired Assets or the
Assumed Liabilities occurring or otherwise relating to losses occurring during
the period from the date hereof until the Effective Time (or at such later date
when 


 


3

















 


such Acquired Asset or Assumed Liability is transferred in accordance
with Section 5.4), provided, however, that Sellers shall be
entitled to first satisfy from any such proceeds any losses covered by such
insurance incurred by Sellers with respect to the Acquired Assets or the
Assumed Liabilities from the date hereof until the Effective Time (or at such
later date when such Acquired Asset or Assumed Liability is transferred in
accordance with Section 5.4), and any deductible applicable specifically to
such losses shall be shared by the parties in proportion to the proceeds
received;


(xvi)  all
merchandise on consignment to be transferred to Purchaser pursuant to Section
7.3; and


(xvii) to the extent transferable under applicable
law, all personnel files, workers’ compensation files, employee medical files
and other employee books, operating manuals and records, and affirmative action
plans and related books and records pertaining to the Transferring Employees.


                Notwithstanding
the foregoing, the transfer of the Acquired Assets pursuant to this Agreement
shall not include the assumption of any obligation or liability related to the
Acquired Assets unless Purchaser expressly assumes that obligation or liability
pursuant to Section 1.3(b).


 


(b)  Notwithstanding anything in this Agreement to
the contrary, all assets, properties and rights of Sellers or any of their
affiliates not specifically identified as Acquired Assets pursuant to Section
1.2(a) and the following assets, properties and rights of Sellers or any of
their affiliates (collectively, the “Excluded Assets”), shall be
excluded from and shall not constitute any part of the Acquired Assets:


(i)  other than
Petty Cash, all cash and cash equivalents on hand or in banks, all bank
accounts, all lock box receipts and lock boxes and all certificates of deposit
and other bank deposits owned or held by Sellers or any of their affiliates;


(ii)  all
accounts receivable (the “Accounts Receivable”);


(iii)  all
rights of Sellers or any of their affiliates under this Agreement and the
Ancillary Documents to which they are a party, qualifications to conduct
business, taxpayer and other identification numbers, corporate seals, minute
books, stock transfer records, and any other document relating to the
organization, maintenance or existence of Sellers as legal entities, and all
records of Sellers pertaining to the Excluded Assets and the Excluded
Liabilities;


(iv)  (A)  all records prepared in connection with the
sale of the Business, including bids received from third persons and analyses
relating to the Business, and (B) any confidential information of third parties
that is contained within records relating to the Business and that is not part
of the Acquired Assets, or otherwise held under an obligation of
confidentiality not assumed by Purchaser 


 


4

















 


pursuant to this Agreement or for which consent for such assumption is
necessary and not obtained;


(v)  all rights,
claims, causes of action, recoveries and rights of reimbursement arising out
of, relating to or otherwise in any way in respect of the Excluded Liabilities
or the Excluded Assets, including, except as provided in Section
1.2(a)(xv),  rights, claims, causes of
action and recoveries under insurance policies relating thereto or to the
Business;


(vi)  all rights
to and all claims available to or being pursued by Sellers or any of their
affiliates for refunds of or credits against Taxes attributable to Sellers or
any of their affiliates arising out of, relating to or otherwise in any way in
respect of Pre-Closing Tax Periods (determined as if such taxable period ended
as of the Effective Time);


(vii)  any
consolidated, combined, unitary or separate company Tax Return arising out of,
relating to or otherwise in any way in respect of Taxes that includes Sellers
or any of their affiliates and records and work papers used in preparation
thereof;


(viii)  all
rights of Sellers or any of their affiliates arising out of, relating to or
otherwise in any way in respect of any Intercompany Accounts;


(ix)  any asset arising
out of, relating to or otherwise in any way in respect of any benefit plan of
Sellers, including, but not limited to, the right to receive assets of any such
plan upon termination thereof;


(x)  all
Intellectual Property not specifically included in the Acquired Assets,
including without limitation the items listed on Schedule 1.2(b)(x);


(xi)  all
personnel files, workers’ compensation files, employee medical files and other
employee books, operating manuals and records, and affirmative action plans and
related books and records pertaining to the Employees, except that copies of
such information shall be provided to Purchaser to the extent it relates to
Transferring Employees and is transferable under applicable law;


(xii)  all
policies of insurance of Sellers or any of their affiliates and, except as
provided in Section 1.2(a)(xv), all of the rights of Sellers or any of their
affiliates thereunder;


(xiii)  all
assets, properties and rights of Sellers or any of their affiliates identified
on Schedule 1.2(b)(xiii); and


(xiv)  any
computer equipment or computer software used in connection with the operation
of the Business that is not located at the Real Property or on the point of
sale terminals.


 


5

















 


SECTION
1.3  Assumption of Liabilities.


(a)  Except as set forth below, upon the terms and
subject to the conditions of this Agreement, Purchaser hereby agrees to assume,
from and after the Effective Time, and agrees at all times thereafter to be
responsible for, pay, perform and discharge when due only the following
liabilities, obligations and commitments, whether contingent or otherwise
(collectively, the “Assumed Liabilities”):


(i)  all
obligations and liabilities arising out of consumer warranties, diamond bonds,
trade-in obligations, store credits, merchandise returns and jewelry care
plans;


(ii)  all
obligations and liabilities arising out of, relating to or otherwise in any way
in respect of all Contracts, excluding liabilities occurring or relating to the
period prior to the Effective Time or resulting from any breach arising out of
the assignment of such Contracts;


(iii)  Sellers’
liabilities and obligations for capital expenditures and other costs to be paid
after the Effective Time and made consistent with Section 5.1 hereof  for the acquisition, renovation or repair of
fixed or capital assets of the Business that are also Acquired Assets;


(iv)  to the
extent provided in Article VI, all obligations and liabilities arising out of,
relating to or otherwise in any way in respect of any Transferring Employee
with respect to periods from and after the Effective Time, but excluding any
liabilities or obligations that are Excluded Liabilities as provided in Section
1.2(b)(vi);


(v)  all
obligations and liabilities arising out of, relating to or otherwise in any way
in respect of Taxes attributable to the Business and the Acquired Assets for
all taxable periods from and after the Effective Time;


(vi)  all
obligations and liabilities arising out of, relating to or otherwise in any
respect of Permitted Liens, but only to the extent that any such Permitted Lien
relates to an Assumed Liability under Section 1.3(a)(ii) or Section 1.3(a)(iii)
hereof; and


(vii)  all
obligations and liabilities identified on Schedule 1.3(a)(vii).


Except as expressly provided in this Agreement or in the Ancillary
Documents, Purchaser shall not assume or be liable, nor be deemed to have
assumed or be liable for, any liability or obligation of the Sellers or Parent
of any nature whatsoever.


(b)  Purchaser
will not assume any liabilities of Sellers or Parent or any of their affiliates
other than the Assumed Liabilities (all such liabilities that are not being
assumed by Purchaser, the “Excluded Liabilities”), including, but not
limited to, the following liabilities:


 


6

















 


(i)  except as
otherwise specifically provided in Section 1.3(a), any obligations or
liabilities of Sellers or any of their affiliates to the extent arising out of,
relating to or otherwise in any way in respect of the Excluded Assets;


(ii)  all
obligations and liabilities arising out of, relating to or otherwise in any way
in respect of the merchandise sold on or prior to the Effective Time,  except for consumer warranties, diamond bonds,
trade-in obligations, store credits, merchandise returns and jewelry care plans
assumed pursuant to Section 1.3(a)(i);


(iii)  all
accounts payable and accrued expenses and liabilities (except for the portion
of such expenses or liabilities that are subject to proration as provided in
Section 5.11) owed by Sellers or Parent in connection with the Business
occurring or relating to the period prior to the Effective Time or resulting
from the transactions contemplated by this Agreement;


(iv)  any
obligations or liabilities of Sellers or any of their affiliates arising out
of, relating to or otherwise in any way in respect of any Intercompany
Accounts;


(v)  any
obligations or liabilities of Sellers or any of their affiliates arising out
of, relating to or otherwise in any way in respect of this Agreement or the
Ancillary Documents;


(vi)  any
obligations or liabilities arising out of, relating to, or otherwise in any way
in respect of employment by Sellers of any employee or former employee prior to
the Effective Time, any incident or event occurring during the term of
employment by Sellers of any employee or former employee, or any injury
suffered or illness contracted or any exposure to any substance or condition by
any such employee or former employee while so employed by Sellers or
Parent  at or prior to the Effective
Time, in each case whether or not such employee or former employee is later
employed by Purchaser;


(vii)  any
obligations or liabilities arising out of, relating to or otherwise in any way
in respect of any Employee Benefit Plans or any other “employee benefit plan”
(as defined in Section 3(3) of ERISA) sponsored, maintained or contributed by
(or with respect to which any obligation to contribute has been undertaken) any
of the Sellers, Parent or any ERISA Affiliate;


(viii)  all
obligations and liabilities arising out of Contracts occurring or relating to
the period prior to the Effective Time or resulting from the transactions
contemplated by this Agreement (excluding any liabilities relating to rent
increase provisions set forth in the Leases);


(ix)  (A) any
Tax liabilities of Sellers and (B) any liabilities for Taxes related to
the Business or the Acquired Assets related to the Pre-Closing Tax
Periods.  For the avoidance of doubt, the
parties acknowledge that the Tax liabilities related to the Business or the
Acquired Assets related to the Post-


 


7

















 


Closing Periods are not Excluded Liabilities and further, for the
avoidance of doubt, the liability for Transfer Taxes incurred as a consequence
of the transactions contemplated by the Agreement is governed by Section
5.10(b);


(x)  any
liability or obligation arising out of any cause of action or judicial or
administrative action, suit, proceeding, investigation or any other liability
relating to any event occurring, or facts, circumstances or conditions existing
prior to the Effective Time (whether known or unknown and whether asserted
before or after the Closing Date), including any currently pending causes of
action or judicial or administrative actions, suits, proceedings or
investigations (including those listed on Schedules 3.7 and 3.18),
regardless of whether such obligation or liability would constitute a breach of
a representation or warranty of Parent or Sellers set forth in this Agreement
or any Ancillary Document; and


(xi)  all other
liabilities or obligations of Parent or Sellers not acquired or assumed by
Purchaser pursuant to this Agreement, whether or not pertaining to the
Business.


                (c) 
Notwithstanding anything to the contrary contained herein, but subject
to the provisions of Section 5.4, this Agreement shall not operate to assign
any Acquired Asset or any claim, right or benefit arising thereunder or
resulting therefrom if an attempted assignment thereof, without the consent of
any Governmental Entity or any other Person, would constitute a breach, default
or other contravention or a violation of applicable law.  Sellers and Purchaser shall each use commercially
reasonable efforts to obtain the consent of such Persons for the assignment
thereof to Purchaser prior to the Closing (it being understood that the failure
to obtain such consents shall not relieve any party from its obligation to
consummate the Closing of the transactions contemplated by this Agreement
except to the extent provided in Section 8.1) and otherwise shall comply with
the provisions of Section 5.4.


 


                (d)  Notwithstanding that Excluded Liabilities
include (i) all gift cards issued prior to the Effective Time to the extent not
redeemed by the Effective Time (“Previously Issued Gift Cards”) and (ii)
all layaways as of the Effective Time (“Previously Issued Layaways”),
Purchaser agrees to honor, subject to the terms and provisions of Section 5.20
hereof, such Previously Issued Gift Cards and fulfill all Previously Issued
Layaways following the Effective Time. 
Purchaser’s performance with respect to such Previously Issued Gift
Cards and Previously Issued Layaways after the Closing shall not be deemed an
assignment or transfer to Purchaser of the obligations and liabilities of
Sellers thereunder.  The parties
acknowledge that Sellers have collected all cash with respect to the Previously
Issued Gift Cards and Previously Issued Layaways and any obligations pertaining
to compliance with laws with respect thereto, including the laws of escheat,
shall remain the obligation of Sellers or their affiliates.


 


SECTION
1.4  Purchase Price.


The
aggregate purchase price for the Acquired Assets shall be the sum of (i)
$200,000,000.00, plus (ii) the assumption of the Assumed Liabilities minus
(iii) any 


 


8

















 


adjustments
specified on Schedule 1.4 (collectively, the “Purchase Price”),
payable as set forth in Section 2.2(b)(i), except that any adjustment specified
in Schedule 1.4 shall be determined as set forth therein.


ARTICLE II

The Closing


SECTION 2.1  Closing Date.  The closing of the sale and transfer of the
Acquired Assets and the assumption of the Assumed Liabilities (the “Closing”)
shall take place at the offices of Troutman Sanders, LLP, The Chrysler
Building, 405 Lexington Avenue, New York, NY 
10174, at 11:00 a.m., local time, on (a) the last Business Day of
Sellers’ fiscal month in which the last of the conditions set forth in Article
VIII are (and remain as of the last day of such fiscal month of Sellers
satisfied or waived (other than conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or waiver of such
conditions), or (b) such other time, date or place as Sellers and Purchaser may
agree in writing.  (The date on which the
Closing shall occur is herein referred to as the “Closing Date.”)  The Closing shall be deemed to have occurred,
for all purposes, as of the Effective Time.


SECTION 2.2  Transactions to be Effected at the Closing.


(a)  At the Closing, Parent and Sellers, as the
case may be, shall deliver or cause to be delivered to Purchaser the following:


(i)  such
appropriately executed bills of sale, assignments and other instruments of transfer
as shall be necessary for the sale, assignment, transfer, conveyance and
delivery as contemplated by this Agreement of the Acquired Assets (it being
understood that any such bill of sale, assignment or other instrument shall not
provide for any representations or warranties or any obligations or liabilities
that are not otherwise expressly provided for in this Agreement);


(ii)  a duly
executed copy of each of the Ancillary Documents to be executed at the Closing
to which Sellers or any of their affiliates are parties; and


(iii)  such
other instruments or documents, the delivery of which is a condition to
Closing, as Purchaser may reasonably request (it being understood that any such
other instrument or document shall not provide for any representations or
warranties or any obligations or liabilities that are not otherwise expressly
provided for in this Agreement).


(b)  At the
Closing, Purchaser shall deliver or cause to be delivered (or, with respect to
Section 2.2(b)(i), Finlay shall cause Purchaser to deliver) to Sellers the
following:


 


9

















 


(i)  by wire
transfer to an account designated in writing by Sellers prior to the Closing,
immediately available U.S. funds in an amount equal to the cash portion of the
Purchase Price specified in Section 1.4(i);


(ii)  such
appropriately executed assumption agreements and other instruments of
assumption providing for Purchaser’s assumption of, and indemnification of
Parent and Sellers and their affiliates from and against, the Assumed
Liabilities as contemplated by this Agreement (it being understood that any
such agreement or instrument shall not provide for any representations or
warranties or any obligations or liabilities that are not otherwise expressly
provided for in this Agreement);


(iii)  such
other instruments or documents, the delivery of which is a condition to
Closing, as Sellers may reasonably request (it being understood that any such
other instrument or document shall not provide for any representations or
warranties or any obligations or liabilities that are not otherwise expressly
provided for in this Agreement); and


(iv)  a duly
executed copy of each of the Ancillary Documents to be executed at Closing to
which Purchaser or any of its affiliates is a party.


Section 2.3  Inventory True-Up.


(a)  Beginning ten days prior to the scheduled
Closing Date, representatives of Purchaser and Sellers, supervised or observed,
if requested by either Purchaser or Sellers (and at the requesting party’s sole
expense), by Grant Thornton LLP, shall conduct a physical count of the
Inventory at the Real Property and the Distribution Center such physical count
to be brought forward and adjusted (utilizing perpetual inventory records)
through the close of business immediately prior to the Effective Time, using
methodology consistent with past practices and GAAP principles (“Inventory
Count”).  It
is acknowledged and agreed that all expenses incurred by and all sales made by
the Business on and after the Effective Time shall be for the account and
benefit of Purchaser. The value of the Inventory (the “Closing Inventory
Value”) shall be determined based on Sellers’ cost for such Inventory as
reflected on Sellers’ books and records (including freight in and freight out,
excluding reserves).  In connection with
the calculation of the Closing Inventory Value, Purchaser and its independent
accountants, if requested by Purchaser, will have reasonable access to all
requisite accounting and other records of Sellers and to the Real Property and
the Distribution Center, if necessary. The parties will use their respective
reasonable best efforts to complete an estimate of said count by no later than
one day prior to Closing. The Inventory Count shall be completed no later than
three days after the Closing.  If the
parties cannot agree upon the Closing Inventory Value based upon the Inventory
Count three days after the Closing, the parties shall submit such matter to a
mutually agreed upon third party for review and resolution, with the fees and
expenses thereof to be shared equally by the parties; and any determination by
such party shall be final and binding upon the parties.


 


10
















 


                (b)  Immediately following the determination of
the Closing Inventory Value, but in no event later than three Business Days
after the Closing Date, Purchaser or Sellers, as the case may be, shall pay (or
in the event that Purchaser shall be obligated to pay, Finlay shall cause
Purchaser to pay) by wire transfer to the other party immediately available
U.S. funds in an amount equal to the excess or shortfall, as the case may be,
of the Closing Inventory Value as compared to $189,000,000, subject to a maximum
payment by Purchaser of $26,000,000. 
Notwithstanding the foregoing, to the extent that all or a portion of
the Closing Inventory Value is being disputed in good faith, the disputed
portion shall not be payable at the time specified in the preceding sentence
but instead shall become due and shall be paid within three (3) Business Days
following the resolution of such dispute. 
If not paid when due, interest shall accrue on the amount due at a rate
equal to the lesser of (a) 12% per annum or (b) the maximum rate permitted by
law.


ARTICLE III

Representations and Warranties of Parent and Sellers


Parent and Sellers
hereby jointly and severally represent and warrant to Purchaser, subject to
such qualifications and exceptions as are disclosed in writing in the applicable
Schedules as follows:


                SECTION 3.1  Organization,
Standing and Power.  Parent and Opco
are corporations duly organized, validly existing and in good standing under
the laws of their state of organization. 
Inventory Company is a limited partnership duly organized, validly
existing and in good standing under the laws of its state of organization.  Parent and Sellers have the requisite
corporate or partnership, as applicable, power and authority to execute and
deliver this Agreement and the Ancillary Documents to which they are a party,
to perform fully their obligations under this Agreement and to consummate the
transactions contemplated hereby and thereby. 
Parent and Sellers are qualified to conduct business as foreign entities
in each jurisdiction in which the conduct by them of their businesses,
including the Business, or ownership of their assets, including the Acquired
Assets, makes such qualification necessary, except where the failure to be so
qualified would not, individually or in the aggregate, have a Material Adverse
Effect.


