Document:

Exhibit
10.5

 

AMENDED AND
RESTATED CREDIT AGREEMENT

 

dated as of

May 10, 2010

 

among

 

ZALE DELAWARE, INC.,

ZALE CORPORATION,

ZGCO, LLC.,

TXDC, L.P.,

ZALE PUERTO RICO, INC.

 

as 

Borrowers

 

ZALE CANADA CO.

and the other Facility Guarantors named herein

 

as Facility Guarantors

 

The LENDERS Party Hereto,

 

BANK OF AMERICA, N.A.

as Administrative Agent and Collateral Agent,

 

BANK OF AMERICA, N.A. 

WELLS FARGO RETAIL FINANCE, LLC

GENERAL ELECTRIC CAPITAL CORPORATION

as Co-Borrowing Base Agents

 

BANC OF AMERICA SECURITIES
LLC

WELLS FARGO RETAIL FINANCE, LLC

GE CAPITAL MARKETS, INC.

as Joint Lead Arrangers and Joint Bookrunners

 

and

 

WELLS FARGO RETAIL
FINANCE, LLC

GE CAPITAL MARKETS, INC.

as Co-Syndication Agents

 

 

TABLE
OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  
	
  ARTICLE
  I DEFINITIONS

  	
  3

  
	
   

  	
   

  	
   

  
	
  SECTION 1.1

  	
  Defined Terms

  	
  3

  
	
  SECTION 1.2

  	
  Terms Generally

  	
  35

  
	
   

  	
   

  
	
  ARTICLE
  II AMOUNT AND TERMS OF CREDIT

  	
  36

  
	
   

  	
   

  
	
  SECTION 2.1

  	
  Commitment
  of the Lenders

  	
  36

  
	
  SECTION 2.2

  	
  Reserves;
  Changes to Reserves

  	
  36

  
	
  SECTION 2.3

  	
  Making
  of Loans

  	
  37

  
	
  SECTION 2.4

  	
  Overadvances

  	
  38

  
	
  SECTION 2.5

  	
  Swingline
  Loans

  	
  38

  
	
  SECTION 2.6

  	
  Letters
  of Credit

  	
  39

  
	
  SECTION 2.7

  	
  Settlements
  Amongst Lenders

  	
  43

  
	
  SECTION 2.8

  	
  Notes;
  Repayment of Loans

  	
  44

  
	
  SECTION 2.9

  	
  Interest
  on Loans

  	
  45

  
	
  SECTION 2.10

  	
  Default
  Interest

  	
  46

  
	
  SECTION 2.11

  	
  Certain
  Fees

  	
  46

  
	
  SECTION 2.12

  	
  Unused
  Commitment Fee

  	
  46

  
	
  SECTION 2.13

  	
  Letter
  of Credit Fees

  	
  46

  
	
  SECTION 2.14

  	
  Nature
  of Fees

  	
  47

  
	
  SECTION 2.15

  	
  Termination
  or Reduction of Commitments

  	
  47

  
	
  SECTION 2.16

  	
  Alternate
  Rate of Interest

  	
  48

  
	
  SECTION 2.17

  	
  Conversion
  and Continuation of Loans

  	
  48

  
	
  SECTION 2.18

  	
  Mandatory
  Prepayment; Cash Collateral

  	
  49

  
	
  SECTION 2.19

  	
  Optional
  Prepayment of Loans; Reimbursement of Lenders

  	
  51

  
	
  SECTION 2.20

  	
  Maintenance
  of Loan Account; Statements of Account

  	
  52

  
	
  SECTION 2.21

  	
  Cash
  Receipts

  	
  53

  
	
  SECTION 2.22

  	
  Application
  of Payments

  	
  55

  
	
  SECTION 2.23

  	
  Increased
  Costs

  	
  55

  
	
  SECTION 2.24

  	
  Change
  in Legality

  	
  57

  
	
  SECTION 2.25

  	
  Payments;
  Sharing of Setoff

  	
  58

  
	
  SECTION 2.26

  	
  Taxes

  	
  59

  
	
  SECTION 2.27

  	
  Security
  Interests in Collateral

  	
  61

  
	
  SECTION 2.28

  	
  Mitigation
  Obligations; Replacement of Lenders

  	
  62

  
	
  SECTION 2.29

  	
  Increase
  in Revolving Credit Facility

  	
  63

  
	
  SECTION 2.30

  	
  Canadian
  Loan Parties

  	
  64

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  III REPRESENTATIONS AND WARRANTIES

  	
  65

  
	
   

  	
   

  	
   

  
	
  SECTION 3.1

  	
  Organization;
  Powers

  	
  65

  
	
  SECTION 3.2

  	
  Authorization;
  Enforceability

  	
  65

  
	
  SECTION 3.3

  	
  Governmental
  Approvals; No Conflicts

  	
  65

  
	
  SECTION 3.4

  	
  Financial
  Condition

  	
  65

  
	
  SECTION 3.5

  	
  Properties

  	
  66

  

 

ii

 

TABLE OF CONTENTS

(Continued)

 

	
  SECTION 3.6

  	
  Litigation and Environmental Matters

  	
  66

  
	
  SECTION 3.7

  	
  Compliance with Laws and Agreements

  	
  67

  
	
  SECTION 3.8

  	
  Investment Company Status

  	
  67

  
	
  SECTION 3.9

  	
  Taxes

  	
  67

  
	
  SECTION 3.10

  	
  ERISA; No Canadian Plans

  	
  67

  
	
  SECTION 3.11

  	
  Disclosure

  	
  69

  
	
  SECTION 3.12

  	
  Subsidiaries

  	
  70

  
	
  SECTION 3.13

  	
  Insurance

  	
  70

  
	
  SECTION 3.14

  	
  Accounts; Credit Cards

  	
  70

  
	
  SECTION 3.15

  	
  Labor Matters

  	
  70

  
	
  SECTION 3.16

  	
  Security Documents

  	
  70

  
	
  SECTION 3.17

  	
  Federal Reserve Regulations

  	
  71

  
	
  SECTION 3.18

  	
  Solvency

  	
  71

  
	
  SECTION 3.19

  	
  Foreign Assets Control Regulations,
  Etc.

  	
  71

  
	
  SECTION 3.20

  	
  Excluded Subsidiaries

  	
  71

  
	
  SECTION 3.21

  	
  ZC Partnership

  	
  71

  
	
   

  	
   

  
	
  ARTICLE IV CONDITIONS

  	
  72

  
	
   

  	
   

  
	
  SECTION 4.1

  	
  Effective Date

  	
  72

  
	
  SECTION 4.2

  	
  Conditions Precedent to Each Loan and Each Letter of Credit

  	
  74

  
	
   

  	
   

  
	
  ARTICLE V AFFIRMATIVE COVENANTS

  	
  75

  
	
   

  	
   

  
	
  SECTION 5.1

  	
  Financial Statements and Other Information

  	
  75

  
	
  SECTION 5.2

  	
  Notices of Material Events

  	
  77

  
	
  SECTION 5.3

  	
  Information Regarding Collateral

  	
  78

  
	
  SECTION 5.4

  	
  Existence; Conduct of Business

  	
  78

  
	
  SECTION 5.5

  	
  Payment of Obligations

  	
  79

  
	
  SECTION 5.6

  	
  Maintenance of Properties

  	
  79

  
	
  SECTION 5.7

  	
  Insurance

  	
  79

  
	
  SECTION 5.8

  	
  Casualty and Condemnation

  	
  80

  
	
  SECTION 5.9

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

  	
  80

  
	
  SECTION 5.10

  	
  Compliance with Laws

  	
  82

  
	
  SECTION 5.11

  	
  Employee Benefit Plans

  	
  82

  
	
  SECTION 5.12

  	
  Use of Proceeds and Letters of Credit

  	
  82

  
	
  SECTION 5.13

  	
  New Subsidiaries

  	
  82

  
	
  SECTION 5.14

  	
  Further Assurances

  	
  82

  
	
  SECTION 5.15

  	
  Private Label Credit Cards

  	
  83

  
	
   

  	
   

  
	
  ARTICLE VI NEGATIVE COVENANTS

  	
  83

  
	
   

  	
   

  
	
  SECTION 6.1

  	
  Indebtedness and Other Obligations

  	
  83

  
	
  SECTION 6.2

  	
  Liens

  	
  84

  
	
  SECTION 6.3

  	
  Fundamental Changes

  	
  86

  
	
  SECTION 6.4

  	
  Investments, Loans, Advances, Guarantees and Acquisitions

  	
  86

  
	
  SECTION 6.5

  	
  Asset Sales

  	
  89

  

 

iii

 

TABLE OF CONTENTS

(Continued)

 

	
  SECTION 6.6

  	
  Restricted Payments; Certain Payments of Indebtedness

  	
  90

  
	
  SECTION 6.7

  	
  Transactions with Affiliates

  	
  91

  
	
  SECTION 6.8

  	
  Financial Covenants

  	
  91

  
	
  SECTION 6.9

  	
  Hedging Agreement

  	
  92

  
	
  SECTION 6.10

  	
  Excluded Subsidiaries

  	
  92

  
	
  SECTION 6.11

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

  	
  92

  
	
   

  	
   

  
	
  ARTICLE VII EVENTS OF DEFAULT

  	
  93

  
	
   

  	
   

  
	
  SECTION 7.1

  	
  Events of Default

  	
  93

  
	
  SECTION 7.2

  	
  When Continuing

  	
  96

  
	
  SECTION 7.3

  	
  Remedies on Default

  	
  96

  
	
  SECTION 7.4

  	
  Application of Proceeds

  	
  96

  
	
   

  	
   

  
	
  ARTICLE VIII THE AGENTS

  	
  97

  
	
   

  	
   

  	
   

  
	
  SECTION 8.1

  	
  Administration by the Agents

  	
  97

  
	
  SECTION 8.2

  	
  The Collateral Agent

  	
  97

  
	
  SECTION 8.3

  	
  The Co-Borrowing Base Agents

  	
  98

  
	
  SECTION 8.4

  	
  Sharing of Excess Payments

  	
  98

  
	
  SECTION 8.5

  	
  Agreement of Applicable Lenders

  	
  99

  
	
  SECTION 8.6

  	
  Liability of Agents

  	
  99

  
	
  SECTION 8.7

  	
  Reimbursement and Indemnification

  	
  100

  
	
  SECTION 8.8

  	
  Rights of Agents

  	
  100

  
	
  SECTION 8.9

  	
  Independent Lenders and Issuing Bank

  	
  101

  
	
  SECTION 8.10

  	
  Notice of Transfer

  	
  101

  
	
  SECTION 8.11

  	
  Relation Among the Lenders

  	
  101

  
	
  SECTION 8.12

  	
  Successor Agent

  	
  101

  
	
  SECTION 8.13

  	
  Reports and Financial Statements

  	
  101

  
	
  SECTION 8.14

  	
  Agency for Perfection

  	
  102

  
	
  SECTION 8.15

  	
  Delinquent Lender

  	
  102

  
	
  SECTION 8.16

  	
  Collateral Matters

  	
  103

  
	
  SECTION 8.17

  	
  Syndication Agent, Documentation Agent and Arrangers

  	
  104

  
	
   

  	
   

  
	
  ARTICLE IX MISCELLANEOUS

  	
  104

  
	
   

  	
   

  	
   

  
	
  SECTION 9.1

  	
  Notices

  	
  104

  
	
  SECTION 9.2

  	
  Waivers; Amendments

  	
  105

  
	
  SECTION 9.3

  	
  Expenses; Indemnity; Damage Waiver

  	
  107

  
	
  SECTION 9.4

  	
  Successors and Assigns

  	
  109

  
	
  SECTION 9.5

  	
  Reserved

  	
  111

  
	
  SECTION 9.6

  	
  Survival

  	
  111

  
	
  SECTION 9.7

  	
  Counterparts; Integration; Effectiveness

  	
  111

  
	
  SECTION 9.8

  	
  Severability

  	
  112

  
	
  SECTION 9.9

  	
  Right of Setoff

  	
  112

  
	
  SECTION 9.10

  	
  Governing Law; Jurisdiction; Consent to Service of Process

  	
  112

  
	
  SECTION 9.11

  	
  Waiver of Jury Trial

  	
  113

  

 

iv

 

TABLE OF CONTENTS

(Continued)

 

	
  SECTION 9.12

  	
  Headings

  	
  113

  
	
  SECTION 9.13

  	
  Interest Rate Limitation

  	
  113

  
	
  SECTION 9.14

  	
  Confidentiality

  	
  114

  
	
  SECTION 9.15

  	
  Additional Waivers

  	
  114

  
	
  SECTION 9.16

  	
  Press Releases and Related Matters

  	
  115

  
	
  SECTION 9.17

  	
  Patriot Act; Proceeds of Crime Act

  	
  115

  
	
  SECTION 9.18

  	
  Judgment Currency

  	
  116

  
	
  SECTION 9.19

  	
  Intercreditor Agreement

  	
  117

  
	
  SECTION 9.20

  	
  Existing Credit Agreement Amended and Restated

  	
  117

  

 

EXHIBITS

 

	
  A.

  	
  Assignment
  and Acceptance

  
	
  B-1.

  	
  Revolving
  Note

  
	
  B-2.

  	
  Swingline
  Note

  
	
  C-1.

  	
  Security
  Agreement

  
	
  C-2.

  	
  General
  Security Agreement

  
	
  D.

  	
  Borrowing
  Base Certificate

  
	
  E.

  	
  Co-Borrowing
  Base Agent Rights Agreement

  

 

SCHEDULES

 

	
  1.1

  	
   

  	
  Lenders
  and Commitments

  
	
  1.1(a)

  	
   

  	
  Existing
  Letters of Credit

  
	
  1.1(b)

  	
   

  	
  Existing
  Bank Products

  
	
  2.21(a)(i)

  	
   

  	
  DDAs
  and Concentration Accounts

  
	
  2.21(a)(ii)

  	
   

  	
  Credit
  Card Arrangements

  
	
  3.5(b)

  	
   

  	
  Intellectual
  Property

  
	
  3.6

  	
   

  	
  Litigation
  and Environmental Matters

  
	
  3.12

  	
   

  	
  Subsidiaries

  
	
  3.13

  	
   

  	
  Insurance

  
	
  5.1(l)

  	
   

  	
  Financial
  Reporting Requirements

  
	
  6.1

  	
   

  	
  Indebtedness

  
	
  6.2

  	
   

  	
  Liens

  
	
  6.4

  	
   

  	
  Investments

  
	
  6.7

  	
   

  	
  Transactions
  with Affiliates

  

 

v

 

AMENDED AND RESTATED
CREDIT AGREEMENT dated as of May 10, 2010 (this “Agreement”) among

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

1

 

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

 

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

 

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

 

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

 

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

 

the
LENDERS party hereto; and

 

BANK
OF  AMERICA, N.A., as Administrative
Agent, Collateral Agent, and as a Co-Borrowing Base Agent, a national banking
association having a place of business at 100 Federal Street, Boston, Massachusetts
02110; and

 

WELLS
FARGO RETAIL FINANCE, LLC (“Wells Fargo”) and GENERAL ELECTRIC CAPITAL
CORPORATION (“GE Capital”), each as a Co-Borrowing Base Agent; and

 

WELLS
FARGO RETAIL FINANCE, LLC (“Wells Fargo”) and GE CAPITAL MARKETS, INC.,
each as a Co-Syndication Agent; and

 

BANC
OF AMERICA SECURITIES LLC, WELLS FARGO RETAIL FINANCE, LLC and GE CAPITAL
MARKETS, INC., as Joint Lead Arrangers and Joint Bookrunners.

 

W  I  T  N  E  S  S
E  T  H:

 

WHEREAS, the Borrowers have
entered into a Credit Agreement, dated as of July 23, 2003 (as amended and
in effect, the “Existing Credit Agreement”), between, among others, the
Borrowers, the “Lenders” as defined therein, and Bank of America, N.A. as “Administrative
Agent”, “Collateral Agent” and “Issuing Bank” each as defined therein; and

 

2

 

WHEREAS, in accordance with SECTION 9.02
of the Existing Credit Agreement, the Borrowers, the Required Lenders, and the
Agents desire to amend and restate the Existing Credit Agreement as provided
herein.

 

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

 

ARTICLE I

DEFINITIONS

 

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

 

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

 

“ACH” means automated clearing house transfers.

 

“Activation Notice” has the meaning set forth in Section 2.21(b).

 

“Adjusted Excess Availability” means, for purposes
of calculation of the Applicable Commitment Fee Rate and the Applicable Margin
for Non-Extending Lenders, as of any date of determination, the excess, if any,
of (a) the Borrowing Base minus (b) the outstanding Credit
Extensions.

 

“Adjusted LIBO Rate” means, with respect to any
LIBOR Borrowing for any Interest Period, an interest rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate
for such Interest Period multiplied by (b) the Statutory Reserve Rate.

 

“Administrative Agent” means Bank of America, in its
capacity as administrative agent for the Lenders hereunder.

 

“Affiliate” means, with respect to a specified
Person, another Person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control with
the Person specified.

 

“Agents” means collectively, the Administrative
Agent and the Collateral Agent.

 

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

 

3

 

“Alternate Base Rate” means, for any day, the higher
of (a) the annual rate of interest then most recently announced by Bank of
America at its head office in Boston, Massachusetts as its “Base Rate”
and (b) the Federal Funds Effective Rate in effect on such day plus
1⁄2 of 1% (0.50%) per annum.  If for any
reason the Administrative Agent shall have determined (which determination
shall be conclusive absent manifest error) that it is unable to ascertain the
Federal Funds Effective Rate for any reason, including the inability of the
Administrative Agent to obtain sufficient quotations thereof in accordance with
the terms hereof, the Alternate Base Rate shall be determined without regard to
clause (b) of the first sentence of this definition, until the
circumstances giving rise to such inability no longer exist.  Any change in the Alternate Base Rate due to
a change in Bank of America’s Base Rate or the Federal Funds Effective Rate
shall be effective on the effective date of such change in Bank of America’s
Base Rate or the Federal Funds Effective Rate, respectively.

 

“Applicable Commitment Fee Rate” means the following
rates per annum:

 

	
  Level

  	
   

  	
  Adjusted Excess Availability

  	
   

  	
  Commitment Fee

  	
   

  
	
  I

  	
   

  	
  Greater
  than or equal to $250,000,000

  	
   

  	
  0.20

  	
  %

  
	
  II

  	
   

  	
  Less
  than $250,000,000 but greater than or equal to $100,000,000

  	
   

  	
  0.20

  	
  %

  
	
  III

  	
   

  	
  Less
  than $100,000,000

  	
   

  	
  0.25

  	
  %

  

 

The Applicable Commitment Fee Rate (which shall apply only
to the Non-Extending Lenders) shall be adjusted quarterly as of the first day
of each fiscal quarter of the Borrowers, based upon the average Adjusted Excess
Availability for the immediately preceding fiscal quarter.

 

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

 

“Applicable Lending Office” means with respect to
each Lender, its domestic lending office in the case of a Loan that is a Base
Rate Loan and its LIBOR lending office in the case of a LIBOR Loan.

 

“Applicable Margin” means the rates for Base
Rate Loans and LIBOR Loans set forth below:

 

	
  Level

  	
   

  	
  Adjusted Excess
  Availability

  	
   

  	
  Base Rate 

  Loans

  	
   

  	
  LIBOR Loans

  	
   

  
	
  I

  	
   

  	
  Greater than or equal to $250,000,000

  	
   

  	
  0

  	
  %

  	
  1.00

  	
  %

  
	
  II

  	
   

  	
  Less than $250,000,000 but greater than or equal to $100,000,000

  	
   

  	
  0

  	
  %

  	
  1.25

  	
  %

  
	
  III

  	
   

  	
  Less than $100,000,000

  	
   

  	
  0

  	
  %

  	
  1.50

  	
  %

  

 

4

 

The Applicable Margin
(which shall apply only to the Non-Extending Lenders) shall be adjusted
quarterly as of the first day of each fiscal quarter of the Borrowers, based
upon the average Adjusted Excess Availability for the immediately preceding
fiscal quarter.

 

“Applicable Termination Date” means (a) in the
case of the Non-Extending Lenders, the Termination Date, and (b) in the
case of the Extending Lenders, the Extended Termination Date.

 

“Appraisal Percentage” means (a) 90% from the
Effective Date through December 31, 2010, and (b) 87.5% at all times
thereafter.

 

“Appraised Inventory Liquidation Value” means the
product of (a) the Cost of Eligible Inventory, minus Inventory Reserves multiplied
by (b) that percentage determined from the then most recent appraisal of
the Borrowers’ Inventory undertaken at the request of the Administrative Agent,
to reflect the appraiser’s estimate of the net recovery on the Borrowers’
Inventory in the event of an in-Store net orderly liquidation of that
Inventory.

 

“Arranger” means, collectively, Banc of America
Securities, LLC, Wells Fargo Retail Finance, LLC and GE Capital Markets, Inc.,
in their capacities as joint lead arrangers.

 

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

 

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

 

“Bank Products” means any services or facilities
provided to any Borrower or any of its Subsidiaries by the Administrative
Agent, any Extending Lender, or any of their respective Affiliates, including,
without limitation, on account of (a) Hedging Agreements, (b) purchase
cards, (c) merchant card services, and (d) leasing, but excluding
Cash Management Services.  For purposes
hereof (x) if a Person who is an Extending Lender ceases to be a Lender,
or (y) if a Lender fails to provide the Administrative Agent with written
notice of any Bank Products furnished by such Lender or its Affiliates on the
earlier of ten (10) days after the effective date of such Bank Product or
the delivery of the first Borrowing Base Certificate after such effective date,
then, in either such event, the Bank Products furnished by such Person or its
Affiliates shall no longer be deemed to constitute “Bank Products” for purposes
of this Agreement and the other Loan Documents. 
As of the Effective Date, all Bank Products are as set forth on Schedule
1.1(b) and all such Bank Products shall at all times be deemed to be
within the “Ancillary Cap” (as defined in the Intercreditor Agreement)
regardless of any new Bank Products which may hereafter be furnished.

 

“Base Rate Loan” means any Loan to the Borrowers
bearing interest at a rate determined by reference to the Alternate Base Rate
or the Extended Term Prime Rate in accordance with the provisions of Article II.

 

5

 

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

 

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

 

“Borrowers” means the Initial Borrowers and any
other Subsidiary of Zale which becomes a Borrower under this Agreement pursuant
to a joinder agreement to this Agreement and the Loan Documents, as applicable,
with the other parties hereto and thereto, in form and substance satisfactory
to the Administrative Agent.

 

“Borrowing” means (a) the incurrence of Loans
of a single Type, on a single date and having, in the case of LIBOR Loans, a
single Interest Period, or (b) a Swingline Loan.

 

“Borrowing Base” means at any time of
calculation, an amount equal to

 

(a)                                  the lesser of

 

(i)                                     the Inventory
Advance Rate multiplied by the difference between the Cost of Eligible
Inventory and Inventory Reserves;

 

or

 

(ii)                                  the Appraisal
Percentage multiplied by the Appraised Inventory Liquidation Value;

 

plus

 

(b)                                 eighty-five percent (85%) of
the Loan Parties’ Eligible Credit Card Receivables;

 

minus

 

(c)                                  the Reserves
(other than Inventory Reserves and the Term Reserve), but including a Reserve
for Texas ad valorem taxes;

 

minus

 

(d)                                 the Term
Reserve, if then in effect.

 

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

 

“Breakage Costs” has the meaning set forth in SECTION 2.19(b).

 

“Business Day” means any day that is not a Saturday,
Sunday or other day on which commercial banks in Boston, Massachusetts, New
York, New York or Dallas, Texas are authorized or required by law to remain
closed, provided, that, when used in connection with a LIBOR Loan, the
term “Business Day” shall also exclude any day on which banks are not
open for dealings in dollar deposits in the London interbank market.

 

6

 

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

 

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

 

“Canadian Priority Payables Reserve” means on
any date of determination, a reserve established from time to time in
accordance with SECTION 2.2 for amounts payable by any Canadian Loan Party
and secured by any Liens, choate or inchoate, which rank or which would
reasonably be expected to rank in priority to or pari passu
with the Collateral Agent’s Liens and/or for amounts which represent costs in
connection with the preservation, protection, collection or realization of the
Collateral, including any such amounts due and not paid for wages, vacation
pay, severance pay, amounts payable under the Wage Earner Protection Program
Act (Canada), amounts due and not paid under any legislation relating to workers’
compensation or to employment insurance, all amounts deducted or withheld and
not paid and remitted when due under the Income Tax Act (Canada), sales tax,
goods and services tax, value added tax, harmonized tax, excise tax, tax
payable pursuant to Part IX of the Excise Tax Act (Canada) or similar
applicable provincial legislation, government royalties, amounts currently or
past due and not paid for realty, municipal or similar taxes and all amounts
currently or past due and not contributed, remitted or paid to any Canadian
Plan under any applicable law or otherwise as required to be contributed
pursuant to any applicable law relating to Canadian Plans, or any similar
statutory or other claims that would have or would reasonably be expected to
have priority over or pari passu with
any Liens granted to the Collateral Agent in the future.

 

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

 

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

 

7

 

“Cash Collateral Account” means an interest-bearing
account established by the Borrowers with the Collateral Agent at Bank of
America under the sole and exclusive dominion and control of the Collateral
Agent designated as the “Zale Cash Collateral Account”.

 

“Cash Control Event” means that either: (a) an
Event of Default exists and is continuing, or (b) Excess Availability is
less than $60,000,000 at any time.  For
purposes of this Agreement, the occurrence of a Cash Control Event shall be
deemed continuing, notwithstanding that Excess Availability may after the Cash
Control Event exceed the applicable amount set forth in clause (b), above,
unless and until the Event of Default giving rise to the Cash Control Event has
been waived and Excess Availability exceeds the applicable amount set forth in
clause (b), above for sixty (60) consecutive days, in which case a Cash Control
Event shall no longer be deemed to be continuing for purposes of this
Agreement, provided that a Cash Control Event shall be deemed continuing
(even if an Event of Default is no longer continuing and/or Excess Availability
exceeds the required amount for sixty (60) consecutive days) at all times after
a Cash Control Event has occurred and been discontinued on two (2) occasions
in any twelve (12) month period or on five (5) occasions at any time after the
Effective Date.

 

“Cash Management Services” means any one or
more of the following types or services or facilities provided to any Borrower
or any of its Subsidiaries by the Administrative Agent or any Extending Lender
or any of their respective Affiliates: (a) ACH transactions, (b) cash
management services, including, without limitation, controlled disbursement
services, treasury, depository, overdraft, and electronic funds transfer services,
(c) foreign exchange facilities, (d) credit card processing services,
and (e) credit or debit cards.  For
purposes hereof, if a Person who is an Extending Lender ceases to be a Lender,
the Cash Management Services previously furnished by such Extending Lender or
its Affiliates shall no longer be deemed to constitute “Cash Management
Services” for purposes of this Agreement and the other Loan Documents.

 

“Cash Receipts” has the meaning set forth in Section 2.21(b).

 

“CDN$” means Canadian Dollars.

 

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

 

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

 

“Change in Law” means (a) the adoption of any
law, rule or regulation after the date of this Agreement, (b) any
change in any law, rule or regulation or in the interpretation or 

 

8

 

application thereof by any Governmental Authority
after the date of this Agreement or (c) compliance by any Lender or any
Issuing Bank (or, for purposes of SECTION 2.23(b), by any lending office
of such Lender or by such Lender’s or such Issuing Bank’s holding company, if
any) with any request, guideline or directive (whether or not having the force
of law) of any Governmental Authority made or issued after the date of this
Agreement.

 

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

 

“Closing Date” means July 23, 2003.

 

“Co-Borrowing Base Agent Rights Agreement” means
that certain letter agreement, in the form of Exhibit E attached
hereto, entered into as of the date hereof by and among the Agents, the
Co-Borrowing Base Agents and the Loan Parties.

 

“Co-Borrowing Base Agents” means Bank of America,
Wells Fargo and GE Capital.

 

“Co-Syndication Agents” means Wells Fargo and GE Capital
Markets, Inc.

 

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

 

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

 

“Collateral Agent” means Bank of America, in its
capacity as collateral agent under the Security Documents.

 

“Collection Account” has the meaning set forth in Section 2.21(b) hereof.

 

“Commercial Letter of Credit” means any Letter of
Credit issued for the purpose of providing the primary payment mechanism in
connection with the purchase of any materials, goods or services by a Borrower
in the ordinary course of business of such Borrower.

 

“Commitment Fee” has the meaning set forth in Section 2.12(a).

 

“Commitment Percentage” means, with respect to each
Lender, the percentage of the Commitments of all Lenders hereunder in the
amount set forth opposite its name on Schedule 1.1 or as may subsequently
be set forth in the Register from time to time, as the same may be reduced
pursuant to SECTION 2.15, provided  that unless the
Commitments of all Lenders shall have then expired or been terminated,
after the Commitments of the Non-Extending Lenders shall have expired or been
terminated and all Loan Agreement Obligations owed to the Non-Extending Lenders
shall have been paid in full, the Commitment Percentages of the Extending
Lenders shall be appropriately adjusted to reflect the expiration or
termination of the Commitments of the Non-Extending Lenders.

 

“Commitments” means, with respect to each Lender,
the commitment of such Lender hereunder in the amount set forth opposite its
name on Schedule 1.1 or as may subsequently 

 

9

 

be set forth in the Register from time to time, as
the same may be reduced from time to time pursuant to SECTION 2.15.

 

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

 

“Consignment A/R Reserve” means (a) prior to
the occurrence of a Cash Control Event, an amount, determined on a monthly
basis, equal to (i) that percentage determined by dividing the total sales
arising from the Loan Parties’ sale of Inventory consisting of consigned goods
during the immediately preceding month (the “Subject Month”) by the
total sales arising from the Loan Parties’ sale of Inventory (including but not
limited to consigned goods) during the Subject Month, multiplied by (ii) the
credit card receivables arising from the Loan Parties’ sale of Inventory
(including but not limited to consigned goods) during the Subject Month
multiplied by (iii) fifty percent (50%), and (b) after the occurrence and
during the continuance of a Cash Control Event, an amount equal to 100% of the
outstanding accounts payable to all of the consignment vendors of the Loan
Parties.

 

“Consolidated EBITDA” means Consolidated Net Income
for any period plus (a) without duplication, the sum of the
following expenses of Zale and its Subsidiaries for such period, in each case
to the extent included in determining said Consolidated Net Income: (i) depreciation
expense, (ii) amortization expense, excluding amortization expense
attributable to a prepaid cash item, (iii)  interest expense, (iv) total
United States and foreign federal, state, provincial and local income tax
expense, (v) charges relating to the valuation of inventory by application
of the LIFO (last in/first out) method of inventory valuation, (vi) non-cash
compensation expense arising out of the grant or exercise of stock options or
other equity based compensation, (vii) the effect of any non-cash
impairment charges related to the write-off of goodwill, property or equipment
resulting from the application of GAAP, (viii) non-cash restructuring
charges, (ix) to the extent incurred or reserved for between the Effective
Date and July 31, 2011, cash restructuring charges in an aggregate amount
not to exceed $15,000,000 and (x) all other non-cash charges less (b) without
duplication, in each case to the extent included in determining Consolidated
Net Income, the sum of (i) income earned during such period relating to
the valuation of inventory by the application of the LIFO method of inventory
valuation, (ii) interest income for such period, (iii) non-cash gains
for such period and (iv) total United States and foreign federal, state,
provincial and local income tax benefits provided during such period.

 

“Consolidated Net Income” means the consolidated net
income (or loss) of Zale and its Subsidiaries, after eliminating therefrom all
non-cash extraordinary items of income and all non-cash extraordinary items of
loss, all determined on a consolidated basis in accordance with GAAP; provided,
however, that there shall be excluded from Consolidated Net Income (a) the
income (or loss) of any Person in which Zale or any of its Subsidiaries has a
joint interest except to the extent of any cash dividends actually paid to the
Borrower or its Subsidiaries, (b) the income (or loss) of any Person
accrued prior to the date it becomes a Subsidiary of Zale or is merged into or
consolidated with Zale or any of its Subsidiaries or that Person’s assets are
acquired by Zale or any of its Subsidiaries and (c) the income of any
direct or indirect Subsidiary of Zale that is not a Loan Party or a Zale
Insurance Subsidiary to the extent that, on the date of determination, the
declaration or payment of cash dividends or similar cash distributions by such
Subsidiary is not permitted 

 

10

 

without any prior approval of any Governmental
Authority that has not been obtained or is not permitted by the operation of
the terms of its charter, by-laws or other organizational documents or any
agreement or other instrument binding upon such Subsidiary or any law
applicable to such Subsidiary, unless such restrictions with respect to the
payment of cash dividends and other similar cash distributions have been
legally and effectively waived.

 

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

 

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

 

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

 

“Credit Card Notifications” has the meaning set
forth in Section 2.21(b)(ii).

 

“Credit Extensions” means as of any day, the sum of (a) the
principal balance of all Loans then outstanding, and (b) the then amount
of the Letter of Credit Outstandings.

 

“Customer Credit Reserve” means 50% of the aggregate
face value at such time of (a) outstanding gift certificates and gift
cards of the Loan Parties entitling the holder thereof to use all or a portion
of the certificate to pay all or a portion of the purchase price for any
Inventory, and (b) outstanding merchandise credits of the Loan Parties.

 

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

 

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

 

“Delinquent Lender” has the meaning provided in SECTION 8.15.

 

“Deteriorating Lender” means any Delinquent Lender
or any Lender as to which (a) any of the Issuing Banks or the Swingline
Lender has reasonably ascertained that such 

 

11

 

Lender or its Subsidiary has, without cause,
defaulted in fulfilling its obligations under one or more other syndicated
credit facilities, unless such default is being disputed by such Lender in good
faith, or (b) such Lender or a Person that controls such Lender has been
deemed insolvent by the Administrative Agent in its reasonable judgment or
become the subject of a bankruptcy, insolvency or similar proceeding.

 

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

 

“Effective Date” means the date on which the
conditions specified in SECTION 4.1 are satisfied (or waived by the
Administrative Agent).

 

“Eligible Credit Card Receivables” means (a) Accounts
of the Loan Parties due in four (4) Business Days or less on a
non-recourse basis from major credit card processors and (b) Eligible
Private Label Credit Card Receivables, in each case to the extent that it
constitutes Collateral.

 

“Eligible Inventory” means, as of the date of
determination thereof, items of Inventory of the Loan Parties that are finished
goods (including, but not limited to, unmounted gemstones and shanks or mounts
for which no stone has been mounted to the extent such goods are listed in the
stock ledger or inventory systems), merchantable and readily saleable to the
public in the ordinary course deemed by the Administrative Agent in accordance
with its customary credit and collateral considerations and policies to be eligible
for inclusion in the calculation of the Borrowing Base.  Without limiting the foregoing, unless
otherwise approved in writing by the Administrative Agent, none of the
following shall be deemed to be Eligible Inventory:

 

(a)           Inventory that is
not owned solely by the Loan Parties, or is leased or on consignment or such
Loan Parties do not have good and valid title thereto;

 

(b)           Inventory (i) that
is not located at a warehouse facility or Store that is owned or leased by a
Loan Party, unless it is in-transit (in the United States and its territories
and possessions, or Canada) between warehouse facilities and Stores leased or
owned by a Loan Party and (ii) that is located at a warehouse facility,
unless a landlord, bailee or other access or custodial agreement in favor of
the Collateral Agent, and in form and substance reasonably satisfactory to the
Collateral Agent and the Co-Borrowing Base Agents, has been executed and
delivered by the applicable landlord, bailee or other Person;

 

(c)           Inventory that represents
(i) goods damaged, defective or otherwise unmerchantable, except in the
case of each of the foregoing to the extent that the Administrative Agent has
determined a recoverable value and (ii) goods that do not conform in all
material respects to the representations and warranties contained in this
Agreement or any of the Security Documents;

 

(d)           Inventory
that is not located in the United States of America (excluding, except as
otherwise specifically provided, territories and possessions thereof), Puerto
Rico or Canada;

 

12

 

(e)           Inventory that is
not subject to a perfected first-priority Lien in favor of the Collateral Agent
for the benefit of the Secured Parties;

 

(f)            Inventory which
consists of samples, labels, bags, packaging, and other similar non-merchandise
categories;

 

(g)           Inventory as to
which insurance in compliance with the provisions of SECTION 5.7 hereof is
not in effect;

 

(h)           Inventory, other
than layaway inventory, which has been sold but not yet delivered or as to
which any Loan Party has accepted a deposit;

 

(i)            Inventory acquired
in permitted acquisitions in compliance with the provisions of Section 6.4,
unless and until the Administrative Agent shall have received (i) the
results of appraisals of the Inventory acquired in such acquisition and (ii) such
other due diligence related to such acquisition by the Administrative Agent
that the Administrative Agent may require, all of the results of the foregoing
to be reasonably satisfactory to the Administrative Agent;

 

(j)            Inventory
of a Subsidiary that becomes a Loan Party hereunder in compliance with the
provisions of Section 5.13, unless and until the Administrative Agent
shall have received (i) the results of appraisals of the Inventory of such
Subsidiary and (ii) such other due diligence related to such Subsidiary by
the Administrative Agent that the Administrative Agent may require, all of the
result of the foregoing to be reasonably satisfactory to the Administrative
Agent.

 

“Eligible Private Label Credit Card Receivables”
means Accounts of the Loan Parties due in four (4) Business Days or less
on (a) private label credit cards issued by Citibank USA, N.A. on
substantially the terms as in effect on the Effective Date or as otherwise
modified in a manner reasonably acceptable to the Administrative Agent and (b) other
private label credit cards issued by other Persons reasonably acceptable to the
Administrative Agent.

 

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

 

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

 

13

 

contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.

 

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

 

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

 

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

 

“ERISA Event” means (a) any “reportable
event”, as defined in Section 4043 of ERISA or the regulations issued
thereunder with respect to a Plan (other than an event for which the 30-day
notice period is waived); (b) the failure to satisfy the minimum funding standard
with respect to any Plan resulting in an “accumulated funding deficiency”
(as provided in Section 412 of the Code or Section 302 of ERISA),
whether or not waived; (c) the filing pursuant to Section 412(d) of
the Code or Section 303(d) of ERISA of an application for a waiver of
the minimum funding standard with respect to any Plan; (d) the incurrence
by the Loan Parties or any of their ERISA Affiliates of any liability under
Title IV of ERISA with respect to the termination of any Plan; (e) the
receipt by the Loan Parties or any ERISA Affiliate from the PBGC or a plan
administrator of any notice relating to an intention to terminate any Plan or
Plans or to appoint a trustee to administer any Plan; (f) the incurrence
by the Loan Parties or any of their ERISA Affiliates of any liability with
respect to the withdrawal or partial withdrawal from any Plan or Multiemployer
Plan; or (g) the receipt by the Loan Parties or any ERISA Affiliate of any
notice, or the receipt by any Multiemployer Plan from the Loan Parties or any
ERISA Affiliate of any notice, concerning the imposition of Withdrawal
Liability or a determination that a Multiemployer Plan is, or is expected to
be, insolvent or in reorganization, within the meaning of Title IV of
ERISA.

 

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

 

“Excess Availability” means, as of any date of
determination, the excess, if any, of (a) the Line Cap, minus (b) the
outstanding Credit Extensions.

 

“Excluded Subsidiaries” means, collectively, Zale
Life Insurance Company, an Arizona corporation, Zale Indemnity Company, a Texas
corporation, Jewel Re-Insurance 

 

14

 

Ltd., a Barbados corporation, Zale Funding Trust, a
Delaware trust, Zale Disaster Relief Fund, Inc. a Texas corporation, ZC
Partnership LP, a New Brunswick limited partnership, and Dobbins Jewelers, Inc.,
a Guam corporation.

 

“Excluded Taxes” means, with respect to the Agents,
any Lender, any Issuing Bank or any other recipient of any payment to be made
by or on account of any obligation of the Loan Parties hereunder, (a) income
or franchise taxes, levies, imposts, deductions, charges or withholdings
imposed on (or measured by) its gross or net income or profit by the United
States of America, or by the jurisdiction under the laws of which such
recipient is organized, in which such recipient is resident for tax purposes,
or in which its principal office is located or, in the case of any Lender, in
which its Applicable Lending Office is located or in which it otherwise is
deemed to be engaged in a trade or business for tax purposes, (b) any
branch profits taxes imposed by the United States of America or any similar tax
imposed by any other jurisdiction in which any Loan Party is located and (c) in
the case of a Lender (other than an assignee pursuant to a request by a
Borrower under SECTION 2.28(b)), any withholding tax that is imposed on
amounts payable to such Lender at the time such Lender becomes a party to this
Agreement (or designates a new lending office) or is attributable to such
Lender’s failure to comply with SECTION 2.26(e) except to the extent
that such Lender (or its assignor, if any) was entitled, at the time of
designation of a new lending office (or assignment), to receive additional
amounts from the Loan Parties with respect to such withholding tax pursuant to SECTION 2.26(a).

 

“Existing Letters of Credit” means those letters of
credit issued and outstanding under the Existing Credit Agreement which are
identified on Schedule 1.1(a).

 

“Extended Term Applicable
Margin” means:

 

(a)           From and after the Effective Date until July 31,
2010, the percentages set forth in Level II of the pricing grid below; and

 

(b)           On the first day of each of the fiscal quarters of each
year (each, an “Adjustment Date”), commencing with the fiscal quarter
beginning on or about August 1, 2010, the Extended Term Applicable Margin
shall be determined from the pricing grid below based upon average daily Excess
Availability for the most recently ended fiscal quarter immediately preceding
such Adjustment Date, provided that in no event shall the Extended Term
Applicable Margin be established at Level I prior to July 31, 2010 (even
if the conditions for the application of Level I are met); provided
further if any Borrowing Base Certificates are at any time restated or
otherwise revised (including as a result of an audit) or if the information set
forth in any Borrowing Base Certificates otherwise proves to be false or
incorrect such that the Extended Term Applicable Margin would have been higher
than was otherwise in effect during any period, without constituting a waiver
of any Default or Event of Default arising as a result thereof, interest due
under this Agreement shall be immediately recalculated at such higher rate for
any applicable periods and shall be due and payable on demand.

 

15

 

	
  Level

  	
   

  	
  Average Daily Excess 

  Availability

  	
   

  	
  LIBOR Loan

  	
   

  	
  Base Rate

  Loan

  	
   

  
	
  I

  	
   

  	
  Greater than or equal
  to $250,000,000

  	
   

  	
  3.50

  	
  %

  	
  2.50

  	
  %

  
	
  II

  	
   

  	
  Greater than or equal
  to 100,000,000 but less than $250,000,000

  	
   

  	
  3.75

  	
  %

  	
  2.75

  	
  %

  
	
  III

  	
   

  	
  Less than $100,000,000

  	
   

  	
  4.00

  	
  %

  	
  3.00

  	
  %

  

 

Notwithstanding
anything to the contrary herein contained, upon the occurrence and during the
continuance of an Event of Default, the Extended Term Applicable Margin shall
be at the percentages set forth in Level III of the pricing grid.  The foregoing shall be supplemental of, and
shall not be deemed to modify or waive, any rights of the Administrative Agent
or the Required Lenders under Section 2.10 hereof.

 

“Extended Term Maturity Date” means April 30,
2014.

 

“Extended Term Prime Rate” means, for any day, the
highest of: (a) the variable annual rate of interest then most recently
announced by Bank of America, N.A. at its head office in Charlotte, North
Carolina as its “prime rate”; (b) the Federal Funds Effective Rate in
effect on such day plus one-half of one percent (0.50%) per annum; or (c) the
Adjusted LIBO Rate (calculated utilizing the LIBOR Rate for a one-month
Interest Period) plus one percent (1.00%) per annum.  The “prime rate” is a reference rate and does
not necessarily represent the lowest or best rate being charged by Bank of
America to any customer.  If for any
reason the Administrative Agent shall have determined (which determination
shall be conclusive absent manifest error) that it is unable to ascertain the
Federal Funds Effective Rate or the LIBOR Rate for any reason, including the
inability or failure of the Administrative Agent to obtain sufficient
quotations thereof in accordance with the terms hereof, the Extended Term Prime
Rate shall be determined without regard to clauses (b) or (c) of the
first sentence of this definition, as applicable, until the circumstances
giving rise to such inability no longer exist. Any change in the Extended Term
Prime Rate due to a change in Bank of America’s “prime rate”, the Federal Funds
Effective Rate or the Adjusted LIBO Rate shall be effective on the effective
date of such change in Bank of America’s Prime Rate, the Federal Funds Effective
Rate or the Adjusted LIBO Rate, respectively.

 

“Extended Term Unused Commitment” means, on any day,
(a) the then Total Commitment (which for purposes of this calculation
shall include the Seasonal Commitments, whether or not then in effect) minus (b) the
sum of (i) the principal amount of Loans then outstanding and (ii) the
then Letter of Credit Outstandings.

 

“Extended Term Unused Fee” has the meaning provided
in Section 2.12(b).

 

“Extended Termination Date” means the earliest to
occur of (i) the Extended Term Maturity Date, (ii) the date on which
the maturity of the Loans is accelerated and the Commitments are terminated in
accordance with SECTION 7.1, (iii) the date of the 

 

16

 

occurrence of any Event of Default pursuant to SECTION 7.1(h) or
(i), or (iv) the date on which the Borrowers permanently terminate all
Commitments pursuant to SECTION 2.15.

 

“Extending Lender” means each Lender listed on Schedule
1.1 under the heading “Extending Lenders”, whose Commitment shall terminate
on the Extended Termination Date.

 

“Facility Guarantee” means each Guarantee executed
by each of the Facility Guarantors in favor of the Agents and the other Secured
Parties, as amended and in effect from time to time.

 

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

 

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

 

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

 

“Fee Letter” means the letters entitled “Fee Letter”
among the Borrowers, the Administrative Agent and the Arranger dated on or
about the Effective Date, as such letter may from time to time be amended.

 

“Fidelity Investment Account” means Account No. 487498743
maintained with Fidelity Brokerage Services LLC or any other account which
replaces such securities account with Fidelity Brokerage Services LLC and used
for short term investments for cash management purposes (including in order to
minimize LIBOR breakage costs).

 

“Financial Officer” means, with respect to any
Borrower, the chief financial officer, controller, treasurer or assistant
treasurer of such Borrower.

 

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

 

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

 

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

 

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

 

17

 

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

 

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

 

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

 

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

 

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

 

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

 

18

 

anticipated liability in respect thereof.  The term “Guarantee” as a verb has a
corresponding meaning.

 

“Guaranteed Pension Plan” means any employee pension
benefit plan within the meaning of §3(2) of ERISA maintained or
contributed to by any of the Loan Parties or any ERISA Affiliate the benefits
of which are guaranteed on termination in full or in part by the PBGC pursuant
to Title IV of ERISA.

 

“Hazardous Materials” means all explosive or
radioactive substances or wastes and all hazardous or toxic substances, wastes
or other pollutants, including petroleum or petroleum distillates, asbestos or
asbestos containing materials, polychlorinated biphenyls, radon gas, infectious
or medical wastes and all other substances or wastes of any nature regulated
pursuant to any Environmental Law, including any material listed as a hazardous
substance under Section 101(14) of CERCLA.

 

“Hedging Agreement” means any interest rate
protection agreement, foreign currency exchange agreement, commodity price
protection agreement, or other interest or currency exchange rate or commodity
price hedging arrangement.

 

“Inadvertent
Overadvance” means the funding of any Loan or the issuance, renewal or
amendment of a Letter of Credit by an Issuing Bank which did not result in an
Overadvance when made based upon the most recent Borrowing Base Certificate
received by the ABL Agent prior to such funding or issuance, renewal or
amendment of a Letter of Credit but which has, on the relevant date of
determination, become an Overadvance as the result of (i) a decline in the
value of the Borrowing Base or the Collateral, (ii) errors or fraud on a
Borrowing Base Certificate, (iii) components of the Borrowing Base on any
date thereafter being deemed ineligible, (iv) the return of uncollected
checks or other items of payment applied to the reduction of Loans or other
similar involuntary or unintentional actions, (v) the imposition or
modification of any Reserve or a reduction in advance rates after the funding
of any loan or advance or the issuance, renewal or amendment of a Letter of
Credit by an Issuing Bank or (vi) any other circumstance beyond the
reasonable control of the ABL Agent or the ABL Secured Parties that results in
the reduction of the realizable value of the Borrowing Base. An Inadvertent
Overadvance shall be deemed outstanding until such time as no Overadvance is
outstanding.

 

“Indebtedness” means, of any Person, without
duplication, (a) all obligations of such Person for borrowed money, (b) all
obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such Person under conditional sale or
other title retention agreements relating to property acquired by such Person, (d) all
obligations of such Person in respect of the deferred purchase price of
property or services (excluding trade payables not more than 60 days past due
or other current accounts payable incurred in the ordinary course of business,
deferred compensation and any purchase-price adjustment or earn-out
obligation), (e) all Indebtedness of others secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien on property owned or acquired by such Person, whether
or not the Indebtedness secured thereby has been assumed, (f) all
Guarantees by such Person of Indebtedness of others (including under any
Synthetic Leases), (h) all Capital Lease Obligations of such Person, (h) all
obligations, contingent or otherwise, of such Person as an 

 

19

 

account party in respect of letters of credit and
letters of guaranty and (i) all obligations, contingent or otherwise, of
such Person in respect of bankers’ acceptances. 
The Indebtedness of any Person shall include the Indebtedness of any
other entity (including any partnership in which such Person is a general
partner) to the extent such Person is liable therefor as a result of such
Person’s ownership interest in or other relationship with such entity, except
to the extent the terms of such Indebtedness provide that such Person is not
liable therefor.

 

“Indemnified Taxes” means Taxes other than Excluded
Taxes.

 

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

 

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

 

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

 

“Intercompany Subordination Agreement” means the
Intercompany Subordination Agreement, dated as of the Effective Date, by and
among the obligors party thereto, in favor of the Administrative Agent and the
Secured Parties, as amended and in effect from time to time.

 

“Intercreditor Agreement” means that certain
Intercreditor Agreement dated as of May 10, 2010 by and between the Agents
and Z Investment Holdings LLC as administrative agent for the holders of the
Term Loan, as amended and in effect from time to time.

 

“Interest Payment Date” means (a) with respect
to any Base Rate Loan (including a Swingline Loan), the last day of each
calendar month, and (b) with respect to any LIBOR Loan, the last day of
each Interest Period and, in the case of any Interest Period longer than three
months, on each successive date three months after the first day of such
Interest Period.

 

“Interest Period” means, with respect to any LIBOR
Borrowing, the period commencing on the date of such Borrowing and ending on
the numerically corresponding day in the calendar month that is one, two,
three or six months thereafter, as any Borrower may elect, provided,
that (a) if any Interest Period would end on a day other than a Business
Day, such Interest Period shall be extended to the next succeeding Business Day
unless such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business
Day, and (b) any Interest Period that commences on the last Business Day
of a calendar month (or on a day for which there is no numerically
corresponding day in the last calendar month of such Interest Period) shall end
on the last Business Day of the last calendar month of such Interest Period,
and (c) (i) until such time as the Commitments of the Non-Extending
Lenders shall have expired or been terminated and all Loan Agreement Obligations
owed to the Non-Extending Lenders shall have been paid in full, no Interest
Period shall extend beyond the Maturity Date, and (ii) thereafter, no
Interest Period shall extend beyond the Extended Term Maturity Date.  For purposes hereof, the date of a Borrowing
initially shall be the date on which such Borrowing is made and thereafter
shall be the effective date of the most recent conversion or continuation of
such Borrowing.

 

20

 

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

 

“Inventory Advance Rate” means (i) 69.4% for
the months of January through September and (ii) 73.1% for the
months of October through December.

 

“Inventory Reserves” means such reserves as may be
established from time to time by the Administrative Agent, either in its
reasonable commercial discretion, or at the direction of any Co-Borrowing Base
Agent acting in its reasonable discretion, exercised in good faith, with
respect to changes in the determination of the saleability of the Eligible
Inventory or which reflect such other factors as negatively affect the value of
the Eligible Inventory.  Inventory
Reserves shall include, without limitation, the Shrink Reserve.

 

“Issuing Bank” means each of Bank of America and Wells
Fargo Bank (an Affiliate of Wells Fargo Retail Finance, LLC), each in its
capacity as the issuer of Letters of Credit hereunder, and any successor to
either of them in such capacity (which may only be a Lender selected by the
Borrowers and approved by the Administrative Agent in its reasonable
discretion).  Each Issuing Bank may, in
its reasonable discretion, arrange for one or more Letters of Credit to be
issued by Affiliates of such Issuing Bank, in which case the term “Issuing
Bank” shall include any such Affiliate with respect to Letters of Credit
issued by such Affiliate.  Each Issuing
Bank shall act commercially reasonably and otherwise in accordance with the
standard of care set forth in SECTION 2.6(i).

 

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

 

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

 

“Landlord Lien Reserve” means two (2) month’s
base rent for each of the Loan Parties’ facilities at which inventory is stored
and located in the States of Washington, Pennsylvania, Virginia and such other
state(s), province(s), and other jurisdiction(s) in which a landlord’s
claim for rent may have priority over the Lien of the Collateral Agent in any
of the Collateral. The Landlord Lien Reserve shall be calculated quarterly.

 

“Layaway Reserve” means 100% of the aggregate amount
deposited by customers with the Loan Parties including, without limitation,
amounts deposited on account of layaway or similar programs.

 

“L/C Disbursement” means a payment made by any
Issuing Bank pursuant to a Letter of Credit.

 

“Lenders” means the Persons identified on
Schedule 1.1 (including, in each case, Extending Lenders and Non-Extending
Lenders) and each assignee that becomes a party to this Agreement as set forth
in SECTION 9.4.

 

“Letter of Credit” means a letter of credit that is (i) issued
pursuant to this Agreement for the account of any Borrower, (ii) a Standby
Letter of Credit or Commercial Letter of Credit, (iii) issued in
connection with the purchase of Inventory by any Borrower or for any other
purpose that is reasonably acceptable to the Administrative Agent, and 

 

21

 

(iv) in form and substance reasonably
satisfactory to the applicable Issuing Bank. 
The term “Letter of Credit” shall also include any banker’s acceptance
issued by any Issuing Bank.

 

“Letter of Credit Fees” means the fees payable in
respect of Letters of Credit pursuant to SECTION 2.13.

 

“Letter of Credit Outstandings” means, at any time,
the sum of (a) with respect to Letters of Credit outstanding at such time,
the aggregate maximum amount that then is or at any time thereafter may become
available for drawing or payment thereunder plus (b) all amounts
theretofore drawn or paid under Letters of Credit for which any Issuing Bank
has not then been reimbursed.

 

“LIBOR Borrowing” means a Borrowing comprised of
LIBOR Loans.

 

“LIBOR Loan” means any Loan bearing interest at a
rate determined by reference to the Adjusted LIBO Rate in accordance with the
provisions of Article II.

 

“LIBOR Rate” means, with respect to any LIBOR
Borrowing for any Interest Period, the rate of interest (rounded upwards, if
necessary to the next 1/16 of 1%) determined by the Administrative Agent to be
the prevailing rate per annum at which deposits in Dollars are offered by banks
in the London interbank market based on information presented on Reuters Screen
FRBD or Telerate at 11:00 a.m. (London time) not less than two Business
Days before the first day of the Interest Period for the subject LIBOR Borrowing,
for a deposit approximately in the amount of the subject Borrowing and for a
period of time approximately equal to such Interest Period.

 

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

 

“Line Cap” means, at any time of determination, the
lesser of (a) the Total Commitment or (b) the Borrowing Base., provided
that for purposes of determining the amount of Permitted Overadvances which may
be made only, the Borrowing Base shall be calculated without giving effect to
the Term Reserve, if any.

 

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

 

“Loan Agreement Obligations” means (a) the
payment by the Loan Parties of (i) the principal of, and interest on the
Loans (including all interest that accrues after the commencement of any case
or proceeding by or against any Loan Party under the Bankruptcy Code or any
state, federal, provincial or foreign bankruptcy, insolvency, receivership,
reorganization or similar law, whether or not allowed or allowable in such case
or proceeding), when and as due, whether at maturity, by acceleration, upon one
or more dates set for prepayment or otherwise, (ii) each payment required
to be made by the Loan 

 

22

 

Parties under this Agreement in respect of any Letter
of Credit, when and as due, including payments in respect of reimbursement of
disbursements, interest thereon and obligations to provide cash collateral and (iii) all
other monetary obligations, including fees, costs, expenses and indemnities,
whether primary, secondary, direct, contingent, fixed or otherwise (excluding
obligations under clauses (b) and (c) of the definition of “Obligations”),
of the Loan Parties to the Secured Parties under this Agreement and the other
Loan Documents (in each case, including all such amounts that accrue after the
commencement of any case or proceeding by or against any Loan Party under the
Bankruptcy Code or any state, federal, provincial, or foreign bankruptcy,
insolvency, receivership, organization or similar law, whether or not allowed
or allowable in such case or proceeding), and (b) the payment and
performance of all the covenants, agreements, obligations and liabilities of
each Loan Party under or pursuant to this Agreement, and the other Loan
Documents.

 

“Loan Documents” means this Agreement, the Notes,
the Letters of Credit, the Fee Letters, all Borrowing Base Certificates, the
Blocked Account Agreements, the Credit Card Notifications, the Security
Documents, the Facility Guarantee, the Facility Guarantor Collateral Documents,
the Intercreditor Agreement, the Intercompany Subordination Agreement, and any
other instrument or agreement executed and delivered in connection herewith or
therewith.

 

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

 

“Loans” means all loans (including, without
limitation, Revolving Loans and Swingline Loans) at any time made to the
Borrowers or for account of the Borrowers pursuant to this Agreement.

 

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

 

“Material Adverse Effect” means a material adverse
effect on (a) the business, operations, property, assets, or financial
condition of the Loan Parties and their Subsidiaries taken as a whole, or (b) the
validity or enforceability of this Agreement or any of the other Loan Documents
or any of the material rights or remedies of the Administrative Agent, the
Collateral Agent, the Co-Borrowing Base Agents, the Lenders or the Issuing
Banks hereunder or thereunder; provided, however, that no Material
Adverse Effect shall be deemed to exist with respect to the Loan Parties solely
as a result of (i) the loss by any Loan Party of its investment in an
Excluded Subsidiary; (ii) the loss of that portion of the Loan Parties’
consolidated results of operations generated by any Excluded Subsidiary; or (iii) any
liability of an Excluded Subsidiary that is not, on an unconsolidated basis, a
liability of a Loan Party.

 

“Material Indebtedness” means Indebtedness
(other than the Loans and Letters of Credit) of any one or more of the Loan
Parties in an aggregate principal amount exceeding $25,000,000.

 

“Maturity Date” means, with respect to Loan
Agreement Obligations due to Non-Extending Lenders, August 11, 2011.

 

23

 

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

 

“Minority Lenders” has the meaning set forth in Section 9.2(c).

 

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

 

“Multiemployer Plan” means a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.

 

“Net Proceeds” means with respect to any sale,
transfer or other disposition by any Loan Party or any Subsidiary thereof, the
excess, if any, of (i) the sum of cash and cash equivalents actually
received in connection with such transaction (including any cash or cash
equivalents received by way of deferred payment pursuant to, or by monetization
of, a note receivable or otherwise, but only as and when so received) over (ii) the
sum of (A) the principal amount of (and accrued and unpaid interest on,
and other amounts payable in connection with) any Indebtedness that is secured
by a Lien on the applicable asset which Lien is permitted hereunder and which
Lien is senior to the Collateral Agent’s Lien on such asset and that is
required to be paid or repaid (or to establish an escrow for the future
repayment thereof) in connection with such transaction (other than Indebtedness
under the Loan Documents), (B) the reasonable and customary out-of-pocket
expenses incurred by such Loan Party in connection with such transaction
(including, without limitation, appraisals, brokerage, title and recording or
transfer tax expenses and commissions, legal, accounting and other professional
fees) paid or payable by such Loan Party to third parties (other than
Affiliates)), (C) cash taxes paid or reasonably estimated to be actually
payable in cash in connection therewith (provided that, to the extent and at
the time any such amounts are determined to not be payable, such amounts shall
constitute Net Proceeds), (D) amounts provided as a reserve against any
liabilities under any indemnification obligations or purchase price adjustment
associated with such asset disposition (provided that, to the extent and at the
time any such amounts are released from such reserve, such amounts shall constitute
Net Proceeds), and (E) any liabilities relating to the property subject to
such asset disposition that are retained by any Loan Party or its Subsidiaries,
provided that, at all times such liabilities remain outstanding, the Loan
Parties shall maintain an amount sufficient to satisfy such liabilities in a
segregated account established with the Administrative Agent to be used by the
Loan Parties solely to satisfy such liabilities as they become due.

 

“Noncompliance Notice” has the meaning set forth in Section 2.5(b).

 

“Non-Extending Lender” means each Lender listed on Schedule
1.1 under the heading “Non-Extending Lenders”, whose Commitment shall
terminate on the Termination Date.

 

“Notes” means (i) the promissory notes
of the Borrowers substantially in the form of Exhibit B-1, each payable to
the order of a Lender, evidencing the Revolving Loans, and (ii) the
promissory note of the Borrowers substantially in the form of Exhibit B-2,
payable to the Swingline Lender, evidencing the Swingline Loans.

 

24

 

“Obligations” means (a) Loan Agreement
Obligations, (b) the payment and performance of any transaction which
arises out of any Cash Management Services, and (c) the payment and
performance of any transaction which arises out of any Bank Products.

 

“Other Taxes” means any and all current or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies arising from any payment made under any Loan Document or from
the execution, delivery or enforcement of, or otherwise with respect to, any
Loan Document.

 

“Overadvance” means, at any time of calculation, a
circumstance in which the Credit Extensions exceed the Line Cap.

 

“Payment Conditions” means, at the time of
determination with respect to a specified transaction or payment, that (a) no
Default or Event of Default then exists or would arise as a result of the
entering into of such transaction or the making of such payment and (b) after
giving effect to such transaction or payment, the Pro Forma Availability
Condition has been satisfied and the Consolidated Fixed Charge Coverage Ratio,
on a pro-forma basis for the Reference Period immediately preceding such
transaction or payment, will be equal to or greater than 1.15:1.00.  Prior to undertaking any transaction or
payment which is subject to the Payment Conditions, the Loan Parties shall
deliver to the Administrative Agent a certificate certifying as to the absence
of any Event of Default and setting forth the calculations of the Pro Forma
Availability Condition and the Consolidated Fixed Charge Coverage Ratio which
evidences satisfaction of the conditions contained in clause (b) above on
a basis reasonably satisfactory to the Administrative Agent and the
Co-Borrowing Base Agents.

 

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

 

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

 

“Permitted Encumbrances” means:

 

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

 

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

 

(c)                                  pledges and
deposits made in the ordinary course of business in compliance with workers’
compensation, unemployment insurance, old-age pension and other social security
laws or regulations;

 

25

 

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

 

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

 

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

 

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

 

“Permitted Investments” means each of the
following:

 

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

 

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

 

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

 

26

 

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

 

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

 

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

 

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

 

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

 

(i)                                     Reserved; and

 

27

 

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

 

“Permitted Overadvance” means an Overadvance
determined by the Administrative Agent, in its reasonable discretion, (a) which
is made to maintain, protect or preserve the Collateral, and/or the Lenders’
rights under the Loan Documents, including to preserve the Loan Parties’
business assets and infrastructure (such as the payment of insurance premiums,
taxes, necessary suppliers, rent and payroll), (b) to fund an orderly
liquidation or wind-down of the Loan Parties’ assets or business or a
bankruptcy or other insolvency proceeding (whether or not occurring prior to or
after the commencement of such a bankruptcy or insolvency proceeding), (iv) to
enhance the likelihood, or maximize, the repayment of the Obligations, or (v) which
is otherwise in the Lenders’ interests; provided, that Permitted
Overadvances shall not (i) exceed five percent (5%) of the Line Cap
(without giving effect to the Term Reserve) or (ii) unless a liquidation of any of the Collateral is occurring, remain outstanding for more than thirty consecutive Business Days, unless
in case of clause (ii), the Required Supermajority Lenders otherwise
agree; and provided, further, that the foregoing shall not (1) modify
or abrogate any of the provisions of SECTION 2.6(g) regarding the
Lenders’ obligations with respect to L/C Disbursements, or (2) result
in any claim or liability against the Administrative Agent (regardless of the
amount of any Overadvance) for Inadvertent Overadvances, and further provided,
that in no event shall the Administrative Agent make an Overadvance, if after
giving effect thereto, the principal amount of the Credit Extensions would
exceed the Total Commitment.

 

“Permitted Refinancing” means, with respect to any Person, any Indebtedness issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace, defease
or refund (collectively, to “Refinance”), the Indebtedness being
Refinanced (or previous refinancings thereof constituting a Permitted
Refinancing); provided, that (a) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
Refinanced (plus unpaid accrued interest and premiums thereon and underwriting
discounts, defeasance costs, fees, commissions and expenses), (b) the
weighted average life to maturity of such Permitted Refinancing is greater than
or equal to the weighted average life to maturity of the Indebtedness being
Refinanced, (c) such Permitted Refinancing shall not require any scheduled
principal payments due prior to the Extended Term Maturity Date in excess of,
or prior to, the scheduled principal payments due prior to such Extended Term
Maturity Date for the Indebtedness being Refinanced, (d) if the
Indebtedness being Refinanced is subordinated in right of payment to the
Obligations under this Agreement, such Permitted Refinancing shall be
subordinated in right of payment to such Obligations on terms at least as
favorable to the Lenders as those contained in the documentation governing the
Indebtedness being Refinanced, (e) no Permitted Refinancing shall have
different direct or indirect obligors, or greater guarantees or security, than
the Indebtedness being Refinanced, (f) the
interest rate applicable to any such Permitted Refinancing shall not exceed the
then applicable market interest rate, and (g) at
the time thereof, both before and 

 

28

 

after giving effect to such Refinancing, no Default
or Event of Default shall have occurred and be continuing.

 

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

 

“Plan” means any employee pension benefit plan
(other than a Multiemployer Plan) subject to the provisions of Title IV of
ERISA or Section 412 of the Code or Section 302 of ERISA, and in
respect of which the Loan Parties or any ERISA Affiliate is (or, if such plan
were terminated, would under Section 4069 of ERISA be deemed to be) an “employer”
as defined in Section 3(5) of ERISA.

 

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

 

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

 

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

 

(b)                                 Any casualty or
other insured damage to, or any taking under power of eminent domain or by
condemnation, expropriation or similar proceeding of, any asset of a Loan Party
or any Subsidiary thereof, unless the proceeds therefrom are required to be
paid to the holder of a Lien on such property or asset having priority over the
Lien of the Collateral Agent;

 

(c)                                  Any incurrence
of any Indebtedness by any Loan Party or any Subsidiary thereof (excluding
Indebtedness permitted to be incurred under SECTION 6.1, other than clause
(l) thereof) to the extent that the proceeds of any such incurrence are
not used to prepay the Term Loan; or

 

(d)                                 Any issuance by
any Loan Party of any Stock (other than Stock issued to another Loan Party and
Stock issued upon the exercise of options, warrants or other similar rights to
purchase Stock), to the extent that the proceeds of any such issuance are not
used to prepay the Term Loan.

 

“Pro
Forma Availability Condition” shall mean, for any date of calculation with
respect to any transaction or payment, the Pro Forma Availability for each of
the twelve months

 

29

 

following,
and after giving effect to, such transaction or payment, will be equal to or
greater than the greater of (i) $75,000,000 or (ii) twenty percent (20%)
of the Line Cap.

 

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

 

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

 

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

 

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

 

“Record” means the grid attached to a Note, or the
continuation of such grid, or any other similar record, including computer
records, maintained by a Lender with respect to any Loan, whether referred to
in such Note or otherwise.

 

“Register” has the meaning set forth in Section 9.4(c).

 

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

 

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

 

“Related Parties” means, with respect to any
specified Person, such Person’s Affiliates and the respective directors,
officers, employees, agents and advisors of such Person and such Person’s
Affiliates.

 

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

 

“Required Lenders” means, at any time, Lenders having
Commitments equal to 51% of the Total Commitment, or if the Commitments have
been terminated, Lenders whose percentage of the Credit Extensions (after
settlement and repayment of all Swingline Loans by the Lenders) aggregate not
less than 51% of all such Credit Extensions, provided that the
Commitment of, and the portion of the Credit Extensions held or deemed held by,
any Delinquent Lender or Deteriorating Lender shall be excluded for purposes of
making a determination of Required Lenders.

 

“Required Supermajority Lenders” means, at any time,
Lenders having Commitments equal to 75% of the Total Commitment, or if the
Commitments have been terminated, 

 

30

 

Lenders whose percentage of the Credit Extensions
(after settlement and repayment of all Swingline Loans by the Lenders)
aggregate not less than 75% of all such Credit Extensions, provided that
the Commitment of, and the portion of the Credit Extensions held or deemed held
by, any Delinquent Lender or Deteriorating Lender shall be excluded for
purposes of making a determination of Required Supermajority Lenders.

 

“Reserves” means, without duplication, Inventory
Reserves, the Shrink Reserve, Layaway Reserve, Customer Credit Reserve, the
Landlord Lien Reserve, the Consignment A/R Reserve, the Canadian Priority
Payables Reserve, the Term Reserve and such other reserves established from
time to time in accordance with SECTION 2.2(b).

 

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

 

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

 

“Revolving Credit Increase Effective Date” has the
meaning set forth in Section 2.29(e).

 

“Revolving Loans” means all Loans at any time made
by a Lender pursuant to Section 2.1.

 

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

 

“Seasonal Commitments” means the Commitments
described as “Seasonal Commitments” and set forth on Schedule 1.1 hereto.  As of the Effective Date, the sum of the
Seasonal Commitments is $108,600,000.

 

“Secured Parties” has the meaning set forth in the
Security Agreement.

 

“Security Agreement” means, collectively, the
Security Agreement, in the form of Exhibit C-1 attached hereto and
incorporated herein, among the Loan Parties and the Collateral Agent for the
benefit of the Secured Parties, and the General Security Agreement, 

 

31

 

in the form of Exhibit C-2 attached
hereto and incorporated herein, among each Canadian Loan Party and the
Collateral Agent for the benefit of the Secured Parties, in each case as
amended and in effect from time to time.

 

“Security Documents” means the Security Agreement
and each other security agreement or other instrument or document executed and
delivered pursuant to Section 5.13 to secure any of the Obligations.

 

“Settlement Date” has the meaning set forth in SECTION 2.7(b).

 

“Shrink” means Inventory which has been lost,
misplaced, stolen, or is otherwise unaccounted for.

 

“Shrink Reserve” means from time to time the Loan
Parties’ then current general ledger reserve for Shrink provided that the
determination of such current general ledger reserve is consistent with the
methodologies used in the Loan Parties’ most recent physical Inventory results
delivered to the Administrative Agent prior to the Effective Date.

 

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

 

“Standby Letter of Credit” means any Letter of
Credit other than a Commercial Letter of Credit.

 

“Statutory Reserve Rate” means a fraction (expressed
as a decimal), the numerator of which is the number one and the denominator of
which is the number one minus the aggregate of the maximum reserve percentages
(including any marginal, special, emergency or supplemental reserves) expressed
as a decimal established by the Board to which the Administrative Agent is
subject with respect to the Adjusted LIBO Rate, for eurocurrency funding
(currently referred to as “Eurocurrency Liabilities” in Regulation D
of the Board).  Such reserve percentages
shall include those imposed pursuant to such Regulation D.  LIBOR Loans shall be deemed to constitute
eurocurrency funding and to be subject to such reserve requirements without
benefit of or credit for pro ration, exemptions or offsets that may be
available from time to time to any Lender under such Regulation D or any
comparable regulation.  The Statutory
Reserve Rate shall be adjusted automatically on and as of the effective date of
any change in any reserve percentage.

 

32

 

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

 

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

 

“Subsidiary” means, with respect to any Person (the “parent”)
at any date, any corporation, limited liability company, unlimited liability
company, partnership, association or other entity the accounts of which would
be consolidated with those of the parent in the parent’s consolidated financial
statements if such financial statements were prepared in accordance with GAAP
as of such date, as well as any other corporation, limited liability company,
partnership, association or other entity of which securities or other ownership
interests representing more than 50% of the equity or more than 50% of the
ordinary voting power or, in the case of a partnership, more than 50% of the
general partnership interests are, as of such date, owned, controlled or held.

 

“Swingline Lender” means Bank of America, in its
capacity as lender of Swingline Loans hereunder.

 

“Swingline Loan” means a Loan made by the Swingline
Lender to the Borrowers pursuant to SECTION 2.5.

 

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

 

“Taxes” means any and all current or future taxes,
levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental
Authority.

 

“Term Loan” means the term loan facility in favor of
Zale, as borrower, in the original principal amount of $150,000,000 made under
that certain Credit Agreement dated as of May 10, 2010 among Zale, the
lenders party thereto, and Z Investment Holdings LLC as administrative agent,
as amended and in effect from time to time in accordance with the terms of the
Intercreditor Agreement.

 

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

 

“Term Reserve” means a Reserve requested by the Term
Agent (as defined in the Intercreditor Agreement) in the amounts and at the
times set forth in the Intercreditor, but in no event in excess of two and
one-half percent (2.5%) of the Borrowing Base (without giving effect to clause (d) of
the definition thereof) at any time. The Term Reserve, once established, may be
reduced or eliminated only with the prior written consent of the Term Agent or
upon receipt of written certification from the Borrowers that the conditions
set 

 

33

 

forth in the credit agreement governing the Term
Loan with respect to such reduction or elimination have been satisfied.

 

“Term Securities Accounts” means one or more
securities accounts (other than the Fidelity Investment Account) into which
Permitted Investments and/or proceeds of ABL Priority Collateral are deposited
from time to time; provided that the maximum amount deposited in such
securities accounts shall in no event exceed $10,000,000 in the aggregate
outstanding at any time.

 

“Termination Date” means the earliest to occur of (i) the
Maturity Date, (ii) the date on which the maturity of the Loans is
accelerated and the Commitments are terminated in accordance with SECTION 7.1,
(iii) the date of the occurrence of any Event of Default pursuant to SECTION 7.1(h) or
(i) or (iv) the date on which the Borrowers permanently terminate all
Commitments pursuant to SECTION 2.15.

