Document:

exv4w2

 

Exhibit 4.2

EXECUTION COPY

SECURITY AGREEMENT

     SECURITY AGREEMENT (this “Agreement”) dated as of July 23, 2003 by and
among each of:

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

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

		
	 	DDCC, INC., a corporation organized under the laws of the State of
Delaware having a place of business at 101 Convention Center Drive, Suite
850 Las Vegas, Nevada 89109 (“DDCC”); and

		
	 	TXDC, L.P., a limited partnership organized under the laws of the State
of Texas, having a place of business at 901 W. Walnut Hill Lane, Irving,
Texas 75038-1003 (“TXDC” and collectively with Zale Delaware, Zale and
DDCC, the “Grantors”, and each such Person, individually, a “Grantor”);
and

		
	 	FLEET RETAIL FINANCE INC., a Delaware corporation, as collateral agent
(in such capacity, the “Collateral Agent”) for the Secured Parties (as
defined herein), in consideration of the mutual covenants contained
herein and benefits to be derived herefrom.

WITNESSETH:

     Reference is made to the Credit Agreement of even date herewith (as such
may be amended, modified, supplemented or restated hereafter, the “Credit
Agreement”) by and among (i) the Grantors, as Borrowers (ii) the Lenders named
therein, (iii) Fleet National Bank, a national banking association, as
Administrative Agent, for itself and the Lenders, and the Issuing Bank, (iv)
Fleet Retail Finance Inc., as Collateral Agent for the Lenders, (v) Fleet
Securities, Inc., as Arranger, (vi) Bank One, NA and Congress Financial
Corporation (Southwest), as Syndication Agents, and (vii) JPMorgan Chase Bank
and Bank of America, N.A. as Documentation Agents.

     The Lenders have agreed to make Loans to the Grantors, and the Issuing
Bank has agreed to issue Letters of Credit for the account of the Grantors,
pursuant to, and upon the terms and subject to the conditions specified in, the
Credit Agreement. The obligations of the Lenders to

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make Loans and of the Issuing Bank to issue Letters of Credit are each
conditioned upon, among other things, the execution and delivery by the
Grantors of this Agreement to secure the Secured Obligations (as defined
herein).

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

ARTICLE I

Definitions

     SECTION 1.1 Definition of Terms Used Herein. Unless the context otherwise
requires, all capitalized terms used but not defined herein shall have the
meanings set forth in the Credit Agreement, and all references to the UCC shall
mean the Uniform Commercial Code as in effect from time to time in the State of
New York.

     SECTION 1.2 Definition of Certain Terms Used Herein. As used herein, the
following terms shall have the following meanings:

     “Account Debtor” shall have the meaning given that term in the UCC.

     “Accounts” shall mean all accounts, accounts receivable, receivables, and
rights to payment (whether or not earned by performance) arising out of the
sale, lease, license, assignment or other disposition of Inventory and/or
arising out of the use of a credit or charge card or information contained on
or used with that card.

     “Chattel Paper” shall have the meaning given that term in the UCC.

     “Collateral” shall mean the following assets of each Grantor: (a) all
Accounts, (b) all Inventory, (c) all Deposit and Concentration Accounts, (d)
all Documents relating to the Grantors’ Inventory, (e) all Chattel Paper
arising from the sale of the Grantors’ Inventory, (f) all Instruments, General
Intangibles, Supporting Obligations and Letter-of-Credit Rights arising from
the sale of Inventory, (g) all policies and certificates of insurance and all
insurance proceeds, refunds, and premium rebates, including, without
limitation, proceeds of fire and credit insurance, with respect to any of the
foregoing, (h) all books, records, and information relating to any of the
foregoing, and all rights of access to such books, records, and information,
(i) all liens, guaranties, rights, remedies, and privileges pertaining to any
of the foregoing ((a) through (h)), including the right of stoppage in transit,
and (j) any of the foregoing whether now owned or now due, or in which any
Grantor has an interest, or hereafter acquired, arising, or to become due, or
in which any Grantor obtains an interest, and all products, Proceeds,
substitutions, and accessions of or to any of the foregoing. Notwithstanding
the foregoing, the term “Collateral” shall expressly exclude any Inventory or
other Goods that have been delivered to any Grantor on

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a consignment basis (“Consigned Inventory”), or any Accounts, Documents,
Chattel Paper, Instruments, General Intangibles, Supporting Obligations, Letter
of Credit rights or any other assets or properties described in this
definition, to the extent that any of the foregoing relate to, or arise out of
the sale or other disposition of, any of the Consigned Inventory or Proceeds
thereof.

     “Collateral Agent’s Rights and Remedies” shall have the meaning assigned
to such term in Section 8.9(a).

     “Concentration Account” shall have the meaning assigned to such term in
the Credit Agreement.

     “Credit Agreement” shall have the meaning assigned to such term in the
preliminary statement of this Agreement.

     “Deposit Account” shall mean any checking or other demand deposit account
into which proceeds of Collateral are deposited.

     “Documents” shall have the meaning given that term in the UCC.

     “General Intangibles” shall have the meaning given that term in the UCC,
and shall also include, without limitation, all: Payment Intangibles; rights to
payment for credit extended; deposits; amounts due to any Grantor; credit
memoranda in favor of any Grantor, tax refunds and abatements; insurance
refunds and premium rebates; records; customer lists; telephone numbers; causes
of action; judgments; payments under any settlement or other agreement;
licenses; internet addresses and domain names; computer software programs;
trade names, trademarks, service marks, together with all goodwill connected
with and symbolized by any of the foregoing; all other general intangible
property of any Grantor in the nature of intellectual property, and any
warranty claims.

     “Goods” shall have the meaning given that term in the UCC.

     “Instruments” shall have the meaning given that term in the UCC.

     “Inventory” shall include, without limitation, “inventory” as defined in
the UCC and also all: (a) Goods which (i) are leased by a Person as lessor,
(ii) are held by a Person for sale or lease or to be furnished under a contract
of service, (iii) are furnished by a Person under a contract of service, or
(iv) consist of raw materials, work in process, or materials used or consumed
in a business; (b) Goods of said description in transit; (c) Goods of said
description which are returned, repossessed and rejected; (d) packaging and
shipping materials related to any of the foregoing; and (e) all Documents which
represent any of the foregoing. Notwithstanding the foregoing, the term
“Inventory” shall not include any Inventory located anywhere other than any
State of the United States of America or the District of Columbia.

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     “Letter of Credit Rights” shall have the meaning given that term in the
UCC.

     “Payment Intangible” shall have the meaning given that term in the UCC,
and shall also refer to any General Intangible under which the Account Debtor’s
primary obligation is a monetary obligation.

     “Perfection Certificate” shall mean a certificate substantially in the
form of Annex 1 hereto, completed and supplemented with the schedules and
attachments contemplated thereby, and duly executed by a Financial Officer of
the each of the Grantors.

     “Proceeds” shall have the meaning given that term in the UCC.

     “Secured Obligations” shall mean the Obligations as defined in the Credit
Agreement.

     “Secured Parties” shall mean (a) the Lenders, (b) the Agents and their
Affiliates, (c) the Issuing Bank, (d) the Arranger, (e) the beneficiaries of
each indemnification obligation undertaken by any Grantor under any Loan
Document, (f) any other Person to whom Secured Obligations are owed, and (g)
the successors and assigns of each of the foregoing.

     “Security Interest” shall have the meaning assigned to such term in
Section 2.1 of this Agreement.

     “Supporting Obligation” shall have the meaning given that term in the UCC.

     SECTION 1.3 Rules of Interpretation. The rules of interpretation
specified in Section 1.2 of the Credit Agreement shall be applicable to this
Agreement.

ARTICLE II

Security Interest

     SECTION 2.1 Security Interest. As security for the payment or
performance, as the case may be, in full of the Secured Obligations, each
Grantor hereby bargains, assigns, mortgages, pledges, hypothecates and
transfers to the Collateral Agent, its successors and assigns, for the benefit
of the Secured Parties, and hereby grants to the Collateral Agent, its
successors and assigns, for the benefit of the Secured Parties, a security
interest in, all of such Grantor’s right, title and interest in, to and under
the Collateral (the “Security Interest”), provided, however, that the Liens
granted pursuant to this Section 2.1 shall not attach to the Collateral until
the earlier of (1) redemption of the senior notes issued pursuant to the Note
Indenture and (2) the date the Lenders make the initial Loans under the Credit
Agreement. Without limiting the foregoing, each Grantor hereby designates the
Collateral Agent as such Grantor’s true and lawful attorney,

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exercisable by the Collateral Agent whether or not an Event of Default
exists, with full power of substitution, at the Collateral Agent’s option, to
file one or more financing statements or continuation statements, or to sign
other documents for the purpose of perfecting, confirming, continuing, or
protecting the Security Interest granted by each Grantor, without the signature
of any Grantor (each Grantor hereby appointing the Collateral Agent as such
Person’s attorney to sign such Person’s name to any such document, whether or
not an Event of Default exists), and naming any Grantor or the Grantors as
debtors and the Collateral Agent as secured party, provided, that the
Collateral Agent shall have the same rights as the Grantor’s true and lawful
attorney referred to above to enforce the Security Interest granted by each
Grantor, but only if an Event of Default exists.

     SECTION 2.2 No Assumption of Liability. The Security Interest is granted
as security only and shall not subject the Collateral Agent or any other
Secured Party to, or in any way alter or modify, any obligation or liability of
any Grantor with respect to or arising out of the Collateral.

ARTICLE III

Representations and Warranties

     The Grantors jointly and severally represent and warrant to the Collateral
Agent and the Secured Parties that:

     SECTION 3.1 Title and Authority. Each Grantor has good and valid rights
in, and title to, the Collateral with respect to which it has purported to
grant a Security Interest hereunder and has full power and authority to grant
to the Collateral Agent the Security Interest in such Collateral pursuant
hereto and to execute, deliver and perform its obligations in accordance with
the terms of this Agreement, without the consent or approval of any other
Person other than any consent or approval which has been obtained.

     SECTION 3.2 Filings. Each Perfection Certificate has been duly prepared,
completed and executed, and the information set forth therein is correct and
complete in all material respects. Fully executed UCC financing statements or
other appropriate filings, recordings or registrations containing a description
of the Collateral have been, or will be, filed in each governmental, municipal
or other office as is necessary to publish notice and protect the validity of,
and to establish a legal, valid and perfected security interest in favor of the
Collateral Agent (for the benefit of the Secured Parties) with respect to all
Collateral in which the Security Interest may be perfected by filing, recording
or registration in the United States (or any political subdivision thereof) and
its territories and possessions, and no further or subsequent filing, refiling,
recording, rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the
filing of continuation statements.

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     SECTION 3.3 Validity and Priority of Security Interest. The Security
Interest constitutes (a) a legal and valid security interest in all of the
Collateral securing the payment and performance of the Secured Obligations, and
(b) subject to the filings described in Section 3.2 above, a perfected security
interest in all of the Collateral, to the extent that perfection of the
Security Interest can be achieved by filings or recordings. The Security
Interest is and shall be prior to any other Lien on any of the Collateral,
subject only to those Liens expressly permitted pursuant to Section 6.2 of the
Credit Agreement.