                SECTION 3.2  Authority.  Parent and each Seller has the requisite
corporate or partnership, as applicable, power and authority to own or lease,
as applicable, its assets, including the Acquired Assets, and to operate the
Business as currently operated.  The
execution and delivery of this Agreement and the Ancillary Documents to which
Parent and each Seller is a party and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate or partnership action on the part of Parent and Sellers,
and no other proceedings on the part of Parent or either Seller are necessary
to authorize such execution, delivery and performance.  This Agreement has been duly and validly
executed and delivered by Parent and Sellers and constitutes, and the Ancillary
Documents, when executed and delivered by Sellers and Parent, shall constitute
the legal, valid and binding obligation of Parent and Sellers enforceable
against Parent and Sellers in accordance with their respective terms, except as
enforceability may be limited by bankruptcy, insolvency or


 


11

















 


other laws affecting the
enforcement of creditors’ rights generally, and except that the availability of
the remedy of specific performance or other equitable relief is subject to the
discretion of the court before which any proceeding therefor may be brought.


                SECTION 3.3  No
Conflicts.


                (a)  The
execution and delivery of this Agreement and the Ancillary Documents to which
they are a party by Parent and Sellers does not, and the consummation by Parent
and Sellers of the transactions contemplated hereby and thereby and the
compliance by Parent and Sellers with the terms of this Agreement  and the Ancillary Documents to which they are
a party, will not, conflict with, or result in any violation of or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
a material benefit under, or result in the creation of any Lien (other than a
Permitted Lien) upon any of the Acquired Assets under any provision of
(i) the organizational documents of Parent or Sellers, (ii) subject to the
filings and other matters referred to in the following paragraph (b), any law,
judgment, order, decree, statute, ordinance, rule or regulation applicable to
Parent or Sellers or the Acquired Assets, the Assumed Liabilities or the
Business, or (iii) any Contract; except, in the case of clause (ii) or (iii),
for any such conflicts, violations, defaults, rights or Liens that would not,
individually or in the aggregate, be material to the Business or the Acquired
Assets, in each case taken as a whole. 
This Section 3.3(a) does not apply to the need for consents of landlords
with respect to Leases.


                (b)  No
consent, approval, license, permit, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required to be obtained
or made by Parent or Sellers with respect to the Acquired Assets, the Assumed
Liabilities or the Business in connection with the execution and delivery of
this Agreement or the Ancillary Documents or the consummation of the
transactions contemplated hereby or thereby, except for (i) compliance with and
filings under the HSR Act, and (ii) those the failure of which to obtain or
make would not, individually or in the aggregate, be material to the Business
or the Acquired Assets, in each case taken as a whole.


                SECTION 3.4  Compliance with Applicable Laws.  Parent and Sellers have complied and
currently are in compliance in all material respects with all laws,
regulations, rules and orders of all Governmental Entities applicable to them
that relate to the Acquired Assets, the Assumed Liabilities or the
Business.  During the past twelve months,
with respect to the Business, none of Parent and Sellers has received any
written notice from a Governmental Entity and no action, investigation or
arbitration has been filed or commenced alleging any non-compliance with any
such laws, regulations, rules or orders in any material respect.  Each material Permit is in full force and
effect, and Sellers are in compliance in all material respects with the terms
of such Permits, and there are no actions, investigations, arbitrations or
proceedings pending or, to the Knowledge of Parent and Sellers, threatened that
may result in the revocation, cancellation, suspension or modification of any
such Permit.  This Section 3.4 does not
apply to


 


12

















 


environmental matters (to
which Section 3.16 is applicable), Tax matters (to which Section 3.17 is
applicable) or labor matters (to which Section 3.18 is applicable).


SECTION 3.5  Financial Statements; Books and Records.  Attached hereto on Schedule 3.5(a) are
(a) unaudited balance sheet data of the Business at July 31, 2006 and the
related unaudited statement of operations for the fiscal year then ended and
(b) unaudited balance sheet data of the Business at July 31, 2007 and the
related unaudited statement of operations for the fiscal year then ended (the “2007
Unaudited Financials”) ((a) and (b), collectively, the “Financial
Statements”).  The Financial
Statements are true, correct and complete and are consistent with the books and
records of Sellers and Parent and present fairly in all material respects the
financial condition and results of operations of the Business, for the periods
or as of the dates set forth therein, in conformity with GAAP, except as set
forth on Schedule 3.5(b).


SECTION 3.6  Absence of Certain Changes.  Except as set forth on Schedule 3.6,
since January 1, 2007 Sellers have conducted the Business in the ordinary and
usual course consistent with past practice, and there has occurred no fact,
event or circumstance which, individually or in the aggregate, has had or could
reasonably expected to have a Material Adverse Effect.  Without limiting the foregoing, since January
1, 2007:


(a)  Sellers have not mortgaged, pledged,
subjected to any Liens (other than Permitted Liens), sold, transferred, leased,
licensed, disposed of, or agreed to sell, transfer, lease, license or dispose
of any of the Acquired Assets (including, without limitation, any Intellectual
Property) other than the sale of Inventory in the ordinary course of the
operation of the Business consistent with past practice;


(b)  Sellers have not made any material increase
in the salary or other compensation of any Employee or entered into, terminated
or amended in any material respect any employment, severance, change of control
or termination agreement other than in the ordinary course of the operation of
the Business consistent with past practice (and except as may be required under
existing agreements or benefit plans with respect to an Employee);


(c)  Sellers have not delayed or postponed the
payment of any accounts payable with respect to the Business other than in the
ordinary course of the operation of the Business consistent with past practice;


(d)  Sellers have not granted any license or
sublicense of any rights with respect to any Intellectual Property, or entered
into any Contract with respect to any Intellectual Property;


(e)  Sellers, with respect to the Business, have
not waived any material claims, rights or benefits of, or agreed to modify in
any material respect, any non-compete or non-solicitation agreement to which
either Seller is a party;


(f)  no damage, destruction or loss, whether or
not covered by insurance, has occurred in the Business that is material to the
Business or the Acquired Assets taken as a whole;


 


13

















 


(g)  no vendor of the Business has terminated any
Contract or course of dealing with the Business or has provided notice to the
Sellers, Parent or any of its affiliates of its intention to take such action
or to reduce its sales to the Business in a manner that would be material to
the Business or Acquired Assets taken as a whole;


(h)  other than in the ordinary course of
business, neither Sellers nor Parent have entered into (i) any transaction or
contract relating to the acquisition or disposition of any Acquired Assets or
(ii) any transaction or contract  that is
material to the Business or the Acquired Assets taken as a whole;


(i)  no labor dispute, other than routine
individual grievances, or any activity or proceeding to organize any employees
of the Business has occurred, and the Business has not suffered any lockouts,
strikes, slowdowns, work stoppages or threats thereof by or with respect to its
employees;


(j)  neither Sellers nor Parent has initiated,
received or settled any action, suit or proceeding material to the Business or
Acquired Assets taken as a whole;


(k)  there has been no material change or
amendment to any Contract that is or would be required to be disclosed in Schedule
3.9 or Schedule 3.14, except in the ordinary course of business; and


(l)  Sellers have not agreed to take any action
described above, except as contemplated by this Agreement.


                                                SECTION 3.7  Litigation; Decrees.  Except as set forth on Schedule 3.7
and except for any lawsuit, action or proceeding brought after the date of this
Agreement by any Person seeking to delay or prevent, or otherwise challenging,
the transactions contemplated by this Agreement and by the Ancillary Documents,
there is no, and within the past twelve months there has not been any, claim,
lawsuit, action, proceeding or investigation pending or, to the Knowledge of
Parent or Sellers, threatened against or affecting Parent or Sellers related to
the Business or the Acquired Assets, except for any matter that, if resolved in
a manner adverse to Sellers or Parent would not, individually or in the
aggregate, be material to the Business or the Acquired Assets.  Sellers and Parent are in compliance in all
material respects with each judgment, order, injunction or decree of any
Governmental Entity or arbitrator entered against any of the Acquired Assets or
against Parent or either Seller with respect to or affecting the Business,
which judgments, orders, injunctions, and decrees are set forth on Schedule
3.7.  True, correct and complete
copies of such judgments, orders, injunctions, and decrees have been previously
provided to the Purchaser.


 


SECTION 3.8  Title to Acquired Assets. Sellers
have, or at the Closing will have, good and valid title to (or in the case of
leased Acquired Assets, own a valid leasehold interest in) all of the Acquired
Assets free and clear of all Liens, except for Permitted Liens.  Subject to Section 5.4 with respect to certain
Contracts, at the Closing, Sellers will convey to Purchaser good and valid
title, or a valid leasehold interest in, to all of the Acquired Assets (free
and clear of any Liens except for Permitted Liens).  This


 


14

















 


Section 3.8 does not
apply to Real Property (which is exclusively the subject of Section 3.9),
Intellectual Property (which is exclusively the subject of Section 3.12)
or Contracts (which are exclusively the subject of Section 3.14).


SECTION 3.9  Real Property.  Schedule 3.9 sets forth a complete list of
the names and locations of the Real Property and the names of the landlords
with respect to the leases thereof (the “Leases”).  Opco is the lessee of all Real Property and
is in possession of the Real Property subject to the Leases.  The CD-ROMs containing electronic copies of
the Leases, which were delivered to Proskauer Rose LLP on July 23, 2007, and
September 26, 2007, together with an e-mail on September 26, 2007, with respect
to store no. 2074, contain complete copies of the documentation setting forth
the material terms of all of the Leases.


 


SECTION 3.10  Personal Property.  The Personal Property included in the
Acquired Assets necessary to operate the Business as it is presently conducted,
is, in all material respects, in good working order (taking into account
ordinary wear and tear and the need for ordinary, routine maintenance and
repairs).


SECTION 3.11  Advertising.  Set forth on Schedule 3.11 hereto is a
true, correct and complete list or statement (to the extent each has been
determined as of the date hereof) of the advertising allocations of the
Business for the preceding fiscal year and of all advertising allocations in
excess of $25,000 for all future periods. 
Sellers have delivered to Purchaser a correct and complete copy of the
Business’ anticipated budget plans for advertising for the six month period
beginning on the date hereof.


SECTION 3.12  Intellectual Property.


(a)  Parent or Sellers own all right, title and
interest in and to, or possess adequate licenses or other rights to use, all of
the Intellectual Property used or held for use in connection with the Business
(collectively, the “Business IP”). 
For the Business IP licensed for use by Parent or Sellers, Schedule
3.12(a) sets forth each and every material license or other agreement
(excluding customary licenses from vendors in connection with the sale of
merchandise) by which Parent or Sellers have obtained rights to any such
Business IP, together with the identity of the licensor (or vendor), the type
of rights granted and the relevant Business IP.


(b)  Schedule 3.12(b) sets forth a true and
complete list of all actions, suits or proceedings pending or, to the Knowledge
of Parent and Sellers, threatened against Sellers or Parent that involve the
infringement, validity or ownership of Intellectual Property. Except as set
forth in Schedule 3.12(b), (i) to the Knowledge of Parent and Sellers,
none of the commercial products of the Business or the operation of the
Business infringes upon any patent, trademark, copyright or other Intellectual
Property rights of any third party, (ii) no royalty or similar fee of any kind
of more than $50,000 annually or in the aggregate is payable by Sellers or
Parent for the use of any of the Business IP, (iii) to the Knowledge of Parent
and Sellers, no third party has or is infringing, violating or misappropriating
any Business IP and (iv) each license held by Parent or Sellers to use any
Business IP is a legal, valid and binding obligation of Parent or Sellers and
the


 


15

















 


relevant other parties
thereto, enforceable in accordance with the terms thereof and the transactions
contemplated by this Agreement will not breach the terms thereof or result in the
loss or diminution of any rights in any Business IP.


(c)  There exists no Lien (except for Permitted
Liens) in favor of any third party on any of the Business IP, and Parent and
Sellers have not pledged, licensed, transferred or assigned to any third party
any right, title or interest in or to the Business IP.


                                                (d) 
To the Knowledge of Parent and Sellers, the practices of Parent or
Sellers with respect to the operation of the Business are, and have always
been, in compliance in all material respects with its privacy policies,
including the privacy statement posted on the Internet sites of the Business.


 


                                                SECTION 3.13  Insurance.  The Acquired Assets are insured for the
benefit of Sellers, and will be so insured until immediately prior to the
Closing, in amounts and against risks consistent with the corporate practices
of Parent.  Except as set forth on Schedule
3.13, there are no pending claims under such insurance policies relating to
the Business or the Acquired Assets. 
Sellers have delivered to Purchaser a true, correct and complete copy of
the history of all claims relating to the Business or the Acquired Assets that
have been made since August 1, 2004 under such insurance policies.


SECTION 3.14  Contracts.


(a)  Except for Contracts listed on Schedule 3.9
or Schedule 3.14(a), neither Parent nor either Seller is a party to or
bound by any contract exclusively related to or primarily used in the Business
or covering the Acquired Assets or the Assumed Liabilities that is:


(i)  a Contract
not terminable by Sellers or Parent, as applicable, upon notice to the other
party or parties thereto of ninety (90) days or less without penalty or
premium;


(ii)  a Contract
for the employment of any Person (A) with an annual base salary in excess of
$250,000 or any consulting agreement or independent contractor agreement with
any Person involving payments by Sellers in excess of $250,000; (B) that
contains an obligation to pay severance upon termination of employment; or
(C) that contains a requirement to make any payment or provide any benefit
or contractual right as a result of a sale of substantially all of the Business
or the termination of employment following a sale of the Business;


(iii)  a
Contract with any labor union;


(iv)  other than the Ancillary Documents, a Contract
with any director, officer, subsidiary or affiliate of Sellers that will not be
terminated at or prior to the Closing;


 


16

















 


(v)  a letter of
credit, an indenture, note, loan or credit agreement or other Contract relating
to the borrowing of money by either Seller or Parent or to the direct or
indirect guarantee or assumption by Sellers or Parent of the obligations of any
other Person (other than an affiliate of Sellers or Parent) for borrowed money,
including any arrangement which has the economic effect although not the legal
form of such a guarantee;


(vi)  a covenant
not to compete;


(vii)  a lease
or similar agreement under which any of Parent or either Seller (A) is lessee
of, or holds or uses, any machinery, equipment, vehicle or other tangible
personal property owned by any third Person for an annual rent in excess of
$100,000 or (B) is lessor of, or makes available for use by any third Person,
any tangible personal property owned (including ownership for Tax purposes) by
Sellers having a fair market value in excess of $100,000;


(viii)  other
than the Intercompany Accounts, a contract or agreement (including purchase
orders) involving the obligation of Sellers or Parent to purchase products,
including consignment inventory, or services for payment by the Business (or
allocated to the Business) of more than $500,000 annually (unless terminable by
Parent or Sellers (A) without payment or penalty or, as the case may be, with a
payment or penalty of not more than $100,000 or (B) upon no more than ninety
days’ notice);


(ix)  a
mortgage, pledge, security agreement, deed of trust or other document granting
a Lien upon any Acquired Asset (including Liens upon properties acquired under
conditional sales, capital lease or other title retention or security devices);


(x)  an
agreement concerning a partnership or joint venture of which the Parent or
either Seller is a member;


(xi)  a material
contract concerning confidentiality;


(xii)  a
contract under which the consequences of default or termination reasonably
could be expected to have a Material Adverse Effect;


(xiii)  any
contract for the sale of any of the Acquired Assets (other than for the sale of
Inventory in the ordinary course of business), or for the grant to any person
of any option, right of first refusal or similar right to purchase any of the
Acquired Assets (other than customary layaway arrangements);


(xiv)  other
than pursuant to the Employment Benefit Plans listed on Schedule 3.20,
any contract requiring the payment to any person of a brokerage or sales
commission; or


(xv)  any contract involving the assignment,
transfer or license (whether as licensee or licensor) of any of the material
Intellectual Property that is part of


 


17

















 


the Acquired Assets (excluding any implied license that may attach as a
result of sales of merchandise to customers).


                                                (b) 
With respect to each Contract that is required to be listed on Schedule
3.9 or Schedule 3.14(a), (i) such Contract is valid, binding and
enforceable in accordance with its terms against Parent and Sellers, as
applicable, (ii) to the Knowledge of Parent and Sellers, such Contract is
valid, binding and enforceable in accordance with its terms against the other parties
thereto, (iii) Sellers and Parent are not (with or without the lapse of time or
the giving of notice, or both) in breach or default of such Contract, which
default or breach, individually or in the aggregate with defaults and breaches
under other such Contracts, would reasonably be expected to be material to the
Business, (iv) to the Knowledge of Parent and Sellers, none of the other
parties to such Contract are in breach or default thereof, which defaults or
breaches, individually or in the aggregate with defaults and breaches under
other such Contracts, would reasonably be expected to be material to the
Business, (v) neither Parent nor Sellers have received any written notice of
the intention of any other party to terminate such Contract (whether as a
termination for convenience or for default of Sellers or Parent thereunder),
and (vi) neither Parent or Sellers have failed to perform or deliver under such
Contract, which failure of performance or delivery has caused or is reasonably
expected to cause a cancellation, material modification or any penalty, right
of setoff or other material charge by the other parties thereto.  Sellers 
have delivered to Purchaser true, correct and complete copies of all
Contracts set forth on Schedule 3.14(a).


                                                (c) 
Except as would not be expected to have a Material Adverse Effect, with
respect to Contracts that are not required to be listed on Schedule 3.9
or Schedule 3.14(a), (i) such Contracts are valid, binding and
enforceable in accordance with their terms against Parent and Sellers, as
applicable, (ii) to the Knowledge of Parent and Sellers, such Contracts are
valid, binding and enforceable in accordance with their terms against the other
parties thereto, (iii) Sellers and Parent are not (with or without the lapse of
time or the giving of notice, or both) in breach or default of such Contract,
(iv) to the Knowledge of Parent and Sellers, none of the other parties to such
Contracts are in breach or default thereof, (v) neither Parent nor Sellers have
received any written notice of the intention of any other parties to terminate
such Contracts (whether as a termination for convenience or for default of
Sellers or Parent thereunder), and (vi) neither Parent or Sellers have failed
to perform or deliver under such Contracts, which failure of performance or
delivery has caused or is reasonably expected to cause a cancellation,
modification or any penalty, right of setoff or other charge by the other
parties thereto.