 

“Total Commitment” means, as of any date of
determination, (a) an amount equal to the sum of the Commitments in effect
on such date, as reduced by the Borrowers pursuant to Section 2.15 or
increased pursuant to Section 2.29, plus (b) for the period of
October 15 through December 15 of each year, the sum of the Seasonal
Commitments in effect on such date.

 

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

 

“Type”, when used in reference to any Loan or
Borrowing, refers to whether the rate of interest on such Loan, or on the Loans
comprising such Borrowing, is determined by reference to the Adjusted LIBO
Rate, the Extended Term Prime Rate or the Alternate Base Rate.

 

“Uncapped Availability” means as of any date of
determination, the excess, if any, of (a) the Borrowing Base minus (b) the
outstanding Credit Extensions.

 

“Uniform Customs” means with respect to any Letter
of Credit, the Uniform Customs and Practice for Documentary Credits (1993
Revision), International Chamber of Commerce Publication No. 500 or any
successor version thereto adopted by the Administrative Agent in the ordinary
course of its business as a letter of credit issuer and in effect at the time
of issuance of such Letter of Credit.

 

“Unused Commitment” means, on any day, (a) the
then Total Commitment minus (b) the sum of (i) the principal amount
of Loans then outstanding and (ii) the then Letter of Credit Outstandings.

 

“Withdrawal Liability” means liability to a
Multiemployer Plan as a result of a complete or partial withdrawal from such
Multiemployer Plan, as such terms are defined in Part I of Subtitle E
of Title IV of ERISA.

 

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

 

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

 

34

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

SECTION 1.2                                             Terms Generally. The
definitions of terms herein shall apply equally to the singular and plural
forms of the terms defined.  Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms.  The words “include”,
“includes” and “including” shall be deemed to be followed by the
phrase “without limitation”.  The
word “will” shall be construed to have the same meaning and effect as
the word “shall”.  Unless the
context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any
reference herein to any Person shall be construed to include such Person’s
successors and permitted assigns, (c) the words “herein”, “hereof”
and “hereunder”, and words of similar import, shall be construed to
refer to this Agreement in its entirety and not to any particular provision
hereof, (d) all references herein to Articles, Sections, Exhibits and
Schedules shall be construed to refer to Articles and Sections of, and Exhibits
and Schedules to, this Agreement (e) the words “asset” and “property”
shall be construed to have the same meaning and effect and to refer to any and
all tangible (corporeal) and intangible (incorporeal) assets and properties,
including cash, securities, accounts and contract rights, and (f) all
references to “$” or “Dollars” or to amounts of money and all calculations of
the Borrowing Base, Excess Availability, permitted “baskets” and other similar
matters shall be deemed to be references to the lawful currency of the United
States of America at the Equivalent Amount.

 

35

 

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

 

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

 

ARTICLE II

AMOUNT AND TERMS OF CREDIT

 

SECTION 2.1                          Commitment of
the Lenders.

 

(a)                                  Each Lender severally and not jointly
with any other Lender, agrees, upon the terms and subject to the conditions
herein set forth, to extend credit to the Borrowers, or any of them, on a
revolving basis, in the form of Revolving Loans and Letters of Credit and in an
amount not to exceed the lesser of such Lender’s Commitment or such Lender’s
Commitment Percentage of the Borrowing Base, subject to the following
limitations:

 

(i)                                     The aggregate outstanding amount of the
Credit Extensions shall not at any time exceed the Line Cap.

 

(ii)                                  No Lender shall be obligated to issue any
Letter of Credit, and Letters of Credit shall be available from the Issuing
Banks, subject to the ratable participation of all Lenders, as set forth in SECTION 2.6.  The Borrowers will not at any time permit the
aggregate Letter of Credit Outstandings to exceed $20,000,000.

 

(iii)                               Subject to all of the other provisions of this
Agreement, Revolving Loans that are repaid may be reborrowed prior to the
Extended Termination Date.  However, no
new Loans shall be made to the Borrowers and no new Letter of Credit shall be
issued for the account of the Borrowers, after the Extended Termination Date.

 

(b)                                 Each Borrowing of Revolving Loans shall
be made by the Lenders ratably in accordance with their respective Commitment
Percentages.  The failure of any Lender
to make any Loan shall neither relieve any other Lender of its obligation to
fund its Loan in accordance with the provisions of this Agreement nor increase
the obligation of any such other Lender.

 

SECTION 2.2                          Reserves;
Changes to Reserves.

 

(a)                                  The initial Reserves as of the date of
this Agreement are (i) the Shrink Reserve, (ii) the Customer Credit
Reserve, (iii) the Layaway Reserve, (iv) the Landlord Lien Reserve (v) the
Consignment A/R Reserve, (vi) other Inventory Reserves for (A) point of
sale and permanent 

 

36

 

markdowns, (B) Form 400 and Damaged
Inventory, and (C) Texas ad valorem taxes, (vii) a Reserve for
customer refund liabilities, and (viii) the Canadian Priority Payables
Reserve, and (ix) a Canadian Store rent Reserve.

 

(b)                                 The Administrative Agent may, or at the
direction of any Co-Borrowing Base Agent (or with respect to the Term Reserve,
the Term Agent), shall, hereafter establish additional Reserves or change any
of the foregoing Reserves without consent from the Borrowers.  The Administrative Agent shall endeavor to
consult with the Borrower prior to the establishment or change of any such
Reserves, provided that the failure of the Administrative Agent to so
consult with the Borrower shall not limit, delay or impair any of the rights of
the Administrative Agent or any Co-Borrowing Base Agent hereunder (or with
respect to the Term Reserve, the rights of the Term Agent), or postpone the
date of the effectiveness of any such Reserves (or changes thereto).  The Administrative Agent shall furnish the
Borrowers with prompt written notice of the establishment of or change to any
Reserves.

 

SECTION 2.3                          Making of
Loans.

 

(a)                                  Except as set forth in SECTION 2.16
and SECTION 2.24, Loans (other than Swingline Loans) by the Lenders shall
be either Base Rate Loans or LIBOR Loans as the relevant Borrower may request
subject to and in accordance with this SECTION 2.3, provided, that
all Swingline Loans shall be only Base Rate Loans.  All Loans made pursuant to the same Borrowing
shall, unless otherwise specifically provided herein, be Loans of the same
Type.  Each Lender may fulfill its
Commitment with respect to any Loan by causing any lending office of such
Lender to make such Loan; but any such use of a lending office shall not affect
the obligation of the Borrowers to repay such Loan in accordance with the terms
of the applicable Note.  Subject to the
other provisions of this Section 2.3 and the provisions of SECTION 2.24,
Borrowings of Loans of more than one Type may be incurred at the same time, but
no more than six (6) Borrowings of LIBOR Loans may be outstanding at any
time.

 

(b)                                 The Borrowers requesting a Borrowing
shall give the Administrative Agent telephonic notice (thereafter confirmed in
writing) of each Borrowing of (i) LIBOR Loans not later than 12:00 p.m.
on the third Business Day prior to the date on which such Borrowing is to be
made and (ii) Base Rate Loans not later than 12:00 p.m. on the
Business Day on which such Borrowing is to be made. Such notice shall be
irrevocable and binding on each of the Borrowers and shall specify the amount
of the proposed Borrowing (which shall be in an integral multiple of
$1,000,000, but not less than $5,000,000 in the case of LIBOR Loans) and the
date thereof (which shall be a Business Day) and shall contain disbursement
instructions.  Such notice shall specify
whether the Borrowing then being requested is to be a Borrowing of Base Rate
Loans or LIBOR Loans and, if LIBOR Loans, the Interest Period with respect
thereto.  If no election of Interest
Period is specified in any such notice for a Borrowing of LIBOR Loans, such
notice shall be deemed a request for an Interest Period of one month.  If no election is made as to the Type of Loan,
such notice shall be deemed a request for a Borrowing of Base Rate Loans.  The Administrative Agent shall promptly
notify each Lender of its proportionate share of such Borrowing, the date of
such Borrowing, the Type of Borrowing being requested and the Interest Period
or Interest Periods applicable thereto, as appropriate.  On the borrowing date specified in such
notice, each Lender shall make its share of the Borrowing available at the
office of the Administrative Agent at 100 Federal Street, Boston,
Massachusetts 02110, not later than 4:00 

 

37

 

p.m. in immediately available funds.  Unless the
Administrative Agent shall have received notice from a Lender prior to the
proposed date of any Borrowing of LIBOR Loans and no less than one (1) hour
prior to the proposed Borrowing of Base Rate Loans that such Lender will not
make available to the Administrative Agent such Lender’s share of such
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with this Section and may, in
reliance upon such assumption, make available to the Borrowers a corresponding
amount.  In such event, if a Lender has
not in fact made its share of the applicable Borrowing available to the
Administrative Agent, then the applicable Lender and the Borrowers severally
agree to pay to the Administrative Agent forthwith on demand such corresponding
amount with interest thereon, for each day from and including the date such
amount is made available to the Borrowers to but excluding the date of payment
to the Administrative Agent, at (i) in the case of such Lender, the
greater of the Federal Funds Effective Rate and a rate determined by the
Administrative Agent in accordance with banking industry rules on
interbank compensation or (ii) in the case of the Borrowers, the interest
rate applicable to Base Rate Loans for Extending and Non-Extending Lenders,
respectively.  If such Lender pays such
amount to the Administrative Agent, then such amount shall constitute such
Lender’s Loan included in such Borrowing. 
Upon receipt of the funds made available by the Lenders to fund any
Borrowing hereunder, the Administrative Agent shall disburse such funds in the
manner specified in the notice of borrowing delivered by the Borrowers and shall
use reasonable efforts to make the funds so received from the Lenders available
to the Borrowers not later than 4:00 p.m.

 

SECTION 2.4                          Overadvances

 

.  The Agents, the Lenders and the Issuing Banks
have no obligation to make any Loan or to provide any Letter of Credit to the
extent an Overadvance would result.  The
Administrative Agent may, in its discretion, make Permitted Overadvances
without the consent of the Lenders and each Lender shall be bound thereby.  Any Permitted Overadvances may constitute
Swingline Loans.  The making of any
Permitted Overadvance is for the benefit of the Borrowers; such Permitted
Overadvances constitute Revolving Loans and Obligations.  The making of any such Permitted Overadvances
on any one occasion shall not obligate the Administrative Agent or any Lender
to make or permit any Permitted Overadvances on any other occasion or to permit
such Permitted Overadvances to remain outstanding.

 

SECTION 2.5                          Swingline
Loans.

 

(a)                                  The Swingline Lender is authorized by the
Lenders and shall, subject to the provisions of this Section, make Swingline
Loans up to $50,000,000 in the aggregate outstanding at any time, consisting
only of Base Rate Loans at the Extended Term Prime Rate, upon a notice of
Borrowing received by the Administrative Agent and the Swingline Lender (which
notice, at the Swingline Lender’s discretion, may be submitted prior to 1:00 p.m.
on the Business Day on which such Swingline Loan is requested).  Swingline Loans shall be subject to periodic
settlement with the Lenders under SECTION 2.7 below provided  that
the Swingline Lender shall not be obligated to make any Swingline Loan in its
reasonable discretion if any Lender at such time is a Deteriorating Lender,
unless the Swingline Lender has entered into satisfactory arrangements
with the Borrowers or such Lender to eliminate the Swingline Lender’s risk of
full reimbursement with respect to such Swingline Loan.

 

38

 

(b)                                 Swingline Loans may be made only in the
following circumstances: (A) for administrative convenience, the Swingline
Lender shall, at the Borrowers’ request, make Swingline Loans in reliance upon
the Borrowers’ actual or deemed representations under SECTION 4.2, that
the applicable conditions for borrowing are satisfied or (B) for Permitted
Overadvances.  If the conditions for
borrowing under SECTION 4.2 cannot be fulfilled, the Borrowers shall give
immediate notice thereof to the Administrative Agent and the Swingline Lender
(a “Noncompliance Notice”), and the Administrative Agent shall promptly
provide each Lender with a copy of the Noncompliance Notice.  If the conditions for borrowing under SECTION 4.2
cannot be fulfilled, the Required Lenders may direct the Swingline Lender to,
and the Swingline Lender thereupon shall, cease making Swingline Loans (other
than Permitted Overadvances) until such conditions can be satisfied or are
waived in accordance with SECTION 9.2. 
Unless the Required Lenders so direct the Swingline Lender, the
Swingline Lender may, but is not obligated to, continue to make Swingline Loans
beginning one Business Day after the Noncompliance Notice is furnished to the
Lenders.  Notwithstanding the foregoing,
no Swingline Loans shall be made pursuant to this Subsection (b) (other
than Permitted Overadvances) if the aggregate outstanding amount of the Credit
Extensions would exceed the Line Cap.

 

SECTION 2.6                          Letters of
Credit.

 

(a)                                  Upon the terms and subject to the
conditions herein set forth, the Borrowers may request any Issuing Bank, at any
time and from time to time after the date hereof and prior to the Termination
Date, to issue, and subject to the terms and conditions contained herein, such
Issuing Bank shall issue, for the account of the relevant Borrower one or more
Letters of Credit; provided, that no Letter of Credit shall be issued if
after giving effect to such issuance (i) the aggregate Letter of Credit
Outstandings shall exceed $20,000,000, or (ii) the aggregate Credit Extensions
would exceed the limitations set forth in Section 2.1(a)(i); and provided,
further, that no Letter of Credit shall be issued if such Issuing Bank
shall have received notice from the Administrative Agent or the Required
Lenders that the conditions to such issuance have not been met; provided
further that an Issuing Bank shall not be required to issue any such
Letter of Credit in its reasonable discretion if: (A) any order,
judgment or decree of any Governmental Authority or arbitrator shall by its
terms purport to enjoin or restrain the applicable Issuing Bank from issuing
such Letter of Credit, or any applicable law relating to such Issuing Bank or
any request or directive (whether or not having the force of law) from any
Governmental Authority with jurisdiction over the applicable Issuing Bank shall
prohibit, or request that such Issuing Bank refrain from, the issuance of
letters of credit generally or such Letter of Credit in particular or shall
impose upon such Issuing Bank with respect to such Letter of Credit any
restriction, reserve or capital requirement (for which such Issuing Bank is not
otherwise compensated hereunder) not in effect on the Effective Date, or shall
impose upon the applicable Issuing Bank any unreimbursed loss, cost or expense
which was not applicable on the Effective Date and which such Issuing Bank in
good faith deems material to it, (B) the issuance of such Letter of Credit would violate
one or more policies of the applicable Issuing Bank applicable to letters of
credit generally, or (C) any Lender is at such time a
Deteriorating Lender hereunder, unless such Issuing Bank has entered into
satisfactory arrangements with the Borrowers or such Lender to eliminate such
Issuing Bank’s risk of full reimbursement with respect to such Letter of
Credit.  Any Issuing Bank (other than Bank of America
or any of its Affiliates) shall notify the Administrative Agent in writing on
each Business Day of all Letters of Credit issued on the prior Business Day by
such Issuing Bank; provided  that (A) until the
Administrative Agent advises 

 

39

 

any such Issuing Bank that Excess Availability is less
than $80,000,000, or (B) the aggregate amount of the Letters of Credit
issued in any such week exceeds such amount as shall be agreed by the
Administrative Agent and such Issuing Bank, such Issuing Bank shall be required
to so notify the Administrative Agent in writing only once each week of the
Letters of Credit issued by such Issuing Bank during the immediately preceding
week as well as the daily amounts outstanding for the prior week, such notice
to be furnished on such day of the week as the Administrative Agent and such
Issuing Bank may agree.

 

(b)                                 Each Standby Letter of Credit shall
expire at or prior to the close of business on the earlier of (i) the date
one year after the date of the issuance of such Letter of Credit (or, in the
case of any renewal or extension thereof, one year after such renewal or
extension) and (ii) the date that is five Business Days prior to the
Extended Term Maturity Date, provided, that each Standby Letter of
Credit may, upon the request of the Borrowers, include a provision whereby such
Letter of Credit shall be renewed automatically for additional consecutive
periods of 12 months or less (but not beyond the date that is five Business
Days prior to the Extended Term Maturity Date) unless the applicable Issuing
Bank notifies the beneficiary thereof at least 30 days prior to the then
applicable expiration date that such Letter of Credit will not be renewed.

 

(c)                                  Each Commercial Letter of Credit shall
expire at or prior to the close of business on the earlier of (i) the date
that is 120 days after the date of the issuance of such Commercial Letter of
Credit and (ii) the date that is five Business Days prior to the Extended
Term Maturity Date.

 

(d)                                 Drafts drawn under any Letter of Credit
shall be reimbursed by the Borrowers in Dollars on the next Business Day of any
such payment thereof by an Issuing Bank by paying to the Administrative Agent
an amount equal to such drawing not later than 3:00 p.m. on such date, provided,
that the Borrowers may, subject to the conditions to borrowing set forth
herein, request in accordance with SECTION 2.3 that such payment be
financed with a Revolving Loan consisting of a Base Rate Loan or Swingline Loan
in an equivalent amount and, to the extent so financed, the Borrowers’
obligation to make such payment shall be discharged and replaced by the
resulting Base Rate Loan or Swingline Loan. 
Each Issuing Bank shall, promptly following its receipt thereof, examine
all documents purporting to represent a demand for payment under a Letter of
Credit.  Each Issuing Bank shall promptly
notify the Administrative Agent and the Borrowers by telephone (confirmed by
telecopy) of such demand for payment and whether such Issuing Bank has made or
will make payment thereunder (which payment shall not be made until two (2) Business
Days after such notice from such Issuing Bank to the Borrowers), provided,
that any failure to give or delay in giving such notice shall not relieve the
Borrowers of their obligation to reimburse such Issuing Bank and the Lenders
with respect to any such payment.

 

(e)                                  If any Issuing Bank shall make any L/C
Disbursement, then, unless the Borrowers shall reimburse such Issuing Bank in
full on the date such payment is made, the unpaid amount thereof shall bear
interest, for each day from and including the date such payment is made to but
excluding the date that the Borrowers reimburse such Issuing Bank therefor, at
the rate per annum then applicable to Base Rate Loans for Extending Lenders, provided,
that if the Borrowers fail to reimburse such Issuing Bank when due pursuant to
paragraph (d) of this Section, then SECTION 2.10 shall
apply.  Interest accrued pursuant to this
paragraph shall be for the account of the applicable Issuing Bank, except that
interest accrued on and after the date of 

 

40

 

payment by any Lender pursuant to paragraph (g) of
this Section to reimburse an Issuing Bank shall be (i) in the case of
any such Lender which is a Non-Extending Lender, paid to such Non-Extending
Lender calculated based upon the rate per annum then applicable to Base Rate
Loans for Non-Extending Lenders and (ii) in the case of any such Lender
which is an Extending Lender, paid to such Extending Lender calculated based
upon the rate per annum then applicable to Base Rate Loans for Extending
Lenders.

 

(f)                                    Immediately upon the issuance of any
Letter of Credit by an Issuing Bank (or the amendment of a Letter of Credit
increasing the amount thereof), and without any further action on the part of
such Issuing Bank, such Issuing Bank shall be deemed to have sold to each
Lender, and each such Lender shall be deemed unconditionally and irrevocably to
have purchased from such Issuing Bank, without recourse or warranty, an
undivided interest and participation, to the extent of such Lender’s Commitment
Percentage, in such Letter of Credit, each drawing thereunder and the obligations
of the Borrowers under this Agreement and the other Loan Documents with respect
thereto.  Upon any change in the
Commitments pursuant hereto, it is hereby agreed that with respect to all
Letter of Credit Outstandings, there shall be an automatic adjustment to the
participations hereby created to reflect the new Commitment Percentages of the
assigning and assignee Lenders.  Any
action taken or omitted by any Issuing Bank under or in connection with a
Letter of Credit, if taken or omitted in the absence of gross negligence or
willful misconduct, shall not create for any Issuing Bank any resulting
liability to any Lender.

 

(g)                                 In the event that an Issuing Bank makes
any L/C Disbursement and the Borrowers shall not have reimbursed such amount in
full to such Issuing Bank pursuant to Section 2.6(d), such Issuing Bank
shall promptly notify the Administrative Agent, which shall promptly notify
each Lender of such failure, and each Lender shall promptly and unconditionally
pay to the Administrative Agent for the account of such Issuing Bank the amount
of such Lender’s Commitment Percentage of such unreimbursed payment in Dollars
(or, if such L/C Disbursement is made in CDN$, the Equivalent Amount thereof in
Dollars) and in same day funds.  If an
Issuing Bank so notifies the Administrative Agent, and the Administrative Agent
so notifies the Lenders prior to 11:00 a.m. on any Business Day, each such
Lender shall make available to such Issuing Bank such Lender’s Commitment
Percentage of the amount of such payment on such Business Day in same day
funds.  If and to the extent such Lender
shall not have so made its Commitment Percentage of the amount of such payment
available to such Issuing Bank, such Lender agrees to pay to such Issuing Bank,
forthwith on demand such amount, together with interest thereon, for each day
from such date until the date such amount is paid to the Administrative Agent
for the account of the applicable Issuing Bank at the Federal Funds Effective
Rate.  Each Lender agrees to fund its
Commitment Percentage of such unreimbursed payment notwithstanding a failure to
satisfy any applicable lending conditions or the provisions of SECTION 2.1
or SECTION 2.6, or the occurrence of the Termination Date or the Extended
Termination Date.  The failure of any
Lender to make available to an Issuing Bank its Commitment Percentage of any
payment under any Letter of Credit shall neither relieve any Lender of its
obligation hereunder to make available to such Issuing Bank its Commitment
Percentage of any payment under any Letter of Credit on the date required, as
specified above, nor increase the obligation of such other Lender.  Whenever any Lender has made payments to an
Issuing Bank in respect of any reimbursement obligation for any Letter of
Credit, such Lender shall be entitled to share ratably, based on its Commitment
Percentage, in all payments and collections thereafter received on account of
such reimbursement obligation.

 

41

 

(h)                                 Whenever a Borrower desires that an
Issuing Bank issue a Letter of Credit (or the amendment, renewal or extension
of an outstanding Letter of Credit), such Borrower shall give to the applicable
Issuing Bank and the Administrative Agent at least two Business Days’ prior
written (including telegraphic, telex, facsimile or cable communication) notice
(or such shorter period as may be agreed upon in writing by an Issuing Bank and
such Borrower) specifying the date on which the proposed Letter of Credit is to
be issued, amended, renewed or extended (which shall be a Business Day), the
stated amount of the Letter of Credit so requested, the expiration date of such
Letter of Credit, the name and address of the beneficiary thereof, and the
provisions thereof.  If requested by an
Issuing Bank, the Borrowers shall also submit a letter of credit application on
such Issuing Bank’s standard form in connection with any request for the
issuance, amendment, renewal or extension of a Letter of Credit.

 

(i)                                     The obligations of the Borrowers to
reimburse each Issuing Bank for any L/C Disbursement shall be unconditional and
irrevocable and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including, without limitation: (i) any
lack of validity or enforceability of any Letter of Credit; (ii) the
existence of any claim, setoff, defense or other right which the Borrowers may
have at any time against a beneficiary of any Letter of Credit or against any
of the Lenders, whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction; (iii) any draft, demand,
certificate or other document presented under any Letter of Credit proving to
be forged, fraudulent, invalid or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect; (iv) any other
circumstance or happening whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section, constitute a
legal or equitable discharge of, or provide a right of setoff against, the
Borrowers’ obligations hereunder; or (v) the fact that any Event of
Default shall have occurred and be continuing. 
None of the Administrative Agent, the Lenders, the Issuing Banks or any
of their Affiliates shall have any liability or responsibility by reason of or
in connection with the issuance or transfer of any Letter of Credit or any
payment or failure to make any payment thereunder (irrespective of any of the
circumstances referred to in the preceding sentence), or any error, omission,
interruption, loss or delay in transmission or delivery of any draft, notice or
other communication under or relating to any Letter of Credit (including any
document required to make a drawing thereunder), any error in interpretation of
technical terms or any consequence arising from causes beyond the control of an
Issuing Bank, provided, that the foregoing shall not be construed to
excuse any Issuing Bank from liability to the Borrowers to the extent of any
direct damages (as opposed to consequential damages, claims in respect of which
are hereby waived by the Borrowers to the extent permitted by applicable law)
suffered by the Borrowers that are caused by an Issuing Bank’s failure to
exercise care when determining whether drafts and other documents presented
under a Letter of Credit comply with the terms thereof.  The parties hereto expressly agree that, in
the absence of gross negligence or willful misconduct on the part of an Issuing
Bank (as finally determined by a court of competent jurisdiction), such Issuing
Bank shall be deemed to have exercised care in each such determination.  In furtherance of the foregoing and without
limiting the generality thereof, the parties agree that, with respect to
documents presented that appear on their face to be in compliance with the
terms of a Letter of Credit, an Issuing Bank may, in its reasonable discretion,
either accept and make payment upon such documents without responsibility for
further investigation, regardless of any notice or information to the contrary,
or refuse to accept and make payment upon such documents if such documents are
not in strict compliance with the terms of such Letter of Credit.

 

42

 

(j)                                     If any Event of Default shall occur and
be continuing, on the Business Day that the Borrowers receive notice from the
Administrative Agent or the Required Lenders demanding the deposit of cash
collateral pursuant to this paragraph, the Borrowers shall deposit in the Cash
Collateral Account an amount in cash equal to 103% of the Letter of Credit
Outstandings as of such date plus any accrued and unpaid interest
thereon.  Each such deposit shall be held
by the Collateral Agent as collateral for the payment and performance of the
Obligations of the Borrowers under this Agreement.  The Collateral Agent shall have exclusive
dominion and control, including the exclusive right of withdrawal, over such
Cash Collateral Account.  Other than any
interest earned on the investment of such deposits, which investments shall be
made at the option and sole discretion of the Administrative Agent at the
request of the Borrowers and at the Borrowers’ risk and expense, such deposits
shall not bear interest.  Interest or
profits, if any, on such investments shall accumulate in such account.  Moneys in such Cash Collateral Account shall
be applied by the Administrative Agent to reimburse the Issuing Banks for
payments on account of drawings under Letters of Credit for which it has not
been reimbursed and, to the extent not so applied, shall be held for the
satisfaction of the reimbursement obligations of the Borrowers for the Letter
of Credit Outstandings at such time or, if the Loans have matured or the
maturity of the Loans has been accelerated, be applied to satisfy other Obligations
of the Borrowers under this Agreement.

 

(k)                                  All Existing Letters of Credit shall,
from and after the Effective Date, be deemed for all purposes to be Letters of
Credit under this Agreement.

 

SECTION 2.7                          Settlements
Amongst Lenders.

 

(a)                                  The Swingline Lender may (but shall not
be obligated to), at any time, on behalf of the Borrowers (which hereby
authorize the Swingline Lender to act in their behalf in that regard) request
the Administrative Agent to cause the Lenders to make a Revolving Loan (which shall
be a Base Rate Loan) in an amount equal to such Lender’s Commitment Percentage
of the outstanding amount of Swingline Loans made in accordance with SECTION 2.5,
which request may be made regardless of whether the conditions set forth in Article IV
have been satisfied.  Upon such request,
each Lender shall make available to the Administrative Agent the proceeds of
such Revolving Loan for the account of the Swingline Lender.  If the Swingline Lender requires a Revolving
Loan to be made by the Lenders and the request therefor is received prior to
12:00 Noon on a Business Day, such transfers shall be made in immediately
available funds not later than 4:00 p.m. that day; and, if the request
therefor is received after 12:00 Noon then not later than 4:00 p.m. on the
next Business Day.  The obligation of
each Lender to transfer such funds is irrevocable, unconditional and without
recourse to or warranty by the Administrative Agent or the Swingline Lender.  If and to the extent any Lender shall not
have so made its transfer to the Administrative Agent, such Lender agrees to
pay to the Administrative Agent, forthwith on demand such amount, together with
interest thereon, for each day from such date until the date such amount is
paid to the Administrative Agent at the Federal Funds Effective Rate.

 

(b)                                 The amount of each Lender’s Commitment
Percentage of outstanding Revolving Loans and Swingline Loans shall be computed
weekly (or more frequently in the Administrative Agent’s discretion) and shall
be adjusted upward or downward based on all Revolving Loans, Swingline Loans
and repayments of Revolving Loans and Swingline Loans  received by the 

 

43

 

Administrative Agent as of 4:00 p.m. on the first
Business Day following the end of the period specified by the Administrative
Agent (such date, the “Settlement Date”).

 

(c)                                  The Administrative Agent shall deliver to
each of the Lenders promptly after the Settlement Date a summary statement of
the amount of outstanding Revolving Loans and Swingline Loans for the period
and the amount of repayments received for the period.  As reflected on the summary statement: (x) the
Administrative Agent shall transfer to each Lender its applicable Commitment
Percentage of repayments, and (y) each Lender shall transfer to the
Administrative Agent (as provided below), or the Administrative Agent shall
transfer to each Lender, such amounts as are necessary to insure that, after
giving effect to all such transfers, the amount of Revolving Loans made by each
Lender shall be equal to such Lender’s applicable Commitment Percentage of
Revolving Loans outstanding as of such Settlement Date.  If the summary statement requires transfers
to be made to the Administrative Agent by the Lenders and is received prior to
12:00 Noon on a Business Day, such transfers shall be made in immediately
available funds not later than 4:00 p.m. that day; and, if received after
12:00 Noon then not later than 4:00 p.m. on the next Business Day.  The obligation of each Lender to transfer
such funds is irrevocable, unconditional and without recourse to or warranty by
the Administrative Agent.  If and to the
extent any Lender shall not have so made its transfer to the Administrative
Agent, such Lender agrees to pay to the Administrative Agent, forthwith on
demand such amount, together with interest thereon, for each day from such date
until the date such amount is paid to the Administrative Agent at the Federal
Funds Effective Rate.

 

SECTION 2.8                          Notes;
Repayment of Loans.

 

(a)                                  The Loans made by each Lender (and by the
Swingline Lender, with respect to Swingline Loans) shall be evidenced by a Note
duly executed by the Borrowers, dated the Effective Date, in substantially the
form attached hereto as Exhibit B-1 or B-2, as applicable, payable to the
order of each such Lender (or the Swingline Lender, as applicable) in an
aggregate principal amount equal to such Lender’s Commitment (or, in the case
of the Note evidencing the Swingline Loans, $50,000,000).

 

(b)                                 The outstanding principal balance of all
Swingline Loans shall be repaid on the earlier of the Extended Termination Date
or, on the date otherwise required in accordance with the provisions of
Sections 2.5(a) and 2.5(b).  The
outstanding principal balance of (i) all other Loan Agreement Obligations
shall be payable, with respect to the Non-Extending Lenders, on the Termination
Date or, (ii) all other Loan Agreement Obligations shall be payable, with
respect to the Extending Lenders, and all other Obligations then due and owing,
on the Extended Termination Date (subject, in each case, to earlier repayment
as provided below).  Each Note shall bear
interest from the date thereof on the outstanding principal balance thereof as
set forth in this Article II.  Each
Lender is hereby authorized by the Borrowers to endorse on a schedule attached
to each Note delivered to such Lender (or on a continuation of such schedule
attached to such Note and made a part thereof), or otherwise to record in such
Lender’s internal records, an appropriate notation evidencing the date and
amount of each Loan from such Lender, each payment and prepayment of principal
of any such Loan, each payment of interest on any such Loan and the other
information provided for on such schedule; provided, however,
that the failure of any Lender to make such a notation or any error therein
shall not affect the obligation 

 

44

 

of the Borrowers to repay the Loans made by such
Lender in accordance with the terms of this Agreement and the applicable Notes.

 

SECTION 2.9                          Interest on
Loans.

 

(a)                                  Interest on Loans of Non-Extending
Lenders.

 

(i)                                     Subject to SECTION 2.10, each Base
Rate Loan made by a Non-Extending Lender shall bear interest (computed on the
basis of the actual number of days elapsed over a year of 365 or 366 days,
as applicable) at a rate per annum that shall be equal to the then Alternate
Base Rate, plus the Applicable Margin for Base Rate Loans.

 

(ii)                                  Subject to SECTION 2.10, each LIBOR
Loan made by a Non-Extending Lender shall bear interest (computed on the basis
of the actual number of days elapsed over a year of 360 days) at a rate per
annum equal, during each Interest Period applicable thereto, to the Adjusted
LIBO Rate for such Interest Period, plus the Applicable Margin for LIBOR
Loans.

 

(iii)                               Accrued interest on all Loans shall be payable in
arrears on each Interest Payment Date applicable thereto, on the Termination
Date, after the Termination Date on demand and (with respect to LIBOR Loans)
upon any repayment or prepayment thereof (on the amount prepaid).

 

(b)                                 Interest on Loans of Extending Lenders.

 

(i)                                     Subject to SECTION 2.10, each Base
Rate Loan made by an Extending Lender shall bear interest (computed on the
basis of the actual number of days elapsed over a year of 365 or 366 days,
as applicable) at a rate per annum that shall be equal to the then Extended
Term Prime Rate, plus the Extended Term Applicable Margin for Base Rate
Loans.

 

(ii)                                  Subject to SECTION 2.10, each LIBOR
Loan made by an Extending Lender shall bear interest (computed on the basis of
the actual number of days elapsed over a year of 360 days) at a rate per annum
equal, during each Interest Period applicable thereto, to the Adjusted LIBO
Rate for such Interest Period, plus the Extended Term Applicable Margin
for LIBOR Loans.

 

(iii)                               Accrued interest on all Loans shall be payable in
arrears on each Interest Payment Date applicable thereto, on the Extended
Termination Date, after the Extended Termination Date on demand and (with
respect to LIBOR Loans) upon any repayment or prepayment thereof (on the amount
prepaid).

 

(c)                                  For the purposes of the Interest Act (Canada) and disclosure thereunder, whenever
interest to be paid hereunder is to be calculated on the basis of a year of 360
days or any other period of time that is less than a calendar year, the yearly
rate of interest to which the rate determined pursuant to such calculation is
equivalent is the rate so determined multiplied by the actual number of days in
the calendar year in which the same is to be ascertained and divided by either
360 or such other period of time, as the case may be. Calculations of interest
shall be made 

 

45

 

using the nominal rate method of calculation, and will
not be calculated using the effective rate method of calculation or any other
basis that gives effect to the principle of deemed reinvestment of interest.

 

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

 

SECTION 2.11                                       Certain Fees.  The Borrowers shall pay to the Arranger (or
its Affiliates or designees), the fees set forth in the Fee Letter as and when
payment of such fees is due as therein set forth.

 

SECTION 2.12                                       Unused
Commitment Fee.  (a)                 The Borrowers shall pay to
the Administrative Agent for the account of the Non-Extending Lenders, a
commitment fee (the “Commitment Fee”) equal to the Applicable Commitment
Fee Rate (on the basis of actual days elapsed in a year of 360 days) of the
average daily balance of the Unused Commitment for each day commencing on and
including the Closing Date and ending on but excluding the Termination
Date.  The Commitment Fee so accrued in
any fiscal quarter shall be payable on the first Business Day of the
immediately succeeding fiscal quarter, except that all Commitment Fees so
accrued as of the Termination Date shall be payable on the Termination Date.

 

(b)                                 The Borrowers shall pay to the
Administrative Agent for the account of the Extending Lenders, a commitment fee
(the “Extended Term Unused Fee”) equal to 0.50% per annum (on the basis
of actual days elapsed in a year of 360 days) of the average daily balance of
the Extended Term Unused Commitment for each day commencing on and including
the Effective Date and ending on but excluding the Extended Termination
Date.  The Extended Term Unused Fee so
accrued in any fiscal quarter shall be payable on the first Business Day of the
immediately succeeding fiscal quarter, except that all Extended Term Unused
Fees so accrued as of the Extended Termination Date shall be payable on the
Extended Termination Date.

 

SECTION 2.13                    Letter of
Credit Fees.

 

(a)                                  The Borrowers shall pay the
Administrative Agent, for the account of the Lenders, on the first day of each
fiscal quarter, in arrears, a fee (each, a “Letter of Credit Fee”) equal to the
following per annum percentages of the average face amount of the following
categories of Letters of Credit outstanding during the subject quarter (each
computed on the basis of the actual number of days elapsed over a year of 360
days):

 

(i)                                     Standby Letters of Credit:  (A) For the account of each
Non-Extending Lender, at the then Applicable Margin per annum for LIBOR Loans,
and (B) for the 

 

46

 

account of each Extending Lender at a per annum rate equal to the then
Extended Term Applicable Margin for LIBOR Loans.

 

(ii)                                  Commercial Letters of Credit: (A) For
the account of each Non-Extending Lender, at the rate equal to fifty percent
(50%) of then Applicable Margin per annum for LIBOR Loans, (B) for the
account of each Extending Lender at a per annum rate equal to fifty percent
(50%) of the then Extended Term Applicable Margin for LIBOR Loans.

 

(iii)                               After the occurrence and during the continuance of an
Event of Default, at the option of the Administrative Agent or upon the
direction of the Required Lenders, the Letter of Credit Fee set forth in
clauses (i) and (ii) above, shall be increased by an amount
equal to two percent (2%) per annum.

 

(b)                                 The Borrowers shall pay to the
Administrative Agent, for the account of each Issuing Bank, and in addition to
all Letter of Credit Fees otherwise provided for hereunder, such fees and
charges in connection with the issuance, negotiation, settlement, amendment and
processing of each Letter of Credit issued by such Issuing Bank as are
customarily imposed by each Issuing Bank from time to time in connection with
letter of credit transactions and such fronting fees as are agreed upon by the
Borrowers and each Issuing Bank, and upon receipt thereof the Administrative
Agent shall promptly remit such fees to the applicable Issuing Bank.

 

SECTION 2.14                                       Nature of Fees.  All fees shall be paid on the dates due, in
immediately available funds, to the Administrative Agent, for the respective
accounts of the Administrative Agent, the Issuing Banks, and the Lenders, as
provided herein.  Once paid, all fees
shall be fully earned and shall not be refundable under any circumstances.

 

SECTION 2.15                                       Termination or Reduction of Commitments

 

(a)                                  Upon the Effective Date, a portion of the
Commitments of certain Extending Lenders may be reduced, in each case, without
a pro rata reduction of the Commitments of any other Lenders.  After such reduction, the Commitments of the
Lenders shall be as set forth on Schedule 1.1 hereto.

 

(b)                                 Upon at least five (5) Business Days’
prior written notice to the Administrative Agent, the Borrowers may at any time
in whole permanently terminate, or from time to time in part permanently
reduce, the Commitments; provided that, no termination or partial
reduction of the Commitments of the Non-Extending Lenders shall be permitted
unless the Borrowers shall have (i) provided at least thirty
(30) days prior written notice to the Administrative Agent and (ii) satisfied
the requirements of SECTION 6.8(a). 
Each such reduction or termination shall first be applied, if no Default
or Event of Default then exists or would arise therefrom, ratably to the
Commitments of each Non-Extending Lender and, after the Commitments of the
Non-Extending Lenders have been terminated in full, shall be applied ratably to
the Commitments of each Extending Lender. 
If such a Default or Event of Default exists or would arise from the
termination of any portion of the Commitments, each such reduction or
termination shall be applied ratably to the Commitments of each Lender. Each
such reduction shall be in the principal amount of $5,000,000 or any integral
multiple of $1,000,000 in excess thereof. 
Each notice of such reduction or termination shall be irrevocable when
given.  At the effective time of each 

 

47

 

such reduction or
termination, the Borrowers shall pay to the Administrative Agent for
application as provided herein (i) all Commitment Fees and Extended Term
Unused Fees accrued on the unused portion of the Commitments so terminated or
reduced through the date thereof, and (ii) any amount by which the Credit
Extensions outstanding on such date exceed the amount to which the Commitments
are to be reduced effective on such date, in each case pro rata based on the
amount prepaid.  Upon the termination of
all Commitments by the Borrowers hereunder and the Borrowers’ payment and
satisfaction in full of all Obligations, all Letters of Credit shall have
expired or terminated (or been collateralized in a manner satisfactory to the
Issuing Banks) and all Letter of Credit Outstandings have been reduced to zero
(or collateralized in a manner satisfactory to the Issuing Banks), the
Collateral Agent and Administrative Agent shall, subject to SECTION 9.6,
release their respective Liens in the Collateral and, subject to the
Intercreditor Agreement, deliver any possessory Collateral to the Borrowers or
their designee.

 

SECTION 2.16                                       Alternate Rate
of Interest.  If prior to
the commencement of any Interest Period for a LIBOR Borrowing:

 

(a)                                  the Administrative Agent reasonably
determines (which determination shall be conclusive absent manifest error) that
adequate and reasonable means do not exist for ascertaining the Adjusted LIBO
Rate for such Interest Period; or

 

(b)                                 the Administrative Agent is advised by
the Required Supermajority Lenders that the Adjusted LIBO Rate for such
Interest Period will not adequately and fairly reflect the cost to such Lenders
(or Lender) of making or maintaining their Loans (or its Loan) included in such
Borrowing for such Interest Period;

 

then the Administrative
Agent shall give notice thereof to the Borrowers and the Lenders by telephone
or telecopy as promptly as practicable thereafter (but in any event, within two
(2) Business Days) and, until the Administrative Agent notifies the
Borrowers and the Lenders that the circumstances giving rise to such notice no
longer exist, (i) any Borrowing Request that requests the conversion of
any Borrowing to, or continuation of any Borrowing as, a LIBOR Borrowing shall
be ineffective and (ii) if any Borrowing Request requests a LIBOR
Borrowing, such Borrowing shall be made as a Borrowing of Base Rate Loans.

 

SECTION 2.17                                       Conversion and
Continuation of Loans.  The
Borrowers shall have the right at any time,

 

(a)                                  on three (3) Business
Days’ prior irrevocable notice to the Administrative Agent (which notice, to be
effective, must be received by the Administrative Agent not later than 11:00 a.m.
on the third Business Day preceding the date of any conversion), (x) to convert
any outstanding Borrowings of  Base Rate
Loans (but in no event Swingline Loans) to Borrowings of LIBOR Loans or (y) to
continue an outstanding Borrowing of LIBOR Loans for an additional Interest
Period,

 

(b)                                 on one (1) Business
Day’s prior irrevocable notice to the Administrative Agent (which notice, to be
effective, must be received by the Administrative Agent not later than 11:00 

 

48

 

a.m. on the first Business
Day preceding the date of any conversion), to convert any outstanding
Borrowings of LIBOR Loans to a Borrowing of 
Base Rate Loans, subject to the following:

 

(i)                                     no Borrowing of Loans may be converted
into, or continued as, LIBOR Loans at any time when an Event of Default has
occurred and is continuing;

 

(ii)                                  if less than a full Borrowing of Loans is
converted, such conversion shall be made pro rata among the
Lenders, as applicable, in accordance with the respective principal amounts of
the Loans comprising such Borrowing held by such Lenders immediately prior to
such conversion;

 

(iii)                               the aggregate principal amount of Loans being
converted into or continued as LIBOR Loans shall be in an integral of
$1,000,000 and at least $5,000,000;

 

(iv)                              the Interest Period with respect to a
Borrowing of LIBOR Loans effected by a conversion or in respect to the
Borrowing of LIBOR Loans being continued as LIBOR Loans shall commence on the
date of conversion or the expiration of the current Interest Period applicable
to such continuing Borrowing, as the case may be;

 

(v)                                 a Borrowing of LIBOR Loans may be
converted only on the last day of an Interest Period applicable thereto;

 

(vi)                              each request for a conversion or
continuation of a Borrowing of LIBOR Loans which fails to state an applicable
Interest Period shall be deemed to be a request for an Interest Period of one
month; and

 

(vii)                           no more than six (6) Borrowings of LIBOR Loans
may be outstanding at any time.

 

If any of the Borrowers
does not give notice to convert any Borrowing of Base Rate Loans, or does not
give notice to continue, or does not have the right to continue, any Borrowing
as LIBOR Loans, in each case as provided above, such Borrowing shall automatically
be converted to, or continued as, as applicable, a Borrowing of Base Rate Loans
at the expiration of the then-current Interest Period.  The Administrative Agent shall, after it
receives notice from any Borrower, promptly give each Lender notice of any
conversion, in whole or part, of any Loan made by such Lender.

 

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

 

(a)                                  If at any time the amount of the Credit
Extensions exceeds the Line Cap, the Borrowers will immediately (A) prepay
the Loans in an amount necessary to eliminate such excess, and (B) if,
after giving effect to the prepayment in full of all outstanding Loans such
excess has not been eliminated, deposit cash into the Cash Collateral Account
in an amount equal to such excess.

 

(b)                                 To the extent required pursuant to Section 2.21(b),
the Revolving Loans shall be repaid daily in accordance with the provisions of
said Section 2.21(b).

 

49

 

(c)           Subject to the terms of the
Intercreditor Agreement, any Net Proceeds received from a Prepayment Event,
whether or not a Cash Control Event then exists, shall be paid over to the
Administrative Agent on receipt by the Borrowers and shall be utilized to
prepay the Loans in the order of priority set forth in Section 2.22 or Section 7.4,
as applicable.  The Agents shall not be
obligated to release their Liens on any Collateral included in such Prepayment
Event until such Net Proceeds have been so received.  The application of such Net Proceeds to the
Loans shall not reduce the Commitments. 
If all Loan Agreement Obligations are paid, any excess Net Proceeds
shall be remitted to the operating account of the Borrowers maintained with the
Administrative Agent.

 

(d)           Subject to the foregoing, outstanding
Base Rate Loans shall be prepaid before outstanding LIBOR Loans are
prepaid.  Each partial prepayment of
LIBOR Loans shall be in an integral multiple of $5,000,000.  No prepayment of LIBOR Loans shall be permitted
pursuant to this SECTION 2.18 other than on the last day of an Interest
Period applicable thereto, unless the Borrowers simultaneously reimburse the
Lenders for all “Breakage Costs” (as defined in SECTION 2.19, below)
associated therewith.  In order to avoid
such Breakage Costs, as long as no Event of Default has occurred and is
continuing, at the request of the Borrowers, the Administrative Agent shall
hold all amounts required to be applied to LIBOR Loans in the Cash Collateral
Account and will apply such funds to the applicable LIBOR Loans at the end of
the then pending Interest Period therefor (provided, that the foregoing
shall in no way limit or restrict the Agents’ rights upon the subsequent
occurrence of an Event of Default).  No
partial prepayment of a Borrowing of LIBOR Loans shall result in the aggregate
principal amount of the LIBOR Loans remaining outstanding pursuant to such
Borrowing being less than $5,000,000 (unless all such outstanding LIBOR Loans
are being prepaid in full).  Any prepayment
of the Revolving Loans shall not permanently reduce the Commitments.

 

(e)           All amounts required to be applied to
all Loans hereunder (other than Swingline Loans) shall be applied ratably in
accordance with each Lender’s Commitment Percentage.

 

(f)            Upon the Termination Date, the
Commitments of the Non-Extending Lenders shall be terminated in full and the
Borrowers shall pay, in full and in cash, all outstanding Loans and all other
outstanding Loan Agreement Obligations then owing by them to the Non-Extending
Lenders.

 

(g)           Upon the Extended Termination Date,
the Commitments of the Extending Lenders shall be terminated in full, and the
Borrowers shall pay, in full and in cash, all outstanding Loans and all other
outstanding Loan Agreement Obligations then owing by them to the Extending
Lenders, and all other Obligations then due and owing by them to the Secured
Parties.

 

(h)           For clarity, without limiting the
provisions of Section 9.6 hereof, except as otherwise set forth herein,
all Obligations due or to become due under any Cash Management Services or Bank
Products provided to any Borrower or any of its Subsidiaries, shall be
terminated and paid by the Borrowers and their Subsidiaries (to the extent
liable therefor) in accordance with the terms of the documents, instruments and
agreements evidencing such Obligations.

 

50

 

SECTION 2.19       Optional Prepayment of Loans;
Reimbursement of Lenders.

 

(a)           The Borrowers shall have the right at
any time and from time to time to prepay outstanding Loans in whole or in part,
(x) with respect to LIBOR Loans, upon at least two Business Days’ prior
written or facsimile notice to the Administrative Agent prior to 11:00 a.m.,
Boston time, and (y) with respect to Base Rate Loans, on the same Business
Day if written, telex or facsimile notice is received by the Administrative
Agent prior to 1:00 p.m. subject to the following limitations:

 

(i)            Subject
to SECTION 2.18, all prepayments shall be paid to the Administrative Agent
for application, first, to the prepayment of outstanding Swingline
Loans, second, to the prepayment of other outstanding Loans ratably in
accordance with each Lender’s Commitment Percentage, and third, to the
funding of a cash collateral deposit in the Cash Collateral Account in an
amount equal to 103% of all Letter of Credit Outstandings.

 

(ii)           Subject
to the foregoing, outstanding Base Rate Loans shall be prepaid before
outstanding LIBOR Loans are prepaid. 
Each partial prepayment of LIBOR Loans shall be in an integral multiple
of $5,000,000.  No prepayment of LIBOR
Loans shall be permitted pursuant to this SECTION 2.19 other than on the
last day of an Interest Period applicable thereto, unless the Borrowers
simultaneously reimburse the Lenders for all “Breakage Costs” (as defined
below) associated therewith.  No partial
prepayment of a Borrowing of LIBOR Loans shall result in the aggregate
principal amount of the LIBOR Loans remaining outstanding pursuant to such
Borrowing being less than $5,000,000 (unless all such outstanding LIBOR Loans
are being prepaid in full).

 

(iii)          Each
notice of prepayment shall specify the prepayment date, the principal amount
and Type of the Loans to be prepaid and, in the case of LIBOR Loans, the
Borrowing or Borrowings pursuant to which such Loans were made.  The Administrative Agent shall, promptly
after receiving notice from the Borrowers hereunder, notify each Lender of the
principal amount and Type of the Loans held by such Lender which are to be
prepaid, the prepayment date and the manner of application of the prepayment.

 

(b)           The Borrowers shall reimburse each
Lender on demand for any loss incurred or to be incurred by it in the
reemployment of the funds released (i) resulting from any prepayment (for
any reason whatsoever, including, without limitation, conversion to Base Rate
Loans or acceleration by virtue of, and after, the occurrence of an Event of
Default) of any LIBOR Loan required or permitted under this Agreement, if such
Loan is prepaid other than on the last day of the Interest Period for such Loan
or (ii) in the event that after the Borrowers deliver a notice of
borrowing under SECTION 2.3 in respect of LIBOR Loans, such Loans are not
borrowed on the first day of the Interest Period specified in such notice of
borrowing for any reason.  Such loss
shall be the amount as reasonably determined by such Lender as the excess, if
any, of (A) the amount of interest which would have accrued to such Lender
on the amount so paid or not borrowed at a rate of interest equal to the Adjusted
LIBO Rate for such Loan, for the period from the date of such payment or
failure to borrow to the last day (x) in the case of a payment or
refinancing of a LIBOR Loan other than on the last day of the Interest Period
for such Loan, of the then current Interest Period for such Loan or (y) in
the case of such failure to borrow, of the

 

51

 

Interest Period for such LIBOR Loan which would have
commenced on the date of such failure to borrow, over (B) the amount of
interest which would have accrued to such Lender on such amount by placing such
amount on deposit for a comparable period with leading banks in the London
interbank market (collectively, “Breakage Costs”).  Any Lender demanding reimbursement for such
loss shall deliver to the Borrowers simultaneously with such demand one or more
certificates setting forth the amount of such loss as determined by such Lender
and setting forth in reasonable detail the manner in which such amount was
determined.

 

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

 

(d)           Whenever any partial prepayment of
Loans is to be applied to LIBOR Loans, such LIBOR Loans shall, unless the
Borrowers otherwise direct, be prepaid in the chronological order of their
Interest Payment Dates.

 

SECTION 2.20       Maintenance of Loan Account;
Statements of Account.

 

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

 

(b)           The Loan Account will be credited
with all amounts received by the Administrative Agent from the Borrowers,
including all amounts received in the Collection Account from any Concentration
Account, on the date such amounts are received and the amounts so credited
shall be applied as set forth in SECTION 2.22(a) and (b).  After the end of each month, the
Administrative Agent shall send to the Borrowers a statement accounting for the
charges, loans, advances and other transactions occurring among and between the
Administrative Agent, the Lenders and the Borrowers during that month.  The monthly statements shall, absent manifest
error, be an account stated, which is final, conclusive and binding on the Loan
Parties.

 

(c)           The Administrative Agent, without the
consent or request of the Borrowers, may advance any interest, fee, service
charge, cost, charge, expense, or other payment to which any Lender or any
Agent is entitled from the Loan Parties pursuant to this Agreement or any other
Loan Document and may charge the same to the Loan Account by adding such amount
to the principal balance of the Loan Account, notwithstanding that an
Overadvance may result thereby.  The
Administrative Agent shall advise the Borrowers of any such advance or charge
promptly after the making thereof.  Such
action on the part of the Administrative Agent shall not constitute

 

52

 

a waiver of either the Administrative Agent’s or any
Lender’s rights under, or the Loan Parties’ obligations to make any payment
required pursuant to, this Agreement or any other Loan Document.

 

SECTION 2.21       Cash Receipts.

 

(a)           (i) Annexed hereto as Schedule
2.21(a)(i) is a list of all DDAs and accounts maintained by the Loan
Parties into which more than one DDA deposits or transfers funds (the “Concentration
Accounts”) as of the date hereof, which Schedule includes, with respect to
each Concentration Account depository (1) the name and address of that
depository; (2) the account number(s) maintained with such depository;
and (3) to the extent known, a contact person at such depository.

 

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

 

(b)           (i) Within 45 days after the
Effective Date, to the extent not previously furnished to the Agents, the Loan
Parties shall have entered into agency agreements with the banks maintaining
the Concentration Accounts, which agreements (the “Blocked Account
Agreements”) shall be in form and substance reasonably satisfactory to the
Administrative Agent.

 

(ii)           On the Effective Date, to the extent
not previously furnished to the Agents, the Loan Parties shall deliver to the
Administrative Agent notifications (the “Credit Card Notifications”)
executed on behalf of the Loan Parties to each of their major credit card
processors instructing such credit card processors to remit all proceeds of all
credit card charges to a Concentration Account. 
On the Effective Date, the Administrative Agent may deliver the Credit
Card Notifications to such credit card processors.

 

(iii)          The Blocked Account Agreements shall
provide that, after the occurrence and during the continuance of a Cash Control
Event, the Administrative Agent may, or at the request of the Required Lenders
shall, provide a notice to each bank (with a copy to the Borrowers) maintaining
a Concentration Account (an “Activation Notice”) requiring the sweep on
each Business Day of all available cash receipts and other proceeds from the
sale of Inventory, including, without limitation, the proceeds of all credit
card charges (all such cash receipts and proceeds, “Cash Receipts”), to
an account maintained by the Administrative Agent at Bank of America (the “Collection
Account”).  At such time as such Cash
Control Event no longer exists, the Activation Notice shall cease to be
effective and the Administrative Agent shall give notice thereof to each bank
maintaining a Concentration Account rescinding such Activation Notice
previously given to such bank. 
Furthermore, during the continuance of a Cash Control Event, the Loan
Parties shall cease making Permitted Investments and depositing amounts in the
Fidelity Investment Account or any other securities account (other than the
Term Securities Accounts) and shall sweep any and all proceeds thereof and
deposits therein to the Collection Account.

 

53

 

(c)           The Loan Parties may close Concentration
Accounts and/or open new Concentration Accounts, subject to the execution and
delivery to the Administrative Agent of appropriate Blocked Account Agreements
consistent with the provisions of this SECTION 2.21. The Loan Parties may
close DDAs and/or open new DDAs, subject to the Borrowers updating Schedule
2.21(a)(i) and otherwise complying with the terms of this Agreement.  The Loan Parties may not enter into any
agreement with any credit card processors unless contemporaneously therewith, a
Credit Card Notification is executed and delivered to the Administrative Agent.
The Loan Parties shall each cause each of their credit card processors to remit
all proceeds of all credit card charges to a Concentration Account.

 

(d)           The Collection Account is, and shall
remain, under the sole dominion and control of the Administrative Agent.  Each Loan Party acknowledges and agrees that (i) such
Loan Party has no right of withdrawal from the Collection Account, (ii) the
funds on deposit in the Collection Account, if any, shall continue to be
collateral security for all of the Obligations and (iii) the funds on
deposit in the Collection Account shall be applied as provided in SECTION 2.22(a).

 

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

 

(f)            So long as no Activation Notice
shall have been given and remain in effect, the Loan Parties may direct, and
shall have sole control over, the manner of disposition of the funds in the
Concentration Accounts.  After the
delivery of an Activation Notice and during the effectiveness thereof, the Loan
Parties shall cause the ACH or wire transfer to the Collection Account, no less
frequently than daily of the then contents of each Concentration Account, each
such transfer to be net of any minimum balance, not to exceed $10,000, as may
be required to be maintained in the subject Concentration Account by the bank
at which such Concentration Account is maintained, and, in connection with each
such transfer, the Loan Parties shall also provide the Administrative Agent
with an accounting of the contents of each Concentration Account.

 

In the event that,
notwithstanding the provisions of this SECTION 2.21, after the delivery of
an Activation Notice and during the effectiveness thereof, the Borrowers
receive or otherwise have dominion and control of any such proceeds or
collections, such proceeds and collections shall be held in trust by the Borrowers
for the Administrative Agent and shall not be commingled with any of the
Borrowers’ other funds or deposited in any account of any Borrower other than
as instructed by the Administrative Agent.

 

54

 

Effective upon delivery
of an Activation Notice to the Borrowers from the Administrative Agent (which
notice may be given by telephone if promptly confirmed in writing), after the
occurrence and during the continuation of a Cash Control Event, each Concentration
Accounts will, without any further action on the part of any Borrower or the
Administrative Agent convert into  closed
accounts under the exclusive dominion and control of the Administrative Agent
in which funds are held subject to the rights of the Administrative Agent
hereunder.  In such event, all amounts in
the Collection Account from time to time may be applied to the Obligations in
such order and manner as provided in SECTION 2.22 hereof.

 

SECTION 2.22       Application of Payments.

 

(a)           Subject to the provisions of SECTION 2.21,
as long as no Event of Default then exists, all amounts received in the
Collection Account from any source, including the Concentration Accounts, shall
be applied, on the day of receipt, in the following order: first, to pay
interest due and payable on Credit Extensions and to pay fees and expense
reimbursements and indemnification then due and payable to the Administrative
Agent, the Arrangers, the Issuing Banks, the Collateral Agent, the Co-Borrowing
Base Agents and the Lenders; second, to repay outstanding Swingline
Loans; third, to repay other outstanding Revolving Loans that are Base
Rate Loans and all outstanding reimbursement obligations under Letters of
Credit; fourth, to repay outstanding Revolving Loans that are LIBOR Loans
and all Breakage Costs due in respect of such repayment pursuant to SECTION 2.19(b) or,
at the Borrowers’ option, to fund a cash collateral deposit to the Cash
Collateral Account sufficient to pay, and with direction to pay, all such
outstanding LIBOR Loans on the last day of the then pending Interest Period
therefor; fifth, to pay all amounts then due for Cash Management
Services, sixth, to pay all amounts then due on account of Bank
Products, and seventh, to pay all other Obligations that are then outstanding
and then due and payable (it being understood that undrawn Letters of Credit
shall not be required to be cash collateralized if no Event of Default has
occurred and is continuing).  If all
amounts set forth in clauses first through and including seventh above are
paid, any excess amounts shall be deposited in the operating account of the
Borrowers maintained with the Administrative Agent.  Any other amounts received by the
Administrative Agent, any Issuing Bank, the Collateral Agent, or any Lender as
contemplated by SECTION 2.21 shall also be applied in the order set forth
above in this SECTION 2.22.

 

(b)           All credits against the Obligations
shall be effective on the day of receipt thereof, and shall be conditioned upon
final payment to the Administrative Agent of the items giving rise to such
credits.  If any item deposited to the
Collection Account and credited to the Loan Account is dishonored or returned
unpaid for any reason, whether or not such return is rightful or timely, the
Administrative Agent shall have the right to reverse such credit and charge the
amount of such item to the Loan Account and the Borrowers shall indemnify the
Administrative Agent, the Collateral Agent, each Co-Borrowing Base Agent, each
Issuing Bank and the Lenders against all claims and losses resulting from such
dishonor or return.

 

SECTION 2.23       Increased Costs.

 

(a)           If any Change in Law shall:

 

55

 

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

 

(ii)           subject
any Lender or any Issuing Bank to any tax of any kind whatsoever with respect
to this Agreement, any Letter of Credit, any participation in a Letter of
Credit or any LIBOR Loan made by it, or change the basis of taxation of
payments to such Lender or such Issuing Bank in respect thereof (except for
Indemnified Taxes or Other Taxes covered by SECTION 2.26 and the
imposition of, or any change in the rate of, any Excluded Taxes payable by such
Lender or such Issuing Bank); or

 

(iii)          impose
on any Lender or any Issuing Bank or the London interbank market any other
condition, cost or expense affecting this Agreement or LIBOR Loans made by such
Lender or any Letter of Credit or participation therein;

 

and the result of any of
the foregoing shall be to increase the cost to such Lender of making or
maintaining any LIBOR Loan (or of maintaining its obligation to make any such
Loan), or to increase the cost to such Lender or such Issuing Bank of
participating in, issuing or maintaining any Letter of Credit (or of maintaining
its obligation to participate in or to issue any Letter of Credit), or to
reduce the amount of any sum received or receivable by such Lender or such
Issuing Bank hereunder (whether of principal, interest or any other amount)
then, upon request of such Lender or such Issuing Bank, the Borrowers will pay
to such Lender or such Issuing Bank, as the case may be, such additional amount
or amounts as will compensate such Lender or such Issuing Bank, as the case may
be, for such additional costs incurred or reduction suffered.

 

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

 

(c)           A certificate of a Lender or any
Issuing Bank setting forth the amount or amounts necessary to compensate such
Lender or such Issuing Bank or its holding company, as the case may be, as
specified in subsection (a) or (b) of this SECTION 2.23 and delivered
to the Borrowers shall be conclusive absent manifest error.  The Borrowers shall pay such Lender or such
Issuing Bank, as the case may be, the amount shown as due on any such
certificate within 10 days after receipt thereof.

 

56

 

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

 

(e)           The Borrowers shall pay to each Lender,
as long as such Lender shall be required to maintain reserves with respect to
liabilities or assets consisting of or including Eurocurrency funds or deposits
(currently known as “Eurocurrency liabilities”), additional interest on the
unpaid principal amount of each LIBOR Loan equal to the actual costs of such
reserves allocated to such Loan by such Lender (as determined by such Lender in
good faith, which determination shall be conclusive), which shall be due and
payable on each date on which interest is payable on such Loan, provided the
Borrowers shall have received at least 10 days’ prior notice (with a copy to
the Administrative Agent) of such additional interest from such Lender.  If a Lender fails to give notice 10 days
prior to the relevant Interest Payment Date, such additional interest shall be
due and payable 10 days from receipt of such notice.

 

SECTION 2.24       Change in Legality.

 

(a)           Notwithstanding anything to the
contrary contained elsewhere in this Agreement, if (x) any Change in Law
shall make it unlawful for a Lender to make or maintain a LIBOR Loan or to give
effect to its obligations as contemplated hereby with respect to a LIBOR Loan
or (y) at any time any Lender determines that the making or continuance of
any of its LIBOR Loans has become impracticable as a result of a contingency
occurring after the date hereof which adversely affects the London interbank
market or the position of such Lender in the London interbank market, then, by
written notice to the Borrowers, such Lender may (i) declare that LIBOR
Loans will not thereafter be made by such Lender hereunder, whereupon any
request by the Borrowers for a LIBOR Borrowing shall, as to such Lender only,
be deemed a request for a Base Rate Loan unless such declaration shall be
subsequently withdrawn; and (ii) require that all outstanding LIBOR Loans
made by it be converted to Base Rate Loans, in which event all such LIBOR Loans
shall be automatically converted to Base Rate Loans as of the effective date of
such notice as provided in paragraph (b) below. 
In the event any Lender shall exercise its rights under clause (i) or
(ii) of this paragraph (a), all payments and prepayments of principal
which would otherwise have been applied to repay the LIBOR Loans that would
have been made by such Lender or the converted LIBOR Loans of such Lender shall
instead be applied to repay the Base Rate Loans made by such Lender in lieu of,
or resulting from the conversion of, such LIBOR Loans.

 

(b)           For purposes of this SECTION 2.24,
a notice to the Borrowers by any Lender pursuant to paragraph (a) above
shall be effective, if lawful, and if any LIBOR Loans shall then

 

57

 

be outstanding, on the last day of the then-current
Interest Period; and otherwise such notice shall be effective on the date of
receipt by the Borrowers.

 

SECTION 2.25       Payments; Sharing of Setoff.

 

(a)           The Borrowers shall make each payment
required to be made by it hereunder or under any other Loan Document (whether
of principal, interest, fees or reimbursement of drawings under Letters of
Credit, or of amounts payable under SECTION 2.19(b), SECTION 2.23 or SECTION 2.26,
or otherwise) prior to 12:00 noon on the date when due, in immediately
available funds, without setoff or counterclaim.  Any amounts received after such time on any
date may, in the discretion of the Administrative Agent, be deemed to have been
received on the next succeeding Business Day for purposes of calculating
interest thereon.  All such payments
shall be made to the Administrative Agent at its offices at 100 Federal
Street, Boston, Massachusetts, except payments to be made directly to the
applicable Issuing Bank or Swingline Lender as expressly provided herein and
except that payments pursuant to SECTION 2.19(b), SECTION 2.23, SECTION 2.26
and SECTION 9.3 shall be made directly to the Persons entitled thereto and
payments pursuant to other Loan Documents shall be made to the Persons
specified therein.  The Administrative
Agent shall distribute any such payments received by it for the account of any
other Person to the appropriate recipient promptly following receipt
thereof.  If any payment under any Loan
Document (other than payments with respect to LIBOR Borrowings) shall be due on
a day that is not a Business Day, the date for payment shall be extended to the
next succeeding Business Day, and, in the case of any payment accruing
interest, interest thereon shall be payable for the period of such
extension.  All payments under each Loan
Document shall be made in Dollars.

 

(b)           If at any time insufficient funds are
received by and available to the Administrative Agent to pay fully all amounts
of principal, unreimbursed drawings under Letters of Credit, interest and fees
then due hereunder, such funds shall be applied (i) first, towards payment
of interest and fees then due hereunder, ratably among the parties entitled
thereto in accordance with the amounts of interest and fees then due to such
parties, and (ii) second, towards payment of principal and unreimbursed
drawings under Letters of Credit then due hereunder, ratably among the parties
entitled thereto in accordance with the amounts of principal and unreimbursed
drawings under Letters of Credit then due to such parties.

 

(c)           If any Lender shall, by exercising
any right of setoff or counterclaim or otherwise, obtain payment in respect of
any principal of or interest on any of its Loans or participations in drawings
under Letters of Credit or Swingline Loans resulting in such Lender’s receiving
payment of a greater proportion of the aggregate amount of its Loans and
participations in drawings under Letters of Credit and Swingline Loans and
accrued interest thereon than the proportion received by any other Lender, then
the Lender receiving such greater proportion shall purchase (for cash at face
value) participations in the Loans and participations in drawings under Letters
of Credit and Swingline Loans of other Lenders to the extent necessary so that
the benefit of all such payments shall be shared by the Lenders ratably in accordance
with the aggregate amount of principal of and accrued interest on their
respective Loans and participations in drawings under Letters of Credit and
Swingline Loans, provided, that (i) if any such participations are
purchased and all or any portion of the payment giving rise thereto is
recovered, such participations shall be rescinded and the purchase price
restored to the extent of

 

58

 

such recovery, without interest, and (ii) the
provisions of this paragraph shall not be construed to apply to any payment
made by the Borrowers pursuant to and in accordance with the express terms of
this Agreement or any payment obtained by a Lender as consideration for the
assignment of or sale of a participation in any of its Loans or participations
in drawings under Letters of Credit to any assignee or participant, other than
to the Borrowers or any Affiliate thereof (as to which the provisions of this
paragraph shall apply).  The Borrowers
consent to the foregoing and agree, to the extent they may effectively do so
under applicable law, that any Lender acquiring a participation pursuant to the
foregoing arrangements may exercise against the Borrowers rights of setoff and
counterclaim with respect to such participation as fully as if such Lender were
a direct creditor of the Borrowers in the amount of such participation.

 

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

 

(e)           If any Lender shall fail to make any
payment required to be made by it pursuant to this Agreement, then the
Administrative Agent may, in its discretion (notwithstanding any contrary
provision hereof), apply any amounts thereafter received by the Administrative
Agent for the account of such Lender to satisfy such Lender’s obligations under
this Agreement until all such unsatisfied obligations are fully paid.

 

SECTION 2.26       Taxes.

 

(a)           Any and all payments by or on account
of any obligation of the Loan Parties hereunder or under any other Loan
Document shall be made free and clear of and without reduction or withholding
for any Indemnified Taxes or Other Taxes, provided that if the Loan Parties
shall be required by applicable law to deduct any Indemnified Taxes (including
any Other Taxes) from such payments, then (i) the sum payable shall be
increased as necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this SECTION 2.26(a))
the Administrative Agent, such Lender or such Issuing Bank, as the case may be,
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Loan Parties shall make such deductions and
(iii) the Loan Parties shall timely pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable law.

 

59

 

(b)           Without limiting the provisions of
subsection (a) above, the Loan Parties shall timely pay any Other Taxes to
the relevant Governmental Authority in accordance with applicable law.

 

(c)           The Loan Parties shall indemnify the
Administrative Agent, each Lender and each Issuing Bank, within 10 days after
demand therefor, for the full amount of any Indemnified Taxes or Other Taxes
(including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this SECTION 2.26) paid by the
Administrative Agent, such Lender or the Issuing Bank, as the case may be, and
any penalties, interest and reasonable expenses arising therefrom or with
respect thereto (other than penalties and interest arising from the gross
negligence or willful misconduct of the Administrative Agent, any Co-Borrowing
Base Agent, such Lender or the Issuing Bank, as applicable), whether or not
such Indemnified Taxes or Other Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority.  A certificate as to the amount of such
payment or liability delivered to the Loan Parties by a Lender or an Issuing
Bank (with a copy to the Administrative Agent), or by the Administrative Agent
on its own behalf or on behalf of a Lender or an Issuing Bank, shall be
conclusive absent manifest error.

 

(d)           As soon as practicable after any
payment of Indemnified Taxes or Other Taxes by the Loan Parties to a
Governmental Authority, the Loan Parties shall deliver to the Administrative
Agent the original or a certified copy of a receipt issued by such Governmental
Authority evidencing such payment, a copy of the return reporting such payment
or other evidence of such payment reasonably satisfactory to the Administrative
Agent.

 

(e)           Any Lender that is entitled to an
exemption from or reduction of withholding tax under the law of the
jurisdiction in which any Loan Party is resident for tax purposes, or any
treaty to which such jurisdiction is a party, with respect to payments
hereunder or under any other Loan Document shall deliver to the Loan Parties
(with a copy to the Administrative Agent), at the time or times prescribed by
applicable law or reasonably requested by the Loan Parties or the
Administrative Agent, such properly completed and executed documentation
prescribed by applicable law as will permit such payments to be made without
withholding or at a reduced rate of withholding.  Such delivery shall be provided on the
Effective Date and on or before such documentation expires or becomes obsolete
or after the occurrence of an event requiring a change in the documentation
most recently delivered.   In addition,
any Lender, if requested by the Loan Parties or the Administrative Agent, shall
deliver such other documentation prescribed by applicable law or reasonably
requested by the Loan Parties or the Administrative Agent as will enable the
Loan Parties or the Administrative Agent to determine whether or not such
Lender is subject to backup withholding or information reporting requirements.

 

Without limiting the generality of the foregoing, in
the event that any Loan Party is resident for tax purposes in the United
States, any Foreign Lender shall deliver to the Loan Parties and the
Administrative Agent (in such number of copies as shall be requested by the recipient)
on or prior to the date on which such Foreign Lender becomes a Lender under
this Agreement (and from time to time thereafter upon the request of the Loan
Parties or the Administrative Agent, but only if such Foreign Lender is legally
entitled to do so), whichever of the following is applicable:

 

60

 

(i)            duly
completed copies of Internal Revenue Service Form W-8BEN claiming
eligibility for benefits of an income tax treaty to which the United States is
a party,

 

(ii)           duly
completed copies of Internal Revenue Service Form W-8ECI,

 

(iii)          in
the case of a Foreign Lender claiming the benefits of the exemption for
portfolio interest under section 881(c) of the Code, (x) a
certificate to the effect that such Foreign Lender is not (A) a “bank”
within the meaning of section 881(c)(3)(A) of the Code, (B) a “10
percent shareholder” of the Loan Parties within the meaning of section
881(c)(3)(B) of the Code, or (C) a “controlled foreign corporation”
described in section 881(c)(3)(C) of the Code and (y) duly completed
copies of  Internal Revenue Service Form W-8BEN,
or

 

(iv)          any
other form prescribed by applicable law as a basis for claiming exemption from
or a reduction in United States Federal withholding tax duly completed together
with such supplementary documentation as may be prescribed by applicable law to
permit the Loan Parties to determine the withholding or deduction required to
be made.

 

(f)            If the Administrative Agent, any
Lender or any Issuing Bank determines, in its sole discretion, that it has
received a refund of any Taxes or Other Taxes as to which it has been
indemnified by the Loan Parties or with respect to which the Loan Parties have
paid additional amounts pursuant to this SECTION 2.26, it shall pay to the
Loan Parties an amount equal to such refund (but only to the extent of
indemnity payments made, or additional amounts paid, by the Loan Parties under
this SECTION 2.26 with respect to the Taxes or Other Taxes giving rise to
such refund), net of all out-of-pocket expenses of the Administrative Agent,
such Lender or such Issuing Bank, as the case may be, and without interest
(other than any interest paid by the relevant Governmental Authority with
respect to such refund), provided that the Loan Parties, upon the request of
the Administrative Agent, such Lender or such Issuing Bank, agree to repay the
amount paid over to the Loan Parties (plus any penalties, interest or other
charges imposed by the relevant Governmental Authority) to the Administrative
Agent, such Lender or such Issuing Bank in the event that the Administrative
Agent, such Lender or such Issuing Bank is required to repay such refund to
such Governmental Authority.  Upon
reasonable request of the Loan Parties, the Administrative Agent, Lenders, or
any Issuing Bank, as applicable, shall in its sole discretion exercised in good
faith, use reasonable efforts to cooperate with the Loan Parties with a view to
obtaining a refund of any taxes with respect to which any Loan Party has paid
any amount pursuant to this SECTION 2.26 and which such Loan Party
reasonably believes were not correctly or legally asserted by the relevant
Governmental Authority. This subsection shall not be construed to require the
Administrative Agent, any Lender or any Issuing Bank to make available its tax
returns (or any other information relating to its taxes that it deems
confidential) to the Loan Parties or any other Person.