     SECTION 3.4 Absence of Other Liens. The Collateral is owned by the
Grantors free and clear of any Lien, except for Liens expressly permitted
pursuant to Section 6.2 of the Credit Agreement. Except as provided herein and
in the Credit Agreement or disclosed in the Perfection Certificates, no Grantor
has filed or consented to the filing of (a) any financing statement or
analogous document under the UCC or any other applicable law covering any
Collateral, (b) any assignment in which any Grantor assigns any Collateral or
any security agreement or similar instrument covering any Collateral with the
United States Patent and Trademark Office or the United States Copyright
Office, or (c) any assignment in which any Grantor assigns any Collateral or
any security agreement or similar instrument covering any Collateral with any
foreign governmental, municipal or other office, which financing statement or
analogous document, assignment, security agreement or similar instrument is
still in effect, except, in each case, for Liens expressly permitted pursuant
to Section 6.2 of the Credit Agreement.

     SECTION 3.5 Bailees, Warehousemen, Etc. Except as otherwise disclosed in
the Perfection Certificate, no Inventory of any Grantor is in the care or
custody of any third party or stored or entrusted with a bailee or other third
party and none shall hereafter be placed under such care, custody, storage, or
entrustment except for goods in transit.

ARTICLE IV

Covenants

     SECTION 4.1 Change of Name; Location of Collateral; Records; Place of
Business.

          (a)     Each Grantor agrees to furnish to the Collateral Agent (a) prompt
written notice of any change in (i) any Grantor’s trade name used to identify
it in the conduct of its business or in the ownership of its properties, (ii)
any office in which it maintains books or records relating to Collateral owned
by it and having a value in excess of $10,000,000 or any office or facility at
which Collateral owned by it and having a value in excess of $10,000,000 is
located (including the establishment of any such new office or facility) or
(iii) the acquisition by any Grantor of any property for which additional
filings or recordings are necessary to perfect and maintain the Collateral
Agent’s Security Interest therein, and (b) prior written notice of any

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change in (i) any Grantor’s corporate name or the location of any
Grantor’s chief executive office or its principal place of business, (ii) any
Grantor’s identity or corporate structure or (iii) any Grantor’s jurisdiction
of incorporation, Federal Taxpayer Identification Number or state
organizational number. Zale also agrees promptly to notify the Collateral
Agent if any material portion of the Collateral is damaged, destroyed, or lost,
stolen or otherwise unaccounted for. Notwithstanding the foregoing, if any
Grantor’s Federal Taxpayer Identification Number or organizational
identification number assigned to it by its state of organization is changed by
the applicable Governmental Authority, such Grantor will furnish to the
Collateral Agent prompt written notice of any such change not later than ten
(10) days from the date such Grantor has been notified by such Governmental
Authority of such change. Each Grantor agrees not to effect or permit any
change referred to in the preceding sentence unless all necessary filings have
been made under the UCC or otherwise in order for the Collateral Agent to
continue at all times following such change to have a valid, legal and
perfected first priority security interest in all of the Collateral.

          (b)     Each Grantor agrees to maintain, or cause to be maintained, at its own
cost and expense, such complete and accurate records with respect to the
Collateral owned by it as is consistent with its current practices, but in any
event to include complete accounting records indicating all payments and
proceeds received with respect to any part of the Collateral.

     SECTION 4.2 Periodic Certification. Each year, at the time of delivery
of annual financial statements with respect to the preceding fiscal year
pursuant to Section 5.1 of the Credit Agreement, each Grantor shall deliver, or
cause to be delivered, to the Collateral Agent a certificate executed by a
Financial Officer of such Grantor confirming that there has been no change in
the information contained in the Perfection Certificate since the date of the
Perfection Certificate delivered on the Closing Date or the date of the most
recent certificate delivered pursuant to this Section 4.2 or, if any such
change has occurred specifying such revised information.

     SECTION 4.3 Protection of Security. Each Grantor shall, at its own cost
and expense, take any and all actions reasonably necessary to defend title to
the Collateral against all Persons and to defend the Security Interest of the
Collateral Agent in the Collateral and the priority thereof against any Lien
not expressly permitted pursuant to Section 6.2 of the Credit Agreement.

     SECTION 4.4 Further Assurances. Each Grantor agrees, at its own expense,
to execute, acknowledge, deliver and cause to be filed all such further
instruments and documents and to take all such actions as the Collateral Agent
may from time to time reasonably request to assure, preserve, protect and
perfect the Security Interest and the rights and remedies created hereby,
including the payment of any fees and taxes required in connection with the
execution and delivery of this Agreement, the granting of the Security Interest
and the filing of any financing statements or other documents in connection
herewith or therewith. If any amount payable under or in connection with any
of the Collateral shall be or become evidenced by any promissory note

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or other instrument in an amount in excess of $5,000,000, such note or
instrument shall be immediately pledged and delivered to the Collateral Agent,
duly endorsed in a manner satisfactory to the Collateral Agent.

     SECTION 4.5 Taxes; Encumbrances. At its option during the continuance of
an Event of Default, the Collateral Agent may discharge past due taxes,
assessments, charges, fees or Liens (other than Liens permitted under the
Credit Agreement), at any time levied or placed on the Collateral, and may take
any other action which the Collateral Agent may deem necessary or desirable to
repair, maintain or preserve any of the Collateral to the extent any Grantor
fails to do so as required by the Credit Agreement or this Agreement, and each
Grantor jointly and severally agrees to reimburse the Collateral Agent on
demand for any payment made or any expense incurred by the Collateral Agent
pursuant to the foregoing authorization; provided, however, that the Collateral
Agent shall not have any obligation to undertake any of the foregoing and shall
have no liability on account of any action so undertaken except to the extent
that any liability on account of any such action resulted from the gross
negligence, bad faith, or breach of the contractual obligations of the
Collateral Agent; and provided further that the making of any such payments or
the taking of any such action by the Collateral Agent shall not be deemed to
constitute a waiver of any Default or Event of Default arising from the
Grantor’s failure to have made such payments or taken such action. Nothing in
this Section 4.6 shall be interpreted as excusing any Grantor from the
performance of any covenants or other promises of any Grantor with respect to
taxes, assessments, charges, fees, Liens, security interests or other
encumbrances and maintenance as set forth herein or in the other Loan
Documents.

     SECTION 4.6 Assignment of Security Interest.

		
	 	     (a)     If at any time any Grantor shall take a security interest in any
property of an Account Debtor or any other Person to secure payment and
performance of an Account and the property securing payment and
performance of the Account has a value in excess of $5,000,000, such
Grantor shall promptly assign such security interest to the Collateral
Agent. Such assignment need not be filed of public record unless
necessary to continue the perfected status of the security interest
against creditors of, and transferees from, the Account Debtor or other
Person granting the security interest.

		
	 	     (b)     To the extent that any Grantor is a beneficiary under any
written letter of credit relating to the Collateral in an amount in
excess of $5,000,000 now or hereafter issued in favor of such Grantor,
such Grantor shall deliver such letter of credit to the Collateral Agent.
The Collateral Agent shall from time to time, at the request and expense
of such Grantor, make such arrangements with such Grantor as are in the
Collateral Agent’s reasonable judgment necessary and appropriate so that
such Grantor may make any drawing to which such Grantor is entitled under
such letter of credit, without impairment of the Collateral Agent’s
perfected security interest in such Grantor’s rights to proceeds of such
letter of credit or in the actual proceeds of such drawing. At the
Collateral Agent’s request, such Grantor shall, for any letter of credit
relating to the

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	 	Collateral in an amount in excess of $5,000,000, whether or not
written, now or hereafter issued in favor of such Grantor as beneficiary,
execute and deliver to the issuer and any confirmer of such letter of
credit an assignment of proceeds form, in favor of the Collateral Agent
and satisfactory to the Collateral Agent and such issuer or (as the case
may be) such confirmer, requiring the proceeds of any drawing under such
letter of credit to be paid directly to the Collateral Agent.

     SECTION 4.7 Continuing Obligations of the Grantors. Each Grantor shall
remain liable to observe and perform all the conditions and obligations to be
observed and performed by it under each contract, agreement or instrument
relating to the Collateral, all in accordance with the terms and conditions
thereof, except where the failure to do so would not have a Material Adverse
Effect, and each Grantor jointly and severally agrees to indemnify and hold
harmless the Collateral Agent and the Secured Parties from and against any and
all liability for such performance.

     SECTION 4.8 Limitation on Modification of Accounts. None of the Grantors
will, without the Collateral Agent’s prior written consent, grant any extension
of the time of payment of any of the Accounts, compromise, compound or settle
the same for less than the full amount thereof, release, wholly or partly, any
Person liable for the payment thereof or allow any credit or discount
whatsoever thereon, other than extensions, releases, credits, discounts,
compromises or settlements granted or made in the ordinary course of business
and consistent with its current practices.

     SECTION 4.9 Insurance. Each Grantor hereby irrevocably makes, constitutes
and appoints the Collateral Agent (and all officers, employees or agents
designated by the Collateral Agent) as such Grantor’s true and lawful agent
(and attorney-in-fact), exercisable after the occurrence and during the
continuance of any Event of Default, for the purpose of making, settling and
adjusting claims in respect of Collateral under policies of insurance,
endorsing the name of such Grantor on any check, draft, instrument or other
item of payment for the proceeds of such policies of insurance and for making
all determinations and decisions with respect thereto. In the event that any
Grantor at any time or times shall fail to obtain or maintain any of the
policies of insurance required hereby or to pay any premium in whole or part
relating thereto, the Collateral Agent may, without waiving or releasing any
obligation or liability of the Grantors hereunder or any Default or Event of
Default, in its sole discretion, obtain and maintain such policies of insurance
and pay such premium and take any other actions with respect thereto as the
Collateral Agent deems advisable. All sums disbursed by the Collateral Agent
in connection with this Section 4.11, including reasonable attorneys’ fees,
court costs, expenses and other charges relating thereto, shall be payable,
upon demand, by the Grantors to the Collateral Agent and shall be additional
Secured Obligations secured hereby.

     SECTION 4.10 Legend. At the request of the Collateral Agent if an Event
of Default shall occur and be continuing, each Grantor shall legend, in form
and manner satisfactory to the

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Collateral Agent, its Accounts and its books, records and documents
evidencing or pertaining thereto with an appropriate reference to the fact that
such Accounts have been assigned to the Collateral Agent for the benefit of the
Secured Parties and that the Collateral Agent has a security interest therein.

ARTICLE V

Collections

     SECTION 5.1 Collections.

          (a)      Each Grantor shall at all times comply with the Cash Receipts
provisions of Section 2.21 of the Credit Agreement including, without
limitation, after the occurrence and during the continuation of an Event of
Default or Cash Control Event, the provisions of Section 2.21(f) causing the
sweep on each Business Day of all Cash Receipts into the Fleet Concentration
Account.