 


SECTION 3.15  Sufficiency of Acquired Assets.  Assuming the continued purchase by Purchaser
after the Closing of inventory in the ordinary course of the Business, the
Acquired Assets, together with the services to be provided under the Transition
Services Agreement or listed on Schedule 3.15, include all of the
properties, assets and rights that are used in, or are necessary to carry on
the Business as currently conducted in all material respects.


SECTION 3.16  Environmental Matters.  Except as disclosed on Schedule 3.16,
with respect to the Acquired Assets and the Business:


 


18

















 


(a)  Sellers, the Acquired Assets and the
Business  are in material compliance with
all Environmental Laws;


(b)  there is no claim, action, suit, complaint or
legal proceeding pending or, to the Knowledge of Parent and Sellers, threatened
against Sellers, and neither Parent nor Sellers have received during the past
twelve months any other written notice, by any Person alleging a material
violation of, or material liability under, any Environmental Law on the part of
Sellers, the Acquired Assets or the Business;


(c)  Neither Parent nor Sellers have not entered
into any consent order or other similar agreement with any Governmental Entity
that imposes any material obligations on Sellers, Parent, the Acquired Assets
or the Business under any Environmental Law;


(d)  Sellers have furnished or made available to
Purchaser all material environmental reports and other materials and
environmental documents relating to the Acquired Assets and the Business that
are in Sellers’ or Parent’s possession or under its reasonable control;


(e)  except in compliance with applicable
Environmental Laws, no portion of the Real Property is being used, has been
used by any Seller or Parent, or, to Knowledge of Parent and Sellers has been
used by any other person, entity or organization for the purpose of or in any
way involving the manufacture, processing, use, generation, release, discharge,
spilling, emission, dumping, disposal, storage, treatment, processing or other
handling of Hazardous Materials at, on, under or from the Real Property;


(f)  there are no conditions existing at the Real
Property that has resulted in, or which with the giving of notice or the
passage of time or both, could reasonably be expected to result in any
liability or obligation, arising under Environmental Laws, of the Sellers or
Parent;


(g)  Sellers, the Acquired Assets and the Business
have all material permits, licenses, authorizations and approvals necessary for
the conduct of its business and operations on, in or at the Real Property which
are required under applicable Environmental Laws (collectively, the “Environmental
Permits”).  Sellers, the Acquired
Assets and the Business are in material compliance with the terms and
conditions of all such Environmental Permits;


(h)  the execution, delivery and performance of
this Agreement and the other transactions contemplated hereby will not require
any notification, registration, filing, reporting, disclosure, investigation,
remediation or cleanup obligations pursuant to the any requirement of any
Governmental Entity or any other Environmental Law, including, without
limitation, the New Jersey Industrial Site Recovery Act (N.J.S.A.
§§ 13:1L-6 et seq.) and the Connecticut Real
Property Transfer Act, C.G.S.A. 22a-134 et seq. (the “Connecticut
Transfer Act”); and


(i)  notwithstanding anything to the contrary in
the foregoing, the Sellers, the Acquired Assets, the Business and their
products are and have been in compliance with all applicable requirements under
the Toxic Enforcement Act of 1986 (Proposition 65).


 


19






 












                SECTION 3.17  Taxes. 
Except as set forth on Schedule 3.17:


 


(a)  There are no Liens for Taxes (other than
Liens for Taxes not yet due and payable) on any of the Acquired Assets.  No deficiencies for Taxes have been claimed,
proposed or assessed with respect to the Business or the Acquired Assets, and
there are no audits, investigations or other administrative or judicial
proceedings involving Taxes (a “Tax Proceeding”) pending or currently
being conducted, or to the Knowledge of Parent and Sellers, threatened with
respect to the Business or the Acquired Assets.


(b)  All income and other material Tax Returns
with respect to the Business and the Acquired Assets required to be filed on or
prior to the date hereof are true and correct in all material respects and have
been timely filed.


(c)  All Taxes due and owing (whether or not shown
on any Tax Return) with respect to the Business and the Acquired Assets for all
Pre-Closing Tax Periods have been paid or are being contested in good
faith and are adequately reserved for in the Financial Statements.


(d)  None of the Acquired Assets is an interest in
an entity treated as a corporation or as a partnership for tax purposes.


(e)  Schedule 3.17(e) sets forth a list of
all jurisdictions to which any Tax is properly payable with respect to the
Business or the Acquired Assets.


SECTION 3.18  Labor Matters.  Except as set forth on Schedule 3.18:


(a)  There are no strikes or lockouts or material
work stoppages or slowdowns pending or, to the Knowledge of Parent and Sellers,
threatened against the Business.


(b)  There are no complaints, charges, claims or
grievances against Sellers pending or, to the Knowledge of Parent and Sellers,
threatened to be brought or filed with any Governmental Entity, or arbitrator
based on or arising out of the employment by Sellers of any Employee, except
for those that would not, individually or in the aggregate be material to the
Business and the Acquired Assets taken as a whole.


(c)  Each of Parent and Sellers is in compliance
in all material respects with respect to the Business with all laws,
regulations, rules and orders of all Governmental Entities relating to the
employment of labor, including all such laws, regulations, rules and orders
relating to wages, hours, discrimination, civil rights, safety and health,
immigration, workers’ compensation, layoffs, and the collection and payment of
withholding Taxes and similar Taxes.


SECTION 3.19  Brokers; Transaction Bonuses.  Except as disclosed on Schedule 3.19,
no broker, finder or investment banker acting on behalf of Sellers or Parent
are entitled to any fee, commission or other payment from Sellers or Parent in
connection with this Agreement, the Ancillary Documents or the transactions
contemplated hereby or thereby.  Except
as disclosed on Schedule 3.19, there are no special bonuses or
other similar compensation payable by Sellers to any of their directors, officers
or employees in


 


20

















 


connection with the
transactions contemplated by this Agreement. 
For purposes of clarification, the parties acknowledge and agree that
any matter disclosed on Schedule 3.19 is an Excluded Liability.


SECTION 3.20  Employee Benefits.


(a)  Schedule 3.20 contains a true and complete
list of all material Employee Benefit Plans.


(b)  Each of the Employee Benefit Plans intended
to be “qualified” within the meaning of Section 401(a) of the Code has received
a favorable determination letter from the Internal Revenue Service to the
effect that it meets the requirements of Section 401(a) of the Code and, to the
Knowledge of Parent and Sellers, no event has occurred, either by reason of any
action or failure to act, which could reasonably be expected to give rise to
disqualification of any such Employee Benefit Plan.


                SECTION 3.21  Certain
Payments.  None of the Sellers,
Parent or any member, director, officer, agent, employee, or any other person
acting on behalf of either Seller or Parent, has, directly or indirectly, used
any funds for unlawful contributions, gifts, entertainment, or other unlawful
expenses; made any unlawful payment to government officials or employees or to
political parties or campaigns; established or maintained any unlawful fund of
corporate monies or other assets; made or received any bribe, or any unlawful
rebate, payoff, influence payment, kickback or other payment; or made any
bribe, kickback, or other payment of a similar or comparable nature to any
Governmental Entity or non-governmental person, regardless of form, whether in
money, property, or services, to obtain favorable treatment in securing
business or to obtain special concessions, or to pay for favorable treatment
for business or for special concessions secured.


ARTICLE IV

Representations and Warranties of Purchaser


                Purchaser hereby represents and
warrants to each of Parent and Sellers as follows:


SECTION 4.1  Organization, Standing and Power.  Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation.  Purchaser has the requisite
corporate power and authority to execute and deliver this Agreement and the
Ancillary Documents to which it is a party, to perform fully its obligations
under this Agreement and such Ancillary Documents and to consummate the
transactions contemplated hereby and thereby, and to carry on its business as
currently conducted.


SECTION 4.2  Authority.  The execution and delivery of this Agreement
and the Ancillary Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Purchaser, and no other
proceedings on the part of


 


21

















 


Purchaser are necessary
to authorize such execution, delivery and performance.  This Agreement has been duly and validly
executed and delivered by Purchaser and constitutes, and the Ancillary
Documents, when executed and delivered by Purchaser, shall constitute the legal,
valid and binding obligation of Purchaser enforceable against Purchaser in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, insolvency or other laws affecting the enforcement of creditors’
rights generally, and except that the availability of the remedy of specific
performance or other equitable relief is subject to the discretion of the court
before which any proceeding therefor may be brought.


SECTION 4.3  No Conflicts.  (a) The execution and delivery of this
Agreement and the Ancillary Documents by Purchaser does not, and the
consummation by Purchaser of the transactions contemplated hereby and thereby
and the compliance by Purchaser with the terms of this Agreement and the
Ancillary Documents will not, conflict with, or result in any violation of or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of a material benefit under, or result in the creation of any Lien upon
any of Purchaser’s assets under any provision of (i) the organizational
documents of Purchaser; (ii) subject to the filings and other matters referred
to in the following paragraph (b), any law, judgment, order, decree, statute,
ordinance, rule or regulation applicable to Purchaser; or (iii) any of the
terms, conditions, or provisions of any note, lien, bond, mortgage, indenture,
license, lease, contract, commitment, agreement, understanding, restriction or
other instrument or obligation, except in the case of clause (ii) and (iii),
any such conflicts, violations, defaults, rights or Liens that, individually or
in the aggregate, would not materially impair the ability of Purchaser to
perform its obligations under this Agreement.


(b)  No consent, approval, license, permit, order
or authorization of, or registration, declaration or filing with, any
Governmental Entity is required to be obtained or made by Purchaser in
connection with the execution and delivery of this Agreement or the Ancillary
Documents or the consummation of the transactions contemplated hereby and
thereby, except for (i) compliance with and filings under the HSR Act and (ii)
those the failure of which to obtain or make, individually or in the aggregate,
would not materially impair the ability of Purchaser to perform its obligations
under this Agreement or the Ancillary Documents.


SECTION
4.4  Financial Ability.  Purchaser has received a commitment letter
(the “Commitment Letter”) from General Electric Capital Corporation (“GE”)
committing GE to provide to Purchaser debt financing for the transactions contemplated hereby, subject to the terms and
conditions set forth therein.  Purchaser
has delivered to Sellers a true and complete copy of the Commitment
Letter.  As of the date hereof, the
Commitment Letter is in full force and effect and has not been amended,
withdrawn or terminated in any manner and, to Purchaser’s Knowledge, Purchaser
will be able to satisfy on a timely basis the terms and conditions applicable
to it in the Commitment Letter.  Assuming
that the loans contemplated by the Commitment Letter are extended, Purchaser
will be solvent immediately following the Closing.


 


22

















 


SECTION 4.5  Litigation.  As of the date hereof, there is no claim,
action, suit, proceeding or governmental investigation pending or, to the
Knowledge of Purchaser, threatened against Purchaser, by or before any
Governmental Entity that would impair the ability of Purchaser to perform its
obligations under this Agreement.


SECTION 4.6  Brokers.  Except as disclosed on Schedule 4.6,
no broker or investment banker acting on behalf of Purchaser is entitled to any
fee, commission or other payment from Purchaser in connection with this
Agreement or the transactions contemplated hereby.


ARTICLE V

Covenants


SECTION 5.1  Conduct of Business.  During the period from the date of this
Agreement and continuing until the earlier of the Closing or the termination of
this Agreement pursuant to Article VIII, Parent and Sellers agree that Sellers
shall operate the Business and maintain the Acquired Assets in the ordinary
course of the operation of the Business in substantially the same manner as
presently maintained and operated and shall use all commercially reasonable
efforts consistent with past practices to preserve intact the Business and the
Acquired Assets.  To the extent that any
assets that would be Acquired Assets if owned by Sellers are owned by an
affiliate of Sellers, Sellers shall cause such assets to be transferred to
Sellers prior to the Closing.


Without limiting the
generality of the foregoing, from the date hereof until the Closing Date, with
respect to the Business, neither Sellers nor Parent will (and will cause their
affiliates not to), without the consent of Purchaser, which consent shall not
be unreasonably withheld:


(a)  sell, lease or otherwise dispose of any of
the Acquired Assets other than sales of Inventory in the ordinary course of
business;


(b)  enter into any material contract, agreement
or other commitment giving any person an option, rights of first offer or other
similar rights with respect to any of the Acquired Assets (other than customary
layaway arrangements);


(c)  other than in the ordinary course of
business, consistent with past practice, increase or decrease the compensation,
including, without limitation, the bonus, benefits or rate of pay, for any
Employee (except as required by contractual obligations existing on the date
hereof and scheduled annual salary raises, as reflected in the financial and
other information previously delivered by Sellers to Purchaser), or terminate
any Employee;


(d)  incur or commit to incur any liability other
than in the ordinary course of business;


(e)  other than in the ordinary course of
business, hire any new employee for the Business, except as a replacement for a
current employee of the Business;


 


23

















 


(f)  change in any material manner the way it
accounts for sales or the valuation of Inventory, unless required by a change
after the date hereof in GAAP;


(g)  change in any material manner the policies,
practices, methods or procedures of the Business with respect to gift cards,
gift certificates, diamond bonds, warranties, jewelry care plans and
merchandise returns, credits or refunds;


(h)  amend, terminate or modify any Lease or
Contracts required to be listed on Schedule 3.9 or Schedule 3.14(a);


(i)  fail to pay when due any liabilities or
obligations under any Contracts or delay or postpone the payment of any
accounts payable or any other liability with respect to the Business, other
than in the ordinary course of business consistent with past practice;


(j)  fail to pay when due any Excluded Liabilities
relating to the Business;


(k)  fail to complete capital expenditures in the
ordinary course of business or make any commitments for capital expenditures
that will become Assumed Liabilities of more than 105% of the amount provided
in the budget as previously provided by Sellers to Purchaser;


(l)  make aggregate commitments for advertising which
will become Assumed Liabilities in excess of 105% of the aggregate advertising
commitments set forth on Schedule 3.11;


(m)  grant any license or sublicense of any rights
with respect to the Business IP required to be set forth on Schedule
1.2(a)(vii) or Schedule 1.2(a)(viii) (excluding any implied license
that may attach as a result of sales of merchandise to customers); or


(n)  enter into any agreement, whether oral or
written, fixed or contingent, to do any of the foregoing.


Notwithstanding the foregoing,
Purchaser and Sellers acknowledge that they have agreed to the actions detailed
on Schedule 5.1 and (i) Opco shall be permitted to enter into Leases (or
amendments to Leases) consistent with the terms set forth on Schedule 5.1,
subject to Purchaser’s prior review and approval, such approval not to be
unreasonably withheld, conditioned or delayed, and (ii) take the other actions
described on Schedule 5.1 with respect to the Leases.


SECTION 5.2  Access to Information.  Parent and Sellers shall afford to Purchaser
and its  accountants, counsel, lenders,
financial advisors, consultants and other representatives (collectively, the “Representatives”)
reasonable access during normal business hours and upon reasonable prior notice
during the period prior to the Closing to the properties including the Real
Property, books, Contracts, commitments and records primarily related to the
Business and during such period shall furnish promptly to Purchaser and its
Representatives any information concerning the Business or the Acquired Assets
as Purchaser may reasonably request; provided, however, that
neither


 


24

















 


Parent nor the Sellers
nor any of their affiliates is under any obligation to disclose to Purchaser or
its Representatives (i) any information the disclosure of which is restricted
by contract or applicable law except in strict compliance with the applicable
contract or law, provided that Parent or either Seller, as applicable, shall
take all reasonable steps, including, obtaining any waivers necessary in order
to provide such otherwise required access or disclosure, (ii) any
information as to which the attorney-client privilege may be applicable, and
(iii) personnel files, workers’ compensation files, employee medical files
(including employee “protected health information” (as defined in the HIPPA
Standards for Privacy of Individually Identifiable Health Information, 45 CFR
Part 146)) and other employee books and records and affirmative action plans
and related books and records.  Purchaser
acknowledges that any information being provided to it or its Representatives
by Parent and Sellers or any of their affiliates or Representatives pursuant to
or in connection with this Agreement is subject to Section 5.7(b) of this
Agreement and the terms of the Confidentiality Agreement, the terms of which
are incorporated herein by reference.


SECTION 5.3  Inventory.  Prior to the Closing, Sellers shall maintain
a generally consistent inventory mix (by merchandise category/class and vendor
and vendor style classifications) in accordance with the ordinary course of
business of the Business on a year-to-year basis and on a season-to-season
basis.  Sellers acknowledge and agree
that the Inventory that will be included in the Inventory Count shall not
include any inventory or merchandise of any business of Parent or Sellers other
than the Business.


SECTION 5.4  Third Party Consents.


(a)  Sellers and Parent shall use commercially
reasonable efforts to obtain all Third Party novations, consents, approvals or
waivers, including consents for all the Leases, prior to the Closing and, once
obtained, provide the other parties hereto with copies thereof.  Sellers shall submit the form previously
agreed with Purchaser when soliciting the Required Consents for the
Leases.  If any novations, consents,
approvals or waivers necessary for the assignment, assumption, transfer or
novation of any Contract or Intellectual Property shall not have been obtained
on or prior to the Closing Date, then Purchaser and Sellers shall use
commercially reasonable efforts and cooperate and assist one another to obtain
promptly such novations, consents, approvals or waivers as soon as practicable
after the Closing, provided, however, that this sentence shall not be applicable
with respect to any Leases for which a Required Consent is not delivered unless
Purchaser provides notice to Sellers following the Closing Date of its request
for assistance and cooperation.  Once any
novation, consent, approval or waiver in respect of such Contract or
Intellectual Property is obtained, Sellers shall assign, transfer, convey or
deliver such Contract or Intellectual Property to Purchaser at no additional
cost.


(b)  Pending the receipt of any novations,
consents, approvals or waivers pursuant to Section 5.4(a) and for all other
Contracts or Intellectual Property included in the Acquired Assets for which a
novation, consent, approval or waiver is required but not obtained, as of the
Effective Time, to the extent permitted by law and necessary to give effect to
the terms hereof and not expressly prohibited by the terms of any applicable
Contracts or evidence of Intellectual Property, this Agreement shall constitute
full and


 


25

















 


equitable assignment by
Sellers to Purchaser of all of their right, title and interest in and to, and
assumption by Purchaser of all of the respective obligations and liabilities of
Sellers, under, such Intellectual Property and Contracts, to the extent such
liabilities or obligations would be, but for the lack of assignment, Assumed
Liabilities, and, in the case of Contracts, Purchaser shall be deemed the agent
of Sellers for purposes of completing, fulfilling and discharging when due all
of the liabilities of Sellers under any such Contract to the extent such
liabilities otherwise would be an Assumed Liability.  The parties shall take all actions reasonably
necessary to provide Purchaser with the benefits of such Intellectual Property
and Contracts to the extent included in the Acquired Assets, and, in the case
of such Contracts, to relieve Sellers of the burdens of performance and other
obligations thereunder, including entry into subcontracts for the performance
thereof, to the extent that such performance and other obligations would be,
but for the lack of assignment, Assumed Liabilities.  Purchaser agrees to pay, perform and
discharge when due all of Sellers’ obligations and liabilities under such
Contracts to the extent such liabilities or obligations otherwise would be an
Assumed Liability.  This paragraph shall
not be applicable to the Leases unless consented to by Sellers and Purchaser in
writing.