 

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

 

61

 

SECTION 2.28       Mitigation Obligations; Replacement of
Lenders.

 

(a)           If any Lender requests compensation
under SECTION 2.23, or if any Lender is not required to make LIBOR Loans
under Section 2.24 or if the Borrowers are required to pay any additional
amount to any Lender or any Governmental Authority for the account of any
Lender pursuant to SECTION 2.26, then such Lender shall use reasonable
efforts to designate a different lending office for funding or booking its
Loans hereunder or to assign its rights and obligations hereunder to another of
its offices, branches or affiliates, if, in the reasonable judgment of such
Lender, such designation or assignment (i) would eliminate or reduce
amounts payable pursuant to SECTION 2.23 or SECTION 2.26 or would
permit such Lender to make LIBOR Loans, as the case may be, in the future and (ii) would
not subject such Lender to any material unreimbursed cost or expense and would
not otherwise be materially disadvantageous to such Lender.  The Borrowers hereby agree to pay all
reasonable costs and expenses incurred by any Lender in connection with any
such designation or assignment; provided, however, that the
Borrowers shall not be liable for such costs and expenses of a Lender
requesting compensation if (i) such Lender becomes a party to this
Agreement on a date after the Effective Date and (ii) the relevant Change
in Law occurs on a date prior to the date such Lender becomes a party hereto.

 

(b)           If any Lender requests compensation
under SECTION 2.23, or if any Lender is not required to make LIBOR Loans
under SECTION 2.24, or if the Borrowers are required to pay any additional
amount to any Lender or any Governmental Authority for the account of any
Lender pursuant to SECTION 2.26, or if any Lender is a Delinquent Lender,
then the Borrowers may upon notice to such Lender and the Administrative Agent
either (i) terminate the Commitment of such Lender or (ii) require
such Lender to assign and delegate, without recourse (in accordance with and
subject to the restrictions contained in SECTION 9.4), all its interests,
rights and obligations under this Agreement to an assignee that shall assume
such obligations (which assignee may be another Lender, if a Lender accepts
such assignment), provided, that (A) except in the case of an
assignment to another Lender, the Borrowers shall have received the prior
written consent of the Administrative Agent, which consent shall not
unreasonably be withheld, (B) such Lender shall have received payment of
an amount equal to the outstanding principal of its Loans and participations in
unreimbursed drawings under Letters of Credit and Swingline Loans, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder,
from the assignee (to the extent of such outstanding principal and accrued
interest and fees) or the Borrowers (in the case of all other amounts) and (C) in
the case of any such assignment resulting from a claim for compensation under SECTION 2.23
or payments required to be made pursuant to SECTION 2.26, such assignment
will result in a reduction in such compensation or payments.  A Lender shall not be required to make any such
assignment and delegation if, prior thereto, as a result of a waiver by such
Lender or otherwise, the circumstances entitling the Borrowers to require such
assignment and delegation cease to apply.

 

(c)           If any Issuing Bank fails, in its
discretion, to issue a Letter of Credit pursuant to SECTION 2.6(a), then
the Borrowers may, upon notice to such Issuing Bank and the Administrative
Agent, replace such Issuing Bank with a Lender (if agreed to by such Lender in
its sole discretion) selected by the Borrowers and approved by the
Administrative Agent in its reasonable discretion.

 

62

 

SECTION 2.29       Increase in Revolving Credit Facility.

 

(a)           Request for Increase Prior to
Maturity Date.  Prior to the Maturity
Date, provided no Default or Event of Default then exists or would arise
therefrom, upon notice to the Administrative Agent (which shall promptly notify
the Lenders), the Borrowers may from time to time, request an increase in the
Total Commitments by an amount (for all such requests) not exceeding
$100,000,000; provided that (i) any such request for an increase
shall be in a minimum amount of $10,000,000 and (ii) after giving effect
to any such increase, the Total Commitments shall not exceed $750,000,000.  At the time of sending such notice, the
Borrowers (in consultation with the Administrative Agent) shall specify the
time period within which each Lender is requested to respond (which shall in no
event be less than ten Business Days from the date of delivery of such notice
to the Lenders).

 

(b)           Request for Increase After
Maturity Date.  At any time and from
time to time on or after the Maturity Date and payment in full of all Loan
Agreement Obligations of the Non-Extending Lenders, provided no Default or Event
of Default then exists or would arise therefrom, upon notice to the
Administrative Agent (which shall promptly notify the Lenders), the Borrowers
may from time to time, request an increase in the Total Commitments by an
amount (for all such requests) not exceeding $100,000,000; provided that
(i) any such request for an increase shall be in a minimum amount of
$10,000,000 and (ii) after giving effect to any such increase, the Total
Commitments shall not exceed $750,000,000. 
At the time of sending such notice, the Borrowers (in consultation with
the Administrative Agent) shall specify the time period within which each
Lender is requested to respond (which shall in no event be less than ten
Business Days from the date of delivery of such notice to the Lenders).

 

(c)           Lender Elections to Increase.  Each Lender shall notify the Administrative
Agent within such time period whether or not it agrees to increase its
Commitment and, if so, whether by an amount equal to, greater than, or less
than its Commitment Percentage of such requested increase.  Any Lender not responding within such time
period shall be deemed to have declined to increase its Commitment.  No Lender shall be obligated to provide an
increase of its Commitment as a result of any such request by the Borrowers and
nothing contained herein shall constitute the unconditional obligation of the
Administrative Agent or any Lender to provide or obtain commitments for such
requested increase.

 

(d)           Notification by Administrative
Agent; Additional Lenders.  The
Administrative Agent shall notify the Borrowers and each Lender of the Lenders’
responses to each request made hereunder. 
To achieve the full amount of a requested increase, and subject to the
approval of the Administrative Agent (which approvals shall not be unreasonably
withheld), the Borrowers may also invite additional Persons to become Lenders
pursuant to a joinder agreement in form and substance satisfactory to the
Administrative Agent and its counsel.

 

(e)           Effective Date and Allocations.  If the Total Commitments are increased in
accordance with this Section, the Administrative Agent and the Borrowers shall
determine the effective date (the “Revolving Credit Increase Effective Date”) and the final allocation of such
increase.  The Administrative Agent shall
promptly notify the Borrowers and the Lenders of the final allocation of such
increase and the Revolving Credit Increase Effective Date. Each Extending
Lender agreeing to provide an increased Commitment and each additional Person
becoming Lenders shall be entitled to receive interest, letter of credit fees
and unused fees at the rates provided for Extending Lenders.  Moreover, that portion of the increased Commitment of

 

63

 

each Extending Lender and each such other Person (i) shall
terminate on the Extended Termination Date, and (ii) shall otherwise be on
the same terms as set forth in, and be entitled to the benefits of, this
Agreement and the other Loan Documents.

 

(f)            Conditions to Effectiveness of
Increase.  As a condition precedent
to such increase, the Borrowers shall deliver to the Administrative Agent a
certificate of each Borrower dated as of the Revolving Credit Increase
Effective Date (in sufficient copies for each Lender) signed by an authorized
officer of such Borrower (i) certifying and attaching the resolutions
adopted by such Borrower approving or consenting to such increase, and (ii) certifying
that, before and after giving effect to such increase, (A) the
representations and warranties made by such Borrower in Article III
and the other Loan Documents are true and correct on and as of the Revolving
Credit Increase Effective Date, other than representations and warranties that
relate solely to an earlier date (in which case they are true and correct as of
such earlier date) and except for changes thereto which are not prohibited by
the other terms of this Agreement or the other Loan Documents, and except that
for purposes of this Section 2.29, the representations and warranties
contained in subsections (a) of Section 3.4 shall be deemed to
refer to the most recent statements furnished pursuant to clause (a) of Section 5.1,
and (B) no Default exists.  The
Borrowers shall prepay any Revolving Loans outstanding on the Revolving Credit
Increase Effective Date (and pay any additional amounts required pursuant to Section 2.19(b))
to the extent necessary to keep the outstanding Revolving Loans ratable with
any revised Commitment Percentages arising from any nonratable increase in the
Commitments under this Section.  In
addition, the Borrowers shall pay such fees and other compensation as the
Borrowers, the Administrative Agent and each such Lender may agree.

 

SECTION 2.30       Canadian Loan Parties.       Following the Maturity Date, Zale may,
upon not less than 30 days’ notice to the Administrative Agent and the
Co-Borrowing Base Agents (or such shorter period as may be agreed by the
Administrative Agent and the Co-Borrowing Base Agents in their sole
discretion), request that the Administrative Agent and the Co-Borrowing Base
Agents consent (in their sole discretion) to the termination of each Canadian
Loan Party’s status as a Facility Guarantor and a Loan Party hereunder,
provided that, any such consent (if given) shall be conditioned upon, among
other terms, the satisfaction of the following: (a) all Letters of Credit
issued for the account of each Canadian Loan Party shall have expired or
terminated (or been collateralized in a manner satisfactory to the Issuing
Banks) and all Letter of Credit Outstandings with respect to all Letters of
Credit issued for the account of the Canadian Loan Parties have been reduced to
zero (or collateralized in a manner satisfactory to the Issuing Banks), as of
the effective date of such termination (unless such Obligations have been
assumed by a Borrower upon terms satisfactory to the Administrative Agent), (b) after
giving effect to such termination and to the release of the Liens held by the
Collateral Agent in the assets of the Canadian Loan Parties and the removal of
all assets of the Canadian Loan Parties from the Borrowing Base and all
component definitions thereof, Excess Availability shall not be less than
$100,000,000 and (c) the Term Loan has been paid in full and all Liens on,
and security interests in, the assets of the Canadian Loan Parties to secure
the Term Loan have been terminated and released to the reasonable satisfaction
of the Administrative Agent. The Administrative Agent will promptly notify the
Lenders of any such termination of the Canadian Loan Parties status as Facility
Guarantors and Loan Parties hereunder. Upon such termination, each Canadian
Loan Party shall be released from its obligations hereunder and under the Loan
Documents and the Administrative Agent and/or Collateral Agent shall, subject
to SECTION

 

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9.6, release all Liens on, and security interests held by them in, the
assets of the Canadian Loan Parties.

 

ARTICLE
III

REPRESENTATIONS AND WARRANTIES

 

Each
Loan Party, represents and warrants to the Agents and the Lenders that:

 

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

 

SECTION 3.2         Authorization; Enforceability.  The transactions contemplated hereby, by the
other Loan Documents and by the Co-Borrowing Base Agent Rights Agreement to be
entered into by each Loan Party are within such Loan Party’s corporate or
partnership powers and have been duly authorized by all necessary corporate or
partnership, and, if required, stockholder action.  This Agreement and the Co-Borrowing Base
Agent Rights Agreement have been duly executed and delivered by each Loan Party
that is a party hereto and thereto and constitutes, and each other Loan
Document to which any Loan Party is a party, when executed and delivered by
such Loan Party will constitute, a legal, valid and binding obligation of such
Loan Party (as the case may be), enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors’ rights generally and subject to general
principles of equity, regardless of whether considered in a proceeding in
equity or at law.

 

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

 

SECTION 3.4         Financial Condition. (a) There
have been furnished to each of the Lenders (i) consolidated balance sheets
of Zale and its Subsidiaries as of July 31, 2009, and a consolidated
statement of operations and consolidated statement of cash flow of Zale and its

 

65

 

Subsidiaries for the fiscal year then ended, certified by Ernst &
Young  and (ii) an unaudited consolidated
and consolidating balance sheet of Zale and its Subsidiaries as of January 31,
2010, and an unaudited consolidated statement of operations and consolidated
statement of cash flow of Zale and its Subsidiaries for the period then
ended.  Such balance sheets, statements
of operations and statements of cash flow have been prepared in accordance with
GAAP and fairly present in all material respects the financial condition of
Zale and its Subsidiaries as at the close of business on the dates thereof and
the results of operations for the periods then ended, subject, in the case of
such unaudited consolidated balance sheet, unaudited consolidated statement of
operations and unaudited consolidated statement of cash flow, to year-end
adjustments, and except that there are no notes to such financial
statements.  There are no contingent
liabilities that are likely to become fixed obligations of Zale or any of its
Subsidiaries as of such dates involving material amounts, known to the
Financial Officers of the Loan Parties, which were not disclosed in such
balance sheets and the notes related thereto.

 

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

 

(c)           From January 31, 2010, there has
been no event or occurrence which has had a Material Adverse Effect.

 

SECTION 3.5         Properties

 

(a)           As of the date hereof, the Loan
Parties and their Subsidiaries own all of the material assets reflected in the
consolidated balance sheet of Zale and its Subsidiaries as of January 31,
2010 or acquired since that date (except property or assets sold or otherwise
disposed of in the ordinary course of business and other property sold as
permitted by SECTION 6.5 hereof since that date), subject to no Liens
except Liens permitted by SECTION 6.2.

 

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

 

SECTION 3.6         Litigation and Environmental
Matters.

 

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

 

66

 

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

 

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

 

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

 

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

 

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

 

SECTION 3.10       ERISA; No Canadian Plans.

 

(a)           Each Plan and each Guaranteed Pension
Plan has been maintained and operated in compliance with the provisions of
ERISA and, to the extent applicable, the Code, including but not limited to the
provisions thereunder respecting prohibited transactions and the bonding of fiduciaries
and other persons handling plan funds as required by §412 of ERISA, except
where the failure to so comply would not reasonably be expected to have a
Material Adverse Effect.  The Borrowers
have heretofore delivered to the Administrative Agent the most recently
completed, prior to the date hereof, annual report, Form 5500, with all
required attachments, and actuarial statement required to be submitted under
§103(d) of ERISA, with respect to each Guaranteed Pension Plan.

 

(b)           Under each Plan which is an employee
welfare benefit plan within the meaning of §3(1) or §3(2)(B) of
ERISA, no benefits are due unless the event giving rise to the benefit
entitlement occurs prior to plan termination (except as required by Title I, Part 6
of ERISA).  One of the Loan Parties or an
ERISA Affiliate, as appropriate, may terminate each such Plan at any time (or
at any time subsequent to the expiration of any applicable bargaining
agreement) in

 

67

 

the discretion of such Loan Party or such ERISA
Affiliate without liability to any Person, except for benefit entitlements
which have accrued prior to such termination.

 

(c)           Each contribution required to be made
to a Guaranteed Pension Plan, whether required to be made to avoid the
incurrence of an accumulated funding deficiency, the notice or lien provisions
of §302(f) of ERISA, or otherwise, has been timely made.  No waiver of an accumulated funding
deficiency or extension of amortization periods has been received with respect
to any Guaranteed Pension Plan, and none of the Loan Parties nor any ERISA
Affiliate is obligated to or has posted security in connection with an
amendment to a Guaranteed Pension Plan pursuant to §307 of ERISA or §401(a)(29)
of the Code.  No liability to the PBGC
(other than required insurance premiums, all of which have been paid) has been
incurred by any Loan Party or any ERISA Affiliate with respect to any
Guaranteed Pension Plan and there has not been any ERISA Event (other than an
ERISA Event as to which the requirement of thirty (30) days notice has been
waived), or any other event or condition which presents a material risk of
termination of any Guaranteed Pension Plan by the PBGC.  Based on the latest valuation of each
Guaranteed Pension Plan (which in each case occurred within twelve months of
the date of this representation), and on the actuarial methods and assumptions
employed for that valuation, the aggregate benefit liabilities of all such
Guaranteed Pension Plans within the meaning of §4001 of ERISA did not exceed
the aggregate value of the assets of all such Guaranteed Pension Plans,
disregarding for this purpose the benefit liabilities and assets of any
Guaranteed Pension Plan with assets in excess of benefit liabilities, by more
than $1,000,000.

 

(d)           None of the Loan
Parties nor any ERISA Affiliate has incurred any material liability (including
secondary liability) to any Multiemployer Plan as a result of a complete or
partial withdrawal from such Multiemployer Plan under §4201 of ERISA or as a
result of a sale of assets described in §4204 of ERISA.  None of the Loan Parties nor any ERISA
Affiliate has been notified that any Multiemployer Plan is in reorganization or
insolvent under and within the meaning of §4241 or §4245 of ERISA or is at risk
of entering reorganization or becoming insolvent, or that any Multiemployer
Plan intends to terminate or has been terminated under §4041A of ERISA.

 

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

 

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

 

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

 

68

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

69

 

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

 

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

 

SECTION 3.14       Accounts; Credit Cards.

 

(a)           Schedule 2.21(a)(i) lists all
DDAs and Concentration Accounts maintained by any of the Loan Parties or their
Subsidiaries as of the Effective Date, and such Schedule correctly identifies
the name and address of each depository, the account number(s) maintained
with such depository, and to the extent known, a contact person at such
depository.

 

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

 

SECTION 3.15       Labor Matters.  As of the Effective Date, there are no
strikes, lockouts or slowdowns against any Loan Party or any Subsidiary thereof
pending or, to the knowledge of the Borrowers, threatened.  The hours worked by and payments made to
employees of the Loan Parties and their Subsidiaries have not been in violation
of the Fair Labor Standards Act or any other applicable federal, state,
provincial, municipal, local or foreign law dealing with such matters to the
extent that any such violation could reasonably be expected to have a Material
Adverse Effect.  All material payments
due from any Loan Party or any Subsidiary thereof, or for which any claim may
be made against any such Person, on account of wages and employee health and
welfare insurance and other benefits, have been paid or accrued as a liability
on the books of such member.  The
consummation of the transactions contemplated by the Loan Documents will not
give rise to any right of termination or right of renegotiation on the part of
any union under any collective bargaining agreement to which any Loan Party or
any Subsidiary thereof is bound.

 

SECTION 3.16       Security Documents.  The Security Documents create in favor of the
Collateral Agent, for the ratable benefit of the Secured Parties, a legal,
valid and enforceable security interest in the Collateral, and the Security
Documents constitute, or will upon the filing of Uniform Commercial Code, PPSA
and PRUCC financing statements or equivalent forms and the obtaining of “control”,
in each case with respect to the relevant Collateral as required under the
applicable Uniform Commercial Code, PPSA and PRUCC, the creation of a fully
perfected

 

70

 

first priority Lien on, and security interest in, all right, title and
interest of the Loan Parties thereunder in such Collateral, in each case prior
and superior in right to any other Person, except as permitted hereunder or
under any other Loan Document or as provided by applicable law.

 

SECTION 3.17       Federal Reserve Regulations.  Neither the Loan Parties nor any of their
respective Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of buying or
carrying Margin Stock.  No part of the
proceeds of any Loan or any Letter of Credit will be used, whether directly or
indirectly, and whether immediately, incidentally or ultimately, (i) to
buy or carry Margin Stock or to extend credit to others for the purpose of
buying or carrying Margin Stock or to refund indebtedness originally incurred
for such purpose or (ii) for any purpose that entails a violation of, or
that is inconsistent with, the provisions of the Regulations of the Board,
including Regulations U or X.

 

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

 

SECTION 3.19       Foreign Assets Control Regulations,
Etc.

 

None
of the requesting or borrowing of the Loans, the requesting or issuance,
extension or renewal of any Letters of Credit or the use of the proceeds of any
thereof will violate the Trading With the Enemy Act (50 U.S.C. § 1 et seq., as
amended) (the “Trading With the Enemy Act”) or any of the foreign assets
control regulations of the United States Treasury Department (31 CFR, Subtitle
B, Chapter V, as amended) (the “Foreign Assets Control Regulations”) or
any enabling legislation or executive order relating thereto (which for the
avoidance of doubt shall include, but shall not be limited to (a) Executive
Order 13224 of September 21, 2001 Blocking Property and Prohibiting
Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism
(66 Fed. Reg. 49079 (2001)) (the “Executive
Order”) and (b) the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (Public Law 107-56)).  Furthermore, none of the Loan Parties nor any
of their respective Subsidiaries or other Affiliates (a) is or will become
a “blocked person” as described in the Executive Order, the Trading With the
Enemy Act or the Foreign Assets Control Regulations or (b) engages or will
engage in any dealings or transactions, or be otherwise associated, with any
such “blocked person”.

 

SECTION 3.20       Excluded
Subsidiaries.  No Excluded Subsidiary
owns or has rights in any credit card receivables, Inventory generally
consisting of watches, gemstones, jewelry and giftware or other Eligible
Inventory, or the proceeds of any of the foregoing.

 

SECTION 3.21       ZC Partnership. The ZC Partnership
has no outstanding Indebtedness or other material obligations and no assets
other than Investments in Zale Canada Co. permitted hereunder.

 

71

 

ARTICLE
IV

CONDITIONS

 

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

 

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

 

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

 

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

 

(d)           After giving effect to any of the
Loans to be made on, or immediately subsequent to, the Effective Date and all
Letters of Credit to be issued (or deemed issued) at, or immediately subsequent
to, the Effective Date, Excess Availability shall be not less than
$200,000,000.  The Administrative Agent
and each Co-Borrowing Base Agent shall have received a Borrowing Base
Certificate dated the Effective Date, relating to the month ended on March 31,
2010 (but the amount of the Loan Agreement Obligations shall be as of May 10,
2010), and executed by a Financial Officer of Zale.

 

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

 

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

 

(g)           Lenders having Commitments (including
Seasonal Commitments) aggregating more than $500,000,000 shall have become
Extending Lenders.

 

(h)           The Borrowers shall have received at
least $150,000,000 of gross proceeds from the Term Loan and the Intercreditor
Agreement shall have been executed and in full force and effect. The
Intercreditor Agreement and all other documents, instruments and agreements
evidencing, guaranteeing, or securing the Term Loan shall be generally
consistent with terms

 

72

 

previously disclosed to the Co-Borrowing Base Agents
and shall be otherwise reasonably satisfactory in form and substance to the
Administrative Agent and the Co-Borrowing Base Agents.

 

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

 

(j)            The Administrative Agent shall have
received and be satisfied with detailed financial projections and business
assumptions for Zale and its Subsidiaries (x) a monthly basis for the
twelve month period following the Effective Date, and (y) on an annual
basis for each fiscal year thereafter through the Extended Term Maturity Date,
including, in each case, a consolidated income statement, balance sheet,
statement of cash flows and the Borrowing Base availability analysis, giving
pro forma effect to the Term Loan.

 

(k)           No event shall have occurred after January 31,
2010 that could reasonably be expected to have a Material Adverse Effect.

 

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

 

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

 

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

 

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

 

(p)           No material changes in governmental
regulations or policies affecting the Loan Parties, the Agents, the Arrangers
or any Lender involved in this transaction shall have occurred

 

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prior to the Effective Date which could, individually
or in the aggregate, materially adversely affect the transaction contemplated
by this Agreement.

 

(q)          The Administrative Agent shall have
received a certificate of Zale stating that the representations and warranties
made by the Loan Parties to the Agents and the Lenders in the Loan Documents
are true and correct in all material respects as of the date of such
Certificate, and that no event has occurred which is or which, solely with the
giving of notice or passage of time (or both) would be an Event of Default.

 

(r)           There shall be no Default or Event of
Default on the Effective Date.

 

(s)           There shall have been delivered to
the Administrative Agent such additional instruments and documents as the
Administrative Agent or counsel to the Administrative Agent may reasonably
require or request.

 

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

 

SECTION 4.2         Conditions Precedent to Each Loan
and Each Letter of Credit.  In
addition to those conditions described in SECTION 4.1, the obligation of
the Lenders to make any Loan and of the Issuing Banks to issue, amend, renew,
extend or increase each Letter of Credit, is subject to the following
conditions precedent:

 

(a)           Notice.  The Administrative Agent shall have received
a notice with respect to such Borrowing or issuance, as the case may be, as
required by Article II.

 

(b)           Representations and Warranties.  All representations and warranties contained
in this Agreement and the other Loan Documents or otherwise made in writing in
connection herewith or therewith shall be true and correct in all material
respects on and as of the date of each Borrowing or the issuance, amendment,
renewal, extension or increase of a Letter of Credit hereunder with the same
effect as if made on and as of such date, other than representations and
warranties that relate solely to an earlier date and except for changes thereto
which are not prohibited by the other terms of this Agreement or the other Loan
Documents.

 

(c)           No Default.  On the date of each Borrowing hereunder and
the issuance, amendment, renewal, extension or increase of each Letter of
Credit, no Default or Event of Default shall have occurred and be continuing.

 

(d)           Borrowing Base Certificate.  The Administrative Agent shall have received
the  most recently required Borrowing
Base Certificate.

 

The request by the
Borrowers for, and the acceptance by the Borrowers of, each extension of credit
hereunder shall be deemed to be a representation and warranty by the Borrowers
that the conditions specified in this SECTION 4.2 have been satisfied at
that time and that after giving effect to such extension of credit the
aggregate of all Credit Extensions shall not exceed the amounts set forth in Section 2.1(a) hereof.  The conditions set forth in this SECTION 4.2
are for the sole benefit of the Administrative Agent, each Issuing Bank and
each Lender and 

 

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may be waived by
the Administrative Agent in whole or in part without prejudice to the
Administrative Agent or any Lender.

 

ARTICLE
V

AFFIRMATIVE COVENANTS

 

So long as any Lender shall have any outstanding
Commitment hereunder, any Letter of Credit is outstanding, or any Loan or any
other Loan Agreement Obligation hereunder shall remain unpaid or unsatisfied
(other than contingent indemnification claims for which a claim has not then
been asserted), each
Loan Party covenants and agrees with the Agents, the Issuing Banks and the
Lenders that:

 

SECTION 5.1         Financial Statements and Other
Information.  The Borrowers will
furnish to the Administrative Agent (and, in the case of SECTION 5.1(f),
(g), (h) and (i), the Co-Borrowing Base Agents):

 

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

 

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

 

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

 

(d)           (i) concurrently with any
delivery of financial statements under clause (a), (b) or (c) above
a certificate of a Financial Officer of Zale (A) certifying as to whether
a Default or 

 

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Event of Default has occurred and, if a Default has
occurred, specifying the details thereof and any action taken or proposed to be
taken with respect thereto, (B) stating whether any change in GAAP or in
the application thereof has occurred since the date of Zale’s audited financial
statements referred to in SECTION 3.4 and, if any such change has
occurred, specifying the effect of such change on the financial statements
accompanying such certificate and (C) a compliance certificate, certified
by a Financial Officer of Zale, setting forth in reasonable detail the
computation of the Fixed Charge Coverage Ratio (even if compliance with Section 6.8
is not then required), and (ii) within three (3) Business Days after
the occurrence of a Cash Control Event, a compliance certificate, certified by
a Financial Officer of Zale, setting forth in reasonable detail the computation
evidencing compliance with Section 6.8 based upon the most recent monthly
financial statements delivered in accordance with clause (c) above.

 

(e)           on the last day of each fiscal year
of Zale, (i) a detailed consolidated budget by quarter for the immediately
following fiscal year (including a projected consolidated balance sheet and
related statements of projected operations and cash flow as of the end of and
for such fiscal year) and (ii) a monthly detail of projected Inventory
levels and Credit Extensions and the projected Borrowing Base and Excess
Availability for such fiscal year; and, promptly when available, any
significant revisions to the budget and the projections; provided that,
the Borrowers shall, by no later than February 15th of each
calendar year, reforecast and update the projections delivered pursuant to the
foregoing clauses (i) and (ii) for the remaining period of each such
fiscal year;

 

(f)            except as provided below, within
fifteen (15) days after the end of each month, a certificate in the form of Exhibit D
(a “Borrowing Base Certificate”) showing the Borrowing Base as of the
close of business on the last day of the immediately preceding month, each such
Certificate to be certified as complete and correct on behalf of the Borrowers
by a Financial Officer of Zale, provided, however, (i) for the
period of November 30 of each year through January 15 of the
subsequent year, such Borrowing Base Certificate (showing the Borrowing Base as
of the close of business on the last day of the immediately preceding week)
shall be furnished weekly on Wednesday of each week, (ii) if, (A) Excess
Availability is less than $75,000,000 at any time, or (B) an Event of
Default exists, such Borrowing Base Certificate (showing the Borrowing Base as
of the close of business on the last day of the immediately preceding week)
shall be furnished weekly on Wednesday of each week; and (iii) if the
Borrowers notify the Administrative Agent in writing that the Borrowers have
elected, during any period of any year other than the periods set forth in
clauses (i) and (ii) above, to furnish Borrowing Base Certificates on
a weekly basis, such Borrowing Base Certificate (showing the Borrowing Base as
of the close of business on the last day of the immediately preceding week)
shall be furnished weekly on Wednesday of each week from the date of such
notice and continuing during the entire ninety (90) day period thereafter;

 

(g)           Reserved;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

SECTION 5.2         Notices of Material Events.  The Borrowers will furnish to the
Administrative Agent, the Issuing Banks, the Collateral Agent, the Co-Borrowing
Base Agents and each Lender written notice of the following promptly following
a Responsible Officer’s obtaining knowledge thereof:

 

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

 

(b)           the filing or commencement of any
action, suit or proceeding by or before any arbitrator or Governmental
Authority against or affecting any Loan Party thereof that, if adversely
determined, could reasonably be expected to result in a Material Adverse
Effect;

 

77

 

(c)           the occurrence of any material
violation of any applicable Environmental Law that any of the Loan Parties
reports in writing or is reportable by such Person in writing (or for which any
written report supplemental to any oral report is made) to any U.S. and any
foreign federal, state or local environmental agency which violation could
reasonably be expected to result in a Material Adverse Effect;

 

(d)           the occurrence of any ERISA Event
that, alone or together with any other ERISA Events that have occurred (or
similar event or events in respect of any Canadian Plans), could reasonably be
expected to result in a Material Adverse Effect occurrence of certain events
related to Canadian Plans, if applicable;

 

(e)           any other development that results
in, or could reasonably be expected to result in, a Material Adverse Effect;
and

 

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

 

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

 

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

 

SECTION 5.4         Existence; Conduct of Business.

 

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

 

78

 

franchises, patents,
copyrights, trademarks and trade names material to the conduct of its business.

 

SECTION 5.5         Payment of Obligations.

 

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

 

SECTION 5.6         Maintenance of Properties.

 

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

 

SECTION 5.7         Insurance.

 

(a)           Each Loan Party will maintain the
following insurance under this Agreement (or, to the extent consistent with
prudent business practice, a program of self insurance): (i) worker’s
compensation and employer’s liability insurance affording (A) protection under
the workers’ compensation laws of the state(s) or province(s) in
which the service is to be provided and (B) employers’ liability protection
subject to a limit of not less than $500,000; (ii) comprehensive
automobile liability insurance providing limits of not less than $2,000,000
each occurrence for bodily injury and property damage combined; (iii) commercial
general liability insurance providing not less than $2,000,000 each occurrence
for bodily injury and property damage combined; and (iv) umbrella
liability insurance in amounts not less than $3 million in excess of primary
liability coverage.  All such insurance
policies required to be maintained under this Agreement shall be procured from
insurance companies rated at least A-VIII or better by the then current edition
of Best’s Insurance Reports published by A.M. Best Co.  The Borrowers shall provide Administrative
Agent with certificates of insurance evidencing the required coverage
concurrently with the execution of this Agreement and upon each renewal of such
policies thereafter, and, in addition to the notices required under Section 5.7(b),
the Loan Parties shall furnish prompt written notice of any material change or
cancellation of such policies.  Each of
the Loan Parties will maintain with financially sound and reputable insurers
insurance with 

 

79

 

respect to the Collateral and its other properties
against such casualties as shall be consistent with past practices and in
accordance with the general practices of businesses engaged in similar
activities in similar geographic areas and in amounts, containing such terms,
in such forms and for such periods as may be reasonable and prudent.

 

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

 

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

 

SECTION 5.8         Casualty and Condemnation.

 

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

 

SECTION 5.9         Books and Records; Inspection and Audit
Rights; Appraisals; Consultants for the Agents and Lenders

 

(a)           Each Loan Party will, and will cause
each of its Subsidiaries to, keep proper books of record and account in which
full, true and correct entries are made of all dealings and transactions in
relation to its business and activities. Each Loan Party will, and will cause
each of its Subsidiaries to, permit any representatives designated by any
Agent, upon reasonable prior notice, to visit and inspect its properties, to
examine and make extracts from its books and records, and to discuss its
affairs, finances and condition with its officers and independent accountants,
all at such reasonable times and as often as reasonably requested.

 

80

 

(b)           Each Loan Party will from time to
time upon such Loan Party’s election or the reasonable request of the
Administrative Agent, any Co-Borrowing Base Agent (after consultation with the
Administrative Agent) or the Required Lenders through the Administrative Agent,
permit any Agent or professionals (including investment bankers, consultants,
accountants, lawyers and appraisers) retained (in all events) by the
Administrative Agent to conduct appraisals, commercial finance examinations and
other evaluations, including, without limitation, of (i) the Loan Parties’
practices in the computation of the Borrowing Base and (ii) the assets
included in the Borrowing Base and related financial information such as, but
not limited to, sales, gross margins, payables, accruals and reserves, and pay
the reasonable fees and expenses of the Administrative Agent or such
professionals with respect to such evaluations and appraisals; provided,
however, so long as there exists no Event of Default, the Loan Parties
shall not be required to pay for more than three (3) Inventory appraisals
and three (3) commercial finance examinations during any period of twelve
(12) consecutive fiscal months; provided that from and after the date
that the Borrowers’ Fixed Charge Ratio for any Measurement Period is greater
than or equal to 1.1:1.0, as long as Excess Availability is not less than
$75,000,000 for any five (5) consecutive days, the Loan Parties shall not
be required to pay for more than two (2) Inventory appraisals and two (2) commercial
finance examinations during any period of twelve (12) consecutive fiscal
months; provided further that, in all events, any appraisal, commercial
finance examination and other evaluation conducted upon the election of any
Loan Party, shall be at the sole cost and expense of the Loan Parties and shall
not count towards the number of Inventory appraisals and commercial finance
examinations for which the Loan Parties are required to pay as set forth
above.  In addition to the foregoing, the
Administrative Agent, acting on its own behalf or at the direction of any
Co-Borrowing Base Agent (after consultation with the Administrative Agent), (A) may,
at any time, undertake additional Inventory appraisals and commercial finance
examinations at the sole expense of the Lenders, and (B) after the
occurrence and during the continuance of any Default or Event of Default, may
cause such additional Inventory appraisals and commercial finance examinations
to be taken as the Administrative Agent or any Co-Borrowing Base Agent (after
consultation with the Administrative Agent) determines, all at the expense of
the Loan Parties.

 

(c)           The Administrative Agent or its
counsel may retain any Person the Administrative Agent and the Lenders deem
appropriate, as consultant for the Administrative Agent and the Lenders, to
assist them in connection with the administration and enforcement of this
Agreement, including, without limitation, the analysis of all financial
information and business plans prepared by the Loan Parties.  The Loan Parties shall reasonably cooperate
with such consultants in order that they may fulfill their obligations under
the terms of their engagement.  Without
limiting the provisions of Section 9.3 hereof, the Borrowers shall
reimburse the Administrative Agent and the Lenders for all fees and expenses
incurred by any such consultants. 
Notwithstanding the Borrowers’ obligations to so reimburse the
Administrative Agent, the Borrowers acknowledge and agree that the Loan Parties
are not entitled to receive or review any work product prepared by any such
consultants and that such work product is for the sole and exclusive benefit of
the Agents and the Lenders.  If,
notwithstanding the foregoing, any of such work product is furnished to any of
the Loan Parties, such Loan Parties shall maintain such work product as
confidential and may not disclose such work product in connection with any
litigation or dispute amongst the parties hereto or otherwise.  The receipt by the Loan Parties of any such
work product on any one occasion shall not obligate the consultants or any
other Person to furnish any work product on any other occasion.

 

81

 

SECTION 5.10       Compliance with Laws.

 

Each Loan Party will, and
will cause each of its Subsidiaries to, comply with all laws, rules,
regulations, and orders of any Governmental Authority applicable to it or its
property except where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect.

 

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

 

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

 

SECTION 5.13       New Subsidiaries.

 

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

 

SECTION 5.14       Further Assurances.

 

Each Loan Party will execute any and all further
documents, agreements and instruments, and take all such further actions
(including the filing and recording of financing statements and other
documents), that may be required under any applicable law, or which any Agent,
any Co-Borrowing Base Agent or the Required Lenders may reasonably request, to
effectuate the transactions contemplated by the Loan Documents or to grant,
preserve, protect or perfect the Liens created or intended to be created by the
Security Documents or the validity or priority of any such Lien, all at the
expense of the Loan Parties. The Loan Parties also agree to provide to the
Agents, from time to time upon request, evidence reasonably satisfactory to the
Agents as to 

 

82

 

the perfection and
priority of the Liens created or intended to be created by the Security
Documents.

 

SECTION 5.15       Private Label Credit Cards

 

The Borrowers shall enter
into an agreement to replace their existing domestic private label credit card
facility with Citibank, N.A. or its Affiliates (with a processor and on terms
reasonably satisfactory to the Administrative Agent, whose consent shall not be
unreasonably withheld) at least 30 days prior to the earlier of: (i) the
scheduled expiration of such facility, or (ii) any earlier termination
thereof.

 

ARTICLE
VI

NEGATIVE COVENANTS

 

So long as any Lender
shall have any outstanding Commitment hereunder, any Letter of Credit is
outstanding or any Loan or any other Loan Agreement Obligation hereunder shall
remain unpaid or unsatisfied (other than contingent indemnification claims for
which a claim has not then been asserted), each Loan Party covenants and agrees
with the Agents and the Lenders that:

 

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

 

(a)           Indebtedness created under the Loan
Documents;

 

(b)           Indebtedness set forth in Schedule
6.1 and extensions, renewals and replacements of any such Indebtedness that do
not increase the outstanding principal amount thereof or result in an earlier
maturity date or decreased weighted average life thereof;

 

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

 

(d)           Indebtedness of any of the Borrowers
to any Excluded Subsidiary in an aggregate amount of all such Indebtedness for
all Excluded Subsidiaries not to exceed $10,000,000;

 

(e)           So long as the Intercreditor
Agreement is in effect, Indebtedness on account of the Term Loan (including the
accrual of interest and the accretion or amortization of original issue
discount (as applicable) on such Indebtedness and the payment of interest in
the form of additional Indebtedness originally incurred on the Term Loan) and
any Permitted Refinancing thereof;

 

(f)            Indebtedness of any Loan Party to
finance the acquisition of any fixed or capital assets, including Capital Lease
Obligations and any Indebtedness assumed in connection with the acquisition of
any such assets or secured by a Lien on any such assets prior to the
acquisition thereof, and extensions, renewals and replacements of any such
Indebtedness that do not increase the outstanding principal amount thereof or
result in an earlier maturity date or decreased 

 

83

 

weighted average life thereof, provided, that
the aggregate principal amount of Indebtedness permitted by this clause (f) shall
not exceed $50,000,000 at any time outstanding;

 

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

 

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

 

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

 

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

 

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

 

(l)            Indebtedness of Zale Canada Co. to
ZC Partnership consistent with past practice; and

 

(m)          other unsecured Indebtedness in an
aggregate principal amount not exceeding $150,000,000 at any time outstanding, provided,
that the terms of such Indebtedness do not contain any covenants or events of
default which may be interpreted to be or are deemed to be in, the reasonable
discretion of the Administrative Agent, more restrictive than the covenants and
Events of Default contained in this Agreement.

 

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

 

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

 

(a)           Liens created under the Loan
Documents;

 

(b)           Permitted Encumbrances;

 

84

 

(c)           any Lien on any property or asset of
any Loan Party set forth in Schedule 6.2, and any extensions or renewals
thereof; provided, that (i) such Lien shall not apply to any other
property or asset of any Loan Party other than after-acquired property affixed
or incorporated thereto and the proceeds or products thereof, and (ii) such
Lien shall secure only those obligations (including commitments in respect
thereof) that it secures as of the Effective Date, and any Permitted
Refinancing thereof;

 

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

 

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

 

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

 

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

 

(h)           Liens (if any) in favor of any credit
card processor on any credit card receivables in the nature of chargebacks or
reserves for claims, credits or credits pending, promotional program
allowances, price adjustments, finance charges or other allowances, to the
extent arising under or in connection with the Loan Parties’ private label
credit card facility, as amended or restated from time to time, and any
replacement facilities thereof and any proceeds of the foregoing;

 

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

 

(j)            Liens securing the Term Loan and any
Permitted Refinancings thereof, if and for so long as the Intercreditor
Agreement is in effect;

 

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

 

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

 

85

 

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

 

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

 

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

 

SECTION 6.3         Fundamental Changes

 

(a)           The Loan Parties will not merge into,
amalgamate or consolidate with any other Person, or permit any other Person to
merge into, amalgamate or consolidate with it, or liquidate or dissolve, except
that, if at the time thereof and immediately after giving effect thereto, no
Default or Event of Default shall have occurred and be continuing, (i) any
Subsidiary may merge into or amalgamate with a Loan Party in a transaction in
which such Loan Party is the surviving corporation, (ii) any Loan Party
may merge or amalgamate with any other Person as long as such Loan Party is the
surviving corporation, and (iii) any Subsidiary that is not a Loan Party
may merge into or amalgamate with any other Subsidiary that is not a Loan
Party, provided, that any such merger or amalgamate involving a Person
that is not a wholly owned Subsidiary immediately prior to such merger or amalgamate
shall not be permitted unless also permitted by SECTION 6.4.

 

(b)           The Loan Parties will not engage to
any material extent in any business other than businesses of the type conducted
by the Loan Parties on the date of execution of this Agreement and businesses
reasonably related thereto.

 

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

 

(a)           Permitted Investments;

 

(b)           investments existing on the Effective
Date, and set forth on Schedule 6.4, and any modification, renewal or
extension thereof; provided that the amount of any investment permitted
pursuant to this clause is not increased from the amount of such investment on
the 

 

86

 

Effective Date except pursuant to the terms of such
investment as of the Effective Date or as otherwise permitted by this SECTION 6.4;

 

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

 

(d)           loans, advances, or other investments
by any of the Loan Parties to or in, and guaranties by any Loan Party of the
obligations of, any of its respective Subsidiaries or purchases by a Loan Party
of stock of any Subsidiary or of assets constituting a business unit of a
Subsidiary, all in an amount not to exceed $20,000,000 in the aggregate for all
such loans, advances, guaranties, stock or asset purchases or other investments
made since the Closing Date;

 

(e)           Reserved;

 

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

 

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

 

(h)           investments consisting of promissory
notes received as proceeds of asset dispositions permitted by SECTION 6.5;

 

(i)            Reserved;

 

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

 

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

 

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

 

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

 

(n)           acquisitions of assets or stock
(other than the stock of any of the Loan Parties) so long as (i) such
assets or stock acquired are related to the business of one of the Loan Parties
or their Subsidiaries, (ii) the Payment Conditions are satisfied at the
time of and after giving effect 

 

87

 

to such acquisition, and (iii) with respect to
any such acquisitions of stock, simultaneously with the occurrence of such
acquisition, the entity so acquired shall if it owns Inventory (A) be
merged, amalgamated or consolidated with and into one of the Loan Parties, (B) transfer
all of its assets (other than those required to satisfy liabilities) to the
Loan Parties, or (C) become a Loan Party under this Agreement and the other Loan
Documents in accordance with Section 5.13 hereof;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(x)            Contingent obligations under leases
transferred as part of the sale of the Bailey Banks & Biddle division
of Zale Delaware; and

 

(y)           Other investments in an aggregate
amount not to exceed $5,000,000.

 

Notwithstanding anything in this Agreement to the
contrary, (a) exclusive of Indebtedness of Zale Canada Co. to ZC
Partnership permitted hereunder and contractual
liability 

 

88

 

insurance policies incurred in the ordinary course
of business, the aggregate outstanding amount of any and all transactions between
any or all of the Loan Parties, on the one hand, and any or all of the Excluded
Subsidiaries, on the other hand, that are covered by any of the clauses (a) through
(y) of this SECTION 6.4 shall not exceed $10,000,000 at any one time,
(b) in no event may proceeds of the ABL Priority Collateral be invested in
Permitted Investments or otherwise deposited in securities accounts, in each
case other than those Permitted Investments and deposits maintained in the
Fidelity Investment Account and in the Term Securities Accounts, and (c) the
Loan Parties shall cause the ZC Partnership not to make any Investments in any
other Person, other than Investments in Zale Canada Co. consistent with past
practice and otherwise permitted hereunder.

 

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

 

(i)            (A) sales
of Inventory in the ordinary course of business (other than in connection with
the closure of Stores), or (B) used or surplus equipment, or (C) Permitted
Investments and investments permitted pursuant to Sections 6.4(g), (h), (i),
and (j), in each case in the ordinary course of business;

 

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

 

(iii)          Reserved;

 

(iv)          Reserved;

 

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

 

(vi)          the
natural expiration of intellectual property licenses in accordance with the
terms thereof;

 

(vii)         transfers
of assets permitted as investments under Section 6.4;

 

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

 

(ix)           bulk
sales or other dispositions of the Loan Parties’ Inventory and Store fixtures
not in the ordinary course of business in connection with Store closures, at
arm’s length; provided  that such Store closures and related
Inventory dispositions shall not exceed (i) for the first twelve months
after the Effective Date, 200 of the Loan Parties’ Stores on terms and subject
to conditions to be agreed by the Borrowers and the Administrative Agent and
the Co-Borrowing Base Agents, and (ii) thereafter, in any 

 

89

 

fiscal year of the Borrowers, ten percent (10%) of the number of the
Loan Parties’ Stores as of the beginning of such fiscal year (net of new Store
openings) on terms and subject to conditions to be agreed by the Borrowers and
the Administrative Agent and the Co-Borrowing Base Agents and (iii) in the
aggregate from and after the first anniversary of the Effective Date,
twenty-five percent (25%) of the number of the Loan Parties’ Stores in
existence as of the first anniversary of the Effective Date (net of new Store openings);
provided  further that all sales of Inventory in connection with
Store closings shall be conducted at Store locations (provided that, in
conjunction with any such sales, Inventory having an aggregate Cost of up to
$15,000,000 in the aggregate in any fiscal year, may be transferred to other
Store locations or distribution centers of the Loan Parties) pursuant to a
going out of business, liquidation or similar sale, in accordance with
liquidation agreements and with professional liquidators reasonably acceptable
to the Administrative Agent; provided  further that all Net
Proceeds received in connection therewith, whether or not a Cash Control Event
then exists, shall be paid over to the Administrative Agent on receipt by any
Loan Party and shall be utilized to prepay the Obligations in the order of
priority set forth in Section 2.22 or Section 7.4, as applicable;

 

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

 

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

 

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

 

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

 

SECTION 6.6         Restricted Payments; Certain
Payments of Indebtedness

 

(a)           The Loan Parties will not declare or
make, or agree to pay or make, directly or indirectly, any Restricted Payment,
except that the Loan Parties may make Restricted Payments so long as the Payment Conditions are
satisfied at the time of the making of and after giving effect to such
Restricted Payment; provided that for purposes of determining compliance
with the Payment Conditions with respect to this SECTION 6.6(a) only,
the percentage used for the Pro Forma Availability Condition shall be
twenty-five percent (25%).

 

90

 

(b)           Any Loan Party may make a Restricted
Payment to any other Loan Party.

 

(c)           Zale may make repurchases of stock or other equity interests in Zale deemed to occur
upon exercise of stock options or warrants if such stock or equity interests
represent a portion of the exercise price of such options or warrants, in each
case, to the extent not made in cash;

 

(d)           The
Loan Parties will not at any time, make or agree to pay or make, directly or
indirectly any payment or other distribution (whether in cash, securities or
other property) of or in respect of principal of or interest on any
Indebtedness, or any payment or other distribution (whether in cash, securities
or other property), including any sinking fund or similar deposit, on account
of the purchase, redemption, retirement, acquisition, cancellation or
termination of any Indebtedness, except (i) payment of regularly scheduled
payments or mandatory prepayments of principal, interest and premium, if any,
arising solely with respect to such payment in respect of any Indebtedness
permitted under Section 6.1 hereof, (ii) if the Payment Conditions
are satisfied at the time of the making of and after giving effect to such
payment (provided that for purposes of determining compliance with the
Payment Conditions with respect to this Section 6.6(d)(ii) only, the
required Consolidated Fixed Charge Coverage Ratio shall be equal to or greater
than 1.0:1.0), and (iii) Permitted Refinancings of Indebtedness.

 

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

 

SECTION 6.7         Transactions with Affiliates.  Except as set forth on Schedule 6.7 hereto,
the Loan Parties will not at any time sell, lease or otherwise transfer any
property or assets to, or purchase, lease or otherwise acquire any property or
assets from, or otherwise engage in any other transactions with, any of their
respective Affiliates, except (a) transactions in the ordinary course of
business that are at prices and on terms and conditions not less favorable to
the Loan Parties than could be obtained on an arm’s length basis from unrelated
third parties, (b) transactions among the Borrowers and (c) transactions
in the ordinary course of business, consistent with past practices, between or
among the Loan Parties and/or their respective Subsidiaries not involving any
other Affiliate, which would not otherwise violate the provisions of the Loan
Documents.

 

SECTION 6.8         Financial Covenants.

 

(a)           The Borrowers shall maintain (i) for
each of the thirty (30) consecutive days immediately preceding the Maturity
Date (or, if earlier, the date of any proposed partial reduction of the Commitments
of the Non-Extending Lenders pursuant to SECTION 2.15) on a pro forma
basis after giving effect to, the termination (or reduction, as applicable) and
repayment of the Commitments of the Non-Extending Lenders on the Maturity Date
(or, if earlier, the date of any proposed partial reduction of the Commitments
of the Non-Extending Lenders pursuant to SECTION 2.15), Excess
Availability of not less than $60,000,000, and (ii) on a pro forma and
projected basis for each of the six (6) months immediately following, and
after giving effect to, the termination (or reduction, as applicable) and
repayment of the Commitments of the Non-Extending Lenders on the Maturity Date
(or, if earlier, the date of any proposed partial reduction 

 

91

 

of the Commitments of the Non-Extending Lenders
pursuant to SECTION 2.15), Excess Availability of not less than
$60,000,000.  The Borrowers shall deliver
to the Administrative Agent evidence of satisfaction of the conditions contained
in clause (ii) above on a basis reasonably satisfactory to the
Administrative Agent, which evidence shall be delivered to the Administrative
Agent not less than thirty (30) days prior to the Maturity Date (or, if
earlier, the date of any proposed partial reduction of the Commitments of the
Non-Extending Lenders pursuant to SECTION 2.15).

 

(b)           For all periods other than any period
described in SECTION 6.8(a), the Borrowers shall not permit Excess
Availability to be less than $50,000,000, provided that (i) on two occasions
only during the period September 1 through November 30 of each
year, Excess Availability may be less than $50,000,000 for up to three (3) consecutive
Business Days, but in no event may Uncapped Availability be less than
$40,000,000, at any time during any such period; and (ii) on one occasion
in each four month period not including the period September 1 through November 30
of each year, Excess Availability may be less than $50,000,000 for a period of
up to three (3) consecutive Business Days but in no event shall Excess
Availability be less than $40,000,000, at any time during any such period;
provided further that in no event may Excess Availability be less than
$50,000,000 for a period of three (3) or more consecutive Business Days on
more than four (4) occasions in any twelve consecutive month period.

 

SECTION 6.9         Hedging Agreement.  No Loan Party shall enter into any Hedging
Agreement except for Hedging Agreements used solely as a part of its normal
business operations as a risk management strategy and/or hedge against changes
resulting from market operations in accordance with its customary policies.

 

SECTION 6.10       Excluded Subsidiaries.  No Loan Party shall permit any Excluded
Subsidiary to own or have any rights in any credit card receivables, Inventory
generally consisting of watches, gemstones, jewelry and giftware or other
Eligible Inventory, or the proceeds of any of the foregoing.

 

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

 

(a)           the existence of any unfunded,
solvency, or deficiency on windup liability or any accumulated funding
deficiency (whether or not waived), or of any amount of unfunded benefit
liabilities in respect of any Canadian Plan;

 

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

 

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

 

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

 

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

 

92

 

ARTICLE
VII

EVENTS OF DEFAULT

 

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

 

(a)           the Loan Parties shall fail to pay
any principal of any Loan or any reimbursement obligation in respect of any L/C
Disbursement when and as the same shall become due and payable, whether at the
due date thereof or at a date fixed for prepayment thereof or otherwise;

 

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

 

(c)           any representation or warranty made
or deemed made by or on behalf of any Loan Party in or in connection with any
Loan Document or any amendment or modification thereof or waiver thereunder, or
in any report, certificate, financial statement or other document furnished
pursuant to or in connection with any Loan Document or any amendment or
modification thereof or waiver thereunder, shall prove to have been incorrect
in any material respect when made or deemed made;

 

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

 

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

 

(ii)           in
SECTION 5.1(f), and such failure shall continue unremedied for a period of
one Business Day after notice thereof from the Administrative Agent to the
Borrowers;

 

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

 

(f)            any Loan Party shall fail to
make any payment (whether of principal or interest and regardless of amount) in
respect of any Material Indebtedness when and as the same shall become due and
payable (after giving effect to the expiration of any grace or cure period set
forth therein);

 

(g)           any event or condition occurs that
results in any Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits (with or without the giving of notice, the
lapse of time or both) the holder or holders of any such Material Indebtedness
or any trustee or agent on its or their behalf to cause any such Material
Indebtedness to become due, or to require the prepayment, repurchase,
redemption or defeasance thereof, prior to its scheduled 

 

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maturity; provided, however, that this clause (g) shall
not apply to (x) secured Indebtedness that becomes due as a result of the
voluntary sale or transfer of the property or assets securing such
Indebtedness, if such sale or transfer is permitted under this Agreement and
under the documents providing for such Indebtedness, or (y) to mandatory
prepayments under Material Indebtedness that are not due as a result of a
default under the documents providing for such Indebtedness;

 

(h)           an involuntary proceeding shall be
commenced or an involuntary petition shall be filed seeking (i) liquidation,
reorganization, arrangement or other relief in respect of any Loan Party or its
debts, or of a substantial part of its assets, under any federal, state,
provincial or foreign bankruptcy, insolvency, receivership or similar law now
or hereafter in effect or (ii) the appointment of a receiver, interim
receiver, national receiver, monitor, trustee, custodian, sequestrator,
conservator or similar official for any Loan Party or for a substantial part of
its assets, and, in any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect for 30 days;

 

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

 

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

 

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

 

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

 

(ii)           any
challenge by or on behalf of any other Person to the validity of any Loan
Document or the applicability or enforceability of any Loan Document strictly
in accordance with the subject Loan Document’s terms, or which seeks to void,
avoid, limit, or otherwise adversely affect the Agents’ and the Lenders’ rights
under the Intercreditor 

 

94

 

Agreement or any security
interest created by or in any Loan Document or any payment made pursuant
thereto, in each case, as to which an order or judgment has been entered
adverse to the Agents and the Lenders.

 

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

 

(m)          a Change in Control shall occur;

 

(n)           the occurrence of any uninsured loss
to the Collateral in an amount equal to $10,000,000 or greater;

 

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

 

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

 

(q)           except as otherwise permitted
hereunder, the determination by any Loan Party, whether by vote of such Loan
Party’s board of directors or otherwise to: generally suspend the operation of
such Loan Party’s business in the ordinary course, liquidate all or a material
portion of such Loan Party’s assets or Store locations, or employ an agent or
other third party to conduct any so-called store closing, store liquidation or “Going-Out-Of-Business”
sales for such Loan Party’s Stores generally; or

 

(r)            any event shall occur with regard to
the Excluded Subsidiaries which has a Material Adverse Effect on the Loan
Parties, taken as a whole;

 

(s)           then, and in every such event (other
than an event with respect to any Loan Party described in clause (h) or
(i) of this SECTION 7.1), and at any time thereafter during the
continuance of such event, the Administrative Agent may, and at the request of the
Required Lenders shall, by notice to the Borrowers, take either or both of the
following actions, at the same or different times: (i) terminate the
Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare
the Loans then outstanding to be due and payable in whole (or in part, in which
case any principal not so declared to be due and payable may thereafter be
declared to be due and payable), and thereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and all
fees and other obligations of the Loan Parties accrued hereunder, shall become
due and payable immediately, without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Loan Parties; and (iii) require
the Loan Parties to furnish cash collateral in an amount 

 

95

 

equal to 103% of the Letter of Credit Outstandings,
and in case of any event with respect to any Loan Party described in
clause (h) or (i) of this SECTION 7.1, the Commitments
shall automatically terminate and the principal of the Loans then outstanding,
together with accrued interest thereon and all fees and other obligations of
the Loan Parties accrued hereunder, shall automatically become due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Loan Parties.

 

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

 

SECTION 7.3         Remedies on Default.  In case any one or more of the Events of
Default shall have occurred and be continuing, and whether or not the maturity
of the Loans shall have been accelerated pursuant hereto, the Agents may
proceed to protect and enforce their rights and remedies under this Agreement,
the Notes or any of the other Loan Documents by suit in equity, action at law
or other appropriate proceeding, whether for the specific performance of any
covenant or agreement contained in this Agreement and the other Loan Documents
or any instrument pursuant to which the Obligations are evidenced, and, if such
amount shall have become due, by declaration or otherwise, proceed to enforce
the payment thereof or any other legal or equitable right of the Agents or the
Lenders. No remedy herein is intended to be exclusive of any other remedy and
each and every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity
or by statute or any other provision of law.

 

SECTION 7.4         Application of Proceeds. In the
event that an Event of Default exists and the Administrative Agent, Collateral
Agent, any Co-Borrowing Base Agent or any Lender, as the case may be, receives
any monies in connection with the enforcement of this Agreement or any of the
Security Documents, or otherwise with respect to the realization upon, or
disposition of, any of the Collateral, such monies shall be distributed for
application as follows:

 

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

 

(b)           Second, to all Loan Agreement
Obligations owing to the Lenders and the Administrative Agent and Collateral
Agent (including the allowance to take into account for any 

 

96

 

Loan Agreement Obligations not then due and payable
(i.e., to cash collateralize up to 103% of Letter of Credit Outstandings)), in
such order or preference as the Required Lenders may determine; provided,
however, that (i) distributions shall be made (A) pari  passu
among Loan Agreement Obligations with respect to fees owed to the
Administrative Agent, the Collateral Agent and the Co-Borrowing Base Agents and
all other Loan Agreement Obligations owed to the Lenders and (B) with
respect to each type of Loan Agreement Obligation owing to the Lenders, such as
interest, principal, reasonable fees and expenses, among the Lenders pro
rata, and (ii) the Administrative Agent may in its reasonable
discretion make proper allowance to take into account any Loan Agreement
Obligations not then due and payable;

 

(c)           Third, to all other Obligations owing
to the Lenders pro  rata;

 

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

 

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

 

ARTICLE
VIII

THE AGENTS

 

SECTION 8.1         Administration by the Agents.  The Collateral Agent, each Co-Borrowing Base
Agent, each Lender and each Issuing Bank hereby irrevocably designates Bank of
America as Administrative Agent under this Agreement and the other Loan
Documents. The general administration of the Loan Documents shall be by the
Administrative Agent. The Collateral Agent, the Co-Borrowing Base Agents, the
Lenders and the Issuing Banks each hereby irrevocably authorizes the
Administrative Agent (i) to enter into the Loan Documents to which it is a
party and (ii) at its discretion, to take or refrain from taking such
actions as agent on its behalf and to exercise or refrain from exercising such
powers under the Loan Documents and the Notes as are delegated by the terms
hereof or thereof, as appropriate, together with all powers reasonably
incidental thereto.  The Administrative
Agent shall have no duties or responsibilities except as set forth in this
Agreement and the remaining Loan Documents, nor shall it have any fiduciary
relationship with any other Secured Party, and no implied covenants,
responsibilities, duties, obligations, or liabilities shall be read into the
Loan Documents or otherwise exist against the Administrative Agent.

 

SECTION 8.2         The Collateral Agent.  Each Lender, each Co-Borrowing Base Agent,
the Administrative Agent and each Issuing Bank hereby irrevocably (a) designate
Bank of America as Collateral Agent under this Agreement and the other Loan
Documents, (b) authorize the Collateral Agent to enter into the other Loan
Documents to which it is a party and to perform its duties and obligations
thereunder and (c) agree and consent to all of the provisions of the
Security Documents.  All Collateral shall
be held or administered by the Collateral Agent (or its duly-appointed agent)
for its benefit and for the ratable benefit of the other Secured Parties. Any 

 

97

 

proceeds
received by the Collateral Agent from the foreclosure, sale, lease or other
disposition of any of the Collateral and any other proceeds received pursuant
to the terms of the Security Documents or the other Loan Documents shall be
paid over to the Administrative Agent for application as provided in SECTION 2.18,
SECTION 2.22, or SECTION 7.4, as applicable. The Collateral Agent
shall have no duties or responsibilities except as set forth in this Agreement
and the other Loan Documents, nor shall it have any fiduciary relationship with
any other Secured Party, and no implied covenants, responsibilities, duties,
obligations, or liabilities shall be read into the Loan Documents or otherwise
exist against the Collateral Agent.

 

SECTION 8.3         The Co-Borrowing Base Agents.  Each Lender, the Administrative Agent, the
Collateral Agent and each Issuing Bank hereby irrevocably designates each of
Bank of America, Wells Fargo and GE Capital individually, as a Co-Borrowing
Base Agent, and collectively, as the Co-Borrowing Base Agents under this
Agreement and the other Loan Documents and hereby irrevocably authorizes each
of the Co-Borrowing Base Agents at its discretion, to take or refrain from
taking such actions as agent on its behalf and to exercise or refrain from
exercising such powers under the Loan Documents as are delegated by the terms
hereof or thereof, as appropriate, together with all powers reasonably
incidental thereto.  No Co-Borrowing Base
Agent shall have any duties or responsibilities except as set forth in this
Agreement and the Co-Borrowing Base Agent Rights Agreement, nor shall it have
any fiduciary relationship with any other Secured Party, and no implied
covenants, responsibilities, duties, obligations, or liabilities shall be read
into the Loan Documents or otherwise exist against any Co-Borrowing Base
Agent.  The rights of each Co-Borrowing
Base Agent are set forth in the Co-Borrowing Base Agent Rights Agreement.

 

SECTION 8.4         Sharing of Excess Payments.  Each of the Lenders, the Agents, the
Co-Borrowing Base Agents, the Issuing Banks and the other Secured Parties
agrees that if it shall, through payment, foreclosure, counterclaim, the
exercise of a right of banker’s lien, setoff or counterclaim against the Loan
Parties or otherwise, including, but not limited to, a secured claim under Section 506
of the Bankruptcy Code or other security or interest arising from, or in lieu
of, such secured claim and received by such Secured Party under any applicable
bankruptcy, insolvency or other similar law, or otherwise, obtain payment in
respect of the Obligations owed it (an “excess payment”) as a result of
which such Lender, such Agent, such Co-Borrowing Base Agent or such Issuing
Bank has received payment of any Loans or other Obligations outstanding to it
in excess of the amount that it would have received if all payments at any time
applied to the Loans and other Obligations had been applied in the order of
priority set forth in SECTION 2.22, then such Secured Party shall promptly
purchase at par, without recourse or warranty, (and shall be deemed to have
thereupon purchased) from the other Lenders, such Agent, such Co-Borrowing Base
Agent and the applicable Issuing Bank, as applicable, a participation in the
Loans and Obligations outstanding to such other Persons, in an amount
determined by the Administrative Agent in good faith as the amount necessary to
ensure that the economic benefit of such excess payment is reallocated in such
manner as to cause such excess payment and all other payments at any time
applied to the Loans and other Obligations to be effectively applied in the
order of priority set forth in SECTION 2.22 pro rata in proportion to
its Commitment; provided, that if any such excess payment is thereafter
recovered or otherwise set aside such purchase of participations shall be
correspondingly rescinded (without interest). The Loan Parties expressly
consent to the foregoing arrangements and agree that any Lender, any Agent, any
Co-Borrowing Base Agent or any Issuing Bank holding (or deemed to be holding) a
participation in 

 

98

 

any
Loan or other Obligation may exercise any and all rights of banker’s lien,
setoff or counterclaim with respect to any and all moneys owing by such Loan
Party to such Lender, such Agent, such Co-Borrowing Base Agent or such Issuing
Bank as fully as if such Lender, Agent, Co-Borrowing Base Agent or Issuing Bank
held a Note and was the original obligee thereon, in the amount of such
participation. In no event shall the provisions of this SECTION 8.4 be
construed to apply to any payment made by the Borrowers pursuant to and in
accordance with the express terms of this Agreement or any payment obtained by
a Lender as consideration for the assignment of or sale of a participation in
any of its Loans or participations in drawings under Letters of Credit to any
assignee or participant, other than to the Borrowers or any Affiliate(s) thereof.

 

SECTION 8.5         Agreement of Applicable Lenders.

 

(a)           Upon any occasion requiring or
permitting an approval, consent, waiver, election or other action on the part
of only the Applicable Lenders, action shall be taken by the Agents for and on
behalf or for the benefit of all Lenders upon the direction of the Applicable
Lenders, and any such action shall be binding on all Lenders.  No amendment, modification, consent, or
waiver shall be effective except in accordance with the provisions of SECTION 9.2.

 

(b)           Upon the occurrence of an Event of
Default, the Agents shall (subject to the provisions of SECTION 9.2) take
such action with respect thereto as may be reasonably directed by the Required
Lenders; provided, that unless and until the Agents shall have received
such directions, the Agents may (but shall not be obligated to) take such
action as they shall deem advisable in the best interests of the Lenders. In no
event shall the Agents be required to comply with any such directions to the
extent that the Agents believe that the Agents’ compliance with such directions
would be unlawful.

 

SECTION 8.6         Liability of Agents.

 

(a)           Each of the Agents and each of the
Co-Borrowing Base Agents, when acting on behalf of the Lenders and the Issuing
Banks, may execute any of its respective duties under this Agreement by or
through any of its respective officers, agents and employees, and none of the
Agents, the Co-Borrowing Base Agents nor their respective directors, officers,
agents or employees shall be liable to the Lenders or the Issuing Banks or any
of them for any action taken or omitted to be taken in good faith, or be
responsible to the Lenders or the Issuing Banks or to any of them for the
consequences of any oversight or error of judgment, or for any loss, except to
the extent of any liability imposed by law by reason of such Agent’s or such
Co-Borrowing Base Agent’s own gross negligence or willful misconduct. The
Agents, the Co-Borrowing Base Agents and their respective directors, officers,
agents and employees shall in no event be liable to the Lenders or the Issuing
Banks or to any of them for any action taken or omitted to be taken by them
pursuant to instructions received by them from the Applicable Lenders, or in
reliance upon the advice of counsel selected by it. Without limiting the
foregoing, none of the Agents or the Co-Borrowing Base Agents, nor any of their
respective directors, officers, employees, or agents shall be responsible to
any Lender or any Issuing Bank for the due execution, validity, genuineness,
effectiveness, sufficiency, or enforceability of, or for any statement,
warranty or representation in, this Agreement, any Loan Document or any related
agreement, document or order, or shall be required to ascertain or to make any
inquiry concerning the performance or 

 

99

 

observance by any Loan Party of any of the terms,
conditions, covenants, or agreements of this Agreement or any of the Loan
Documents.

 

(b)           None of the Agents, the Co-Borrowing
Base Agents, nor any of their respective directors, officers, employees, or
agents shall have any responsibility to the Loan Parties on account of the failure
or delay in performance or breach by any Lender (other than by the Agent or any
Co-Borrowing Base Agent in its capacity as a Lender) or any Issuing Bank of any
of their respective obligations under this Agreement or the Notes or any of the
Loan Documents or in connection herewith or therewith.

 

(c)           The Administrative Agent, the
Collateral Agent and each Co-Borrowing Base Agent, each in such capacities
hereunder, shall be entitled to rely on any communication, instrument, or
document reasonably believed by such Person to be genuine or correct and to
have been signed or sent by a person or persons believed by such Person to be
the proper Person or Persons, and, such Person shall be entitled to rely on
advice of legal counsel, independent public accountants, and other professional
advisers and experts selected by such Person.

 

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

 

SECTION 8.8         Rights of Agents.  It is understood and agreed that any Person
serving as the Administrative Agent, the Collateral Agent or a Co-Borrowing
Base Agent shall have the same rights and powers hereunder (including the right
to give such instructions) in its capacity as a Lender as the other Lenders and
may exercise such rights and powers, as well as its rights and powers under
other agreements and instruments to which it is or may be party, and engage in
other transactions with the Borrowers, as though it were not the Administrative
Agent, the Collateral Agent or a Co-Borrowing Base Agent, as applicable, of the
Lenders under this Agreement.  Such
Persons and their Affiliates may accept deposits from, lend money to, and

 

100

 

generally engage in any kind of commercial or investment banking,
trust, advisory or other business with the Loan Parties and their Affiliates as
if such Persons were not the Administrative Agent, the Collateral Agent or a
Co-Borrowing Base Agent hereunder.

 

SECTION 8.9                          Independent
Lenders and Issuing Bank.  The
Lenders and the Issuing Banks each acknowledge that they have decided to enter
into this Agreement and to make the Loans or issue the Letters of Credit
hereunder based on their own analysis of the transactions contemplated hereby
and of the creditworthiness of the Loan Parties and agrees that the Agents and
the Co-Borrowing Base Agents shall bear no responsibility therefor.

 

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

 

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

 

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

 

SECTION 8.13                    Reports and
Financial Statements.. 
Promptly after receipt thereof from the Borrowers, the Administrative
Agent shall remit to each Lender and, to the extent not 

 

101

 

previously
delivered to such Person by the Borrowers, each Co-Borrowing Base Agent copies
of (a) all financial statements, compliance certificates and Borrowing
Base Certificates, as required to be delivered by the Borrowers hereunder, (b) all
commercial finance examinations and appraisals of the Collateral received by
the Administrative Agent and (c) such other information regarding the
operations, business affairs and financial condition of any Borrower, or
compliance with the terms of any Loan Document, as any Lender or Co-Borrowing
Base Agent may reasonably request. 
Without limiting the requirements of the definition of Bank Products,
each Lender agrees to furnish the Administrative Agent, at such frequency as
the Administrative Agent may reasonably request, with a summary of all
Obligations due or to become due to such Lender under and arising out of any
Cash Management Services and Bank Products provided by such Person to any Loan
Party or any of its Subsidiaries, and, in connection with any distributions to
be made hereunder, the Administrative Agent shall be entitled to assume that no
amounts are due to any Lender on account of such Obligations unless the
Administrative Agent has received written notice thereof from such Lender.

 

SECTION 8.14                    Agency for
Perfection.  Each Lender
hereby appoints each other Lender as agent for the purpose of perfecting Liens
for the benefit of the Agents and the other Secured Parties, in assets which,
in accordance with Article 9 of the UCC or any other applicable law of the
United States of America or Canada can be perfected only by possession.  Should any Lender (other than the Agents)
obtain possession of any such Collateral, such Lender shall notify the
Administrative Agent thereof, and, promptly upon the Administrative Agent’s
request therefor, shall deliver such Collateral to the Collateral Agent, or
otherwise deal with such Collateral in accordance with the Administrative Agent’s
or Collateral Agent’s (as applicable) instructions.

 

SECTION 8.15                    Delinquent
Lender.  If for any reason any Lender (a) shall
fail or refuse to abide by its material obligations under this Agreement,
including, without limitation, its obligation to make available to the
Administrative Agent its Commitment Percentage of any Loans, expenses or setoff
or purchase its Commitment Percentage of a participation interest in the
Swingline Loans or Letter of Credit Outstandings and such failure is not cured
within one Business Day after receipt from the Administrative Agent of written
notice thereof, (b) shall fail, within three (3) Business Days after
request by the Administrative Agent, to confirm that it will comply with the
terms of this Agreement relating to its Commitments or (c) has, without
cause, defaulted in fulfilling its obligations under one or more other
syndicated credit facilities (unless such default is being disputed by such
Lender in good faith) or has become the subject of a bankruptcy, insolvency or
similar proceeding (each, a “Delinquent Lender”), then, in addition to
the rights and remedies that may be available to the other Secured Parties, the
Loan Parties or any other party at law or in equity, and not at limitation
thereof, (i) such Delinquent Lender’s right to participate in the
administration of, or decision-making rights related to, the Loans, this
Agreement or the other Loan Documents shall be suspended during the pendency of
such failure, refusal, insolvency or proceeding (provided that the Commitment
of such Delinquent Lender may not be increased or extended without the written
consent of such Delinquent Lender), and (ii) subject to the provisions of
clause (iii) below, such Delinquent Lender shall be deemed to have
assigned any and all payments due to it from the Loan Parties in connection
with this Agreement, whether on account of outstanding Loans, interest, fees or
otherwise, to the remaining non-delinquent Lenders for application to, and
reduction of, their proportionate shares of all outstanding Obligations until,
as a result of application of such assigned payments the Lenders’ respective
Commitment Percentages of all outstanding Obligations shall have returned 

 

102

 

to
those in effect immediately prior to such delinquency and without giving effect
to the nonpayment causing such delinquency, and (iii) at the option of the
Administrative Agent, any amounts payable to such Delinquent Lender hereunder
(whether on account of principal, interest, fees or otherwise) shall, in lieu
of being distributed to such Delinquent Lender, be retained by the
Administrative Agent as cash collateral for future funding obligations of the
Delinquent Lender in respect of any Loan or existing or future participating
interest in any Swingline Loan or Letter of Credit.  The Delinquent Lender’s decision-making and
participation rights and rights to payments as set forth in clauses (i) and
(ii) hereinabove shall be restored only upon the payment by the Delinquent
Lender of its Commitment Percentage of any Obligations, any participation
obligation, or expenses as to which it is delinquent, together with interest
thereon at the rate set forth in Section 2.10, from the date when
originally due until the date upon which any such amounts are actually paid.

 

(a)                                  The non-Delinquent Lenders shall also
have the right, but not the obligation, in their respective, sole and absolute
discretion, to cause the termination and assignment without any further action
by the Delinquent Lender for no cash consideration (pro rata, based on the
respective Commitments electing to exercise such right), the Delinquent Lender’s
Commitment, to fund future Loans.  Upon
any such purchase of the Commitment of any Delinquent Lender, the Delinquent Lender’s
share in future Loans and its rights under the Loan Documents with respect
thereto shall terminate on the date of purchase, and the Delinquent Lender
shall promptly execute all documents reasonably requested to surrender and
transfer such interest, including, if so requested, an Assignment and
Acceptance.