          (b)      Without the prior written consent of the Collateral Agent, no Grantor
shall modify or amend the instructions pursuant to any of the Credit Card
Notifications or the Blocked Account Agreements. So long as no Event of
Default or Cash Control Event has occurred and is then continuing, each Grantor
shall have sole control over the manner of disposition of the funds in the
Accounts (except for the Fleet Concentration Account), for the benefit and on
behalf of the Collateral Agent and the other Secured Parties; provided,
however, that such privilege may, at the option of the Collateral Agent, be
terminated upon the occurrence and during the continuance of any Event of
Default or Cash Control Event in accordance with Section 2.21 of the Credit
Agreement.

     SECTION 5.2 Power of Attorney. Each Grantor hereby irrevocably makes,
constitutes and appoints the Collateral Agent (and all officers, employees or
agents designated by the Collateral Agent) as such Grantor’s true and lawful
agent and attorney-in-fact, and in such capacity the Collateral Agent shall
have the right, with power of substitution for each Grantor and in each
Grantor’s name or otherwise, for the use and benefit of the Collateral Agent
and the Secured Parties, (a) at any time, whether or not a Default or Event of
Default has occurred, to take actions required to be taken by the Grantors
under Section 2.1 of this Agreement, (b) upon the occurrence and during the
continuance of an Event of Default or Cash Control Event or as otherwise
permitted under the Credit Agreement, (i) to take actions required to be taken
by the Grantors under Section 5.1 of this Agreement, (ii) to receive, endorse,
assign and/or deliver any and all notes, acceptances, checks, drafts, money
orders or other evidences of payment relating to the Collateral or any part
thereof; (iii) to demand, collect, receive payment of, give receipt for and
give discharges and releases of all or any of the Collateral; and (c) upon the
occurrence and during the continuance of an Event of Default or as otherwise
permitted in the Credit Agreement (i) to sign the name of any Grantor on any
invoices, schedules of Collateral, freight or express

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receipts, or bills of lading storage receipts, warehouse receipts or other
documents of title relating to any of the Collateral; (ii) to sign the name of
any Grantor on any notice to such Grantor’s Account Debtors; (iii) to sign the
name of any Grantor on any proof of claim in bankruptcy against Account
Debtors; (iv) to the extent relating to the Collateral, to sign change of
address forms to change the address to which each Grantor’s mail is to be sent
to such address as the Collateral Agent shall designate; (v) to receive and
open each Grantor’s mail, remove any Proceeds of Collateral therefrom and turn
over the balance of such mail either to any of the Grantors or to any trustee
in bankruptcy or receiver of a Grantor, or other legal representative of a
Grantor whom the Collateral Agent determines to be the appropriate person to
whom to so turn over such mail; (vi) to commence and prosecute any and all
suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect or otherwise realize on all or any of the Collateral or
to enforce any rights in respect of any Collateral; (vii) to settle,
compromise, compound, adjust or defend any actions, suits or proceedings
relating to all or any of the Collateral; (viii) to take all such action as may
be necessary to obtain the payment of any letter of credit and/or banker’s
acceptance of which any Grantor is a beneficiary to the extent relating to
Collateral; (ix) to repair, manufacture, assemble, complete, package, deliver,
alter or supply goods, if any, necessary to fulfill in whole or in part the
purchase order of any customer of any Grantor; (x) to use for the purposes
permitted by Section 6.1 hereof, any or all General Intangibles of any Grantor
relating to the Collateral, provided that the Collateral Agent’s use of such
General Intangibles will comply with all applicable law; and (xi) to use, sell,
assign, transfer, pledge, make any agreement with respect to or otherwise deal
with all or any of the Collateral, and to do all other acts and things
necessary to carry out the purposes of this Agreement, as fully and completely
as though the Collateral Agent were the absolute owner of the Collateral for
all purposes; provided, however, that nothing herein contained shall be
construed as requiring or obligating the Collateral Agent or any other Secured
Party to make any commitment or to make any inquiry as to the nature or
sufficiency of any payment received by the Collateral Agent or any other
Secured Party, or to present or file any claim or notice. It is understood and
agreed that the appointment of the Collateral Agent as the agent and
attorney-in-fact of the Grantors for the purposes set forth above is coupled
with an interest and is irrevocable.

     SECTION 5.3 No Obligation to Act. The Collateral Agent shall not be
obligated to do any of the acts or to exercise any of the powers authorized by
Section 5.2, but if the Collateral Agent elects to do any such act or to
exercise any of such powers, it shall not be accountable for more than it
actually receives as a result of such exercise of power, and shall not be
responsible to any Grantor for any act or omission to act except for any act or
omission to act which constitutes gross negligence, bad faith, or breach of the
contractual obligations of the Collateral Agent. The provisions of Section 5.2
shall in no event relieve any Grantor of any of its obligations hereunder or
under any other Loan Document with respect to the Collateral or any part
thereof or impose any obligation on the Collateral Agent or any other Secured
Party to proceed in any particular manner with respect to the Collateral or any
part thereof, or in any way limit the exercise by the Collateral Agent or any
other Secured Party of any other or further right

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which it may have on the date of this Agreement or hereafter, whether
hereunder, under any other Loan Document, by law or otherwise.

ARTICLE VI

Remedies

     SECTION 6.1 Remedies upon Default. Upon the occurrence and during the
continuance of an Event of Default, it is agreed that the Collateral Agent
shall have in any jurisdiction in which enforcement hereof is sought, in
addition to all other rights and remedies, the rights and remedies of a secured
party under the UCC or other applicable law. The rights and remedies of the
Collateral Agent shall include, without limitation, the right to take any of or
all the following actions at the same or different times upon the occurrence
and during the continuance of an Event of Default:

		
	 	     (a)      With respect to any Collateral consisting of Accounts, General
Intangibles, (including Payment Intangibles), Letter-of-Credit Rights,
Chattel Paper, Instruments and Documents, the Collateral Agent may
collect the Collateral with or without the taking of possession of any of
the Collateral.

		
	 	     (b)      With respect to any Collateral consisting of Inventory, the
Collateral Agent may conduct one or more going out of business sales, in
the Collateral Agent’s own right or by one or more agents and
contractors. Such sale(s) may be conducted upon any premises owned,
leased, or occupied by any Grantor. The Collateral Agent and any such
agent or contractor, in conjunction with any such sale, may augment the
Inventory with other goods (all of which other goods shall remain the
sole property of the Collateral Agent or such agent or contractor). Any
amounts realized from the sale of such goods which constitute
augmentations to the Inventory (net of an allocable share of the costs
and expenses incurred in their disposition) shall be the sole property of
the Collateral Agent or such agent or contractor and neither any Grantor
nor any Person claiming under or in right of any Grantor shall have any
interest therein. Each purchaser at any such going out of business sale
shall hold the property sold absolutely, free from any claim or right on
the part of any Grantor.

		
	 	     (c)      With or without legal process and with or without prior notice
or demand for performance, the Collateral Agent may enter upon, occupy,
and use any premises owned or occupied by each Grantor, and may exclude
the Grantors from such premises or portion thereof as may have been so
entered upon, occupied, or used by the Collateral Agent. The Collateral
Agent shall not be required to remove any of the Collateral from any such
premises upon the Collateral Agent’s taking possession thereof, and may
render any Collateral unusable to the Grantors. In no event shall the
Collateral Agent be liable to any Grantor for use or occupancy by the
Collateral Agent of any premises pursuant to this Section 6.1, nor for
any charge (such as wages for the Grantors’ employees and

12

 

		
	 	utilities) incurred in connection with the Collateral Agent’s
exercise of the Collateral Agent’s Rights and Remedies (as defined
herein) hereunder.

		
	 	     (d)      The Collateral Agent may require any Grantor to assemble the
Collateral and make it available to the Collateral Agent at the Grantor’s
sole risk and expense at a place or places which are reasonably
convenient to both the Collateral Agent and such Grantor.

		
	 	     (e)      Each Grantor agrees that the Collateral Agent shall have the
right, subject to applicable law, to sell or otherwise dispose of all or
any part of the Collateral, at public or private sale, for cash, upon
credit or for future delivery as the Collateral Agent shall deem
appropriate. Each purchaser at any such sale shall hold the property
sold absolutely, free from any claim or right on the part of any Grantor.

		
	 	     (f)      Unless the Collateral is perishable or threatens to decline
speedily in value, or is of a type customarily sold on a recognized
market (in which event the Collateral Agent shall provide the Grantors
such notice as may be practicable under the circumstances), the
Collateral Agent shall give the Grantors at least ten (10) days’ prior
written notice, by authenticated record, of the date, time and place of
any proposed public sale, and of the date after which any private sale or
other disposition of the Collateral may be made. Each Grantor agrees
that such written notice shall satisfy all requirements for notice to
that Grantor which are imposed under the UCC or other applicable law with
respect to the exercise of the Collateral Agent’s rights and remedies
upon default. The Collateral Agent shall not be obligated to make any
sale or other disposition of any Collateral if it shall determine not to
do so, regardless of the fact that notice of sale or other disposition of
such Collateral shall have been given. The Collateral Agent may, without
notice or publication, adjourn any public or private sale or cause the
same to be adjourned from time to time by announcement at the time and
place fixed for sale, and such sale may, without further notice, be made
at the time and place to which the same was so adjourned.

		
	 	     (g)      Any public sale shall be held at such time or times within
ordinary business hours and at such place or places as the Collateral
Agent may fix and state in the notice of such sale. At any sale or other
disposition, the Collateral, or portion thereof, to be sold may be sold
in one lot as an entirety or in separate parcels, as the Collateral Agent
may (in its sole and absolute discretion) determine. If any of the
Collateral is sold, leased, or otherwise disposed of by the Collateral
Agent on credit, the Secured Obligations shall not be deemed to have been
reduced as a result thereof unless and until payment is finally received
thereon by the Collateral Agent.

		
	 	     (h)      At any public (or, to the extent permitted by applicable law,
private) sale made pursuant to this Section 6.1, the Collateral Agent or
any other Secured Party may bid for or purchase, free (to the extent
permitted by applicable law) from any right of

13

 

		
	 	redemption, stay, valuation or appraisal on the part of any Grantor,
the Collateral or any part thereof offered for sale and may make payment
on account thereof by using any claim then due and payable to the
Collateral Agent or such other Secured Party from any Grantor on account
of the Secured Obligations as a credit against the purchase price, and
the Collateral Agent or such other Secured Party may, upon compliance
with the terms of sale, hold, retain and dispose of such property without
further accountability to any Grantor therefor.

		
	 	     (i)      For purposes hereof, a written agreement to purchase the
Collateral or any portion thereof shall be treated as a sale thereof.
The Collateral Agent shall be free to carry out such sale pursuant to
such agreement and no Grantor shall be entitled to the return of the
Collateral or any portion thereof subject thereto, notwithstanding the
fact that after the Collateral Agent shall have entered into such an
agreement all Events of Default shall have been remedied and the Secured
Obligations paid in full.