(c)  If Sellers, Parent or any of their affiliates
shall be unable to make the equitable assignment described in Section 5.4(b),
or if such attempted assignment would give rise to any right of termination or
would otherwise adversely affect the rights of Sellers, Purchaser or any of
their affiliates under such Intellectual Property or Contract, or would not
assign all of the rights or transfer all of the obligations and liabilities of
Sellers thereunder (to the extent such and obligations would be, but for the
lack of assignment, Assumed Liabilities) at the Closing, Sellers, Parent and
their affiliates shall use commercially reasonable efforts to (i) provide to
Purchaser, at the request of Purchaser, the benefits of any such Intellectual
Property or Contract to the extent included in the Acquired Assets,
(ii) cooperate in any lawful arrangement designed to provide such benefits
to Purchaser, and (iii) enforce, at the request of and for the account of
Purchaser, any rights of Sellers arising from any such Intellectual Property or
Contract against any third Person (including any Governmental Entity) including
the right to elect to terminate in accordance with the terms thereof upon the
advice of Purchaser.  To the extent that
Purchaser is provided the benefits of any Intellectual Property or Contract
referred to in this Section 5.4 (whether from Sellers or otherwise), Purchaser
shall, after the Closing Date, perform at the direction of Sellers and for the
benefit of any third Person (including any Governmental Entity) the obligations
of Sellers thereunder or in connection therewith, and Purchaser agrees to pay,
perform and discharge when due all of Sellers’ obligations and liabilities
under such Contracts to the extent such liabilities or obligations otherwise
would be an Assumed Liability.  This
paragraph shall not be applicable to the Leases unless consented to by Sellers
and Purchaser in writing.


(d)  In connection with obtaining the novations,
consents, approvals or waivers contemplated by this Section 5.4, Sellers shall
not consent to any modification of any Contract to the extent included in the
Acquired Assets that would materially adversely affect the rights of Purchaser
under such Contract without the prior written consent of Purchaser.  This paragraph shall not be applicable to the
Leases, for which the definition of Required Consents shall be applicable.


 


26
















 


SECTION 5.5  Expenses.  Whether or not the Closing takes place, and
except as otherwise specifically provided in Section 5.10(b) (with respect to
Transfer Taxes), in Section 5.16 (with respect to HSR filing fees) and the cost
of the preparation of the 2006 Audited Financials, the 2007 Audited Financials
and the Supplemental Financial Information, which shall be shared equally
between Purchaser and Sellers, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such costs or expenses.


SECTION 5.6  No Additional Representations.  Purchaser acknowledges and agrees that it and
its Representatives have had  access to
the books and records, facilities, equipment, Contracts and other properties
and assets included in or related to the Business and the Acquired Assets and
Assumed Liabilities.  Purchaser also
acknowledges that it has conducted its own review and analysis of the Business
and the Acquired Assets and Assumed Liabilities.  Purchaser further acknowledges and agrees
that neither Parent nor the Sellers nor any of their Representatives has made
any representation or warranty, express or implied, with respect to the
Business or the Acquired Assets or Assumed Liabilities or the accuracy or
completeness of any information regarding the Business, the Acquired Assets or
the Assumed Liabilities, except as expressly set forth in this Agreement or in
the Ancillary Documents.


SECTION 5.7  Certain Information.


(a)  After the Closing, upon reasonable written
notice, Purchaser, Parent and Sellers shall furnish or cause to be furnished to
each other and their respective accountants, counsel and other Representatives
access, during normal business hours and upon reasonable prior notice, to such
information (including records pertinent to the Business, the Acquired Assets,
the Excluded Assets, the Assumed Liabilities or the Excluded Liabilities),
personnel and properties together with assistance relating to the Business, the
Acquired Assets, the Excluded Assets, the Assumed Liabilities and the Excluded
Liabilities as is reasonably necessary for verification of calculations
delivered by either party pursuant to Section 5.11, financial reporting
purposes, the preparation by Sellers and its auditors of audited statements for
the Business (including for historical periods), the preparation and filing of
any returns, reports or forms or the defense of, or response required under, or
pursuant to, any lawsuit, action proceeding, audit or investigation (including
any proceeding involving Sellers or any of their affiliates and any litigation
related to the Acquired Assets, the Excluded Assets, the Assumed Liabilities,
the Excluded Liabilities, the Business or any Employee other than litigation
between the parties relating to this Agreement or the Ancillary
Documents).  After the Closing, Purchaser
and Sellers agree to deliver promptly to the other all mail and other documents
received by such party which relate to any business conducted by such other party
or its affiliates after the Closing. 
Purchaser and Sellers shall, and shall cause their affiliates to, retain
after the Closing Date all such records (other than retention of tax records)
pertinent to the Acquired Assets, the Excluded Assets, the Assumed Liabilities
and the Excluded Liabilities that are owned by such Person immediately after
the Closing until the later to occur of (i) the expiration of the applicable
statute of limitations with respect to the subject matter described in such
records or (ii) the final resolution of any outstanding claim or proceeding
with respect to the subject matter described in such


 


27

















 


records.  After the end of such period, before
disposing of any such records, the applicable party shall give notice to such
effect to the other, and shall give the other, at the other’s cost and expense,
a reasonable opportunity to remove and retain all or any part of such records
as the other may select.  Cooperation
with respect to Tax matters shall be governed by Section 5.10.


(b)  Notwithstanding anything else set forth
herein to the contrary, in no event shall Sellers or Purchaser, or any of their
respective affiliates, be obligated under this Agreement to disclose to any
other party or parties (i) any information the disclosure of which is
restricted by contract or applicable law except in strict compliance with the
applicable contract or law, provided that the parties shall take all reasonable
steps, including, obtaining any waivers necessary in order to provide such
otherwise required access or disclosure, (ii) any information as to which the
attorney-client privilege may be applicable, or (iii) any personnel files,
workers’ compensation files, employee medical files, other employee books and
records, affirmative action plans or related books and records, except as
provided by law or as required by valid subpoena or court order and then only
in strict compliance with applicable law, subpoena or court order.  Purchaser acknowledges that any information
being provided to it or its Representatives by Sellers or any of their
affiliates or Representatives pursuant to or in connection with this Agreement
is subject to the terms of the Confidentiality Agreement, the terms of which
are incorporated herein by reference.  If
privileged and/or attorney work product documents or information, including
communications between any party hereto or its affiliates and any of their
respective counsel, are disclosed to any other party pursuant to or in
connection with this Agreement and the transactions contemplated hereby, then
Sellers and Purchaser hereby acknowledge and agree that (i) such disclosure is
inadvertent, (ii) such disclosure will not constitute a waiver, in whole or in
part, of any privilege or work product, and (iii) the receiving party will
promptly return to the disclosing party all copies of such documents or
information in its possession or in the possession of its affiliates or
Representatives.  Additionally, Sellers
and Purchaser agree that they and their affiliates shall not waive the
attorney-client, work product, or like privilege of the other party with
respect to any of such documents or information, without the other party’s
prior written consent.


(c)  Parent and Sellers shall use commercially
reasonable efforts to deliver to Purchaser on or prior to the forty-fifth (45th)
day following the Closing, (i) audited financial statements of the Business for
the fiscal year ended July 31, 2006 
prepared in accordance with GAAP, together with an opinion thereon of
Sellers’ independent public accountants, which audited financial statements and
opinion shall meet all standards required by Regulation S-X promulgated under
the Exchange Act (the “2006 Audited Financials”), (ii) unaudited interim
condensed financial statements of the Business including notes thereto,
prepared in accordance with GAAP, for the three-month period from August 1,
2007 through October 31, 2007, meeting all standards required by Regulation
S-X, (iii) unaudited interim condensed financial statements of the Business
including notes thereto, prepared in accordance with GAAP, for the three-month
period from August 1, 2006 through October 31, 2006, derived from the 2007
Audited Financials, (iv) supplemental income statements of the Business for
each of the three-month periods during the fiscal year ended July 31, 2007,
derived from the 2007 Audited


 


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Financials and prepared
in accordance with GAAP; and (iv) supplemental income statements for the six
month period from February 1, 2006 through and July 31, 2006 and the six month
period from August 1, 2006 through January 31, 2007, derived from the 2006
Audited Financials and the 2007 Audited Financials, respectively, prepared in
accordance with GAAP (the financial information in clauses (ii) through (iv)
shall be referred to as “Supplemental Financial Information”).


(d)  No later than five (5) days prior to Closing,
Sellers shall deliver to Purchaser a substantially completed draft of the 2007
Audited Financials, including a draft opinion.


SECTION 5.8  Bulk Transfer Laws.  Purchaser hereby waives compliance by Sellers
with the provisions of any so-called “bulk transfer law” of any jurisdiction in
connection with the sale of the Acquired Assets to Purchaser.


SECTION 5.9  Cooperation of the Parties; Further
Assurances.


(a)  The parties shall cooperate with each other
and with their respective Representatives in connection with any acts or
actions required to be taken as part of or as a condition to their respective
obligations under this Agreement or any Ancillary Document.  Without limiting the foregoing, Sellers shall
cooperate with, and use commercially reasonable efforts to assist, Purchaser in
connection with the requests that Purchaser may receive from its lenders in
connection with completing the terms and conditions set forth in the Commitment
Letter.


(b)  On and after the Closing Date, Sellers and
Purchaser shall use commercially reasonable efforts to take, or cause to be taken,
all reasonably necessary or appropriate actions and do, or cause to be done,
all things reasonably necessary or appropriate to consummate the transactions
contemplated by this Agreement and the Ancillary Documents, including the
execution of any additional documents or instruments of any kind (not
containing additional representations or warranties) which may be reasonably
necessary or appropriate to carry out the provisions hereof and thereof.  In addition, Seller shall pay and discharge
the Excluded Liabilities in the ordinary course of business, consistent with
past practice.


SECTION 5.10  Allocation; Tax Matters.


(a)  All amounts constituting consideration within
the meaning of, and for the purposes of, Section 1060 of the Code and the
regulations thereunder shall be allocated among the Acquired Assets and any
other rights acquired by Purchaser hereunder, as applicable, in  the manner required by Section 1060 of the Code and
the regulations thereunder and all applicable laws.  Within sixty (60) calendar days after the
Closing Date, Sellers shall provide Purchaser with a proposed schedule (the “Allocation
Schedule”) allocating all such amounts as provided herein.  The Allocation Schedule shall become final
and binding on the parties hereto forty-five (45) calendar days after Sellers
provides such schedule to Purchaser, unless Purchaser objects in writing to
Sellers and, orally or in writing, specifies the basis for its objections and
proposes an alternative


 


29

















 


allocation.  If Purchaser does object, Sellers and
Purchaser shall in good faith attempt to resolve the dispute within fifteen
(15) calendar days of written notice to Sellers of Purchaser’s objection.  Any such resolution shall be final and
binding on the parties hereto.  Any
unresolved disputes shall be promptly submitted to an accounting firm mutually
agreeable to Purchaser and Sellers that is not the current auditor of either
(the “Reviewing Accountants”) for determination, with such determination
being final and binding on the parties hereto. 
Sellers and Purchaser will each pay one-half of the fees and expenses of
the Reviewing Accountants.  Sellers and
Purchaser shall cooperate with each other and the Reviewing Accountants in
connection with the matters contemplated by this Section 5.10(a),
including, without limitation, by furnishing such information and access to
books, records (including, without limitation, accountants work papers),
personnel and properties as may be reasonably requested.  Each of the parties hereto agrees
to (i) prepare and timely file all Tax Returns, including, without
limitation, Form 8594 (and all supplements thereto) in a manner consistent with
the Allocation Schedule as finalized and (ii) act in accordance with the Allocation
Schedule for all Tax purposes.  The
parties hereto will revise the Allocation Schedule to the extent necessary to
reflect any post-Closing payment made pursuant to or in connection with this
Agreement.  In the case of any payment
referred to in the preceding sentence, Sellers shall propose a revised
Allocation Schedule, and the parties hereto shall follow the procedures
outlined above with respect to review, dispute and resolution in respect of
such revision.


(b)  Purchaser on the one hand and Sellers on the
other hand shall share equally and each shall bear one-half of all transfer,
documentary, sales, use, registration, stamp, value-added and other similar
Taxes (including all applicable real estate transfer Taxes and real property
gains Taxes and sales Taxes on vehicles), including any penalties, fees,
interest and additions to Tax, incurred in connection with the transactions
contemplated hereby and any Taxes (collectively, “Transfer Taxes”) as
well as all out-of-pocket costs associated with the preparation and filing of
the Tax Returns under this Section 5.10(b). 
If either party pays a liability for Transfer Taxes, then the paying
party may request the non-paying party to reimburse it for fifty percent of such
liability and the non-paying party shall reimburse the paying party within five
(5) days of the paying party’s written request. 
Sellers and Purchaser shall cooperate in timely making and filing all
Tax Returns as may be required to comply with the provisions of any Transfer
Tax laws and in making arrangements that lawfully minimize Transfer Taxes
without increasing other Taxes above the amount that would otherwise be payable
in the absence of such arrangements.  To
the extent legally able to do so, Purchaser shall deliver to Sellers exemption
certificates satisfactory in form and substance to Sellers with respect to
Transfer Taxes if such delivery would reduce the amount of Transfer Taxes that
would otherwise be imposed.


(c)  At the Closing, each Seller shall deliver to
Purchaser a certification from such Seller in accordance with United States
Treasury Regulation Section 1.1445-2(b)(2)(i) and in the form provided in
United States Treasury Regulation Section 1.1445-2(b)(2)(iv)(B) (the “FIRPTA
Certificate”).


(d)  Sellers and Purchaser shall each provide the
other with such assistance as may be reasonably requested (including making employees
reasonably available to


 


30

















 


provide information or
testimony, at no cost to the other party, except out-of-pocket costs) in
connection with the preparation and filing of any Tax Return or the
determination of liability for Taxes with respect to the Acquired Assets.  Sellers and Purchaser each shall retain until
seven years after the Closing Date all Tax Returns, schedules, work papers,
accounting records and other records that are owned by such Person immediately
after the Closing Date and that relate to the Acquired Assets and
representatives of each party will, upon reasonable notice, have access to such
Tax records during normal business hours to examine, inspect and copy
them.  At the end of the seven year
period after the Closing Date but prior to disposal, each party will inform the
other of its intent to dispose of any such Tax records and will provide the other
party with a reasonable opportunity to obtain such Tax records as they deem
appropriate.


(e)  If any Tax authority informs Purchaser or any
of its affiliates of any notice of a proposed audit, claim, assessment or other
dispute concerning Taxes relating to a Pre-Closing Tax Period, the party so
informed shall promptly notify Sellers of such matter.  If Sellers or any of their affiliates are
informed of any audit, claim, assessment or other dispute concerning Non-Income
Taxes relating to the operation of the Business or the Acquired Assets during
any Pre-Closing Tax Period, the party so informed shall promptly notify
Purchaser of such matter. Such notice shall be accompanied by copies of any
notice or other documents received from any Tax authority with respect to such
matter.  Sellers shall have the right to
control any Tax Proceedings relating to any Pre-Closing Tax Periods, including
any settlements thereof, provided that, prior to asserting control over such Tax
Proceeding, Sellers have acknowledged in writing their indemnification
obligation under Article X with respect to all Taxes and related expenses
arising from such Tax Proceedings.  Any
Tax Proceeding involving Pre- and Post-Closing Tax Periods and relating to
Non-Income Taxes shall be jointly controlled by Sellers and Purchaser.  Purchaser shall not settle any liability for
Taxes related to Pre-Closing Tax Periods for which Sellers have an
indemnification obligation and have previously provided the written
acknowledgement of their indemnification obligation described above without the
prior written consent of Sellers.


SECTION 5.11  Proration of Certain Assets and
Liabilities.


(a)  The following assets and liabilities of the
Business shall be prorated on a per diem basis and apportioned between Sellers,
on the one hand, and Purchaser, on the other, as of the Effective Time:  any current prepaid expenses (but excluding
any items covered by Section 5.20), advertising, utility charges (including
telecommunication charges), rent, water and sewer fees, license and permit fees
(but only to the extent such license or permit is an Acquired Asset),
maintenance contracts (which become Acquired Assets), and similar charges
imposed with respect to the Acquired Assets (collectively, with Property Taxes
apportioned pursuant to Section 5.11(b), the “Prorated Assets and
Liabilities”).  Sellers shall be
liable for (and shall promptly reimburse Purchaser to the extent Purchaser
shall have paid) that portion of the Prorated Assets and Liabilities relating
to, or arising in respect of, days ending prior to the Effective Time, and
Purchaser shall be liable for (and shall promptly reimburse Sellers to the
extent Sellers shall have paid) that portion of the Prorated Assets and
Liabilities relating to, or arising in respect of, all periods on and after the
Effective Time.  With respect to the pro
ration of


 


31

















 


percentage rent due under
a Lease, the pro ration shall be based upon the overall sales during the Lease
year relative to sales during the Lease year that occurred prior to the
Effective Time (which shall be for the account of Sellers) and sales during the
Lease year that occurred on or subsequent to the Effective Time (which shall be
for the account of the Purchaser).


(b)  Property Taxes with respect to the operation
of the Business and the Acquired Assets relating to the Straddle Period shall
be apportioned in the following manner: The amount of Property Taxes allocated
to the Pre-Closing Tax Period included in the Straddle Period shall be equal to
the total amount of such Property Taxes for the Straddle Period multiplied by a
fraction, the numerator of which is the number of days in the Pre-Closing Tax
Period included in the Straddle Period and the denominator of which is the
total number of days in the Straddle Period. 
The amount of Property Taxes attributable to the Post-Closing Tax Period
included in the Straddle Period shall be equal to the total amount of Property
Taxes for the Straddle Period less the amount of Property Taxes attributable to
the Pre-Closing Tax Period included in the Straddle Period.