 

(b)                                 Each Delinquent Lender shall indemnify
the Agents, each Issuing Bank which is not a Delinquent Lender and each
non-Delinquent Lender from and against any and all loss, damage or expenses,
including, but not limited to, reasonable attorneys’ fees and funds advanced by
any Agent, any Issuing Bank which is not a Delinquent Lender or by any
non-Delinquent Lender, on account of a Delinquent Lender’s failure to timely
fund its Commitment Percentage of a Loan or to otherwise perform its
obligations under the Loan Documents.

 

SECTION 8.16                    Collateral
Matters.

 

(a)                                  The Lenders hereby irrevocably authorize
the Agents to release any Lien upon any Collateral: (i) upon the
termination of the Commitments and payment and satisfaction in full of all
Obligations, all Letters of Credit shall have expired or terminated (or been
collateralized in a manner satisfactory to the Issuing Banks) and all Letter of
Credit Outstandings have been reduced to zero (or collateralized in a manner
satisfactory to the Issuing Banks); or (ii) constituting property being
sold, transferred or disposed of in a disposition permitted under Section 6.5
hereof upon receipt by the Administrative Agent of the Net Proceeds thereof to
the extent required by this Agreement. 
Except as provided above, the Agents will not release any of the
Collateral Agent’s Liens without the prior written authorization of the
Applicable Lenders. Upon request by the any Agent or any Borrower at any time,
the Lenders will confirm in writing the Collateral Agent’s authority to release
any Liens upon particular types or items of Collateral pursuant to this SECTION 8.16.

 

(b)                                 Upon at least two (2) Business Days’
prior written request by the Borrowers, the Collateral Agent shall (and is
hereby irrevocably authorized by the Lenders to) execute such 

 

103

 

documents as may be necessary to evidence the release
of the Liens upon any Collateral described in Section 8.10(a); provided,
however, that (i) the Agents shall not be required to execute any
such document on terms which, in their reasonable opinion, would, under
applicable law, expose either Agent to liability or create any obligation or
entail any adverse consequence other than the release of such Liens without
recourse or warranty, and (ii) such release shall not in any manner
discharge, affect or impair the Obligations or any Liens (other than those
expressly being released) upon (or obligations of any Loan Party in respect of)
all interests retained by any Loan Party, including (without limitation) the
proceeds of any sale, all of which shall continue to constitute part of the
Collateral.

 

SECTION 8.17                                       Syndication
Agent, Documentation Agent and Arrangers.  Notwithstanding the provisions of this
Agreement or any of the other Loan Documents, the Co-Syndication Agents, the
Documentation Agents and the Arrangers shall have no powers, rights, duties,
responsibilities or liabilities with respect to this Agreement and the other Loan
Documents.

 

ARTICLE IX

MISCELLANEOUS

 

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

 

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

 

(b)                                 If to the
Administrative Agent, the Collateral Agent or the Swingline Lender to Bank of
America, N.A., 100 Federal Street, Boston, Massachusetts 02110, Attention:
Andrew Cerussi (Telecopy No. (617) 310-2686), e-mail andrew.cerussi@baml.com, with a copy to
Riemer & Braunstein, LLP, Three Center Plaza, Boston, Massachusetts
02108, Attention: David S. Berman, Esq. (Telecopy No. (617)
880-3456), e-mail
dberman@riemerlaw.com;

 

(c)                                  If to Bank of
America, as a Co-Borrowing Base Agent, to Bank of America, N.A., 100 Federal
Street, Boston, Massachusetts 02110, Attention: Andrew Cerussi (Telecopy No. (617)
310-2686), e-mail
andrew.cerussi@baml.com, with a copy to Riemer & Braunstein,
LLP, Three Center Plaza, Boston, Massachusetts 02108, Attention: David S.
Berman, Esq. (Telecopy No. (617) 880-3456), e-mail dberman@riemerlaw.com;

 

(d)                                 If to Wells
Fargo, as a Co-Borrowing Base Agent, to Wells Fargo Retail Finance, LLC, One
Boston Place, 18th Floor, Boston, Massachusetts 02108, Boston,
Massachusetts, Attention: Connie Liu (Telecopy No. (866) 303-3944), e-mail Connie.Liu@wellsfargo.com, with 

 

104

 

a copy to Brown Rudnick LLP,
Seven Times Square, New York, New York 10036, Attention: Christopher J. Carolan, Esq.
(Telecopy No. (212) 938-2871), e-mail ccarolan@brownrudnick.com;

 

(e)                                  (e)                                  If to GE
Capital, as a Co-Borrowing Base Agent, to General Electric Capital Corporation,
777 Long Ridge Road, Building A, Stamford, Connecticut 06927, Attention: Zale
Corporation Account Manager (Telecopy No. (203)585-2647, e-mail Domenica.Simone@ge.com,
with a copy to General Electric Capital Corporation, 201 Merritt 7, Norwalk,
Connecticut 08651, Attention: Corporate Counsel (Telecopy No. (203)
956-4003) with a second copy to Kilpatrick Stockton LLP, 1100 Peachtree Street,
Suite 2800, Atlanta, Georgia 30309 Attention: Hilary P. Jordan, Esq.
(Telecopy No. (404)815-6555, e-mail hjordan@kilpatrickstockton.com;

 

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

 

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

 

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

 

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

 

SECTION 9.2                          Waivers;
Amendments.

 

(a)                                  No failure or delay by the Agents, any
Issuing Bank or any Lender in exercising any right or power hereunder or under
any other Loan Document shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The
rights and remedies of the Agents, the Issuing Banks and the Lenders hereunder
and under the other Loan Documents are cumulative and are not exclusive of any
rights or remedies that they would otherwise have. No waiver of any provision
of any Loan Document or consent to any departure by any Loan Party therefrom
shall 

 

105

 

in any event be effective unless the same shall be
permitted by paragraph (b) of this Section, and then such waiver or
consent shall be effective only in the specific instance and for the purpose
for which given. Without limiting the generality of the foregoing, the making
of a Loan or issuance of a Letter of Credit shall not be construed as a waiver
of any Default, regardless of whether the Agents, any Lender or any Issuing
Bank may have had notice or knowledge of such Default at the time.

 

(b)                                 Neither this Agreement nor any other Loan
Document nor any provision hereof or thereof may be waived, amended or modified
except, in the case of this Agreement, pursuant to an agreement or agreements
in writing entered into by the Borrowers and the Required Lenders or, in the
case of any other Loan Document, pursuant to an agreement or agreements in
writing entered into by the Agents and the Borrowers that are parties thereto,
in each case with the consent of the Required Lenders, provided, that no
such agreement shall (i) increase the Commitment of any Lender without the
written consent of each Lender affected, (ii) reduce the rate of interest
on any Loan or L/C Disbursement, or reduce any fees payable hereunder, without
the written consent of each Lender affected thereby, (iii) postpone the
scheduled date of payment of the principal amount of any Loan or L/C
Disbursement, or any interest thereon, or any fees payable hereunder, or reduce
the amount of, waive or excuse any such payment, or postpone the scheduled date
of expiration of the Commitments, the Maturity Date or the Extended Term
Maturity Date, without the written consent of each Lender affected thereby, (iv) change
any of the provisions of this SECTION 9.2 or the definition of the term “Required
Lenders”, “Required Supermajority Lenders” or any other provision of
any Loan Document specifying the number or percentage of Lenders required to
waive, amend or modify any rights thereunder or make any determination or grant
any consent thereunder, without the written consent of each Lender, (v) except
for sales described in SECTION 6.5 or as permitted in the Security
Documents, release any material portion of the Collateral from the Liens of the
Security Documents, without the written consent of each Lender; provided,
that the foregoing shall not limit the discretion of the Required Supermajority
Lenders to change the definition of the term “Permitted Asset Sales”, (vi) change
the definition of the term “Borrowing Base” or any component definition
thereof (other than changes to the Inventory Advance Rate) if as a result
thereof the amounts available to be borrowed by the Borrowers would be
increased, without the written consent of each Lender, provided, that
the foregoing shall not limit the discretion of the Administrative Agent to
change, establish or eliminate any Reserves in accordance with SECTION 2.2
or to determine whether Inventory or Accounts are Eligible Inventory or
Eligible Credit Card Receivables, respectively, (vii) increase the
Permitted Overadvance, without the written consent of each Lender, and  provided, further, that no such
agreement shall amend, modify or otherwise affect the rights or duties of the
Agents, or the Issuing Banks without the prior written consent of the Agents,
or the Issuing Banks, as the case may be, and (viii) increase the
principal amount of the Swingline Loan, without the written consent of the
Required Supermajority Lenders.

 

(c)                                  Notwithstanding anything to the contrary
contained in this SECTION 9.2, in the event that the Borrowers request
that this Agreement or any other Loan Document be modified, amended or waived
in a manner which would require the consent of the Lenders pursuant to SECTION 9.2(b) and
such amendment is approved by the Required Lenders, but not by the requisite
percentage of the Lenders, the Borrowers, and the Required Lenders shall be
permitted to amend this Agreement without the consent of the Lender or Lenders
which did not agree to the modification or amendment requested by the Borrowers
(such Lender or Lenders,

 

106

 

collectively the “Minority Lenders”) to provide
for (w) the termination of the Commitment of each of the Minority Lenders,
(x) the addition to this Agreement of one or more other financial
institutions, or an increase in the Commitment of one or more of the Required
Lenders, so that the aggregate Commitments after giving effect to such
amendment shall be in the same amount as the aggregate Commitments immediately
before giving effect to such amendment, (y) if any Loans are outstanding
at the time of such amendment, the making of such additional Loans by such new
or increasing Lender or Lenders, as the case may be, as may be necessary to
repay in full the outstanding Loans (including principal, interest, and fees)
of the Minority Lenders immediately before giving effect to such amendment and (z) such
other modifications to this Agreement or the Loan Documents as may be
appropriate and incidental to the foregoing.

 

(d)                                 No notice to or demand on any Loan Party
shall entitle any Loan Party to any other or further notice or demand in the
same, similar or other circumstances. Each holder of a Note shall be bound by
any amendment, modification, waiver or consent authorized as provided herein,
whether or not a Note shall have been marked to indicate such amendment,
modification, waiver or consent and any consent by a Lender, or any holder of a
Note, shall bind any Person subsequently acquiring a Note, whether or not a
Note is so marked. No amendment to this Agreement shall be effective against
the Borrowers unless signed by the Borrowers or other applicable Loan Party.

 

SECTION 9.3                          Expenses;
Indemnity; Damage Waiver.

 

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

 

(b)                                 The Loan Parties shall, jointly and
severally, indemnify the Agents, each Co-Borrowing Base Agent, each Issuing
Bank and each Lender, and each Related Party of any of the foregoing Persons
(each such Person being called an “Indemnitee”) against, and hold each 

 

107

 

Indemnitee harmless from, any and all losses, claims,
damages, liabilities and related expenses, including the reasonable and
documented fees, charges and disbursements of any counsel for any Indemnitee,
incurred by or asserted against any Indemnitee arising out of, in connection
with, or as a result of (i) the execution or delivery of any Loan Document
or any other agreement or instrument contemplated hereby, the performance by
the parties to the Loan Documents of their respective obligations thereunder or
the consummation of the transactions contemplated by the Loan Documents or any
other transactions contemplated hereby, (ii) any Loan or Letter of Credit
or the use of the proceeds therefrom (including any refusal by an Issuing Bank
to honor a demand for payment under a Letter of Credit if the documents
presented in connection with such demand do not strictly comply with the terms
of such Letter of Credit), (iii) any actual or alleged presence or release
of Hazardous Materials on or from any property currently or formerly owned or
operated by any Loan Party or any of its Subsidiaries, or any Environmental
Liability related in any way to any Loan Party or any of its Subsidiaries, or (iv) any
actual or prospective claim, litigation, investigation or proceeding relating
to any of the foregoing, 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 or willful misconduct of such Indemnitee or with
respect to a claim by one Indemnitee against another Indemnitee.

 

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

 

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

 

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

 

108

 

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

 

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

 

SECTION 9.4                          Successors and
Assigns.

 

(a)                                  The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted hereby (including any Affiliate of
an Issuing Bank that issues any Letter of Credit), except that no Loan Party
may assign or otherwise transfer any of its rights or obligations hereunder
without the prior written consent of each Lender (and any such attempted
assignment or transfer without such consent shall be null and void). Nothing in
this Agreement, expressed or implied, shall be construed to confer upon any
Person (other than the parties hereto, their respective successors and assigns
permitted hereby (including any Affiliate of an Issuing Bank that issues any
Letter of Credit) and, to the extent expressly contemplated hereby, the Related
Parties of each of the Agents, each Issuing Bank and the Lenders) any legal or
equitable right, remedy or claim under or by reason of this Agreement.

 

(b)                                 Any Lender may assign to one or more
assignees all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans at the time owing
to it), provided, that (i) except in the case of an assignment to a
Lender or an Affiliate of a Lender, (1) the Administrative Agent must give
its prior written consent to such assignment (which consent shall not be
unreasonably withheld or delayed) and (2) so long as no Default or Event
of Default has occurred and is continuing, the Borrowers shall give their prior
written consent to such assignment (which consent shall not be unreasonably
withheld or delayed), (ii) except in the case of an assignment to a Lender
or an Affiliate of a Lender or an assignment of the entire remaining amount of
the assigning Lender’s Commitment or Loans, the amount of the Commitment or
Loans of the assigning Lender subject to each such assignment (determined as of
the date the Assignment and Acceptance with respect to such assignment is
delivered to the Administrative Agent) shall not be less than $5,000,000 unless
the Administrative Agent and the Borrowers otherwise consent, (iii) each
partial assignment shall be made as an assignment of a proportionate part of
all the assigning Lender’s rights and obligations, (iv) any assignment by
an Extending Lender to a Non-Extending Lender shall not modify the tenor or
maturity of, or pricing for, the Commitment and Loans so assigned, (v) any
assignment by a Non-Extending Lender to an Extending Lender shall not modify
the tenor or maturity of, or pricing for, the Commitment and Loans so assigned
unless agreed to by such Extending Lender and consented to by the
Administrative Agent in writing, and (vi) the parties to each assignment
shall execute and deliver to the Administrative Agent an Assignment and
Acceptance, together with (unless waived by the Administrative Agent or unless
such assignment is to an Affiliate of a Lender) a processing and recordation
fee of $3,500 (which shall not be payable or reimbursable by the
Borrowers).  Subject to acceptance and
recording thereof pursuant to paragraph (d) of this Section, from and
after the effective date specified in each Assignment and Acceptance the
assignee thereunder shall be a party hereto and, to the extent of the interest
assigned by such Assignment and Acceptance, have the rights and obligations of
a Lender under this Agreement, and the assigning Lender thereunder shall, to
the extent of the 

 

109

 

interest assigned by such Assignment and Acceptance,
be released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all of the assigning Lender’s rights and
obligations under this Agreement, such Lender shall cease to be a party hereto
but shall continue to be entitled to the benefits of SECTION 9.3).  Any assignment or transfer by a Lender of
rights or obligations under this Agreement that does not comply with this
paragraph shall be treated for purposes of this Agreement as a sale by such
Lender of a participation in such rights and obligations in accordance with
paragraph (e) of this Section.

 

(c)                                  The Administrative Agent, acting for this
purpose as an agent of the Loan Parties, shall maintain at one of its offices
in Boston, Massachusetts a copy of each Assignment and Acceptance delivered to
it and a register for the recordation of the names and addresses of the
Lenders, and the Commitment of, and principal amount of the Loans and L/C
Disbursements owing to, each Lender pursuant to the terms hereof from time to
time (the “Register”). The entries in the Register shall be conclusive
absent manifest error and the Loan Parties, the Administrative Agent, each
Issuing Bank and the Lenders may treat each Person whose name is recorded in
the Register pursuant to the terms hereof as a Lender hereunder for all
purposes of this Agreement, notwithstanding notice to the contrary. The
Register shall be available for inspection by the Borrowers, each Issuing Bank
and any Lender, at any reasonable time and from time to time upon reasonable
prior notice.

 

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

 

(e)                                  Any Lender may sell participations to one
or more banks or other entities (a “Participant”) in all or a portion of
such Lender’s rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans owing to it), provided, that (i) such
Lender’s obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations and (iii) the Loan Parties, the Agents,
each Issuing Bank and the other Lenders shall continue to deal solely and
directly with such Lender in connection with such Lender’s rights and
obligations under this Agreement. Any agreement or instrument pursuant to which
a Lender sells such a participation in the Commitments, the Loans and the
Letters of Credit Outstandings shall provide that such Lender shall retain the
sole right to enforce the Loan Documents and to approve any amendment,
modification or waiver of any provision of the Loan Documents, provided,
that such agreement or instrument may provide that such Lender will not,
without the consent of the Participant, agree to any amendment, modification or
waiver described in the first proviso to SECTION 9.2(b) that affects
such Participant. Subject to paragraph (f) of this Section, the Loan
Parties agree that each Participant shall be entitled to the benefits of SECTION 2.23,
SECTION 2.25 and SECTION 2.26 to the same extent as if it were a
Lender and had acquired its interest by assignment pursuant to paragraph (b) of
this Section. To the extent permitted by law, each Participant also shall be
entitled to the benefits of SECTION 9.9 as though it were a Lender, provided,
such Participant agrees to be subject to SECTION 2.25(c) and Section 2.28
as though it were a Lender.

 

110

 

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

 

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

 

SECTION 9.5                          Reserved.

 

SECTION 9.6                          Survival.  All covenants, agreements, representations
and warranties made by the Loan Parties in the Loan Documents and in the
certificates or other instruments delivered in connection with or pursuant to
this Agreement or any other Loan Document shall be considered to have been
relied upon by the other parties hereto and shall survive the execution and
delivery of the Loan Documents and the making of any Loans and issuance of any
Letters of Credit, regardless of any investigation made by any such other party
or on its behalf and notwithstanding that the Agents, any Issuing Bank or any
Lender may have had notice or knowledge of any Default or incorrect
representation or warranty at the time any credit is extended hereunder, and
shall continue in full force and effect as long as the principal of or any
accrued interest on any Loan or any fee or any other amount payable under this
Agreement is outstanding and unpaid or any Letter of Credit is outstanding and
so long as the Commitments have not expired or terminated. The provisions of SECTION 2.23,
SECTION 2.26 and SECTION 9.3 and Article VIII shall survive and
remain in full force and effect regardless of the consummation of the
transactions contemplated hereby, the repayment of the Loans, the expiration or
termination of the Letters of Credit and the Commitments or the termination of
this Agreement or any provision hereof. 
In connection with the termination of this Agreement and the release and
termination of the security interests in the Collateral, the Administrative
Agent on behalf of itself and the other Secured Parties, may require such
indemnities or collateral as it shall reasonably deem necessary or appropriate
to protect the Secured Parties against loss on account of such release and
termination, including, without limitation, with respect to credits previously
applied to the Obligations that may subsequently be reversed or revoked, and
any Obligations that may thereafter arise, including without limitation under SECTION 9.3.

 

SECTION 9.7                          Counterparts;
Integration; Effectiveness.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract. This Agreement and the other Loan Documents
constitute the entire contract among the 

 

111

 

parties relating to the subject matter hereof and supersede any and all
previous agreements and understandings, oral or written, relating to the
subject matter hereof. Except as provided in SECTION 4.1, this Agreement
shall become effective when it shall have been executed by the Agents and the
Lenders and when the Administrative Agent shall have received counterparts
hereof that, when taken together, bear the signatures of each of the other
parties hereto, and thereafter shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. Delivery of
an executed counterpart of a signature page of this Agreement by telecopy
shall be effective as delivery of a manually executed counterpart of this
Agreement.

 

SECTION 9.8                          Severability.  Any provision of this Agreement held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a particular provision
in a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

 

SECTION 9.9                          Right of Setoff.  If an Event of Default shall have occurred
and be continuing, each Lender, each Participant and each of their respective
Affiliates is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other obligations at any time owing by such Lender, Participant or Affiliate to
or for the credit or the account of the Loan Parties against any of and all the
obligations of the Loan Parties now or hereafter existing under this Agreement
held by such Lender, irrespective of whether or not such Lender shall have made
any demand under this Agreement and although such obligations may be unmatured
and/or such Obligations may be otherwise fully secured. The rights of each
Lender, Participant and Affiliate under this Section are in addition to
other rights and remedies (including other rights of setoff) that such Lender,
Participant or Affiliate may have.  No
Lender will, or will permit its Participant to, exercise its rights under this Section 9.8
without the consent of the Administrative Agent or the Required Lenders.  ANY AND ALL RIGHTS TO REQUIRE ANY AGENT TO
EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH
SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE BY ANY LENDER, PARTICIPANT
OR AFFILIATE OF ITS RIGHT OF SETOFF UNDER THIS SECTION ARE HEREBY
KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

 

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

 

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

 

112

 

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

 

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

 

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

 

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

 

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

 

113

 

SECTION 9.14                    Confidentiality.

 

Each of the Lenders, the
Agents and the Co-Borrowing Base Agents agrees, on behalf of itself and each of
its affiliates, directors, officers, employees and representatives, to use
reasonable precautions to keep confidential, in accordance with their customary
procedures for handling confidential information of the same nature and in
accordance with safe and sound practices, any non-public information supplied
to it by the Loan Parties or of their Subsidiaries pursuant to this Agreement
that is identified by such Person as being confidential at the time the same is
delivered to such Lender, such Agent, or such Co-Borrowing Base Agent provided
that nothing herein shall limit the disclosure of any such information (a) after
such information shall have become public other than through a violation of
this Section 9.14 (b) to the extent required by statute, rule,
regulation or judicial process, (c) to counsel for any of the Lenders, or
the Administrative Agent, the Collateral Agent, or any of the Co-Borrowing Base
Agents, (d) to bank examiners, the National Association of Insurance
Commissioners or any other U.S. federal or foreign regulatory authority having
jurisdiction over any Lender, the Administrative Agent,  the Collateral Agent, any Co-Borrowing Base
Agent, or to auditors or accountants, (e) to the Administrative Agent, the
Collateral Agent, any Co-Borrowing Base Agent, or any Lender, (f) in
connection with any litigation to which the Administrative Agent, the
Collateral Agent, any Co-Borrowing Base Agent, or any Lender is a party, or in
connection with the enforcement of rights or remedies hereunder or under any
other Loan Document, or (g) to any assignee or participant (or prospective
assignee or participant) so long as such assignee or participant agrees to be
bound by the provisions of this SECTION 9.14.

 

SECTION 9.15                    Additional
Waivers.

 

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

 

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

 

114

 

that would otherwise operate as a discharge of any
Loan Party as a matter of law or equity (other than the indefeasible payment in
full in cash of all the Obligations).

 

(c)                                  To the fullest extent permitted by
applicable law, each Loan Party waives any defense based on or arising out of
any defense of any other Loan Party or the unenforceability of the Obligations
or any part thereof from any cause, or the cessation from any cause of the
liability of any other Loan Party, other than the indefeasible payment in full
in cash of all the Obligations. The Collateral Agent and the other Secured Parties
may, at their election, foreclose on any security held by one or more of them
by one or more judicial or nonjudicial sales, accept an assignment of any such
security in lieu of foreclosure, compromise or adjust any part of the
Obligations, make any other accommodation with any other Loan Party, or
exercise any other right or remedy available to them against any other Loan
Party, without affecting or impairing in any way the liability of any Loan
Party hereunder except to the extent that all the Obligations have been
indefeasibly paid in full in cash. Pursuant to applicable law, each Loan Party
waives any defense arising out of any such election even though such election
operates, pursuant to applicable law, to impair or to extinguish any right of
reimbursement or subrogation or other right or remedy of such Loan Party
against any other Loan Party, as the case may be, or any security.

 

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

 

SECTION 9.16                    Press Releases
and Related Matters.

 

Each Loan Party consents to
the publication by the Administrative Agent of customary trade advertising
material in tombstone format relating to the financing transactions
contemplated by this Agreement using any Loan Party’s name logo or
trademark.  The Administrative Agent
shall provide a draft reasonably in advance of any advertising material to the
Borrowers for review and comment prior to the publication thereof.  The Administrative Agent reserves the right
to provide to industry trade organizations information necessary and customary
for inclusion in league table measurements.

 

SECTION 9.17                    Patriot Act;
Proceeds of Crime Act.

 

Each Lender hereby notifies
the Loan Parties that, pursuant to the requirements of the USA PATRIOT Act (Title
III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”)
(including all applicable “know your customer” rules, regulations and
procedures applicable to 

 

115

 

such
Lender in Canada), it is required to obtain, verify and record information that
identifies the Loan Parties, which information includes the name and address of
each Loan Party and other information that will allow such Lender to identify
such Loan Party in accordance with the Act. 
Each Loan Party is in compliance, in all material respects, with the
Patriot Act and the Proceeds of Crime (Money
Laundering) and Terrorist Financing Act (Canada) (together with any
successor statue, the “Proceeds of Crime Act”).  No part of the proceeds of the Loans will be
used by the Loan Parties, directly or indirectly, for any purpose which would
contravene or breach the Proceeds of Crime Act or for any payments to any
governmental official or employee, political party, official of a political party,
candidate for political office, or anyone else acting in an official capacity,
in order to obtain, retain or direct business or obtain any improper advantage,
in violation of the United States Foreign Corrupt Practices Act of 1977, as
amended.

 

SECTION 9.18                    Judgment
Currency.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

116

 

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

 

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

 

(iv)                              if a required rate is not so published by
the Bank of Canada for any such date, the spot rate quoted by the Bank of
America (acting through its Canada branch) at Toronto, Canada at approximately
noon (Toronto time) on that date in accordance with its normal practice for the
applicable currency conversion in the wholesale market.

 

SECTION 9.19                    Intercreditor
Agreement.

 

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

 

SECTION 9.20                    Existing Credit
Agreement Amended and Restated.

 

(a)                                  Upon satisfaction of the conditions
precedent to the effectiveness of this Agreement, (a) this Agreement shall
amend and restate the Existing Credit Agreement in its entirety (except to the
extent that definitions from the Existing Credit Agreement are incorporated
herein by reference) and (b) the rights and obligations of the parties
under the Existing Credit Agreement shall be subsumed within, and be governed
by, this Agreement; provided, however, that the Loan Parties
hereby agree that (i) the Letter of Credit Outstandings under, and as
defined in, the Existing Credit Agreement on the Effective Date shall be Letter
of Credit Outstandings hereunder, and (ii) all Obligations of the Loan
Parties under, and as defined in, the Existing Credit Agreement shall remain
outstanding, shall constitute continuing Obligations secured by the Collateral,
and this Agreement shall not be deemed to evidence or result in a novation or
repayment and reborrowing of such obligations and other liabilities.

 

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

 

117

 

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

 

 

	
   

  	
  ZALE
  DELAWARE, INC.

  
	
   

  	
  as
  Borrower

  
	
   

  	
  By:

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CORPORATION

  
	
   

  	
  as
  Borrower

  
	
   

  	
  By:

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZGCO,
  LLC

  
	
   

  	
  as
  Borrower

  
	
   

  	
  By:

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TXDC,
  L.P.

  
	
   

  	
  as
  Borrower

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  ZALE
  DELAWARE, INC.

  
	
   

  	
   

  	
  Its
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  PUERTO RICO, INC.

  
	
   

  	
  as
  Borrower

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  

 

 

	
   

  	
  ZALE
  CANADA CO.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CANADA DIAMOND SOURCING, INC.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZAP,
  INC.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CANADA DIAMOND SOURCING, INC.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CANADA HOLDING, LP.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  

 

 

	
   

  	
  ZCSC,
  LLC

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  INTERNATIONAL, INC.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  EMPLOYEES’ CHILD CARE ASSOCIATION, INC.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CANADA FINCO 2, INC.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FINCO
  HOLDING LP.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  

 

 

	
   

  	
  FINCO
  PARTNERSHIP LP.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CANADA FINCO, LLC

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CANADA FINCO 1, INC.

  
	
   

  	
  as
  a Facility Guarantor

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Matthew W. Appel

  
	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  

 

 

	
   

  	
  BANK
  OF AMERICA, N.A., as Administrative Agent, Collateral Agent and Co-Borrowing
  Base Agent and as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Andrew Cerussi

  
	
   

  	
  Name:
  Andrew Cerussi

  
	
   

  	
  Title:
  SVP

  

 

 

	
   

  	
  JPMORGAN
  CHASE BANK, as Documentation Agent and as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

	
   

  	
  GENERAL
  ELECTRIC CAPITAL CORPORATION, as Co-Borrowing Base Agent and a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

	
   

  	
  THE
  CIT GROUP/BUSINESS CREDIT, INC., as a Lender

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

	
   

  	
  NATIONAL
  CITY COMMERCIAL FINANCE, INC., as a Lender

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

	
   

  	
  WELLS
  FARGO RETAIL FINANCE, LLC, as Co-Borrowing Base Agent and a Lender

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Connie Liu

  
	
   

  	
  Name:
  Connie Liu

  
	
   

  	
  Title:
  Vice President

  

 

 

	
   

  	
  KEYBANK
  NATIONAL ASSOCIATION, as a Lender

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

	
   

  	
  THE
  BANK OF NEW YORK, as a Lender

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

	
   

  	
  ABN/AMRO
  BANK, as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  An Blommaert

  
	
   

  	
  Name:
  An Blommaert

  
	
   

  	
  Title:
  Head Credit Administration ID & JG

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
  /s/
  Frank Coenegrachts

  
	
   

  	
  Name:
  Frank Coenegrachts

  
	
   

  	
  Title:
  Chief Risk Officer

  

 

 

	
   

  	
  HIBERNIA
  NATIONAL BANK, as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:
  

  	
   

  
	
   

  	
  Name:
  

  
	
   

  	
  Title:
  

  

 

 

EXHIBIT A

 

FORM OF 

ASSIGNMENT AND ACCEPTANCE

 

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

 

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

 

	
  1.             Assignor:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  2.             Assignee:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  3.             Borrowers:

  	
   

  	
  Zale
  Delaware, Inc.  

  Zale
  Corporation  

  ZGCO,
  LLC  

  TXDC,
  L.P.  

  Zale
  Puerto Rico, Inc.

  
	
   

  	
   

  	
   

  
	
  4.             Administrative Agent:

  	
   

  	
  Bank
  of America, N.A., as the administrative agent under the Credit Agreement

  

 

 

	
  5.             Credit Agreement:

  	
   

  	
  The
  Amended and Restated Credit Agreement dated as of May 10, 2010 by, among
  others, Zale Delaware, Inc., Zale Corporation, ZGCO, LLC, TXDC, L.P.,
  and Zale Puerto Rico, Inc. (collectively, the “Borrowers”), the
  Facility Guarantors party thereto, the Lenders party thereto, and Bank of
  America, N.A. as Administrative Agent and Collateral Agent

  
	
   

  	
   

  	
   

  
	
  6.             Assigned Interest:

  	
   

  	
   

  

 

	
  Percentage Interest of
  Total Commitments being assigned:

  	
   

  	
   

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Amount of Commitment being
  assigned:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  After Giving Effect to the
  Assignment:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Assignor’s Commitment:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Assignee’s Commitment:

  	
   

  	
  $

  	
   

  	
   

  

 

	
  [7.            Trade Date:

  	
   

  	
                              ]
  (1)

  

 

Effective date:
                      
      , 201   .

 

The terms set forth in this
Assignment and Acceptance are hereby agreed to:

 

	
   

  	
  ASSIGNOR

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  ASSIGNEE

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

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

 

 

	
   

  	
  Consented
  to and Accepted:

  
	
   

  	
   

  
	
   

  	
  BANK
  OF AMERICA, N.A., as Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  [Consented
  to:](2)

  
	
   

  	
   

  
	
   

  	
  [ZALE
  DELAWARE, INC.]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  [ZALE
  CORPORATION]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  [ZGCO,
  LLC]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  [TXDC,
  L.P.]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [ZALE
  PUERTO RICO, INC.]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

(2) In
accordance with Section 9.4 of the Credit Agreement, so long as no Default
or Event of Default has occurred and is continuing, the Borrowers shall give
their prior written consent to such assignment.

 

 

ANNEX 1

 

The Amended and Restated
Credit Agreement dated as of May 10, 2010 by, among others, ZALE DELAWARE,
INC., a Delaware corporation (“Zale Delaware”), ZALE CORPORATION, a Delaware
corporation (“Zale”), ZGCO, LLC, a Virginia limited liability company (“ZGCO”),
TXDC, L.P., a Texas limited partnership (“TXDC”), and ZALE PUERTO RICO, INC., a
Puerto Rico corporation (“Zale Puerto Rico”, and together with Zale Delaware,
Zale, ZGCO, and TXDC, the “Borrowers”), the Facility Guarantors, the Lenders
party thereto, and BANK OF AMERICA, N.A., as Administrative Agent, and the
other agents parties thereto.

 

STANDARD TERMS AND CONDITIONS
FOR 

ASSIGNMENT AND ACCEPTANCE

 

1.             Representations
and Warranties.

 

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

 

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

 

2.             Joint
Representations of Assignor and Assignee.        The
Assignor and Assignee each hereby represent and warrant that: (i) this
assignment is (a) being made to a Lender or an Affiliate of a Lender, (b) is
an assignment of the entire remaining amount of the Assignor’s Commitment, (c) is
an assignment of not less than $5,000,000, or (d) the Administrative Agent
and Borrowers have otherwise consented below; (ii) this assignment is not being made by an
Extending Lender to a Non-

 

 

Extending Lender; (iii) if this is an
assignment that is being made by a Non-Extending Lender to an Extending Lender,
this assignment shall not modify the tenor or maturity of, or pricing for, the
Commitment and Loans so assigned unless agreed to by such Assignee and
consented to by the Administrative Agent in a separate writing; and (vi) to
the extent required under the Credit Agreement, the Assignor and Assignee have
delivered, or caused to be delivered, a processing and recording fee of $3,500
to the Administrative Agent.

 

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

 

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

 

 

EXHIBIT B-1

 

[AMENDED
AND RESTATED](1) REVOLVING LOAN NOTE

 

as of                             ,
2010

 

FOR VALUE RECEIVED, the undersigned, ZALE
DELAWARE, INC. , a Delaware corporation (“Zale Delaware”), ZALE CORPORATION, a Delaware corporation (“Zale”),
ZGCO, LLC, a Virginia limited
liability company (f/k/a DDCC, Inc., a Delaware corporation) (“ZGCO”), TXDC, L.P., a Texas limited partnership (“TXDC”)
and ZALE PUERTO RICO, INC. (“Zale
Puerto Rico”, and together with Zale Delaware, Zale, ZGCO, and TXDC, the “Borrowers”),
hereby jointly and severally promise to pay to the order of [                                                        ]
(the “Lender”) at the Administrative Agent’s office at 100 Federal Street, 9th Floor, Boston, Massachusetts 02110:

 

(a)           prior to or on the [Extended] Termination Date the
principal amount of
                        
                            
                    
Dollars
($                            )
or, if less, the aggregate unpaid principal amount of Revolving Loans advanced
by the Lender to the Borrowers pursuant to the Amended and Restated Credit
Agreement dated as of May 10, 2010 (as amended, modified, supplemented or
restated and in effect from time to time, the “Credit Agreement”), by, among
others, the Borrowers, the Facility Guarantors party thereto, the Lender, the
other Lenders party thereto, the Collateral Agent, and the Administrative
Agent;

 

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

 

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

 

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

 

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

 

(1) Insert
bracketed language as appropriate

 

 

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

 

The Borrowers have the right
in certain circumstances and the obligation under certain other circumstances
to prepay the whole or part of the principal of this Note on the terms and
conditions specified in the Credit Agreement.

 

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

 

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

 

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

 

THIS NOTE AND THE
OBLIGATIONS OF THE BORROWERS HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS, BUT INCLUDING SECTIONS 5-1401 AND
5-1402 OF THE GENERAL OBLIGATIONS LAW. THE BORROWERS AGREE THAT ANY SUIT FOR
THE ENFORCEMENT OF THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH
SUIT BEING MADE UPON THE BORROWERS BY MAIL AT THE ADDRESS SPECIFIED IN §9.1 OF
THE CREDIT AGREEMENT. THE BORROWERS HEREBY WAIVE ANY OBJECTION THAT THEY MAY NOW
OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH
SUIT IS BROUGHT IN AN INCONVENIENT COURT.

 

[Signature
Page Follows]

 

2

 

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

 

	
   

  	
  ZALE
  DELAWARE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZGCO,
  LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TXDC,
  L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  ZALE
  DELAWARE, INC.

  
	
   

  	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZALE
  PUERTO RICO, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

Signature Page to [Amended and
Restated] Revolving Loan Note

 

 

EXHIBIT B-2

 

AMENDED
AND RESTATED SWINGLINE NOTE

 

	
  $50,000,000

  	
  as of May 10, 2010

  

 

FOR VALUE RECEIVED, the
undersigned, ZALE DELAWARE, INC., a Delaware
corporation (“Zale Delaware”), ZALE CORPORATION,
a Delaware corporation (“Zale”), ZGCO, LLC, a
Virginia limited liability company (f/k/a DDCC, Inc., a Delaware
corporation) (“ZGCO”), TXDC, L.P., a
Texas limited partnership (“TXDC”) and ZALE PUERTO RICO, INC.
(“Zale Puerto Rico”, and together with Zale Delaware, Zale, ZGCO, and TXDC, the
“Borrowers”), hereby jointly and severally, absolutely and unconditionally
promise to pay to the order of BANK OF AMERICA, N.A.
(the “Swingline Lender”), without offset or counterclaim, with offices at 100
Federal Street, 9th Floor, Boston, Massachusetts 02110:

 

(a)           on the Extended Termination Date, the principal amount of
FIFTY MILLION DOLLARS ($50,000,000) or, if less, the then outstanding aggregate
unpaid principal amount of Swingline Loans made by the Swingline Lender to the
Borrowers pursuant to the Amended and Restated Credit Agreement, dated as of May 10,
2010 (as amended, modified, supplemented or restated and in effect from time to
time, the “Credit Agreement”), by and between, among others, (i) the
Borrowers, (ii) the Facility Guarantors party thereto, (iii) the
lending institutions identified as Lenders therein, (iv) the
Administrative Agent, and (v) the Collateral Agent; and

 

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

 

This Amended and Restated
Swingline Note (the “Swingline Note”) replaces in its entirety that certain
Swingline Note dated July 23, 2003, by certain of the Borrowers, payable
to the Lender. This Swingline Note evidences borrowings under, is subject to
the terms and conditions of, and has been issued by the Borrowers in accordance
with the Credit Agreement and is the Swingline Note referred to therein. The
Swingline Lender and any holder hereof are entitled to the benefits of the
Credit Agreement and may enforce the agreements of the Borrowers contained
therein, and any holder hereof may exercise the respective remedies provided
for thereby or otherwise available in respect thereof, all in accordance with
the respective terms thereof. All capitalized terms used in this Swingline Note
and not otherwise defined herein shall have the same meanings herein as in the
Credit Agreement.

 

The Swingline Lender shall
endorse, and is hereby irrevocably authorized by the Borrowers to endorse, on
its records and/or on the schedule attached to this Swingline Note or a
continuation of such schedule attached hereto and made a part hereof, an
appropriate notation evidencing advances to the Borrowers and repayments by the
Borrowers of principal of this Swingline Note, provided that failure by the
Swingline Lender to make any such notations shall not affect any of the
Borrowers’ obligations or the validity of any repayments made by the Borrowers
in respect of this Swingline Note.

 

The Borrowers have the right
in certain circumstances and the obligation in certain other circumstances to
prepay the whole or part of the principal of this Swingline Note on the terms
and conditions specified in the Credit Agreement.

 

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

 

 

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

 

THIS SWINGLINE NOTE AND
THE OBLIGATIONS OF THE BORROWERS HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS, BUT INCLUDING SECTIONS 5-1401 AND
5-1402 OF THE GENERAL OBLIGATIONS LAW. THE BORROWERS AGREE THAT ANY SUIT FOR
THE ENFORCEMENT OF THIS SWINGLINE NOTE MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH
SUIT BEING MADE UPON THE BORROWERS BY MAIL AT THE ADDRESS SPECIFIED IN §9.1 OF
THE CREDIT AGREEMENT. THE BORROWERS HEREBY WAIVE ANY OBJECTION THAT THEY MAY NOW
OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH
SUIT IS BROUGHT IN AN INCONVENIENT COURT.

 

[Signature
Page Follows]

 

2

 

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

 

	
   

  	
  ZALE
  DELAWARE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  ZALE
  CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZGCO,
  LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TXDC,
  L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  ZALE
  DELAWARE, INC.

  
	
   

  	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  ZALE
  PUERTO RICO, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

Signature
Page to Amended and Restated Swingline Note

 

 

Exhibit C-1

 

AMENDED
AND RESTATED SECURITY AGREEMENT

 

This AMENDED AND RESTATED SECURITY AGREEMENT
(this “Agreement”) dated as of May 10, 2010 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

 

Each
of the entities list on Schedule 1 attached hereto (each such Person,
individually, a “Grantor” and, collectively with Zale Delaware, the “Grantors”);
and

 

BANK OF AMERICA, N.A., a national
association, 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 July 23,
2003 (as amended and in effect, the “Existing Credit Agreement”) by and
among (i) certain of the Grantors, as Borrowers (ii) the Lenders
named therein, (iii) Bank of America, N.A., as successor by merger to
Fleet National Bank, a national banking association, as Administrative Agent,
for itself and the Lenders, (iv) Bank of America, N.A., as successor to
Fleet Retail Group, LLC (f/k/a Fleet Retail Finance Inc.), as Collateral Agent
for the Lenders, (v) Banc of America Securities LLC, as successor to Fleet
Securities, Inc., as Arranger, (vi) JPMorgan Chase Bank, N.A. and
Wachovia Capital Finance Corporation (Southwest), as Co-Syndication Agents, and
(vii) JPMorgan Chase Bank and Bank of America, N.A. as Documentation
Agents.

 

Reference is also made to that certain
Security Agreement dated as of July 23, 2003, by and between certain of
the Grantors and the Collateral Agent (as amended and in effect, the “Existing
Security Agreement”), pursuant to which such Grantors granted a Lien in
favor of the Collateral Agent, for the benefit of the Secured Parties, to
secure their obligations under the Existing Credit Agreement.

 

The Grantors and Collateral Agent, among
others, have agreed to amend and restate the Existing Credit Agreement in its
entirety pursuant to that certain Amended and Restated Credit Agreement of even
date herewith by and between, among others: (i) the Grantors, as either
Borrowers or Facility Guarantors, (ii) the Lenders from time to time party
thereto (individually, a “Lender” and, collectively, the “Lenders”),
(iii) Bank of America, N.A. as Collateral Agent and Administrative Agent
for the Secured Parties, and (iv) Bank of America, N.A., General Electric
Capital Corporation and Wells Fargo Retail Finance, LLC, as Co-Borrowing Base
Agents (as amended, restated, supplemented, or otherwise modified from time to
time, the “Credit Agreement”).

 

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

 

 

Issuing Banks 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 that the
Existing Security Agreement shall be amended and restated in its entirety to
read 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 or in the Credit Agreement shall
have the meanings set forth in the UCC, 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; provided, however, that if a term is defined in Article 9
of the UCC differently than in another Article thereof, the term shall
have the meaning set forth in Article 9; and provided  further
that if by reason of mandatory provisions of law, perfection, or the effect of
perfection or non-perfection, of the Security Interest in any Collateral or the
availability of any remedy hereunder is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than New York, “UCC” means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or
non-perfection or availability of such remedy, as the case may be. Capitalized
terms used but not otherwise defined herein that are defined in the Credit
Agreement shall have the meanings given to them in the Credit Agreement.

 

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

 

“Collateral” shall mean the following
assets of each Grantor: (a) all Accounts, (b) all Inventory, (c) all
Deposit Accounts, Concentration Accounts and cash, (d) all Documents, (e) all
Chattel Paper, (f) all Instruments, General Intangibles, Supporting
Obligations and Letter-of-Credit Rights, (g) all Goods, (h) Equipment
and Fixtures, (i) all Investment Property, (j) all Securities
Accounts and Commodity Accounts, (k) all Commercial Tort Claims, (l) all
Intellectual Property, (m) all other personal property not otherwise
described above, whether tangible or intangible and wherever located (except
for any property expressly excluded in this definition of “Collateral”), (n) all
policies and certificates of insurance and all insurance proceeds, refunds and
premium rebates, including proceeds of fire and credit insurance, with respect
to any of the foregoing, (o) all books, records, and information relating
to any of the foregoing, and all rights of access to such books, records, and information,
(p) all liens, guaranties, rights, remedies, and privileges pertaining to
any of the foregoing ((a) through (o)), including the right of stoppage in
transit, and (q) any of the foregoing whether now owned or now due, or in
which any Grantor has an interest, or hereafter acquired, arising, or to become
due, or in which any Grantor obtains an interest, and all products, Proceeds,
substitutions, and accessions of or to any of the foregoing.  Notwithstanding the foregoing, the term “Collateral”
shall expressly exclude the following: (i) any Trademark applications
filed on an “intent to use” basis until the earlier of the filing of a
statement of use thereon or the first use in commerce thereof, (ii) any
Inventory or other Goods that have been delivered to any Grantor on a
consignment basis to the extent that the rights of such consignor have been
properly perfected under applicable law, (iii) any property to the extent
that such grant of a security interest is prohibited by any valid enforceable
law or regulation applicable thereto, requires a consent not obtained of any 

 

2

 

Governmental Authority pursuant to such law or regulation or is
prohibited by, or constitutes a breach or default under or results in the
termination of or gives rise to a right on the part of the parties thereto
other than such Grantor to terminate (or materially modify) or requires any
consent not obtained under, any contract, license, agreement, instrument or
other document evidencing or giving rise to such property, except to the extent
that such law or regulation or the term in such contract, license, agreement,
instrument or other document or similar agreement providing for such
prohibition, breach, default or right of termination or modification or
requiring such consent is ineffective under applicable law, provided, however,
that such security interest shall attach immediately at such time as the
condition causing such prohibition, breach, default or right of termination or modification
or requiring such consent, as the case may be, shall be remedied and, to the
extent severable, shall attach immediately to any portion of such contract,
license, agreement, instrument or other document that does not result in any of
such consequences, including any proceeds of such contract, license, agreement,
instrument or other document, (iv) the Equity Interests of Dobbins
Jewelers, Inc., (v) the Equity Interests of Jewel Re-Insurance Ltd.
in excess of 65% of the issued and outstanding shares of any class of Equity
Interests of such Subsidiary and (vi) the voting Equity Interests of ZC
Partnership, LP in excess of 65% of the general partnership Equity Interests of
such Subsidiary; provided, further, that in all events, all Proceeds,
substitutions or replacements of the foregoing shall constitute “Collateral”
hereunder.

 

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

 

“Copyright Licenses” shall mean
exclusive Licenses in respect of Copyrights where a Grantor is a licensee.

 

“Copyrights” shall mean, with respect
to any Person, all of such Person’s right, title and interest, now or hereafter
acquired, in and to the following:  (a) all
copyrights, rights and interests in copyrights, works protectable by copyright,
copyright registrations and copyright applications; (b) all extensions and
renewals of any of the foregoing; (c) all income, royalties, damages, and
payments now or hereafter due and/or payable under any of the foregoing,
including damages or payments for past, present or future infringements for any
of the foregoing; (d) the right to sue for past, present and future
infringements of any of the foregoing; and (e) all rights corresponding to
any of the foregoing.

 

“Deposit Account” shall have the
meaning given that term in the UCC, and shall also refer to any checking or
other demand deposit account into which proceeds of Collateral are deposited,
and shall include any time, savings, passbook, or similar accounts maintained
with a bank or other financial institution.

 

“Distribution” shall have the meaning
assigned to such term in Section 6.4(a).

 

“Equity Interests” means, with respect
to any Person, all of the shares of capital stock of (or other ownership or
profit interests in) such Person, and all of the warrants or options for the
purchase or acquisition from such Person of shares of capital stock of (or
other ownership or profit interests in) such Person (including partnership,
member or trust interests therein), whether voting or nonvoting (but excluding,
for avoidance of doubt, any Indebtedness convertible into or exchangeable for
Equity Interests).

 

3

 

“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; all 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.

 

“Industrial Designs”
shall mean, with respect to any Person, all of such Person’s right, title and
interest, now owned or hereafter acquired, in and to: (a) any and all
Canadian industrial designs and industrial design applications; (b) all
income, royalties, damages, claims, and payments now or hereafter due or
payable under and with respect thereto, including damages and payments for
past, present and future infringements thereof; (c) all rights to sue for
past, present and future infringements thereof; and (d) all rights
corresponding to any of the foregoing.

 

“Intellectual Property” shall mean all
intellectual property and similar property of every kind and nature now owned
or hereafter acquired by any Person, including inventions, designs, Patents,
Copyrights, Trademarks, Industrial Designs, Licenses, trade secrets,
confidential or proprietary technical and business information, know-how,
show-how or other data or information and all related documentation, and all
additions and improvements to any of the foregoing.

 

“Inventory” shall include all “inventory”
as defined in the UCC and also, without limitation, 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.

 

“Investment Property”
shall have the meaning given that term in the UCC and shall also include all
Pledged Collateral, Pledged Operating Agreements and Pledged Partnership
Agreements.

 

“License” shall mean, with respect to
any Person, all of such Person’s right, title and interest in and to (a) any
and all licensing agreements or similar arrangements in and to any other Person’s
Intellectual Property, (b) all income, royalties, damages, claims and
payments now or hereafter due or payable under and with respect thereto,
including damages and payments for past, present and future breaches thereof,
and (c) all rights to sue for past, present and future breaches thereof.

 

“Material Trademark” shall mean any
Trademark of a Grantor that is material to the conduct of such Grantor’s
business.

 

“Patents” shall mean, with respect to
any Person, all of such Person’s right, title and interest, now owned or
hereafter acquired, in and to:  (a) any
and all patents and patent applications or Canadian industrial design
registrations and applications; (b) all inventions and improvements
described and claimed therein, including the right to make, use and/or sell the
inventions disclosed or claimed therein; (c) all reissues, divisions,
continuations, renewals, extensions, and continuations-in-part thereof; (d) all

 

4

 

income, royalties, damages, claims, and payments now or hereafter due
or payable under and with respect thereto, including damages and payments for
past, present and future infringements thereof; (e) all rights to sue for
past, present and future infringements thereof; and (f) all rights
corresponding to any of the foregoing.

 

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

 

“Perfection Certificate” shall mean a
certificate substantially in the form of Schedule 2 hereto, completed
and supplemented with the schedules and attachments contemplated thereby, and
duly executed by a Financial Officer of each of the Grantors.

 

“Pledged Collateral” shall mean all
Pledged Interests and Pledged Notes.

 

“Pledged Collateral Addendum” shall
mean a Pledged Collateral Addendum substantially in the form of Annex 2 to this
Agreement.

 

“Pledged Companies” shall mean each
Person listed on Schedule 4 hereto as a “Pledged Company”, together with each
other Person, all or a portion of whose equity interests, is acquired or
otherwise owned by a Grantor after the Effective Date.

 

“Pledged Interests” shall mean all of
each Grantor’s right, title and interest in and to all of the equity interests
now or hereafter owned by such Grantor (other than such equity interests in
Dobbins Jewelers, Inc.), regardless of class or designation, including in
each of the Pledged Companies owned by it, and all substitutions therefor and
replacements thereof, all proceeds thereof and all rights relating thereto,
also including any certificates representing the equity interests, the right to
receive any certificates representing any of the Equity Interests, all
warrants, options, share appreciation rights and other rights, contractual or
otherwise in respect thereof, and the right to receive dividends, distributions
of income, profits, surplus, or other compensation by way of income or
liquidating distributions, in cash or in kind, and all cash, instruments, and
other property from time to time received, receivable, or otherwise distributed
in respect of or in addition to, in substitution of, on account of, or in
exchange for any or all of the foregoing.

 

“Pledged Notes” shall mean, with
respect to any Grantor, all of the debt securities now or hereafter owned by
such Grantor and the promissory notes evidencing such debt securities.

 

“Pledged Operating Agreements” shall
mean all of each Grantor’s rights, powers, and remedies under the limited
liability company operating agreements of each of the Pledged Companies that
are limited liability companies.

 

“Pledged Partnership Agreements” shall
mean all of each Grantor’s rights, powers, and remedies under the partnership
agreements of each of the Pledged Companies that are partnerships.

 

“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 Banks, (d) the
Arranger, (e) the Co-Borrowing Base Agents, (f) the beneficiaries of
each indemnification 

 

5

 

obligation undertaken by any Grantor under any Loan Document, (g) any
other Person to whom Secured Obligations are owed or may become due and owing,
and (h) 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.

 

“Trademarks” shall mean, with respect
to any Person, all of such Person’s right, title and interest, now owned or
hereafter acquired, in and to the following: 
(a) all trademarks (including service marks), trade names, trade
dress, trade styles and other source indicators and the registrations and
applications for registration thereof and the goodwill of the business
symbolized by the foregoing; (b) all licenses of the foregoing, whether as
licensee or licensor; (c) all renewals of the foregoing; (d) all
income, royalties, damages and payments now or hereafter due or payable with
respect thereto, including damages, claims and payments for past and future
infringements thereof; (e) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (f) all rights corresponding
to any of the foregoing.

 

“ULC” shall mean an unlimited company
under the Companies Act (Nova Scotia).

 

“ULC Pledgor” has the meaning assigned
to such term in Section 6.05.

 

“ULC Shares” shall mean shares of
stock or other Equity Interests of one or more ULCs.

 

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, mortgages, pledges, hypothecates,
and (except in the case of ULC Shares) transfers and assigns, 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 wherever located,
whether now owned or hereafter acquired (the “Security Interest”).  Without limiting the foregoing, each Grantor
hereby designates the Collateral Agent as such Grantor’s true and lawful
attorney, 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, to file with
the United States Patent and Trademark Office, United States Copyright Office,
Canadian Intellectual Property Office or Canadian Industrial Design Office (or
any successor office or any similar office in any other country) such documents
as may be necessary or advisable, or to sign other documents for the purpose of
perfecting, confirming, continuing, or protecting the Security Interest granted
by each Grantor, without the signature of any Grantor (each Grantor hereby
appointing the 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), 

 

6

 

and
naming any Grantor or the Grantors as debtors and the Collateral Agent as
secured party.  Any such financing
statement may indicate the Collateral as “all assets of the Grantor” or words
of similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the UCC.

 

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.

 

SECTION 2.3                 Perfection
Regarding Certain Term Priority Collateral.  In the event that the Term Agent (as defined
in the Intercreditor Agreement) shall determine in its reasonable discretion
that the cost (including adverse tax consequences) of perfecting a security
interest in any Term Priority Collateral would be excessive in relation to the
value of the security to be afforded thereby, then the Collateral Agent shall
not require the perfection of its security interest in such Term Priority
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.  The Perfection Certificate has been duly
prepared, completed and executed, and the information set forth therein is
correct and complete in all material respects. UCC and PRUCC financing
statements (other than fixture filings), or other appropriate filings,
recordings or registrations containing a description of the Collateral have
been, or will be, filed in each governmental, municipal or other office as is
necessary to publish notice and protect the validity of, and to establish a
legal, valid and perfected security interest in favor of the 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 pursuant to the UCC or the PRUCC in the United States (or any
political subdivision thereof) and its territories and possessions, and no
further or subsequent filing, refiling, recording, rerecording, registration or
reregistration (other than filings required to be made in the United States
Patent and Trademark Office, the United States Copyright Office, the Canadian
Intellectual Property Office and the Canadian Industrial Design Office in order
to perfect the Security Interest in Collateral consisting of United States and
Canadian Patents, Industrial Designs, Trademarks, Copyrights and Copyright
Licenses, as the case may be) is necessary in any such jurisdiction, except as
provided under applicable law with respect to the filing of continuation
statements.  A fully executed Patent,
Industrial Design and Trademark Security Agreement, in the form attached as
Annex 3 hereto, and a fully executed 

 

7

 

Copyright
Security Agreement, in the form attached as Annex 4 hereto (such agreements
being collectively referred to as the “IP Agreements”), covering the
United States and Canadian registered Patents, Industrial Designs, United
States and Canadian registered Trademarks and United States and Canadian
registered Copyrights (and applications for any of the foregoing) and Copyright
Licenses, as applicable, have been delivered to the Collateral Agent for
recording by the United States Patent and Trademark Office and the United
States Copyright Office pursuant to 35 U.S.C. § 261, 15 U.S.C. § 1060 or 17
U.S.C. § 205 and the regulations thereunder, and the Canadian Intellectual
Property Office and the Canadian Industrial Design Office, as applicable, as is
necessary to protect the validity of and to establish a legal, valid and
perfected security interest in favor of the Collateral Agent (for the benefit
of the Secured Parties) in respect of all Collateral consisting of Intellectual
Property in which a security interest may be perfected by filing, recording or
registration in the United States or Canada (or any political subdivision,
province or territory thereof) and its territories and possessions, and no
further or subsequent filing, refiling, recording, rerecording, registration or
reregistration is necessary (other than such actions as are necessary to
perfect the Security Interest with respect to any Intellectual Property
acquired or developed after the date hereof).

 

SECTION 3.3                 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 filing or recording a financing statement or analogous document in
the United States or Canada (or any political subdivision, province or territory
thereof) and its territories and possessions pursuant to the UCC or the PRUCC
or by recording of the IP Agreements with the United States Patent and
Trademark Office, the United States Copyright Office, the Canadian Intellectual
Property Office and the Canadian Industrial Design Office, as applicable, and (c) subject
to the obtaining of Control, a perfected security interest in all the
Collateral, to the extent that perfection of the Security Interest in such
Collateral is required by the terms hereof or the Credit Agreement and may only
be accomplished through Control.  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 and which have priority by operation of law.

 

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 Certificate, no Grantor
has filed or consented to the filing of (a) any financing statement or
analogous document under the UCC or the PRUCC or any other applicable law
covering any Collateral, (b) any assignment in which any Grantor assigns
any Collateral or any security agreement or similar instrument covering any
Collateral with the United States Patent and Trademark Office, the United
States Copyright Office, the Canadian Intellectual Property Office or the
Canadian Industrial Design Office, or (c) any assignment in which any
Grantor assigns any Collateral or any security agreement or similar instrument
covering any Collateral with any foreign governmental, municipal or other
office, which financing statement or analogous document, assignment, security
agreement or similar instrument is still in effect, except, in each case, for
Liens expressly permitted pursuant to Section 6.2 of the Credit Agreement.

 

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

 

8

 

storage,
or entrustment except for Equipment and Inventory (i) out for repair or
replacement in the ordinary course of business, (ii) being shipped, or in
transit, from a supplier or to a customer or between suppliers, in the ordinary
course of business or (iii) in the possession of suppliers, subcontractors
and licensees, in the ordinary course of business, unless the applicable
Grantor complies with Section 4.1(c) below.

 

SECTION 3.6                 Intellectual
Property.   Schedule 3
hereto sets forth, as of the date hereof, (i) all of each Grantor’s
registered Patents and Patent applications (and for greater certainty,
registered Industrial Designs and Industrial Design applications), including
the name of the registered owner, type, registration or application number and
the expiration date (if already registered) of each such Patent and Patent
application owned by any Grantor, (ii) all of each Grantor’s
registered Industrial Designs and Industrial Design applications, including the
name of the registered owner, registration or application number and the
expiration date (if already registered) of such industrial design and
industrial design application owned by any Grantor, (iii) all of each
Grantor’s registered Trademarks and Trademark applications, including the
name of the registered owner, the registration or application number and the
expiration date (if already registered) of each such Trademark and Trademark
application owned by any Grantor and (iv) all of each Grantor’s
registered Copyrights, Copyright applications and Copyright Licenses, including
the name of the registered owner, title and, if applicable, the registration
number of each such Copyright, Copyright application or Copyright License owned
by any Grantor.

 

SECTION 3.7                 Commercial Tort
Claims.  Except as otherwise disclosed
in the Perfection Certificate, none of the Collateral consists of Commercial
Tort Claims seeking damages in an amount of $1,000,000 or more.

 

SECTION 3.8                 Pledged
Collateral.

 

(a)           Each Grantor is the holder
of record and the legal and beneficial owner, free and clear of all Liens other
than the Security Interest granted to the Collateral Agent for the benefit of
the Secured Parties hereunder and Liens permitted by Section 6.2 of the
Credit Agreement, of the Pledged Collateral indicated on Schedule 4 as being
owned by such Grantor and any Pledged Collateral owned by such Grantor and
acquired after the Effective Date.

 

(b)           All of the Pledged
Collateral constituting Pledged Interests is duly authorized, validly issued,
fully paid and nonassessable (provided that Pledged Interests which are
ULC Shares will be assessable in accordance with the provisions of the
Companies Act (Nova Scotia)) and such Pledged Interests constitute or will
constitute the percentage of the issued and outstanding Equity Interests of the
Pledged Companies of each applicable Grantor identified on Schedule 4, any
Pledged Collateral Addendum or any Supplement to this Agreement.  All of the Pledged Collateral constituting
Pledged Notes is duly authorized, validly issued and delivered by the issuer of
such Pledged Note and is the legal, valid and binding obligation of such issuer
and such issuer is not in default thereunder. 
Each Grantor has the right and requisite authority to pledge the Pledged
Collateral pledged by such Grantor to the Collateral Agent as provided herein.

 

(c)           All actions necessary to
perfect or establish the first priority of the Collateral Agent’s Liens
(subject to Permitted Encumbrances which have priority by operation of law) in
the Pledged Collateral, and the proceeds thereof, have been duly taken, (A) upon
the execution and delivery of this Agreement; (B)(i) upon the taking of
possession by the Collateral Agent of 

 

9

 

any certificates constituting the Pledged
Interests, to the extent such Pledged Interests are represented by
certificates, together with undated powers endorsed in blank by the applicable
Grantor and (ii) upon the taking of possession by the Collateral Agent of
any promissory notes constituting the Pledged Notes, together with undated
powers endorsed in blank by the applicable Grantor; and (C) upon the
filing of Uniform Commercial Code financing statements in the applicable jurisdiction
for such Grantor with respect to the Pledged Interests of such Grantor that are
not represented by certificates.  Subject
to Section 8.17, each Grantor has delivered to and deposited with the
Collateral Agent (or, with respect to any Pledged Collateral created or
obtained after the Effective Date, will deliver and deposit in accordance with Section 4.12
hereof) all certificates representing the Pledged Interests owned by such
Grantor to the extent such Pledged Interests are represented by certificates,
all promissory notes representing the Pledged Notes owned by such Grantor, and
undated powers endorsed in blank with respect to such certificates or
promissory notes.

 

(d)           None of the Pledged
Collateral owned or held by such Grantor has been issued or transferred in
violation of any securities registration, securities disclosure, or similar
laws of any jurisdiction to which such issuance or transfer may be subject.

 

SECTION 3.9                 Nature of Certain Consignment
Filings.  Each of the Liens and other
filings set forth on Schedule 6.2 of the Credit Agreement which purports to
cover goods delivered to a Grantor on a consignment basis (a) evidences
arrangements entered into with such Grantor and its trade vendors in the
ordinary course of business, intended by such Grantor and vendor to be a “true”
consignment, (b) does not encumber any assets of such Grantor other than
the consigned goods to which its relates and the proceeds thereof, to the
extent owing to the vendor and (c) secures solely the obligation of such
Grantor to either return such consigned goods or pay the purchase price for
such consigned goods, in each case, pursuant to a written consignment agreement
on terms substantially similar to those set forth in the Grantors’ standard
form of consignment agreement as in effect on or about the Effective Date (with
the exception of any such Liens and other filings made by any trade vendors in
connection with or relating to that certain Amendment to Existing Agreements
dated as of March 3, 2010 by and among Zale Delaware, Inc., TXDC,
L.P., Rosy Blue Jewelry, Inc. and Rosy Blue, Inc., relating to
consigned goods for such Grantor’s 2010 Spring season), a copy of which has
been provided to the Collateral Agent.

 

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 (i) prompt written notice of any change in
(A) any Grantor’s trade name used to identify it in the conduct of its
business or in the ownership of its properties, (B) any office in which it
maintains books or records relating to Collateral owned by it and having a
value in excess of $1,000,000 or any office or facility at which Collateral
owned by it and having a value in excess of $1,000,000 is located (including
the establishment of any such new office or facility), other than, in each
case, (I) retail Store locations or (II) Equipment and Inventory (1) out
for repair or replacement in the ordinary course of business, (2) being
shipped, or in transit, from a supplier or to a customer or between suppliers,
in the ordinary course of business or (3) in the possession of suppliers,
subcontractors and licensees, 

 

10

 

in the ordinary course of business, or (C) the
acquisition by any Grantor of any property for which additional filings or
recordings are necessary to perfect and maintain the Collateral Agent’s
Security Interest therein, and (ii) prior written notice of any change in (i) any
Grantor’s corporate or partnership name or  the location
of any Grantor’s chief executive office or its principal place of business, (ii) any
Grantor’s identity or corporate or partnership structure or (iii) any
Grantor’s jurisdiction of incorporation, amalgamation or formation, Federal
Taxpayer Identification Number or state organizational number or similar
taxation or organization number; provided, however, that if any of the
occurrences referred to in clauses (i) and (ii) shall occur with
respect to any Canadian Loan Party or any of its assets, Canadian Loan Party
shall furnish the Collateral Agent with 30 days prior written notice
thereof.  The Grantors also agree
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 the PRUCC 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.  Each of the Grantors
which is a Canadian Loan Party acknowledges and agrees that, except as
disclosed on the Perfection Certificate, such Grantor does not currently, nor
will it in the future, have any assets that constitute Collateral located in
the United States.

 

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

 

(c)           Each Grantor agrees that, to
the extent it acquires any additional leased warehouses or distribution centers
after the Effective Date, the Grantors shall provide the Collateral Agent with
prompt notice thereof, and shall obtain a waiver and collateral access
agreement in form and substance reasonably satisfactory to the Collateral
Agent.

 

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(a) 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 Effective 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.

 

11

 

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 or the validity or priority of such Security Interest, 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, as well as causing the Collateral Agent to have Control of any such
Collateral to the extent required perfection is required under this Agreement
or the Credit Agreement and can only be accomplished through Control.  If any amount payable under or in connection
with any of the Collateral shall be or become evidenced by any promissory note,
Document, draft, Chattel paper, or other Instrument in an amount in excess of
$1,000,000, such note, Document, draft, Chattel paper, or other 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.  The
Collateral Agent may, at its option, 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 that, so long as no Event of Default
shall have occurred and be continuing, if such taxes, assessments, charges,
fees or Liens are being contested in good faith and by appropriate proceedings
by such Grantor, the Collateral Agent shall consult with such Grantor before
making any such payment or taking any such action; 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; 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 4.5 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
$1,000,000, 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 $1,000,000 now or hereafter issued in
favor of 

 

12

 

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 Collateral in an amount in excess of $1,000,000, whether or not
written, now or hereafter issued in favor of such Grantor as beneficiary,
execute and deliver to the issuer and any confirmer of such letter of credit an
assignment of proceeds form, in favor of the 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.

 

(c)           If any amount payable under
or in connection with any of the Collateral shall become evidenced by any
Electronic chattel paper or any “transferable record” (as that term is defined
in Section 201 of the Federal Electronic Signatures in Global and National
Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act,
as in effect in any relevant jurisdiction) in an amount in excess of $250,000,
other than such Electronic chattel paper and transferable records listed in the
Perfection Certificate attached hereto, the Grantor acquiring such Electronic chattel
paper or transferable record shall promptly notify the Collateral Agent thereof
and shall take such action as the Collateral Agent may reasonably request to
vest in the Collateral Agent “control” of such Electronic chattel paper under Section 9-105
of the UCC, under Section 201 of the Federal Electronic Signatures in
Global and National Commerce Act or under Section 16 of the Uniform
Electronic Transactions Act, as the case may be, as in effect in such
jurisdiction, of such transferable record.

 

SECTION 4.7                 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                 Reserved.

 

SECTION 4.9                 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 4.10               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 

 

13

 

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 4.10,
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 4.11               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 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.

 

SECTION 4.12               Intellectual
Property.

 

(a)           Each Grantor agrees that it
will not do any act or omit to do any act (and will exercise commercially
reasonable efforts to prevent its licensees and sub-licensees from doing any
act or omitting to do any act) whereby any Patent or Industrial Design may
become invalidated or dedicated to the public, and agrees that it shall
continue to mark any products covered by a Patent or Industrial Design that is
material to the conduct of such Grantor’s business with the relevant patent
number as necessary and sufficient to establish and preserve its maximum rights
under applicable patent laws.

 

(b)           Each Grantor (either itself
or through its licensees or its sublicensees) will, for each Material
Trademark, (i) maintain such Material Trademark in full force free from
any claim of abandonment or invalidity for non-use, (ii) maintain the
quality of products and services offered under such Material Trademark
including where applicable policing the use of such Material Trademarks by its
licensees and sublicensees, (iii) display such Material Trademark with
notice of Federal or foreign registration to the extent necessary and
sufficient to establish and preserve its maximum rights under applicable law
and (iv) not knowingly use or knowingly permit the use of such Material
Trademark in violation of any third party rights.

 

(c)           Each Grantor (either itself
or through its licensees or sublicensees) will, for each work covered by a
Copyright material to the conduct of such Grantor’s business, continue to
publish, reproduce, display, adopt and distribute the work with appropriate
copyright notice as necessary and sufficient to establish and preserve its
maximum rights under applicable copyright laws.

 

(d)           Each Grantor shall notify
the Collateral Agent promptly if it knows or has reason to know that any
Material Trademark or any Patent, Copyright or Industrial Design material to the
conduct of its business may become abandoned, lost or dedicated to the public,
or of any materially adverse determination or development (including the
institution of, or any such 

 

14

 

determination or development in, any
proceeding in the United States Patent and Trademark Office, United States
Copyright Office, the Canadian Intellectual Property Office, the Canadian
Industrial Design Office or any court or similar office of any country)
regarding such Grantor’s ownership of any Patent, Material Trademark, Copyright
or Industrial Design material to the conduct of its business, its right to
register the same, or its right to keep and maintain the same.

 

(e)           At the time of delivery of
quarterly financial statements with respect to each Fiscal Quarter pursuant to Section 5.1(b) of
the Credit Agreement, each Grantor shall inform the Collateral Agent of any
application for any Patent, Trademark, Industrial Design or Copyright (or any
registration of any Patent, Trademark, Industrial Design or Copyright) such
Grantor has filed with the United States Patent and Trademark Office, United
States Copyright Office, the Canadian Intellectual Property Office, the
Canadian Industrial Design Office or any office or agency in any political
subdivision of the United States, Canada or in any other country or any
political subdivision, province or territory thereof or any Copyright License
for which such Grantor has become the licensee, in each case, during such
Fiscal Quarter, and, upon request of the Collateral Agent, execute and deliver
any and all agreements, instruments, documents and papers as the Collateral
Agent may reasonably request to evidence the Collateral Agent’s Security
Interest in any of the foregoing, and each Grantor hereby appoints the
Collateral Agent as its attorney-in-fact to execute and file such writings for
the foregoing purposes, all acts of such attorney being hereby ratified and
confirmed; such power, being coupled with an interest, is irrevocable.

 

(f)            Each Grantor will take all
necessary steps that are consistent with the practice in any proceeding before
the United States Patent and Trademark Office, United States Copyright Office,
the Canadian Intellectual Property Office, the Canadian Industrial Design
Office or any office or agency in any political subdivision of the United
States, Canada or in any other country or any political subdivision, province
or territory thereof, to maintain and pursue each application relating to
Material Trademarks and each material application relating to the Patents
and/or Copyrights and/or Industrial Designs (and to obtain the relevant grant
or registration) and to maintain each issued Patent and each registration of
Copyrights and/or Industrial Designs that is material to the conduct of any
Grantor’s business and each registration of Material Trademarks, including
timely filings of applications for renewal, affidavits of use, affidavits of
incontestability and payment of maintenance fees, and, if consistent with good
business judgment, to initiate opposition, interference and cancelation
proceedings against third parties.

 

(g)           In the event that any
Grantor has reason to believe that any Collateral consisting of a Patent,
Industrial Design or Copyright material to the conduct of any Grantor’s
business or a Material Trademark has been or is likely to be infringed,
misappropriated or diluted by a third party, such Grantor promptly shall notify
the Collateral Agent and shall, if consistent with reasonable business
judgment, promptly sue for infringement, misappropriation or dilution and to
recover any and all damages for such infringement, misappropriation or
dilution, and take such other actions as are appropriate under the
circumstances to protect such Collateral. 
Each Grantor further agrees not to abandon any Material Trademark or any
Patent, Industrial Design, Copyright or Copyright License that in such Grantor’s
reasonable business judgment is material to the operation of such Grantor’s
business without the prior written consent of the Collateral Agent.

 

15

 

(h)           Upon and during the
continuance of an Event of Default, each Grantor shall use its best efforts to
obtain all requisite consents or approvals by the licensor of each Copyright
License, Patent License, Industrial Design License or Material Trademark
License under which such Grantor is a licensee to effect the assignment of all
such Grantor’s right, title and interest thereunder to the Collateral Agent or
its designee.

 

(i)            Without limiting the
generality of any of the foregoing, each Grantor hereby authorizes the
Collateral Agent, with prompt notice thereof to the Grantors, to supplement
this Agreement by supplementing Schedule 3 or adding additional schedules
hereto to identify specifically any asset or item that may constitute
Copyrights, Copyright Licenses, Patents, and/or Industrial Design or Material
Trademarks; provided that any Grantor shall, within ten (10) days after it
has been notified by the Collateral Agent of the specific identification of
such Collateral, advise the Collateral Agent in writing of any inaccuracy of
the representations and warranties made by such Grantor hereunder with respect
to such Collateral.

 

SECTION 4.13               Pledged
Collateral.

 

(a)           Subject to Section 4.04
and Section 4.12(c), if any Grantor shall receive or become entitled to
receive any Pledged Collateral after the Effective Date, it shall deliver to
the Collateral Agent (i) a duly executed Pledged Collateral Addendum
identifying such Pledged Collateral and (ii) to the extent such Pledged
Collateral is represented by certificates or promissory notes, such
certificates or promissory notes, together with undated powers endorsed in
blank by such Grantor.

 

(b)           Upon the occurrence and
continuance of an Event of Default, each Grantor shall promptly deliver to the
Collateral Agent a copy of each material written notice or other material
written communication received by it in respect of any Pledged Collateral.