		
	 	     (j)      As an alternative to exercising the power of sale herein
conferred upon it, the Collateral Agent may proceed by a suit or suits at
law or in equity to foreclose upon the Collateral and to sell the
Collateral or any portion thereof pursuant to a judgment or decree of a
court or courts having competent jurisdiction or pursuant to a proceeding
by a court-appointed receiver.

		
	 	     (k)      To the extent permitted by applicable law, each Grantor hereby
waives all rights of redemption, stay, valuation and appraisal which such
Grantor now has or may at any time in the future have under any rule of
law or statute now existing or hereafter enacted.

     SECTION 6.2 Grant of Non-Exclusive License. For the purpose of enabling
the Collateral Agent to exercise the Collateral Agent’s Rights and Remedies
under Section 6.1 (including, without limitation, in order to take possession
of, hold, preserve, process, assemble, prepare for sale, market for sale, sell
or otherwise dispose of the Collateral) at such time as the Collateral Agent
shall be lawfully entitled to exercise the Collateral Agent’s Rights and
Remedies under Section 6.1, each Grantor hereby (i) grants to the Collateral
Agent, for the benefit of the Collateral Agent and the other Secured Parties, a
royalty free, non-exclusive, irrevocable license, such license being with
respect to the Collateral Agent’s exercise of the Collateral Agent’s Rights and
Remedies under Section 6.1 including, without limitation, in connection with
any completion of the manufacture of Inventory or any sale or other disposition
of Inventory (a) to use, apply, and affix any trademark, trade name, logo, or
the like in which any Grantor now or hereafter has rights, (b) to use, license
or sublicense any intellectual property, computer software now owned, held or
hereafter acquired by such Grantor, including in such license access to all
media such and to the extent to which any of the licensed items may be recorded
or stored and to all computer software programs such and to the extent used for
the compilation or print out thereof, provided that the Collateral Agent’s use
of the property described in subclauses (a) and (b) above will comply with all
applicable law, and (c) to use any

14

 

and all furniture, fixtures and equipment contained in any premises owned
or occupied by any Grantor in connection with the exercise of the Collateral
Agent’s Rights and Remedies under Section 6.1, and (ii) without limiting the
provisions of Section 6.1(c), above, agrees to provide the Collateral Agent
and/or its agents with access to, and the right to use, any such premises owned
or occupied by any Grantor.

     SECTION 6.3 Application of Proceeds. After the occurrence of an Event of
Default and acceleration of the Secured Obligations, the Collateral Agent shall
apply the proceeds of any collection or sale of the Collateral, as well as any
Collateral consisting of cash, or any Collateral granted under any other of the
Security Documents in the manner set forth in Section 7.4 of the Credit
Agreement.

ARTICLE VII

Perfection of Security Interest

     SECTION 7.1 Perfection by Filing. This Agreement constitutes an
authenticated record, and each Grantor hereby authorizes the Collateral Agent,
pursuant to the provisions of Sections 2.1 and 5.2, to file one or more
financing or continuation statements, and amendments thereto, relative to all
or any part of the Collateral, in such filing offices as the Collateral Agent
shall deem appropriate, and the Grantors shall pay the Collateral Agent’s
reasonable costs and expenses incurred in connection therewith. Each Grantor
hereby further agrees that a carbon, photographic, or other reproduction of
this Agreement shall be sufficient as a financing statement and may be filed as
a financing statement in any and all jurisdictions.

     SECTION 7.2 Other Perfection, etc. The Grantors shall at any time and
from time to time take such steps as the Collateral Agent may reasonably
request for the Collateral Agent (a) to obtain an acknowledgment, in form and
substance reasonably satisfactory to the Collateral Agent, of any bailee having
possession of any of the Collateral that the bailee holds such Collateral for
the Collateral Agent, (b) to obtain “control” of any Deposit Accounts and
Concentration Accounts, Letter-of-Credit Rights, or electronic Chattel Paper,
with any agreements establishing control to be in form and substance
satisfactory to the Collateral Agent, and (c) otherwise to insure the continued
perfection of the Collateral Agent’s security interest in any of the Collateral
with the priority described in Section 3.3 and of the preservation of its
rights therein.

     SECTION 7.3 Savings Clause. Nothing contained in this Article VII shall be
construed to narrow the scope of the Collateral Agent’s Security Interest in
any of the Collateral or the perfection or priority thereof or to impair or
otherwise limit any of the Collateral Agent’s Rights and Remedies hereunder
except (and then only to the extent) as mandated by the UCC.

15

 

ARTICLE VIII

Miscellaneous

     SECTION 8.1 Notices. All communications and notices hereunder shall
(except as otherwise expressly permitted herein) be in writing and given as
provided in Section 9.1 of the Credit Agreement.

     SECTION 8.2 Security Interest Absolute. All rights of the Collateral
Agent hereunder, the Security Interest and all obligations of the Grantors
hereunder shall be absolute and unconditional irrespective of (a) any lack of
validity or enforceability of the Credit Agreement, any other Loan Document,
any agreement with respect to any of the Secured Obligations or any other
agreement or instrument relating to any of the foregoing, (b) any change in the
time, manner or place of payment of, or in any other term of, all or any of the
Secured Obligations, or any other amendment or waiver of or any consent to any
departure from the Credit Agreement, any other Loan Document, or any other
agreement or instrument, (c) any exchange, release or non-perfection of any
Lien on other collateral, or any release or amendment or waiver of or consent
under or departure from any guarantee, securing or guaranteeing all or any of
the Secured Obligations, or (d) any other circumstance that might otherwise
constitute a defense available to, or a discharge of, any Grantor in respect of
the Secured Obligations or this Agreement.

     SECTION 8.3 Suretyship Waivers by Grantors. The Grantors waive demand,
notice, protest, notice of acceptance of this Agreement, notice of loans made,
credit extended, Collateral received or delivered or other action taken in
reliance hereon and all other demands and notices of any description. With
respect to both the Secured Obligations and the Collateral, each Grantor
assents to any extension or postponement of the time of payment or any other
indulgence, to any substitution, exchange or release of or failure to perfect
any security interest in any Collateral, to the addition or release of any
party or person primarily or secondarily liable, to the acceptance of partial
payment thereon and the settlement, compromising or adjusting of any thereof,
all in such manner and at such time or times as the Collateral Agent may deem
advisable. The Collateral Agent shall have no duty as to the collection or
protection of the Collateral or any income therefrom, the preservation of
rights against prior parties, or the preservation of any rights pertaining
thereto. Each of the Grantors further waives any and all other suretyship
defenses.

     SECTION 8.4 Marshalling. Neither the Collateral Agent nor any Lender
shall be required to marshal any present or future collateral security
(including but not limited to the Collateral) for, or other assurances of
payment of, the Secured Obligations or any of them or to resort to such
collateral security or other assurances of payment in any particular order, and
all of the rights and remedies of the Collateral Agent or any Lender hereunder
and of the Collateral Agent or any Lender in respect of such collateral
security and other assurances of payment shall be cumulative and in addition to
all other rights and remedies, however existing or arising. To

16

 

the extent that it lawfully may, each Guarantor hereby agrees that it will
not invoke any law relating to the marshalling of collateral which might cause
delay in or impede the enforcement of the Collateral Agent’s Rights and
Remedies under this Agreement or under any other instrument creating or
evidencing any of the Secured Obligations or under which any of the Secured
Obligations is outstanding or by which any of the Secured Obligations is
secured or payment thereof is otherwise assured, and, to the extent that it
lawfully may, each Grantor hereby irrevocably waives the benefits of all such
laws.

     SECTION 8.5 Survival of Agreement. All covenants, agreements,
representations and warranties made by the Grantors herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Collateral Agent and the other Secured Parties and
shall survive the execution and delivery of this Agreement and the other Loan
Documents and the making of any Loans and the issuance of any Letters of
Credit, and shall continue in full force and effect as long as the Secured
Obligations are outstanding and unpaid or the Letter of Credit Outstandings do
not equal zero, or are not fully cash collateralized in a manner satisfactory
to the Issuing Bank and the Administrative Agent, and as long as the
Commitments have not expired or terminated.

     SECTION 8.6 Binding Effect; Several Agreement; Assignments. Whenever in
this Agreement any of the parties hereto is referred to, such reference shall
be deemed to include the successors and assigns of such party (subject to the
provisions of the Credit Agreement), and all covenants, promises and agreements
by or on behalf of the Grantors that are contained in this Agreement shall bind
and inure to the benefit of each Grantor and its respective successors and
assigns. This Agreement shall be binding upon each Grantor and the Collateral
Agent and their respective successors and assigns, and shall inure to the
benefit of each Grantor, the Collateral Agent and the other Secured Parties and
their respective successors and assigns, except that no Grantor shall have the
right to assign or transfer its rights or obligations hereunder or any interest
herein or in the Collateral (and any such attempted assignment or transfer
shall be void) except as expressly permitted by this Agreement or the Credit
Agreement. This Agreement shall be construed as a separate agreement with
respect to each Grantor and may be amended, modified, supplemented, waived or
released with respect to any Grantor without the approval of any other Grantor
and without affecting the obligations of any other Grantor hereunder.

     SECTION 8.7 Collateral Agent’s Fees and Expenses; Indemnification.

               (a)      Without limiting any of their obligations under the Credit Agreement
or the other Loan Documents, the Grantors jointly and severally agree to pay
all reasonable out-of-pocket expenses reasonably incurred by the Collateral
Agent, including the reasonable and documented fees, charges and disbursements
of any counsel and any outside consultants for the Collateral Agent, in
connection with (i) the administration of this Agreement, (ii) the custody or
preservation of, or the sale of, collection from or other realization upon any
of the Collateral, (iii) the exercise, enforcement or protection of any of the Collateral
Agent’s Rights and

17

 

Remedies hereunder or (iv) the failure of any Grantor to perform or
observe any of the provisions hereof.

               (b)      Without limiting any of their indemnification obligations under the
Credit Agreement or the other Loan Documents, the Grantors shall jointly and
severally agree to indemnify each Secured Party and their respective Affiliates
(each such Person being called an “Indemnitee”), and hold each Indemnitee
harmless from, any and all losses, claims, damages, liabilities and related
expenses, including the reasonable and documented fees, charges and
disbursements of any counsel for any Indemnitee, incurred by or asserted
against any Indemnitee arising out of, in connection with, or as a result of,
(i) the execution or delivery or performance of this Agreement or any other
Loan Document, the performance by any Grantor of its obligations under this
Agreement or any other Loan Document, or the consummation of the transactions
contemplated by the Loan Documents or any other transactions contemplated
hereby, or (ii) any actual or prospective claim, litigation, investigation or
proceeding relating to any of the foregoing or to the Collateral, whether based
on contract, tort or any other theory and regardless of whether any Indemnitee
is a party thereto; provided that such indemnity shall not, as to any
Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses resulted from the gross negligence, willful
misconduct, bad faith, or breach of the contractual obligations of such
Indemnitee or any Affiliate of such Indemnitee (or of any officer, director,
employee, advisor or agent of such Indemnitee or any such Indemnitee’s
Affiliates) or with respect to a claim by one Indemnified Party against another
Indemnified Party.