(c)  Following the Closing, Purchaser shall
reimburse Sellers for any deposits exclusively related to the Real Property and
for which Purchaser will continue to receive a benefit following the
Closing.  If requested by Purchaser,
Sellers shall provide Purchaser with documentation to substantiate the
reimbursement request prior to payment being due.


SECTION 5.12  Supplemental Disclosure.  From time to time prior to the Closing Date,
Sellers shall have the right to supplement or amend (by written notice to
Purchaser) the Schedules to Article III of this Agreement (provided Sellers
shall not have such right with regard to Schedule  3.14, except to
the  extent such supplement or amendment
pertains to any Permits or contracts entered into after the date hereof) with
respect to any matter that first arises after the date hereof in the ordinary
course of business which, if existing, occurring or known at the date of this
Agreement, would have been required to be set forth or described in the
Schedules or which is necessary to correct any information in the Schedules
which has been rendered materially inaccurate thereby.  For the purpose of determining satisfaction
of the conditions set forth in Section 8.2(a), no supplement or amendment to
the Schedules shall eliminate Purchaser’s right, if any, to terminate this
Agreement based upon any inaccuracy or breach of representation or
warranty.  After the Closing, the
Schedules shall be deemed for the purposes of Article IX hereof, to include and
reflect such supplements and amendments made in accordance with this Section
5.12 prior to the Closing Date.


SECTION 5.13  Parent Trademarks.  It is expressly agreed that Purchaser is not
acquiring any right, title or interest in trademarks, service marks, logos,
trade names or Internet protocol addresses or Internet domain names of Parent
or its affiliates (other than as provided in Section 1.2(a)) or in any
trademark, service mark logo, trade name, or Internet domain name or Internet
protocol address incorporating the words Zale, Zales, Gordons, Peoples,
Piercing Pagoda and Mappins, Parent’s corporate signature or logo, or any part,
variation or derivative thereof (collectively, “Parent Trademarks”).  As promptly as practicable, but in no event
later than ninety (90) days following the Closing


 


32

















 


Date, Purchaser shall use
commercially reasonable efforts to remove, strike over or otherwise obliterate,
at its own cost, all Parent Trademarks from all items and materials
constituting or included in the Acquired Assets or otherwise owned or held by
Purchaser, including any facility signs, equipment, vehicles, Internet sites,
business cards, schedules, purchase orders, invoices, stationery, displays,
signs, promotional materials, manuals, forms and other materials, if such items
and materials are routinely visible to, or distributed or made available or
proposed to be distributed or made available to, third parties or the public,
and Purchaser shall use commercially reasonable efforts to cease using
invoices, purchase orders, stationery and business cards containing Parent
Trademarks no later than one hundred eighty (180) days after the Closing Date.  Nothing contained herein shall require or be
construed to require Purchaser to cause customers of the Business to take any
action with respect to property in the possession of any such customers.  Notwithstanding the foregoing, neither
Purchaser nor any of its affiliates shall, from and after the Closing Date,
except as otherwise expressly agreed in writing by Parent or as provided in the
Transition Services Agreement or in this Section 5.13 with respect to Purchaser’s
use of such invoices, purchase orders, stationery and business cards containing
Parent Trademarks, make any direct or indirect use of any Parent Trademarks or
make any reference to Parent or its affiliates in any advertisements, of
Purchaser or any of its affiliates.


SECTION 5.14  Insurance.  Purchaser acknowledges and agrees that
effective upon the Closing, all insurance policies carried by or for the
benefit of Parent and Sellers or any of their affiliates with respect to the
Acquired Assets and the operation, activities and liabilities of the Business
(the “Seller Insurance Policies”) may be terminated or modified by
Parent or Sellers or deemed by the language of such policies to exclude
coverage of the Acquired Assets and the activities, liabilities and operations
of the Business, and Purchaser shall, on or before the Closing, obtain at its
sole cost and expense replacement insurance coverage for the Acquired Assets
and the activities, operations and liabilities of the Business from and after
the Effective Time, provided, however, if any Acquired Asset is not actually
transferred to Purchaser on the Closing Date, but Sellers are providing the
Purchaser with the benefits of such Acquired Asset pursuant to Section 5.4,
Sellers shall continue to insure such asset on the Sellers’ insurance policies
(at Purchaser’s cost) on terms not less favorable than those in effect on the
date hereof until such time as the Acquired Asset is transferred to
Purchaser.  Following the Closing, the
parties shall cooperate (at their own respective cost and expense) in submitting
any claims under any of the Seller Insurance Policies arising out of
occurrences prior to the Closing. 
Purchaser acknowledges that Sellers shall not have any responsibility
for obtaining or maintaining any insurance or bearing any liability with respect
to the Acquired Assets or the operations, liabilities or activities of the
Business relating to or directly or indirectly arising out of events occurring
subsequent to the Closing. 
Notwithstanding any of the provisions of this Section 5.14, Purchaser
shall have no right to make any claim directly against Parent or Sellers,
except as otherwise expressly set forth in this Agreement, or against any
insurance carrier under any of the Seller Insurance Policies for any claim,
loss, liability, lien, damage or expense applicable to the Acquired Assets or
the activities, liabilities or operations of the Business.


 


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SECTION
5.15  Guarantees of Parent and Sellers.  The parties shall cooperate and use their
respective commercially reasonable efforts to release any and all guarantees
and letters of credit of Parent or Sellers or any of their affiliates in
respect of the Assumed Liabilities or the Acquired Assets (collectively, the “Seller
Guarantees”), provided, however, any obligation of Sellers or
any of their affiliates under the Leases shall not be included within the term
Seller Guarantees.  Purchaser shall use
commercially reasonable efforts to execute any substitute guarantees and make
any other arrangements on the part of Purchaser or its affiliates reasonably
necessary to obtain the release of any such Seller Guarantees.  If the parties are unable to cause any of the
Seller Guarantees to be released prior to the Closing, Purchaser shall
indemnify and hold harmless Parent and Sellers and their affiliates from and
against any and all amounts becoming payable under or with respect to any such
Seller Guarantees following the Closing as a result of actions or events
occurring after the Closing.  In addition, Purchaser shall not extend, renew or amend any Lease in any
manner that would increase or extend the liability of either Seller thereunder
without obtaining the full release of Sellers from any increased or extended
liabilities under such Lease, and Purchaser shall give notice to Sellers of
each such release.  Following the
Closing, Purchaser shall give Sellers prior written notice of any such proposed
extensions, renewals or amendments and shall promptly provide copies of any
written notice of a default or similar event pertaining to the Leases received
by Purchaser.


SECTION 5.16  Governmental Approval.  If a filing is required pursuant to the HSR
Act, each of Purchaser and Parent shall as promptly as practicable, but in no
event later than fifteen Business Days following the execution and delivery of
this Agreement, file with the United States Federal Trade Commission and the
United States Department of Justice, the notification and report form under the
HSR Act required for the transactions contemplated hereby and any supplemental
information requested in connection therewith pursuant to the HSR Act.  Each party will bear its own costs for the
preparation of any such filing and responding to any inquiries or information
requests, and Purchaser and Parent shall each be responsible for the payment of
one half of any applicable filing fees. 
Each of Purchaser and Parent shall use commercially reasonable efforts
to promptly comply with any other laws of any country which are applicable to
any of the transactions contemplated hereby and pursuant to which any consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity or any other Person in connection with such
transactions is necessary.  Each of
Purchaser and Parent shall furnish to the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of any filing, registration or declaration which is necessary under
the HSR Act or any other such laws. 
Purchaser and Parent shall keep each other reasonably apprised of the
status of any communications with, and any inquiries or requests for additional
information from, any Governmental Entity, and shall use commercially
reasonable efforts to comply promptly with any such inquiry or request.  Purchaser and Parent shall use all
commercially reasonable efforts to obtain any clearance under the HSR Act or
any other consent, approval, order or authorization of any Governmental Entity
necessary in connection with the transactions contemplated hereby or to resolve
any objections which may be asserted by any Governmental Entity with respect to
the transactions contemplated hereby, provided that no party hereto shall be
required to execute any agreements or submit to


 


34

















 


judicial or
administrative orders to hold separate and/or divest any of its assets or
businesses or the businesses or assets of any of their respective subsidiaries.


SECTION 5.17  Commitment Letter.  Purchaser shall use its commercially
reasonable efforts to complete the transactions contemplated by the Commitment
Letter in accordance with the terms of the Commitment Letter (including
obtaining rating agency approvals, maintaining in effect the Commitment Letter,
satisfying on a timely basis all conditions applicable to Purchaser to
obtaining the financing contemplated by the Commitment Letter, negotiating
definitive agreements with respect thereto on terms and conditions contained
therein, satisfying all conditions applicable to Purchaser in such definitive
agreements that are within its control and, if necessary, borrowing pursuant to
the Commitment Letter in the event the “flex” provisions are exercised), with
such changes as Purchaser may desire, in order to have available to it the
Purchase Price, the reasonably expected Inventory true-up payment contemplated
by Section 2.3 and other transaction costs at or prior to the Closing; provided,
however, that in no event will Purchaser make any changes that
reasonably would be expected to have a material adverse effect on the solvency
of the Purchaser upon the consummation of the transactions contemplated by this
Agreement  Purchaser shall keep Sellers
informed on a reasonably current basis in reasonable detail of the status of
its efforts to comply with the terms of, and satisfy the conditions
contemplated by, the financing contemplated by the Commitment Letter and shall
not permit any amendment or modification to be made to, or any waiver of any
provision or remedy under, the Commitment Letter that would have a material
adverse effect on the ability of Purchaser to consummate the transactions in
the Commitment Letter without obtaining the prior written consent of Sellers
(such consent not to be unreasonably withheld (or delayed).


SECTION 5.18  Nonsolicitation.  With respect to any Transferring Employee,
for eighteen months following the Closing Date, Sellers, Parent and their
affiliates shall not, directly or indirectly, for their own account or on
behalf of any other person, solicit or employ any such person at any time
during the six months following the end of such person’s employment with
Purchaser, or induce or attempt to induce any such employee to leave his or her
employment with Purchaser or any of its affiliates after the Closing, except if
such person responds to a general solicitation.


SECTION 5.19  Confidential Information.  Following the Closing, Sellers, Parent, and
any of their affiliates shall not at any time use or disclose to any person
other than Purchaser any confidential or proprietary information, knowledge or
data relating to the Business or the Acquired Assets (including, without
limitation, information relating to accounts, financial dealings, transactions,
trade secrets, intangibles, customer lists, pricing lists, processes, plans and
proposals), whether or not marked or otherwise identified as confidential or
secret unless such information (i) is now, or hereafter becomes, through no act
or failure to act on the part of Sellers, Parent or any of their affiliates in
breach of this Agreement, generally known or available; (ii) is hereafter
furnished to Sellers, Parent or any of their affiliates by a third party who is
not bound by an obligation of confidentiality with respect to such information;
(iii) is the subject of a written permission to disclose provided by Purchaser;
(iv) is necessary or appropriate in making any filing or obtaining any consent
or approval required for the consummation of


 


35

















 


the transactions
contemplated hereby; or (v) required to be included in Parent’s SEC
filings.  If compelled by a requirement
of a Governmental Entity or by law (including, without limitation, by subpoena
or court order, but other than pursuant to routine filing requirements) or
discovery to disclose any confidential information, Sellers, Parent and any of
their affiliates, as applicable, promptly will notify Purchaser in writing
prior to making any disclosure to provide Purchaser a reasonable opportunity to
either waive any objection to such disclosure or request a remedy from the
appropriate Governmental Entity.  Sellers,
Parent and any of their affiliates, as applicable, will cooperate with
Purchaser, at Purchaser’s expense, in its efforts to obtain such a remedy.  If Purchaser waives its objections or is
unsuccessful in its request, Sellers, Parent and any of their affiliates, as
applicable, will furnish only that portion of the confidential information that
is generally required.


SECTION 5.20  True-ups for Gift Cards and Deposits for
Special Orders.


(a)  Gift Cards and Layaways.


(i)  In order to facilitate the agreement between
the parties with respect to Previously Issued Gift Cards and Previously Issued
Layaways in Section 1.3(d), as soon as practicable following the Closing,
Sellers shall determine the aggregate amount of cash received by the Business (“Cash
Received”) for the Previously Issued Gift Cards and Previously Issued
Layaways as then reflected in Sellers’ records. 
Sellers shall notify Purchaser of the Cash Received and shall provide
Purchaser with an accurate list of each Previously Issued Gift Card (including
date of issuance and cash amount, except with respect to gift cards issued
prior to 2003, Sellers need only provide an aggregate cash amount, not to
exceed $20,000) and each Previously Issued Layaway (including amount of cash
collected and the merchandise subject to such layaway) (such information
required to be provided in this sentence, the “Cash Received Statement”).  If Cash Received exceeds $1,270,000, Sellers
shall pay to Purchaser, by wire transfer of immediately available funds, the
amount of such excess (the “Excess Amount”) on the date of delivery of
the Cash Received Statement.  Purchaser
shall have 30 days following the receipt of the Cash Received Statement to
notify Sellers of any disagreements with such Cash Received Statement, which
notice shall contain reasonable detail. 
During such 30-day period, Sellers shall provide Purchaser and its
Representatives access to such financial and other information as required
pursuant to Section 5.7 to aid Purchaser in its verification of the Cash
Received Statement.  Failure to notify
Sellers of its disagreement with the calculation within such 30-day period
shall be deemed acceptance of the Cash Received Statement by Purchaser.


(ii)  In the event that Purchaser timely notifies
Sellers of any disagreement, the parties agree that each of them will negotiate
in good faith to resolve such disagreement. 
If within thirty (30) days after delivery to Sellers of the notification
by Purchaser of a disagreement, the parties are unable to resolve such
disagreement, either the Purchaser, on the one hand, or Sellers, on the other
hand, shall have the right to submit the determination of such matters to an


 


36

















 


independent accountant of national or regional
standing reasonably acceptable to Purchaser and Sellers (the “Independent
Accountant”), whose decisions shall be binding on the parties.  The cost of the Independent Accountant shall
be paid by the party whose aggregate estimate of the disputed amount or
amounts, as the case may be, differs most greatly from the determination of the
Independent Accountant.


(iii)  If the Cash Received, as finally determined,
exceeds $1,270,000, within three (3) Business Days after the final
determination of the Cash Received, Sellers shall pay to Purchaser (x) the
shortfall amount, or (y) if Sellers had previously paid Purchaser the Excess
Amount, the difference between the final Cash Received amount and the Cash
Received amount initially included on the Cash Received Statement.  If not paid when due, interest shall accrue
on the amount at a rate equal to the lesser of (a) 12% and (b) the maximum rate
permitted by law.


(b)  Deposits for Special Orders.


(i)  Within ten (10) days following the Closing,
Seller shall (i) determine the aggregate amount of cash received by the
Business as deposits (the “Cash Deposit Amount”) on all special order
merchandise that remains undelivered to the Business as of the Effective Time
and for which Purchaser shall be responsible to pay the vendor upon receipt of
the merchandise after the Effective Time, (ii) provide Purchaser with a
schedule of all such special order merchandise, the deposit amount related
thereto and the cost of such merchandise (the “Special Items Schedule”)
and (iii) pay to Purchaser the Cash Deposit Amount.


(ii)  Purchaser shall have 30 days following the
receipt of the Cash Deposit Amount and Special Items Schedule to notify Sellers
of any disagreements with such Special Items Schedule, which notice shall
contain reasonable detail.  During such
30-day period, Sellers shall provide Purchaser and its Representatives access
to such financial and other information as required pursuant to Section 5.7 to
aid Purchaser in its verification of the Special Items Schedule.  Failure to notify Sellers of its disagreement
with the calculation within such 30-day period shall be deemed acceptance of
the Cash Deposit Amount and Special Items Schedule by Purchaser.


(iii)  In the event that Purchaser timely notifies
Sellers of any disagreement, the parties agree that each of them will negotiate
in good faith to resolve such disagreement. 
If within thirty (30) days after delivery to Sellers of the notification
by Purchaser of a disagreement, the parties are unable to resolve such
disagreement, either the Purchaser, on the one hand, or Sellers, on the other
hand, shall have the right to submit the determination of such matters to the
Independent Accountant, whose decisions shall be binding on the parties.  The cost of the Independent Accountant shall
be paid by the party whose aggregate estimate of the disputed amount or
amounts, as the case may be, differs most greatly from the determination of the
Independent Accountant.


 


37

















 


(iv)  If the Cash Deposit Amount, as finally
determined, is more than the amount initially paid by Sellers to Purchaser,
within three (3) Business Days after the final determination of the Cash
Deposit Amount, Sellers shall pay to Purchaser the shortfall.  If not paid when due, interest shall accrue
on the amount at a rate equal to the lesser of (a) 12% and (b) the maximum rate
permitted by law.


ARTICLE VI

Employees


SECTION 6.1  General


(a)  As of the Effective Time, Purchaser agrees to
offer to hire all of Sellers’ salaried and hourly personnel who are actively
employed at the Real Property (whether or not such employees are on medical,
family or other authorized leaves of absence and set forth on Schedule 6.1)
(the “Field Employees”) in substantially comparable jobs.  With respect to Sellers’ employees who are
listed on Schedule 6.1 (whether or not such employees are on medical,
family or other authorized leaves of absence and set forth on Schedule 6.1)
(the “Scheduled Employees”), as of the Effective Time, Purchaser shall
either offer to hire each such Scheduled Employee or shall reimburse Sellers
the cost of the severance amount specified on Schedule 6.1 for each such
Scheduled Employee not receiving an offer, less applicable withholdings.  The Scheduled Employees together with the
Field Employees, are referred to herein as the “Employees.”  Employees who become employed by Purchaser on
or within ninety days after the Closing Date are referred to herein as “Transferring
Employees.”  Subject to the provisions of
Section 6.2, Purchaser agrees to be responsible for all employment-related
obligations with respect to Transferring Employees arising on and after the
Effective Time.  If any Scheduled
Employee declines Purchaser’s offer of employment, Purchaser shall reimburse
Sellers the severance amount specified on Schedule 6.1 for each Scheduled
Employee who declines the Purchaser’s offer, less applicable withholdings.  Payment of such specified severance amount
shall represent the total amount owed by Purchaser with respect to such
Scheduled Employee.  If any Field
Employee declines Purchaser’s offer of employment, Purchaser shall have no
further obligations with respect to such Field Employee for severance or any
other benefits, and Sellers shall pay to such Field Employee severance in
accordance with the Sellers’ severance plans, policies or arrangements and
Sellers shall be responsible for obligations with respect to such Field
Employee for severance and any other benefits.