 

(c)           No Grantor shall make or
consent to any amendment or other modification or waiver with respect to any
Pledged Collateral, Pledged Operating Agreement, or Pledged Partnership
Agreement, or enter into any agreement or agree to any restriction with respect
to any Pledged Collateral which would materially adversely affect either the
rights of Collateral Agent or the other Secured Parties pursuant to the Loan
Documents or the value of the Pledged Collateral, or that would result in a
material violation of any provision of the Credit Agreement or any other Loan
Document.

 

(d)           Each Grantor agrees that it
will assist the Collateral Agent in obtaining all necessary approvals and
making all necessary filings under federal, state, local, or foreign law in
connection with the Collateral Agent’s Liens on the Pledged Collateral or any
sale or transfer thereof.

 

(e)           As to all limited liability
company or partnership interests owned by a Grantor and issued under any
Pledged Operating Agreement or Pledged Partnership Agreement which are not
certificated (the “Uncertificated Interests”), each Grantor hereby
represents, warrants and covenants that such Uncertificated Interests issued
pursuant to such agreement (A) are not and shall not be dealt in or traded
on securities exchanges or in securities markets, (B) do not and will not
constitute investment company securities, and (C) are not and will not be
held by such Grantor in a securities account. 
In addition, none of the Pledged Operating Agreements, the 

 

16

 

Pledged Partnership Agreements, or any other
agreements governing any of the Uncertificated Interests issued under any
Pledged Operating Agreement or Pledged Partnership Agreement, provide or shall
provide that such Pledged Interests are securities governed by Article 8
of the Uniform Commercial Code as in effect in any relevant jurisdiction.

 

SECTION 4.14               Commercial Tort
Claims.             If any Grantor
shall at any time after the date hereof hold or acquire a Commercial Tort Claim
in respect of which a complaint or counterclaim has been filed seeking damages
in an amount in excess of $1,000,000, the Grantor shall promptly notify the
Collateral Agent thereof in a writing signed by such Grantor, including a
summary description of such claim, and grant to the Collateral Agent in such
writing a security interest therein and in the proceeds thereof, all upon the
terms of this Agreement, with such writing to be in form and substance
reasonably satisfactory to the Collateral Agent.

 

SECTION 4.15               Securities
Accounts.   With respect to
(i) the Securities Accounts (other than Securities Accounts with an
aggregate value of less than $10,000) and (ii) any Collateral that
constitutes a Security Entitlement as to which the financial institution acting
as Collateral Agent hereunder is not the Securities Intermediary, the relevant
Grantor will cause the Securities Intermediary with respect to each such
account or Security Entitlement to either (A) to identify in its records
the Collateral Agent as the Entitlement Holder thereof or (B) to agree
with such Grantor and the Collateral Agent that such Securities Intermediary
will comply with Entitlement Orders originated by the Collateral Agent without
further consent of such Grantor, such agreement to be in form and substance
reasonably satisfactory to the applicable Grantor and the Collateral Agent
(which agreement may also be for the benefit of the agent for the Term Loan);
provided that the Collateral Agent will not give any such orders except after a
Cash Control Event; provided further that no Grantor shall be required to take
the foregoing actions with respect to any Securities Account until the later of
(A) sixty (60) days after the Effective Date and (B) in the case of
Securities Accounts opened after the Effective Date, at the time of establishment
of such Securities Account (or, in each case, such later date as the Collateral
Agent shall in its reasonable discretion agree).

 

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 Collection 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 Collection 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 

 

17

 

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 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; (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, license, or transfer, for the
purposes permitted by Section 6.1 hereof, any or all General Intangibles
of any Grantor, 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.  Notwithstanding the
provisions of this Section 5.2, the power of the Collateral Agent to act
in any name other than the name of the Grantor shall not apply to any Pledged
Collateral that is ULC Shares.

 

18

 

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

 

SECTION 5.4                 The Collateral
Agent’s Duty of Care.  Other than
the exercise of reasonable care to assure the safe custody of the Collateral
while being held by the Collateral Agent hereunder, the Collateral Agent shall
have no duty or liability to preserve rights pertaining thereto, it being
understood and agreed that the Grantors shall be responsible for preservation
of all rights in the Collateral, and the Collateral Agent shall be relieved of
all responsibility for the Collateral upon surrendering it or tendering the
surrender of it to the Grantors.  The
Collateral Agent shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral in its possession if such Collateral
is accorded treatment substantially equal to that which the Collateral Agent
accords its own property, which shall be no less than the treatment employed by
a reasonable and prudent agent in the industry, it being understood that the
Collateral Agent shall not have responsibility for taking any necessary steps
to preserve rights against any parties with respect to any of the Collateral.

 

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, the PRUCC 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 Accounts, the Collateral Agent may: (i) demand,
collect and receive any amounts relating thereto, as the Collateral Agent may
determine; (ii) commence and prosecute any actions in any court for the
purposes of collecting any such Accounts and enforcing any other rights in
respect thereof; (iii) defend, settle or compromise any action brought
and, in connection therewith, give such discharges or releases as the
Collateral Agent may reasonably deem appropriate; (iv) without limiting
the Collateral 

 

19

 

Agent’s rights set forth in Section 5.2
hereof, receive, open and dispose of mail addressed to any Grantor and endorse
checks, notes, drafts, acceptances, money orders, bills of lading, warehouse
receipts or other instruments or documents evidencing payment, shipment or
storage of the goods giving rise to such Accounts or securing or relating to
such Accounts, on behalf of and in the name of such Grantor; and (v) sell,
assign, transfer, make any agreement in respect of, or otherwise deal with or
exercise rights in respect of, any such Accounts or the goods or services which
have given rise thereto, as fully and completely as though the Collateral Agent
was the absolute owner thereof for all purposes.

 

(c)           With respect to any
Collateral consisting of Investment Property, the Collateral Agent may: (i) exercise
all rights of any Grantor with respect thereto, including without limitation,
the right to exercise all voting and corporate rights at any meeting of the
shareholders of the Issuer of any Investment Property and to exercise any and
all rights of conversion, exchange, subscription or any other rights,
privileges or options pertaining to any Investment Property as if the
Collateral Agent was the absolute owner thereof, including the right to
exchange, at its discretion, any and all of any Investment Property upon the
merger, consolidation, reorganization, recapitalization or other readjustment
of the Issuer thereof, all without liability except to account of or property
actually received as provided in Section 5.2 hereof; (ii) transfer
such Collateral at any time to itself, or to its nominee, and receive the
income thereon and hold the same as Collateral hereunder or apply it to the
Secured Obligations; and (iii) demand, sue for, collect or make any
compromise or settlement it deems desirable. 
The Grantors recognize that (a) the Collateral Agent may be unable
to effect a public sale of all or a part of the Investment Property by reason
of certain prohibitions contained in applicable laws, but may be compelled to
resort to one or more private sales to a restricted group of purchasers who
will be obliged to agree, among other things, to acquire the Investment
Property for their own account, for investment and not with a view to the
distribution or resale thereof, (b) that private sales so made may be at
prices and upon other terms less favorable to the seller than if the Investment
Property were sold at public sales, (c) that neither the Collateral Agent
nor any other Secured Party has any obligation to delay sale of any of the
Investment Property for the period of time necessary to permit the Investment
Property to be registered for public sale under applicable law, and (d) that
private sales made under the foregoing circumstances shall be deemed to have
been made in a commercially reasonable manner.

 

(d)           With respect to any
Collateral consisting of Inventory, Goods, and Equipment, 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.

 

20

 

(e)           With respect to any
Collateral consisting of Intellectual Property: on demand, to cause the
Security Interest granted herein to become an assignment, transfer and
conveyance of any of or all such Collateral by the applicable Grantors to the
Collateral Agent or to license or sublicense, whether general, special or
otherwise, and whether on an exclusive or a nonexclusive basis, any such
Collateral throughout the world on such terms and conditions and in such manner
as the Collateral Agent shall reasonably determine (other than in violation of
any then-existing licensing arrangements to the extent that waivers thereunder
cannot be obtained).

 

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

 

(g)           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.

 

(h)           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.

 

(i)            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, the
PRUCC, 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.

 

(j)            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 

 

21

 

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.  In the event that the purchaser fails to pay
for the Collateral, the Collateral Agent may resell the Collateral and apply
the proceeds from such resale in accordance with the terms of the Credit
Agreement.

 

(k)           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 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.

 

(l)            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.

 

(m)          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.

 

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

 

SECTION 6.2                 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 and to the extent to which any of the licensed items may be recorded
or stored and to all such computer 

 

22

 

software
programs 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 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(f), 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.

 

SECTION 6.4                 Voting Rights.

 

(a)           So long as no Event of
Default shall have occurred and be continuing:

 

(i)            Each Grantor shall be entitled to exercise any and
all voting and other consensual rights pertaining to the Pledged Collateral of
such Grantor or any part thereof for any purpose.  For so long as any Grantor shall have the
right to vote the Pledged Interests of such Grantor, such Grantor covenants and
agrees that it will not, without the prior written consent of the Collateral
Agent, vote or take any consensual action with respect to the Pledged Interests
which would materially affect the rights of the Collateral Agent, any other
Secured Party or the value of the Pledged Interests.  The Collateral Agent shall execute and
deliver to each Grantor, or cause to be executed and delivered to such Grantor,
all such proxies, powers of attorney and other instruments as such Grantor may
reasonably request for the purpose of enabling such Grantor to exercise the
voting and/or consensual rights and powers it is entitled to exercise pursuant
to this Section 6.04(a)(i).

 

(ii)           Each Grantor shall be entitled to receive and retain
any and all dividends, cash, options, warrants, rights, instruments,
distributions, returns of capital or principal, income, interest, profits and
other property, interests (debt or equity) or proceeds, including as a result
of a split, revision, reclassification or other like change of the Pledged
Collateral, from time to time received, receivable or otherwise distributed to
such Grantor in respect of or in exchange for any or all of the Pledged
Collateral (any of the foregoing, a “Distribution” and collectively the “Distributions”)
paid in respect of the Pledged Collateral of such Grantor to the extent that
the payment thereof is not otherwise prohibited by the terms of the Loan
Documents; provided, however, that any and all Distributions paid
or payable other than in cash (other than in connection with a partial or total
liquidation or dissolution or in connection with a reduction of capital,
capital surplus or paid-in-surplus) in respect of, and instruments and other
property received, receivable or otherwise distributed in respect of, or in
exchange for, any Pledged Collateral, shall be, and, subject to the limitations
in the definition of “Collateral”, be promptly delivered to the Collateral
Agent to hold as Pledged Collateral and shall, if received by such Grantor, be
received in trust for the benefit of the Collateral Agent, be segregated from
the other property or funds of such Grantor and be promptly delivered to the
Collateral Agent as 

 

23

 

Pledged
Collateral in the same form as so received (with any necessary endorsement).

 

(b)           Upon the occurrence and
during the continuance of an Event of Default:

 

(i)            All rights of each Grantor (x) to exercise or
refrain from exercising the voting and other consensual rights that it would
otherwise be entitled to exercise pursuant to Section 6.04(a)(i) shall
automatically cease and (y) to receive Distributions that it would
otherwise be authorized to receive and retain pursuant to 6.04(a)(ii) shall
automatically cease, and all such rights shall thereupon become vested in the
Collateral Agent, which shall thereupon have the sole right to exercise or
refrain from exercising such voting and other consensual rights and to receive
and hold as Pledged Collateral such dividends, interest and other
distributions; provided that, unless otherwise directed by the Required
Lenders, the Collateral Agent shall have the right from time to time following
and during the continuance of an Event of Default to permit the Grantors to
exercise such rights.  Any and all money
and other property paid over to or received by the Collateral Agent pursuant to
the provisions of this Section 6.04(b)(i) shall be retained by the
Collateral Agent in an account to be established by the Collateral Agent upon
receipt of such money or other property and shall be applied in accordance with
the provisions of the Credit Agreement. 
After all Events of Default have been cured or waived and the Borrowers
have delivered to the Collateral Agent a certificate to that effect, the
Collateral Agent shall promptly repay to each Grantor (without interest) all
dividends or interest that such Grantor would otherwise be permitted to retain
pursuant to the terms of this Section 6.04 and that remain in such
account.

 

(ii)           All Distributions that are received by any Grantor
contrary to the provisions of paragraph (i) of this Section 6.04(b) shall
be received in trust for the benefit of the Collateral Agent, shall be
segregated from other funds of such Grantor and shall be promptly paid over to
the Collateral Agent as Pledged Collateral in the same form as so received
(with any necessary endorsement).

 

(c)           This Section 6.4 shall
not apply to any Pledged Collateral that is ULC Shares or to any Distributions
that are paid in respect of ULC Shares.

 

SECTION 6.5       ULC Shares.

 

(a)           Notwithstanding any
provisions to the contrary contained in this Agreement or any other document or
agreement among all or some of the parties hereto, each Grantor that is the
registered and beneficial owner of any Pledged Collateral which are ULC Shares
(“ULC Pledgor”) will remain so until such time as such ULC Shares are
effectively transferred into the name of the Collateral Agent, any Secured
Party or any other Person on the books and records of such ULC.  Accordingly, each ULC Pledgor shall be
entitled to receive and retain for its own account any Distribution in respect
of such Pledged Collateral (except insofar as such ULC Pledgor has granted a
security interest in such Distribution, and any shares which are Pledged
Collateral shall be delivered to the Collateral Agent to hold as Pledged
Collateral hereunder) and shall  have the
right to vote such Pledged Collateral and to control the direction, management
and policies of the applicable ULC issuer to the same extent as such ULC
Pledgor would if such Pledged Collateral were not pledged to the Collateral
Agent (for its own benefit and for the 

 

24

 

benefit of the Secured Parties) pursuant
hereto.  Nothing in this Agreement or any
other document or agreement among all or some of the parties hereto is intended
to, and nothing in this Agreement or any other document or agreement among all
or some of the parties hereto shall, constitute the Collateral Agent, any
Secured Party or any other Person other than a ULC Pledgor a member of a ULC
for the purposes of the Companies Act (Nova Scotia) until such time as notice
is given to such ULC Pledgor and further steps are taken pursuant hereto or
thereto so as to register the Collateral 
Agent, any Secured Party or any other Person as holder of the applicable
ULC Shares.  To the extent any provision
hereof would have the effect of constituting the Collateral  Agent or any Secured Party as a member of any
ULC prior to such time, such provision shall be severed therefrom and shall be
ineffective with respect to Pledged Collateral which are ULC Shares without
otherwise invalidating or rendering unenforceable this Agreement or
invalidating or rendering unenforceable such provision insofar as it relates to
Pledged Collateral which are not ULC Shares.

 

(b)           Except upon the exercise of
rights to sell, transfer or otherwise dispose of the Pledged Stock issued by a
ULC following the occurrence of an Event of Default pursuant to Article VI,
no ULC Pledgor shall cause or permit, or enable any ULC in which they hold ULC
Shares to cause or permit, the Collateral Agent or any other Secured Party
to:  (i) be registered as shareholder
or member of such ULC; (ii) accept or request stock powers of attorney in
respect of such Person endorsed or assigned in favor of the Collateral Agent or
other Secured Party; (iii) have any notation entered in its favor in the
share register of such ULC; (iv) be held out as a shareholder or member of
such ULC; (v) receive, directly or indirectly, any dividends, property or
other distributions from such ULC by reason of the Collateral Agent or any
other Secured Party holding a security interest in such ULC; or (vi) act
as a shareholder or member of such ULC, or exercise any rights of a shareholder
or member including the right to attend a meeting of, or to vote the shares of,
such ULC.

 

SECTION 6.6                 Disposition of
Pledged Collateral by Collateral Agent.  None of the Pledged Collateral existing as of
the date of this Agreement is, and none of the Pledged Collateral hereafter
acquired on the date of acquisition thereof will be, registered or qualified
under the various federal or state securities laws of the United States and
disposition thereof after an Event of Default has occurred and is continuing
may be restricted to one or more private (instead of public) sales in view of
the lack of such registration.  Each Grantor
understands that in connection with such disposition, the Collateral Agent may
approach only a restricted number of potential purchasers and further
understands that a sale under such circumstances may yield a lower price for
the Pledged Collateral than if the Pledged Collateral were registered and
qualified pursuant to federal and state securities laws and sold on the open
market.  Each Grantor, therefore, agrees
that:  (a) if the Collateral Agent
shall, pursuant to the terms of this Agreement, sell or cause the Pledged
Collateral or any portion thereof to be sold at a private sale, the Collateral
Agent shall have the right to rely upon the advice and opinion of any
nationally recognized brokerage or investment firm (but shall not be obligated
to seek such advice and the failure to do so shall not be considered in
determining the commercial reasonableness of such action) as to the best manner
in which to offer the Pledged Collateral or any portion thereof for sale and as
to the best price reasonably obtainable at the private sale thereof; and (b) such
reliance shall be conclusive evidence that the Collateral Agent has handled the
disposition in a commercially reasonable manner.

 

25

 

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, including
recording of the IP Agreements with the United States Patent and Trademark
Office,  the United States Copyright
Office, the Canadian Intellectual Property Office and the Canadian Industrial
Design Office, and the Grantors shall pay the 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,
Securities Accounts, Concentration Accounts, Letter-of-Credit Rights,
Investment Property, or Electronic chattel paper, with any agreements
establishing control to be in form and substance satisfactory to the Collateral
Agent (and which may also be for the benefit of the agent for the Term Loan),
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. The Grantors
acknowledge that notwithstanding anything to the contrary contained therein,
the Blocked Account Agreements, Credit Card Notifications, and landlord waivers
and consents previously executed and delivered to, or for the benefit of, the
Collateral Agent shall remain in full force and effect until all Secured
Obligations (including, without limitation, on account of the obligations owed
by the Facility Guarantors under the Facility Guarantor Security Documents) are
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 Banks and the Administrative
Agent, and the Issuing Banks have no further obligation to issue Letters of
Credit under the Credit Agreement, and any Obligations related to Letters of
Credit, Cash Management Services or Bank Products have been fully cash
collateralized in a manner reasonably satisfactory to the respective Lender to
whom such Obligations are owed.

 

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 or the PRUCC.

 

26

 

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 the extent that it lawfully may, each
Grantor hereby agrees that it will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the 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.

 

27

 

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 subject to
the provisions of Section 9.6 of the Credit Agreement and 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 Banks 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 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 

 

28

 

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 with respect to a claim by
one Indemnified Party against another Indemnified Party.

 

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

 

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 and
any Person, at any time, shall preclude the other or further exercise of the
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.

 

29

 

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 (and by different parties on different counterparts), each of
which shall constitute an original but all of which, when taken together, shall
constitute a single contract.  Delivery
of an executed counterpart of a signature page to this Agreement by
telecopy or other electronic image scan transmission (e.g., “pdf” or “tif” via
e-mail) shall be as effective as delivery of a manually executed counterpart to
this Agreement.

 

SECTION 8.13               Headings.  Article and Section headings 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.

 

(a)           Upon any disposition of
Collateral in connection with any disposition permitted under the Credit
Agreement or any other Loan Document (other than a sale or transfer to a
Grantor), or upon the effectiveness of any written consent to the release of
the Security Interest 

 

30

 

granted hereby in any Collateral pursuant to Section 9.2
of the Credit Agreement, the Security Interest in such Collateral shall be
automatically released.

 

(b)           Except for those provisions
which expressly survive the termination thereof, the Credit Agreement, this
Agreement and the Security Interest shall, subject to Section 9.6 of the
Credit Agreement, terminate when all the Secured Obligations (other than any of
the Secured Obligations which are not Loan Agreement Obligations, and which are
not then due and owing) 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
Banks and the Administrative Agent, and the Issuing Banks have no further
obligation to issue Letters of Credit under the Credit Agreement, and any
Obligations related to Letters of Credit, Cash Management Services or Bank
Products have been fully cash collateralized in a manner reasonably
satisfactory to the respective Lender to whom such Obligations are owed, at
which time the Collateral Agent shall execute and deliver to the Grantors, at
the Grantors’ expense, all UCC or PRUCC 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; provided, however,
that the Credit Agreement, this Agreement, and the Security Interest granted
herein shall be reinstated if at any time payment, or any part thereof, of any
Secured Obligation is rescinded or must otherwise be restored by any Secured
Party upon the bankruptcy or reorganization of any Grantor; and provided
further that the Security Interest granted herein shall not terminate as
to any indemnification obligation of any Grantor which expressly survives the
termination of the Credit Agreement and this Agreement, including, without
limitation, the obligations of the Grantors set forth in Section 9.3 of
the Credit Agreement and the obligations of the Grantors set forth in Section 8.7
of this Agreement (in each case with respect to obligations other than
contingent obligations with respect to then unasserted claims) unless such
obligations have been cash collateralized or otherwise provided for to the
satisfaction of the Collateral Agent. 
Any execution and delivery of termination statements or other documents
pursuant to this Section 8.15 shall be at the expense of the
Grantors and without recourse to, or warranty by, the Collateral Agent or any
other Secured Party.

 

SECTION 8.16               Additional
Grantors.    Pursuant to Section 5.13
of the Credit Agreement, the Grantors shall each cause any new direct or
indirect Subsidiary (other than an Excluded Subsidiary) of any Grantor to enter
into this Agreement as a Grantor.  Upon
execution and delivery by the Collateral Agent and a Subsidiary of an
instrument in the form of Annex 1 hereto, such Subsidiary shall become a
Grantor hereunder with the same force and effect as if originally named as a
Grantor herein.  The execution and
delivery of any such instrument shall not require the consent of any other Loan
Party hereunder.  The rights and
obligations of each Loan Party hereunder shall remain in full force and effect
notwithstanding the addition of any new Loan Party as a party to this
Agreement.

 

SECTION 8.17               Intercreditor
Agreement. 
Notwithstanding anything herein to the contrary, the Lien and Security
Interest granted pursuant to this Agreement and the exercise of any right or
remedy hereunder are subject to the provisions of the Intercreditor
Agreement.  In the event of any conflict
between the terms of the Intercreditor Agreement and this Agreement, the terms
of the Intercreditor Agreement shall govern and control.  Without limiting the generality of the
foregoing, and notwithstanding anything herein to the contrary, all rights and
remedies of the Collateral Agent (and the 

 

31

 

other
Secured Parties) with respect to the “Term Priority Collateral” (as defined in
the Intercreditor Agreement) shall be subject to the terms of the Intercreditor
Agreement, and until the discharge of the “Term Obligations” (as defined in the
Intercreditor Agreement), any obligation of any Grantor hereunder or under any
other Loan Document with respect to the delivery or control of any Term
Priority Collateral, the novation of any lien on any certificate of title, bill
of lading or other document, the giving of any notice to any bailee or other
Person, the provision of voting rights, the obtaining of any consent of any
Person or otherwise, in each case in connection with any Term Priority
Collateral, shall be deemed to be satisfied if such Grantor, as applicable,
complies with the requirements of the similar provision of the applicable “Term
Document” (as defined in the Intercreditor Agreement). Until the discharge of
the Term Obligations, the delivery of any Term Priority Collateral to the “Term
Priority Agent” (as defined in the Intercreditor Agreement) pursuant to the
Term Documents shall satisfy any delivery requirement hereunder or under any
other Loan Document.

 

SECTION 8.18               Amendment and
Restatement.  This
Agreement shall be deemed to amend, restate and replace the Existing Security
Agreement in its entirety.  It is
expressly understood and agreed by each of the parties hereto that this
Agreement is in no way intended and shall not be deemed or construed to
constitute a novation agreement.  Each
Grantor acknowledges and agrees that (i) each reference in the Loan Documents
to the “Security Agreement” shall be a reference to this Agreement and (ii) with
respect to matters prior to the date of this Agreement, all terms of the
Existing Security Agreement are ratified and confirmed.

 

SECTION 8.19               Grantor Consent.          Each Grantor which is not a
ULC hereby consents to the security interests granted herein by each other
Grantor, including any security interests in Equity Interests issued by such
Grantor or Equity Interests issued by any Person in which such Grantor owns any
Equity Interest.  Each Grantor which is
not a ULC hereby waives any rights of such Grantor to notice in connection with
the grant of any Security Interests by any Grantor hereunder.

 

[SIGNATURE PAGES FOLLOW]

 

32

 

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:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZGCO,
  LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TXDC,
  L.P.

  
	
   

  	
  By:

  	
  ZALE
  DELAWARE, INC.

  
	
   

  	
   

  	
  Its
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  PUERTO RICO, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  CANADA CO.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

	
   

  	
  ZALE
  CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZAP,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZCSC,
  LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  EMPLOYEES’ CHILD CARE ASSOCIATION, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  CANADA HOLDING LP

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  CANADA FINCO 1, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

	
   

  	
  ZALE
  CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  FINCO
  HOLDING LP

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  FINCO
  PARTNERSHIP LP

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE
  CANADA FINCO, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

	
  COLLATERAL
  AGENT:

  	
  BANK
  OF AMERICA, N.A.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

SCHEDULE 1

 

Other Grantors

 

Zale Corporation

ZGCO, LLC

TXDC, L.P.

Zale Puerto Rico, Inc.

Zale Canada Co.

Zale Canada Diamond Sourcing Inc.

ZAP, Inc.

ZCSC, LLC

Zale International, Inc.

Zale Employees’ Child Care
Association, Inc.

Zale Canada Holding, LP

Zale Canada Finco 1, Inc.

Zale Canada Finco 2, Inc.

Finco Holding LP

Finco Partnership LP

Zale Canada Finco, LLC

 

 

SCHEDULE 2

 

Form of Perfection Certificate

 

(See attached)

 

 

SCHEDULE 3

 

INTELLECTUAL PROPERTY

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

(to be provided by Company)

 

 

SCHEDULE 4

 

Pledged
Interests

 

	
  Name of Grantor

  	
   

  	
  Name of
  Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage
  of

  Class Owned

  	
   

  	
  Certificate

  Nos.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pledged Notes

 

	
  Name of Grantor

  	
   

  	
  Name of
  Issuer

  	
   

  	
  Amount

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

ANNEX 1

 

FORM OF SUPPLEMENT

 

SUPPLEMENT NO.      dated as of
[                    ]
(this “Supplement”), to the Amended and Restated Security Agreement dated as of
May 10, 2010 (as such may be amended, modified, supplemented or restated,
the “Security Agreement”), among ZALE CORPORATION, as a Borrower, the
other Borrowers party thereto from time to time, the Facility Guarantors party
thereto from time to time (each, including the Borrowers, a “Grantor”,
and collectively, the “ Grantors”) and Bank of America, N.A., in its
capacity as  Collateral Agent (in such
capacity, the “Collateral Agent”).

 

Reference is made to the Amended and Restated Credit Agreement dated as
of May 10, 2010 (as such may be amended, modified, supplemented or restated,
the “Credit Agreement”) by and between, among others, (i) the
Borrowers, (ii) the Facility Guarantors party thereto, (iii) the
Lenders party thereto and (iii) the Collateral Agent.

 

Capitalized terms used herein and not otherwise defined herein shall have
the meanings assigned to such terms in the Credit Agreement and the Security
Agreement referred to therein.

 

The Grantors have entered into the Security Agreement in order to
induce the Lenders to make Loans.  Section 8.16
of the Security Agreement provides that new direct and indirect Subsidiaries of
the Grantors may become Grantors under the Security Agreement by execution and
delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary (the “New
Subsidiary”) is executing this Supplement in accordance with the
requirements of the Credit Agreement to become a Grantor under the Security
Agreement as consideration for Loans previously under made the Credit
Agreement.

 

Accordingly, the Collateral Agent and the New Subsidiary agree as
follows:

 

SECTION 1.  In accordance with Section 8.16 of the
Security Agreement, the New Subsidiary by its signature below becomes a Grantor
under the Security Agreement with the same force and effect as if originally
named therein as a Grantor and the New Subsidiary hereby (a) agrees to all
the terms and provisions of the Security Agreement applicable to it as a
Grantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Grantor thereunder are true and
correct on and as of the date hereof.  In
furtherance of the foregoing, the New Subsidiary, as security for the payment
and performance in full of the Secured Obligations, does hereby create and
grant to the Collateral Agent, its successors and assigns, for the benefit of
the Secured Parties, a security interest in and lien on all of the New
Subsidiary’s right, title and interest in and to the Collateral (as defined in
the Security Agreement) of the New Subsidiary. 
Each reference to a “Grantor” in the Security Agreement shall be deemed
to include the New Subsidiary.  The
Security Agreement is hereby incorporated herein by reference.

 

SECTION 2.  The New Subsidiary represents and warrants to
the Collateral Agent and the other Secured Parties that this Supplement has
been duly authorized, executed and delivered by it and constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its
terms.

 

SECTION 3.  This Supplement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Supplement shall become effective when the Collateral 

 

 

Agent shall have received a counterpart of
this Supplement that bears the signature of the New Subsidiary and the
Collateral Agent has executed a counterpart hereof.  Delivery of an executed signature page to
this Supplement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be effective as delivery of a manually signed
counterpart to this Supplement.

 

SECTION 4.  The New Subsidiary hereby represents and
warrants that, as of the date hereof, (a) set forth on Schedule i
attached hereto is a fully executed Perfection Certificate in the form annexed
to the Security Agreements, (b) set forth on Schedule 2
attached hereto is a true and correct schedule of Intellectual Property
consisting (i) all of the New Subsidiary’s United States registered
Patents and Patent applications, including the name of the registered owner,
type, registration or application number and the expiration date (if already
registered) of each such Patent and Patent application owned by the New
Subsidiary, (ii) all of the New Subsidiary’s Canadian registered
Industrial Designs and Industrial Design applications including the name of the
registered owner, registration or application number and the expiration date
(if already registered) of each Industrial Design and Industrial Design application
owned by the New Subsidiary, (iii) all of the New Subsidiary’s United
States registered Trademarks and Trademark applications, including the name of
the registered owner, the registration or application number and the expiration
date (if already registered) of each such Trademark and Trademark application
owned by the New Subsidiary and (iv) all of the New Subsidiary’s United
States registered Copyrights, Copyright applications and Copyright Licenses,
including the name of the registered owner, title and, if applicable, the
registration number of each such Copyright, Copyright application or Copyright
License owned by the New Subsidiary, and (c) set forth on Schedule 3
attached hereto is the Pledged Collateral held by the New Subsidiary.

 

SECTION 5.  Except as expressly supplemented hereby, the
Security Agreement shall remain in full force and effect.

 

SECTION 6.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS SUPPLEMENT AND THE SECURED OBLIGATIONS SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS
LAW, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

 

SECTION 7.  In the event any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and in the Security Agreement shall not
in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision in a particular jurisdiction shall not in
and of itself affect the validity of such provision in any other jurisdiction).

 

SECTION 8.  All communications and notices hereunder
shall be in writing and given as provided in Section 8.01 of the Security
Agreement.

 

SECTION 9.  The New Subsidiary agrees to reimburse the
Collateral Agent for its reasonable out-of-pocket expenses reasonably incurred
in connection with this Supplement, including the reasonable fees, other
charges and disbursements of counsel for the Collateral Agent.

 

 

IN WITNESS WHEREOF, the New Subsidiary and the Collateral Agent have
duly executed this Supplement to the Security Agreement as of the day and year
first above written.

 

 

	
  COLLATERAL AGENT:

  	
  BANK OF AMERICA, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  NEW SUBSIDIARY:

  	
  [                                                            ]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

Annex 2

 

Form of
Pledged Collateral Addendum

 

This Pledged Collateral Addendum, dated as of
                  
      , 20      ,
is delivered pursuant to Section 4.12 of the Security Agreement referred
to below.  The undersigned hereby agrees
that this Pledged Collateral Addendum may be attached to that certain Amended
and Restated Security Agreement, dated as of May 10, 2010, (as amended,
restated, supplemented or otherwise modified from time to time, the “Security
Agreement”), among the undersigned, the other Grantors named therein, to
Bank of America, N.A., as Collateral Agent. 
Initially capitalized terms used but not defined herein shall have the
meaning ascribed to such terms in the Security Agreement or the Credit Agreement.  The undersigned hereby agrees that the
additional interests listed on this Pledged Collateral Addendum as set forth
below shall be and become part of the Pledged Collateral pledged by the
undersigned to the Collateral Agent in the Security Agreement and any pledged
company set forth on this Pledged Collateral Addendum as set forth below shall
be and become a “Pledged Company” under the Security Agreement, each with the
same force and effect as if originally named therein.

 

The undersigned hereby certifies that the representations and
warranties set forth in Section 3.08 of the Security Agreement of the
undersigned are true and correct as to the Pledged Collateral listed herein on
and as of the date hereof.

 

	
   

  	
  [                                      ]

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

Pledged Interests

 

	
  Name of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage

  of Class

  Owned

  	
   

  	
  Certificate

  Nos.

  

  

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pledged Notes

 

	
  Name
  of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBIT C-2

 

EXECUTION VERSION

 

AMENDED AND RESTATED CANADIAN SECURITY AGREEMENT

 

EXECUTED by the parties hereto as of the 10 day of May,
2010.

 

TO:                                                                                                                          BANK OF AMERICA, N.A., a national banking
association organized under the federal laws of the United States of America,
having an office at 100 Federal Street, Floor 9, Boston, Massachusetts 02110,
U.S.A., as administrative agent and collateral agent (in such capacity,
including its successors and assigns, hereinafter the “Collateral
Agent”) for the Secured Parties (as defined herein), in
consideration of the mutual covenants contained herein and benefits derived
herefrom;

 

GRANTED BY:                  ZALE CANADA CO., a Nova Scotia
unlimited liability company, having its registered office at 1959
Upper Water Street, Suite 900, Halifax, Nova Scotia, B3J 2X2 and its
chief executive office and principal place of business at 901 West Walnut Hill
Lane, Irving, Texas 75038

 

ZALE CANADA DIAMOND SOURCING INC., a Nova Scotia limited liability company, having its registered
office at 1959 Upper Water Street, Suite 900, Halifax, Nova Scotia,
B3J 2X2 and its chief executive office and principal place of business at
901 West Walnut Hill Lane, Irving, Texas 75038

 

ZALE CANADA FINCO 1, INC., a Nova Scotia limited liability company, having its registered
office at 1959 Upper Water Street, Suite 900, Halifax, Nova Scotia,
B3J 2X2 and its chief executive office and principal place of business at
901 West Walnut Hill Lane, Irving, Texas 75038

 

ZALE CANADA FINCO 2, INC., a Nova Scotia limited liability company, having its registered
office at 1959 Upper Water Street, Suite 900, Halifax, Nova Scotia,
B3J 2X2 and its chief executive office and principal place of business at
901 West Walnut Hill Lane, Irving, Texas 75038

 

FINCO HOLDING LP, a New Brunswick limited partnership, having its registered
office at 44 Chipman Hill, Suite 1000, Saint-John, New Brunswick, E2L 4S6
and its chief executive office and principal place of business at 901 West
Walnut Hill Lane, Irving, Texas 75038

 

FINCO PARTNERSHIP LP, a New Brunswick limited partnership, having its registered
office at 44 Chipman Hill, Suite 1000, Saint-John, New Brunswick, E2L 4S6
and its chief executive office and principal place of business at 901 West
Walnut Hill Lane, Irving, Texas 75038

 

 

and

 

ZALE CANADA HOLDING LP, a New Brunswick limited partnership, having its registered
office at 44 Chipman Hill, Suite 1000, Saint-John, New Brunswick, E2L 4S6
and its chief executive office and principal place of business at 901 West
Walnut Hill Lane, Irving, Texas 75038

 

(each a “Grantor”, and collectively, the “Grantors”)

 

WITNESSETH

 

WHEREAS, the Grantors are party to the Amended and Restated Credit
Agreement of even date herewith (as such may be amended, modified, supplemented
or restated hereafter, the “Credit Agreement”)
between, among others, Zale Delaware, Inc., Zale Corporation, ZGCO, LLC,
TXDC, L.P. and Zale Puerto Rico, Inc. (collectively, the “Borrowers”), as borrowers, each of the Grantors, as
guarantors, the Lenders (as defined in the Credit Agreement) party thereto from
time to time as lenders, and Bank of America, N.A., in its capacity as
Administrative Agent and Collateral Agent (as such terms are defined in the
Credit Agreement);

 

AND WHEREAS, the Lenders have agreed to make Loans to the Borrowers
pursuant to, and upon the terms and subject to the conditions specified in, the
Credit Agreement, and the obligations of the Lenders to make Loans are each
conditioned upon, among other things, the execution and delivery by the
Grantors of a guarantee granted by the Grantors in favour of the Collateral
Agent dated the date hereof and this Security Agreement;

 

NOW THEREFORE, the Grantors and the Collateral Agent, for and on behalf
of itself and the Lenders (and each of their respective successors or assigns),
hereby agree as follows:

 

SECTION 1 — GRANT OF SECURITY INTEREST

 

1.1           Security
Interest

 

As a general and
continuing security for the payment and performance, as the case may be, in
full of the Secured Obligations, each Grantor, IN CONSIDERATION THEREOF, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
hereby bargains, mortgages, pledges, hypothecates and (except in the case of
ULC Shares) assigns and transfers to the Collateral Agent, including its
successors and assigns, for the benefit of the Secured Parties, and hereby
grants to the Collateral Agent, including its successors and assigns, for the
benefit of the Secured Parties, a continuing security interest (the “Security Interest”) in, all of its right, title and interest
in, to and under all of its property, assets and undertakings, whether now
owned

 

2

 

or
hereafter-acquired by it or on its behalf, wherever located (hereinafter,
collectively, the “Collateral”),
including, without limitation, all of the its present and after acquired
personal property and including without limitation:

 

(a)           Accounts Receivable

 

All debts, book debts,
accounts, Deposit Accounts, Concentration Accounts, Supporting Obligations,
Letter of Credit Rights, claims, demands, moneys and choses in action
whatsoever including, without limitation, claims against the Crown and claims
under insurance policies, which are now owned by or are due, owing or accruing
due to it or which may  hereafter be
owned by or become due, owing or accruing due to it together with all
contracts, investment property, bills, notes, lien notes, judgments, chattel
mortgages, mortgages and all other rights, benefits and documents now or
hereafter taken, vested in or held by such Corporation in respect of or as
security for the same and the full benefit and advantage thereof, and all
rights of action or claims which such Corporation now has or may at any time
hereafter have against any Person in respect thereof (all of the foregoing
being herein collectively called the “Accounts Receivable”);

 

(b)           Inventory

 

All inventory of whatever
kind now or hereafter owned by such Corporation or in which such Corporation
now or hereinafter has an interest or right of any kind, and all accessions
thereto and products thereof, including, without limitation, all goods,
merchandise, raw materials, goods in process, finished goods, packaging and
packing material and other tangible personal property now or hereafter held for
sale, lease, rental or resale or that are to be furnished or have been
furnished under a contract of service or that are to be used or consumed in the
business of such Corporation (all of the foregoing being herein collectively
called the “Inventory”);

 

(c)           Equipment

 

All goods now or hereafter
owned by such Corporation which are not inventory or consumer goods as defined
in the PPSA including, without limitation, all machinery, equipment, furniture,
furnishings, fixtures, and other tangible personal property, including motor
vehicles with respect to which a certificate of title has been issued,
aircraft, dies, tools, jigs, and office equipment, as well as all of such types
of property leased by such Corporation and all of such Corporation’s rights and
interests with respect thereto under such leases (including, without
limitation, options to purchase); together with all present and future
additions and accessions thereto, replacements therefor, component and
auxiliary parts and supplies used or to be used in connection therewith, and
all substitutes for any of the foregoing, and all manuals, drawings,
instructions, warranties and rights with respect thereto; wherever any of the
foregoing is located (all of the foregoing being herein collectively called the
“Equipment”);

 

(d)           Chattel Paper, Instruments, Securities, etc.

 

All chattel paper,
instruments, warehouse receipts, bills of lading and other documents of title,
whether negotiable or non negotiable, share, stock, security

 

3

 

entitlements, warrants,
bonds, debentures, debenture stock or other securities or investment property
and financial assets now or hereafter owned by such Corporation;

 

(e)           Intangibles

 

All intangibles now or
hereafter owned by such Corporation including, without limitation, Intellectual
Property, all goodwill connected with or symbolized by any of such general
intangibles; all contract rights, documents, applications, licenses, materials
and other matters related to such general intangibles; all tangible property
embodying or incorporating any such general intangibles; and all chattel paper
and instruments relating to such general intangibles (collectively, the “Intangibles”).

 

(f)            Books and Accounts, etc.

 

With respect to the personal
property described in Paragraphs (a) to (e) inclusive, all books,
accounts, invoices, deeds, documents, writings, letters, papers, security
certificates and other records in any form evidencing or relating thereto and
all contracts, securities, instruments and other rights and benefits in respect
thereof;

 

(g)           Other Property

 

The uncalled capital, money,
rights, bills of exchange, negotiable and non negotiable instruments, judgments
and securities not otherwise described in Paragraphs (a) to (f) inclusive;

 

(h)           Replacements, etc.

 

With respect to the personal
property described in Paragraphs (a) to (g) inclusive, all
substitutions and replacements thereof, increases, additions and accessions
thereto and any interest of such Corporation therein; and

 

(i)            Proceeds

 

With respect to the personal
property described in Paragraphs (a) to (h) inclusive, personal
property in any form or fixtures derived directly or indirectly from any
dealing with such property or that indemnifies or compensates for such property
destroyed or damaged and proceeds of proceeds whether of the same type, class
or kind as the original proceeds.

 

1.2           Additional
Specification with respect to Security Interest

 

(a)           Notwithstanding
anything in Section 1.1, the term “Collateral” shall expressly exclude the
following: (i) any trademark applications filed on an “intent to use”
basis until the earlier of the filing of a statement of use thereon or the
first use in commerce thereof, (ii) any Inventory or other goods that have
been delivered to any Grantor on a consignment basis to the extent that the
rights of such consignor have been properly perfected under applicable law, (iii) any
property (including any goods, investment property, instruments, documents of
title, chattel paper, intangibles or money) to the extent that such grant of a
Security Interest is prohibited by any valid enforceable law or regulation
applicable thereto, requires a consent not obtained of any Governmental
Authority pursuant to such law or

 

4

 

regulation or is prohibited
by, or constitutes a breach or default under or results in the termination of
or gives rise to a right on the part of the parties thereto other than such
Grantor to terminate (or materially modify) or requires any consent not
obtained under, any contract, license, agreement, instrument or other document
evidencing or giving rise to such property, except to the extent that such law
or regulation or the term in such contract, license, agreement, instrument or other
document or similar agreement providing for such prohibition, breach, default
or right of termination or modification or requiring such consent is
ineffective under applicable law, provided, however, that such
security interest shall attach immediately at such time as the condition
causing such prohibition, breach, default or right of termination or
modification or requiring such consent, as the case may be, shall be remedied
and, to the extent severable, shall attach immediately to any portion of such contract,
license, agreement, instrument or other document that does not result in any of
such consequences, including any proceeds of such contract, license, agreement,
instrument or other document, and (iv) the voting Equity Interests of ZC
Partnership, LP in excess of 65% of the general partnership Equity Interests of
such Subsidiary; provided  further  that, in all events, all
Proceeds, substitutions or replacements of the foregoing shall constitute “Collateral”
hereunder.

 

(b)           Without limiting
the foregoing and in addition to Section 4.2 herein, each Grantor hereby
designates the Collateral Agent as such Grantor’s true and lawful attorney,
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, to file one or more
financing statements or continuation statements, to file with the Canadian
Intellectual Property Office such documents as may be necessary or advisable,
or to sign other documents for the purpose of perfecting, confirming,
continuing, or protecting the Security Interest granted by each Grantor,
without the signature of such 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.  Any such financing statement may
indicate the Collateral as “all assets of the Grantor” or words of similar
effect.

 

(c)           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.

 

(d)           The Security
Interest with respect to Trademarks constitutes a Security Interest in, and a
charge, hypothecation and pledge of, such Collateral in favour of the
Collateral Agent, but does not constitute an assignment or mortgage of such
Collateral to the Collateral Agent.

 

(e)           Until the
Security Interest is enforceable, the grant of the Security Interest in the
Intellectual Property does not affect in any way any Grantor’s rights to
commercially exploit the Intellectual Property, defend it, enforce any Grantor’s

 

5

 

rights in it or with respect
to it against third parties in any court or claim and be entitled to receive
any damages with respect to any infringement of it.

 

(f)            The Security
Interest does not extend to consumer goods.

 

(g)           The Security
Interest does not extend or apply to the last day of the term of any lease or
sublease of real property or any agreement for a lease or sublease of real
property, now held or hereafter acquired by any Grantor, but any Grantor will
stand possessed of any such last day upon trust to assign and dispose of it as
the Collateral Agent may reasonably direct.

 

1.3           Definition
of Terms Used Herein

 

(a)           Terms defined in
the Personal Property Security Act (Ontario)
(as amended from time to time, the “PPSA”) and used
in this security agreement have the same meanings.  Any reference to the “STA”
is a reference to the Securities Transfer Act,
2006 (Ontario) or, to the extent applicable, similar legislation of any other
jurisdiction, as amended from time to time. 
Where a reference is made to the Collateral Agent, it includes, as
applicable, any nominee appointed by the Collateral Agent to hold or otherwise
take possession of the Collateral;

 

(b)           Capitalized terms
not otherwise defined herein shall have the same meanings as ascribed to them
in the Credit Agreement;

 

(c)           Any reference to “Collateral” shall, unless the context otherwise requires,
refer to “Collateral or any part thereof”;

 

(d)           The grant of the
Security Interest shall include, without limitation, a mortgage, hypothecation,
pledge, charge and assignment of the Collateral in favour of the Collateral
Agent (for itself and on behalf of the Secured Parties);

 

(e)           The term “encumbrance” shall include, without limitation, a security
interest, lien, hypothec, claim, charge, deemed trust or encumbrance of any
kind whatsoever;

 

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

 

(g)           “Copyrights” shall mean, with respect to any Person, all of
such Person’s right, title and interest, now or hereafter acquired, in and to
the following:  (a) all copyrights,
rights and interests in copyrights, works protectable by copyright, copyright
registrations and copyright applications; (b) all extensions and renewals
of any of the foregoing; (c) all income, royalties, damages, and payments
now or hereafter due and/or payable under any of the foregoing, including
damages or payments for past, present or future infringements for any of the
foregoing; (d) the right to sue for past, present and future infringements
of any of the foregoing; and (e) all rights corresponding to any of the
foregoing.

 

(h)           “Copyright Licenses” shall mean exclusive Licenses in respect
of Copyrights where a Grantor is a licensee.

 

6

 

(i)            “Concentration Account” shall have the meaning assigned to
such term in the Credit Agreement;

 

(j)            “Deposit Account” shall mean any chequing or other demand
deposit account into which proceeds of Collateral are deposited, and shall
include any time, savings, passbook, or similar accounts maintained with a bank
or other financial institution;

 

(k)           “Equity Interests” means, with respect to any Person, all of
the shares of capital stock of (or other ownership or profit interests in) such
Person, and all of the warrants or options for the purchase or acquisition from
such Person of shares of capital stock of (or other ownership or profit
interests in) such Person (including partnership, member or trust interests
therein), whether voting or nonvoting (but excluding, for avoidance of doubt,
any Indebtedness convertible into or exchangeable for Equity Interests).

 

(l)            “Industrial Designs” shall mean, with respect to any Person,
all of such Person’s right, title and interest, now owned or hereafter
acquired, in and to: (a) any and all Canadian industrial designs and
industrial design applications; (b) all income, royalties, damages, claims,
and payments now or hereafter due or payable under and with respect thereto,
including damages and payments for past, present and future infringements
thereof; (c) all rights to sue for past, present and future infringements
thereof; and (d) all rights corresponding to any of the foregoing.

 

(m)          “Intellectual Property” shall mean all intellectual property
and similar property of every kind and nature now owned or hereafter acquired
by any Person, including inventions, designs, Patents, Copyrights, Trademarks,
Industrial Designs, Licenses, trade secrets, confidential or proprietary
technical and business information, know-how, show-how or other data or
information and all related documentation, and all additions and improvements
to any of the foregoing.

 

(n)           “Letter of Credit Right” shall mean a right to payment or
performance under a letter of credit, whether or not the beneficiary has
demanded or is at the time entitled to demand payment or performance;

 

(o)           “License” shall mean, with respect to any Person, all of such
Person’s right, title and interest in and to (a) any and all licensing
agreements or similar arrangements in and to any other Person’s Intellectual
Property, (b) all income, royalties, damages, claims and payments now or
hereafter due or payable under and with respect thereto, including damages and
payments for past, present and future breaches thereof, and (c) all rights
to sue for past, present and future breaches thereof.

 

(p)           “Material Trademark” shall mean any Trademark of a Grantor
that is material to the conduct of such Grantor’s business.

 

(q)           “Patents” shall mean, with respect to any Person, all of such
Person’s right, title and interest, now owned or hereafter acquired, in and
to:  (a) any and all patents and
patent applications or industrial design registrations and applications; (b) all
inventions and improvements described and claimed therein, including the right
to make, use and/or sell the inventions disclosed or claimed therein; (c) all
reissues,

 

7

 

divisions, continuations,
renewals, extensions, and continuations-in-part thereof; (d) all income,
royalties, damages, claims, and payments now or hereafter due or payable under
and with respect thereto, including damages and payments for past, present and
future infringements thereof; (e) all rights to sue for past, present and
future infringements thereof; and (f) all rights corresponding to any of
the foregoing.

 

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

 

(s)           “Pledged Collateral” shall mean all Pledged Interests and
Pledged Notes.

 

(t)            “Pledged Collateral Addendum” shall mean a Pledged Collateral
Addendum substantially in the form of Annex 2 to this Security Agreement.

 

(u)           “Pledged Companies” shall mean each Person listed on Schedule
3 hereto as a “Pledged Company”, together with each other Person, all or a
portion of whose Equity Interests, is acquired or otherwise owned by a Grantor
after the Effective Date.

 

(v)           “Pledged Interests” shall mean all of each Grantor’s right,
title and interest in and to all of the Equity Interests now or hereafter owned
by such Grantor (other than such Equity Interests in Dobbins Jewelers, Inc.),
regardless of class or designation, including in each of the Pledged Companies
owned by it, and all substitutions therefor and replacements thereof, all proceeds
thereof and all rights relating thereto, also including any certificates
representing the Equity Interests, the right to receive any certificates
representing any of the Equity Interests, all warrants, options, share
appreciation rights and other rights, contractual or otherwise in respect
thereof, and the right to receive dividends, distributions of income, profits,
surplus, or other compensation by way of income or liquidating distributions,
in cash or in kind, and all cash, instruments, and other property from time to
time received, receivable, or otherwise distributed in respect of or in
addition to, in substitution of, on account of, or in exchange for any or all
of the foregoing.

 

(w)          “Pledged Notes” shall mean, with respect to any Grantor, all
of the debt securities now or hereafter owned by such Grantor and the
promissory notes evidencing such debt securities.

 

(x)            “Secured Obligations” shall mean the Obligations and shall
include any obligations owed by the Facility Guarantors under the Facility
Guarantor Collateral Documents;

 

(y)           “Secured Parties” shall mean the Lenders, (b) the Agents
and their Affiliates, (c) the Issuing Banks, (d) the Arranger, (e) the
Co-Borrowing Base Agents, (f) the beneficiaries of each indemnification
obligation undertaken by any Grantor under any Loan Document, (g) any
other Person to whom Secured Obligations are owed or may become due and owing,
and (h) the successors and assigns of each of the foregoing.

 

8

 

(z)            “Supplement” shall mean a Supplement substantially in the
form of Annex 1 to this Security Agreement.

 

(aa)         “Supporting Obligations” shall mean a Letter of Credit Right
and all other secondary obligation, including, namely, lien notes, judgments,
chattel mortgages, mortgages, security interests, hypothecs, assignments,
guarantees, suretyships, accessories, bills of exchange, negotiable
instruments, invoices, that supports the payment or performance of an Account
Receivable, chattel paper, a document of title, an intangible, an instrument or
investment property, and all other rights, benefits and documents now or
hereafter taken, vested in or held by a Grantor in respect of or as security
for the same and the full benefit and advantage thereof.

 

(bb)         “Term Priority Collateral” shall have the meaning given to it
the Intercreditor Agreement.

 

(cc)         “Trademarks” shall mean, with respect to any Person, all of
such Person’s right, title and interest, now owned or hereafter acquired, in
and to the following:  (a) all trademarks
(including service marks), trade names, trade dress, trade styles and other
source indicators and the registrations and applications for registration
thereof and the goodwill of the business symbolized by the foregoing; (b) all
licenses of the foregoing, whether as licensee or licensor; (c) all
renewals of the foregoing; (d) all income, royalties, damages and payments
now or hereafter due or payable with respect thereto, including damages, claims
and payments for past and future infringements thereof; (e) all rights to
sue for past, present and future infringements of the foregoing, including the
right to settle suits involving claims and demands for royalties owing; and (f) all
rights corresponding to any of the foregoing.

 

(dd)         “ULC” means an unlimited company under the Companies Act (Nova Scotia).

 

(ee)         “ULC Pledgor” has the meaning assigned to such term in Section 6.17.

 

(ff)           “ULC Shares” means shares of stock or other Equity Interests
in one or more ULCs.

 

1.4           Rules of
Interpretation.

 

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

 

1.5           Grantors
Remain Liable

 

Notwithstanding anything herein to the contrary:

 

(a)           each Grantor
shall remain liable under the contracts and agreements included in the
Collateral to the extent set forth therein to perform all its duties and
obligations thereunder to the same extent as if this Security Agreement had not
been executed;

 

(b)           the exercise by
the Collateral Agent of any of the rights or remedies hereunder shall not
release any Grantor from any of its duties or obligations under the contracts
and agreements included in the Collateral; and

 

9

 

(c)                                  the
Collateral Agent shall not have any obligation or liability under the contracts
and agreements included in the Collateral by reason of this Security Agreement,
nor shall the Collateral Agent be obligated to perform any of the obligations
or duties of any Grantor thereunder or to take any action to collect or enforce
any claim for payment assigned hereunder.

 

1.6                                 Perfection
Regarding Certain Term Priority Collateral

 

In the event that the Term Agent (as defined in the Intercreditor
Agreement) shall determine in its reasonable discretion that the cost
(including adverse tax consequences) of perfecting a security interest in any
Term Priority Collateral would be excessive in relation to the value of the
security to be afforded thereby, then the Collateral Agent shall not require
the perfection of its security interest in such Term Priority Collateral.

 

SECTION 2 — REPRESENTATIONS AND WARRANTIES

 

Each Grantor does hereby
represent and warrant that each representation, warranty, covenant and
agreement made in the Credit Agreement by the Grantor is hereby reiterated as
if incorporated by reference herein, and is hereby confirmed as true and
correct,  and further represents and warrants to the Collateral
Agent:

 

2.1                                 Title and Authority

 

The Grantor has good and valid
rights in, and title to, the Collateral with respect to which it has purported
to grant the Security Interest 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 Security Agreement, without the consent or approval of any other Person
other than any consent or approval which has been obtained.

 

2.2                                 Filings

 

The Perfection Certificate has
been duly prepared, completed and executed, and the information set forth
therein is correct and complete in all material respects. Fully executed PPSA
financing statements or other appropriate filings, recordings or registrations
containing a description of the Collateral (as and if required) have been filed
in each governmental, municipal or other office as is necessary to publish
notice of and protect the validity of and to establish a legal, valid and
perfected security interest in favour of the Collateral Agent (for the benefit
of the Secured Parties) in respect of all Collateral in which the security
interest may be perfected by filing, recording or registration in all the
Provinces, other than Québec, and Territories of Canada (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.  A fully executed Canadian Patent, Industrial
Design and Trademark Security Agreement, in the form attached as Annex 3
hereto, and a fully executed Copyright Security

 

10

 

Agreement, in the form attached
as Annex 4 hereto, covering its Canadian registered Patents, Canadian
registered Industrial Designs, Canadian registered Trademarks and Canadian
registered Copyrights (and applications for any of the foregoing) and Copyright
Licenses, as applicable, have been delivered to the Collateral Agent for
recording by any relevant offices of the Canadian Intellectual Property Office,
as is necessary to protect the validity of and to establish a legal and valid
security interest in favour of the Collateral Agent (for the benefit of the
Credit Parties) in respect of all Collateral consisting of Intellectual
Property in which a security interest may be perfected by filing, recording or
registration in Canada (or any Province or Territory thereof), and no further
or subsequent filing, refiling, recording, rerecording, registration or
reregistration is necessary (other than such actions as are necessary to
perfect the Security Interest with respect to any Intellectual Property
acquired or developed after the date hereof).

 

2.3                                 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, (b) subject
to the filings described in Section 2.2 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 and (c) subject
to the obtaining of “control”, a perfected security interest in all the
Collateral, to the extent that perfection of the security interest in such
Collateral is required by the terms hereof or the Credit Agreement and may only
be accomplished through “control”. 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 and
which have priority by operation of law.

 

2.4                                 Absence of Other Liens

 

The Collateral is owned by the Grantor 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 Certificate, the Grantor has not filed or
consented to the filing of (a) a registration application, financing
statement or analogous document under the Civil Code of Québec,
the PPSA (or any successor statute) or similar legislation of any other
jurisdiction, the Uniform Commercial Code, or any other applicable law covering
any Collateral, (b) any assignment or hypothecation in which the Grantor
assigns or hypothecates any Collateral or any security agreement or similar
instrument covering any Collateral with the United States Patent and Trademark
Office, the United States Copyright Office or the Canadian Intellectual
Property Office, or (c) any assignment or hypothecation in which the
Grantor assigns or hypothecates any Collateral or any security agreement or
similar instrument covering any Collateral with any foreign governmental,
municipal or other office, which registration application, financing statement
or analogous document, assignment, hypothecation, 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.

 

11

 

2.5                                 Bailees, Warehousemen, Etc.

 

Except as otherwise disclosed in
the Perfection Certificate, no Inventory or Equipment of any Grantor is in the
care or custody of any third party or stored or entrusted with a bailee or
other third party and none shall hereafter be placed under such care, custody,
storage, or entrustment except for Equipment and Inventory (i) out for
repair or replacement in the ordinary course of business, (ii) being
shipped, or in-transit, from a supplier or to a customer or between suppliers,
in the ordinary course of business or (iii) in the possession of
suppliers, subcontractors and licensees, in the ordinary course of business,
unless the applicable Grantor complies with Section 3.1(c) below.

 

2.6                                 Intellectual Property

 

Schedule 2 hereto sets forth, as
of the date hereof, (i) all of each Grantor’s registered Patents and
Patent applications, including the name of the registered owner, type,
registration or application number and the expiration date (if already
registered) of each such Patent and Patent application owned by any Grantor, (ii) all
of each Grantor’s registered Industrial Designs and Industrial Design
applications, including the name of the registered owner, registration or
application number and the expiration date (if already registered) of each such
Industrial Design and Industrial Design application owned by any Grantor, (iii) all
of each Grantor’s registered Trademarks and Trademark applications, including
the name of the registered owner, the registration or application number and
the expiration date (if already registered) of each such Trademark and
Trademark application owned by any Grantor and (iv) all of each Grantor’s
registered Copyrights, Copyright applications and Copyright Licenses, including
the name of the registered owner, title and, if applicable, the registration
number of each such Copyright, Copyright application or Copyright License owned
by any Grantor.

 

2.7                                 Pledged Collateral

 

(a)                                  Each
Grantor is the holder of record and the legal and beneficial owner, free and
clear of all Liens other than the Security Interest granted to the Collateral
Agent for the benefit of the Secured Parties hereunder and Liens permitted by Section 6.2
of the Credit Agreement, of the Pledged Collateral indicated on Schedule 3 as
being owned by such Grantor and any Pledged Collateral owned by such Grantor
and acquired after the Effective Date. 
Except as otherwise disclosed on Schedule 3 attached hereto or the
Perfection Certificate attached hereto, no amounts payable under or in
connection with any of the Collateral are evidenced by any instruments or
chattel paper as of the Effective Date.

 

(b)                                 All
of the Pledged Collateral constituting Pledged Interests is duly authorized,
validly issued, fully paid and nonassessable (provided that Pledged Interests
which are ULC Shares will be assessable in accordance with the provisions of
the Companies Act (Nova Scotia)) and such
Pledged Interests constitute or will constitute the percentage of the issued
and outstanding Equity Interests of the Pledged Companies of each applicable
Grantor identified on Schedule 3, any Pledged Collateral Addendum or any
Supplement to this Agreement.  All of the
Pledged Collateral constituting Pledged Notes is duly authorized, validly
issued and delivered by the issuer of such Pledged Note and is the legal, valid
and binding obligation of such issuer and such issuer is not in default
thereunder.

 

12

 

Each Grantor has
the right and requisite authority to pledge the Pledged Collateral pledged by
such Grantor to the Collateral Agent as provided herein.

 

(c)                                  All
actions necessary to perfect or establish the first priority of the Collateral
Agent’s Liens (subject to Permitted Encumbrances which have priority by
operation of law or as provided in the Intercreditor Agreement) in the Pledged
Collateral, and the proceeds thereof, have been duly taken, (A) upon the
execution and delivery of this Security Agreement; (B)(i) upon the taking
of possession by the Collateral Agent of any certificates constituting the
Pledged Interests, to the extent such Pledged Interests are represented by
certificates, together with undated powers endorsed in blank by the applicable
Grantor and (ii) upon the taking of possession by the Collateral Agent of
any promissory notes constituting the Pledged Notes, together with undated
powers endorsed in blank by the applicable Grantor; and (C) upon the
filing of PPSA financing statements in the applicable jurisdiction for such
Grantor with respect to the Pledged Interests of such Grantor that are not
represented by certificates.  Each
Grantor has delivered to and deposited with the Collateral Agent (or, with
respect to any Pledged Collateral created or obtained after the Effective Date,
will deliver and deposit in accordance with Section 3.13 hereof) all
certificates representing the Pledged Interests owned by such Grantor to the
extent such Pledged Interests are represented by certificates, all promissory
notes representing the Pledged Notes owned by such Grantor, and undated powers
endorsed in blank with respect to such certificates or promissory notes.

 

(d)                                 None
of the Pledged Collateral owned or held by such Grantor has been issued or
transferred in violation of any securities registration, securities disclosure,
or similar laws of any jurisdiction to which such issuance or transfer may be
subject.

 

2.8                                 Nature of Certain Consignment Filings

 

Each of the Liens and other
filings set forth on Schedule 6.2 of the Credit Agreement which purports to
cover goods delivered to a Grantor on a consignment basis (a) evidences
arrangements entered into with such Grantor and its trade vendors in the
ordinary course of business, intended by such Grantor and vendor to be a “true”
consignment, (b) does not encumber any assets of such Grantor other than
the consigned goods to which its relates and the proceeds thereof, to the
extent owing to the vendor and (c) secures solely the obligation of such
Grantor to either return such consigned goods or pay the purchase price for
such consigned goods, in each case, pursuant to a written consignment agreement
on terms substantially similar to those set forth in the Grantors’ standard
form of consignment agreement as in effect on or about the Effective Date (with
the exception of any such Liens and other filings made by any trade vendors in
connection with or relating to that certain Amendment to Existing Agreements
dated as of March 3, 2010 by and among Zale Delaware, Inc., TXDC,
L.P., Rosy Blue Jewelry, Inc. and Rosy Blue, Inc., relating to
consigned goods for such Grantors’ 2010 Spring season), a copy of which has
been provided to the Collateral Agent.

 

13

 

SECTION 3 — COVENANTS OF THE GRANTORS

 

Each Grantor covenants and agrees with the Collateral Agent that so
long as there shall remain any Secured Obligations:

 

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

 

(a)                                  Each
Grantor agrees to furnish to the Collateral Agent (i) prompt written
notice of any change in (A) any Grantor’s trade name used to identify it
in the conduct of its business or in the ownership of its properties, (B) any
office in which it maintains books or records relating to Collateral owned by
it and having a value in excess of $1,000,000 or any office or facility at
which Collateral owned by it and having a value in excess of $1,000,000 is
located (including the establishment of any such new office or facility), other
than, in each case, (I) retail store locations or (II) Equipment and
Inventory (1) out for repair or replacement in the ordinary course of
business, (2) being shipped, or in transit, from a supplier or to a
customer or between suppliers, in the ordinary course of business or (3) in
the possession of suppliers, subcontractors and licensees, in the ordinary
course of business, or (C) the acquisition by any Grantor of any property
for which additional filings or recordings are necessary to perfect and
maintain the Collateral Agent’s Security Interest therein, and (ii) (x) 30
days prior written notice of any change in (A) any Grantor’s corporate or
partnership name or the location of any Grantor’s chief executive office or its
principal place of business, (B) any Grantor’s identity or corporate or
partnership structure, and (y) prior written notice of any Grantor’s
jurisdiction of incorporation, amalgamation or formation, Federal Taxpayer
Identification Number or organizational number or similar taxation
identification or organizational number. 
Each Grantor 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.  Each Grantor
acknowledges and agrees that, except as disclosed on the Perfection
Certificate, it does not currently, nor will it in the future, have any assets
that constitute Collateral located in the United States.

 

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

 

(c)                                  Each
Grantor agrees that, to the extent it acquires any additional leased warehouses
or distribution centers after the Effective Date, the Grantors shall provide
the Collateral Agent with prompt notice thereof, and shall obtain a waiver and
collateral access agreement in form and substance reasonably satisfactory to
the Collateral Agent.

 

14

 

3.2                                 Periodic Certification

 

Each Grantor shall deliver to
the Collateral Agent, at least thirty (30) days prior to setting up a location
in the Province of Québec in which it intends on maintaining tangible property,
a deed of movable hypothec in form and substance and on terms and conditions
reasonably satisfactory to the Collateral Agent which has been published in
each governmental, municipal or other appropriate office in the Province of
Québec to the extent necessary to protect, perfect and set-up the security
interest and hypothec.

 

Without limiting the scope of the
foregoing, 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 date hereof or the date of the most recent certificate delivered
pursuant to this Section 3.2 or, if any such change has occurred
specifying such revised information.

 

3.3                                 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.

 

3.4                                 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 or the validity or priority of such Security Interest, including the
payment of any fees and taxes required in connection with the execution and
delivery of this Security Agreement, the granting of the Security Interest and
the filing of any financing statements or other documents in connection
herewith or therewith, as well as causing the Collateral Agent to have “control”
(as defined in the STA) of any such Collateral to the extent required
perfection is required under this Agreement and can only be accomplished
through Control.  If any amount payable
under or in connection with any of the Collateral shall be or become evidenced
by any promissory note, document, draft, chattel paper, or other instrument in
an amount in excess of $1,000,000, such note, document, draft, chattel paper,
or other Instrument shall be immediately pledged and delivered to the
Collateral Agent, duly endorsed in a manner satisfactory to the Collateral
Agent.

 

3.5                                 Taxes; Encumbrances

 

The Collateral Agent may, at its
option, 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

 

15

 

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 that, so long as no Event of Default shall have occurred and be
continuing, if such taxes, assessments, charges, fees or Liens are being
contested in good faith and by appropriate proceedings by such Grantor, the
Collateral Agent shall consult with such Grantor before making any such payment
or taking any such action; 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; 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
any Grantor’s failure to have made such payments or taken such action.  Nothing in this Section 3.5 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.

 

3.6                                 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 Receivable and the property securing payment and performance of the
Account Receivable has a value in excess of $1,000,000, 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 $1,000,000 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 Collateral in an amount in excess of $1,000,000, whether
or not written, now or hereafter issued in favour of such Grantor as
beneficiary, execute and deliver to the issuer and any confirmer of such letter
of credit an assignment of proceeds form, in favour of the 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.

 

16

 

3.7                                 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.

 

3.8                                 Use and Disposition of the Collateral

 

None of the Grantors shall make
or permit to be made an assignment, pledge or hypothecation of the Collateral
or shall grant any other Lien in respect of the Collateral or shall grant “control”
(as defined in the STA) over any Collateral to any Person, except as expressly
permitted by Section 6.2 of the Credit Agreement.  Except as expressly permitted in the Credit
Agreement, none of the Grantors shall make or permit to be made any transfer of
the Collateral, and each Grantor shall remain at all times in possession of the
Collateral owned by it, except that the Grantors may use and dispose of the
Collateral in any lawful manner permitted by the terms of and not otherwise
inconsistent with the provisions of this Agreement, the Credit Agreement or any
other Loan Document.

 

3.9                                 Limitation on Modification of Accounts

 

No Grantor shall, 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.

 

3.10                           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 3.10, including

 

17

 

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.

 

3.11                           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 Collateral Agent, its Accounts
Receivable 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.

 

3.12                           Intellectual Property

 

(a)                                  Each
Grantor agrees that it will not do any act or omit to do any act (and will
exercise commercially reasonable efforts to prevent its licensees and
sub-licensees from doing any act or omitting to do any act) whereby any Patent
or Industrial Design may become invalidated or dedicated to the public, and
agrees that it shall continue to mark any products covered by a Patent or Industrial
Design that is material to the conduct of such Grantor’s business with the
relevant patent number as necessary and sufficient to establish and preserve
its maximum rights under applicable patent laws.

 

(b)                                 Each
Grantor (either itself or through its licensees or its sublicensees) will, for
each Material Trademark, (i) maintain such Material Trademark in full
force free from any claim of abandonment or invalidity for non use, (ii) maintain
the quality of products and services offered under such Material Trademark
including where applicable policing the use of such Material Trademarks by its
licensees and sublicensees, (iii) display such Material Trademark with
notice of registration to the extent necessary and sufficient to establish and
preserve its maximum rights under applicable law and (iv) not knowingly
use or knowingly permit the use of such Material Trademark in violation of any
third party rights.

 

(c)                                  Each
Grantor (either itself or through its licensees or sublicensees) will, for each
work covered by a Copyright material to the conduct of such Grantor’s business,
continue to publish, reproduce, display, adopt and distribute the work with
appropriate copyright notice as necessary and sufficient to establish and
preserve its maximum rights under applicable copyright laws.

 

(d)                                 Each
Grantor shall notify the Collateral Agent promptly if it knows or has reason to
know that any Material Trademark or any Patent, Copyright or Industrial Design
material to the conduct of its business may become abandoned, lost or dedicated
to the public, or of any materially adverse determination or development
(including the institution of, or any such determination or development in, any
proceeding in the Canadian Intellectual Property Office or any court or similar
office of any country) regarding such Grantor’s ownership of any Patent,
Material Trademark, Copyright or Industrial Design material to the conduct of
its business, its right to register the same, or its right to keep and maintain
the same.

 

18

 

(e)                                  At
the time of delivery of quarterly financial statements with respect to each
Fiscal Quarter pursuant to Section 5.1(b) of the Credit Agreement,
each Grantor shall inform the Collateral Agent of any application for any
Patent, Trademark, Copyright or Industrial Design (or any registration of any
Patent, Trademark, Copyright or Industrial Design) such Grantor has filed with
the Canadian Intellectual Property Office or any office or agency in any
political subdivision of the Canada or in any other country or any political
subdivision thereof or any Copyright License for which such Grantor has become
the licensee, in each case, during such Fiscal Quarter, and, upon request of
the Collateral Agent, execute and deliver any and all agreements, instruments,
documents and papers as the Collateral Agent may reasonably request to evidence
the Collateral Agent’s Security Interest in any of the foregoing, and each
Grantor hereby appoints the Collateral Agent as its attorney-in-fact to execute
and file such writings for the foregoing purposes, all acts of such attorney
being hereby ratified and confirmed; such power, being coupled with an
interest, is irrevocable.

 

(f)                                    Each
Grantor will take all necessary steps that are consistent with the practice in
any proceeding before the Canadian Intellectual Property Office or any office
or agency in any political subdivision of the Canada or in any other country or
any political subdivision thereof, to maintain and pursue each application
relating to Material Trademarks and each material application relating to the
Patents and/or Copyrights and/or Industrial Designs (and to obtain the relevant
grant or registration) and to maintain each issued Patent and each registration
of Copyrights and/or Industrial Designs that is material to the conduct of any
Grantor’s business and each registration of Material Trademarks, including
timely filings of applications for renewal, affidavits of use, affidavits of
incontestability and payment of maintenance fees, and, if consistent with good
business judgment, to initiate opposition, interference and cancelation
proceedings against third parties.

 

(g)                                 In
the event that any Grantor has reason to believe that any Collateral consisting
of a Patent, Copyright or Industrial Design material to the conduct of any
Grantor’s business or a Material Trademark has been or is likely to be
infringed, misappropriated or diluted by a third party, such Grantor promptly
shall notify the Collateral Agent and shall, if consistent with reasonable
business judgment, promptly sue for infringement, misappropriation or dilution
and to recover any and all damages for such infringement, misappropriation or
dilution, and take such other actions as are appropriate under the
circumstances to protect such Collateral. 
Each Grantor further agrees not to abandon any Material Trademark or any
Patent, Copyright, Industrial Design or Copyright License that in such Grantor’s
reasonable business judgment is material to the operation of such Grantor’s
business without the prior written consent of the Collateral Agent.

 

(h)                                 Upon
and during the continuance of an Event of Default, each Grantor shall use its
best efforts to obtain all requisite consents or approvals by the licensor of
each Copyright License, Patent License, Industrial Design licence or Material
Trademark License under which such Grantor is a licensee to effect the

 

19

 

assignment of all
such Grantor’s right, title and interest thereunder to the Collateral Agent or
its designee.

 

(i)                                     Without
limiting the generality of any of the foregoing, each Grantor hereby authorizes
the Collateral Agent, with prompt notice thereof to the Grantors, to supplement
this Agreement by supplementing Schedule 2 or adding additional schedules hereto
to identify specifically any asset or item that may constitute Copyrights,
Copyright Licenses, Patents and/or Industrial Designs or Material Trademarks;
provided that any Grantor shall within ten (10) days after it has been
notified by the Collateral Agent of the specific identification of such
Collateral, advise the Collateral Agent in writing of any inaccuracy of the
representations and warranties made by such Grantor hereunder with respect to
such Collateral.

 

3.13                           Pledged
Collateral

 

Subject to the Intercreditor Agreement:

 

(a)                                  If
any Grantor acquires Collateral consisting of chattel paper, instruments or
negotiable documents of title (collectively, “Negotiable
Collateral”), such Grantor shall, immediately upon receipt thereof,
deliver to the Collateral Agent the Negotiable Collateral and shall, at the
request of the Lender (i) endorse the same for transfer in blank or as the
Collateral Agent may direct, (ii) cause any transfer to be registered
wherever, in the opinion of the Lender, such registration may be required or
advisable, and (iii) deliver to the Collateral Agent any and all consents
or other documents which may be necessary or desirable to transfer the
Negotiable Collateral.