               (c)      Any such amounts payable as provided hereunder shall be additional
Secured Obligations secured hereby and by the other Security Documents. All
amounts due under this Section 8.7 shall be payable on written demand therefor.

     SECTION 8.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK INCLUDING,
WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL
OBLIGATIONS LAW.

     SECTION 8.9 Waivers; Amendment.

               (a)      The rights, remedies, powers, privileges, and discretions of the
Collateral Agent hereunder (herein, the “Collateral Agent’s Rights and
Remedies”) shall be cumulative and not exclusive of any rights or remedies
which it would otherwise have. No delay or omission by the Collateral Agent in
exercising or enforcing any of the Collateral Agent’s Rights and Remedies shall
operate as, or constitute, a waiver thereof. No waiver by the Collateral Agent
of any Event of Default or of any Default under any other agreement shall
operate as a waiver of any other Event of Default or other Default hereunder or
under any other agreement. No single or partial exercise of any of the
Collateral Agent’s Rights or Remedies, and no express or implied agreement or
transaction of whatever nature entered into between the Collateral Agent

18

 

and any Person, at any time, shall
preclude the other or further exercise of and
Collateral Agent’s Rights and Remedies. No waiver by the Collateral Agent of
any of the Collateral Agent’s Rights and Remedies on any one occasion shall be
deemed a waiver on any subsequent occasion, nor shall it be deemed a continuing
waiver. The Collateral Agent’s Rights and Remedies may be exercised at such
time or times and in such order of preference as the Collateral Agent may
determine. The Collateral Agent’s Rights and Remedies may be exercised without
resort or regard to any other source of satisfaction of the Secured
Obligations. No waiver of any provisions of this Agreement or any other Loan
Document or consent to any departure by any Grantor therefrom shall in any
event be effective unless the same shall be permitted by paragraph (b) below,
and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on any
Grantor in any case shall entitle such Grantor or any other Grantor to any
other or further notice or demand in similar or other circumstances.

               (b)      Neither this Agreement nor any provision hereof may be waived, amended
or modified except pursuant to a written agreement entered into between the
Collateral Agent and the Grantor or Grantors with respect to whom such waiver,
amendment or modification is to apply, subject to any consent required in
accordance with Section 9.2 of the Credit Agreement.

     SECTION 8.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).
EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS SET FORTH IN THIS SECTION 8.10.

     SECTION 8.11 Severability. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby (it being understood that the invalidity of a particular provision in a
particular jurisdiction shall not in and of itself affect the validity of such
provision in any other jurisdiction).

     SECTION 8.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original but all of which, when
taken together, shall constitute a single contract. Delivery of an executed
counterpart of a signature page to this

19

 

Agreement by facsimile transmission shall be effective as delivery of a
manually executed counterpart hereof.

     SECTION 8.13 Headings. Article and Section headings used herein are for
the purpose of reference only, are not part of this Agreement and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Agreement.

     SECTION 8.14 Jurisdiction; Consent to Service of Process.

		
	 	     (a)      Each Grantor agrees that any suit for the enforcement of this
Agreement or any other Loan Document may be brought in the courts of the
State of New York or any federal court sitting therein and consent to the
non-exclusive jurisdiction of such courts. Each Grantor hereby waives
any objection which it may now or hereafter have to the venue of any such
suit or any such court or that such suit is brought in an inconvenient
forum.

		
	 	     (b)      Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 8.1. Nothing in
this Agreement or any other Loan Document will affect the right of any
party to this Agreement to serve process in any other manner permitted by
law.

     SECTION 8.15 Termination; Release of Collateral. Except for those
provisions which expressly survive the termination thereof, the Credit
Agreement, this Agreement and the Security Interest shall terminate when all
the Secured Obligations have been paid in full, the Lenders have no further
commitment to lend, the Letter of Credit Outstandings have been reduced to zero
or fully cash collateralized in a manner reasonably satisfactory to the Issuing
Bank and the Administrative Agent, and the Issuing Bank has no further
obligation to issue Letters of Credit under the Credit Agreement, and any Other
Liabilities have been fully cash collateralized in a manner reasonably
satisfactory to the respective Lender to whom such Other Liabilities are owed,
at which time the Collateral Agent shall execute and deliver to the Grantors,
at the Grantors’ expense, all UCC termination statements and similar documents
that the Grantors shall reasonably request to evidence such termination. Any
execution and delivery of termination statements or documents pursuant to this
Section 8.15 shall be without recourse to, or warranty by, the Collateral
Agent.

[SIGNATURE PAGES FOLLOW]

20

 

     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
under seal as of the day and year first above written.

	 	 	 	 	 
	GRANTORS:	 	
ZALE DELAWARE, INC.
	 	 	 	 	 
	 	 	
By: 	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name: Mark R. Lenz
	 	 	
Title:   Group Senior Vice President & Chief
	 	 	 	 	
    Financial Officer
	 	 	 
	 	 	
ZALE CORPORATION
	 	 	 
	 	 	
By:	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name: Mark R. Lenz
	 	 	
Title:   Group Senior Vice President & Chief
	 	 	 	 	
    Financial Officer
	 	 	 
	 	 	
DDCC, Inc.
	 	 	 
	 	 	
By: 	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name: Mark R. Lenz
	 	 	
Title:   Group Service Vice President & Chief
	 	 	 	 	
    Financial Officer
	 	 	 	 
	 	 	
TXDC, L.P.
	 	 	 
	 	 	
By: ZALE DELAWARE, INC.
	 	 	 	 	
Its General Partner
	 	 	 
	 	 	
By:	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name: Mark R. Lenz
	 	 	
Title:   Group Senior Vice President & Chief
	 	 	 	 	
    Financial Officer

 

 

	 	 	 	 	 
	COLLATERAL AGENT:	 	
FLEET RETAIL FINANCE, INC.
	 
	 	 	
By:	 	/s/ Betsy Ratto
	 	 	 	 	

	 	 	
Name: Betsy Ratto
	 	 	
Title:   Managing Director

 

 

Annex 1 to the

Security Agreement

Form of Perfection Certificateexv10w4

 

EXHIBIT 10.4

APPENDIX B

2003 STOCK INCENTIVE PLAN

1. PREAMBLE

     This Zale Corporation 2003 Stock Incentive Plan, as it may be amended from
time to time (the “Plan”), is intended to promote the interests of Zale
Corporation, a Delaware corporation (together with its Subsidiaries, the
“Company”), and its stockholders by providing officers and other employees
(including directors who are employees) of the Company with appropriate
incentives and rewards to encourage them to enter into and continue in the
employ of the Company and to acquire a proprietary interest in the long-term
success of the Company.

2. DEFINITIONS

     As used in the Plan, the following definitions apply to the terms
indicated below:

     (a)  “Board of Directors” shall mean the Board of Directors of the Company.

     (b)  “Cause,” when used in connection with the termination of a
Participant’s (as defined herein) employment by the Company, shall mean (i) the
willful and continued failure by the Participant substantially to perform his
or her duties and obligations to the Company (other than any such failure
resulting from his or her incapacity due to physical or mental illness) or (ii)
the willful engaging by the Participant in misconduct which is materially
injurious to the Company. For purposes of this Section 2(b), no act, or
failure to act, on a Participant’s part shall be considered “willful” unless
done, or omitted to be done, by the Participant in bad faith and without
reasonable belief that his or her action or omission was in the best interests
of the Company. The Company shall determine whether a termination of
employment is for Cause and shall notify the Committee of such a determination.

     (c)  “Change in Control” shall mean any of the following occurrences:

          (1) any “person,” as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company or any trustee or other fiduciary holding
securities under an employee benefit plan of the Company), is or becomes the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company’s then outstanding securities;

          (2) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors, and any new
director (other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (1), (3)
or (4) of this definition) whose election by the Board of Directors or
nomination for election by the Company’s stockholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute at
least a majority thereof;

          (3) the stockholders of the Company approve a merger or consolidation of the
Company with any other entity, other than (i) a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than 50%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation or
(ii) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no “person” (as

B-1

 

hereinabove defined) acquires more than 50% of the combined voting power of the
Company’s then outstanding securities; or

          (4) the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of all
or substantially all of the Company’s assets.

     (d)  “Code” shall mean the Internal Revenue Code of 1986, as amended.

     (e)  “Committee” shall mean the Compensation Committee of the Board of
Directors or such other committee as the Board of Directors shall appoint from
time to time to administer the Plan; provided, that the Committee shall at all
times consist of two or more persons, each of whom shall be a member of the
Board of Directors. To the extent required for transactions under the Plan to
qualify for the exemptions available under Rule 16b-3 (as defined herein),
members of the Committee (or any subcommittee thereof) shall be “non-employee
directors” within the meaning of Rule 16b-3. To the extent required for
compensation realized from Incentive Awards (as defined herein) under the Plan
to be deductible by the Company pursuant to Section 162(m) of the Code, members
of the Committee (or any subcommittee thereof) shall be “outside directors”
within the meaning of such section.

     (f)  “Company Stock” shall mean the common stock, par value $.01 per share,
of the Company.

     (g)  “Disability” shall mean: (1) any physical or mental condition that
would qualify a Participant for a disability benefit under the long-term
disability plan maintained by the Company and applicable to him or her or (2)
when used in connection with the exercise of an Incentive Stock Option (as
defined herein) following termination of employment, disability within the
meaning of Section 422(e)(3) of the Code.

     (h)  “Effective Date” shall mean November 6, 2003.

     (i)  “Exchange Act” shall mean the Securities Exchange Act of 1934, as
amended.

     (j)  The “Fair Market Value” of a share of Company Stock with respect to
any day shall be the closing price of Company Stock on the immediately
preceding business day as reported on the New York Stock Exchange or on such
other securities exchange or reporting system as may be designated by the
Committee. In the event that the price of a share of Company Stock shall not
be so reported, the Fair Market Value of a share of Company Stock shall be
determined by the Committee in its absolute discretion.

     (k)  “Incentive Award” shall mean an Option, Tandem SAR, Stand-Alone SAR,
share of Restricted Stock, share of Phantom Stock or Stock Bonus (each as
defined herein) granted pursuant to the terms of the Plan.

     (l)  “Incentive Stock Option” shall mean an Option that is an “incentive
stock option” within the meaning of Section 422 of the Code.

     (m)  “Issue Date” shall mean the date established by the Committee on which
Certificates representing shares of Restricted Stock shall be issued by the
Company pursuant to the terms of Section 10(e).

     (n)  “Non-Qualified Stock Option” shall mean an Option that is not an
Incentive Stock Option.

B-2

 

     (o)  “Option” shall mean an option to purchase shares of Company Stock
granted pursuant to Section 7.