(b)  On the Effective Time or as soon as
administratively feasible thereafter (but in no event later than the time required
by applicable law), Seller shall pay to any Employee all amounts earned or
accrued as of the Effective Time, including, but not limited to salary,
commissions, paid time off and vacation pay.


(c)  Subject to Section 6.1(a), Purchaser
understands and acknowledges that Parent and Sellers are relying on Purchaser’s
agreement to hire all Field Employees and certain Scheduled Employees as of the
Effective Time.  In that regard,
Purchaser shall bear (or Finlay shall cause Purchaser to bear) sole responsibility
for any obligations or


 


38

















 


liabilities to
such Employees under the WARN Act and any other law of any other applicable
Governmental Entity regarding notice of employment termination, and Purchaser
agrees (and Finlay agrees to cause Purchaser) to indemnify and to hold Parent
and Sellers harmless from same. 
Purchaser’s indemnification of Sellers in this regard specifically
includes, but is not limited to, any claim by such Employee for back pay, front
pay, benefits, or compensatory or punitive damages, any claim by any
Governmental Entity for penalties regarding any issue of prior notification (or
any lack thereof) of any plant closing or mass layoff, as well as defense
costs, including attorneys’ fees, in defending any such claims, and such
indemnification shall continue for so long as any Employee has a right to seek
compensation under the WARN Act or any other law of any other applicable
Governmental Entity.  Notwithstanding the
foregoing, Sellers agree that at any time after the execution and delivery of
this Agreement Purchaser shall have the right to provide to the Scheduled
Employees such notices as may be necessary to comply with the requirements of
the WARN Act or any other law of any other applicable Governmental Entity
regarding notice of employment termination. 
Further, Sellers agree to provide the names, addresses and other
pertinent information with respect to the Scheduled Employees as may be
necessary to facilitate the delivery of the notices described in the foregoing
sentence no later than three (3) days following the execution and delivery of
this Agreement.


SECTION 6.2  Employee Benefits.


(a)  For a period of no less than twelve months
from the Closing Date, Purchaser shall provide each Transferring Employee, so
long as they remain employed by Purchaser during such period, overall benefits
and total compensation that, taken together, are substantially comparable in
the aggregate to the benefits and compensation customarily provided by Sellers.  Transferring Employees shall be eligible to
participate in any “employee benefit plan” (as defined in Section 3(3) of
ERISA), stock purchase, stock option, severance, fringe benefit, bonus,
incentive, deferred compensation, and all other employee benefit plans,
agreements, programs, policies or other arrangements (whether or not subject to
ERISA) maintained by Purchaser (“Purchaser’s Benefit Plans”) for its
similarly situated employees; provided, that nothing herein shall
obligate Purchaser to establish or maintain any particular form of employee
benefit plan or to require it to amend any existing benefit plan or
policy.  Notwithstanding the foregoing,
should Purchaser terminate a Transferring Employee other than for cause prior
to the first anniversary of the Effective Time, Purchaser shall pay the
Transferring Employee severance that is not less than the severance provided
for in Sellers’ severance plan in effect on the date hereof.  In addition, if Purchaser transfers a
Scheduled Employee located in the Dallas/Fort Worth Metroplex to a location
outside the Dallas/Fort Worth Metroplex and the Scheduled Employee declines the
transfer, Purchaser shall pay the Scheduled Employee severance equal to the
amount specified on Schedule 6.1.


(b)  Purchaser agrees to credit each Transferring
Employee, for purposes of Purchaser’s vacation and severance policies, for
years of service with Parent and Sellers, their affiliates and their
predecessors, as the case may be, determined immediately prior to the Effective
Time and to give Transferring Employees credit for deductibles and co-pays paid
by them during 2007 with respect to health and benefit plans.


 


39

















 


(c)  The parties hereto acknowledge and agree that
all provisions contained in this Section 6.2 are included for the sole benefit
of the parties hereto, and that nothing in this Agreement, whether express or
implied, shall (i) create any third party beneficiary or other rights (A) in
any other Person, including, without limitation, any employees or former
employees of Parent, Sellers or the Business, any participant in any employee
benefit plan maintained by Purchaser or any of its affiliates, or any dependent
or beneficiary thereof, or (B) to continued employment with Purchaser or any of
its affiliates; or (ii) constitute an amendment to any Employee Benefit Plan or
any employee benefit plan of Purchaser or any of its affiliates.


(d)  As soon as practicable following the Closing
Date, any Transferring Employees who have account balances in the Seller 401(k)
Plan shall be entitled to receive distributions of their account balances and
shall be permitted to roll over their eligible rollover distributions, as soon
as practicable after the Closing Date, but in no event later than ninety (90)
days after the Closing Date, to any 401(k) plan established or maintained by
Purchaser (or an affiliate thereof) (the “Purchaser 401(k) Plan”) on
behalf of such Transferring Employees. 
Such rollover may consist of cash, promissory notes evidencing
outstanding participant loans (“Loans”) under the Seller 401(k) Plan or
any combination thereof.  The Seller
401(k) Plan shall not place any Transferring Employee’s Loan into default so
long as such employee transfers his or her account balance under the Seller
401(k) Plan, together with the Loan, to the Purchaser 401(k) Plan through a
direct rollover as soon as administratively practicable following the Closing
Date.  Sellers and Purchaser shall cause
their respective plans to be amended, as necessary, and to cooperate with each
other in order to facilitate the implementation of the foregoing provisions.


ARTICLE VII

Merchandise


SECTION 7.1  Merchandise
Returns.  With respect to any merchandise sold at the
Real Property prior to the Effective Time, Purchaser agrees to follow and
adhere to the customary policy of the Business regarding merchandise returns,
credits and refunds.  Parent and Sellers
shall have no obligation to reimburse Purchaser for any credits or refunds
given by Purchaser with respect to any such returned merchandise, and Purchaser
shall be entitled to resell such returned merchandise without paying any
additional consideration therefor to Parent or Sellers.  Sellers have delivered to Purchaser a true,
correct and complete copy of the policies of the Business regarding merchandise
returns, credits and refunds in effect on the date hereof.


SECTION 7.2  Merchandise
Repairs.  At the Closing Sellers will
deliver to Purchaser all customer property in their possession in connection
with repairs and will direct the providers of repair services to the Business
to deliver to Purchaser any customer property in their possession.  To the extent that Sellers have paid a
provider of repair services for repairs with respect to such customer property,
and the customer has not reimbursed Sellers for such amounts, Purchaser shall
promptly reimburse Sellers for such unreimbursed amounts following Closing.


 


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                SECTION 7.3  Merchandise Consignments.  No later than ten (10) days prior to the
Closing, Sellers shall deliver to Purchaser a schedule of the consigned
merchandise of the Business.  Purchaser
shall deliver to Sellers a list of the consigned merchandise that it desires to
retain subsequent to the Closing no later than five (5) days prior to the
Closing.  Purchaser shall provide Sellers
written confirmation from the vendors that, following the Closing, Sellers no
longer will be responsible for such merchandise or for payment for merchandise
due except to the extent sold prior to the Effective Time.  Sellers will return all other consigned
merchandise to the appropriate owner thereof.


ARTICLE VIII

Conditions Precedent


SECTION 8.1  Conditions to Each Party’s Obligation.  The obligation of Purchaser to purchase the
Acquired Assets and to complete the other Purchaser actions contemplated by
this Agreement to occur at the Closing, and the obligation of Sellers to sell,
assign, transfer, convey and deliver the Acquired Assets to Purchaser and to
complete the other Sellers actions contemplated by this Agreement to occur at
the Closing, shall be subject to the satisfaction at or prior to the Closing of
the following conditions:


(a)  Certain Waiting Periods.  (i) Any waiting period under the HSR Act
applicable to any of the transactions contemplated hereby shall have expired or
been earlier terminated, and (ii) no antitrust authority shall have
required Parent, Sellers or any of their affiliates to continue to own any of
the Acquired Assets or to have required any party hereto to divest, separate or
offer for sale any of their assets.


(b)  No Injunctions or Restraints.  No temporary restraining order, preliminary
or permanent injunction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated by this Agreement and/or the
Ancillary Documents shall be in effect; provided, however, that
each of Purchaser and Sellers shall have used commercially reasonable efforts
to prevent the entry of any such order, injunction or other restraint or
prohibition and to appeal as promptly as possible any such order, injunction or
other restraint or prohibition that may be entered.


(c)  Leasehold Consents.  The Sellers shall have obtained and delivered
to Purchaser the Required Consents no later than five (5) Business Days prior
to the Closing.


SECTION 8.2  Conditions to Obligation of Purchaser.  The obligation of Purchaser to purchase the
Acquired Assets and to complete the other actions of Purchaser contemplated by
this Agreement to occur at the Closing, is subject to the satisfaction at and
as of the Closing of each of the following conditions, any of which may be
waived by Purchaser in its sole discretion:


(a)  Representations and Warranties.  The representations and warranties of Parent
and Sellers set forth in this Agreement shall be true and correct in all
material respects (except for such representations and warranties that are
qualified by their terms 


 


41

















 


by a reference to
materiality or to Material Adverse Effect, which representations and warranties
as so qualified shall be true and correct in all respects) as of the Closing as
though such representations and warranties were made on and as of the Closing,
except for those representations and warranties that address matters only as of
a particular date, which representations and warranties shall be true and
correct in all material respects (except for such representations and
warranties that are qualified by their terms by a reference to materiality or
to Material Adverse Effect, which representations and warranties as so
qualified shall be true and correct in all respects) only as of such date, and
Purchaser shall have received a certificate from Parent and Sellers to such
effect.


(b)  Performance of Obligations of Parent and
Sellers.  Parent and Sellers shall
have performed or complied in all material respects with all obligations,
conditions and covenants required to be performed or complied with by them
under this Agreement at or prior to the Closing, and Purchaser shall have
received a certificate from Parent and Sellers to such effect.


(c)  Funds. 
Purchaser shall have obtained an amount equal to the sum of the Purchase
Price, the reasonable expected Inventory true-up payment contemplated by
Section 2.3, plus $10.0 million to pay transaction-related expenses in debt
financing from GE in accordance with the Commitment Letter or such other
lender, on terms and conditions satisfactory to Purchaser in its reasonable
discretion.


(d)  2007
Audited Financial Statements.  No
later than one (1) Business Day prior to Closing, Sellers shall have delivered
to Purchaser audited financial statements of the Business for the fiscal year
ended July 31, 2007 prepared in accordance with GAAP, together with an opinion
thereon of Sellers’ independent public accountants, which financial statements
and opinion shall meet all standards required by Regulation S-X of the Exchange
Act (the “2007 Audited Financials”). The 2007 Audited Financials shall
be comparable, in all material respects, to the 2007 Unaudited Financials,
taking into account the required GAAP adjustments to be made to the 2007
Unaudited Financials.


 


(e)  Flagship
Store Consents.  Parent and Sellers shall
have received and delivered to Purchaser consents for the assignment of the
Leases listed on Schedule 8.2(e), which consent shall meet the
requirements of the last two sentences of the definition of Required Consents.


 


(f)  Expected
Delivery of 2006 Audited Financials and Supplemental Financial Information.  Based upon discussions with KPMG and/or
Sellers, nothing shall have come to Purchaser’s attention to cause it to
reasonably conclude that the 2006 Audited Financials and the Supplemental
Financial Information will not be delivered as contemplated by Section 5.7(c).


 


SECTION 8.3  Conditions to Obligation of Sellers.  The obligation of Sellers to sell, assign,
transfer, convey, and deliver the Acquired Assets and to complete the
other  actions of Sellers and Parent
contemplated by this Agreement to occur at the Closing, is subject to the
satisfaction at and as of the Closing of each of the following conditions, any
of which may be waived by Sellers in their sole discretion:


 


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(a)  Representations and Warranties.  The representations and warranties of
Purchaser set forth in this Agreement shall be true and correct in all material
respects  (except for such
representations and warranties that are qualified by their terms by a reference
to materiality, which representations and warranties as so qualified shall be
true and correct in all respects) as of the Closing as though such
representations and warranties were made on and as of the Closing, except for those
representations and warranties that address matters only as of a particular
date, which representations and warranties shall be true and correct in all
material respects (except for such representations and warranties that are
qualified by their terms by a reference to materiality, which representations
and warranties as so qualified shall be true and correct in all respects) only
as of such date, and Sellers shall have received a certificate from Purchaser
to such effect.


(b)  Performance of Obligations of Purchaser.  Purchaser shall have performed or complied in
all material respects with all obligations, conditions and covenants required
to be performed or complied with by it under this Agreement at or prior to the
Closing, and Sellers shall have received a certificate to such effect.


ARTICLE IX

Termination, Amendment and Waiver


SECTION 9.1  Termination.


(a)  Notwithstanding anything to the contrary in
this Agreement, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing:


(i)  by mutual
written consent of Parent, Sellers and Purchaser;


(ii)  by
Sellers, if any of the conditions set forth in Sections 8.1(a), 8.1(b) or
8.3(b) shall have become incapable of fulfillment by November 16, 2007 or
such later date as may be mutually agreed by the parties (the “Closing
Deadline”), and, in the case of Section 8.3(b), shall not have been waived
by Sellers;


(iii)  by
Purchaser, if any of the conditions set forth in Sections 8.1 or 8.2(b) shall
have become incapable of fulfillment by the Closing Deadline, and, in the case
of Section 8.2(b), shall not have been waived by Purchaser;


(iv)  by
Sellers, if any of Purchaser’s representations or warranties set forth herein
shall have become inaccurate as of a date subsequent to the date of this
Agreement, such that the condition set forth in Section 8.3(a) would not be
satisfied, and, if such inaccuracy is capable of being cured, Purchaser fails
to cure such inaccuracy within thirty days following written notification
thereof from Sellers to Purchaser;


 


43

















 


(v)  by
Purchaser, if any of Parent’s or Sellers’ representations or warranties set
forth herein shall have become inaccurate as of a date subsequent to the date of
this Agreement, such that the condition set forth in Section 8.2(a) would not
be satisfied, and, if such inaccuracy is capable of being cured, Parent or
Sellers fail to cure such inaccuracy within thirty days following written
notification thereof from Purchaser to Sellers; or


(vi)  by Sellers
or Purchaser if the Closing shall not have occurred by the Closing Deadline;


provided, however, that the right to
terminate this Agreement pursuant to clause (ii), (iii), (iv), (v) or (vi)
above shall not be available to a party (A) whose failure to fulfill an
obligation, or (B) whose breach of a representation, warranty, covenant or
agreement set forth in this Agreement, and/or (C) whose delay or
non-performance shall have been the cause of, or shall have resulted in, the
right to terminate this Agreement pursuant to this Section 9.1(a).


(b)  In the event of termination by Sellers or
Purchaser pursuant to Section 9.1(a), written notice thereof shall
promptly be given to the other party and the transactions contemplated by this
Agreement shall be terminated, without further action by any party.  If the transactions contemplated by this
Agreement are terminated as provided herein:


(i)  Upon
written request from Sellers, Purchaser shall return or destroy all documents and
other material received from Parent, Sellers or any other Person relating to
the transactions contemplated hereby, whether so obtained before or after the
execution hereof, to Parent or Sellers; and


(ii)  all
confidential information received by Purchaser with respect to the Acquired
Assets, the Business or any other aspect of the business of Sellers shall be
treated in accordance with the Confidentiality Agreement, which shall remain in
full force and effect notwithstanding the termination of this Agreement.


(c)  If this Agreement is terminated and the
transactions contemplated hereby are abandoned as described in this Section
9.1, this Agreement shall become null and void and of no further force and
effect, without any further obligation or liability of Parent, Sellers or
Purchaser hereunder (except for any liability of a party for its breach of this
Agreement), except for (i) the provisions of Section 5.2 relating to the
obligation of Purchaser to keep confidential certain information and data
obtained by it from Sellers, or other Persons, (ii) the provisions of this
Agreement relating to expenses (including Section 5.5), (iii) the provisions of
this Section 9.1 and (v) the provisions of Article XI.  Nothing in this Section 9.1 shall be
deemed to release either Purchaser or Parent and Sellers from any liability for
any breach by such party of the terms and provisions of this Agreement or to
impair the right of any party to compel specific performance by the other party
of its obligations under this Agreement.


 


44

















 


(d)  If 
either Purchaser or Sellers terminates this Agreement pursuant to
Section 9.1(a)(i), 9.1(a)(iii) or 9.1(vi) due to Sellers’ inability to
satisfy the condition set forth in Section 8.1(c) and all other conditions were
capable of being satisfied at the time, Sellers shall pay to Purchaser an
aggregate of $1,000,000 on the date of termination.


(e)  If Sellers terminate this Agreement pursuant
to Section 9.1(a)(i) or 9.1(a)(vi) due to Purchasers’ inability to satisfy the
condition set forth in Section 8.2(c) and all other conditions were capable of
being satisfied at the time, Purchaser shall pay to Sellers an aggregate of
$1,000,000 on the date of termination.


SECTION 9.2  Amendments and Waivers.  This Agreement may not be amended except by
an instrument in writing signed on behalf of the parties hereto.  By an instrument in writing, Purchaser, on
the one hand, or Parent and Sellers, on the other, may waive compliance by any
other party with any term or provision of this Agreement that such other party
was or is obligated to comply with or perform. 
No failure or delay of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof constitute a continuing waiver or preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege.


ARTICLE X

Indemnification


SECTION 10.1  Indemnification by Parent and Sellers.


(a)  Subject to all applicable terms and
conditions of this Article X, from and after the Closing Date, Parent and
Sellers, jointly and severally, hereby agree to indemnify Purchaser, Finlay and
their affiliates and their respective officers, directors, employees and Representatives
(collectively, the “Purchaser Group”) against, and to hold them harmless
from, any loss, liability, Tax, claim, damage or reasonable expense (including
without limitation reasonable attorneys’ fees’, whether or not involving a
Third-Party Claim (collectively, “Losses”), as incurred to the extent
arising directly or indirectly from, relating to or otherwise in respect of:


(i)  any failure
of any representation or warranty made by Parent or either Seller contained in
this Agreement to be true and correct; provided, however, that
(except with respect to the representations and warranties contained in set
forth in Sections 3.1, 3.2, 3.3, 3.8, the first sentence of 3.12(a), 3.17 and
3.19), Parent and Sellers shall not have any liability under this Section
10.1(a)(i) unless and until the aggregate of all Losses relating thereto for
which Parent or Sellers would, but for this proviso, be liable exceeds on a
cumulative basis an amount equal to $2,050,000 (the “Deductible”), at
which time Parent and Sellers shall only be liable for amounts in excess of the
Deductible; provided, further, that no claim for Losses under
this Section 10.1(a)(i) (except with respect to Sections 3.1, 3.2, 3.3, 3.8,
the first sentence of 3.12(a), 3.17 and 3.19) may be made, and no Losses shall
be applied against the Deductible for any claim that 


 


45

















 


(when aggregated with a series of substantially related claims) does
not cause Losses in an amount in excess of $15,000;


(ii)  any
nonfulfillment of, or failure to comply with, any covenant of Parent or either
Seller set forth in this Agreement;


(iii)  any
Excluded Liabilities; or


(iv)  any fees
of any Person referred to in Section 3.19 and any other fees, commissions or
expenses asserted by any other Representative of Parent or Sellers on the basis
of the transactions contemplated by this Agreement.