 

(b)                                 Each
Grantor shall not cause or permit any Person other than the Collateral Agent to
have control (as defined in the STA) of any investment property constituting
part of the Collateral, other than control in favour of a depositary bank or
securities intermediary which has subordinated its lien to the lien of the
Collateral Agent pursuant to documentation in form and substance satisfactory
to the Collateral Agent.

 

(c)                                  Provided
no Event of Default has occurred and is continuing, any Grantor has the right
to exercise all voting, consensual and other powers of ownership pertaining to
Collateral which is investment property (the “Pledged
Investment Property”) for all purposes not inconsistent with the
terms of this Security Agreement and each Grantor agrees that it will not vote
the Pledged Investment Property in any manner that is inconsistent with such
terms.

 

(d)                                 Provided
no Event of Default has occurred and is continuing, any Grantor may receive and
retain any dividends, distributions or proceeds on the Pledged Investment
Property.

 

(e)                                  If
an Event of Default has occurred and is continuing, whether or not the
Collateral Agent exercises any right to declare any Obligations due and payable
or seeks or pursues any other relief or remedy available to it under applicable
law or under this security agreement or otherwise, all dividends and other
distributions on the Pledged Investment Property shall be paid directly to the
Collateral Agent and retained by it as part of the Collateral, and, if the
Collateral Agent so requests

 

20

 

in writing, the Corporation
will execute and deliver to the Collateral Agent any instruments or other
documents necessary or desirable to ensure that the Pledged Investment Property
is paid directly to the Collateral Agent.

 

(f)                                    With
respect to (i) the securities accounts (other than securities accounts
with an aggregate value of less than $10,000) and (ii) any Collateral that
constitutes a security entitlement as to which the financial institution acting
as Collateral Agent hereunder is not the securities intermediary, the relevant
Grantor will cause the securities intermediary with respect to each such
account or security entitlement to enter into a control agreement, such
agreement to be in form and substance reasonably satisfactory to the applicable
Grantor and the Collateral Agent (which agreement may also be for the benefit
of the agent for the Term Loan); provided that the Collateral Agent will not
exercise exclusive control over such accounts except after a Cash Control
Event; provided further that no Grantor shall be required to take the foregoing
actions with respect to any securities account until the later of (A) sixty
(60) days after the Effective Date and (B) in the case of securities
accounts opened after the Effective Date, at the time of establishment of such
securities account (or, in each case, such later date as the Collateral Agent
shall in its reasonable discretion agree).

 

3.14                           Payment

 

Each Grantor will pay duly and punctually all sums of money owed by it
to the Collateral Agent or any other Secured Party under this Security
Agreement at the times and places and in the manner provided for herein, the
Credit Agreement or any other Loan Document, as applicable.

 

3.15                           Credit Agreement

 

Each Grantor acknowledges having reviewed the covenants contained in
the Credit Agreement which relate to such Grantor and its business, and hereby
covenants and agrees to observe and perform all covenants provided for in the
Credit Agreement which relate to it and to do all things necessary or
appropriate to ensure that it is in compliance with such covenants at all
times.

 

SECTION 4 — COLLECTIONS

 

4.1                                 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 Collection 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

 

21

 

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 Collection 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.

 

4.2                                 Power of Attorney

 

(a)                                  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 1.1 of this Security 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 4.1 of
this Security 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 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; (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

 

22

 

Grantor; (x) to use,
license, or transfer, for the purposes permitted by Section 6 hereof, any
or all Intangibles of any Grantor, provided that the Collateral Agent’s use of
such 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 Security 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.

 

(b)                                 Notwithstanding
the provisions of Section 4.2, the power of the Collateral Agent to act in
any name other than the name of a Grantor shall not apply to any Pledged
Collateral that is ULC Shares.

 

4.3                                 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 4.2 hereof, 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 4.2 hereof 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 which it may have on the date of this Agreement or
hereafter, whether hereunder, under any other Loan Document, by law or
otherwise

 

SECTION 5 — DEFAULT

 

Each Grantor agrees that, upon the occurrence and during the
continuance of an Event of Default, the security interests hereby constituted
shall become enforceable and the Collateral Agent shall be entitled to exercise
and enforce any or all of the remedies herein provided or which may otherwise
be available to the Collateral Agent by statute, at law or in equity and all
amounts secured hereby shall immediately be paid to the Collateral Agent (for
itself and on behalf of the Secured Parties) by such Grantor.

 

23

 

SECTION 6 — REMEDIES
ON DEFAULT

 

If the security interests hereby constituted become
enforceable, the Collateral Agent shall have, in addition to any other rights,
remedies and powers which it may have at law, in equity or under the PPSA, the Civil Code of Quebec (the “CCQ”)
or the Uniform Commercial Code (the “Code”) (whether
or not the CCQ or the Code applies to the affected Collateral), the following
rights, remedies and powers:

 

6.1                                 Power of Entry

 

Each Grantor shall forthwith upon demand assemble and deliver to the
Collateral Agent possession of all of the Collateral at such place as may be
specified by the Collateral Agent. The Collateral Agent may take such steps as
it considers necessary or desirable to obtain possession of all or any part of
the Collateral and, to that end, each Grantor agrees that the Collateral Agent,
its servants or agents or Receiver (as hereinafter defined) may, at any time,
during the day or night, enter upon lands and premises where the Collateral may
be found for the purpose of taking possession of and/or removing the Collateral
or any part thereof. In the event of the Collateral Agent taking possession of
the Collateral, or any part thereof, the Collateral Agent shall have the right
to maintain the same upon the premises on which the Collateral may then be
situate.

 

6.2                                 Power of Sale

 

The Collateral Agent may sell, lease or otherwise dispose of all or any
part of the Collateral, as a whole or in separate parcels, by public auction,
private tender or by private contract, with or without notice, except as
otherwise required by applicable law, with or without advertising and without
any other formality, all of which are hereby waived by each Grantor. Such sale,
lease or disposition shall be on such terms and conditions as to credit and
otherwise and as to upset or reserve bid or price as the Collateral Agent, in
its sole discretion, may deem advantageous. If such sale, transfer or
disposition is made on credit or part cash and part credit, the Collateral
Agent need only credit against the Secured Obligations the actual cash received
at the time of the sale. Any payments made pursuant to any credit granted at
the time of the sale shall be credited against the Secured Obligations as they are
received. The Collateral Agent may buy in or rescind or vary any contract for
sale of all or any of the Collateral and may reasonably resell without being
answerable for any loss occasioned thereby. Any such sale, lease or disposition
may take place whether or not the Collateral Agent has taken possession of the
Collateral. The Collateral Agent may, before any such sale, lease or
disposition, perform any commercially reasonable repair, processing or
preparation for disposition and the amount so paid or expended shall be deemed
advanced to the Grantors by the Collateral Agent, shall become part of the
Secured Obligations, shall bear interest at the highest rate per annum charged
by the Collateral Agent on the Secured Obligations or any part thereof and shall
be secured by this Security Agreement.

 

6.3                                 Validity of Sale

 

No person dealing with the Collateral Agent or its servants or agents
shall be concerned to inquire whether the security hereby constituted has
become enforceable, whether the powers which the Collateral Agent is purporting
to exercise have become exercisable, whether any money remains due on the
security of the Collateral, as to the necessity or expedience of the
stipulations and conditions subject to which any sale, lease or disposition shall
be made, otherwise as to the propriety or regularity of any sale or any other
dealing by the Collateral

 

24

 

Agent with the Collateral or to see to the application of any money
paid to the Collateral Agent. In the absence of fraud on the part of such
persons, such dealings shall be deemed, so far as regards the safety and
protection of such person, to be within the powers hereby conferred and to be
valid and effective accordingly.

 

6.4                                 Receiver-Manager

 

The Collateral Agent may, in addition to any other rights it may have,
appoint by instrument in writing a receiver, an interim receiver or receiver
and manager (each of which are herein called a “Receiver”)
of all or any part of the Collateral or may institute proceedings in any court
of competent jurisdiction for the appointment of such a Receiver. Any such
Receiver is hereby given and shall have the same powers and rights and
exclusions and limitations of liability as the Collateral Agent has under this
Security Agreement, at law or in equity. In exercising any such powers, any
such Receiver shall, to the extent permitted by law, act as and for all
purposes shall be deemed to be the agent of the applicable Grantor and the
Collateral Agent and the other Secured Parties shall not be responsible for any
act or default of any such Receiver. The Collateral Agent may appoint one or
more Receivers hereunder and may remove any such Receiver or Receivers and
appoint another or others in his or their stead from time to time. Any Receiver
so appointed may be an officer or employee of the Collateral Agent. A court
need not appoint, ratify the appointment by the Collateral Agent of or
otherwise supervise in any manner the actions of any Receiver. Upon a Grantor
receiving notice from the Collateral Agent of the taking of possession of the
Collateral or the appointment of a Receiver, all powers, functions, rights and
privileges of each of the directors and officers of such Grantor with respect
to the Collateral shall cease, unless specifically continued by the written
consent of the Collateral Agent.

 

6.5                                 Carrying on Business

 

The Collateral Agent may carry on, or concur in the carrying on of, all
or any part of the business or undertaking of each Grantor, may, to the
exclusion of all others, including such Grantor and any other Grantor, enter
upon, occupy and use all or any of the premises, buildings, plant and
undertaking of or occupied or used by such Grantor and may use all or any of
the tools, machinery, equipment and intangibles of such Grantor for such time
as the Collateral Agent sees fit, free of charge, to carry on the business of
such Grantor and, if applicable, to manufacture or complete the manufacture of
any Inventory and to pack and ship the finished product.

 

6.6                                 Dealing with Collateral

 

The Collateral Agent may seize, collect, realize, dispose of, enforce,
release to third parties or otherwise deal with the Collateral or any part
thereof in such manner, upon such terms and conditions and at such time or
times as may seem to it advisable, all of which without notice to any Grantor
except as otherwise required by any applicable law. The Collateral Agent may
demand, sue for and receive any Accounts Receivable with or without notice to
any Grantor, give such receipts, discharges and extensions of time and make
such compromises in respect of any Accounts Receivable which may, in the
Collateral Agent’s absolute discretion, seem bad or doubtful. The Collateral
Agent may charge on its own behalf and pay to others, sums for costs and
expenses incurred including, without limitation, legal fees and expenses on a
solicitor and his own client scale and Receivers’ and accounting fees, in or in
connection with seizing, collecting, realizing, disposing, enforcing or
otherwise dealing with the Collateral and in connection with the protection and
enforcement of the rights of the Collateral Agent hereunder

 

25

 

including, without limitation, in connection with advice with respect
to any of the foregoing. The amount of such sums shall be deemed advanced to
such Grantor by the Collateral Agent, shall become part of the Secured
Obligations, shall bear interest at the highest rate per annum charged by the
Collateral Agent on the Secured Obligations or any part thereof and shall be
secured by this Security Agreement.

 

6.7                                 Right to Use

 

For the purpose of enabling the Collateral Agent to exercise the
Collateral Agent’s Rights and Remedies under Section 6 (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, 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
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 such
Grantor now or hereafter has rights, (b) to use, license or sublicense any
Intellectual Property, computer software now owned, held or hereafter acquired
by such Grantor, including in such license access to all media and to the
extent to which any of the licensed items may be recorded or stored and to all
such computer software programs and to the extent used for the compilation or
print out thereof, provided that the 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 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, and (ii) without limiting the provisions of Section 6.1,
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.

 

6.8                                 Retention of Collateral

 

Upon notice to any Grantor and subject to any obligation to dispose of
any of the Collateral, as provided in the PPSA, the Collateral Agent may elect
to retain all or any part of the Collateral in satisfaction of the Secured
Obligations or any of them.

 

6.9                                 Pay Encumbrances

 

The Collateral Agent may pay any encumbrance that may exist or be
threatened against the Collateral. In addition, the Collateral Agent may borrow
money, at standard commercial rates, required for the maintenance, preservation
or protection of the Collateral or for the carrying on of the business or
undertaking of any Grantor and may grant further security interests in the
Collateral in priority to the security interest created hereby as security for
the money so borrowed. In every such case the amounts so paid or borrowed
together with costs, charges and expenses incurred in connection therewith
shall be deemed to have been advanced to each Grantor by the Collateral Agent,
shall become part of the Secured Obligations, shall bear interest at the
highest rate per annum charged by the Collateral Agent on the Secured
Obligations or any part thereof and shall be secured by this Security
Agreement.

 

26

 

6.10                           Application of Payments Against Secured
Obligations

 

Any and all payments made in respect of the Secured
Obligations from time to time and moneys realized on the Collateral may be
applied to such part or parts of the Secured Obligations as the Collateral
Agent may see fit, subject to the terms of the Credit Agreement. The Collateral
Agent shall, at all times and from time to time, have the right to change any
appropriation as it may see fit, subject to the terms of the Credit Agreement.
Any insurance moneys received by the Collateral Agent pursuant to this Security
Agreement may, at the option of the Collateral Agent, be applied to rebuilding
or repairing the Collateral or be applied against the Secured Obligations in
accordance with the provisions of this Section.

 

6.11                           Set-Off

 

The Secured Obligations will be paid by each Grantor without regard to
any equities between such Grantor and the Collateral Agent and/or any other
Secured Party or any right of set-off or cross-claim. Any indebtedness owing by
the Collateral Agent and/or any other Secured Party to any Grantor may be set
off and applied by the Collateral Agent against the Secured Obligations at any
time or from time to time either before or after maturity, without demand upon
or notice to anyone.

 

6.12                           Deficiency

 

If the proceeds of the realization of the Collateral are insufficient
to repay the Collateral Agent and the other Secured Parties all moneys due to
them, each Grantor shall forthwith pay or cause to be paid to the Collateral
Agent (either for itself or on behalf of the Secured Parties) such deficiency.

 

6.13                           Collateral Agent Not Liable

 

Neither the Collateral Agent nor any of the other Secured Parties shall
be liable or accountable for any failure to seize, collect, realize, dispose
of, enforce or otherwise deal with the Collateral. The Collateral Agent and the
other Secured Parties shall not be bound to institute proceedings for any such
purposes or for the purpose of preserving any rights of the Collateral Agent,
any Grantor or any other person, firm or corporation in respect of the
Collateral and shall not be liable or responsible for any loss, cost or damage
whatsoever which may arise in respect of any such failure including, without
limitation, resulting from the negligence of the Collateral Agent or any of its
officers, servants, agents, solicitors, attorneys, Receivers or otherwise other
than for any loss, cost or damage arising as a result of any such person’s
wilful misconduct or gross negligence. Neither the Collateral Agent nor any of
the other Secured Parties, nor their respective officers, servants, agents or
Receivers shall be liable by reason of any entry into possession of the
Collateral or any part thereof, to account as a mortgagee in possession, for
anything except actual receipts, for any loss on realization, for any act or
omission for which a mortgagee in possession might be liable, for any
negligence in the carrying on or occupation of the business or undertaking of
any Grantor as provided in Section 6.5 or for any loss, cost, damage or
expense whatsoever which may arise in respect of any such actions, omissions or
negligence other than for any loss, cost or damage arising as a result of any
such person’s wilful misconduct or gross negligence.

 

6.14                           Extensions of Time

 

The Collateral Agent and any of the other Secured Parties may grant
renewals, extensions of time and other indulgences, take and give up
securities, accept compositions, grant releases and

 

27

 

discharges, perfect or fail to perfect any securities, release any part
of the Collateral to third parties and otherwise deal or fail to deal with any
Grantor, debtors of any Grantor, guarantors, sureties and others and with the
Collateral and other securities as the Collateral Agent may see fit, all without
prejudice to the liability of any Grantor to the Collateral Agent and the other
Secured Parties or the Collateral Agent’s and the other Secured Parties’ rights
and powers under this Security Agreement.

 

6.15                           Rights in Addition

 

The rights and powers conferred by this Section 6 are in
supplement of and in addition to and not in substitution for any other rights
or powers the Collateral Agent may have from time to time under this Security
Agreement or under applicable law. The Collateral Agent may proceed by way of
any action, suit, remedy or other proceeding at law or in equity and no such
remedy for the enforcement of the rights of the Collateral Agent shall be
exclusive of or dependent on any other such remedy. Any one or more of such
remedies may from time to time be exercised separately or in combination.

 

6.16                           Voting Rights

 

(a)                                  So
long as no Event of Default shall have occurred and be continuing:

 

(i)                                     Each
Grantor shall be entitled to exercise any and all voting and other consensual
rights pertaining to the Pledged Collateral of such Grantor or any part thereof
for any purpose.  For so long as any
Grantor shall have the right to vote the Pledged Interests of such Grantor,
such Grantor covenants and agrees that it will not, without the prior written consent
of the Collateral Agent, vote or take any consensual action with respect to the
Pledged Interests which would materially affect the rights of the Collateral
Agent, any other Secured Party or the value of the Pledged Interests.  The Collateral Agent shall execute and
deliver to each Grantor, or cause to be executed and delivered to such Grantor,
all such proxies, powers of attorney and other instruments as such Grantor may
reasonably request for the purpose of enabling such Grantor to exercise the voting
and/or consensual rights and powers it is entitled to exercise pursuant to this
Section 6.16(a)(i).

 

(ii)                                  Each
Grantor shall be entitled to receive and retain any and all dividends, cash,
options, warrants, rights, instruments, distributions, returns of capital or
principal, income, interest, profits and other property, interests (debt or
equity) or proceeds, including as a result of a split, revision,
reclassification or other like change of the Pledged Collateral, from time to
time received, receivable or otherwise distributed to such Grantor in respect
of or in exchange for any or all of the Pledged Collateral (any of the
foregoing, a “Distribution” and collectively the “Distributions”) paid in
respect of the Pledged Collateral of such Grantor to the extent that the
payment thereof is not otherwise prohibited by the terms of the Loan Documents;
provided, however, that any and all Distributions paid or payable other than in
cash (other than in connection with a partial or total liquidation or dissolution
or in connection with a reduction of capital,

 

28

 

capital surplus
or paid in surplus) in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for, any
Pledged Collateral, shall be, and, subject to the limitations in the definition
of “Collateral”, be promptly delivered to the Collateral Agent to hold as
Pledged Collateral and shall, if received by such Grantor, be received in trust
for the benefit of the Collateral Agent, be segregated from the other property
or funds of such Grantor and be promptly delivered to the Collateral Agent as
Pledged Collateral in the same form as so received (with any necessary
endorsement).

 

(b)                                 Upon
the occurrence and during the continuance of an Event of Default:

 

(i)                                     All
rights of each Grantor (x) to exercise or refrain from exercising the
voting and other consensual rights that it would otherwise be entitled to
exercise pursuant to Section 6.16(a)(i) shall automatically cease and
(y) to receive Distributions that it would otherwise be authorized to
receive and retain pursuant to 6.16(a)(ii) shall automatically cease, and
all such rights shall thereupon become vested in the Collateral Agent, which
shall thereupon have the sole right to exercise or refrain from exercising such
voting and other consensual rights and to receive and hold as Pledged
Collateral such dividends, interest and other distributions; provided that,
unless otherwise directed by the Required Lenders, the Collateral Agent shall
have the right from time to time following and during the continuance of an
Event of Default to permit the Grantors to exercise such rights.  Any and all money and other property paid
over to or received by the Collateral Agent pursuant to the provisions of this Section 6.16(b)(i) shall
be retained by the Collateral Agent in an account to be established by the
Collateral Agent upon receipt of such money or other property and shall be
applied in accordance with the provisions of the Credit Agreement.  After all Events of Default have been cured
or waived and the Borrowers have delivered to the Collateral Agent a
certificate to that effect, the Collateral Agent shall promptly repay to each
Grantor (without interest) all dividends or interest that such Grantor would
otherwise be permitted to retain pursuant to the terms of this Section 6.16
and that remain in such account.

 

(ii)                                  All
Distributions that are received by any Grantor contrary to the provisions of
paragraph (i) of this Section 6.16(b) shall be received in trust
for the benefit of the Collateral Agent, shall be segregated from other funds
of such Grantor and shall be promptly paid over to the Collateral Agent as
Pledged Collateral in the same form as so received (with any necessary
endorsement).

 

(c)                                  This
Section 6.16 shall not apply to any Pledged Collateral that is ULC Shares
or to any Distributions that are paid in respect of ULC Shares

 

29

 

6.17                           ULC Shares

 

(a)                                  Notwithstanding
any provisions to the contrary contained in this Security Agreement or any
other document or agreement among all or some of the parties hereto, each
Grantor that is the registered and beneficial owner of any Pledged Collateral
which are ULC Shares (“ULC Pledgor”)
will remain so until such time as such ULC Shares are effectively transferred
into the name of the Collateral Agent, any Secured Party or any other Person on
the books and records of such ULC. 
Accordingly, each ULC Pledgor shall be entitled to receive and retain
for its own account any Distribution in respect of such Pledged Collateral
(except insofar as such ULC Pledgor has granted a security interest in such
Distribution, and any shares which are Pledged Collateral shall be delivered to
the Collateral Agent to hold as Pledged Collateral hereunder) and shall have
the right to vote such Pledged Collateral and to control the direction,
management and policies of the applicable ULC issuer to the same extent as such
ULC Pledgor would if such Pledged Collateral were not pledged to the Collateral
Agent (for its own benefit and for the benefit of the Credit Parties) pursuant
hereto.  Nothing in this Security
Agreement or any other document or agreement among all or some of the parties
hereto is intended to, and nothing in this Security Agreement or any other
document or agreement among all or some of the parties hereto shall constitute,
the Collateral Agent, any Secured Party or any other Person other than a ULC
Pledgor a member of a ULC for the purposes of the Companies
Act (Nova Scotia) until such time as notice is given to such ULC
Pledgor and further steps are taken pursuant hereto or thereto so as to
register the Collateral Agent, any Secured Party or any other Person as holder
of the applicable ULC Shares.  To the
extent any provision hereof would have the effect of constituting the
Collateral Agent or any Secured Party as a member of any ULC prior to such
time, such provision shall be severed therefrom and shall be ineffective with
respect to Pledged Collateral which are ULC Shares without otherwise
invalidating or rendering unenforceable this Security Agreement or invalidating
or rendering unenforceable such provision insofar as it relates to Pledged
Collateral which are not ULC Shares.

 

(b)                                 Except
upon the exercise of rights to sell, transfer or otherwise dispose of the
Pledged Collateral issued by a ULC following the occurrence of an Event of
Default pursuant to Section 6, no ULC Pledgor shall cause or permit, or
enable any ULC in which they hold ULC Shares to cause or permit, the Collateral
Agent or any other Secured Party to:  (a) be
registered as shareholder or member of such ULC; (b) accept or request
stock powers of attorney in respect of such Person endorsed or assigned in
favour of the Collateral Agent or other Secured Party; (c) have any
notation entered in its favour in the share register of such ULC; (d) be
held out as a shareholder or member of such ULC; (e) receive, directly or
indirectly, any dividends, property or other distributions from such ULC by
reason of the Collateral Agent or any other Secured Party holding a security
interest in such ULC; or (f) to act as a shareholder or member of such
ULC, or exercise any rights of a shareholder or member including the right to
attend a meeting of, or to vote the shares of, such ULC.

 

30

 

SECTION 7 — PERFECTION
OF SECURITY INTEREST

 

7.1           Perfection by Filing.

 

Each Grantor hereby authorizes the Collateral Agent, pursuant to the
provisions of Section 1 and Section 4.2, 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,
where applicable, a carbon, photographic, or other reproduction of this
Security Agreement shall be sufficient as a financing statement and may be
filed as a financing statement in any and all jurisdictions.

 

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”
(as defined in the STA) of any Deposit Accounts, securities accounts,
Concentration Accounts, Letter-of-Credit Rights, investment property, or
electronic chattel paper, with any agreements establishing control to be in
form and substance satisfactory to the Collateral Agent (and which may also be
for the benefit of the agent for the Term Loan), 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 2.3 and of the
preservation of its rights therein. The Grantors acknowledge that
notwithstanding anything to the contrary contained therein, the Blocked Account
Agreements, Credit Card Notifications, and landlord waivers and consents
previously executed and delivered to, or for the benefit of, the Collateral
Agent shall remain in full force and effect until all Secured Obligations
(including, without limitation, on account of the obligations owed by the
Facility Guarantors under the Facility Guarantor Security Documents) are 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 Banks and the Collateral Agent, and the
Issuing Banks have no further obligation to issue Letters of Credit under the
Credit Agreement, and any Obligations related to Letters of Credit, Cash
Management Services or Bank Products have been fully cash collateralized in a
manner reasonably satisfactory to the respective Lender to whom such
Obligations are owed.

 

7.3           Savings
Clause.

 

Nothing contained in this Section 7 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 (as hereinafter defined) hereunder
except (and then only to the extent) as mandated by the PPSA.

 

31

 

SECTION 8 — GENERAL

 

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.

 

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 SecurityAgreement.

 

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.

 

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 the extent that it lawfully may, each
Grantor hereby agrees that it will not invoke any law relating to the
marshalling of 

 

32

 

collateral which might cause delay in or
impede the enforcement of the Collateral Agent’s Rights and Remedies under this
Security 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.

 

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 Security 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 subject to the provisions
of Section 9.6 of the Credit Agreement and 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 Banks and the Collateral Agent, and as long as the Commitments
have not expired or terminated.

 

8.6           Binding
Effect; Several Agreement; Assignments

 

Whenever in this Security 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 Security 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 Security 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.

 

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 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 Security 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 Remedies 

 

33

 

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 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 Security Agreement or any other Loan Document, the
performance by any Grantor of its obligations under this Security 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 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.

 

8.8           Governing
Law

 

This Security Agreement shall be governed by
and construed in accordance with the laws of the Province of Ontario and the
laws of Canada applicable therein, except as required by mandatory provisions
of law.

 

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 and
any Person, at any time, shall preclude the other 

 

34

 

or further
exercise of the 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 Security 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

 

8.10         Severability

 

In the event any one or more of the provisions
contained in this Security 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).

 

8.11         Counterparts.

 

This Security Agreement may be executed in
two or more counterparts (and by different parties on different counterparts),
each of which shall constitute an original but all of which, when taken
together, shall constitute a single contract. Delivery of an executed
counterpart of a signature page to this Security Agreement by telecopy,
facsimile or other electronic image scan transmission (e.g.
“pdf” or “tif” via e-mail) shall be as effective as delivery of a manually
executed counterpart to this Security Agreement.

 

8.12         Sections
and Headings

 

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

 

8.13         Jurisdiction

 

(a)           Each
Grantor agrees that any suit for the enforcement of this Security Agreement may
be brought in the courts of the Province of Ontario and consent to the non-

 

35

 

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

 

8.14         Termination;
Release of Collateral

 

(a)           (a)           Upon
any disposition of Collateral in connection with any disposition permitted
under the Credit Agreement or any other Loan Document (other than a sale or
transfer to a Grantor), or upon the effectiveness of any written consent to the
release of the security interest granted hereby in any Collateral pursuant to Section 9.2
of the Credit Agreement, the security interest in such Collateral shall be
automatically released.

 

(b)           Except
for those provisions which expressly survive the termination thereof, the
Credit Agreement, this Security Agreement and the security interest shall,
subject to Section 9.6 of the Credit Agreement, terminate when all the
Secured Obligations (other than any of the Secured Obligations which are not
Loan Agreement Obligations, and which are not then due and owing) 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 Banks and the Collateral Agent,
and the Issuing Banks have no further obligation to issue Letters of Credit
under the Credit Agreement, and any Obligations related to Letters of Credit,
Cash Management Services or Bank Products have been fully cash collateralized
in a manner reasonably satisfactory to the respective Lender to whom such
Obligations are owed, at which time the Collateral Agent shall execute and
deliver to the Grantors, at the Grantors’ expense, all PPSA discharges,
releases and similar documents that the Grantors shall reasonably request to
evidence such termination. Any execution and delivery of discharges or
documents pursuant to this Section 8.14 shall be without recourse to, or
warranty by, the Collateral Agent; provided, however, that the
Credit Agreement, this Security Agreement, and the Security Interest granted
herein shall be reinstated if at any time payment, or any part thereof, of any
Secured Obligation is rescinded or must otherwise be restored by any Secured
Party upon the bankruptcy or reorganization of any Grantor; and provided
further that the Security Interest granted herein shall not terminate as to any
indemnification obligation of any Grantor which expressly survives the
termination of the Credit Agreement and this Security Agreement, including,
without limitation, the obligations of the Grantors set forth in Section 9.3
of the Credit Agreement and the obligations of the Grantors set forth in Section 8.7
of this Agreement (in each case with respect to obligations other than
contingent obligations with respect to then unasserted claims) unless such
obligations have been cash collateralized or otherwise provided for to the

 

36

 

satisfaction
of the Collateral Agent.  Any execution
and delivery of discharges or other documents pursuant to this Section 8.14
shall be at the expense of the Grantors and without recourse to, or warranty
by, the Collateral Agent or any other Secured Party.

 

8.15         Additional
Grantors

 

Pursuant to Section 5.13 of the Credit
Agreement, the Grantors shall each cause any new direct or indirect Subsidiary
(other than an Excluded Subsidiary) of any Grantor incorporated, formed or
becoming resident in Canada to enter into this Security Agreement as a Grantor.  Upon execution and delivery by the Collateral
Agent and a Subsidiary of an instrument in the form of Annex 1 hereto, such
Subsidiary shall become a Grantor hereunder with the same force and effect as
if originally named as a Grantor herein. 
The execution and delivery of any such instrument shall not require the
consent of any other Loan Party hereunder. 
The rights and obligations of each Loan Party hereunder shall remain in
full force and effect notwithstanding the addition of any new Loan Party as a party
to this Security Agreement.

 

8.16         Intercreditor
Agreement

 

Notwithstanding anything herein to the
contrary, the Lien and Security Interest granted pursuant to this Security
Agreement and the exercise of any right or remedy hereunder are subject to the
provisions of the Intercreditor Agreement. 
In the event of any conflict between the terms of the Intercreditor
Agreement and this Security Agreement, the terms of the Intercreditor Agreement
shall govern and control. Without limiting the generality of the foregoing, and
notwithstanding anything herein to the contrary, all rights and remedies of the
Collateral Agent (and the other Secured Parties) with respect to the Term
Priority Collateral shall be subject to the terms of the Intercreditor
Agreement, and until the discharge of the “Term Obligations” (as defined in the
Intercreditor Agreement), any obligation of any Grantor hereunder or under any
other Loan Document with respect to the delivery or control of any Term
Priority Collateral, the novation of any lien on any certificate of title, bill
of lading or other document, the giving of any notice to any bailee or other
Person, the provision of voting rights, the obtaining of any consent of any
Person or otherwise, in each case in connection with any Term Priority
Collateral, shall be deemed to be satisfied if such Grantor, as applicable,
complies with the requirements of the similar provision of the applicable “Term
Document” (as defined in the Intercreditor Agreement). Until the discharge of
the Term Obligations, the delivery of any Term Priority Collateral to the “Term
Priority Agent” (as defined in the Intercreditor Agreement) pursuant to the
Term Documents shall satisfy any delivery requirement hereunder or under any
other Loan Document.

 

8.17         Grantor
Consent

 

Each Grantor which is not a ULC hereby
consents to the security interests granted herein by each other Grantor,
including any security interests in Equity Interests issued by such Grantor or
Equity Interests issued by any Person in which such Grantor owns any Equity
Interest.  Each Grantor which is not a
ULC hereby waives any rights of such Grantor to notice in connection with the
grant of any Security Interests by any Grantor hereunder.

 

37

 

8.18         Amendment
and Restatement

 

This Security Agreement shall be deemed to
amend, restate and replace in its entirety the security agreement in existence
between the Collateral Agent and any Grantor prior to the date hereof.  It is expressly understood and agreed by each
of the parties hereto that this Security Agreement is in no way intended and
shall not be deemed or construed to constitute a novation agreement.  Each Grantor acknowledges and agrees that
each reference in the Loan Documents to the “Security Agreement” shall be a
reference to this Security Agreement.

 

8.19         No
Merger

 

Neither the taking of any judgment nor the
exercise of any power of seizure or sale shall operate to extinguish the
liability of any Grantor to make payment of or satisfy the Secured Obligations.
The acceptance of any payment or alternate security shall not constitute or
create any novation and the taking of a judgment or judgments under any of the
covenants herein contained shall not operate as a merger of such covenants.

 

8.20         Security
Interest Effective Immediately

 

Neither the execution or registration of this
Security Agreement nor any partial advances by the Collateral Agent shall bind
the Collateral Agent to advance any other amounts to any Grantor. The parties
intend the security interest created hereby to attach and take effect forthwith
upon execution of this Security Agreement by each Grantor and each Grantor
acknowledges that value has been given and that each Grantor has rights in its
Collateral.

 

8.21         Provisions
Reasonable

 

Each Grantor expressly acknowledges and
agrees that the provisions of this Security Agreement and, in particular, those
respecting remedies and powers of the Collateral Agent against such Grantor,
its business and the Collateral upon default, are commercially reasonable and
not manifestly unreasonable.

 

8.22         Number
and Gender

 

In this Security Agreement, words importing
the singular number include the plural and vice-versa and words importing
gender include all genders.

 

8.23         Precedence

 

Except as limited herein, in the event that
any provisions of this Security Agreement contradict and are otherwise
incapable of being construed in conjunction with the provisions of the Credit
Agreement, the provisions of the Credit Agreement, as applicable, shall take
precedence over those contained in this Security Agreement.

 

8.24         Receipt
of Copy

 

Each Grantor acknowledges receipt of an
executed copy of this Security Agreement.

 

38

 

8.25         Judgment
Currency

 

If, for the purposes of obtaining or
enforcing judgment in any court or for any other purpose hereunder or in
connection herewith, it is necessary to convert a sum due hereunder in any
currency into another currency, such conversion shall be carried out to the
extent and in the manner provided in the Credit Agreement.

 

8.26         Waiver
of The Limitation of Civil Rights Act
(Saskatchewan)

 

Without limiting the generality of the
foregoing, each Grantor agrees that The Limitation of Civil
Rights Act (Saskatchewan) will not apply to this Security Agreement
or any rights, remedies or powers of the Collateral Agent, any Secured Party or
any Receiver hereunder.

 

8.27         Language

 

The
parties hereto acknowledge that they have requested and are satisfied that the
foregoing, as well as all notices, actions and legal proceedings be drawn up in
the English language. Les parties à cette convention reconnaissent qu’elles ont exigé que ce
qui précède ainsi que tous avis, actions et procédures légales soient rédigés
et exécutés en anglais et s’en déclarent satisfaites.

 

[signature page follows]

 

39

 

IN
WITNESS WHEREOF, the parties hereto have duly
executed this Security Agreement as of the date first above written.

 

 

	
  ZALE
  CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  	
  Name: 

  
	
   

  	
  Title: 

  	
   

  	
   

  	
  Title: 

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA FINCO 1, INC.

  	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
   

  	
   

  	
  Title: 

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  	
  Name: 

  
	
   

  	
  Title: 

  	
   

  	
   

  	
  Title: 

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  	
  Name: 

  
	
   

  	
  Title: 

  	
   

  	
   

  	
  Title: 

  

 

40

 

	
   

  	
   

  	
  BANK OF AMERICA, N.A.
  on its own behalf and as Collateral Agent  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
   

  	
   

  	
  Title: 

  

 

41

 

SCHEDULE  1

 

FORM OF PERFECTION CERTIFICATE

 

Attached.

 

42

 

SCHEDULE  2

 

INTELLECTUAL PROPERTY

 

PATENTS

 

None

 

PATENT APPLICATIONS

 

None.

 

INDUSTRIAL DESIGNS

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  TYPE

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  DESIGN PATENT

  	
   

  	
  111,357

  	
   

  	
  09/29/2016

  

 

INDUSTRIAL DESIGN APPLICATIONS

 

None.

 

TRADEMARKS

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP. 

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE  CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  ARCTIC IDEAL

  	
   

  	
  1,187,773

  	
   

  	
  645,250

  	
   

  	
  08/02/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  ARIANNA

  	
   

  	
  1,121,991

  	
   

  	
  601,375

  	
   

  	
  02/04/2019

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  COLLECTORS 1

  	
   

  	
  444,488

  	
   

  	
  247,729

  	
   

  	
  7/4/2010

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  CROWN DESIGN

  	
   

  	
  661,766

  	
   

  	
  407,911

  	
   

  	
  2/12/2023

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  FASHION COMES FULL CIRCLE

  	
   

  	
  1,307,824

  	
   

  	
  743,567

  	
   

  	
  7/26/2024

  

 

43

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP. 

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  FOR PEOPLE WHO
  LOVE DIAMONDS

  	
   

  	
  705,458

  	
   

  	
  433,001

  	
   

  	
  09/09/2024

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  JEWELLER’S
  WORKSHOP & Design

  	
   

  	
  1,012,025

  	
   

  	
  546,105

  	
   

  	
  6/1/2016

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  LES BIJOUTIERS DIAMANTAIRES PEOPLES

  	
   

  	
  435,725

  	
   

  	
  278,507

  	
   

  	
  3/31/2013

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MACKENZIE

  	
   

  	
  174,250

  	
   

  	
  UCA11718

  	
   

  	
  9/30/2013

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MACKENZIE’S & Design

  	
   

  	
  284,953

  	
   

  	
  140,778

  	
   

  	
  6/11/2010

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  Maple Leaf & Circular Geometric Design

  	
   

  	
  1,417,833

  	
   

  	
  758,355

  	
   

  	
  1/29/2025

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPINS

  	
   

  	
  1,176,161

  	
   

  	
  605,395

  	
   

  	
  3/16/2019

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPIN’S

  	
   

  	
  380,832

  	
   

  	
  574,844

  	
   

  	
  1/31/2018

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPINS & Design

  	
   

  	
  1,176,162

  	
   

  	
  605,424

  	
   

  	
  3/16/2019

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPINS & CHINESE CHARACTERS &
  Design

  	
   

  	
  1,159,767

  	
   

  	
  605,118

  	
   

  	
  3/15/2019

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES

  	
   

  	
  342,965

  	
   

  	
  183,418

  	
   

  	
  5/26/2017

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES II

  	
   

  	
  1,217,230

  	
   

  	
  645,031

  	
   

  	
  7/28/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES ANGELS FOUNDATION & Design

  	
   

  	
  874,111

  	
   

  	
  520,666

  	
   

  	
  12/16/2014

  

 

44

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP. 

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES - BRINGING PEOPLE CLOSER FOR OVER 75 YEARS

  	
   

  	
  770,596

  	
   

  	
  448,734

  	
   

  	
  10/6/2010

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES CANADA’S DIAMOND STORE SINCE
  1919 & Design

  	
   

  	
  1,403,666

  	
   

  	
  750,553

  	
   

  	
  10/20/2024

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES CANADIAN DIAMOND

  	
   

  	
  1,162,325

  	
   

  	
  639,719

  	
   

  	
  5/12/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES & CHINESE CHARACTERS DESIGN

  	
   

  	
  853,462

  	
   

  	
  501,614

  	
   

  	
  9/30/2013

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES CREDIT

  	
   

  	
  175,515

  	
   

  	
  UCA12368

  	
   

  	
  4/18/2014

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES & Design

  	
   

  	
  342,969

  	
   

  	
  183,249

  	
   

  	
  5/19/2017

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES DIAMOND

  	
   

  	
  1,159,626

  	
   

  	
  605,256

  	
   

  	
  3/16/2019

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES — FOR EVERYONE

  	
   

  	
  740,555

  	
   

  	
  445,967

  	
   

  	
  8/11/2010

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES JEWELLERS

  	
   

  	
  436,328

  	
   

  	
  246,037

  	
   

  	
  6/6/2010

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES
  JEWELLERS THE DIAMOND PEOPLE

  	
   

  	
  466,248

  	
   

  	
  278,511

  	
   

  	
  3/31/2013

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES THE DIAMOND STORE

  	
   

  	
  793,592

  	
   

  	
  466,305

  	
   

  	
  11/26/2011

  

 

45

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP. 

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  ROYAL PAIR

  	
   

  	
  175,514

  	
   

  	
  UCA11770

  	
   

  	
  4/18/2014

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE DIAMOND PEOPLE PEOPLES

  	
   

  	
  672,154

  	
   

  	
  401,130

  	
   

  	
  8/7/2022

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE EXCLUSIVE MAPPINS CANADIAN DIAMOND

  	
   

  	
  1,174,742

  	
   

  	
  644,129

  	
   

  	
  7/12/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE EXCLUSIVE PEOPLES LOVE BAND

  	
   

  	
  1,175.569

  	
   

  	
  639,609

  	
   

  	
  5/11/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE MAPPINS PREMIER DIAMOND

  	
   

  	
  1,205,545

  	
   

  	
  645,133

  	
   

  	
  7/29/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE MAPPINS ROYAL DIAMOND

  	
   

  	
  1,205,543

  	
   

  	
  645,436

  	
   

  	
  8/8/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE MAPPINS SUPERIOR DIAMOND

  	
   

  	
  1,205,544

  	
   

  	
  645,279

  	
   

  	
  8/3/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE PEOPLES CROWN DIAMOND

  	
   

  	
  1,205,540

  	
   

  	
  645,195

  	
   

  	
  8/2/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE PEOPLES ELITE DIAMOND

  	
   

  	
  1,205,542

  	
   

  	
  639,537

  	
   

  	
  5/10/2020

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE PEOPLES PRESTIGE DIAMOND

  	
   

  	
  1,205,541

  	
   

  	
  639,538

  	
   

  	
  5/10/2020

  

 

46

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP.

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  WHEN WORDS ARE NOT ENOUGH

  	
   

  	
  708,059

  	
   

  	
  416,756

  	
   

  	
  9/10/2023

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  YOUNG’S JEWELLERS

  	
   

  	
  1,012,026

  	
   

  	
  541,076

  	
   

  	
  2/12/2016

  

 

TRADEMARK APPLICATIONS

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP. NO.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  BRILLIANT VALUE

  	
   

  	
  1,446,083

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  BRILLIANT VALUE

  	
   

  	
  1,445,055

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  CELEBRATION CANADIAN DIAMOND & Design

  	
   

  	
  1,403,667

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  LOVE CHANGES EVERYTHING

  	
   

  	
  1,456,672

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES THE DIAMOND STORE SINCE 1919 &
  Design

  	
   

  	
  1,475,161

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE
  CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES
  LE MAGASIN DE DIAMANT DU CANADA DEPUIS 1919 & DESIGN

  	
   

  	
  1,406,481

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  SAY “I LOVE YOU” LIKE NEVER BEFORE

  	
   

  	
  1,457,149

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THIS HOLIDAY SAY “I LOVE YOU” LIKE NEVER BEFORE

  	
   

  	
  1,457,144

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  WEDDING DAY

  	
   

  	
  1,270,667

  

 

COPYRIGHTS

 

None.

 

COPYRIGHT APPLICATIONS

 

None.

 

47

 

COPYRIGHT LICENSES

 

None.

 

48

 

SCHEDULE  3

 

Pledged
Interests

 

	
  Name of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage of

  Class Owned

  	
   

  	
  Certificate

  Nos.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  	
   

  	
  100

  	
   

  	
  Common

  	
   

  	
  100%

  	
   

  	
  C2

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO HOLDING LP

  	
   

  	
  ZALE CANADA CO.

  	
   

  	
  21,536,297

  	
   

  	
  Common

  	
   

  	
  11.44%

  	
   

  	
  C1

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO HOLDING LP

  	
   

  	
  FINCO PARTNERSHIP LP

  	
   

  	
  99

  	
   

  	
  Limited Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO HOLDING LP

  	
   

  	
  ZC PARTNERSHIP, LP

  	
   

  	
  65

  	
   

  	
  General Partner Units

  	
   

  	
  100%(1)

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO PARTNERSHIP LP

  	
   

  	
  ZALE CANADA CO.

  	
   

  	
  166,753,858

  	
   

  	
  Common

  	
   

  	
  88.56%

  	
   

  	
  C2

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO PARTNERSHIP LP

  	
   

  	
  ZC PARTNERSHIP, LP

  	
   

  	
  9900

  	
   

  	
  Limited Partner Units

  	
   

  	
  100%

  	
   

  	
  1 & 2

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO HOLDING LP

  	
   

  	
  1

  	
   

  	
  General Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP

  	
   

  	
  1

  	
   

  	
  General Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA FINCO 1, INC.

  	
   

  	
  FINCO HOLDING LP

  	
   

  	
  99

  	
   

  	
  Limited Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA
  HOLDING LP

  	
   

  	
  ZALE CANADA
  FINCO 1, INC.

  	
   

  	
  100,000

  	
   

  	
  Common

  	
   

  	
  100%

  	
   

  	
  2 & 3

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA
  HOLDING LP

  	
   

  	
  ZALE CANADA
  FINCO LLC

  	
   

  	
  —

  	
   

  	
  LLC

  	
   

  	
  100%

  	
   

  	
  —

  

 

(1) Finco Holding LP holds all of the General
Partner Units, for a total of 100, but will only be pledging 65 General Partner
Units in connection herewith.

 

49

 

Pledged Notes

 

	
  Name of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  ZALE CORPORATION

  	
   

  	
  $

  	
  100,000,000

  	
   

  
							

 

50

 

ANNEX 1

 

FORM OF SUPPLEMENT

 

SUPPLEMENT NO.      dated as of
[                    ]
(this “Supplement”), to the Amended and Restated Security Agreement dated as of
May 10, 2010 (as such may be amended, modified, supplemented or restated
hereafter, the “Security Agreement”), among ZALE CANADA CO., ZALE CANADA
DIAMOND SOURCING INC., ZALE CANADA FINCO 1, INC., ZALE CANADA FINCO 2, INC.,
FINCO HOLDING LP, FINCO PARTNERSHIP LP and ZALE CANADA HOLDING LP (each, a “Grantor”,
and collectively, the “ Grantors”) and the other grantors party thereto
from time to time, as grantors, and Bank of America, N.A., in its capacity
as  Collateral Agent (in such capacity,
the “Collateral Agent”).

 

Reference is made to the Amended and Restated Credit Agreement dated as
of May 10, 2010 (as such may be amended, modified, supplemented or
restated hereafter, the “Credit Agreement”) by and between, among
others, Zale Corporation and certain of its subsidiaries, as borrowers, the
Grantors and certain of their affiliates, as guarantors, the Lenders party
thereto and the Collateral Agent.

 

Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Credit Agreement and the
Security Agreement referred to therein.

 

The Grantors have entered into the Security Agreement in order to
induce the Lenders to make Loans.  Section 8.15
of the Security Agreement provides that new direct and indirect Subsidiaries of
the Grantors may become Grantors under the Security Agreement by execution and
delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary (the “New
Subsidiary”) is executing this Supplement in accordance with the
requirements of the Credit Agreement to become a Grantor under the Security
Agreement as consideration for Loans previously under made the Credit
Agreement.

 

Accordingly, the Collateral Agent and the New Subsidiary agree as
follows:

 

SECTION 1.  In accordance
with Section 8.15 of the Security Agreement, the New Subsidiary by its
signature below becomes a Grantor under the Security Agreement with the same
force and effect as if originally named therein as a Grantor and the New
Subsidiary hereby (a) agrees to all the terms and provisions of the
Security Agreement applicable to it as a Grantor thereunder and (b) represents
and warrants that the representations and warranties made by it as a Grantor
thereunder are true and correct on and as of the date hereof.  In furtherance of the foregoing, the New
Subsidiary, as security for the payment and performance in full of the Secured
Obligations, does hereby create and grant to the Collateral Agent, its
successors and assigns, for the benefit of the Secured Parties, a security
interest in and lien on all of the New Subsidiary’s right, title and interest
in and to the Collateral (as defined in the Security Agreement) of the New
Subsidiary.  Each reference to a “Grantor”
in the Security Agreement 

 

51

 

shall be deemed to include the New Subsidiary.  The Security Agreement is hereby incorporated
herein by reference.

 

SECTION 2.  The New
Subsidiary represents and warrants to the Collateral Agent and the other
Secured Parties that this Supplement has been duly authorized, executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms.

 

SECTION 3.  This Supplement may
be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which
when taken together shall constitute a single contract.  This Supplement shall become effective when the
Collateral Agent shall have received a counterpart of this Supplement that
bears the signature of the New Subsidiary and the Collateral Agent has executed
a counterpart hereof.  Delivery of an
executed signature page to this Supplement by telecopy or other electronic
image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be effective as
delivery of a manually signed counterpart to this Supplement.

 

SECTION 4.  The New
Subsidiary hereby represents and warrants that, as of the date hereof, (a) set
forth on Schedule 1 attached hereto is a fully executed Perfection
Certificate in the form annexed to the Security Agreements, (b) set forth
on Schedule 2 attached hereto is a true and correct schedule of
Intellectual Property consisting (i) all of the New Subsidiary’s Canadian
registered Patents and Patent applications, including the name of the
registered owner, type, registration or application number and the expiration
date (if already registered) of each such Patent and Patent application owned
by the New Subsidiary, (ii) all of the New Subsidiary’s Canadian
registered Industrial Designs and Industrial Design applications including the
name of the registered owner, registration or application number and the
expiration date (if already registered) of each Industrial Design and
Industrial Design application owned by the New Subsidiary, (iii) all of
the New Subsidiary’s Canadian registered Trademarks and Trademark
applications, including the name of the registered owner, the registration or
application number and the expiration date (if already registered) of each such
Trademark and Trademark application owned by the New Subsidiary and (iv) all
of the New Subsidiary’s Canadian registered Copyrights, Copyright applications
and Copyright Licenses, including the name of the registered owner, title and,
if applicable, the registration number of each such Copyright, Copyright
application or Copyright License owned by the New Subsidiary, and (c) set
forth on Schedule 3 attached hereto is the Pledged Collateral held by
the New Subsidiary.

 

SECTION 5.  Except as
expressly supplemented hereby, the Security Agreement shall remain in full
force and effect.

 

SECTION 6.  EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SUPPLEMENT AND THE SECURED
OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE LAWS OF THE PROVINCE OF ONTARIO AND THE FEDERAL LAWS OF CANADA
APPLICABLE THEREIN.

 

52

 

SECTION 7.  In the event any
one or more of the provisions contained in this Supplement should be held
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and in the Security
Agreement shall not in any way be affected or impaired thereby (it being
understood that the invalidity of a particular provision in a particular
jurisdiction shall not in and of itself affect the validity of such provision
in any other jurisdiction).

 

SECTION 8.  All
communications and notices hereunder shall be in writing and given as provided
in Section 8.01 of the Security Agreement.

 

SECTION 9.  The New
Subsidiary agrees to reimburse the Collateral Agent for its reasonable out-of-pocket
expenses reasonably incurred in connection with this Supplement, including the
reasonable fees, other charges and disbursements of counsel for the Collateral
Agent.

 

IN WITNESS WHEREOF, the New Subsidiary and the Collateral Agent have
duly executed this Supplement to the Security Agreement as of the day and year
first above written.

 

 

	
  COLLATERAL AGENT:

  	
   

  	
  BANK OF
  AMERICA, N.A.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  NEW SUBSIDIARY:

  	
   

  	
  [                                                            ]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

53

 

 

Annex 2

 

Form of
Pledged Collateral Addendum

 

This Pledged Collateral Addendum, dated as of
                  
      , 20      ,
is delivered in connection with the Security Agreement referred to below.  The undersigned hereby agrees that this
Pledged Collateral Addendum may be attached to that certain Amended and
Restated Security Agreement, dated as of May 10, 2010, (as amended,
restated, supplemented or otherwise modified from time to time, the “Security
Agreement”), among the undersigned, the other Grantors named therein, to
Bank of America, N.A., as Collateral Agent. 
Initially capitalized terms used but not defined herein shall have the
meaning ascribed to such terms in the Security Agreement or the Credit Agreement
(as defined in the Security Agreement). 
The undersigned hereby agrees that the additional interests listed on
this Pledged Collateral Addendum as set forth below shall be and become part of
the Pledged Collateral pledged by the undersigned to the Collateral Agent in
the Security Agreement and any pledged company set forth on this Pledged
Collateral Addendum as set forth below shall be and become a “Pledged Company”
under the Security Agreement, each with the same force and effect as if
originally named therein.

 

The undersigned hereby certifies that the
representations and warranties set forth in Section 2.08 of the Security
Agreement of the undersigned are true and correct as to the Pledged Collateral
listed herein on and as of the date hereof.

 

	
   

  	
  [                                      ]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

Pledged Interests

 

	
  Name of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage

  of Class

  Owned

  	
   

  	
  Certificate

  Nos.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pledged Notes

 

	
  Name of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  

  

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Annex 3

 

Form of
Canadian Patent, Industrial Design and Trademark Security Agreement

 

CANADIAN PATENT, INDUSTRIAL DESIGN AND
TRADEMARK SECURITY AGREEMENT dated as of May 10, 2010, by and among each
of: the Subsidiaries from time to time party hereto (each a “Grantor”,
and collectively, the “Grantors”) and Bank of America, N.A., in its
capacity as administrative agent and collateral agent (in such capacity, the “Agent”)
for the Lenders, in consideration of the mutual covenants contained herein and
benefits to be derived herefrom.

 

WHEREAS the
Grantors entered into an Amended and Restated Credit Agreement dated as of May 10,
2010 (as such may be amended, modified, supplemented or restated hereafter, the
“Credit Agreement”) between, among others, Zale Delaware, Inc.,
Zale Corporation, ZGCO, LLC, TXDC, L.P. and Zale Puerto Rico, Inc.
(collectively, the “Borrowers”), as borrowers, each of the Grantors and certain
of their affiliates, as guarantors, the Lenders (as defined in the Credit
Agreement) party thereto from time to time as lenders, and Bank of America,
N.A., in its capacity as Administrative Agent and Collateral Agent (as such
terms are defined in the Credit Agreement); and

 

WHEREAS the
Grantors granted security interests over all of their property to and in favour
of the Agent pursuant to the terms of a Canadian Security Agreement dated as of
May 10, 2010 (as amended, supplemented or otherwise modified from time to
time, the “Canadian Security Agreement”).

 

AND WHEREAS, the
Lenders have agreed to make Loans to the Borrowers pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement, and the
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Grantors of this Agreement;

 

NOW THEREFORE,
the Grantors and the Collateral Agent, for and on behalf of itself and the
Lenders (and each of their respective successors or assigns), hereby agree as
follows:

 

SECTION 1.  Defined Terms.  Capitalized terms used in this Agreement and
not otherwise defined herein have the meanings specified in the Credit
Agreement or Canadian Security Agreement, as applicable.   The rules of interpretation specified
in Section 1.02 of the Credit Agreement also apply to this Agreement,
mutatis mutandis.

 

SECTION 2.  Grant of Security Interest.  As security for the payment or performance,
as the case may be, in full of its Secured Obligations, each of the Grantors,
pursuant to the Canadian Security Agreement, did and hereby does grant to the
Agent, its successors and assigns, for the benefit of the Credit Parties, a
security interest in, all right, title and interest in, to and under any and
all of the following assets and properties now owned or at any time hereafter
acquired by such Grantor or in which such Grantor now has or at any time in the
future may acquire any right, title or interest (collectively, the “Patent,
Industrial Design and Trademark Collateral”):

 

 

(a)(i) any and all Canadian patents and patent
applications, including those listed on Schedule I; (ii) all inventions
and improvements described and claimed therein, including the right to make,
use and/or sell the inventions disclosed or claimed therein; (iii) all
reissues, divisions, continuations, renewals, extensions, and
continuations-in-part thereof; (iv) all income, royalties, damages,
claims, and payments now or hereafter due or payable under and with respect
thereto, including damages and payments for past, present and future
infringements thereof; (v) all rights to sue for past, present and future
infringements thereof; and (vi) all rights corresponding to any of the
foregoing;

 

(b)(i) all Canadian trademarks (including
service marks), trade names, trade dress, trade styles and other source
indicators, including those listed on Schedule II, and the registrations and
applications for registration thereof and the goodwill of the business
symbolized by the foregoing; (ii) all licenses of the foregoing, whether
as licensee or licensor; (iii) all renewals of the foregoing; (iv) all
income, royalties, damages and payments now or hereafter due or payable with
respect thereto, including damages, claims and payments for past and future
infringements thereof; (v) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (vi) all rights corresponding
to any of the foregoing; and

 

(c)(i) all Canadian industrial designs and industrial
design applications, including those listed on Schedule I; (ii) all
renewals of the foregoing, (iii) all income, royalties, damages and
payments now or hereafter due or payable with respect thereto, including
damages, claims and payments for past and future infringements thereof; (iv) all
rights to sue for past, present and future infringements of the foregoing,
including the right to settle suits involving claims and demands for royalties
owing; and (v) all rights corresponding to any of the foregoing.

 

SECTION 3. Security
Agreement.  The security interests
granted to the Agent herein are granted in furtherance, and not in limitation,
of the security interests granted to the Agent pursuant to the Canadian
Security Agreement.  Each Grantor hereby
acknowledges and affirms that the rights and remedies of the Agent with respect
to the Patent, Industrial Design and Trademark Collateral are more fully set
forth in the Canadian Security Agreement, the terms and provisions of which are
hereby incorporated herein by reference as if fully set forth herein.  In the event of any conflict between the
terms of this Agreement and the Canadian Security Agreement, the terms of the
Canadian Security Agreement shall govern.

 

SECTION 4. Counterparts.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and the Intercreditor Agreement constitute
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject 

 

 

matter
hereof.  Delivery of an executed
counterpart of a signature page to this Agreement by telecopy or other
electronic image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be
as effective as delivery of a manually executed counterpart of this Agreement.

 

SECTION 5. GOVERNING
LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN
DOCUMENT AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS
OF CANADA APPLICABLE THEREIN.

 

[signature page follows]

 

 

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

 

	
  ZALE
  CANADA CO.

  	
  ZALE CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA FINCO 1, INC.

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  

 

 

	
   

  	
   

  	
   

  	
  BANK OF AMERICA, N.A.
  on its own behalf and as Agent

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  

 

 

Annex 4

 

Form of
Canadian Copyright Security Agreement

 

CANADIAN COPYRIGHT SECURITY AGREEMENT dated
as of May 10, 2010, by and among each of: the Subsidiaries from time to
time party hereto (each a “Grantor”, and collectively, the “Grantors”)
and Bank of America, N.A., in its capacity as administrative agent and
collateral agent (in such capacity, the “Agent”) for the Lenders, in
consideration of the mutual covenants contained herein and benefits to be
derived herefrom.

 

WHEREAS the
Grantors entered into an Amended and Restated Credit Agreement dated as of May 10
2010 (as such may be amended, modified, supplemented or restated hereafter, the
“Credit Agreement”) between, among others, Zale Delaware, Inc.,
Zale Corporation, ZGCO, LLC, TXDC, L.P. and Zale Puerto Rico, Inc.
(collectively, the “Borrowers”), as borrowers, each of the Grantors and certain
of their affiliates, as guarantors, the Lenders (as defined in the Credit
Agreement) party thereto from time to time as lenders, and Bank of America,
N.A., in its capacity as Administrative Agent and Collateral Agent (as such
terms are defined in the Credit Agreement); and

 

WHEREAS the
Grantors granted security interests over all of their property to and in favour
of the Agent pursuant to the terms of a Canadian Security Agreement dated as of
May 10, 2010 (as amended, supplemented or otherwise modified from time to
time, the “Canadian Security Agreement”).

 

AND WHEREAS, the
Lenders have agreed to make Loans to the Borrowers pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement, and the
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Grantors of this Agreement;

 

NOW THEREFORE,
the Grantors and the Collateral Agent, for and on behalf of itself and the
Lenders (and each of their respective successors or assigns), hereby agree as
follows:

 

SECTION 1.  Defined Terms.  Capitalized terms used in this Agreement and
not otherwise defined herein have the meanings specified in the Credit
Agreement or Canadian Security Agreement, as applicable.   The rules of interpretation specified
in Section 1.02 of the Credit Agreement also apply to this Agreement,
mutatis mutandis.

 

SECTION 2.  Grant of Security Interest.  As security for the payment or performance,
as the case may be, in full of its Secured Obligations, each of the Grantors,
pursuant to the Canadian Security Agreement, did and hereby does grant to the
Agent, its successors and assigns, for the benefit of the Credit Parties, a
security interest in, all right, title and interest in, to and under any and
all of the following assets and properties now owned or at any time hereafter
acquired by such Grantor or in which such Grantor now has or at any time in the
future may acquire any right, title or interest (collectively, the “Copyright
Collateral”):

 

 

(a) (a) all copyrights, rights and
interests in copyrights, works protectable by copyright, copyright
registrations and copyright applications subject to the copyright laws of
Canada, including those listed on Schedule I; (b) all extensions and
renewals of any of the foregoing; (c) all income, royalties, damages, and
payments now or hereafter due and/or payable under any of the foregoing,
including damages or payments for past, present or future infringements for any
of the foregoing; (d) the right to sue for past, present and future
infringements of any of the foregoing; and (e) all rights corresponding to
any of the foregoing;

 

SECTION 3. Security
Agreement.  The security interests
granted to the Agent herein are granted in furtherance, and not in limitation,
of the security interests granted to the Agent pursuant to the Canadian
Security Agreement.  Each Grantor hereby
acknowledges and affirms that the rights and remedies of the Agent with respect
to the Copyright Collateral are more fully set forth in the Canadian Security
Agreement, the terms and provisions of which are hereby incorporated herein by
reference as if fully set forth herein. 
In the event of any conflict between the terms of this Agreement and the
Canadian Security Agreement, the terms of the Canadian Security Agreement shall
govern.

 

SECTION 4. Counterparts.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and the Intercreditor Agreement constitute the
entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof. 
Delivery of an executed counterpart of a signature page to this
Agreement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually executed
counterpart of this Agreement.

 

SECTION 5. GOVERNING
LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN
DOCUMENT AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS
OF CANADA APPLICABLE THEREIN.

 

[signature page follows]

 

 

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

 

	
  ZALE
  CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA FINCO 1, INC.

  	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
   

  	
  BANK OF AMERICA, N.A.
  on its own behalf and as Agent

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

 

EXHIBIT
D

Zale
Corporation

Borrowing Base Certificate

 

	
  FAX TO:   (617) 310-2872

  	
   

  	
  Cert.
  No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Retail

  	
   

  	
  Cost

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Beg.
  Inventory as of:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ADD

  	
   

  	
  Receiving/Purchases

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Vendor
  Returns

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Markups/Markup
  Cancellations

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Inter-Co.
  transfers

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Other
  (Explain)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  INVENTORY
  AVAILABLE FOR SALE

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LESS

  	
   

  	
  Net
  Sales @ Retail

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Cost
  of Goods Sold @ Cost

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  POS
  Markdowns

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Perm
  Markdowns

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Shrink

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Prior
  Period Adjustments

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Total
  Reductions

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ending
  inventory as of

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ADD:

  	
   

  	
  Zap Inventory
  (Gemstones, Shanks, and Mounts) Inventory receipts not fully processed in
  D.C.

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LESS:

  	
   

  	
  Shrink Reserve @ EOM Form 400 &
  Damaged Inventory Consignment

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Eligible
  Inventory, as of:

  	
   

  	
   

  	
   

  	
  —

  	
  (A)

  
	
  Advance
  Rate:

  	
   

  	
   

  	
   

  	
   

  	
  (B)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Inventory Borrowing Base (A*B)

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
  (C)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Credit
  Card Receivables, as of:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LESS:

  	
   

  	
  Consignment
  A/R Reserve

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Eligible
  Credit Card Receivables, as of:

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
  (D)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Receivable
  Advance Rate:

  	
   

  	
   

  	
   

  	
   

  	
  (E)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Receivable Borrowing Base (D*E)

  	
   

  	
   

  	
   

  	
  —

  	
  (F)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Less
  Availability Reserves:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Merchandise Credits
  (50% of outstanding Store Credit Liability and 100% Customer Refund Liability)

  	
   

  	
   

  	
   

  
	
   

  	
  Gift Certificates (50%
  of outstanding)

  	
   

  	
   

  	
   

  
	
   

  	
  Landlord Lien Reserve
  (2 months)

  	
   

  	
   

  	
   

  
	
   

  	
  Customer Deposits (100%
  of outstanding layaways)

  	
   

  	
   

  	
   

  
	
   

  	
  Texas Ad Valorem Taxes

  	
   

  	
   

  	
   

  
	
   

  	
  Canadian Sales Tax
  Reserve (previous month’s tax payment for all provinces)

  	
   

  	
   

  	
   

  
	
   

  	
  Canadian Store Rent
  Reserve (previous month’s rent liability)

  	
   

  	
   

  	
   

  
	
   

  	
  Canadian Employee
  Payroll Reserve (50% of previous months payroll)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total
  Availability Reserves

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
  (H)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Borrowing Base (not to exceed           )

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
  (I)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  AVAILABILITY
  CALCULATION

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Beginning
  Principal Balance

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ADD:

  	
  Prior
  days advance

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ADD:

  	
  Fees
  charged today

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ADD:

  	
  LC’S
  CHARGED

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  LESS:

  	
  Prior
  day’s paydown

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ending
  principal balance

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
  ADD:

  	
  Est.
  accrued interest month to date

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ADD:

  	
  Standby
  Letters of Credit

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ADD:

  	
  Documentary
  Letters of Credit

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total
  loan balance prior to request

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
  (J)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net
  availability prior to today’s request (I-J)

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
  (K)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ADVANCE REQUEST

  	
   

  	
   

  	
   

  	
   

  	
  (L)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Paydown

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Availability
  before minimum Excess Availability requirement (K-L)

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
  (M)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Minimum
  Excess Availability requirement(1)

  	
   

  	
   

  	
   

  	
  $

  	
  50,000,000

  	
  (N)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Availability
  after minimum Excess Availability requirement (N-O)

  	
   

  	
   

  	
   

  	
  $

  	
  (50,000,000

  	
  )(O)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Term Loan Liquidity Covenant

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Minimum
  Liquidity as Defined in Sec. 7.08 (d) of the Term Loan Credit Agreement
  ($120MM through 1/31/11; $135MM thereafter)

  	
   

  	
   

  	
   

  	
  $

  	
  —

  	
   

  
	
  Compliance
  with Requirement?

  	
   

  	
   

  	
   

  	
  No

  	
   

  
													

 

The undersigned represents
and warrants that the information set forth above has been prepared in
accordance with the requirements of the Amended and Restated Credit Agreement
dated May 10, 2010 (as amended, restated, supplemented or otherwise
modified) by, among others, Zale Corporation, the other Borrowers and Facility
Guarantors party thereto, the Lenders party thereto, and Bank of America, N.A.,
as Administrative Agent and Collateral Agent for the Lenders.

 

Authorized Signer

 

(1)
(b) For all periods other than any period described in SECTION 6.8(a) of
the Amended and Restated Credit Agreement dated May      ,
2010, the Borrowers shall not permit Excess Availability to be less than (i) $50,000,000,
for any period of three (3) consecutive days or (ii) $40,000,000, at
any time.

 

 

EXHIBIT E

 

BANK OF
AMERICA, N.A.,

as Administrative Agent and Collateral Agent

100 Federal Street, 9th Floor

Boston, Massachusetts 02110

 

May 10, 2010

 

Bank
of America, N.A.

100
Federal Street

Boston,
Massachusetts 02110

Attention:  Andrew Cerussi

 

Wells
Fargo Retail Finance, LLC

One
Boston Place, 18th Floor

Boston,
Massachusetts 02108

Attention:  Connie Liu

 

General
Electric Capital Corporation

777
Long Ridge Road, Building A

Stamford,
Connecticut 06927

Attention:  Zale Corporation Account Manager

 

Re:          Co-Borrowing Base Agent Rights Agreement

 

Ladies and Gentlemen:

 

Reference is hereby made to
that certain Amended and Restated Credit Agreement dated as of May 10,
2010, among (i) Zale Delaware, Inc., Zale Corporation, ZGCO, LLC,
TXDC, L.P. and Zale Puerto Rico, Inc. (collectively, the “Borrowers”),
(ii) Zale Canada Co. and the other Facility Guarantors party thereto
(together with the Borrowers, collectively, the “Loan Parties”), (iii) the
financial institutions from time to time party thereto, (iv) Bank of America,
N.A. (“Bank of America”), as administrative agent and collateral agent
for itself and such other financial institutions (in such capacities, the “Agent”),
and (v) Bank of America, Wells Fargo Retail Finance, LLC (“Wells Fargo”)
and General Electric Capital Corporation (“GE Capital”), each as a
co-borrowing base agents (each, a “Co-Borrowing Base Agent” and
collectively, the “Co-Borrowing Base Agents”) (as amended, modified,
restated and in effect from time to time, the “Credit Agreement”).  Capitalized terms which are used herein
without definition and which are defined in the Credit Agreement shall have the
same meanings herein as in the Credit Agreement.

 

Each of the Agent, the
Co-Borrowing Base Agents and the Loan Parties hereby acknowledge and agree
that, notwithstanding anything to the contrary in any of the Loan Documents:

 

(a)           Each of the Co-Borrowing
Base Agents shall have rights under the Credit Agreement and the other Loan
Documents that are as expansive as the rights afforded 

 

 

thereunder to the Agent
relating to (i)(x) the definition in the Credit Agreement of the term “Excess
Availability” and any component of such definition, in each case insofar as it
is impacted by the Borrowing Base, and (y) the definition in the Credit
Agreement of the term “Borrowing Base” and any component of such definition
(including, without limitation, reserves, advance rates and eligibility
criteria, reporting requirements and appraisals, examinations and collateral
audits), and (ii) verifying the validity, extent, perfection or priority
of the Liens granted to the Agent with respect to the Collateral (the matters
described in clauses (i) and (ii) above being referred to herein
collectively as the “Collateral Issues”); provided that neither
Wells Fargo nor GE Capital shall be named on any financing statements nor have
the actual administration of Collateral with respect to which perfection is
obtained through possession or control;

 

(b)           If any provision in the
Credit Agreement or any other Loan Document relating to a Collateral Issue
allows the Agent to request or reasonably request (as the case may be) that any
action be taken or any documents or other information be provided by or on
behalf of any Loan Party, the Agent shall make any such request or reasonable
request (as applicable) that any of the Co-Borrowing Base Agents may request
and shall provide such Co-Borrowing Base Agent with any such documents or
information so requested promptly after the receipt thereof by the Agent;

 

(c)           Any provision in the Credit
Agreement or any other Loan Document relating to any Collateral Issue which
would otherwise only need the consent or approval of or to be satisfactory or
acceptable (or reasonably satisfactory or acceptable, as the case may be) to
the Agent shall be deemed to require the consent or approval of or be
satisfactory or acceptable (or reasonably satisfactory or acceptable, as the
case may be) to each of the Co-Borrowing Base Agents;

 

(d)           In the event that the
Co-Borrowing Base Agents and the Agent cannot in good faith agree on any issue
relating to the Borrowing Base, Excess Availability, the Borrowing Base
eligibility standards, reserves, advance rates, borrowing base reporting,
appraisals or examinations or any other action or determination relating to a Collateral
Issue, the resolution of such issue shall be to either (x) require that
the most conservative credit judgment be implemented (that is, such credit
judgment that would result in the least amount of credit being available to the
Loan Parties under the Credit Agreement) or (y) decline to permit the
requested action;

 

(e)           With respect to any
certificate, report or other deliverable required to be delivered to the
Administrative Agent pursuant to (x) the definition in the Credit
Agreement of the term “Payment Conditions” and (y) Section 6.8(a) of
the Credit Agreement, the Loan Parties shall deliver each such certificate,
report or other deliverable to each Co-Borrowing Base Agent promptly with the
delivery to the Administrative Agent; and

 

(f)            Without the prior written
consent of each Co-Borrowing Base Agent, no waiver, amendment or modification
of the Credit Agreement or any of the other Loan Documents shall (i) change
the Inventory Advance Rate, (ii) amend Section 6.8 of the 

 

2

 

Credit Agreement or the
definition in the Credit Agreement of the term “Excess Availability” or any
component thereof if as a result thereof any of the minimum Excess Availability
covenants in such section would be reduced, or (iii) amend, modify or
otherwise affect the rights or duties of any of the Co-Borrowing Base Agents
under any of the Loan Documents.

 

Notwithstanding anything in
the Credit Agreement and the other Loan Documents and the foregoing to the
contrary, each of the Co-Borrowing Base Agents hereby agrees with the Agent
that (a) the Agent shall have sole and exclusive authority and
responsibility under the Credit Agreement and the other Loan Documents (without
the consent or further approval of any Co-Borrowing Base Agent) (x) to
make protective Overadvances to the Borrowers, in accordance with the terms and
conditions of the Credit Agreement and (y) to select, employ and retain
all attorneys, financial and other advisors, consultants, appraisers and other
professionals retained or to be retained by the Agent; and (b) all rights
of the Co-Borrowing Base Agents hereunder and the obligation of the Agent to
comply with any request or direction of the Co-Borrowing Base Agents shall be
at all times subject to the terms and conditions and any limitations set forth
in any Loan Document, including without limitation, the Intercreditor
Agreement. The Agent agrees to provide each Co-Borrowing Base Agent with drafts
of Collateral appraisals and audit reports promptly after the Agent’s receipt
thereof (but the Agent shall not be liable for failing to do so).

 

Without limiting the terms
of Section 9.2(a) of the Credit Agreement (a) no failure or
delay by any Co-Borrowing Base Agent in exercising any right or power hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof
or the exercise of any other right or power; and (b) the rights and
remedies of the Co-Borrowing Base Agents hereunder are cumulative and are not
exclusive of any rights or remedies that they would otherwise have.

 

Notwithstanding anything to
the contrary contained herein, in the Credit Agreement or in any other Loan
Document, each of Bank of America, Wells Fargo and GE Capital hereby agrees
that it may not and shall not assign any of its rights, powers, duties and
obligations as a Co-Borrowing Base Agent hereunder to any Person (other than an
Affiliate of such Person designated by such Person from time to time in writing
to the Agent as a Co-Borrowing Base Agent) without the prior written consent of
the Agent and, so long as no Event of Default is then existing, the Borrowers.  Any Co-Borrowing Base Agent may resign in
accordance with Section 8.12 of the Credit Agreement; provided that,
upon any such resignation, no Person shall be appointed as a successor to such
Co-Borrowing Base Agent.

 

For the avoidance of doubt,
each party hereto hereby agrees that nothing contained in the Credit Agreement,
any other Loan Document or herein shall permit any Co-Borrowing Base Agent (in
its capacity as such) to implement any Reserves or undertake to order any
appraisals, audits or exams, but rather this letter agreement (this “Agreement”)
grants each such Person the authority to direct the Agent to do so in
accordance with the terms and conditions of the Credit Agreement.