     (p)  “Participant” shall mean an employee of the Company to whom an
Incentive Award is granted pursuant to the Plan and, upon his or her death, his
or her successors, heirs, executors and administrators, as the case may be.

     (q)  A share of “Phantom Stock” shall mean the right, granted pursuant to
Section 11, to receive in cash the Fair Market Value of a share of Company
Stock.

     (r)  “Plan Agreement” shall mean the written agreement between the Company
and a Participant or other document approved by the Committee evidencing an
Incentive Award.

     (s)  A share of “Restricted Stock” shall mean a share of Company Stock
which is granted pursuant to the terms of Section 10 hereof and which is
subject to the restrictions set forth in Section 10(c).

     (t)  “Rule 16b-3” shall mean the rule thus designated as promulgated under
the Exchange Act.

     (u)  “Stand-Alone SAR” shall mean a stock appreciation right granted
pursuant to Section 9 which is not related to any Option.

     (v)  “Stock Bonus” shall mean a bonus payable in shares of Company Stock
granted pursuant to Section 12.

     (w)  “Subsidiary” shall mean any corporation or other entity in which, at
the time of reference, the Company owns, directly or indirectly, stock or
similar interests comprising more than 50 percent of the combined voting power
of all outstanding securities of such entity.

     (x)  “Tandem SAR” shall mean a stock appreciation right granted pursuant to
Section 8 which is related to an Option.

     (y)  “Vesting Date” shall mean the date established by the Committee on
which a share of Restricted Stock or Phantom Stock may vest.

3. STOCK SUBJECT TO THE PLAN

     (a)  Shares Available for Awards

     The total number of shares of Company Stock with respect to which
Incentive Awards may be granted shall not exceed 3,000,000 shares. Such shares
may be authorized but unissued Company Stock or authorized and issued Company
Stock held in the Company’s treasury or acquired by the Company for the
purposes of the Plan. The Committee may direct that any stock certificate
evidencing shares issued pursuant to the Plan shall bear a legend setting forth
such restrictions on transferability as may apply to such shares pursuant to
the Plan.

     The grant of a Tandem SAR shall not reduce the number of shares of Company
Stock with respect to which Incentive Awards may be granted pursuant to the
Plan.

B-3

 

     (b)  Individual Limitation

     The total number of shares of Company Stock subject to Options and to
Stand-Alone SARS, awarded to any one employee during any fiscal year of the
Company, shall not exceed 600,000 shares. Determinations under the preceding
sentence shall be made in a manner that is consistent with Section 162(m) of
the Code and regulations promulgated thereunder. The provisions of this
Section 3(b) shall not apply in any circumstance with respect to which the
Committee determines that compliance with Section 162(m) of the Code is not
necessary.

     (c)  Adjustment for Change in Capitalization

     If there is any change in the outstanding shares of Company Stock by
reason of a stock dividend or distribution, stock split-up, recapitalization,
combination or exchange of shares, or by reason of any merger, consolidation,
spinoff or other corporate reorganization in which the Company is the surviving
corporation, the number of shares available for issuance both in the aggregate
and with respect to each outstanding Incentive Award, the price per share under
each outstanding Incentive Award, and the limitation set forth in Section 3(b),
shall be proportionately adjusted by the Committee, whose determination shall
be final and binding. After any adjustment made pursuant to this Section 3(c),
the number of shares subject to each outstanding Incentive Award shall be
rounded to the nearest whole number.

     (d)  Re-use of Shares

     The following shares of Company Stock shall again become available for
Incentive Awards: any shares subject to an Incentive Award that remain unissued
upon the cancellation or termination of such Award for any reason whatsoever;
any shares of Restricted Stock forfeited, provided that any dividends paid on
such shares are also forfeited; and any shares in respect of which a stock
appreciation right is settled for cash.

     (e)  Total Grants for Awards Other than Options

     The total number of shares of Company Stock with respect to which Tandem
SARs, Stand Alone SARs, shares of Restricted Stock, shares of Phantom Stock and
Stock Bonuses may collectively be granted shall not exceed 30% of the total
number of shares of Company Stock with respect to which all Incentive Awards
have been or may be granted under the Plan.

     (f)  No Repricing

     Absent stockholder approval, neither the Committee nor the Board of
Directors shall have any authority, with or without the consent of the affected
holders of Incentive Awards, to “reprice” an Incentive Award after the date of
its initial grant with a lower exercise price in substitution for the original
exercise price. This paragraph may not be amended, altered or repealed by the
Board of Directors or the Committee without approval of the stockholders of the
Company.

4. ADMINISTRATION OF THE PLAN

     The Plan shall be administered by the Committee. The Committee shall from
time to time designate the employees of the Company who shall be granted
Incentive Awards and the amount, type and other features of each Incentive
Award.

     The Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan and the terms of
any Incentive Award issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary or appropriate. The

B-4

 

Committee shall determine whether an authorized leave of absence shall
constitute termination of employment. Decisions of the Committee shall be
final and binding on all parties. Notwithstanding anything to the contrary
contained herein, the Board of Directors may, in its sole discretion, at any
time and from time to time, resolve to administer the Plan, in which case the
term “Committee” as used herein shall be deemed to mean the Board of Directors.

     The Committee may, in its absolute discretion, without amendment to the
Plan, (i) accelerate the date on which any Option or Stand-Alone SAR granted
under the Plan becomes exercisable, (ii) waive or amend the operation of Plan
provisions respecting exercise after termination of employment or otherwise
adjust any of the terms of such Option or Stand-Alone SAR and (iii) accelerate
the Vesting Date or Issue Date, or waive any condition imposed hereunder, with
respect to any share of Restricted Stock or Phantom Stock or otherwise adjust
any of the terms applicable to such share.

     No member of the Committee shall be liable for any action, omission or
determination relating to the Plan, and the Company shall indemnify and hold
harmless each member of the Committee and each other director or employee of
the Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated against any cost or expense
(including counsel fees) or liability (including any sum paid in settlement of
a claim with the approval of the Committee) arising out of any action, omission
or determination relating to the Plan, unless, in either case, such action,
omission or determination was taken or made by such member, director or
employee in bad faith and without reasonable belief that it was in the best
interests of the Company.

5. ELIGIBILITY

     The persons who shall be eligible to receive Incentive Awards pursuant to
the Plan shall be such employees of the Company (including officers of the
Company, whether or not they are directors of the Company) as the Committee
shall designate from time to time. Directors who are not employees or officers
of the Company shall not be eligible to receive Incentive Awards under the
Plan.

6. AWARDS UNDER THE PLAN; PLAN AGREEMENTS

     The Committee may grant Options, Tandem SARS, Stand-Alone SARS, shares of
Restricted Stock, shares of Phantom Stock and Stock Bonuses, in such amounts
and with such terms and conditions as the Committee shall determine, subject to
the provisions of the Plan.

     Each Incentive Award granted under the Plan (except an unconditional Stock
Bonus) shall be evidenced by a Plan Agreement which shall contain such
provisions as the Committee may in its sole discretion deem necessary or
desirable. By accepting an Incentive Award, a Participant thereby agrees that
the Incentive Award shall be subject to all of the terms and provisions of the
Plan and the applicable Plan Agreement.

7. OPTIONS

     (a)  Identification of Options

     Each Option shall be clearly identified in the applicable Plan Agreement
as either an Incentive Stock Option or a Non-Qualified Stock Option.

     (b)  Exercise Price

     Each Plan Agreement with respect to an Option shall set forth the amount
(the “exercise price”) payable by the holder to the Company upon exercise of
the Option. The exercise price per share shall be

B-5

 

determined by the Committee but shall in no event be less than the Fair Market
Value of a share of Company Stock on the date the Option is granted.

     (c)  Term and Exercise of Options

          (1) Unless the applicable Plan Agreement provides otherwise, an Option shall
become cumulatively exercisable as to 25% of the shares covered thereby on each
of the first, second, third and fourth anniversaries of the date of grant. The
Committee shall determine the expiration date of each Option; provided,
however, that no Incentive Stock Option shall be exercisable more than ten
years after the date of grant. Unless the applicable Plan Agreement provides
otherwise, no Option shall be exercisable prior to the first anniversary of the
date of grant.

          (2) An Option may be exercised for all or any portion of the shares as to which
it is exercisable; provided, that no partial exercise of an Option shall be for
an aggregate exercise price of less than $1,000. The partial exercise of an
Option shall not cause the expiration, termination or cancellation of the
remaining portion thereof.

          (3) An Option shall be exercised by delivering notice to the Company’s
principal office, to the attention of its Secretary (or the Secretary’s
designee), no less than one business day in advance of the effective date of
the proposed exercise. Such notice shall be accompanied by the applicable Plan
Agreement, shall specify the number of shares of Company Stock with respect to
which the Option is being exercised and the effective date of the proposed
exercise and shall be signed by the Participant or other person then having the
right to exercise the Option. Such notice may be withdrawn at any time prior
to the close of business on the business day immediately preceding the
effective date of the proposed exercise. Payment for shares of Company Stock
purchased upon the exercise of an Option shall be made on the effective date of
such exercise by one or a combination of the following means: (i) in cash, by
certified check, bank cashier’s check or wire transfer; (ii) subject to the
approval of the Committee, in shares of Company Stock owned by the Participant
for at least six months prior to the date of exercise and valued at their Fair
Market Value on the effective date of such exercise; or (iii) subject to the
approval of the Committee, by such other provision as the Committee may from
time to time authorize. Any payment in shares of Company Stock shall be
effected by the delivery of such shares to the Secretary (or the Secretary’s
designee) of the Company, duly endorsed in blank or accompanied by stock powers
duly executed in blank, together with any other documents and evidences as the
Secretary (or the Secretary’s designee) of the Company shall require.

          (4) Certificates for shares of Company Stock purchased upon the exercise of an
Option shall be issued in the name of the Participant or other person entitled
to receive such shares, and delivered to the Participant or such other person
as soon as practicable following the effective date on which the Option is
exercised.

     (d)  Limitations on Incentive Stock Options

          (1) To the extent that the aggregate Fair Market Value of shares of Company
Stock with respect to which Incentive Stock Options are exercisable for the
first time by a Participant during any calendar year under the Plan and any
other stock option plan of the Company (or any “subsidiary corporation” of the
Company within the meaning of Section 424 of the Code) shall exceed $100,000,
or such higher value as may be permitted under Section 422 of the Code, such
Options shall be treated as Non-Qualified Stock Options. Such Fair Market
Value shall be determined as of the date on which each such Incentive Stock
Option is granted.

          (2) No Incentive Stock Option may be granted to an individual if, at the time
of the proposed grant, such individual owns stock possessing more than 10% of
the total combined voting

B-6

 

power of all classes of stock of the Company (or any “subsidiary corporation”
of the Company within the meaning of Section 424 of the Code), unless (i) the
exercise price of such Incentive Stock Option is at least 110% of the Fair
Market Value of a share of Company Stock at the time such Incentive Stock
Option is granted and (ii) such Incentive Stock Option is not exercisable after
the expiration of five years from the date such Incentive Stock Option is
granted.