(b)  Notwithstanding anything else to the contrary
contained herein, the liability of Parent and Sellers under Section 10.1(a)(i)
(except with respect to  the
representations and warranties set forth in Sections 3.1, 3.2, 3.3, 3.8, the
first sentence of 3.12(a), 3.17 and 3.19), in the aggregate, shall be limited
to and in shall no event exceed fifteen percent (15%) of the Purchase Price.


(c)  Notwithstanding anything to the contrary in
this Agreement, for purposes of the indemnification provisions in this Section
10.1, the determination of (i) whether any representation or warranty has been
breached and (ii) the amount of any Losses shall be made without giving effect
to any “material adverse effect” qualification or any materiality or similar
qualification contained in the representations or warranties herein.


(d)  Purchaser acknowledges and agrees that its
sole and exclusive remedy with respect to any and all claims (other than claims
arising from fraud, intentional misrepresentation or willful misconduct on the
part of Parent or Sellers in connection with the transactions contemplated by
this Agreement) for any breach of any representation, warranty, covenant or
agreement set forth herein (but not including any claims arising after the
Closing under the express terms of any Ancillary Documents), shall be pursuant
to the indemnification provisions set forth in this Article X, provided,
however, that Purchaser shall be entitled to specific performance or
injunctive relief in addition to any other remedy at law or in equity to
enforce any of the covenants contained herein that are to be performed by
Parent or Sellers after the Closing since monetary damages would be inadequate
and Purchaser would have no adequate remedy at law.  In furtherance of the foregoing, each of
Purchaser and Finlay hereby waives, on behalf of itself and the members of the
Purchaser Group and to the fullest extent permitted under applicable law, any
and all rights, claims and causes of action for any breach of any
representation, warranty, covenant or agreement set forth herein it may have
against Parent and Sellers and their affiliates, and each of their respective
officers, directors, employees and Representatives arising under or based upon
any Federal, state, local or foreign statute, law, ordinance, rule or
regulation, except pursuant to the indemnification provisions set forth in this
Article X.


SECTION 10.2  Indemnification by Purchaser and Finlay


(a)  Subject to all applicable terms and
conditions of this Article X, from and after the Closing Date, Purchaser and
Finlay, jointly and severally, hereby agree to


 


46

















 


indemnify each of Parent
and Sellers and their affiliates and each of their respective officers,
directors, employees and Representatives (collectively, the “Seller Group”)
against, and agrees to hold them harmless from, any Losses as incurred to the
extent arising directly or indirectly from, relating to or otherwise in respect
of:


(i)  any failure
of any representation or warranty made by Purchaser contained in this Agreement
to be true and correct;


(ii)  any
nonfulfillment of, or failure to comply with, any covenant of Purchaser  set forth in this Agreement;


(iii)  any
Assumed Liabilities;


(iv)  any fees
of any Person referred to in Section 4.6 and any other fees, commissions or
expenses asserted by any other Representative of Purchaser on the basis of the
transactions contemplated by this Agreement; or


(v)  the
operation of the Business or the ownership, operation or use of the Acquired
Assets after the Closing Date.


(b)  Notwithstanding anything to the contrary in
this Agreement, for purposes of the indemnification provisions in this Section
10.2, the determination of (i) whether any representation or warranty has been
breached and (ii) the amount of any Losses shall be made without giving effect
to any “material adverse effect” qualification or any materiality or similar
qualification contained in the representations or warranties herein.


(c)  Parent and Sellers acknowledge and agree that
their sole and exclusive remedy with respect to any and all claims (other than
claims arising from fraud, intentional misrepresentation or willful misconduct
on the part of Purchaser in connection with the transactions contemplated by
this Agreement) for any breach of any representation, warranty covenant or
agreement set forth herein shall be pursuant to the indemnification provisions
set forth in this Article X, provided, however, that Parent and
Sellers shall be entitled to specific performance or injunctive relief in
addition to any other remedy at law or in equity to enforce any of the
covenants contained herein that are to be performed by Purchaser after the
Closing since monetary damages would be inadequate and Parent and Sellers would
have no adequate remedy at law.  In
furtherance of the foregoing, Parent and Sellers hereby waive, to the fullest
extent permitted under applicable law, any and all rights, claims and causes of
action for any breach of any representation, warranty, covenant or agreement
set forth herein they may have against Purchaser, Finlay and their respective
affiliates, and each of their respective officers, directors, employees and
Representatives arising under or based upon any Federal, state, local or
foreign statute, law, ordinance, rule or regulation, except pursuant to the
indemnification provisions set forth in this Article X.


SECTION 10.3  Losses Net of Insurance; No Punitive
Damages; Etc.


(a)  The amount of any Losses (including
Environmental Losses) for which indemnification is provided under this Article
X shall be net of any amounts actually 


 


47

















 


recovered by the
Indemnified Party under insurance policies with respect to such Losses, less
(i) the reasonably estimated amount of future increased premiums resulting
therefrom, (ii) any “retro-premiums” obligation, (iii) any costs incurred in
connection with such recovery and all deductibles, and (iv) co-payments and
similar obligations.


(b)  Notwithstanding anything to the contrary
contained herein, no indemnification shall be provided for under this Article X
in respect of, and the Indemnifying Party shall not be liable for, any
punitive, special, exemplary or similar damages or for lost profits, provided,
however, that the foregoing limitation on lost profits shall not prevent
Purchaser from recovering a portion of the Purchase Price, the benefit of which
Purchaser would lose as a result of a Loss, provided, further,
that such limitations shall not apply to Losses arising out of or relating to
any Third-Party Claim.


(c)  In computing the amount of any Losses with
respect to a breach of Section 3.4, 3.18 or 3.20, any Losses suffered by
Purchaser as a result of Purchaser’s post-Closing practices shall not be
included.


(d)  Parent, Sellers and Purchaser agree that any
payments made pursuant to this Article X will be treated by the parties on
their Tax Returns as an adjustment to the Purchase Price, unless a final
determination by a relevant Tax authority with respect to Purchaser or any of
its affiliates causes any such payment not to be treated as an adjustment to
the Purchase Price for tax purposes.


SECTION 10.4  Termination of Indemnification.  The obligation of Parent and Sellers to
indemnify and hold harmless Purchaser and Finlay for breaches of Parent’s and
Sellers’ representations and warranties shall terminate eighteen months after
the Closing Date, except that (a) the representations and warranties of
Parent and Sellers set forth in Sections 3.1, 3.2, 3.3, 3.8, the first sentence
of 3.12(a) and 3.19 shall survive the Closing indefinitely and (b) the
representations and warranties of Parent and Sellers set forth in Sections
3.16, and 3.17 shall terminate 60 days after the expiration of the applicable
statute of limitations (taking into account any waiver, extension or tolling
thereof).  The obligation of Purchaser
and Finlay to indemnify and hold harmless Parent and Sellers for breaches of
Purchaser’s representations and warranties shall terminate eighteen months
after the Closing Date, except that the representations and warranties of
Purchaser set forth in Sections 4.1, 4.2, 4.3 and 4.6 shall survive the Closing
indefinitely.  Notwithstanding the
foregoing, the obligation of the Indemnifying Party to indemnify and hold
harmless an Indemnified Party pursuant to this Article X shall not terminate
with respect to (x) any item as to which such Indemnified Party shall have,
before the expiration of the applicable period, previously made a claim by
delivering a notice pursuant to this Article X to the Indemnifying Party
or (y) claims made pursuant to Sections 10.1(a)(ii) through (iv) or
Sections 10.2(a)(ii) through (v).


SECTION 10.5  Procedures Relating to Third-Party Claims


(a)  In the event an Indemnified Party receives
notice of a Third-Party Claim, such Indemnified Party shall promptly give
notice, in writing and in reasonable detail, to the party required to provide
indemnification hereunder (the “Indemnifying Party”); 


 


48

















 


provided, that failure to give notification shall
not affect the indemnification provided hereunder except to the extent the
Indemnifying Party shall have been prejudiced as a result of such failure to
promptly notify, provided, further, that the Indemnifying Party
shall have no liability whatsoever if the failure to give such notice was
intentional or resulted from the Indemnified Party’s gross negligence.  Thereafter, the Indemnified Party shall
deliver to the Indemnifying Party, promptly after the Indemnified Party’s
receipt thereof, copies of all notices and documents (including court papers)
received by the Indemnified Party relating to the Third-Party Claim.


(b)  If a Third-Party Claim is made against an
Indemnified Party, the Indemnifying Party shall be entitled to participate in
the defense thereof and, if it so chooses within 20 days after receipt from the
Indemnified Party of the notice of such Third-Party Claim, to assume the
defense thereof, provided that an election to assume the defense of such
Third-Party Claim shall be deemed to be an admission that the Indemnifying
Party is liable to the Indemnified Party in respect of all Losses arising or
resulting from, or relating to, such Third-Party Claim.  Except as hereinafter provided, the
Indemnifying Party shall have the right to defend the Third-Party Claim with
counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified
Party by appropriate proceedings, (unless the nature of the claim creates an
ethical conflict for the same counsel to defend the Indemnified Party and the
Indemnifying Party) which proceedings, including settlement proceedings, shall
be conducted diligently and in good faith by the Indemnifying Party.  The Indemnifying Party shall be liable for
the reasonable fees and expenses of counsel employed by the Indemnified Party
for any period during which the Indemnifying Party does not assume or control
the defense thereof including in the event that the Indemnifying Party failed,
or is failing, to vigorously prosecute or defend such Third-Party Claim or in
the case of the ethical conflict discussed in the immediately preceding
sentence.  If the Indemnifying Party
elects to assume the defense of a Third-Party Claim and no ethical conflict for
the counsel exists, the Indemnifying Party shall not be liable to the
Indemnified Party for any further legal expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof.  If the Indemnifying Party assumes such
defense, the Indemnified Party shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. 
All the parties hereto shall cooperate in the defense of any Third-Party
Claim.  Such cooperation shall include
the retention and (upon the request of the party controlling the defense of the
Third-Party Claim) the provision to the party controlling the defense of the
Third-Party Claim of records and information that are reasonably relevant to
such Third-Party Claim, and making employees (including any employees familiar
with such Third-Party Claim) available to provide additional information and
explanation of any material provided hereunder or to serve as a witness.  If the Indemnifying Party chooses to defend
any Third-Party Claim, the Indemnified Party will agree to any settlement,
compromise or discharge of such Third-Party Claim that the Indemnifying Party
may recommend and that by its terms (i) obligates the Indemnifying Party to pay
the full amount of the liability in connection with such Third-Party Claim
(relating to matters that the Indemnified Party is entitled to indemnification
hereunder); (ii) does not compromise the Indemnified Party’s reputation; (iii)
does not obligate the Indemnified Party to perform or refrain from 


 


49

















 


performing any act under
such compromise, settlement or discharge, there is no Lien  placed on any assets of the Indemnified Party
and there is no injunctive or other non monetary relief; (iv) there is no
finding or admission of any violation of any law, violation or the rights of
any person by the Indemnified Party or any other liability of the Indemnified
Party to any person; and (v) the Indemnified Party receives, as part of such
settlement, compromise or discharge, a complete, general and unconditional
release in form and substance reasonably satisfactory to the Indemnified Party.


(c)  If the Indemnifying Party elects not to
assume and defend a Third-Party Claim, then the Indemnified Party, at the
Indemnifying Party’s expense and with the Indemnified Party’s own counsel, may
defend such matter; provided, however, that whether or not the
Indemnifying Party shall have assumed the defense of such matter, the
Indemnified Party shall not admit any liability with respect to, or settle, compromise
or discharge, such Third-Party Claim without the Indemnifying Party’s prior
written consent, which shall not be unreasonably withheld, conditioned or
delayed.


SECTION 10.6  Procedures Relating to Non-Third-Party
Claims.  The procedures contained in
Section 10.5 shall not be read as a limitation on any party’s right to seek
indemnification hereunder for matters other than Third-Party Claims.  In order for an Indemnified Party to be
entitled to any indemnification provided hereunder, the Indemnified Party shall
deliver notice of its claim, in writing and in reasonable detail specifying the
basis of such claim, to the Indemnifying Party. 
The failure by the Indemnified Party to so notify the Indemnifying Party
shall not relieve the Indemnifying Party from any liability that it may have to
the Indemnified Party, except to the extent that the Indemnifying Party shall
have been materially prejudiced as a result of such failure; provided
that the Indemnifying Party shall have no liability whatsoever if such failure
was intentional or resulted from the Indemnified Party’s gross negligence.  If the Indemnifying Party disputes its
liability with respect to such claim, the Indemnifying Party and the
Indemnified Party shall proceed in good faith to negotiate a resolution of such
dispute and, if not resolved through negotiations, such dispute shall be
resolved by litigation, arbitration or otherwise.


SECTION 10.7  Acknowledgment.  The indemnities provided for in this Article
X shall not be construed as an admission or conclusion, express or implied, as
to liability or damages in respect of the subject matter of such indemnities.


ARTICLE XI

General Provisions


SECTION 11.1  Notices.  All notices and other communications
hereunder shall be in writing (including facsimile or similar writing) and
shall be sent, delivered, mailed, addressed or faxed:


 


50
















 




	
  (a) if to Purchaser 

  or Finlay, to:

  	
   

  	
  Finlay Fine Jewelry Corporation

  529 Fifth Avenue

  New York, NY 10017

  Fax: (212) 867-3326

  Attn: President



  
	
  with a copy to:

  	
   

  	
  Steven Kirshenbaum, Esq.

  Proskauer Rose LLP

  1585 Broadway

  New York, NY 10036

  Fax: (212) 969-2900



  
	
  (b) if to Sellers, to:

  	
   

  	
  Zale Corporation

  901 West Walnut Hill Lane

  Irving, TX 75038

  Attn: President

  Fax: (972) 580-4934



  
	
  with a copy to:

  	
   

  	
  W. Brinkley Dickerson, Jr.

  Troutman Sanders LLP

  600 Peachtree Street, N.E., Suite 5200

  Atlanta, Georgia 30308-2216

  Fax: (404) 962-6743

  






 


Each such notice or other
communication shall be given (i) by hand delivery, (ii) by a
nationally recognized courier service, or (iii) by facsimile, receipt
confirmed.  Each such notice or
communication shall be effective (w) if delivered by hand or by nationally
recognized courier service, when delivered at the address specified in this
Section 11.1 (or in accordance with the latest unrevoked direction from such
party), (x) one day after being sent by reputable overnight express courier,
(y) five days after mailing first class mail, postage prepaid and (z) if
given by facsimile, when such facsimile is transmitted to the facsimile number
specified in this Section 11.1 (or in accordance with the latest unrevoked
direction from such party), and confirmation is received; provided that, the
transmission of all pages is complete prior to 5:00 p.m. Central Time on a
Business Day, and if complete after such time or on a non-Business Day, then
such transmission shall be effective as of the next succeeding Business
Day.  Any of the above addresses may be
changed at any time by notice given as provided above; provided, however,
that any such notice of change of address shall be effective only upon receipt.


SECTION 11.2  Severability.  If any provision of this Agreement (or any
portion thereof) or the application of any such provision (or any portion
thereof) to any Person or circumstance shall be held invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, the remainder
of this Agreement will continue in full force and effect and the application of
such provision will be interpreted so as reasonably to effect the intent of the
parties hereto.  The parties will attempt
to agree in good faith upon a valid, legal and enforceable provision that will
achieve, to the extent possible, the 


51

















 


economic, business and
other purposes of such invalid, illegal or unenforceable provision.


SECTION 11.3  Counterparts.  This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same instrument and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered (including by facsimile or electronic mail) to
each other party.


SECTION 11.4  Entire Agreement; No Third Party
Beneficiaries.  This Agreement
(including the Schedules and Exhibits hereto), the Ancillary Documents and the
Confidentiality Agreement (a) constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof or thereof and (b) are not intended
to confer upon any Person other than the parties identified herein (including
any Indemnified Party) and their successors and permitted assigns any rights,
benefits or remedies hereunder and no Person shall be a third party beneficiary
of this Agreement.


SECTION 11.5  Attachments.  Every Schedule and Exhibit referred to in
this Agreement is incorporated into this Agreement by reference.


SECTION 11.6  Governing Law.  This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts made and to be performed entirely in the State of Delaware,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws.


SECTION 11.7  Consent to Jurisdiction; Waiver of Jury
Trial.


(a)  The
parties hereto irrevocably submit to the exclusive jurisdiction of the United States
District Court for the State of Delaware, located in Wilmington, New Castle
County, or if such court does not have jurisdiction, the state court for the
State of Delaware located in Wilmington, New Castle County, for the purposes of
any suit, action or other proceeding arising out of this Agreement or any
transaction contemplated hereby.  The
parties hereto further agree that service of any process, summons, notice or
document by U.S. registered mail to such party’s respective address set forth
in Section 11.1 shall be effective service of process for any action, suit or
proceeding with respect to any matters to which it has submitted to
jurisdiction as set forth above in the immediately preceding sentence.  The parties hereto irrevocably and unconditionally
waive any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated hereby in
(a) the United States District Court for the State of Delaware located in
Wilmington, New Castle County, or (b) the state court for the State of Delaware
located in Wilmington, New Castle County, and hereby further irrevocably and
unconditionally waive and agree not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.


(b)  Each party
hereto hereby waives, to the fullest extent permitted by applicable law, any
right it may have to a trial by jury in respect of any litigation as 


52

















 


between the parties directly or indirectly arising out of, under or in
connection with this Agreement, the Ancillary Documents, the transactions
contemplated hereby or thereby or disputes relating hereto.  Each party hereto (i) certifies that no
representative, agent or attorney of the 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 (ii) acknowledges that it and the
other party have been induced to enter into this Agreement by, among other
things, the mutual waivers and certifications in this Section 11.7.