 

3

 

This Agreement is the
Co-Borrowing Base Agent Rights Agreement referred to in the Credit
Agreement.  This Agreement expresses the
entire understanding of the parties with respect to the matters set forth
herein.  No prior discussions or
negotiations shall limit, modify, or otherwise affect the provisions
hereof.  This Agreement shall be governed
by, and shall be construed and enforced in accordance with, the laws of the
State of New York (excluding the laws applicable to conflicts or choice of law
(other than the New York General Obligations Law §5-1401)).

 

This Agreement may be
executed in counterparts which, when taken together, shall constitute an
original. Delivery of an executed counterpart of this Agreement by facsimile or
electronic transmission shall be equally effective as delivery of a manually
executed counterpart. This Agreement may not be amended or modified without the
written consent of the Agent and each affected Co-Borrowing Base Agent and, to
the extent such amendment or modification would increase the rights of any
Co-Borrowing Base Agent, without the written consent of the Loan Parties.

 

[Remainder
of page left intentionally blank]

 

4

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  BANK OF AMERICA, N.A., as Administrative Agent
  and Collateral Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

(Signature
Page to Co-Borrowing Base Agent Rights Agreement)

 

 

	
   

  	
  ACCEPTED
  AND AGREED TO

  
	
   

  	
  AS
  OF THE DATE FIRST ABOVE WRITTEN:

  
	
   

  	
   

  
	
   

  	
  BANK OF AMERICA, N.A., as a Co-Borrowing Base
  Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

(Signature
Page to Co-Borrowing Base Agent Rights Agreement)

 

 

	
   

  	
  WELLS
  FARGO RETAIL FINANCE, LLC, as a Co-Borrowing Base Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

(Signature
Page to Co-Borrowing Base Agent Rights Agreement)

 

 

	
   

  	
  GENERAL
  ELECTRIC CAPITAL CORPORATION, as a Co-Borrowing Base Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:  Duly Authorized Signatory

  

 

(Signature
Page to Co-Borrowing Base Agent Rights Agreement)

 

 

ACCEPTED AND AGREED TO

AS OF THE DATE FIRST WRITTEN
ABOVE:

 

	
  ZALE DELAWARE, INC.

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZALE CORPORATION

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZGCO, LLC

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  TXDC, L.P.

  	
   

  
	
   

  	
   

  
	
  By:

  	
  ZALE DELAWARE, INC. Its
  General Partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  

 

	
  ZALE PUERTO RICO, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

(Signature
Page to Co-Borrowing Base Agent Rights Agreement)

 

 

	
  ZALE CANADA CO.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZALE CANADA DIAMOND
  SOURCING, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZALE CANADA HOLDING LP

  	
   

  
	
   

  	
   

  
	
  By:

  	
  ZALE INTERNATIONAL, INC.,
  its general partner

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  

 

	
  ZALE CANADA FINCO 1, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

 

	
  ZALE CANADA FINCO 2, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

 

	
  FINCO HOLDING LP

  	
   

  
	
   

  	
   

  
	
  By:

  	
  ZALE CANADA FINCO 2, INC.,
  its general partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  

 

(Signature
Page to Co-Borrowing Base Agent Rights Agreement)

 

 

	
  FINCO PARTNERSHIP LP

  	
   

  
	
   

  	
   

  
	
  By:

  	
  ZALE CANADA FINCO 2, INC.,
  its general partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  

 

 

	
  ZAP, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZCSC, LLC

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZALE INTERNATIONAL, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZALE EMPLOYEES’ CHILDCARE
  ASSOCIATION, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

	
  ZALE CANADA FINCO, LLC

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

(Signature
Page to Co-Borrowing Base Agent Rights Agreement)Exhibit
10.6

 

 

 

 

CREDIT AGREEMENT

 

dated as of

 

May 10, 2010

 

among

ZALE CORPORATION,

as Borrower

 

Z INVESTMENT HOLDINGS, LLC,

as Administrative Agent

 

and

 

The Lenders Party Hereto

 

 

 

 

 

TABLE
OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  ARTICLE I

  
	
   

  
	
  DEFINITIONS

  
	
   

  	
   

  	
   

  
	
  SECTION 1.01.

  	
  Defined Terms

  	
  1

  
	
  SECTION 1.02.

  	
  Terms Generally

  	
  21

  
	
  SECTION 1.03.

  	
  Accounting Terms; GAAP

  	
  21

  
	
   

  	
   

  	
   

  
	
  ARTICLE II

  
	
   

  
	
  AMOUNT AND TERMS OF CREDIT

  
	
   

  	
   

  	
   

  
	
  SECTION 2.01.

  	
  Loans

  	
  22

  
	
  SECTION 2.02.

  	
  Borrowing of Loans

  	
  22

  
	
  SECTION 2.03.

  	
  Prepayments

  	
  22

  
	
  SECTION 2.04.

  	
  Repayment of Loans

  	
  23

  
	
  SECTION 2.05.

  	
  Interest.

  	
  24

  
	
  SECTION 2.06.

  	
  Computation of Interest

  	
  24

  
	
  SECTION 2.07.

  	
  Evidence of Debt

  	
  24

  
	
  SECTION 2.08.

  	
  Payments Generally; Administrative Agent’s Clawback

  	
  25

  
	
  SECTION 2.09.

  	
  Sharing of Payments by Lenders

  	
  26

  
	
  SECTION 2.10.

  	
  Term Reserve

  	
  26

  
	
   

  	
   

  	
   

  
	
  ARTICLE III

  
	
   

  
	
  TAXES, YIELD PROTECTION AND ILLEGALITY

  
	
   

  	
   

  	
   

  
	
  SECTION 3.01.

  	
  Taxes

  	
  26

  
	
  SECTION 3.02.

  	
  Increased Costs

  	
  30

  
	
  SECTION 3.03.

  	
  Mitigation Obligations; Replacement of Lenders

  	
  32

  
	
  SECTION 3.04.

  	
  Survival

  	
  32

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV

  
	
   

  
	
  CONDITIONS

  
	
   

  	
   

  	
   

  
	
  SECTION 4.01.

  	
  Conditions to Loan

  	
  32

  

 

i

 

	
  ARTICLE V

  
	
   

  
	
  REPRESENTATIONS AND WARRANTIES

  
	
   

  	
   

  	
   

  
	
  SECTION 5.01.

  	
  Organization; Powers

  	
  35

  
	
  SECTION 5.02.

  	
  Authorization; Enforceability

  	
  36

  
	
  SECTION 5.03.

  	
  Governmental Approvals; No Conflicts

  	
  36

  
	
  SECTION 5.04.

  	
  Financial Condition

  	
  36

  
	
  SECTION 5.05.

  	
  Properties

  	
  37

  
	
  SECTION 5.06.

  	
  Litigation and Environmental Matters

  	
  37

  
	
  SECTION 5.07.

  	
  Compliance with Laws and Agreements

  	
  38

  
	
  SECTION 5.08.

  	
  Investment Company Status

  	
  38

  
	
  SECTION 5.09.

  	
  Taxes

  	
  38

  
	
  SECTION 5.10.

  	
  ERISA

  	
  38

  
	
  SECTION 5.11.

  	
  Disclosure

  	
  39

  
	
  SECTION 5.12.

  	
  Subsidiaries

  	
  39

  
	
  SECTION 5.13.

  	
  Insurance

  	
  40

  
	
  SECTION 5.14.

  	
  Labor Matters

  	
  40

  
	
  SECTION 5.15.

  	
  Security Documents

  	
  40

  
	
  SECTION 5.16.

  	
  Federal Reserve Regulations

  	
  40

  
	
  SECTION 5.17.

  	
  Solvency

  	
  40

  
	
  SECTION 5.18.

  	
  Foreign Assets Control Regulations, Proceeds of Crime Act,
  Etc.

  	
  40

  
	
  SECTION 5.19.

  	
  Insurance Subsidiaries

  	
  41

  
	
  SECTION 5.20.

  	
  Material Contracts

  	
  41

  
	
  SECTION 5.21.

  	
  ZC Partnership

  	
  41

  
	
   

  
	
  ARTICLE VI

  
	
   

  
	
  AFFIRMATIVE COVENANTS

  
	
   

  	
   

  	
   

  
	
  SECTION 6.01.

  	
  Financial Statements and Other Information

  	
  41

  
	
  SECTION 6.02.

  	
  Notices of Material Events

  	
  43

  
	
  SECTION 6.03.

  	
  Existence; Conduct of Business

  	
  44

  
	
  SECTION 6.04.

  	
  Payment of Obligations

  	
  44

  
	
  SECTION 6.05.

  	
  Maintenance of Properties

  	
  44

  
	
  SECTION 6.06.

  	
  Insurance

  	
  44

  
	
  SECTION 6.07.

  	
  Casualty and Condemnation

  	
  45

  
	
  SECTION 6.08.

  	
  Books and Records; Inspection Rights; Appraisals

  	
  45

  
	
  SECTION 6.09.

  	
  Compliance with Laws

  	
  46

  
	
  SECTION 6.10.

  	
  Use of Proceeds

  	
  46

  
	
  SECTION 6.11.

  	
  New Subsidiaries

  	
  46

  
	
  SECTION 6.12.

  	
  Information Regarding the Collateral

  	
  46

  
	
  SECTION 6.13.

  	
  Further Assurances

  	
  46

  
	
  SECTION 6.14.

  	
  [Intentionally Omitted]

  	
  47

  
	
  SECTION 6.15.

  	
  Employee Benefit Plans

  	
  47

  
	
  SECTION 6.16.

  	
  Private Label Credit Cards

  	
  47

  

 

ii

 

	
  ARTICLE VII

  
	
   

  
	
  NEGATIVE COVENANTS

  
	
   

  	
   

  	
   

  
	
  SECTION 7.01.

  	
  Indebtedness and Other Obligations

  	
  47

  
	
  SECTION 7.01A.

  	
  Indebtedness

  	
  47

  
	
  SECTION 7.01B.

  	
  Zale Insurance Subsidiaries Indebtedness

  	
  49

  
	
  SECTION 7.02.

  	
  Liens

  	
  49

  
	
  SECTION 7.03.

  	
  Fundamental Changes

  	
  51

  
	
  SECTION 7.04.

  	
  Investments

  	
  51

  
	
  SECTION 7.04A.

  	
  Investments

  	
  51

  
	
  SECTION 7.04B.

  	
  Zale Insurance Subsidiaries Investments

  	
  53

  
	
  SECTION 7.05.

  	
  Asset Sales

  	
  53

  
	
  SECTION 7.06.

  	
  Restricted Payments; Certain Payments of Indebtedness

  	
  54

  
	
  SECTION 7.07.

  	
  Transactions with Affiliates

  	
  55

  
	
  SECTION 7.08.

  	
  Financial Covenants

  	
  56

  
	
  SECTION 7.09.

  	
  Hedging Agreements

  	
  58

  
	
  SECTION 7.10.

  	
  Fiscal Year

  	
  58

  
	
  SECTION 7.11.

  	
  Negative Pledge; Subsidiary Restrictions

  	
  58

  
	
  SECTION 7.12.

  	
  Amendments

  	
  59

  
	
  SECTION 7.13.

  	
  Certain Matters Relating to Zale Insurance Subsidiaries

  	
  59

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  
	
   

  
	
  EVENTS OF DEFAULT

  
	
   

  	
   

  	
   

  
	
  SECTION 8.01.

  	
  Events of Default

  	
  60

  
	
  SECTION 8.02.

  	
  When Continuing

  	
  63

  
	
  SECTION 8.03.

  	
  Remedies on Default

  	
  63

  
	
  SECTION 8.04.

  	
  Application of Proceeds

  	
  63

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX

  
	
   

  
	
  ADMINISTRATIVE AGENT AND LENDERS

  
	
   

  	
   

  	
   

  
	
  SECTION 9.01.

  	
  Appointment of Administrative Agent and Authority

  	
  64

  
	
  SECTION 9.02.

  	
  Rights as a Lender

  	
  64

  
	
  SECTION 9.03.

  	
  Exculpatory Provisions

  	
  65

  
	
  SECTION 9.04.

  	
  Reliance by the Administrative Agent

  	
  66

  
	
  SECTION 9.05.

  	
  Delegation of Duties

  	
  66

  
	
  SECTION 9.06.

  	
  Resignation of the Administrative Agent

  	
  66

  
	
  SECTION 9.07.

  	
  Non-Reliance on the Administrative Agent and Other Lenders

  	
  67

  
	
  SECTION 9.08.

  	
  [Intentionally Omitted]

  	
  67

  
	
  SECTION 9.09.

  	
  Administrative Agent May File Proofs of Claim

  	
  67

  
	
  SECTION 9.10.

  	
  Collateral and Guaranty Matters

  	
  68

  
	
  SECTION 9.11.

  	
  Notice of Transfer

  	
  69

  

 

iii

 

	
  SECTION 9.12.

  	
  Agency for Perfection

  	
  69

  
	
  SECTION 9.13.

  	
  Intercreditor Agreement

  	
  69

  
	
  SECTION 9.14.

  	
  Indemnification of the Administrative Agent

  	
  69

  
	
  SECTION 9.15.

  	
  Relation Among Lenders

  	
  70

  
	
  SECTION 9.16.

  	
  Defaulting Lender

  	
  70

  
	
  SECTION 9.17.

  	
  Actions in Concert

  	
  70

  
	
   

  	
   

  	
   

  
	
  ARTICLE X

  
	
   

  
	
  MISCELLANEOUS

  
	
   

  	
   

  	
   

  
	
  SECTION 10.01.

  	
  Amendments

  	
  70

  
	
  SECTION 10.02.

  	
  Notices; Effectiveness; Electronic Communications

  	
  72

  
	
  SECTION 10.03.

  	
  No Waiver; Cumulative Remedies

  	
  73

  
	
  SECTION 10.04.

  	
  Expenses; Indemnity; Damage Waiver

  	
  73

  
	
  SECTION 10.05.

  	
  Reinstatement; Payments Set Aside

  	
  74

  
	
  SECTION 10.06.

  	
  Successors and Assigns.

  	
  74

  
	
  SECTION 10.07.

  	
  Treatment of Certain Information; Confidentiality

  	
  77

  
	
  SECTION 10.08.

  	
  Interest Rate Limitation

  	
  78

  
	
  SECTION 10.09.

  	
  Counterparts; Integration; Effectiveness

  	
  78

  
	
  SECTION 10.10.

  	
  Survival

  	
  78

  
	
  SECTION 10.11.

  	
  Severability

  	
  79

  
	
  SECTION 10.12.

  	
  Replacement of Lenders

  	
  79

  
	
  SECTION 10.13.

  	
  Governing Law; Consent to Service of Process; Jurisdiction

  	
  79

  
	
  SECTION 10.14.

  	
  Waiver of Jury Trial

  	
  80

  
	
  SECTION 10.15.

  	
  No Advisory or Fiduciary Responsibility

  	
  80

  
	
  SECTION 10.16.

  	
  USA Patriot Act Notice

  	
  81

  
	
  SECTION 10.17.

  	
  No Strict Construction

  	
  81

  
	
  SECTION 10.18.

  	
  Attachments

  	
  81

  
	
  SECTION 10.19.

  	
  Conflict of Terms

  	
  81

  
	
  SECTION 10.20.

  	
  Headings

  	
  81

  

 

EXHIBITS

 

	
  Exhibit A

  	
  –

  	
  Form of
  Note

  
	
  Exhibit B-1

  	
  –

  	
  Form of
  Security Agreement

  
	
  Exhibit B-2

  	
  –

  	
  Form of
  Canadian Security Agreement

  
	
  Exhibit C

  	
  –

  	
  Form of
  Assignment and Assumption

  
	
  Exhibit D-1

  	
  –

  	
  Form of
  Facility Guaranty

  
	
  Exhibit D-2

  	
  –

  	
  Form of
  Canadian Facility Guaranty

  
	
  Exhibit E

  	
  –

  	
  Brand
  Contribution Levels

  

 

iv

 

SCHEDULES

 

	
  Schedule
  1.01(a)

  	
   

  	
  Guarantors

  
	
  Schedule
  1.01(b)

  	
   

  	
  Canadian
  Loan Parties

  
	
  Schedule
  2.01

  	
  –

  	
  Lenders
  and Commitments

  
	
  Schedule
  4.01(a)(viii)

  	
  –

  	
  Security
  Documents

  
	
  Schedule
  4.01(a)(ix)

  	
  –

  	
  Loan
  Documents

  
	
  Schedule
  5.05(c)

  	
  –

  	
  Real
  Property

  
	
  Schedule
  5.05(d)

  	
  –

  	
  Inventory
  on Consignment and Subject to Liens

  
	
  Schedule
  5.06

  	
  –

  	
  Litigation
  and Environmental Matters

  
	
  Schedule
  5.12

  	
  –

  	
  Subsidiaries

  
	
  Schedule
  5.13

  	
  –

  	
  Insurance

  
	
  Schedule
  5.20

  	
  –

  	
  Material
  Contracts

  
	
  Schedule
  7.01A

  	
  –

  	
  Indebtedness

  
	
  Schedule
  7.02

  	
  –

  	
  Liens

  
	
  Schedule
  7.04A

  	
  –

  	
  Investments

  
	
  Schedule
  7.07

  	
  –

  	
  Transactions
  with Affiliates

  
	
  Schedule
  7.11

  	
  –

  	
  Subsidiary
  Restrictions

  
	
  Schedule 10.02

  	
  –

  	
  Notices

  

 

v

 

CREDIT AGREEMENT dated as of May 10, 2010 (this “Agreement”),
among ZALE CORPORATION, a Delaware corporation (the “Borrower”); each
lender from time to time party hereto (collectively, the “Lenders”, and
each individually, a “Lender”); and Z INVESTMENT HOLDINGS, LLC, a
Delaware limited liability company, as Administrative Agent.

 

The Borrower has requested that the Lenders
provide a term loan facility, and the Lenders have indicated their willingness
to provide a term loan facility, on the terms and conditions set forth herein.

 

In consideration of the mutual covenants and
agreements herein contained, the parties hereto agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

SECTION 1.01.  Defined Terms.  As used in this Agreement, the following
terms have the meanings specified below:

 

“ABL Credit Agreement” has the meaning
set forth in the definition of the term “Existing Revolving Credit Facility”.

 

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

 

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

 

“Administrative Agent’s Office” means
the Administrative Agent’s address and, as appropriate, account as set forth on
Schedule 10.02, or such other address or account of which the
Administrative Agent may from time to time notify the Borrower and the Lenders.

 

“Administrative Questionnaire” means
an Administrative Questionnaire in a form supplied by the Administrative Agent.

 

“Affiliate” means, with respect to a
specified Person, another Person that directly, or indirectly through one or
more intermediaries, Controls or is Controlled by or is under common Control
with the Person specified.

 

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

 

“Applicable Percentage” means, with
respect to any Lender at any time, the percentage (carried out to the ninth
decimal place) obtained by dividing (x) the outstanding principal
balance of such Lender’s Loans by (y) the aggregate outstanding principal
balance of the Loans.

 

 

“Appraised Inventory Liquidation Value”
means the product of (a) the Cost of Eligible Inventory, minus Inventory
Reserves, multiplied by (b) that percentage determined from the
most recent appraisal of the Borrower’s and its Subsidiaries’ Inventory
undertaken by an independent appraiser delivered to the Administrative Agent
pursuant to Section 6.01(f) or 6.08(c) to reflect the
appraiser’s estimate of the net recovery on the Borrower’s and its Subsidiaries’
Inventory in the event of an in-Store net orderly liquidation of that
Inventory; provided that, for the purposes of this definition, such
percentage shall not exceed the percentage determined from the appraisal dated March 2010
undertaken by Great American Group of the Borrower’s and its Subsidiaries’
Inventory.

 

“Assignment and Assumption” means an
assignment and assumption entered into by a Lender and an Eligible Assignee
(with the consent of each party whose consent is required pursuant hereto), and
accepted by the Administrative Agent, in the form of Exhibit C or
any other form approved by the Administrative Agent.

 

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

 

“Borrower” has the meaning set forth
in the preamble to this Agreement.

 

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

 

“Canadian Loan Parties” means each
Subsidiary listed on Schedule 1.01(b).

 

“Canadian Facility Guaranty” means a
Guarantee of the Obligations made by a Guarantor organized under the laws of
Canada or any province thereof, in favor of the Administrative Agent and the
other Credit Parties, in substantially the form attached hereto as Exhibit D-2
or otherwise in a form reasonably satisfactory to the Administrative Agent.

 

“Canadian Pension Plan” means any plan
that is or is intended to be a “registered pension plan” as such term is defined
in the Income Tax Act (Canada) that is sponsored or maintained by or under
which any Loan Party has any liability whatsoever.

 

“Canadian Pension Plan Event” means (a) either
(i) the termination in whole or in part of a Canadian Pension Plan or (ii) the
cessation of participation of any Loan Party (or any Affiliate or other related
party thereto with whom there is statutory joint and several liability under
pension standards legislation) in any Canadian Pension Plan, including a
multi-employer pension plan (within the meaning of applicable pension standards
legislation), in either case, for any reason and which event gives rise to an
obligation on such entity to make contributions in respect of any past service
unfunded liability of such plan, (b) the issuance of a notice (or a notice
of intent to issue such a notice) to terminate in whole or in part any Canadian
Pension Plan with a defined benefit provision or the receipt of a notice of
intent from a Governmental Authority to require the termination in whole or in
part of any Canadian Pension Plan, revoking the registration of same or
appointing a new administrator of such a plan, (c) an event or condition
which constitutes grounds under applicable pension standards or tax legislation
for the issuance of an order, direction or other communication from any
Governmental Authority or a 

 

2

 

notice of an intent to issue
such an order, direction or other communication requiring any Loan Party to
take or refrain from taking any action in respect of a Canadian Pension Plan, (d) the
failure to remit by any Loan Party or any of their Affiliates any contribution
to a Canadian Pension Plan when due or the receipt of any notice from an
administrator, a trustee or other funding agent or any other Person that any
Loan Party or any of their Affiliates have failed to remit any contribution to
a Canadian Pension Plan or a similar notice from a Governmental Authority
relating to a failure to pay any fees or other amounts (including payments in
respect of the Pension Benefit Guarantee Fund of Ontario).

 

“Canadian Security Agreement” means
the Security Agreement, dated as of the Closing Date, among the Canadian Loan
Parties and the Administrative Agent for the benefit of the Credit Parties, in
substantially the form attached as Exhibit B-2 hereto, as amended
and in effect from time to time.

 

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

 

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

 

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

 

“Change in Control” means, at any
time, (a) occupation of a majority of the seats (other than vacant seats)
on the board of directors of the Borrower by Persons who were neither (i) nominated
by the board of directors of the Borrower nor (ii) appointed by directors
so nominated; (b) the acquisition of beneficial ownership by any Person or
group (within the meaning of the Securities Exchange Act of 1934, as amended,
and the rules of the SEC thereunder as in effect on the date hereof),
other than a Lender or any Affiliate thereof or any group of such Persons, of
Equity Interests representing 50% or more of the aggregate ordinary voting
power represented by the issued and outstanding Equity Interests of the
Borrower; or (c) a “Change in Control” under the Existing Revolving Credit
Facility (other than as a result of the acquisition of Equity Interests by a
Lender or any Affiliate thereof or any group of such Persons).

 

“Change in Law” means (a) the
introduction or adoption of any law, rule or regulation after the date of
this Agreement or (b) any change in any law, rule, guideline, request or
regulation or in the interpretation or application thereof by any Governmental
Authority after the date of this Agreement.

 

“Closing Date” means May 10,
2010.

 

“Code” means the Internal Revenue Code
of 1986, as amended from time to time, including the regulations proposed or
promulgated thereunder.

 

3

 

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

 

“Commitment” means, as to each Lender,
its obligation to make Loans to the Borrower pursuant to Section 2.01 in
the amount set forth opposite such Lender’s name on Schedule 2.01.

 

“Consolidated EBITDA” means
Consolidated Net Income for any period plus (a) without
duplication, the sum of the following expenses of the Borrower and its
Subsidiaries for such period, in each case to the extent included in
determining Consolidated Net Income:  (i) depreciation
expense, (ii) amortization expense, excluding amortization expense
attributable to a prepaid cash item, (iii) interest expense, excluding
interest expense associated with capital leases, (iv) total U.S. and
foreign federal, state, provincial and local income tax expense, (v) charges
relating to the valuation of inventory by application of the LIFO (last
in/first out) method of inventory valuation, (vi) non-cash compensation
expense arising out of the grant or exercise of stock options or other equity
based compensation, (vii) all losses during such period resulting from the
sale or disposition of any assets outside the ordinary course of business, (viii) the
effect of any non-cash impairment charges related to the write-off of goodwill,
property or equipment resulting from the application of GAAP, (ix) to the
extent incurred or reserved for between the Closing Date and July 31,
2011, restructuring charges in an aggregate amount not to exceed $10,000,000
and (x) all other non-cash charges, excluding (A) any such charge
which consists of or requires an accrual of, or cash reserve for, anticipated
cash charges for any future period, (B) any such non-cash charge in
respect of an item that increased Consolidated Net Income in a prior period (to
the extent of such increase) and (C) any such charge that results from the
write-down or write-off of inventory, less (b) without duplication,
in each case to the extent included in determining Consolidated Net Income
(except for clause (viii) below), the sum of (i) income earned during
such period relating to the valuation of inventory by the application of the
LIFO method of inventory valuation, (ii) interest income for such period, (iii) non-cash
gains for such period, including any gain due to changes in the recognition
period of revenue derived from the sale of lifetime warranties, (iv) all
gains during such period resulting from the sale or disposition of any assets
outside the ordinary course of business, (v) total U.S. and foreign federal,
state, provincial and local income tax benefits provided during such period, (vi) as
it relates to revenue derived from the sale of lifetime warranties, any revenue
recorded in determining Consolidated Net Income in excess of the revenue that
would have been recorded had the revenue recognition period for all current and
historical (since 2007) lifetime warranty sales been five years (for avoidance
of doubt, if the Company were to continue to use a five year revenue
recognition period for lifetime warranty sales, no adjustment would be
required) and (vii) the combined decrease in current and non-current
deferred revenue in excess of $10,000,000 over the prior 12 month period, if
applicable and (viii) the amount of all payments with respect to capital
leases (other than interest expense related to capital leases).

 

“Consolidated Net Income” means the
consolidated net income (or loss) of the Borrower and its Subsidiaries, after
eliminating therefrom all non-cash extraordinary items of income and all
non-cash extraordinary items of loss, all determined on a consolidated basis in
accordance with GAAP; provided, however, that there shall be
excluded from Consolidated Net Income (a) the income (or loss) of any
Person in which the Borrower or any of its Subsidiaries has a joint interest
except to the extent of any cash dividends actually paid to the Borrower or its

 

4

 

Subsidiaries, (b) the
income (or loss) of any Person accrued prior to the date it becomes a Subsidiary
of the Borrower or any of its Subsidiaries or is merged into or consolidated
with the Borrower or any of its Subsidiaries or that Person’s assets are
acquired by the Borrower or any of its Subsidiaries and (c) the income of
any direct or indirect Subsidiary of the Borrower that is not a Loan Party or a
Zale Insurance Subsidiary to the extent that, on the date of determination, the
declaration or payment of cash dividends or similar cash distributions by such
Subsidiary is not permitted without any prior approval of any Governmental
Authority that has not been obtained or is not permitted by the operation of
the terms of its Organization Documents or any agreement or other instrument
binding upon such Subsidiary or any law applicable to such Subsidiary, unless
such restrictions with respect to the payment of cash dividends and other
similar cash distributions have been legally and effectively waived.

 

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

 

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

 

“Credit Party” means (a) each
Lender, (b) the Administrative Agent, (c) each beneficiary of each
indemnification obligation undertaken by any Loan Party under any Loan Document
and (d) the successors and permitted assigns of each of the foregoing.

 

“Credit Party Expenses” means all
reasonable and documented out-of-pocket expenses incurred by the Administrative
Agent and the Lenders in connection with this Agreement and the other Loan
Documents, including the reasonable and documented fees, charges and
disbursements of counsel for the Administrative Agent (limited to not more than
one primary counsel and necessary local counsel (limited to one local counsel
per jurisdiction)) and all other reasonable and documented out-of-pocket
expenses incurred in connection with (a) the preparation, negotiation,
administration, management, execution and delivery of this Agreement and the other
Loan Documents or any amendments, modifications or waivers of the provisions
thereof, and the preparation, negotiation, execution and delivery of the
Warrant Agreement (whether or not the transactions contemplated hereby or
thereby shall be consummated) and (b) the enforcement or protection of
their rights in connection with this Agreement or the other Loan Documents or
efforts to preserve, protect, collect or enforce the Collateral or in
connection with any proceeding under any Debtor Relief Laws in connection
herewith.

 

“Debtor Relief Laws” means the
Bankruptcy Code of the United States, the Bankruptcy and Insolvency Act
(Canada), the Companies’ Creditors Arrangement Act (Canada), the Winding-up and
Restructuring Act (Canada) and all other liquidation, conservatorship,
bankruptcy, assignment for the benefit of creditors, moratorium, receivership,
insolvency, reorganization or similar debtor relief laws of the United States
or other applicable jurisdictions from time to time in effect and affecting the
rights of creditors generally.

 

5

 

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

 

“Default Rate” means, with respect to
any Loan, an interest rate equal to the interest rate otherwise applicable to
such Loan plus 2% per annum.

 

“Defaulting Lender” means any Lender
that (a) has failed to pay over to the Administrative Agent or any other
Lender any amount required to be paid by it hereunder within one Business Day
of the date when due, unless the subject of a good faith dispute or (b) has
been deemed insolvent or become the subject of any proceeding under any Debtor
Relief Law.

 

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

 

“Eligible Assignee” means (a) any
Lender and any Affiliate of a Lender, (b) any investment vehicle
Controlled by the Administrative Agent and (c) after January 1, 2011,
any other Person (other than (i) a natural Person or (ii) the Loan
Parties and their Affiliates) approved by each of (i) the Administrative
Agent and (ii) the Borrower, which approval of the Borrower shall not be
unreasonably withheld, delayed or conditioned and shall not be required if an
Event of Default has occurred and is continuing.

 

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

 

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

 

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

 

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

 

“Equity Interests” means, with respect
to any Person, all of the shares of capital stock of (or other ownership or
profit interests in) such Person, and all of the warrants or options for the
purchase or acquisition from such Person of shares of capital stock of (or
other ownership or profit interests in) such Person (including partnership,
member or trust interests therein), 

 

6

 

whether voting or nonvoting
(but excluding, for avoidance of doubt, any Indebtedness convertible into or
exchangeable for Equity Interests).

 

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

 

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

 

“ERISA Event” means (a) any “reportable
event”, as defined in Section 4043 of ERISA or the regulations issued
thereunder with respect to a Plan (other than an event for which the 30-day
notice period is waived), (b) the failure to satisfy the minimum funding
standard with respect to any Plan (as provided in Section 412 of the Code
or Section 302 of ERISA), whether or not waived, (c) the filing
pursuant to Section 412(c) of the Code or Section 303(c) of
ERISA of an application for a waiver of the minimum funding standard with
respect to any Plan, (d) the incurrence by the Loan Parties or any of
their ERISA Affiliates of any liability under Title IV of ERISA with respect to
the termination of any Plan, (e) the receipt by the Loan Parties or any
ERISA Affiliate from the PBGC or a plan administrator of any notice relating to
an intention to terminate any Plan or Plans or to appoint a trustee to
administer any Plan, (f) the incurrence by the Loan Parties or any of
their ERISA Affiliates of any liability with respect to the withdrawal or
partial withdrawal from any Plan or Multiemployer Plan or (g) the receipt
by the Loan Parties or any ERISA Affiliate of any notice, or the receipt by any
Multiemployer Plan from the Loan Parties or any ERISA Affiliate of any notice,
concerning the imposition of Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA.

 

“Event of Default” has the meaning set
forth in Section 8.01.

 

“Excluded Taxes” means, with respect
to any Recipient, (a) income or franchise Taxes imposed on (or measured
by) such Recipient’s gross or net income or profit by the United States of
America, or by the jurisdiction under the laws of which such Recipient is
organized, in which such Recipient is resident for Tax purposes or in which its
principal office is located or, in the case of any Lender, in which its
applicable Lending Office is located or in which it otherwise is deemed to be
engaged in a trade or business for Tax purposes (or, in each case, any
political subdivision thereof), (b) any branch profits or similar Taxes
imposed by any of the jurisdictions described in clause (a) above or any
other jurisdiction in which any Loan Party is located , (c) any Taxes
imposed by reason of any present or former connection between the jurisdiction
imposing such Taxes and such Recipient other than a connection arising solely
from such Recipient having received payment under this Agreement or any other
Loan Document, (d) any withholding Tax imposed pursuant to any applicable
law in effect at the time such Recipient becomes a Recipient with respect to
its applicable ownership interest in the Loan or designates a new lending
office, (e) any Taxes attributable to such Recipient’s failure to comply
with Sections 3.01(e), (f) or (g) and (f) excluded Other Taxes.

 

7

 

“Existing Revolving Credit Facility”
means the amended and restated senior secured, asset-based revolving credit
facility under the Credit Agreement, dated as of May 10, 2010 (the “ABL
Credit Agreement”), among the Borrower, certain of its Subsidiaries, the
lenders party thereto and Bank of America, N.A., as amended, together with the
collateral and other ancillary agreements entered into in connection therewith,
and as it may from time to time be further amended, restated or replaced as
permitted hereunder, whether or not any such restated agreement or replacement
facility shall include the same lenders or their successors or assigns.

 

“Facility Guaranty” means a Guarantee
of the Obligations made by a Guarantor (other than a Guarantor organized under
the laws of Canada) in favor of the Administrative Agent and the other Credit
Parties, in substantially the form attached hereto as Exhibit D-1
or otherwise in a form reasonably satisfactory to the Administrative Agent.

 

“Federal Funds Effective Rate” means,
for any day, the weighted average (rounded upwards, if necessary, to the next
1/100 of 1%) of the rates on overnight Federal funds transactions with members
of the Federal Reserve System arranged by Federal funds brokers, as published
on the next succeeding Business Day by the Federal Reserve Bank of New York, or
if such rate is not so published for any day that is a Business Day, the
average (rounded upwards, if necessary, to the next 1/100 of 1%) of the
quotations for such day for such transactions received by the Administrative
Agent from three Federal funds brokers of recognized standing selected by the
Administrative Agent.

 

“Financial Officer” means, with
respect to any Loan Party, the chief financial officer, controller, treasurer
or assistant treasurer of such Loan Party.

 

“Fiscal Quarter” means any fiscal
quarter of any Fiscal Year, which quarters shall generally end on the last day
of each January, April, July and October of such Fiscal Year in
accordance with the fiscal accounting calendar of the Loan Parties.

 

“Fiscal Year” means any period of
12 consecutive months ending on July 31 of any calendar year.

 

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

 

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

 

“Gross-Up Payment” has the meaning set
forth in Section 3.01(a).

 

“Guam Subsidiary”  means
Dobbins Jewelers, Inc.

 

“Guarantee” means, of or by any Person
(the “guarantor”), any obligation, contingent or otherwise, of the guarantor
guaranteeing or having the economic effect of guaranteeing any Indebtedness of
any other Person (the “primary obligor”) in any manner, 

 

8

 

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

 

“Guaranteed Pension Plan” means any
employee pension benefit plan within the meaning of §3(2) of ERISA
maintained or contributed to by any of the Loan Parties or any ERISA Affiliate
or with respect to which any of the Loan Parties or any ERISA Affiliate has any
liability, the benefits of which are guaranteed on termination in full or in
part by the PBGC pursuant to Title IV of ERISA.

 

“Guarantor” means each Subsidiary
listed on Schedule 1.01(a) and each Subsidiary that executes and
delivers a Facility Guaranty or a Canadian Facility Guaranty, as applicable,
following the date hereof pursuant to Section 6.11.

 

“Hazardous Materials” means all
explosive or radioactive substances or wastes and all hazardous or toxic
substances, wastes or other pollutants, including petroleum or petroleum
distillates, asbestos or asbestos containing materials, polychlorinated
biphenyls, radon gas, infectious or medical wastes and all other substances or
wastes of any nature regulated pursuant to any Environmental Law, including any
material listed as a hazardous substance under Section 101(14) of CERCLA.

 

“Hedging Agreement” means any interest
rate protection agreement, foreign currency exchange agreement, commodity price
protection agreement or other interest or currency exchange rate or commodity
price hedging arrangement.

 

“Indebtedness” means, with respect to
any Person, without duplication, (a) all obligations of such Person for
borrowed money, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such
Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (d) all obligations of such Person in
respect of the deferred purchase price of property or services (excluding trade
payables not more than 60 days past due or other current accounts payable
incurred in the ordinary course of business and deferred employee compensation
in the ordinary course of business), (e) all Indebtedness of others
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on property owned or
acquired by such Person, whether or not the Indebtedness secured thereby has
been assumed, (f) all Guarantees by such Person of Indebtedness of others
(including under any 

 

9

 

Synthetic Leases), (g) all
Capital Lease Obligations of such Person, (h) all obligations, contingent
or otherwise, of such Person as an account party in respect of letters of
credit and letters of guaranty, (i) all obligations, contingent or
otherwise, of such Person in respect of bankers’ acceptances and (j) all
obligations of such Person under Hedging Agreements.  The Indebtedness of any Person shall include
the Indebtedness of any other entity (including any partnership in which such
Person is a general partner) to the extent such Person is liable therefor as a
result of such Person’s ownership interest in or other relationship with such
entity, except to the extent the terms of such Indebtedness provide that such
Person is not liable therefor.

 

“Indemnified Taxes” means Taxes other
than Excluded Taxes.

 

“Indemnitee” has the meaning set forth
in Section 10.04(b).

 

“Initial Lender” means Z Investment
Holdings, LLC.

 

“Intercompany Subordination Agreement”
means the Intercompany Subordination Agreement, dated as of the Closing Date,
by and among the obligors party thereto, in favor of the Administrative Agent
and the Lenders, as amended and in effect from time to time.

 

“Intercreditor Agreement” means the
Intercreditor Agreement, dated as of the Closing Date, by and between the
Administrative Agent and Bank of America, N.A., as collateral agent for the
secured parties under the Existing Revolving Credit Facility, and acknowledged
by the applicable Loan Parties, as amended from time to time, or any successor
intercreditor agreement having substantially the same terms as the
Intercreditor Agreement or such other terms as may be reasonably acceptable to
the Administrative Agent and the Borrower.

 

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

 

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

 

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

 

“Investment” has the meaning set forth
in Section 7.04A.

 

“IRS” means the United States Internal
Revenue Service.

 

“Lenders” means the
Persons identified on Schedule 2.01 and each assignee that becomes a
party to this Agreement pursuant to Section 10.06.

 

“Lending Office” means, as to any
Lender, the office or offices of such Lender described as such in such Lender’s
Administrative Questionnaire, or such other office or offices as a Lender may
from time to time notify the Borrower and the Administrative Agent.

 

“Lien” means, with respect to any
asset, (a) any mortgage, deed of trust, statutory or deemed trust, lien,
pledge, hypothecation, encumbrance, charge or security interest in, on or of 

 

10

 

such asset, (b) the
interest of a vendor or a lessor under any conditional sale agreement, capital
lease or title retention agreement (or any financing lease having substantially
the same economic effect as any of the foregoing) relating to such asset and (c) in
the case of securities, any purchase option, call or similar right of a third
party with respect to such securities.

 

“Liquidity” means, as of any date of
determination, an amount equal to (a) the sum of (x) the Appraised
Inventory Liquidation Value, plus (y) Eligible Credit Card
Receivables, minus (b) Total ABL Debt.

 

“Loan” has the meaning set forth in Section 2.01.

 

“Loan Documents” means, collectively,
this Agreement, the Notes, the Facility Guaranties, the Canadian Facility
Guaranties, the Intercompany Subordination Agreement, the Security Documents
and any other instrument or agreement executed and delivered in connection
herewith or therewith, but shall exclude the Intercreditor Agreement and the
Warrant Agreement and the documents executed and delivered pursuant thereto.

 

“Loan Parties” means, collectively,
the Borrower and each Guarantor, and “Loan Party” means any one of such
Persons.

 

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

 

“Material Adverse Effect” means a
material adverse effect on (a) the business, operations, property, assets
or financial condition of the Borrower and its Subsidiaries taken as a whole,
or (b) the validity or enforceability of this Agreement or any of the
other Loan Documents or any of the material rights or remedies of the
Administrative Agent or the Lenders hereunder or thereunder.

 

“Material Contract” means each
contract or agreement to which the Borrower or any of its Subsidiaries is a
party, the loss of which would reasonably be expected to have a Material
Adverse Effect.

 

“Material Indebtedness” means
Indebtedness (other than the Obligations) of any one or more of the Loan
Parties in an aggregate principal amount exceeding $20,000,000.

 

“Maturity Date” means May 10,
2015.

 

“Maximum Rate” has the meaning set
forth in Section 10.08.

 

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

 

“Multiemployer Plan” means a multiemployer
plan as defined in Section 4001(a)(3) of ERISA.

 

“Net Proceeds” means, with respect to
any event, the excess, if any, of (a) the sum of cash and cash equivalents
actually received in connection with such event (including any cash or cash
equivalents received by any Loan Party by way of deferred payment pursuant to,
or by monetization of, a note receivable or otherwise, but only as and when so
received) over (b) the 

 

11

 

sum of (i) in the case
of a sale, transfer or other disposition (including pursuant to a
sale-leaseback transaction or a casualty or a condemnation or similar
proceeding) of an asset, the principal amount of (and accrued and unpaid
interest on, and other amounts payable in connection with) any Indebtedness
that is secured by a Lien on the applicable asset (which Lien is permitted
hereunder and is senior to the Lien on such asset securing the Obligations) and
that is required to be paid and is repaid (or with respect to which an escrow
is required to be established for the future repayment thereof) in connection
with such asset disposition (other than Indebtedness under the Loan Documents),
including, for avoidance of doubt, with respect to any such disposition of ABL
Priority Collateral, any amount used to repay Indebtedness under the Existing
Revolving Credit Facility, whether or not such repaid amounts may be
reborrowed, and any amount used to cash collateralize any obligations under the
Existing Revolving Credit Facility, in each case in accordance with the terms
thereof, (ii) the reasonable and customary out-of-pocket fees and expenses
incurred by such Loan Party in connection with such event (including
appraisals, brokerage, title and recording or transfer tax expenses and
discounts, commissions, legal, accounting and other professional fees paid or
payable by such Loan Party to third parties (other than Affiliates of the
Borrower)), (iii) Taxes paid or reasonably estimated to be actually
payable in connection therewith and (iv) amounts provided as a reserve
against any liabilities under any indemnification obligations or purchase price
adjustment associated with such event (provided that, to the extent and
at the time any such amounts are released from such reserve, such amounts shall
constitute Net Proceeds).

 

“Non-Consenting Lender” has the
meaning set forth in Section 10.01.

 

“Note” means a promissory note of the
Borrower in favor of a Lender evidencing the Loan made by such Lender,
substantially in the form of Exhibit A.

 

“Obligations” means (a) all
obligations of the Loan Parties for the payment of the principal of, and
interest on, the Loans, when and as due, whether at maturity, by acceleration,
upon one or more dates set for prepayment or otherwise, (b) all other
monetary obligations, including fees, costs, expenses and indemnities, whether
primary, secondary, direct, contingent, fixed or otherwise, of the Loan Parties
to the Credit Parties under this Agreement and the other Loan Documents and (c) the
payment and performance of all the covenants, agreements, obligations and
liabilities of the Loan Parties under or pursuant to this Agreement and the
other Loan Documents.

 

“Organization Documents” means (a) with
respect to any corporation, the certificate or articles of incorporation and
the bylaws (or equivalent or comparable constitutive documents with respect to
any non-U.S. jurisdiction), (b) with respect to any limited liability
company, the certificate or articles of formation or organization and operating
agreement (or equivalent or comparable constitutive documents with respect to
any non-U.S. jurisdiction) and (c) with respect to any partnership, joint
venture, trust or other form of business entity, the partnership, joint venture
or other applicable agreement of formation or organization and any agreement,
instrument, filing or notice with respect thereto filed in connection with its
formation or organization with the applicable Governmental Authority in the
jurisdiction of its formation or organization.

 

12

 

“Other Taxes” means any and all
current or future stamp or documentary Taxes or any other excise or property
Taxes, charges or similar levies arising from any payment made under any Loan
Document or from the execution, delivery or enforcement of, or otherwise with
respect to, any Loan Document; excluding, however, such Taxes
imposed as a result of an assignment (other than an assignment that occurs as a
result of the Borrower’s request pursuant to Section 3.03(b)).

 

“Pagoda Business” means the business
consisting of Piercing Pagoda, Plumb Gold, Pagoda.com and the Silver and Gold
Connection brands and any line extensions thereof or new brands established as
part thereof and reasonably related thereto.

 

“Pagoda Store Contribution” means, for
any period, the amount equal to (a) the revenue tracked by the Borrower at
the “brand contribution level” (see Exhibit E) for the Pagoda
Business for such period, determined in accordance with GAAP and calculated in
a manner consistent with past practice, less (b) the sum of each of
the following operating costs tracked by the Borrower at the “brand
contribution level” for the Pagoda Business for such period, determined in
accordance with GAAP and calculated in a manner consistent with past practice: (i) cost
of merchandise, (ii) cost of repair and related expenses, (iii) cost
of warranty operations, (iv) distribution and inbound freight costs, (v) store
payroll costs, (vi) store rental expense, (vii) shrink expense, (viii) promotional
expense, (ix) direct occupancy costs and (x) other direct costs
(excluding any store impairment  or
extraordinary expenses and any corporate overhead administrative costs
associated with operating such business, whether direct or allocated, or other
non-recurring non-cash charges (excluding (A) any such charge which
consists of or requires an accrual of, or cash reserve for, anticipated cash
charges for any future period, (B) any such non-cash charge in respect of
an item that increased contribution in a prior period (to the extent of such
increase) and (C) any such charge that results from the write-down or
write-off of inventory)) of operating the Pagoda Business, less (c) any
additional expenses recorded by the Company related to the Pagoda Business and
not reflected in the brand contribution level costs, including cost of sales
adjustments to inventory reserves, in order for the costs for such period to be
in compliance with GAAP; provided, however, that there shall be
excluded from Pagoda Store Contribution (to the extent such items would otherwise
be included in accordance with the foregoing) (1) the revenue and expenses
of any Person in which the Borrower or any of its Subsidiaries has a joint
interest except to the extent of any cash dividends actually paid to the
Borrower or its Subsidiaries, (2) the revenue and expenses of any Person
accrued prior to the date it becomes a Subsidiary of the Borrower or any of its
Subsidiaries or is merged into or consolidated with the Borrower or any of its
Subsidiaries or that Person’s assets are acquired by the Borrower or any of its
Subsidiaries and (3) the revenue and expenses of any direct or indirect
Subsidiary of the Borrower that is not a Loan Party or a Zale Insurance
Subsidiary to the extent that, on the date of determination, the declaration or
payment of cash dividends or similar cash distributions by such Subsidiary is
not permitted without any prior approval of any Governmental Authority that has
not been obtained or is not permitted by the operation of the terms of its
Organization Documents or any agreement or other instrument binding upon such
Subsidiary or any law applicable to such Subsidiary, unless such restrictions
with respect to the payment of cash dividends and other similar cash
distributions have been legally and effectively waived.

 

“Participant” has the meaning set
forth in Section 10.06(d).

 

13

 

“Patriot Act” means USA PATRIOT Act
(Title III of Pub. L. 107-56 (signed into law October 26, 2001)).

 

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

 

“Permitted Asset Sales” means sales
and dispositions of assets that are deemed appropriate by the Borrower for fair
market value not to exceed $10,000,000 in any Fiscal Year and for which not
less than 75% of the aggregate purchase price is paid in cash.

 

“Permitted Encumbrances” means:

 

(a) 
Liens imposed by law and prior claims for Taxes that are not yet delinquent for
a period of more than 30 days or that are being contested in compliance with Section 6.04;

 

(b) 
carriers’, warehousemen’s, landlord’s, mechanics’, materialmen’s, repairmen’s
and other like Liens arising in the ordinary course of business and securing
obligations that are not overdue by more than 90 days or are being contested in
good faith by appropriate proceedings;

 

(c) 
pledges and deposits made in the ordinary course of business in compliance with
workers’ compensation, unemployment insurance, old-age pension and other social
security or similar laws or regulations;

 

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

 

(e) 
judgment liens in respect of judgments that do not constitute an Event of
Default under Section 8.01(k); and

 

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

 

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

 

“Permitted Investments” means each of
the following:

 

14

 

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

 

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

 

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

 

(d) 
demand notes issued by a corporation organized and existing under the laws of
the United States of America or any state thereof that at that time of purchase
have a rating of at least “AA” (or its then equivalent) if rated by
S&P or any successor service thereto having a substantially similar rating
system, or its equivalent by at least two nationally recognized rating
services, or an equivalent rating from either Dominion Bond Rating Services
Limited or CBRS, Inc., and have a maturity date that does not exceed one
year beyond the date of purchase;

 

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

 

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

 

15

 

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

 

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

 

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

 

(j) 
other Investments made pursuant to this clause (j) not to exceed
$10,000,000 in the aggregate outstanding at the time any such Investment is
made after giving effect thereto.

 

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

 

“PIK Amounts” has the meaning set
forth in Section 2.05(d).

 

“PIK Election” has the meaning set
forth in Section 2.05(d).

 

“Plan” means any employee pension
benefit plan (other than a Multiemployer Plan) subject to the provisions of
Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA,
and in respect of which the Loan Parties or any ERISA Affiliate is (or, if such
plan were terminated, would under Section 4069 of ERISA be deemed to be)
an “employer” as defined in Section 3(5) of ERISA.

 

“PPSA” means the Personal Property
Security Act of Ontario (or any successor statute) or similar legislation of any
other Canadian jurisdiction, including the Civil Code of Quebec, the laws of
which are required by such legislation to be applied in connection with the
issue, perfection, enforcement, opposability, validity or effect of security
interests or hypothecs.

 

16

 

“Prepayment Event”
means:

 

(a) any sale, transfer or other disposition (including pursuant to
a sale-leaseback transaction or by way of merger or consolidation) of any asset
held by any Loan Party, other than pursuant to Section 7.05(a) through
(e) or (g) through (h), resulting in aggregate Net Proceeds exceeding
$1,000,000 during any Fiscal Year;

 

(b) any casualty or other insured damage to, or any taking under
power of eminent domain or by condemnation, expropriation or similar proceeding
of, any asset held by any Loan Party, resulting in aggregate Net Proceeds
exceeding $1,000,000;

 

(c) any issuance by the Borrower of any Equity Interests of the
Borrower or the receipt by the Borrower of any capital contribution, other than
(i) any issuance of directors’ qualifying shares or of nominal amounts of
other Equity Interests that are required to be held by specified Persons under
applicable law, (ii) any issuance of Equity Interests to directors,
management or employees of the Borrower or any of its Subsidiaries under any
employee stock option or stock purchase plan or other employee or director
benefit plan or agreement and (iii) any issuance of Equity Interests
pursuant to the Warrant Agreement or the Series A Preferred Stock; or

 

(d) the incurrence by any Loan Party of any Indebtedness, other
than any Indebtedness permitted to be incurred under Section 7.01A.

 

“Proceeds of Crime Act” has the
meaning set forth in Section 5.18.

 

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

 

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

 

“Recipient” means, as
applicable, (a) any Person to which any payment on account of any obligation
of a Loan Party under any Loan Document is made or owed, including the
Administrative Agent or any Lender or (b) if any Person described in
clause (a) is treated as a pass-through entity for applicable Tax
purposes, the beneficial owner of such Person.

 

“Register” has the meaning set forth
in Section 10.06(c).

 

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

 

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

 

“Reinsurance Agreement” means all
policies, treaties, binders, slips, other agreements of reinsurance or
retrocession and binding quotations or letters of intent to which a 

 

17

 

Zale Insurance Subsidiary is
a party, as cedant, reinsurer, retrocedant or retrocessionaire (including all
supplements, endorsements and riders thereto and all ancillary agreements in
connection therewith).

 

“Related Parties” means, with respect
to any specified Person, such Person’s Affiliates and the respective directors,
officers, employees, agents and advisors of such Person and such Person’s
Affiliates.

 

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

 

“Required Lenders” means, as of any
date of determination, Lenders holding in the aggregate more than 50% of the
aggregate outstanding principal amount of all Loans; provided, however,
that the portion of the aggregate outstanding principal amount of all Loans
held or deemed held by any Defaulting Lender shall be excluded for purposes of
making a determination of Required Lenders.

 

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

 

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

 

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

 

“SEC” means the United States
Securities and Exchange Commission.

 

“Security Agreement” means the
Security Agreement, dated as of the Closing Date, among the Loan Parties and
the Administrative Agent for the benefit of the Credit Parties, in substantially
the form attached as Exhibit B-1 hereto, as amended and in effect
from time to time.

 

“Security Documents” means,
collectively, the Security Agreement, the Canadian Security Agreement and each
other security agreement or other instrument or document executed and delivered
pursuant to Section 6.13 to secure any of the Obligations.

 

18

 

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

 

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

 

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

 

“Subsidiary” means, with respect to
any Person (the “parent”) at any date, any corporation, limited liability
company, unlimited liability company, partnership, association or other entity
the accounts of which would be consolidated with those of the parent in the
parent’s consolidated financial statements if such financial statements were
prepared in accordance with GAAP as of such date, as well as any other
corporation, limited liability company, partnership, association or other
entity of which securities or other ownership interests representing more than
50% of the equity or more than 50% of the ordinary voting power or, in the case
of a partnership, more than 50% of the general partnership interests are, as of
such date, owned, controlled or held.

 

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

 

“Taxes” means any and all current or
future taxes, levies, imposts, duties, deductions, charges or withholdings
imposed by any Governmental Authority and any interest, charges or related
liabilities thereto.

 

“Termination Date” means the earlier
to occur of (i) the Maturity Date and (ii) the date on which the
maturity of the Loans is accelerated (or deemed accelerated) in accordance with
Article VIII.

 

“Total ABL Debt” means, as of any date
of determination, an amount equal to (a) the principal balance of all
Loans (as defined in the ABL Credit Agreement) outstanding under the Existing
Revolving Credit Facility and (b) the amount of the Letter of Credit
Outstandings (as defined in the ABL Credit Agreement).

 

19

 

“UCC” or “Uniform Commercial Code”
means the Uniform Commercial Code as in effect from time to time in the State
of New York; provided that, if a term is defined in Article 9 of
the Uniform Commercial Code differently than in another Article thereof,
the term shall have the meaning set forth in such Article 9; provided
further that, if by reason of mandatory provisions of law, perfection,
or the effect of perfection or non-perfection, of a security interest in any
Collateral or the availability of any remedy hereunder is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of
New York, “Uniform Commercial Code” means the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof
relating to such perfection or effect of perfection or non-perfection or
availability of such remedy, as the case may be.

 

“Warrant Agreement” means the Warrant
and Registration Rights Agreement, dated as of the Closing Date, by and among
the Borrower and Z Investment Holdings, LLC in its capacity as agent and the
initial warrant holder thereunder.

 

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

 

“Withdrawal Liability” means liability
to a Multiemployer Plan as a result of a complete or partial withdrawal from
such Multiemployer Plan, as such terms are defined in Part I of Subtitle E
of Title IV of ERISA.

 

“Zale Canada Business” means the
business consisting of the Peoples Jewellers and Mappins Jewellers brands and
any line extensions thereof or new brands established as part thereof and
reasonably related thereto.

 

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

 

“Zale Canada Store Contribution”
means, for any period, the amount equal to (a) the revenue tracked by the
Borrower at the “brand contribution level” (see Exhibit E) for the
Zale Canada Business for such period, determined in accordance with GAAP and
calculated in a manner consistent with past practice, less (b) the
sum of each of the following operating costs tracked by the Borrower at the “brand
contribution level” for the Zale Canada Business for such period, determined in
accordance with GAAP and calculated in a manner consistent with past practice: (i) cost
of merchandise, (ii) cost of repair and related expenses, (iii) cost
of warranty operations, (iv) distribution and inbound freight costs, (v) store
payroll costs, (vi) store rental expense, (vii) shrink expense, (viii) promotional
expense, (ix) direct occupancy costs and (x) other direct costs  (excluding any store
impairment or extraordinary expenses and any corporate overhead administrative
costs associated with operating such business, whether direct or allocated, or
other non-recurring non-cash charges (excluding (A) any such charge which
consists of or requires an accrual of, or cash reserve for, anticipated cash
charges for any future period, (B) any such non-cash charge in respect of
an item that increased contribution in a prior period (to the extent of such
increase) and (C) any such charge that results from the write-down or
write-off of inventory)) of operating the Zale Canada Business, less (c) any
additional expenses recorded by the Company related to the Zale Canada Business
and not reflected in the brand contribution level costs, including cost of
sales adjustments to inventory reserves, in order for the costs for such period
to be in compliance with GAAP; provided, however, that there
shall 

 

20

 

be excluded from Zale Canada
Store Contribution (to the extent such items would otherwise be included in
accordance with the foregoing) (1) the revenue and expenses of any Person
in which the Borrower or any of its Subsidiaries has a joint interest except to
the extent of any cash dividends actually paid to the Borrower or its
Subsidiaries, (2) the revenue and expenses of any Person accrued prior to
the date it becomes a Subsidiary of the Borrower or any of its Subsidiaries or
is merged into or consolidated with the Borrower or any of its Subsidiaries or
that Person’s assets are acquired by the Borrower or any of its Subsidiaries
and (3) the revenue and expenses of any direct or indirect Subsidiary of
the Borrower that is not a Loan Party or a Zale Insurance Subsidiary to the
extent that, on the date of determination, the declaration or payment of cash
dividends or similar cash distributions by such Subsidiary is not permitted
without any prior approval of any Governmental Authority that has not been
obtained or is not permitted by the operation of the terms of its Organization
Documents or any agreement or other instrument binding upon such Subsidiary or
any law applicable to such Subsidiary, unless such restrictions with respect to
the payment of cash dividends and other similar cash distributions have been
legally and effectively waived.

 

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

 

SECTION 1.02.  Terms Generally.  The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun
shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and “including”
shall be deemed to be followed by the phrase “without limitation”.  The word “will” shall be construed to have
the same meaning and effect as the word “shall”.  Unless the context requires otherwise (a) any
definition of or reference to any agreement, instrument or other document herein
shall be construed as referring to such agreement, instrument or other document
as from time to time amended, supplemented or otherwise modified (subject to
any restrictions on such amendments, supplements or modifications set forth
herein), (b) any reference herein to any Person shall be construed to
include such Person’s successors and permitted assigns, (c) the words “herein”,
“hereof” and “hereunder”, and words of similar import, shall be construed to
refer to this Agreement in its entirety and not to any particular provision
hereof, (d) all references herein to Articles, Sections, Exhibits and
Schedules shall be construed to refer to Articles and Sections of, and Exhibits
and Schedules to, this Agreement and (e) the words “asset” and “property”
shall be construed to have the same meaning and effect and to refer to any and
all tangible (corporeal) and intangible (incorporeal) assets and properties,
including cash, securities, accounts and contract rights.

 

SECTION 1.03.  Accounting Terms; GAAP.  Except as otherwise expressly provided
herein, all terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time; provided that if
the Borrower notifies the Administrative Agent that the Borrower requests an
amendment to any provision hereof to reflect the effect of any change occurring
after the date hereof in GAAP or in the application thereof on the operation of
such provision (or if the Administrative Agent notifies the Borrower that the
Required Lenders request an amendment to any provision hereof for such
purpose), regardless of whether any such notice is given before or after such
change in GAAP or in the application thereof, then such provision shall be
interpreted on the basis of GAAP as in effect and applied immediately before
such change shall have become effective until such provision shall have been
amended in accordance herewith.

 

21

 

ARTICLE II

 

AMOUNT AND TERMS OF CREDIT

 

SECTION 2.01.  Loans. 
Subject to the terms and conditions set forth herein, each Lender agrees
to make a loan (each such loan, the aggregate principal amount of which as so
increased by any PIK Amount in respect thereof, a “Loan”) to the
Borrower in a single borrowing on the Closing Date in an aggregate principal
amount equal to such Lender’s Commitment.

 

SECTION 2.02.  Borrowing of Loans.  On the Closing Date, upon satisfaction of the
conditions set forth in Section 4.01, the Initial Lender shall promptly
make the total Commitment available to the Borrower in immediately available
funds, in accordance with instructions provided to the Initial Lender by the
Borrower.

 

SECTION 2.03.  Prepayments.

 

(a)  The Borrower may, upon notice to
the Administrative Agent, at any time and from time to time, voluntarily prepay
Loans in whole or in part; provided, however, that (i) such
notice must be received by the Administrative Agent not later than 12:00 noon,
Eastern Standard time, on the date of prepayment; and (ii) any prepayment
of Loans shall be in a principal amount of $1,000,000 or a whole multiple of
$1,000,000 in excess thereof or, if less, the entire principal amount thereof
then outstanding.  Any such voluntary
prepayment shall be subject to a prepayment premium in the amount of (i) with
respect to any voluntary prepayment made on or prior to the first anniversary
of the Closing Date, 10.0% of the amount of such voluntary prepayment, (ii) with
respect to any voluntary prepayment made after the first anniversary of the
Closing Date but on or prior to the second anniversary of the Closing Date,
7.5% of the amount of such voluntary prepayment, (iii) with respect to any
voluntary prepayment made after the second anniversary of the Closing Date but
on or prior to the third anniversary of the Closing Date, 5.0% of the amount of
such voluntary prepayment, (iv) with respect to any voluntary prepayment
made after the third anniversary of the Closing Date but on or prior to the
fourth anniversary of the Closing Date, 2.5% of the amount of such voluntary
prepayment and (v) with respect to any voluntary prepayment made after the
fourth anniversary of the Closing Date but prior to the Maturity Date, 0.0% of
the amount of such voluntary prepayment. 
Each notice of voluntary prepayment shall specify the date and amount of
such prepayment.  The Administrative
Agent will promptly notify each Lender of its receipt of each such notice, and
of the amount of such Lender’s Applicable Percentage of such prepayment.  The prepayment amount specified in such
notice shall be due and payable on the date specified therein; provided,
however, that a notice of prepayment delivered by the Borrower may state
that such notice is conditioned upon the effectiveness of other financing or
another transaction, in which case such notice may be revoked by the Borrower
(by notice to the Administrative Agent on or prior to the specified effective
date and time) if such condition is not satisfied.

 

(b)  In the event and on each occasion
that any Net Proceeds are received by or on behalf of the Borrower or any other
Subsidiary in respect of any Prepayment Event, the Borrower shall, on the day
such Net Proceeds are received (or, in the case of a Prepayment Event described
in clause (a) or (b) of the definition of Prepayment Event, within
three Business Days after such Net Proceeds are received), prepay the Loans in
an amount equal to such Net 

 

22

 

Proceeds, without premium or penalty; provided that (i) in
the case of any Prepayment Event described in clause (c) of the definition
of Prepayment Event (other than any such event consisting of a public offering
and sale of common stock of the Borrower for an amount per share equal to or
greater than $10.00), the applicable prepayment shall be made at the applicable
premium set forth in Section 2.03(a) as if such prepayment was a
voluntary prepayment, (ii) in the case of any Prepayment Event described
in clause (d) of the definition of Prepayment Event, the applicable
prepayment shall be made at the applicable premium set forth in Section 2.03(a) as
if such prepayment was a voluntary prepayment, and (iii) in the case of
any Prepayment Event described in clause (a) or (b) of the
definition of Prepayment Event, if the Borrower shall, prior to the date of the
required prepayment, deliver to the Administrative Agent a certificate of a
Financial Officer of the Borrower to the effect that a Loan Party intends to
cause the Net Proceeds from such event (or a portion thereof specified in such
certificate) to be applied within 180 days after receipt of such Net Proceeds
to acquire assets constituting Collateral that are to be used in the business
of any Loan Party, and certifying that no Default or Event of Default has
occurred and is continuing, then no prepayment shall be required pursuant to
this paragraph in respect of the Net Proceeds from such event (or the portion
of such Net Proceeds specified in such certificate, if applicable) except to
the extent of any such Net Proceeds that have not been so applied by the end of
such 180-day period (or within a period of 90 days thereafter if by the
end of such initial 180-day period any Loan Party shall have entered into an
agreement with a third party to acquire such assets with such Net Proceeds), at
which time a prepayment shall be required in an amount equal to the Net
Proceeds that have not been so applied.

 

(c)  Prior to any mandatory prepayment
of Loans pursuant to Section 2.03(b), the Borrower shall notify the
Administrative Agent, (i) not later 12:00 noon, Eastern Standard time,
three Business Days before the date of a mandatory prepayment in the case of
any event described in clause (c) or (d) of the definition of
Prepayment Event and (ii) not later than 12:00 noon, Eastern Standard
time, two Business Days before the date of any other mandatory prepayment.  Each such notice shall specify the date and
amount of such mandatory prepayment.  The
Administrative Agent will promptly notify each Lender of its receipt of each
such notice, and of the amount of such Lender’s Applicable Percentage of such
mandatory prepayment.  In the event of
any mandatory prepayment, other than as a result of an event described in
clause (c) of the definition of Prepayment Event consisting of a
public offering and sale of common stock of the Borrower for an amount per
share equal to or greater than $10.00, any Lender may elect, by notice to the
Administrative Agent by telephone (confirmed by hand or telecopier) at least
one Business Day prior to such prepayment, to decline all or any portion of any
such mandatory prepayment.

 

(d)  Any optional or mandatory
prepayment of a Loan under this Section 2.03 shall be accompanied by all
accrued interest on the amount prepaid. 
Each such prepayment shall be applied to the Loans of the Lenders in accordance
with their respective Applicable Percentages.

 

SECTION 2.04.  Repayment of Loans.  The Borrower shall pay to the Administrative
Agent, for the account of the Lenders, on the Termination Date, the aggregate
principal amount of Loans outstanding on such date.  Once repaid or prepaid, Loans may not be
reborrowed.

 

23

 

SECTION 2.05.  Interest.

 

(a)  Subject to the provisions of Section 2.05(b),
each Loan shall bear interest on the outstanding principal amount thereof at a
rate per annum equal to 15.0%.

 

(b)  If any Event of Default exists,
then the Administrative Agent may, and upon the request of the Required Lenders
shall, notify the Borrower that all outstanding Loans shall thereafter bear
interest at a per annum rate equal to the Default Rate to the fullest extent
permitted by applicable law for so long as such Event of Default is
continuing.  Accrued and unpaid interest
on past due amounts (including interest on past due interest to the fullest
extent permitted by applicable law) shall be due and payable upon demand.

 

(c)  Subject to Section 2.05(b),
interest on each Loan shall be due and payable in arrears on each Interest
Payment Date and at such other times as may be specified herein. Interest
hereunder shall be due and payable in accordance with the terms hereof before
and after judgment, and before and after the commencement of any proceeding
under any Debtor Relief Law.

 

(d)  With respect to each Interest
Payment Date (other than the Maturity Date), so long as no Event of Default has
occurred and is continuing, the Borrower may elect to (i) pay all interest
due on such date in cash or (ii) pay up to 33.3% of the interest due on
such date by adding such interest to the principal amount of the outstanding
Loans and the remaining portion of the interest in cash (such election, a “PIK
Election”, and such interest added to the principal amount of the
outstanding Loans, the “PIK Amounts”). 
The Borrower will give notice of such election to the Administrative
Agent at least three Business Days prior to the applicable Interest
Payment Date; provided, however, that in the event no such notice
is given to the Administrative Agent, so long as no Event of Default has
occurred and is continuing, the Borrower shall be deemed to have made a PIK
Election with respect to 33.3% of the interest due on such Interest Payment
Date, and such amount will be deemed a PIK Amount as set forth above.

 

SECTION 2.06.  Computation of Interest.  All computations of interest shall be made on
the basis of a 365-day (or 366-day, in the case of a leap year) year and actual
days elapsed.  Interest shall accrue on
each Loan for the day on which the Loan is made, and shall not accrue on a
Loan, or any portion thereof, for the day on which the Loan or such portion is
paid.

 

SECTION 2.07.  Evidence of Debt.  The Loans made by each Lender shall be
evidenced by one or more accounts or records maintained by the Administrative
Agent.  In addition, each Lender may
record in such Lender’s internal records an appropriate notation evidencing the
date and amount of each Loan from such Lender, each payment of principal of any
such Loan and each payment of interest, fees and other amounts in connection
with the Loans due such Lender.  The
accounts or records maintained by the Administrative Agent and each Lender
shall be conclusive evidence (absent error which can be demonstrated by the
Borrower) of the amount of the Loans made by any such Lender to the Borrower
and the interest and payments thereon. 
Any failure to so record or any error in doing so shall not, however,
limit or otherwise affect the obligation of the Borrower hereunder to pay any
amount owing with respect to the Loans. In the event of any conflict between
the accounts and records maintained by any Lender and the accounts and records
of the Administrative Agent in respect of such matters, the accounts and records
of the Administrative 

 

24

 

Agent shall control in the absence of manifest error.  Upon the request of any Lender made through
the Administrative Agent (who shall notify the Borrower), the Borrower shall
execute and deliver to such Lender (through the Administrative Agent) a Note,
which shall evidence such Lender’s Loans in addition to such accounts or
records.  Each Lender may attach
schedules to its Note and endorse thereon the date, amount and maturity of its
Loans and payments with respect thereto. Any failure to so attach or endorse,
or any error in doing so, shall not, however, limit or otherwise affect the
obligation of the Borrower hereunder to pay any amount owing with respect to
the Loans. Upon receipt of an affidavit and indemnity of a Lender as to the
loss, theft, destruction or mutilation of such Lender’s Note and upon
cancellation of such Note, the Borrower will issue, in lieu thereof, a
replacement Note in favor of such Lender, in the same principal amount thereof
and otherwise of like tenor, at such Lender’s expense.

 

SECTION 2.08.  Payments Generally; Administrative Agent’s
Clawback.

 

(a)  All payments to be made by the
Borrower shall be made without condition or deduction for any counterclaim,
defense, recoupment or setoff.  Except as
otherwise expressly provided herein, all payments by the Borrower hereunder
shall be made to the Administrative Agent, for the account of the respective
Lenders to which such payment is owed, at the Administrative Agent’s Office in
Dollars and in immediately available funds not later than 2:00 p.m.,
Eastern Standard time, on the date specified herein.  The Administrative Agent will promptly
distribute to each Lender its Applicable Percentage (or other applicable share
as provided herein) of such payment in like funds as received by wire transfer
to such Lender’s Lending Office.  All
payments received by the Administrative Agent after 2:00 p.m., Eastern
Standard time, shall be deemed received on the next succeeding Business Day and
any applicable interest shall continue to accrue.  If any payment to be made by the Borrower
shall come due on a day other than a Business Day, payment shall be made either
(i) on the next following Business Day, and such extension of time shall
be reflected in computing interest or (ii) on the immediately preceding
Business Day; provided that in no event will such payment constitute a
prepayment under Section 2.03.

 

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

 

(c)  Nothing herein shall be deemed to
obligate any Lender to obtain the funds for any Loan in any particular place or
manner or to constitute a representation by any Lender that it has obtained or
will obtain the funds for any Loan in any particular place or manner.

 

25

 

SECTION 2.09.  Sharing of Payments by Lenders.  If any Lender shall, by exercising any right
of setoff or counterclaim, obtain payment in respect of any principal of or
interest on any of the Loans made by it resulting in such Lender receiving
payment of a proportion of the aggregate amount of such Loans and accrued
interest thereon greater than its pro rata share thereof as provided herein,
then the Lender receiving such greater proportion shall (a) notify the
Administrative Agent of such fact and (b) purchase (for cash at face
value) participations in the Loans of the other Lenders, or make such other
adjustments as shall be equitable, so that the benefit of all such payments
shall be shared by the Lenders ratably; provided, however, that:

 

(i) if
any such participations or sub-participations are purchased and all or any
portion of the payment giving rise thereto is recovered, such participations or
sub-participations shall be rescinded and the purchase price restored to the
extent of such recovery, without interest; and

 

(ii) the
provisions of this Section shall not be construed to apply to (x) any
payment made by any Loan Party pursuant to and in accordance with the express
terms of this Agreement or (y) any payment obtained by a Lender as
consideration for the assignment of or sale of a participation in any of its
Loans to any assignee or Participant as permitted hereby (it being understood
that the provisions of this Section shall be deemed to apply to an
assignment to the Borrower or any of its Subsidiaries).

 

The Borrower consents to the foregoing and
agrees, to the extent that it may effectively do so under applicable law, that
any Lender acquiring a participation pursuant to the foregoing arrangements may
exercise against the Borrower rights of setoff and counterclaim with respect to
such participation as fully as if such Lender were a direct creditor of the
Borrower in the amount of such participation.

 

SECTION 2.10.  Term Reserve.  The Administrative Agent agrees that if
Excess Availability (as defined in the Existing Revolving Credit Facility as in
effect on the date hereof) exceeds $75,000,000 for five consecutive Business
Days at any time while the Term Reserve (as defined in the Intercreditor
Agreement) is in effect, the Borrower and the ABL Agent (as defined in the
Intercreditor Agreement) may eliminate the Term Reserve (subject to the
Administrative Agent’s right to request that the Term Reserve be imposed on
subsequent occasions if permitted by the Intercreditor Agreement); provided
that the Borrower shall give prompt notice to the Administrative Agent of such
elimination.

 

ARTICLE III

 

TAXES, YIELD PROTECTION AND ILLEGALITY

 

SECTION 3.01.  Taxes.

 

(a)  Any and all payments by or on
account of any obligation of the Borrower hereunder or under any other Loan Document
shall be made free and clear of and without 

 

26

 

reduction or withholding for any Indemnified Taxes; provided, however,
that if the Borrower shall be required by applicable law to withhold or deduct any
Taxes from such payments, then (i) the Borrower shall make such
deductions; (ii) the Borrower shall pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable law; and (iii) if
such Taxes are Indemnified Taxes, the sum payable shall be increased as
necessary so that after making all required withholdings or deductions for such
Indemnified Taxes (including withholdings or deductions applicable to
additional sums payable under this Section 3.01(a)), the Administrative
Agent or Lender, as the case may be, receives an amount equal to the sum it
would have received had no such withholdings or deductions for such Indemnified
Taxes been made (the “Gross-Up Payment”).  Notwithstanding the foregoing, neither the
Borrower nor any Loan Party shall be obligated to make any portion of the
Gross-Up Payment that is (A) governed by Section 3.01(i) or (B) attributable
to the Administrative Agent’s or any such Lender’s own willful misconduct or
gross negligence.