     (e)  Effect of Termination of Employment

          (1) Unless the applicable Plan Agreement provides or the Committee shall
determine otherwise, in the event that the employment of a Participant with the
Company shall terminate for any reason other than Cause, Disability or death:
(i) Options granted to such Participant, to the extent that they were
exercisable at the time of such termination, shall remain exercisable until the
date that is three months after such termination, on which date they shall
expire; and (ii) Options granted to such Participant, to the extent that they
were not exercisable at the time of such termination, shall expire at the close
of business on the date of such termination. The three-month period described
in this Section 7(e)(1) shall be extended to one year in the event of the
Participant’s death during such three-month period. Notwithstanding the
foregoing, no Option shall be exercisable after the expiration of its term.

          (2) Unless the applicable Plan Agreement provides or the Committee shall
determine otherwise, in the event that the employment of a Participant with the
Company shall terminate on account of the Disability or death of the
Participant: (i) Options granted to such Participant, to the extent that they
were exercisable at the time of such termination, shall remain exercisable
until the first anniversary of such termination, on which date they shall
expire; and (ii) Options granted to such Participant, to the extent that they
were not exercisable at the time of such termination, shall expire at the close
of business on the date of such termination. Notwithstanding the foregoing, no
Option shall be exercisable after the expiration of its term.

          (3) In the event of the termination of a Participant’s employment for Cause,
all outstanding Options granted to such Participant shall expire at the
commencement of business on the date of such termination.

     (f)  Acceleration of Exercise Date Upon Change in Control

     Upon the occurrence of a Change in Control, each Option granted under the
Plan and outstanding at such time shall become fully and immediately
exercisable and shall remain exercisable until its expiration, termination or
cancellation pursuant to the terms of the Plan. In addition, in the event of a
potential Change in Control, the Committee may in its discretion, cancel any
outstanding Options and pay to the holders thereof, in cash or stock, or any
combination thereof, the value of such Options based upon the price per share
of Common Stock to be received by other shareholders of the Company in the
Change in Control less the exercise price of each Option.

8. TANDEM SARS

     The Committee may grant in connection with any Option granted hereunder
one or more Tandem SARS relating to a number of shares of Company Stock less
than or equal to the number of shares of Company Stock subject to the related
Option. A Tandem SAR may be granted at the same time as, or, in the case of a
Non-Qualified Stock Option, subsequent to the time that its related Option is
granted.

     (a)  Benefit Upon Exercise

     The exercise of a Tandem SAR with respect to any number of shares of
Company Stock shall entitle the Participant to a cash payment, for each such
share, equal to the excess of (i) the Fair Market

B-7

 

Value of a share of Company Stock on the exercise date over (ii) the option
exercise price of the related Option. Such payment shall be made as soon as
practicable after the effective date of such exercise.

     (b)  Term and Exercise of Tandem SAR

          (1) A Tandem SAR shall be exercisable only if and to the extent that its
related Option is exercisable.

          (2) The exercise of a Tandem SAR with respect to a number of shares of Company
Stock shall cause the immediate and automatic cancellation of its related
Option with respect to an equal number of shares. The exercise of an Option,
or the cancellation, termination or expiration of an Option (other than
pursuant to this Section 8(b)(2)), with respect to a number of shares of
Company Stock shall cause the automatic and immediate cancellation of any
related Tandem SARS to the extent that the number of shares of Company Stock
remaining subject to such Option is less than the number of shares subject to
such Tandem SARS.

     Tandem SARS shall be cancelled in the order in which they became
exercisable.

          (3) A Tandem SAR may be exercised for all or any portion of the shares as to
which it is exercisable; provided, that no partial exercise of a Tandem SAR
shall be for an aggregate exercise price of the related Option of less than
$1,000. The partial exercise of a Tandem SAR shall not cause the expiration,
termination or cancellation of the remaining portion thereof.

          (4) No Tandem SAR shall be assignable or transferable otherwise than together
with its related Option.

          (5) A Tandem SAR shall be exercised by delivering notice to the Company’s
principal office, to the attention of its Secretary (or the Secretary’s
designee), no less than one business day in advance of the effective date of
the proposed exercise. Such notice shall be accompanied by the applicable Plan
Agreement, shall specify the number of shares of Company Stock with respect to
which the Tandem SAR is being exercised and the effective date of the proposed
exercise and shall be signed by the Participant or other person then having the
right to exercise the Option to which the Tandem SAR is related. Such notice
may be withdrawn at any time prior to the close of business on the business day
immediately preceding the effective date of the proposed exercise.

9. STAND-ALONE SARS

     (a)  Exercise Price

     The exercise price per share of a Stand-Alone SAR shall be determined by
the Committee at the time of grant, but shall in no event be less than the Fair
Market Value of a share of Company Stock on the date of grant.

     (b)  Benefit Upon Exercise

     The exercise of a Stand-Alone SAR with respect to any number of shares of
Company Stock shall entitle the Participant to a cash payment, for each such
share, equal to the excess of (i) the Fair Market Value of a share of Company
Stock on the exercise date over (ii) the exercise price of the Stand-Alone SAR.
Such payments shall be made as soon as practicable.

B-8

 

     (c)  Term and Exercise of Stand-Alone SARS

          (1) Unless the applicable Plan Agreement provides otherwise, a Stand-Alone SAR
shall become cumulatively exercisable as to 25 percent of the shares covered
thereby on each of the first, second, third and fourth anniversaries of the
date of grant. The Committee shall determine the expiration date of each
Stand-Alone SAR. Unless the applicable Plan Agreement provides otherwise, no
Stand-Alone SAR shall be exercisable prior to the first anniversary of the date
of grant.

          (2) A Stand-Alone SAR may be exercised for all or any portion of the shares as
to which it is exercisable; provided, that no partial exercise of a Stand-Alone
SAR shall be for an aggregate exercise price of less than $1,000. The partial
exercise of a Stand-Alone SAR shall not cause the expiration, termination or
cancellation of the remaining portion thereof.

          (3) A Stand-Alone SAR shall be exercised by delivering notice to the Company’s
principal office, to the attention of its Secretary (or the Secretary’s
designee), no less than one business day in advance of the effective date of
the proposed exercise. Such notice shall be accompanied by the applicable Plan
Agreement, shall specify the number of shares of Company Stock with respect to
which the Stand-Alone SAR is being exercised, and the effective date of the
proposed exercise, and shall be signed by the Participant. The Participant may
withdraw such notice at any time prior to the close of business on the business
day immediately preceding the effective date of the proposed exercise.

     (d)  Effect of Termination of Employment

     The provisions set forth in Section 7(e) with respect to the exercise of
Options following termination of employment shall apply as well to such
exercise of Stand-Alone SARS.

     (e)  Acceleration of Exercise Date Upon Change in Control

     Upon the occurrence of a Change in Control, any Stand-Alone SAR granted
under the Plan and outstanding at such time shall become fully and immediately
exercisable and shall remain exercisable until its expiration, termination or
cancellation pursuant to the terms of the Plan.

10. RESTRICTED STOCK

     (a)  Issue Date and Vesting Date

     At the time of the grant of shares of Restricted Stock, the Committee
shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting
Dates with respect to such shares. The Committee may divide such shares into
classes and assign a different Issue Date and/or Vesting Date for each class.
If the grantee is employed by the Company on an Issue Date (which may be the
date of grant), the specified number of shares of Restricted Stock shall be
issued in accordance with the provisions of Section 10(e). Provided that all
conditions to the vesting of a share of Restricted Stock imposed pursuant to
Section 10(b) are satisfied, and except as provided in Section 10(g), upon the
occurrence of the Vesting Date with respect to a share of Restricted Stock,
such share shall vest and the restrictions of Section 10(c) shall cease to
apply to such share.

     (b)  Conditions to Vesting

     At the time of the grant of shares of Restricted Stock, the Committee may
impose such restrictions or conditions to the vesting of such shares as it, in
its absolute discretion, deems appropriate. By way of example and not by way
of limitation, the Committee may require, as a condition to the vesting of any
class or classes of shares of Restricted Stock, that the Participant or the
Company achieves such performance goals as the Committee may specify.

B-9

 

     (c)  Restrictions on Transfer Prior to Vesting

     Prior to the vesting of a share of Restricted Stock, no transfer of a
Participant’s rights with respect to such share, whether voluntary or
involuntary, by operation of law or otherwise, shall be permitted. Immediately
upon any attempt to transfer such rights, such share, and all of the rights
related thereto, shall be forfeited by the Participant.

     (d)  Dividends on Restricted Stock

     The Committee in its discretion may require that any dividends paid on
shares of Restricted Stock shall be held in escrow until all restrictions on
such shares have lapsed.

     (e)  Issuance of Certificates

          (1) Reasonably promptly after the Issue Date with respect to shares of
Restricted Stock, the Company shall cause to be issued a stock certificate,
registered in the name of the Participant to whom such shares were granted,
evidencing such shares; provided, that the Company shall not cause such a stock
certificate to be issued unless it has received a stock power duly endorsed in
blank with respect to such shares. Each such stock certificate shall bear the
following legend:

		
	 	     The transferability of this certificate and the shares
of stock represented hereby are subject to the restrictions,
terms and conditions (including forfeiture provisions and
restrictions against transfer) contained in the Zale
Corporation 2003 Stock Incentive Plan and related Plan
Agreement, and such rules, regulations and interpretations
as the Zale Corporation Compensation Committee may adopt.
Copies of the Plan, Plan Agreement and, if any, rules,
regulations and interpretations are on file in the office of
the Secretary of Zale Corporation, 901 West Walnut Hill
Lane, Irving, Texas 75038-1003.

     Such legend shall not be removed until such shares vest pursuant to the
terms hereof.

          (2) Each certificate issued pursuant to this Section 10(e), together with the
stock powers relating to the shares of Restricted Stock evidenced by such
certificate, shall be held by the Company unless the Committee determines
otherwise.

     (f)  Consequences of Vesting

     Upon the vesting of a share of Restricted Stock pursuant to the terms of
the Plan and the applicable Plan Agreement, the restrictions of Section 10(c)
shall cease to apply to such share. Reasonably promptly after a share of
Restricted Stock vests, the Company shall cause to be delivered to the
Participant to whom such shares were granted, a certificate evidencing such
share, free of the legend set forth in Section 10(e). Notwithstanding the
foregoing, such share still may be subject to restrictions on transfer as a
result of applicable securities laws.

     (g)  Effect of Termination of Employment

          (1) Unless the applicable Plan Agreement or the Committee provides otherwise,
during the 90 days following termination of a Participant’s employment for any
reason other than Cause, the Company shall have the right to require the return
of any shares to which restrictions on transferability apply, in exchange for
which the Company shall repay to the Participant (or the Participant’s estate)
any amount paid by the Participant for such shares. In the event that the
Company requires such a return of

B-10

 

shares, it also shall have the right to require the return of all dividends
paid on such shares, whether by termination of any escrow arrangement under
which such dividends are held or otherwise.