SECTION 11.8  Publicity.  From the date of this Agreement through the
Closing, neither Parent, Sellers nor Purchaser shall issue or cause the
publication of any press release or other public announcement with respect to
the transactions contemplated by this Agreement without the consent of the
other parties hereto, which consent shall not be unreasonably withheld, except
as such release or announcement may be required by law or the rules or
regulations of a national securities exchange in the United States.


SECTION 11.9  Assignment.  Neither this Agreement nor any of the rights,
interests or obligations hereunder (including any rights, interests or
obligations under Article X) shall be assigned by any party hereto without the
prior written consent of the other parties hereto, provided, however, that
Purchaser may assign any or all of its rights pursuant to this Agreement,
including its rights to indemnification, to any of its lenders as collateral
without the prior written consent of the other parties hereto.  Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.


ARTICLE XII

Definitions


SECTION 12.1  Definitions.  The following terms shall have the respective
meanings set forth below throughout this Agreement:


“2006 Audited
Financials” has the meaning set forth in Section 5.7(c).


“2007 Audited
Financials” has the meaning set forth in Section 8.2(d).


“2007 Unaudited
Financials” has the meaning set forth in Section 3.5.


“Accounts Receivable”
has the meaning set forth in Section 1.2(b)(ii).


“Acquired Assets”
has the meaning set forth in Section 1.2(a).


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


“Allocation Schedule”
has the meaning set forth in Section 5.10(a).


“Ancillary Documents”
means, collectively, the Transition Services Agreement and any other agreement,
certificate, instrument or other document to be executed and 


53

















 


delivered pursuant
hereto, as contemplated hereby or in connection with the consummation of the
transactions contemplated by this Agreement.


“Assumed Liabilities”
has the meaning set forth in Section 1.3(a).


“Business” has the
meaning set forth in the recitals.


“Business Day”
means any day other than a Saturday, a Sunday or a day on which banks in New
York City are authorized or obligated by law or executive order to close.


“Business IP” has
the meaning set forth in Section 3.12(a).


“Cash Deposit Amount”
has the meaning set forth in Section 5.20.


“Cash Received”
has the meaning set forth in Section 5.20.


“Cash Received
Statement” has the meaning set forth in Section 5.20.


“Closing” has the
meaning set forth in Section 2.1.


“Closing Date” has
the meaning set forth in Section 2.1.


“Closing Deadline”
has the meaning set forth in Section 9.1(a)(ii).


“Closing Inventory
Value” means the value of the Inventory as determined in accordance with
Section 2.3(a).


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


“Commitment Letter”
has the meaning set forth in Section 4.4.


“Confidentiality
Agreement” means that certain confidentiality letter agreement by and
between Purchaser and Parent, dated April 24, 2007.


“Connecticut Transfer
Act” has the meaning set forth in Section 3.16(h).


“Contracts” has
the meaning set forth in Section 1.2(a)(vi).


“Deductible” has
the meaning set forth in Section 10.1(a)(i).


“Distribution Center”
has the meaning set forth in Section 1.2(a)(iii).


“Effective Time”
shall mean 12:00 a.m. (New York time) on the day immediately following the
Closing Date.


“Employees” has
the meaning set forth in Section 6.1(a).


“Employee Benefit Plan”
means (i) each “employee benefit plan” (as defined in Section 3(3) of ERISA);
and (ii) each other material employee benefit plan, program, 


54

















 


arrangement, personnel or
payroll policy, (including vacation time, holiday pay, service awards, moving
expense reimbursement programs and sick leave) or fringe benefit, severance
agreement or plan or any medical, hospital, dental, life or disability plan,
excess benefit plan, bonus, stock option, stock purchase, or other material
incentive plan (including any equity or equity-based plan), top hat plan or
deferred compensation plan, change-of-control agreement, employment agreement
or consulting agreement whether or not written, which in the case of each (i)
and (ii), is maintained, sponsored or contributed to (or with respect to which
any obligation to contribute has been undertaken) by the Parent, Sellers or any
of their ERISA Affiliates on behalf of any current or former employee, director
or independent contractor involved in the Business (or any beneficiary or
dependent thereof).


“Environmental Laws” means any Federal, state,
interstate or local statute, law or regulation having the force of law and in
effect and promulgated as such as of the Closing Date and which is applicable
to the Acquired Assets, or any order, injunction, judgment, decree, ordinance
or code, common law (including any judicial or administrative interpretations,
guidances, directives, policy statements or opinions) or other enforceable
requirement of any Governmental Entity having jurisdiction over the Acquired
Assets, and relating to the pollution or protection of human health and safety
or the environment, including any of the foregoing related to:  (i) Remedial Actions; (ii) the reporting,
licensing, permitting or investigating of the emission, discharge, release or
threatened release of Hazardous Substances into the air, surface water, ground
water or land; or (iii) the manufacture, release, distribution, use,
generation, treatment, storage, disposal, transport or handling of Hazardous
Substances.


 


“Environmental Permits”
has the meaning set forth in Section 3.16(g).


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


“ERISA Affiliate”
means any entity (whether or not incorporated) that is treated as a single
employer together with Sellers under Section 414(b), (c), (m) or (o) of the
Code or Section 4001 of ERISA.


“Exchange Act” means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.


“Excluded Assets”
has the meaning set forth in Section 1.2(b).


“Excluded Liabilities”
has the meaning set forth in Section 1.3(b).


“Exhibits” means
the exhibits listed in the table of contents of this Agreement as attached
hereto.


“Field Employees”
has the meaning set forth in Section 6.1(a).


“Financial Statements”
has the meaning set forth in Section 3.5.


55

















 


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


“FIRPTA Certificate”
has the meaning set forth in Section 5.10(c).


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


“GE” has the
meaning set forth in Section 4.4.


“Governmental Entity”
means any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign.


“Hazardous Substance”
means any substance or material that is defined or regulated under any
Environmental Law.


“HSR Act” means
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.


“Income Tax” means
any Tax on or determined by reference to net income.


“Indemnified Party”
means, with respect to the Purchaser, the Purchaser or any member of the
Purchaser Group, and with respect to Parent or Sellers, the Parent, either
Seller or any member of the Seller Group.


“Indemnifying Party”
has the meaning set forth in Section 10.5(a).


“Independent
Accountant” has the meaning set forth in Section 5.20.


“Intellectual Property”
means patents, trademarks, domain names and copyrights and all registrations
and applications for the foregoing, licensed rights, software, inventions,
trade secrets, know-how, rights of privacy and publicity and all other
intellectual property and similar rights throughout the world, and all goodwill
associated with the foregoing.


“Intercompany Accounts”
means intercompany payables, receivables, accounts, indebtedness and other
liabilities between Parent and Sellers or their affiliates, on the one hand,
and the Business, on the other hand.


“Inventory” has
the meaning set forth in Section 1.2(a)(iii).


“Inventory Company”
has the meaning set forth in the preamble.


“Inventory Count”
has the meaning set forth in Section 2.3(a).


“Knowledge” means,
with respect to Parent and Sellers, the actual (as opposed to constructive,
implied or imputed) knowledge, without duty of inquiry or investigation, of the
Persons listed on Schedule 12.1(a), and, with respect to Purchaser, the
actual (as opposed to constructive, implied or imputed) knowledge, without duty
of inquiry or investigation, of the Persons listed on Schedule 12.1(b).


56

















 


“Leases” has the
meaning set forth in Section 3.9.


“Lien” means
mortgages, liens, security interests, easements, rights of way, pledges,
restrictions or encumbrances of any nature whatsoever.


“Loans” has the
meaning set forth in Section 6.2(d)


“Losses” has the
meaning set forth in Section 10.1(a).


“Material Adverse
Effect” means any event, occurrence, fact, condition, development, change
or effect that, individually or in the aggregate with similar events (within
the context of the applicable reference to Material Adverse Effect),
occurrences, facts, conditions, developments, changes or effects, has or could
reasonably be expected to have a material and adverse effect on the business,
assets, properties, operations, financial condition or results of operations of
the Business taken as a whole; provided, however, that the
following shall not be taken into account in determining whether there has been
or would be a “Material Adverse Effect”: 
(i) any adverse changes or developments resulting from conditions
affecting the United States or any foreign economy generally; (ii) any adverse
changes or developments that are primarily caused by conditions affecting the
jewelry industry generally; (iii) the failure by the Business to meet its
internal revenue or earnings predictions or expectations or otherwise for any
period ending or for which earnings are released on or after the date of this
Agreement (provided that the facts, events or circumstances underlying such
failure shall not be excluded when determining a Material Adverse Effect);
(iv) any adverse changes or developments in the laws, regulations, rules
or orders of any Governmental Entity; (v) any adverse changes or developments
that are attributable to seasonal fluctuations in the industry in which the
Business operates; (vi) any acts of war, insurrection, sabotage or
terrorism; and (vii) any adverse changes or developments arising primarily out
of, or resulting primarily from, actions taken by any party in connection with
(but not in breach of) this Agreement or the Ancillary Agreements and the
transactions contemplated hereunder and thereunder or which are primarily
attributable to the announcement of this Agreement and the transactions
contemplated hereby or the identity of Purchaser (including, any litigation,
employee attrition, any loss or postponement of business resulting from the
termination or modification of any vendor, customer or other business
relationships, any delay of customer orders or otherwise, as well as any
corresponding change in the margins, profitability or financial condition of
such party, but specifically excluding the failure to obtain any required
consents of any Governmental Entities or other third parties, including with
respect to the HSR Act); provided that in the case of (i), (ii), (iii), (iv),
(v) and (vi), only to the extent that such events, occurrences, facts,
conditions, developments, changes or effects do not disproportionately affect the
Business relative to other members of the jewelry industry.


“Non-Income Taxes”
means any Tax other than an Income Tax.


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


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


57

















 


“Parent Trademarks”
has the meaning set forth in Section 5.13.


“Permits” has the
meaning set forth in Section 1.2(a)(xiii).


“Permitted Liens”
means (i) Liens disclosed on Schedule 3.8, (ii) mechanics’, carriers’,
workmen’s, repairmen’s and other like Liens arising or incurred in the ordinary
course of business that are not in the aggregate material to the Business, and
(iii) Liens arising under conditional sales contracts or as purchase money
security interests for the purchase or lease of personal property.  Notwithstanding the foregoing, at the
Effective Time, Permitted Liens shall only include (ii) and (iii) of this
definition to the extent that they relate to an Assumed Liability under Section
1.3(a)(ii) or Section 1.3(a)(iii).


“Person” means any
individual, corporation, partnership, limited partnership, limited liability
company, joint venture, trust, business association or other entity, including
any Governmental Entity.


“Personal Property”
has the meaning set forth in Section 1.2(a)(ii).


“Petty Cash” has
the meaning set forth in Section 1.2(a)(xi).


“Post-Closing Tax
Periods” means taxable periods applicable to the operation of the Business
and the Acquired Assets beginning after the Closing Date and with respect to a
Straddle Period, the portion of such taxable period beginning immediately after
the Closing Date.


“Pre-Closing Tax
Periods” means taxable periods applicable to the operation of the Business
and the Acquired Assets ending on or before the Closing Date and with respect
to a Straddle Period, the portion of such taxable period ending on the Closing
Date.


“Previously Issued
Gift Cards” has the meaning set forth in Section 1.3(d).


“Previously Issued
Layaways” has the meaning set forth in Section 1.3(d).


“Property Taxes”
means personal property taxes, real property taxes and occupancy taxes.


“Prorated Assets and
Liabilities” has the meaning set forth in Section 5.11(a).


“Purchase Price”
has the meaning set forth in Section 1.4.


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


“Purchaser 401(k) Plan”
has the meaning set forth in Section 6.2(d)


“Purchaser Group”
has the meaning set forth in Section 10.1(a).


“Purchaser’s Benefit
Plans” has the meaning set forth in Section 6.2(a).


58

















 


“Radius Provision”
has the meaning set forth in the definition of Required Consents.


“Real Property”
has the meaning set forth in Section 1.2(a)(i).


“Recapture Provision”
has the meaning set forth in the definition of Required Consents.


“Remedial Action”
means any response action, removal action, remedial action, corrective action,
monitoring program, sampling program, investigation or other cleanup activity
required by any Environmental Law to clean up, remove, remediate, treat or
abate any Hazardous Substance in the environment.


“Required Consents”
shall mean consents for the assignment of the Leases that  are sufficient to assign to Purchaser Leases
that provide 90% or more of the Business’ aggregate store contribution for the
fiscal year ended July 31, 2007 as set forth in Schedule 1.4 under the
column labeled “Contr % of Total”. 
For purposes of determining whether a consent shall be deemed to qualify
as a Required Consent, such consent  (i)
shall confirm the material terms of the Lease and the absence of any defaults
or breaches thereunder, (ii) shall waive the application of any so-called “radius”
clause with respect to any stores, locations or operations of Purchaser
existing as of the date hereof (to the extent such “radius” clause could apply
to any such store, location or operation) (a “Radius Provision”), (iii)
shall confirm that no payments shall be required as a result of the transfer
other than reasonable and customary consent fees (e.g.,
a $1,000 consent fee) or administrative expense reimbursements, which expenses
shall be borne by Sellers, (iv) shall waive any recapture or similar rights of
termination with respect to the assignment of the Lease (a “Recapture
Provision”), (v) shall not condition such consent upon a modification in
any material respect of the Lease and (vi) shall not result in any loss of
options to extend the term thereof or any rights or first refusal or similar
rights.


“Representatives”
has the meaning set forth in Section 5.2.


“Reviewing Accountants”
has the meaning set forth in Section 5.10(a).


“Scheduled Employees”
has the meaning set forth in Section 6.1(a).


“Schedules” means
the schedules referred to in this Agreement as attached hereto.


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


“Seller Data” has
the meaning set forth in Section 1.2(a)(iv).


“Seller 401(k) Plan”
means the 401(k) Plan of Parent and Sellers.


“Seller Group” has
the meaning set forth in Section 10.2(a).


“Seller Guarantees”
has the meaning set forth in Section 5.15.


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“Seller Insurance
Policies” has the meaning set forth in Section 5.14.


“Specified Marks”
has the meaning set forth in Section 1.2(a)(vii).


“Straddle Period”
means the period beginning on or before the Closing Date and ending after the
Closing Date.


“Supplemental
Financial Information” has the meaning set forth in Section 5.7(c).


“Supplies” has the
meaning set forth in Section 1.2(a)(x).


“Tax” means (i)
all Federal, state, foreign, provincial, local and other governmental taxes,
assessments, duties, fees, levies or similar charges of any kind, including,
without limitation, all income, profit, franchise, excise, property, use,
intangibles, sales, payroll, employment, withholding, stamp, transfer, value
added, recording, registration, goods and services, real estate, ad valorem,
net proceeds, net worth, special assessments, capital stock, license, social
security, workers’ compensation, unemployment compensation, utility, severance,
production, occupation, premium, windfall profits, and other taxes, and
including all interest, fines, penalties or additions imposed with respect to
such amounts of taxes, assessments, duties, fees, levies or similar charges,
whether disputed or not, or (ii) any liability for or in respect of the payment
of any amount described in clause (i) of this definition as a member of a
consolidated, affiliated, unitary or similar group, as a transferee or
successor, by contract or otherwise.


“Tax Liability”
means any liability, whether known or unknown, asserted or unasserted, absolute
or contingent, accrued or unaccrued, liquidated or unliquidated, or due or to
become due, with respect to Taxes.


“Tax Proceeding”
has the meaning set forth in Section 3.17(a).


“Tax Return” means
any return, report, form or other information filed with any Tax authority with
respect to Taxes.


“Third Party”
means any Person that is neither a party to this Agreement nor is an
Indemnified Party.


“Third-Party Claim”
means any claim, complaint or the commencement of any audit, investigation,
action or proceeding by a Third Party (including any Governmental Entity).


“Transfer Taxes”
has the meaning set forth in Section 5.10(b).


“Transferring Employee”
has the meaning set forth in Section 6.1(a).


“Transition Services
Agreement” means the form of agreement attached hereto as Exhibit A as to
be delivered at Closing.


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SECTION 12.2  Construction and Interpretation of Certain
Terms and Phrases.  Unless the
context of this Agreement otherwise requires: 
(i) words of any gender include each other gender; (ii) words using the
singular or plural number also include the plural or singular number,
respectively; (iii) the terms “hereof,” “herein,” “hereby” and derivative or
similar words refer to this entire Agreement; (iv) the terms “Article” or “Section”
refer to the specified Article or Section of this Agreement; and (v) the
phrases “ordinary course of the operation of the Business” and “ordinary course
of the operation of the Business consistent with past practice” refer to the
business and practice of Sellers in connection with the Business and the
Acquired Assets.  Whenever this Agreement
refers to a number of days, such number shall refer to calendar days unless
Business Days are specified.  The table
of contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.  For purposes of any
indemnification provision in this Agreement, the word “expenses” shall mean
out-of-pocket expenses, and shall not include any allocations of internal
salaries and other expenses.  Whenever
the words “included,” “includes” or “including” are used in this Agreement,
they shall be deemed to be followed by the words “without limitation.”  The parties hereto have participated jointly
in the negotiation and drafting of this Agreement.  Consequently, 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 provision of this Agreement.


[Signature page
follows.]


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IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be signed by their respective
officers thereunto duly authorized, all as of the date first written above.


	
   

  	
  ZALE CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Mary E. Burton

  	
   

  
	
   

  	
  Name:

  	
  Mary E. Burton

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE DELAWARE, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Mary E. Burton

  	
   

  
	
   

  	
  Name:

  	
  Mary E. Burton

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  TXDC, L.P.

  
	
   

  	
  By:

  	
  Zale Delaware, Inc., its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Mary E. Burton

  	
   

  
	
   

  	
  Name:

  	
  Mary E. Burton

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  FINLAY FINE JEWELRY CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Bruce Zurlnick

  	
   

  
	
   

  	
  Name:

  	
  Bruce Zurlnick

  
	
   

  	
  Title:

  	
  Senior Vice President, Treasurer and Chief Financial
  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  for the limited purposes stated herein:

  
	
   

  	
  FINLAY ENTERPRISES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Bruce Zurlnick

  	
   

  
	
   

  	
  Name:

  	
  Bruce Zurlnick

  
	
   

  	
  Title:

  	
  Senior Vice President, Treasurer and Chief Financial
  Officer

  
						



 


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