          (2) In the event of the termination of a Participant’s employment for Cause,
all shares of Restricted Stock granted to such Participant which have not
vested as of the date of such termination shall immediately be returned to the
Company, together with any dividends paid on such shares, in return for which
the Company shall repay to the Participant any amount paid for such shares.

     (h)  Effect of Change in Control

     Upon the occurrence of a Change in Control, all outstanding shares of
Restricted Stock which have not theretofore vested shall immediately vest.

11. PHANTOM STOCK

     (a)  Vesting Date

     At the time of the grant of shares of Phantom Stock, the Committee shall
establish a Vesting Date or Vesting Dates with respect to such shares. The
Committee may divide such shares into classes and assign a different Vesting
Date for each class. Provided that all conditions to the vesting of a share of
Phantom Stock imposed pursuant to Section 11(c) are satisfied, and except as
provided in Section 11(d), upon the occurrence of the Vesting Date with respect
to a share of Phantom Stock, such share shall vest.

     (b)  Benefit Upon Vesting

     Upon the vesting of a share of Phantom Stock, the Participant shall be
entitled to receive in cash, within 30 days of the date on which such share
vests, an amount equal to the sum of (i) the Fair Market Value of a share of
Company Stock on the date on which such share of Phantom Stock vests and (ii)
the aggregate amount of cash dividends paid with respect to a share of Company
Stock during the period commencing on the date on which the share of Phantom
Stock was granted and terminating on the date on which such share vests.

     (c)  Conditions to Vesting

     At the time of the grant of shares of Phantom Stock, the Committee may
impose such restrictions or conditions to the vesting of such shares as it, in
its absolute discretion, deems appropriate. By way of example and not by way
of limitation, the Committee may require, as a condition to the vesting of any
class or classes of shares of Phantom Stock, that the Participant or the
Company achieves such performance goals as the Committee may specify.

     (d)  Effect of Termination of Employment

          (1) Unless the applicable Plan Agreement or the Committee provides otherwise,
shares of Phantom Stock that have not vested, together with any dividends
credited on such shares, shall be forfeited upon the Participant’s termination
of employment for any reason other than Cause.

          (2) In the event of the termination of a Participant’s employment for Cause,
all shares of Phantom Stock granted to such Participant which have not vested
as of the date of such termination shall immediately be forfeited, together
with any dividends credited on such shares.

B-11

 

     (e)  Effect of Change in Control

     Upon the occurrence of a Change in Control all outstanding shares of
Phantom Stock which have not theretofore vested shall immediately vest.

12. STOCK BONUSES

     In the event that the Committee grants a Stock Bonus, a certificate for
the shares of Company Stock comprising such Stock Bonus shall be issued in the
name of the Participant to whom such grant was made and delivered to such
Participant as soon as practicable after the date on which such Stock Bonus is
payable.

13. RIGHTS AS A STOCKHOLDER

     No person shall have any rights as a stockholder with respect to any
shares of Company Stock covered by or relating to any Incentive Award until the
date of issuance of a stock certificate with respect to such shares.

     Except as otherwise expressly provided in Section 3(c), no adjustment to
any Incentive Award shall be made for dividends or other rights for which the
record date occurs prior to the date such stock certificate is issued.

14. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO INCENTIVE AWARD

     Nothing contained in the Plan or any Plan Agreement shall confer upon any
Participant any right with respect to the continuation of employment by the
Company or interfere in any way with the right of the Company, subject to the
terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
Participant.

     No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee’s granting of an Incentive Award to a Participant at
any time shall neither require the Committee to grant any other Incentive Award
to such Participant or other person at any time nor preclude the Committee from
making subsequent grants to such Participant or any other person.

15. SECURITIES MATTERS

     (a)  The Company shall be under no obligation to affect the registration
pursuant to the Securities Act of 1933 of any interests in the Plan or any
shares of Company Stock to be issued hereunder or to effect similar compliance
under any state laws. Notwithstanding anything herein to the contrary, the
Company shall not be obligated to cause to be issued or delivered any
certificates evidencing shares of Company Stock pursuant to the Plan unless and
until the Company is advised by its counsel that the issuance and delivery of
such certificates is in compliance with all applicable laws, regulations of
governmental authority and the requirements of the New York Stock Exchange and
any other securities exchange on which shares of Company Stock are traded.
Certificates evidencing shares of Company Stock issued pursuant to the terms
hereof, may bear such legends, as the Committee or the Company, in its sole
discretion, deems necessary or desirable to insure compliance with applicable
securities laws.

     (b)  The transfer of any shares of Company Stock hereunder shall be
effective only at such time as counsel to the Company shall have determined
that the issuance and delivery of such shares is in compliance with all
applicable laws, regulations of governmental authority and the requirements of
the New York Stock Exchange and any other securities exchange on which shares
of Company Stock are traded. The Committee may, in its sole discretion, defer
the effectiveness of any transfer of shares of

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Company stock hereunder in order to allow the issuance of such shares to be
made pursuant to registration or an exemption from registration or other
methods for compliance available under federal or state securities laws. The
Company shall inform the Participant in writing of the Committee’s decision to
defer the effectiveness of a transfer. During the period of such a deferral in
connection with the exercise of an Option, the Participant may, by written
notice, withdraw such exercise and obtain the refund of any amount paid with
respect thereto.

16. WITHHOLDING TAXES

     Whenever cash is to be paid pursuant to an Incentive Award, the Company
shall have the right to deduct therefrom an amount sufficient to satisfy any
federal, state and local withholding tax requirements related thereto.

     Whenever shares of Company Stock are to be delivered pursuant to an
Incentive Award, the Company shall have the right to require the Participant to
remit to the Company in cash an amount sufficient to satisfy any federal, state
and local withholding tax requirements related thereto. With the approval of
the Committee, which it shall have sole discretion to grant, a Participant may
satisfy the foregoing requirement by electing to have the Company withhold from
delivery shares of Company Stock having a value equal to the amount of tax to
be withheld. Such shares shall be valued at their Fair Market Value on the
date as of which the amount of tax to be withheld is determined (the “Tax
Date”). Fractional share amounts shall be settled in cash. Such a withholding
election may be made with respect to all or any portion of the shares to be
delivered pursuant to an Incentive Award. To the extent required for such a
withholding of stock to qualify for the exemption available under Rule 16b-3,
such an election by a grantee whose transactions in Company Stock are subject
to Section 16(b) of the Exchange Act shall be: (i) subject to the approval of
the Committee in its sole discretion; (ii) irrevocable; (iii) made no sooner
than six months after the grant of the award with respect to which the election
is made; and (iv) made at least six months prior to the Tax Date unless such
withholding election is in connection with exercise of an Option and both the
election and the exercise occur prior to the Tax Date in a “window period” of
ten business days beginning on the third day following release of the Company’s
quarterly or annual summary statement of sales and earnings.

17. NOTIFICATION OF ELECTION UNDER SECTION 83(b) OF THE CODE

     If any Participant shall, in connection with the acquisition of shares of
Company Stock under the Plan, make the election permitted under Section 83(b)
of the Code (i.e., an election to include in gross income in the year of
transfer the amounts specified in Section 83(b)), such Participant shall notify
the Company of such election within ten days of filing notice of the election
with the Internal Revenue Service, in addition to any filing and notification
required pursuant to regulations issued under the authority of Code Section
83(b).

18.     NOTIFICATION UPON DISQUALIFYING DISPOSITION UNDER SECTION 421(b) OF THE
CODE

     Each Plan Agreement with respect to an Incentive Stock Option shall
require the Participant to notify the Company of any disposition of shares of
Company Stock issued pursuant to the exercise of such Option under the
circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions) within ten days of such disposition.

19. AMENDMENT OR TERMINATION OF THE PLAN

     The Board of Directors may, at any time, suspend or terminate the Plan or
revise or amend it in any respect whatsoever; provided, however, that
stockholder approval shall be required if and to the

B-13

 

extent required by Rule 16b-3 or by any comparable or successor exemption under
which the Board of Directors believes it is appropriate for the Plan to
qualify, or if and to the extent the Board of Directors determines that such
approval is appropriate for purposes of satisfying Section 162(m) or Section
422 of the Code. Nothing herein shall restrict the Committee’s ability to
exercise its discretionary authority pursuant to Section 4, which discretion
may be exercised without amendment to the Plan. No action hereunder may,
without the consent of a Participant, reduce the Participant’s rights under any
outstanding Incentive Award.

20. NO OBLIGATION TO EXERCISE

     The grant to a Participant of an Option, Tandem SAR or Stand-Alone SAR
shall impose no obligation upon such Participant to exercise such Option,
Tandem SAR or Stand-Alone SAR.

21. TRANSFERS UPON DEATH; NONASSIGNABILITY

     Upon the death of a Participant outstanding Incentive Awards granted to
such Participant may be exercised only by the executor or administrator of the
Participant’s estate or by a person who shall have acquired the right to such
exercise by will or by the laws of descent and distribution. No transfer of an
Incentive Award by will or the laws of descent and distribution shall be
effective to bind the Company unless the Company shall have been furnished with
(a) written notice thereof and with a copy of the will and/or such evidence as
the Committee may deem necessary to establish the validity of the transfer and
(b) an agreement by the transferee to comply with all the terms and conditions
of the Incentive Award that are or would have been applicable to the
Participant and to be bound by the acknowledgments made by the Participant in
connection with the grant of the Incentive Award.

     During a Participant’s lifetime, the Committee may permit the transfer,
assignment or other encumbrance of an outstanding Option or outstanding shares
of Restricted Stock unless (i) such Option is an Incentive Stock Option and the
Committee and the Participant intend that it shall retain such status or (ii)
the award is meant to qualify for the exemptions available under Rule 16b-3 and
the Committee and the Participant intend that it shall continue to so qualify.

22. EXPENSES AND RECEIPTS

     The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Incentive Award will be used for
general corporate purposes.

23. FAILURE TO COMPLY

     In addition to the remedies of the Company elsewhere provided for herein,
failure by a Participant (or beneficiary) to comply with any of the terms and
conditions of the Plan or the applicable Plan Agreement, unless such failure is
remedied by such Participant (or beneficiary) within ten days after notice of
such failure by the Committee, shall be grounds for the cancellation and
forfeiture of such Incentive Award, in whole or in part, as the Committee, in
its sole discretion, may determine.

24. EFFECTIVE DATE AND TERM OF PLAN

     The Plan shall be effective as of the Effective Date. Unless earlier
terminated by the Board of Directors, the right to grant Incentive Awards under
the Plan will terminate on the tenth anniversary of the Effective Date.
Incentive Awards outstanding at Plan termination will remain in effect
according to their terms and the provisions of the Plan.

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25. APPLICABLE LAW

     Except to the extent preempted by any applicable federal law, the Plan
will be construed and administered in accordance with the laws of the State of
Delaware, without reference to the principles of conflicts of laws thereunder.

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