 

(b)  Without limiting or duplicating the
provisions of subsection (a) above, the Borrower shall pay any Other Taxes
to the relevant Governmental Authority in accordance with applicable law.

 

(c)  The Borrower shall indemnify the
Administrative Agent and each Lender, within 10 Business Days after
written demand therefor, for the full amount of any Indemnified Taxes
(including Indemnified Taxes imposed or asserted on or attributable to amounts
payable under this Section 3.01) paid by the Administrative Agent or such
Lender, as the case may be, on or with respect to any assessment of Indemnified
Taxes imposed or asserted on or attributable to amounts payable under this Section (other
than such penalties or interest arising through the gross negligence or willful
misconduct of the Administrative Agent or such Lender from and against which
the responsible party shall indemnify the Borrower), unless the Borrower, in
good faith, asserts manifest error.  A
certificate as to the amount of such payment or liability delivered to the
Borrower by a Lender or by the Administrative Agent on its own behalf or on
behalf of a Lender setting forth in reasonable detail the manner in which such
amount was determined shall be conclusive absent manifest error.

 

(d)  As soon as practicable after any
payment of Indemnified Taxes by the Borrower to a Governmental Authority, the
Borrower shall deliver to the Administrative Agent the original or a certified
copy of a receipt issued by such Governmental Authority evidencing such payment
or other reasonable documentation evidencing such payment.

 

(e)  Any Recipient that is entitled to
an exemption from, or reduction of, withholding tax under the law of the
jurisdiction in which the Borrower is resident for tax purposes, or any treaty
to which such jurisdiction is a party, with respect to payments hereunder or
under any other Loan Document shall not be entitled to the Gross-Up Payment
unless and until such Recipient delivers to the Borrower (with a copy to the
Administrative Agent), such properly completed and executed documentation
prescribed by applicable law as will permit such payments to be made without
withholding or at a reduced rate of withholding. In addition, any Recipient, if
requested by the Borrower or the Administrative Agent, shall deliver such other
documentation prescribed by applicable law or reasonably requested by the
Borrower or the Administrative Agent as will enable the Borrower or the
Administrative Agent to determine whether or not such Recipient is subject to
backup withholding or information reporting 

 

27

 

requirements. Furthermore, each Recipient shall provide new forms (or
successor forms) upon the expiration or obsolescence of any previously
delivered forms and promptly notify the Administrative Agent of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.

 

(f)  Without limiting the provisions of Section 3.01(e) or
the provisions of any other Loan Document, any Recipient that is entitled to an
exemption from, or reduction of, United States withholding tax shall deliver to
the Borrower and the Administrative Agent in such number of copies as shall be
requested by the recipient on or prior to the date on which such Recipient
becomes a Recipient under this Agreement (and from time to time thereafter upon
the request of the Borrower or the Administrative Agent), whichever of the
following is applicable:

 

(i) in
the case of a Recipient claiming the benefits of an income tax treaty to which
the United States of America is a party, (A) with respect to payments of
interest under this Agreement or any Loan Document, IRS Form W-8BEN
establishing an exemption from, or reduction of, U.S. Federal withholding Tax
pursuant to the “interest” article of such tax treaty and (B) with respect
to all other payments under this Agreement or any Loan Document, IRS Form W-8BEN
establishing an exemption from U.S. Federal withholding Tax pursuant to the “business
profits” or “other income” article of such tax treaty;

 

(ii) in
the case of a Recipient for whom payments under this Agreement or any Loan
Document constitute income that is effectively connected with such Recipient’s
conduct of a trade or business in the United States, duly completed copies of
IRS Form W-8ECI;

 

(iii) to
the extent a Recipient is not a U.S. person within the meaning of section
7701(a)(30) of the Code and is not the beneficial owner of payments made under
this Agreement or any Loan Document (for example, where such Recipient is a
non-U.S. partnership), (A) an IRS Form W-8IMY on behalf of itself and
(B) the relevant forms prescribed in clauses (i), (ii), (iv), (v) and
(vi) of this Section 3.01(f) that would be required of each such
beneficial owner if such beneficial owner were a Recipient;

 

(iv) in
the case of a Recipient that is entitled to claim the benefits of the exemption
for portfolio interest under section 881(c) of the Code, (x) a
statement of such Recipient, signed under penalty of perjury, to the effect
that such Recipient is not (A) a “bank” within the meaning of section
881(c)(3)(A) of the Code, (B) a “10 percent shareholder” of the
Borrower within the meaning of section 881(c)(3)(B) of the Code, or (C) a
“controlled foreign corporation” described in section 881(c)(3)(C) of the
Code; and (y) duly completed copies of IRS Form W-8BEN or Form W-8IMY
(with proper attachments);

 

(v) in
the case of a Recipient that is a U.S. person within the meaning of section
7701(a)(30) of the Code, duly completed copies of IRS Form W-9; or

 

(vi) any
other form prescribed by applicable law as a basis for claiming exemption from
or a reduction of a United States Federal withholding tax, duly completed,
together 

 

28

 

with, such supplementary
documentation as may be prescribed by applicable law to permit the Borrower to
determine the withholding or deduction required to be made.

 

(g)  Without limiting the provisions of Section 3.01(e) or
the provisions of any other Loan Document, any Recipient that is entitled to
claim an exemption from, or reduction of, withholding tax in a jurisdiction
other than the United States agrees with and in favor of the Administrative
Agent and the Borrower to deliver to the Administrative Agent and the Borrower
(or any other applicable payor) any such form or forms as may be required under
the laws of such jurisdiction as a condition to exemption from, or reduction
of, any non-United States withholding or backup withholding tax before
receiving the Gross-Up Payment.

 

(h)  Notwithstanding anything to the
contrary contained herein or in any Loan Document, if a Lender sells, assigns,
grants a participation in or otherwise transfers all or part of the Obligations
of the Loan Parties to such Lender, such Lender agrees to notify the
Administrative Agent of the percentage amount in which it is no longer the
beneficial owner of Obligations of the Loan Parties to such Lender. To the
extent of such percentage amount, the Administrative Agent and the Borrower
will treat such Lender’s documentation provided pursuant to subsection (e), (f) or
(g) of this Section 3.01 as no longer valid.  Neither the Borrower nor any other Loan Party
shall make any greater payments pursuant to this Section 3.01 (including
any Gross-Up Payment) as a consequence of (i) such sale, assignment,
participation or transfer or (ii) any change by a Lender of its designated
lending branch.

 

(i)  If the IRS or any other
Governmental Authority of the United States or other jurisdiction asserts a
claim that the Administrative Agent or any Loan Party did not properly withhold
Tax from amounts paid to or for the account of any Recipient due to a failure
on the part of such Recipient (including, because the appropriate form was not
delivered, was not properly executed, or because such Recipient failed to
notify the Administrative Agent or any Loan Party of a change in circumstances
which rendered the exemption from, or reduction of, withholding Tax
ineffective, or for any other reason), such Recipient shall indemnify and hold
the Administrative Agent and any Loan Party, as applicable, harmless for all
amounts paid, directly or indirectly, by the Administrative Agent or applicable
Loan Party, as Tax or otherwise, including penalties and interest, and
including any Taxes imposed by any jurisdiction on the amounts payable under
this Section 3.01, together with all costs and expenses (including
attorneys fees and expenses).  The
obligation of the Recipients under this subsection shall survive the payment of
all Obligations and the resignation or replacement of the Administrative Agent.

 

(j)  If a Recipient is entitled to a
reduction with respect to any Indemnified Taxes, the Administrative Agent or
the Borrower may withhold from any payment to such Recipient an amount
equivalent to the applicable Indemnified Tax after taking into account such
reduction. If the forms or other documentation required by subsection (e), (f) or
(g) of this Section 3.01, as applicable, are not delivered to the
Administrative Agent or the Borrower, then the Administrative Agent or the
Borrower, as applicable, may withhold from any payment to such Recipient not
providing such forms or other documentation an amount equivalent to the
applicable reduction in Indemnified Tax.

 

29

 

(k)  If any Recipient determines, in its
sole discretion and acting in good faith, that it has received a refund of any
Taxes as to which it has been indemnified by the Borrower or any other Loan
Party or with respect to which the Borrower or any other Loan Party has paid
additional amounts pursuant to this Section 3.01 (including the Gross-Up
Payment) or Section 3.02, it shall pay to the Borrower or such other Loan
Party an amount equal to such refund (but only to the extent of indemnity
payments made, or additional amounts paid, by the Borrower or any other Loan
Party under this Section 3.01 or Section 3.02 with respect to the
Taxes giving rise to such refund), net of all out-of-pocket expenses incurred
in connection with such refund of the applicable Recipient, and without
interest (other than any interest paid by the relevant Governmental Authority
with respect to such refund); provided, however, that the
Borrower or any other Loan Party, upon the request of the applicable Recipient,
agrees to repay the amount paid over to the Borrower or the applicable Loan
Party (plus any penalties, interest or other charges imposed by the relevant
Governmental Authority, other than such penalties, interest or other charges
imposed as a result of the willful misconduct or gross negligence of such
Recipient hereunder) to the applicable Recipient in the event that such
Recipient is required to repay such refund to such Governmental Authority.  This subsection shall not be construed to
require any Recipient to make available its tax returns (or any other
information relating to its taxes that it deems confidential) to the Borrower
or any other Person.  Notwithstanding the
foregoing, upon the reasonable request of the Borrower or any other Loan Party,
a Recipient, shall in its sole discretion, exercised in good faith, use
reasonable efforts to cooperate with the Borrower or the applicable Loan Party
with a view to obtaining a refund of any Taxes with respect to which the
Borrower or the applicable Loan Party has paid any additional amounts pursuant
to this Section 3.01 or Section 3.02 and which the Borrower or the
applicable Loan Party reasonably believes were not correctly or legally
asserted by the relevant Governmental Authority.

 

(l)  The Lenders (including any
successors or assigns thereof) shall severally indemnify the Administrative
Agent, the Borrower or any Loan Party, as applicable, for the full amount of
any Excluded Taxes payable by such payor with respect to this Agreement, any
Loan Document or any payment by the Borrower or any Loan Party under this
Agreement and any Loan Document, plus any reasonable expenses arising therefrom
or with respect thereto, whether or not such Excluded Taxes were correctly
imposed by the relevant Governmental Authority, except to the extent that any
such amount or payment is determined by a court of competent jurisdiction by
final and nonappealable judgment to have resulted from the gross negligence or
willful misconduct of such Administrative Agent.  The indemnity under this paragraph (l) shall
be paid within 10 days after the applicable payor delivers to the applicable
Lender a certificate stating the amount of Excluded Taxes so payable by the
Administrative Agent, the Borrower or any other Loan Party.  Such certificate shall be conclusive of the
amount so payable absent manifest error.

 

SECTION 3.02.  Increased Costs.

 

(a)  If any Change in Law shall:

 

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

 

30

 

(ii) subject
any Lender to any Tax of any kind whatsoever with respect to this Agreement, or
change the basis of taxation of payments to such Lender in respect hereof (in
each case, except for Taxes imposed by way of withholding or deduction,
Indemnified Taxes, Other Taxes and amounts relating to the foregoing, which
shall be governed solely and exclusively by Section 3.01, and the
imposition of, or any change in the rate of, any Excluded Tax payable by such
Lender);

 

and the result of any of the foregoing shall
be to reduce the amount of any sum received or receivable by such Lender
hereunder (whether of principal, interest or any other amount), then, upon
request of such Lender and delivery of the certificate contemplated by Section 3.02(c),
the Borrower will pay to such Lender, within 10 days following receipt of
such certificate by the Borrower, such additional amount or amounts as will
compensate such Lender for such additional costs incurred or reduction
suffered.

 

(b)  If any Lender determines that any
Change in Law affecting such Lender or any Lending Office of such Lender or
such Lender’s holding company, if any, regarding capital requirements has had,
or would have, the effect of reducing the rate of return on such Lender’s
capital or on the capital of such Lender’s holding company, if any, as a
consequence of this Agreement, the Commitments of such Lender or the Loans made
by such Lender, to a level below that which such Lender or such Lender’s
holding company could have achieved but for such Change in Law (taking into
consideration such Lender’s policies and the policies of such Lender’s holding
company with respect to capital adequacy), then from time to time upon prior
written notice to the Borrower no less than five days prior to delivery of the
certificate contemplated by Section 3.02(c), plus delivery of such
certificate, the Borrower will pay to such Lender or such Lender’s holding
company, as the case may be, within 10 days following receipt of such
certificate by the Borrower, such additional amount or amounts as will
compensate such Lender or such Lender’s holding company, as the case may be,
for any such reduction suffered.

 

(c)  A certificate of a Lender setting
forth the amount or amounts necessary to compensate such Lender or its holding
company, as the case may be, and the method for calculating such amount or
amounts, as specified in subsection (a) or (b) of this Section 3.02
and delivered to the Borrower, shall be conclusive absent manifest error.  The Borrower shall pay such Lender the amount
shown as due on any such certificate within 10 days after receipt thereof.

 

(d)  Failure or delay on the part of any
Lender to demand compensation pursuant to the foregoing provisions of this Section 3.02
shall not constitute a waiver of such Lender’s right to demand such
compensation; provided, however, that the Borrower shall not be
required to compensate a Lender pursuant to the foregoing provisions of this Section 3.02
for any increased costs incurred or reductions suffered more than six months
prior to the date that such Lender notifies the Borrower of the Change in Law
giving rise to such increased costs or reductions and of such Lender’s
intention to claim compensation therefor (except that, if the Change in Law
giving rise to such increased costs or reductions is retroactive, then the six
month period referred to above shall be extended to include the period of
retroactive effect thereof).

 

31

 

SECTION 3.03.  Mitigation Obligations; Replacement of
Lenders.

 

(a)  If any Lender requests compensation
under Section 3.02, or the Borrower is required to pay any additional
amount to any Lender or any Governmental Authority for the account of any
Lender pursuant to Section 3.01, then such Lender shall use reasonable
best efforts to designate a different Lending Office for funding or booking its
Loans hereunder or to assign its rights and obligations hereunder to another of
its offices, branches or affiliates, if, in the reasonable judgment of such
Lender, such designation or assignment (i) would eliminate or reduce
amounts payable pursuant to Section 3.01 or Section 3.02, as the case
may be, in the future; and (ii) in each case, would not subject such
Lender to any material unreimbursed cost or expense and would not otherwise be
materially disadvantageous to such Lender. 
The Borrower hereby agrees to pay all reasonable costs and expenses
incurred by any Lender in connection with any such designation or assignment; provided,
however, that the Borrower shall not be liable for such costs and
expenses of a Lender requesting compensation if (i) such Lender becomes a
party to this Agreement on a date after the Closing Date and (ii) the
relevant Change in Law occurs on a date prior to the date such Lender becomes a
party hereto.

 

(b)  If any Lender requests compensation
under Section 3.02, or if the Borrower is required to pay any additional
amount to any Lender or any Governmental Authority for the account of any
Lender pursuant to Section 3.01, the Borrower may replace such Lender in
accordance with Section 10.12.

 

SECTION 3.04.  Survival.  All of the Borrower’s obligations under this Article III
shall survive repayment of all other Obligations hereunder.

 

ARTICLE IV

 

CONDITIONS

 

SECTION 4.01.  Conditions to Loan.  The obligation of the Lenders to make the
Loans hereunder is subject to satisfaction of the following conditions
precedent on the Closing Date (or the waiver thereof in accordance with Section 10.01):

 

(a)  The Administrative Agent’s receipt
of the following, each of which shall be originals or telecopies or other
electronic image scan transmission (e.g., “pdf” or “tif” via e-mail followed
promptly by originals) unless otherwise specified, and each properly executed
by a Responsible Officer of the signing Loan Party (if applicable):

 

(i) executed
counterparts of this Agreement;

 

(ii) a
Note executed by the Borrower in favor of each Lender that has requested a Note
at least two Business Days in advance of the Closing Date;

 

(iii) such
certificates of resolutions or other action, incumbency certificates and/or
other certificates of Responsible Officers of each Loan Party evidencing (A) the
authority of such Loan Party to enter into this Agreement and the other 

 

32

 

Loan Documents to which it
is a party (including approvals by the board of directors or similar governing
body of such Loan Party) and (B) the identity, authority and capacity of
each Responsible Officer thereof authorized to act as a Responsible Officer in
connection with this Agreement and the other Loan Documents to which such Loan
Party is a party;

 

(iv) certified
copies of each Loan Party’s Organization Documents and a certificate of good
standing (where applicable, or such other customary functionally equivalent
certificates or abstracts, to the extent available in the applicable
jurisdiction) of such Loan Party’s jurisdiction of organization and each
jurisdiction where if not obtained would reasonably be expected to have a
Material Adverse Effect;

 

(v) a
favorable opinion of (A) Cravath, Swaine & Moore LLP, special
counsel to the Borrower, addressed to the Administrative Agent and each Lender,
as to customary matters relating to the Loan Documents as the Administrative
Agent may reasonably request, (B) Troutman Sanders LLP, counsel for the
Borrower, addressed to the Administrative Agent and each Lender, as to the
absence of a conflict with Material Indebtedness of the Loan Parties and such
other customary matters as the Administrative Agent may reasonably request, (C) Stikeman
Elliott LLP, Canadian counsel to the Loan Parties, addressed to the
Administrative Agent and each Lender, as to customary matters relating to the
Loan Documents as the Administrative Agent may reasonably request, (D) Goldman
Antonetti & Córdova, P.S.C., Puerto Rican counsel to the Loan Parties,
addressed to the Administrative Agent and each Lender, as to customary matters
relating to the Loan Documents as the Administrative Agent may reasonably
request and (E) local counsel to the Loan Parties in the Canadian
provinces and territories in which the Loan Parties maintain any tangible personal
property, addressed to the Administrative Agent and each Lender, as to
customary matters relating to the Loan Documents as the Administrative Agent
may reasonably request;

 

(vi) a
certificate signed by a Responsible Officer of the Borrower certifying that, as
of the Closing Date after giving effect to the transactions contemplated
hereby, the Borrower and its Subsidiaries on a consolidated basis are Solvent;

 

(vii) all
Uniform Commercial Code and PPSA and PRUCC financing statements required by law
to create or perfect the Liens intended to be created under the Security
Documents, in a form ready for filing;

 

(viii) the
Security Documents set forth on Schedule 4.01(a)(viii) hereto,
each duly executed by the applicable Loan Parties;

 

(ix) all
other Loan Documents set forth on Schedule 4.01(a)(ix) hereto,
each duly executed by the applicable Loan Parties;

 

33

 

(x) a
certificate signed by a Responsible Officer of the Borrower confirming that
borrowing, guaranteeing or securing, as appropriate, the Obligations in the
manner contemplated by this Agreement and the other Loan Documents executed on
the Closing Date does not cause any borrowing, guarantee, security or similar
limit binding on any Loan Party to be exceeded; and

 

(xi)
results of UCC, PPSA, Bank Act (Canada), Bankruptcy and Insolvency Act
(Canada), tax lien and judgment searches, intellectual property searches or
other evidence reasonably satisfactory to the Administrative Agent (in each
case dated as of a date reasonably close to the Closing Date) indicating the
absence of Liens on the assets of the Loan Parties, except for Permitted
Encumbrances and other Liens permitted under Section 7.02 and Liens
for which termination statements and releases or estoppel letters are being
tendered concurrently with such extension of credit or other arrangements
reasonably satisfactory to the Administrative Agent for the delivery of such
termination statements and releases or estoppel letters have been made;

 

(xii)
the financial statements set forth in Section 5.04;

 

(xiii)
certificates (if any) representing the shares of Equity Interests pledged
pursuant to the Security Agreement, together with an undated stock power for
each such certificate executed in blank;

 

(xiv)
insurance certificates satisfying the requirements of Section 6.06; and

 

(xv)
such other items, documents, instruments or agreements as may be reasonably required
by the Administrative Agent.

 

(b)  The Administrative Agent shall have
received an amendment and restatement of the Existing Revolving Credit Facility
in form and substance reasonably acceptable to the Administrative Agent and the
Intercreditor Agreement shall have been executed and in full force and effect
in form and substance reasonably satisfactory to the Administrative Agent.

 

(c)  There shall exist no action, suit,
investigation, litigation or proceeding pending or, to the knowledge of the
Borrower, threatened that (i) would reasonably be expected to (A) have
a Material Adverse Effect, (B) adversely affect the ability of the Loan
Parties to perform their obligations under the Loan Documents in any material
respect or (C) adversely affect the rights and remedies of the
Administrative Agent and the Lenders under the Loan Documents in any material
respect; or (ii) purports to adversely affect in any material respect the
financing of the Loans or prevent the anticipated use of the proceeds thereof.

 

(d)  The Administrative Agent shall have
received copies of all documents and agreements executed by the Loan Parties
pursuant to the Warrant Agreement with respect to the Warrants, each in form
and substance reasonably acceptable to the Administrative Agent, and the
Borrower shall have issued the Warrants to the Administrative Agent (in its
capacity as the initial warrant holder under the Warrant Agreement).

 

34

 

(e)  The board of directors of the
Borrower shall have granted all necessary approvals under the Borrower’s
Organization Documents and the Delaware General Corporation Law with respect to
the issuance and exercise of the Warrants, subject to any required stockholder
approval.

 

(f)  Two vacancies on the board of
directors of the Borrower shall have been filled by nominees of Z Investment
Holdings, LLC in its capacity as initial warrant holder under the Warrant
Agreement.

 

(g)  All necessary governmental and
material third party consents and approvals to the transactions contemplated by
this Agreement to occur on the Closing Date shall have been obtained.

 

(h)  All fees and expenses required to
be paid by the Borrower to the Administrative Agent on or before the Closing
Date shall have been paid in full, and all expenses required to be paid by the
Borrower to the Lenders on or before the Closing Date shall have been paid in
full.

 

(i)  The Administrative Agent shall have
received all documentation and other information requested by the
Administrative Agent in order to conduct any legally-required background checks
and other investigations to ensure compliance with the Patriot Act, the
Proceeds of Crime Act and anti-money laundering laws.

 

(j)  The representations and warranties
of the Borrower contained in Article V hereof and the representations and
warranties contained in any other Loan Document shall be true and correct in
all material respects on and as of the Closing Date and the Administrative
Agent shall have received a certification thereof by a Responsible Officer of
the Borrower.

 

(k)  No Default shall exist on the
Closing Date, and the Administrative Agent shall have received a certification
thereof by a Responsible Officer of the Borrower.

 

(l)  No Loan Party shall be a party to
any binding agreement to dispose of Collateral having a fair market value in
excess of $5,000,000 outside of the ordinary course of business.

 

ARTICLE V

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower represents and warrants to the
Administrative Agent and the Lenders as of the Closing Date that:

 

SECTION 5.01.  Organization; Powers.  Each Loan Party is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, and each such Person has all requisite power and authority to carry
on its business as now conducted and, except where the failure to do so,
individually or in the aggregate, would not reasonably be expected to result 

 

35

 

in a Material Adverse Effect, is qualified to do business in, and is in
good standing in, every jurisdiction where such qualification is required.

 

SECTION 5.02.  Authorization; Enforceability.  The transactions contemplated hereby and by
the other Loan Documents to be entered into by each Loan Party are within such
Loan Party’s corporate, limited liability company or partnership powers and
have been duly authorized by all necessary corporate or organizational, and, if
required, stockholder action.  This
Agreement has been duly executed and delivered by each Loan Party that is a
party hereto and constitutes, and each other Loan Document to which any Loan
Party is a party, when executed and delivered by such Loan Party, will
constitute, a legal, valid and binding obligation of such Loan Party, enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors’ rights generally
and subject to general principles of equity, regardless of whether considered
in a proceeding in equity or at law.

 

SECTION 5.03.  Governmental Approvals; No Conflicts.  The transactions contemplated by the Loan
Documents (a) do not require any consent or approval of, registration or
filing with, or any other action by, any Governmental Authority, except (i) for
such as have been obtained or made and are in full force and effect; (ii) for
those the failure of which to obtain would not reasonably be expected to have a
Material Adverse Effect; and (iii) for filings and recordings necessary to
perfect Liens created under the Loan Documents; (b) will not violate any
applicable law or regulation or the Organization Documents of any Loan Party or
any order of any Governmental Authority, except for any such violation which
would not reasonably be expected to have a Material Adverse Effect; (c) will
not violate or result in a default under the Existing Revolving Credit Facility
or any other indenture, agreement (including any Material Contract) or other
instrument binding upon any Loan Party or its assets or give rise to a right
thereunder to require any payment to be made by any Loan Party or any of its
Subsidiaries, except for any such violation or default which would not
reasonably be expected to have a Material Adverse Effect; and (d) will not
result in the creation or imposition of any Lien on any asset of any Loan
Party, except Liens created under the Loan Documents or otherwise permitted
thereby.

 

SECTION 5.04.  Financial Condition.  (a)  There have been furnished to each
of the Lenders (i) consolidated balance sheets of the Borrower and its
Subsidiaries as of July 31, 2009, and a consolidated statement of
operations and consolidated statement of cash flow of the Borrower and its
Subsidiaries for the Fiscal Year then ended, certified by Ernst &
Young LLP; and (ii) an unaudited consolidated balance sheet of the
Borrower and its Subsidiaries as of January 31, 2010, and an unaudited
consolidated statement of operations and consolidated statement of cash flow of
the Borrower and its Subsidiaries for the period of two Fiscal Quarters then
ended.  Such balance sheets, statements
of operations and statements of cash flow have been prepared in accordance with
GAAP and fairly present in all material respects the financial condition of the
Borrower and its Subsidiaries as at the close of business on the dates thereof
and the results of operations for the periods then ended, subject, in the case
of such unaudited consolidated balance sheet, unaudited consolidated statement
of operations and unaudited consolidated statement of cash flow, to year-end
adjustments, and except for the absence of notes to such financial
statements.  There are no contingent
liabilities that are likely to become fixed obligations of the Borrower or any
of its Subsidiaries as of such dates involving material amounts, known to the
Financial Officers of the Borrower, which were not disclosed in such balance
sheets and the notes related thereto.

 

36

 

(b)  The projected consolidated balance
sheets and cash flow statements of the Borrower and its Subsidiaries for the
2010 and 2011 Fiscal Years, copies of which have been delivered to each Lender,
have been prepared in good faith, are based upon estimates and assumptions
which the Borrower deems reasonable as of the date hereof, have been prepared
on the basis of the assumptions stated therein and reflect the reasonable
estimates of the Borrower and its Subsidiaries of the results of operations and
other information projected therein.

 

(c)  Since January 31, 2010, there
has been no event or occurrence that, either individually or in the aggregate,
has had or would reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.05.  Properties.  (a)  As of the date hereof, the Borrower
and its Subsidiaries have valid leasehold interests in (in the case of
leasehold interests in real or personal property) and good and legal title to
(in the case of fee interests in real property and all other personal property)
all of the material assets reflected in the consolidated balance sheet of the
Borrower and its Subsidiaries as of January 31, 2010, or acquired since
that date (except property or assets sold or otherwise disposed of in the
ordinary course of business), subject to no Liens except Permitted Encumbrances
and other Liens permitted hereby.

 

(b)  Each Loan Party and each of its
Subsidiaries owns, or is licensed to use, all trademarks, trade names,
copyrights, patents and other intellectual property reasonably necessary for
the operation of their respective businesses, and the use thereof by such Loan
Party or Subsidiary does not infringe upon the rights of any other Person,
except for any such infringements that, individually or in the aggregate, would
not reasonably be expected to result in a Material Adverse Effect.

 

(c)  Schedule 5.05(c) hereto
sets forth all real property owned or leased by any Loan Party or any of its
Subsidiaries.

 

(d)  Schedule 5.05(d) hereto
sets forth, as of March 31, 2010, a reasonably detailed description of all
Inventory held by the Borrower and its Subsidiaries on consignment from trade
vendors securing obligations to return or pay the purchase price of such
Inventory, and all Inventory otherwise subject to any Lien securing
Indebtedness not created under the Loan Documents or pursuant to the Existing
Revolving Credit Facility.

 

(e)  The Guam Subsidiary has no assets
or operations.

 

SECTION 5.06.  Litigation and Environmental Matters.  (a)  There are no actions, suits or
proceedings by or before any arbitrator or Governmental Authority pending
against or, to the knowledge of any Loan Party or any of its Subsidiaries,
threatened against or affecting any such Person (i) as to which there is a
reasonable possibility of an adverse determination and that, if adversely
determined, would reasonably be expected, individually or in the aggregate, to
result in a Material Adverse Effect (other than those set forth on Schedule 5.06);
or (ii) that involve any of the Loan Documents.

 

(b)  Except for the matters set forth on
Schedule 5.06, and except as would not reasonably be expected to
have a Material Adverse Effect, no Loan Party (i) has failed to comply
with any Environmental Law or to obtain, maintain or comply with any permit,
license or other 

 

37

 

approval required under any Environmental Law; (ii) has become
subject to any Environmental Liability; (iii) has received notice of any
claim with respect to any Environmental Liability; or (iv) knows of any
basis for any Environmental Liability.

 

SECTION 5.07.  Compliance with Laws and Agreements.  Each of the Loan Parties and each of their
Subsidiaries is in compliance with all laws, regulations and orders of any
Governmental Authority applicable to it or its property and all indentures,
material agreements and other instruments binding upon it or its property,
except where the failure to do so, individually or in the aggregate, would not
reasonably be expected to result in a Material Adverse Effect.

 

SECTION 5.08.  Investment Company Status.  None of the Loan Parties nor any of their
Subsidiaries is an “investment company” as defined in, or subject to regulation
under, the Investment Company Act of 1940.

 

SECTION 5.09.  Taxes. 
Each Loan Party and each of their Subsidiaries has timely filed or
caused to be filed all tax returns and reports required to have been filed by
it and has paid or caused to be paid all Taxes required to have been paid by
it, except (a) Taxes that are being contested in good faith by appropriate
proceedings, for which such Loan Party or applicable Subsidiary has set aside
on its books adequate reserves or (b) to the extent that the failure to do
so would not reasonably be expected to result in a Material Adverse Effect.

 

SECTION 5.10.  ERISA. 
(a)  Each Plan and each Guaranteed Pension Plan has been maintained
and operated in compliance with the provisions of ERISA and, to the extent
applicable, the Code and other applicable laws, including the provisions
thereunder respecting prohibited transactions and the bonding of fiduciaries and
other Persons handling plan funds as required by §412 of ERISA, except where
the failure to so comply would not reasonably be expected to have a Material
Adverse Effect.  The Borrower has
heretofore delivered to the Administrative Agent the most recently completed,
prior to the date hereof, annual report, Form 5500, with all required
attachments, and actuarial statement required to be submitted under §103(d) of
ERISA, with respect to each Guaranteed Pension Plan.

 

(b)  Under each Plan which is an
employee welfare benefit plan within the meaning of §3(1) or §3(2)(B) of
ERISA, no benefits are due unless the event giving rise to the benefit
entitlement occurs prior to plan termination (except as required by Title I, Part 6
of ERISA).  The Borrower or an ERISA Affiliate,
as appropriate, may terminate each such Plan at any time (or at any time
subsequent to the expiration of any applicable bargaining agreement) in the
discretion of the Borrower or such ERISA Affiliate without liability to any
Person, except for benefit entitlements which have accrued prior to such
termination.

 

(c)  Each contribution required to be
made to a Guaranteed Pension Plan, whether required to be made to satisfy the
minimum funding standard, the notice or security provisions of §302(c) of ERISA,
or otherwise, has been timely made.  No
waiver of the minimum funding standard has been received with respect to any
Guaranteed Pension Plan.  No liability to
the PBGC (other than required insurance premiums, all of which have been paid)
has been incurred by any Loan Party or any ERISA Affiliate with respect to any
Guaranteed Pension Plan and there has not been any ERISA Event (other than an
ERISA Event as to which the requirement of 30 days notice has been waived), or
any other event or condition which presents a material risk of 

 

38

 

termination of any Guaranteed Pension Plan by the PBGC or that would
reasonably be expected to result in a material liability to any Loan
Party.  Based on the latest valuation of
each Guaranteed Pension Plan (which in each case occurred within twelve months
of the date of this representation), and on the actuarial methods and
assumptions employed for that valuation, the aggregate benefit liabilities of
all such Guaranteed Pension Plans within the meaning of §4001 of ERISA did not
exceed the aggregate value of the assets of all such Guaranteed Pension Plans,
disregarding for this purpose the benefit liabilities and assets of any
Guaranteed Pension Plan with assets in excess of benefit liabilities, by more
than $1,000,000.

 

(d)  None of the Loan
Parties nor any ERISA Affiliate has incurred any material liability (including
secondary liability) to any Multiemployer Plan as a result of a complete or
partial withdrawal from such Multiemployer Plan under §4201 of ERISA or as a
result of a sale of assets described in §4204 of ERISA.  None of the Loan Parties nor any ERISA
Affiliate has been notified that any Multiemployer Plan is in reorganization or
insolvent under and within the meaning of §4241 or §4245 of ERISA or is at risk
of entering reorganization or becoming insolvent, or that any Multiemployer
Plan intends to terminate or has been terminated under §4041A of ERISA.

 

(e)  Each Canadian
Pension Plan has been maintained in substantial compliance with its terms and
with the requirements of any and all applicable laws, statutes, rules,
regulations and orders and has been maintained, where required, in good
standing with all applicable regulatory authorities.  No Canadian Pension Plan Event has occurred.

 

(f)  No Canadian
Pension Plan is a multi-employer pension plan, as such term is defined in Section 147.1(1) of
the Income Tax Act (Canada) or a multi-employer plan as defined in the Pension
Benefits Act (Ontario) or under any similar legislation of another Canadian
jurisdiction.

 

(g)  The Borrower has delivered to the
Administrative Agent the most recent actuarial valuations of all Canadian
Pension Plans.

 

SECTION 5.11.  Disclosure.  The Loan Parties and their Subsidiaries have
disclosed to the Administrative Agent all agreements, instruments and corporate
or other restrictions to which any Loan Party or any of its Subsidiaries is
subject, and all other matters known to any of them, that, individually or in
the aggregate, in each case, could reasonably be expected to result in a
Material Adverse Effect.  None of the
reports, financial statements, certificates or other information furnished by
or on behalf of any Loan Party or any of its Subsidiaries to the Administrative
Agent or any Lender in connection with this Agreement or any other Loan
Document or delivered hereunder or thereunder (other than projections), taken
as a whole, contains any material misstatement of fact or omits to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not materially misleading.

 

SECTION 5.12.  Subsidiaries.  Schedule 5.12 sets forth the name
of each Subsidiary of the Borrower and the ownership interest of the Borrower
in each of its Subsidiaries as of the Closing Date.  Except as set forth on Schedule 5.12,
as of the Closing Date, the Borrower is not, and each of its Subsidiaries is
not, party to any joint venture, general or limited partnership, or limited
liability company, agreements or any other business ventures or entities.

 

39

 

SECTION 5.13.  Insurance.  Schedule 5.13 sets forth a
description of all policies of insurance which cover the Collateral maintained
by or on behalf of the Loan Parties and their Subsidiaries as of the Closing
Date.  As of the Closing Date, all
premiums in respect of such insurance that are due and payable have been paid.

 

SECTION 5.14.  Labor Matters.  As of the Closing Date, there are no strikes,
lockouts or slowdowns against any Loan Party pending or, to the knowledge of
the Loan Parties, threatened.  The hours
worked by and payments made to employees of the Loan Parties have not been in
violation of the Fair Labor Standards Act or any other applicable federal,
state, provincial, local or foreign law dealing with such matters to the extent
that any such violation would reasonably be expected to have a Material Adverse
Effect.  All material payments due from
any Loan Party, or for which any claim may be made against any such Person, on
account of wages and employee health and welfare insurance and other benefits,
have been paid or accrued as a liability on the books of such member.  The consummation of the transactions
contemplated by the Loan Documents will not give rise to any right of
termination or right of renegotiation on the part of any union under any
collective bargaining agreement to which any Loan Party is bound.

 

SECTION 5.15.  Security Documents.  The Security Documents create in favor of the
Administrative Agent, for the ratable benefit of the Credit Parties, a legal,
valid and enforceable security interest in the Collateral, and the Security
Documents constitute, or will upon the filing of Uniform Commercial Code, PPSA
and PRUCC financing statements or equivalent forms and the obtaining of “control”,
in each case with respect to the relevant Collateral as required under the
applicable Uniform Commercial Code, the PPSA and the PRUCC, the creation of a
fully perfected Lien on, and security interest in, all right, title and
interest of the Loan Parties thereunder in such Collateral, in each case
subject to the terms of the Intercreditor Agreement and except as permitted
hereunder or under any other Loan Document or as provided by applicable law.

 

SECTION 5.16.  Federal Reserve Regulations.  No Loan Party nor any of their respective
Subsidiaries is engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of buying or carrying Margin
Stock.  No part of the proceeds of any
Loan will be used, whether directly or indirectly, and whether immediately,
incidentally or ultimately, (i) to buy or carry Margin Stock or to extend
credit to others for the purpose of buying or carrying Margin Stock or to refund
indebtedness originally incurred for such purpose or (ii) for any purpose
that entails a violation of, or that is inconsistent with, the provisions of
the Regulations of the Board, including Regulation U or Regulation X.

 

SECTION 5.17.  Solvency.  Immediately after giving effect to the
transactions contemplated hereby to occur on the Closing Date, the Borrower and
its Subsidiaries, on a consolidated basis, are Solvent.  No transfer of property is being made by any
Loan Party and no obligation is being incurred by any Loan Party in connection
with the transactions contemplated by this Agreement or the other Loan
Documents with the intent to hinder, delay or defraud either present or future
creditors of any Loan Party.

 

SECTION 5.18.  Foreign Assets Control Regulations,
Proceeds of Crime Act, Etc.  None of
the requesting or borrowing of the Loans or the use of the proceeds thereof
will violate the Trading With the Enemy Act (50 U.S.C. § 1 et seq., as amended)
(the “Trading With the Enemy Act”) or any of the foreign assets control
regulations of the United States Treasury Department (31 CFR, 

 

40

 

Subtitle B, Chapter V, as amended) (the “Foreign Assets Control
Regulations”) or any enabling legislation or executive order relating
thereto (which for the avoidance of doubt shall include (a) Executive
Order 13224 of September 21, 2001 Blocking Property and Prohibiting
Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism
(66 Fed. Reg. 49079 (2001)) (the “Executive Order”); and (b) the
Patriot Act).  Furthermore, none of the
Loan Parties nor any of their respective Subsidiaries (x) is or will
become a “blocked person” as described in the Executive Order, the Trading With
the Enemy Act or the Foreign Assets Control Regulations; or (y) knowingly
engages or will engage in any dealings or transactions, or be otherwise
associated, with any such “blocked person”. 
Each Loan Party is in compliance, in all material respects, with the
Patriot Act and the Proceeds of Crime (Money Laundering) and Terrorist
Financing Act (Canada) (the “Proceeds of Crime Act”).  No part of the proceeds of the Loans will be
used by the Borrower, directly or indirectly, for any purpose which would
contravene or breach the Proceeds of Crime Act.

 

SECTION 5.19.  Insurance Subsidiaries.  None of the Zale Insurance Subsidiaries have
made any Restricted Payments in excess of its retained earnings.

 

SECTION 5.20.  Material Contracts.  Set forth on Schedule 5.20 is a
description of the Material Contracts of each Loan Party and its
Subsidiaries.  Each Material Contract (a) is
in full force and effect and is binding upon and enforceable against the
applicable Loan Party or its Subsidiary and, to the Borrower’s knowledge, each
other Person that is a party thereto, in accordance with its terms, (b) has
not been otherwise amended or modified and (c) is not in default due to
the action or inaction of the applicable Loan Party or its Subsidiary.

 

SECTION 5.21.  ZC Partnership.  The ZC Partnership has no outstanding
Indebtedness or other material obligations and no assets other than Investments
in Zale Canada Co. permitted hereunder.

 

ARTICLE VI

 

AFFIRMATIVE COVENANTS

 

So long as any Lender shall
have any outstanding Commitment hereunder or any Loan shall remain unpaid or
unsatisfied, the Borrower covenants and agrees with the Administrative Agent
and the Lenders that:

 

SECTION 6.01.  Financial Statements and Other
Information.  The Borrower will
furnish to the Administrative Agent (for distribution to each Lender):

 

(a)  as soon as practicable, but in any
event not later than 95 days after the end of each Fiscal Year of the Borrower,
(i) a consolidated balance sheet of the Borrower and its Subsidiaries as
at the end of such Fiscal Year, and the related consolidated statements of
operations, stockholders’ equity and cash flow for such Fiscal Year, setting
forth in each case in comparative form the figures for the previous Fiscal
Year, all audited and reported on by Ernst & Young LLP or another
registered public accounting firm of recognized national standing (without any “going
concern” or like qualification or exception and without qualification or
exception as to the scope of such audit) to the effect that such consolidated
financial statements 

 

41

 

present fairly in all material respects the financial condition and
results of operations of the Borrower and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently applied and (ii) the
annual 10-K reports of the Borrower filed with the SEC;

 

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

 

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

 

(d)  concurrently with any delivery of
financial statements under clause (a) or (b) above, a certificate
signed by a Financial Officer of the Borrower (A) certifying as to whether
a Default or Event of Default has occurred and, if a Default has occurred,
specifying the details thereof and any action taken or proposed to be taken
with respect thereto, (B) stating whether any change in GAAP or in the
application thereof that, in either case, is reasonably likely to impact in any
material respect the financial presentation of the Borrower, has occurred since
the date of the Borrower’s audited financial statements referred to in Section 5.04
and, if any such change has occurred, specifying the effect of such change on
the financial statements accompanying such certificate and (C) a
compliance certificate, certified by a Financial Officer of the Borrower,
setting forth in reasonable detail the computations evidencing compliance with Section 7.08;

 

(e)  on the last day of each Fiscal Year
of the Borrower, (i) a detailed consolidated budget by quarter for the
immediately following Fiscal Year (including a projected consolidated balance
sheet and related statements of projected operations and cash flow as of the
end of and for such Fiscal Year) and (ii) a monthly detail of projected
Inventory levels and Credit Extensions and the projected Borrowing Base and
Excess Availability (each as defined in the ABL Credit Agreement) for such
Fiscal Year and, promptly when available, any significant revisions to the
budget and the projections; provided that, the Borrower shall, by no
later than February 15 of each calendar year, reforecast and update the
projections delivered pursuant to the foregoing clauses (i) and (ii) for
the remaining period of each such Fiscal Year;

 

(f)  any borrowing base certificate,
financial reports (including any weekly cash flow statements and appraisal
reports delivered to the lenders under the ABL Credit Agreement) and any other
material documents, notices or information delivered to lenders pursuant to the
Existing Revolving Credit Facility;

 

42

 

(g)  promptly after the same become publicly
available, copies of all periodic and other reports, proxy statements and other
materials filed by the Borrower or any of its Subsidiaries with the SEC or with
any national securities exchange;

 

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

 

(i)  concurrently with each delivery of
financial statements under clause (a) and (b) above, an updated Schedule
5.05(d) as of a recent date;

 

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

 

(k)  promptly following the filing
thereof, copies of all quarterly and annual reports, risk based capital reports
and Forms B and C registration statements submitted to an insurance regulator
with respect to the Zale Insurance Subsidiaries.

 

SECTION 6.02.  Notices of Material Events.  The Borrower will furnish to the
Administrative Agent written notice of the following promptly following a
Responsible Officer’s obtaining knowledge thereof:

 

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

 

(b)  the filing or commencement of any
action, suit or proceeding by or before any arbitrator or Governmental
Authority against or affecting any Loan Party that, if adversely determined,
would reasonably be expected to result in a Material Adverse Effect;

 

(c)  the occurrence of any material
violation of any applicable Environmental Law that any of the Loan Parties
reports in writing or is required under applicable Environmental Laws to be
reported by such Person in writing (or for which any written report supplemental
to any oral report is made) to any U.S. federal or foreign, state, provincial
or local environmental agency, which violation would reasonably be expected to
result in a Material Adverse Effect;

 

(d)  the occurrence of any ERISA Event
or Canadian Pension Plan Event that, alone or together with any other ERISA
Events or Canadian Pension Plan Events that have occurred, would reasonably be
expected to result in a Material Adverse Effect;

 

(e)  any other development that results
in or would reasonably be expected to result in a Material Adverse Effect; and

 

(f)  the discharge by the Borrower of
its present registered public accountants or any withdrawal or resignation by
such registered public accountants.

 

43

 

Each notice delivered under this Section 6.02
shall be accompanied by a statement of a Responsible Officer of the Borrower
setting forth the details of the event or development requiring such notice
and, if applicable, any action taken or proposed to be taken with respect
thereto.

 

SECTION 6.03.  Existence; Conduct of Business.  (a)  Except as otherwise permitted by
this Agreement, the Borrower will, and will cause each of its Subsidiaries to,
do or cause to be done all things necessary to comply with its respective
Organization Documents, and to preserve, renew and keep in full force and
effect its legal existence and the rights, licenses, permits, privileges,
franchises, patents, copyrights, trademarks and trade names material to the
conduct of its business; provided, however, that the foregoing
shall not prohibit any transaction permitted by Section 7.03.

 

(b)  The Borrower shall cause the Zale
Insurance Subsidiaries to conduct their business in the ordinary course
consistent with past practice in all material respects and to use their
commercially reasonable efforts to preserve intact the Zale Insurance
Subsidiaries and their relationships with customers, suppliers, creditors and
employees.

 

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

 

SECTION 6.04.  Payment of Obligations.  The Borrower will, and will cause each of its
Subsidiaries to, pay its Material Indebtedness, obligations in connection with
Hedging Agreements and Tax liabilities, before the same shall become delinquent
or in default, except where (a) the validity or amount thereof is being
contested in good faith by appropriate proceedings, (b) such Loan Party or
Subsidiary has set aside on its books adequate reserves with respect thereto in
accordance with GAAP and (c) the failure to make payment pending such
contest would not reasonably be expected to result in a Material Adverse
Effect; provided that any payment made by a Loan Party or any of their
Subsidiaries in good faith with respect to any of its Tax liabilities which is
subsequently determined by a Governmental Authority to be less than the payment
deemed to be owed by such Governmental Authority shall not constitute a breach
of this Section 6.04.

 

SECTION 6.05.  Maintenance of Properties.  The Borrower will, and will cause each of its
Subsidiaries to, keep and maintain all property material to the conduct of its
business in good working order and condition, ordinary wear and tear excepted
and with the exception of asset dispositions permitted hereunder.

 

SECTION 6.06.  Insurance.  The Borrower will, and will cause each of its
Subsidiaries to, maintain, with financially sound and reputable insurance
companies, (a) adequate insurance for its insurable properties, all to
such extent and against such risks, including fire, casualty and other risks
insured against by extended coverage, as is customary with companies in the
same or similar businesses operating in the same or similar locations and (b) such
other insurance as is required 

 

44

 

pursuant to the terms of the Existing Revolving Credit Facility.  The Borrower will furnish to the
Administrative Agent, upon request of the Administrative Agent or any Lender,
information in reasonable detail as to the insurance so maintained.  The Borrower shall provide the Administrative
Agent with certificates of insurance evidencing the required coverage
concurrently with the execution of this Agreement and upon each renewal of such
policies thereafter and loss payable and additional insured endorsements in
favor of the Administrative Agent (subject to the Intercreditor
Agreement).  The Borrower shall furnish
prompt written notice to the Administrative Agent of any material change or
cancellation of such policies, and shall use commercially reasonable efforts to
provide such notice reasonably in advance of any such change or cancellation.
Each fire and extended coverage policy maintained with respect to any
Collateral shall provide that it shall not be canceled, modified or not renewed
(i) by reason of nonpayment of premium except upon not less than
10 days’ prior written notice thereof by the insurer to the Administrative
Agent (giving the Administrative Agent the right to cure defaults in the
payment of premiums) or (ii) for any other reason except upon not less
than 30 days’ prior written notice thereof by the insurer to the Administrative
Agent.  The Borrower shall deliver to the
Administrative Agent, prior to the cancellation, modification or nonrenewal of
any such policy of insurance, a copy of a renewal or replacement policy (or
other evidence of renewal of a policy previously delivered to the
Administrative Agent) together with evidence satisfactory to the Administrative
Agent of payment of the premium therefor.

 

SECTION 6.07.  Casualty and Condemnation.  The Borrower will, and will cause each of its
Subsidiaries to, furnish to the Administrative Agent prompt written notice of
any casualty or other insured damage to any material portion of the Collateral
having a value in excess of $10,000,000 or the commencement of any action or
proceeding for the taking of any material portion of the Collateral having a
value in excess of $10,000,000 under power of eminent domain or by condemnation
or similar proceeding.

 

SECTION 6.08.  Books and Records; Inspection Rights;
Appraisals.

 

(a)  The Borrower will, and will cause
each of its Subsidiaries to, keep proper books of record and account in which
full, true and correct entries are made of dealings and transactions in
relation to its business and activities. 
The Borrower will, and will cause each of its Subsidiaries to, permit
any representatives designated by the Administrative Agent, upon reasonable
prior notice, to visit and inspect its properties, to examine and make extracts
from its books and records, and to discuss its affairs, finances and condition
with its officers and independent accountants, all at such reasonable times and
as often as reasonably requested.

 

(b)  Notwithstanding anything to the
contrary in this Section 6.08, none of the Borrower or any of its
Subsidiaries will be required to disclose, permit the inspection, examination
or making of extracts, or discussion of, any document, information or other
matter that (i) constitutes non-financial trade secrets or non-financial
proprietary information unless and until the Administrative Agent executes an
appropriate non-disclosure agreement, (ii) in respect of which disclosure
to the Administrative Agent (or any representative) is then prohibited by law
or any agreement binding on the Borrower or any of its Subsidiaries or (iii) is
subject to attorney-client or similar privilege or constitutes attorney
work-product.

 

(c)  The Borrower shall provide to the
Administrative Agent, at the Borrower’s cost, copies of all Inventory
appraisals, commercial finance examinations and other evaluations 

 

45

 

provided to or commissioned on behalf of the lenders party to the ABL
Credit Agreement, including of (i) the Loan Parties’ practices in the
computation of the Borrowing Base (as defined in the ABL Credit Agreement) and (ii) the
assets included in the Borrowing Base (as defined in the ABL Credit Agreement);
provided, however, that if any event has occurred and is
continuing that would reasonably be expected to be adverse to the interests of
the Lenders, the Administrative Agent or Required Lenders may request, at the
cost of the Borrower, such additional Inventory appraisals, commercial finance
examinations and other evaluations as are reasonably necessary.

 

SECTION 6.09.  Compliance with Laws.  The Borrower will, and will cause each of its
Subsidiaries to, comply with all laws, rules, regulations and orders of any
Governmental Authority applicable to it or its property, except where the
failure to do so, individually or in the aggregate, would not reasonably be
expected to result in a Material Adverse Effect.

 

SECTION 6.10.  Use of Proceeds.  The proceeds of Loans made hereunder shall be
used for working capital and other general corporate purposes of the Borrower
and its Subsidiaries and to pay any fees and expenses in connection with the
transactions contemplated by this Agreement. 
No part of the proceeds of any Loan will be used, whether directly or
indirectly, for any purpose that entails a violation of any of the Regulations
of the Board, including Regulations U and X.

 

SECTION 6.11.  New Subsidiaries.  The Borrower shall cause each new direct or indirect
Subsidiary of the Borrower (excluding, for avoidance of doubt, any Zale
Insurance Subsidiary, the Guam Subsidiary and the ZC Partnership) to promptly
become a Loan Party hereunder by signing a Facility Guaranty or a Canadian
Facility Guaranty, as applicable, and a counterpart of the Security Agreement
and each other Security Document applicable to such Subsidiary as a Loan Party.

 

SECTION 6.12.  Information Regarding the Collateral.  The Borrower will furnish to the
Administrative Agent at least 10 days’ (or such shorter period as the
Administrative Agent shall agree) prior written notice of any change in (i) any
Loan Party’s legal name, (ii) the location of any Loan Party’s chief
executive office or its principal place of business, (iii) any Loan Party’s
organizational type or jurisdiction of organization, (iv) any Loan Party’s
Federal Taxpayer Identification Number or organizational identification number
assigned to it by its state of organization or (v) the jurisdictions where
any Canadian Loan Party maintains any of its tangible personal property. The
Borrower agrees not to effect or permit any change referred to in the preceding
sentence unless all filings have been made under the Uniform Commercial Code or
the PPSA or otherwise that are required in order for the Administrative Agent
to continue following such change to have a valid, legal and perfected security
interest in the Collateral for its own benefit and the benefit of the other
Credit Parties (to the extent a security interest in such Collateral can be
perfected by the filing of a financing statement under the Uniform Commercial
Code or PPSA).

 

SECTION 6.13.  Further Assurances.  The Borrower will, and will cause each other
Loan Party to, execute any and all further documents, agreements and
instruments, and take all such further actions (including the filing and
recording of financing statements and other documents), that may be required
under any applicable law, or that the Administrative Agent or the Required
Lenders may reasonably request, to effectuate the transactions contemplated by
the Loan Documents, to create and perfect Liens in favor of the Administrative
Agent in any real property acquired by the Borrower or any of its Subsidiaries
after the Closing Date or to grant, preserve, protect or perfect the Liens 

 

46

 

created or intended to be created by the Security Documents or the
validity or priority of any such Lien, all at the expense of the Loan
Parties.  The Borrower also agrees to,
and to cause each other Loan Party to, provide to the Administrative Agent,
from time to time upon request, evidence reasonably satisfactory to the
Administrative Agent as to the perfection and priority of the Liens created or
intended to be created by the Security Documents, subject to the terms of the
Intercreditor Agreement.  The Borrower
will, and will cause each other Loan Party to, upon the request of the
Administrative Agent, execute and deliver to the Administrative Agent with
respect to each parcel of real property that has a fair market value equal to
or more than $500,000 and that is owned or held by each Loan Party and any
newly acquired or newly formed Subsidiary, mortgages, title reports, surveys
and engineering, soils and other reports, and environmental assessment reports,
in scope, form and substance reasonably satisfactory to the Administrative
Agent.

 

SECTION 6.14.  [Intentionally Omitted].

 

SECTION 6.15.  Employee Benefit Plans.  The Borrower will (a) promptly upon any
request of the Administrative Agent therefor, furnish to the Administrative
Agent a copy of the most recent actuarial statement required to be submitted
under §103(d) of ERISA and Annual Report, Form 5500, with all
required attachments, in respect of each Guaranteed Pension Plan, (b) within
10 days of receipt or dispatch, furnish to the Administrative Agent any notice,
report or demand sent or received in respect of a Guaranteed Pension Plan under
Sections 302, 4041, 4042, 4043, 4063, 4065, 4066 and 4068 of ERISA, or in
respect of a Multiemployer Plan under Sections 4041A, 4202, 4219, 4242 or
4245 of ERISA.

 

SECTION 6.16.  Private Label Credit Cards.  The Borrower shall enter into an agreement to
replace the Borrower’s and the Loan Parties’ existing domestic private label
credit card facility with Citibank, N.A. or its affiliates (with a processor
and on terms reasonably satisfactory to the Administrative Agent, whose consent
shall not be unreasonably withheld) at least 30 days prior to the earlier of (i) the
scheduled expiration of such facility or (ii) any earlier termination
thereof.

 

ARTICLE VII

 

NEGATIVE COVENANTS

 

So long as any Lender shall have any
outstanding Commitment hereunder or any Loan shall remain unpaid or
unsatisfied, the Borrower covenants and agrees with the Administrative Agent
and the Lenders that:

 

SECTION 7.01.  Indebtedness and Other Obligations.

 

SECTION 7.01A.            Indebtedness.  The Borrower shall not, and shall not permit
any other Loan Party to, create, incur, assume or permit to exist any
Indebtedness, except:

 

(a)  Indebtedness created under the Loan
Documents;

 

(b)  Indebtedness (other than
Indebtedness created pursuant to the Existing Revolving Credit Facility)
existing on the Closing Date and set forth in Schedule 7.01A, and 

 

47

 

extensions, renewals and replacements of any such Indebtedness that do
not increase the outstanding principal amount thereof or result in an earlier
maturity date or decreased weighted average life thereof or provide recourse to
any Loan Party other than those Persons which were obligated with respect to
such Indebtedness; provided, that if such Indebtedness was subordinated
in right of payment to the Obligations, then the terms and conditions of the
extension, renewal or replacement must include subordination terms and
conditions that are at least as favorable to the Lenders as those that were
applicable to such Indebtedness;

 

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

 

(d)  [Intentionally Omitted];

 

(e)  [Intentionally Omitted];

 

(f)  Indebtedness of any Loan Party to
finance the acquisition, construction or improvement of any fixed or capital
assets, including Capital Lease Obligations and any Indebtedness assumed in
connection with the acquisition of any such assets or secured by a Lien on any
such assets prior to the acquisition thereof, and extensions, renewals and
replacements of any such Indebtedness that do not increase the outstanding
principal amount thereof or result in an earlier maturity date or decreased
weighted average life thereof; provided that the aggregate principal
amount of Indebtedness incurred pursuant to this clause (f) shall not
exceed $20,000,000 at any time outstanding;

 

(g)  [Intentionally Omitted];

 

(h)  [Intentionally Omitted];

 

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

 

(j)  obligations in respect of cash
management services, netting services, automatic clearinghouse arrangements,
overdraft protections and similar arrangements;

 

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

 

(l)  other unsecured Indebtedness in an
aggregate principal amount not exceeding $5,000,000 at any time outstanding; provided
that the terms of such Indebtedness do not contain 

 

48

 

any covenants or events of default which are determined to be, in the
reasonable discretion of the Administrative Agent, taken as a whole, materially
more restrictive than the covenants and Events of Default contained in this
Agreement;

 

(m)  So long as the Intercreditor
Agreement is in effect, Indebtedness created under the Existing Revolving
Credit Facility in an aggregate principal amount not exceeding $750,000,000 at
any time outstanding;

 

(n)  Indebtedness consisting of
obligations under Hedging Agreements otherwise permitted by Section 7.09;

 

(o)  Indebtedness of Zale Canada Co. to
the ZC Partnership consistent with past practice and in an aggregate principal
amount not to exceed CDN$149,175,500 outstanding at any time; and

 

(p)  obligations to return or pay the
purchase price of inventory held on consignment from trade vendors incurred in
the ordinary course of business consistent with past practice.

 

Notwithstanding anything to the contrary in
this Agreement, the Borrower shall cause the ZC Partnership not to incur any
Indebtedness or any other material obligations. The accrual of interest and the
accretion or amortization of original issue discount on Indebtedness and the
payment of interest in the form of additional Indebtedness originally incurred
in accordance with this Section 7.01A will not constitute an incurrence of
Indebtedness.

 

SECTION 7.01B.  Zale Insurance Subsidiaries Indebtedness.  The Borrower shall cause the Zale Insurance
Subsidiaries not to: (A) incur any Indebtedness for borrowed money secured
by their assets; (B) other than in the ordinary course of business, cancel
or compromise any Indebtedness or waive any material rights without receiving a
realizable benefit of similar or greater value; or (C) change in any material
respect any of their policies with respect to Investments, except as required
by applicable law or regulation.

 

SECTION 7.02.  Liens. 
The Borrower shall not, and shall not permit any other Loan Party to,
create, incur, assume or permit to exist any Lien on any property or asset now
owned or hereafter acquired by it, except:

 

(a)  Liens created under the Loan
Documents;

 

(b)  Permitted Encumbrances;

 

(c)  any Lien on any property or asset
of any Loan Party set forth in Schedule 7.02 and any extensions or
renewals thereof; provided that (i) such Lien shall not apply to
any other property or asset of any Loan Party other than after-acquired
property affixed or incorporated thereto and the proceeds or products thereof
and (ii) such Lien shall secure only those obligations (including
commitments in respect thereof) that it secures as of the Closing Date, and
extensions, renewals and replacements thereof that do not increase the amount
thereof;

 

49

 

(d)  Liens on fixed or capital assets
acquired, constructed or improved by any Loan Party; provided that (i) such
Liens secure Indebtedness permitted by clause (f) of Section 7.01A, (ii) such
Liens and the Indebtedness secured thereby are incurred prior to or within 180
days after such acquisition or the completion of such construction or
improvement, (iii) the Indebtedness secured thereby does not exceed 100%
of the cost of acquiring, constructing or improving such fixed or capital
assets, (iv) such Liens shall not apply to any other property or assets of
the Loan Parties other than after-acquired property affixed or incorporated
thereto and proceeds or products thereof and (v) if requested by the
Administrative Agent, the Borrower or such Loan Party will use commercially
reasonable efforts to cause the holder of such Liens to enter into an
intercreditor agreement with the Administrative Agent providing for access and
use of the property in connection with the disposition of all or any portion of
the Collateral on terms reasonably satisfactory to the Administrative Agent;

 

(e)  [Intentionally Omitted];

 

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

 

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

 

(h)  [Intentionally Omitted];

 

(i)  sales, assignments or transfers of
assets to the extent permitted by Section 7.05 hereof;

 

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

 

(k)  Liens (if any) arising from
precautionary UCC, PPSA or PRUCC or comparable filings regarding “true”
operating leases;

 

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

 

(m)  So long as the Intercreditor
Agreement is in effect, Liens securing obligations in respect of Indebtedness
incurred pursuant to Section 7.01A(m), which Liens, as to collateral with
respect to which the collateral agent for the secured parties under the
Existing Revolving Credit Facility has first priority pursuant to the
Intercreditor Agreement, may be senior to the Liens securing the Obligations in
accordance with the terms of the Intercreditor Agreement;

 

50

 

(n)  Liens (if any) arising under or in
connection with the Loan Parties’ private label credit card facility, as
amended or replaced from time to time, on Inventory charged to credit cards and
returned to the Loan Parties for which a Loan Party has not reimbursed the
credit card facility provider, including any Liens on the proceeds thereof; and

 

(o)  other Liens on assets of the Loan
Parties (other than Inventory or accounts receivable) to the extent not
otherwise included in paragraphs (a) through (m) of this Section securing
Indebtedness and other liabilities in an aggregate amount not to exceed
$5,000,000 at any time outstanding.

 

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

 

SECTION 7.03.  Fundamental Changes.  (a)  The Borrower shall not, and shall
not permit any of its Subsidiaries to, merge into, amalgamate or consolidate
with any other Person, or permit any other Person to merge into, amalgamate or
consolidate with it, or liquidate or dissolve, except that, if at the time
thereof and immediately after giving effect thereto, no Default or Event of
Default shall have occurred and be continuing: (i) any Subsidiary of the
Borrower (other than any Zale Insurance Subsidiary) may merge into or
amalgamate with any Loan Party in a transaction in which the surviving entity
is a Loan Party, (ii) any Loan Party (other than the Borrower) may effect
a merger, dissolution, liquidation, consolidation or amalgamation to effect a
disposition permitted pursuant to Section 7.05 and (iii) any Loan
Party (other than the Borrower), the Guam Subsidiary and the ZC Partnership may
liquidate or dissolve if the Borrower determines in good faith that such
liquidation or dissolution is in the best interests of the Borrower and is not
materially disadvantageous to the Lenders and so long as all of the assets of
such Loan Party or the ZC Partnership, as applicable, are transferred to a Loan
Party that is not liquidating or dissolving; provided that any such
merger, amalgamation or consolidation involving a Person that is not a wholly
owned Subsidiary immediately prior to such merger, amalgamation or consolidation
shall not be permitted unless also permitted by Section 7.04.

 

(b)  The Borrower shall not, and shall
not permit any other Loan Party to, engage to any material extent in any
business other than businesses of the type conducted by the Loan Parties and their
Subsidiaries on the Closing Date and businesses reasonably related
thereto.  The Borrower shall not permit
the Guam Subsidiary to hold any material assets or become liable for any
Indebtedness or any other material obligations, or engage in any activities
other than those incident to the maintenance of its existence or to the orderly
liquidation and winding-up thereof.

 

SECTION 7.04.  Investments.

 

SECTION 7.04A.  Investments.  The Borrower shall not, and shall not permit
any other Loan Party to, purchase, hold or acquire (including pursuant to any
merger or amalgamation with any Person that was not a wholly owned Subsidiary
prior to such merger or amalgamation) any capital stock, evidences of
indebtedness or other securities (including any option, warrant or other right
to acquire any of the foregoing) of, make or permit to exist any 

 

51

 

loans
or advances to, Guarantee any obligations of, or make or permit to exist any
other investment in, any other Person, or purchase or otherwise acquire (in one
transaction or a series of transactions) any assets of any other Person
constituting a business unit (each of the foregoing, an “Investment”),
except for:

 

(a)  Permitted Investments;

 

(b)  Investments existing on the Closing
Date and set forth on Schedule 7.04A, and any modification, renewal or
extension thereof; provided that the amount of any Investment permitted
pursuant to this clause is not increased from the amount of such Investment on
the Closing Date except pursuant to the terms of such Investment as of the
Closing Date or as otherwise permitted by this Section 7.04A(b);

 

(c)  Investments by any Loan Party in
any other Loan Party (including, for avoidance of doubt, acquisitions of any
Equity Interests of a Loan Party from another Loan Party); provided that
any Loan Party or other Subsidiary of the Borrower (except the ZC Partnership)
making a loan or advance to another Loan Party is subject to the Intercompany
Subordination Agreement;

 

(d)  [Intentionally Omitted];

 

(e)  other Investments by any of the
Loan Parties in any Zale Insurance Subsidiary that are reasonably required for
purposes of compliance by such Zale Insurance Subsidiary with any applicable
law or regulation, in an amount not to exceed $10,000,000 at any time
outstanding in the aggregate for all such Investments made pursuant to this
clause (e);

 

(f)  [Intentionally Omitted];

 

(g)  [Intentionally Omitted];

 

(h)  [Intentionally Omitted];

 

(i)  Investments consisting of
promissory notes received as proceeds of asset dispositions permitted by Section 7.05;

 

(j)  [Intentionally Omitted];

 

(k)  Investments consisting of
Indebtedness (including Guarantees) permitted by Section 7.01;

 

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

 

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

 

52

 

(n)  [Intentionally Omitted];

 

(o)  [Intentionally Omitted];

 

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

 

(q)  Investments in Hedging Agreements
permitted under Section 7.09;

 

(r)  Investments of any Person existing
at the time such Person becomes a Loan Party pursuant to an Investment otherwise
permitted under this Section 7.04A, so long as such Investments were not
made in contemplation of such Person becoming a Loan Party; and

 

(s)  Guarantees of leases of a Loan
Party that do not constitute Indebtedness, in each case entered into in the
ordinary course of business.

 

Notwithstanding anything to the contrary in
this Agreement, the Borrower shall cause the ZC Partnership not to make any
Investments in any other Person, other than Investments in Zale Canada Co.
consistent with past practice and permitted by Section 7.01A(o).

 

SECTION 7.04B.  Zale Insurance Subsidiaries Investments.  The Borrower shall cause the Zale Insurance
Subsidiaries not to make any Investments in any other Person, other than
Investments made in the ordinary course of business in accordance with their
Investment policies.

 

SECTION 7.05.  Asset Sales.  The Borrower shall not, and shall not permit
any of its Subsidiaries to, sell, transfer, lease or otherwise dispose of any
asset, including any Equity Interest of another Person held by the Borrower or
such Subsidiary (other than directors’ qualifying shares and other nominal
amounts of Equity Interests that are required to be held by other Persons under
applicable law), nor shall any Loan Party (other than the Borrower) or any of
their Subsidiaries issue any additional shares of its capital stock or other
Equity Interests in such Loan Party or other Subsidiary, except:

 

(a)  sales or other dispositions of (i) inventory
in the ordinary course of business (including in connection with the closure of
Stores), (ii) used or surplus equipment or (iii) Permitted
Investments and Investments permitted pursuant to Section 7.04A(i) in
the ordinary course of business;

 

(b)  sales, transfers and dispositions
among the Loan Parties and their respective Subsidiaries (excluding, however,
any sales, transfers and dispositions of Collateral from any Loan Party except
to another Loan Party); provided that any such sales, transfers or
dispositions involving a Subsidiary that is not a Loan Party shall be made in
compliance with Section 7.07;

 

53

 

(c)  issuances or sales of Equity
Interests of any Loan Party to any other Loan Party;

 

(d)  the natural expiration of
intellectual property licenses in accordance with the terms thereof;

 

(e)  transfers of assets permitted as
Investments under Section 7.04; provided that no Event of Default
has occurred and is continuing or would occur as a result thereof;

 

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

 

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

 

(h)  licenses or sublicenses of
intellectual property, in each case in the ordinary course of business and
which do not materially interfere with the business of any Loan Party; and

 

(i)  bulk sales or other dispositions of
the Loan Parties’ inventory and Store fixtures not in the ordinary course of
business in connection with Store closures, at arm’s length; provided
that such Store closures and related inventory dispositions shall not exceed (i) for
the first twelve months after the Closing Date, 200 of the Loan Parties’ Stores
on terms and subject to conditions to be agreed by the Borrower and the
Administrative Agent, and (ii) thereafter, in any Fiscal Year of the
Borrower, 10% of the number of the Loan Parties’ Stores as of the beginning of
such Fiscal Year (net of new Store openings) on terms and subject to conditions
to be agreed by the Loan Parties and the Administrative Agent and (iii) in
the aggregate from and after the first anniversary of the Closing Date, 25% of
the number of the Loan Parties’ Stores in existence as of the first anniversary
of the Closing Date (net of new Store openings); provided  further
that all sales of inventory in connection with Store closings shall be
conducted at Store locations (provided that, in conjunction with any
such sales, inventory having an aggregate Cost of up to $15,000,000 in the
aggregate in any Fiscal Year may be transferred to other Store locations or
distribution centers of the Loan Parties) pursuant to a going out of business,
liquidation or similar sale, in accordance with liquidation agreements and with
professional liquidators reasonably acceptable to the Administrative Agent;

 

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

 

SECTION 7.06.  Restricted Payments; Certain Payments of
Indebtedness.  The Borrower shall
not, and shall not permit any of its Subsidiaries to, declare or make, or agree
to pay or make, directly or indirectly, any Restricted Payment, or voluntarily
make any prepayment of principal of any Indebtedness, or any payment or other
distribution (whether in cash, securities or other property), including any
sinking fund or similar deposit, on account of the purchase, redemption,
retirement, acquisition, cancellation or termination of any Indebtedness, in
each case which is expressly subordinated in right of payment to the Loans
(other than regularly scheduled payments of principal on such Indebtedness,
subject to the subordination terms thereof, or any refinancing of such 

 

54

 

Indebtedness with the proceeds of Equity Interests of the Borrower or
new Indebtedness that is also expressly subordinated in right of payment to the
Loans), except:

 

(a)  any Person may make Restricted
Payments to, or prepay subordinated Indebtedness owed to, any Loan Party; provided
that each Zale Insurance Subsidiary may only make Restricted Payments to a Loan
Party in any Fiscal Year out of such Zale Insurance Subsidiary’s retained
earnings for such Fiscal Year and to the extent such Restricted Payments do not
constitute extraordinary dividends;

 

(b)  to the extent constituting Restricted
Payments, the Loan Parties may enter into and consummate transactions permitted
by Section 7.03 or 7.04;

 

(c)  the Borrower may make repurchases
of Equity Interests in the Borrower deemed to occur upon exercise of stock
options or warrants if such Equity Interests represent a portion of the
exercise price of such options or warrants;

 

(d)  the Borrower may pay for and
otherwise effect the repurchase, retirement or other acquisition or retirement
for value of Equity Interests of the Borrower by any employee, director or
officer of the Borrower or any of its Subsidiaries pursuant to any equity plan,
stock option plan or any other benefit plan or any agreement with any employee,
director or officer of the Borrower or any of its Subsidiaries; provided
that (i) the aggregate amount of Restricted Payments made pursuant to this
clause (d) shall not exceed $1,000,000 in any Fiscal Year and (ii) no
Restricted Payments may be made pursuant to this clause (d) upon the
occurrence and during the continuance of an Event of Default or a Cash Control
Event;

 

(e)  any Loan Party may pay cash in lieu of fractional
Equity Interests;

 

(f)  any Person may make other Restricted Payments in an
aggregate amount not to exceed $1,000,000; provided that no Restricted
Payments may be made pursuant to this clause (f) upon the occurrence and
during the continuance of an Event of Default or a Cash Control Event; and

 

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

 

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

 

SECTION 7.07.  Transactions with Affiliates.  Except for the transactions contemplated by
the Loan Documents or the Warrant Agreement or as set forth on Schedule 7.07
hereto, the Borrower shall not, and shall not permit any of its Subsidiaries
to, enter into, renew, extend or be a party to any transaction of any kind with
any Affiliate of any Loan Party, whether or not in the ordinary course of
business, other than on fair and reasonable terms substantially as favorable to
the Loan Parties and their Subsidiaries as would be obtainable by the Loan
Parties and their Subsidiaries at the time in a comparable arm’s length
transaction with a Person other than an Affiliate; provided that the
foregoing restriction shall not apply to (a) any transaction between or
among the Loan Parties 

 

55

 

and their Subsidiaries involving no other Person; (b) Investments
permitted under Section 7.04 and Restricted Payments and prepayments
permitted under Section 7.06; (c) the issuance of Equity Interests in
the Borrower to any officer, director or employee of the Borrower or any of its
Subsidiaries; (d) the payment of reasonable fees and out-of-pocket costs
to directors, and compensation and employee benefit arrangements paid to, and
indemnities provided for the benefit of, directors, officers or employees of
the Borrower or any of its Subsidiaries; or (e) transactions not otherwise
prohibited hereunder between the Borrower or any Subsidiary of the Borrower and
the Administrative Agent or any of its Affiliates.

 

SECTION 7.08.  Financial Covenants.  The Borrower and its Subsidiaries, on a
consolidated basis, must maintain or achieve:

 

(a)  Minimum
Consolidated EBITDA:  Consolidated
EBITDA, measured on the last day of each Fiscal Quarter for the four
consecutive Fiscal Quarters then ended, of at least the required amount set
forth in the following table for the applicable measurement date set forth
opposite thereto:

 

 

	
  Minimum Amount

  	
   

  	
  Measurement Date

  	
   

  
	
  $

  	
  (10,000,000

  	
  )

  	
  January 31, 2011

  	
   

  
	
  $

  	
  0

  	
   

  	
  April 30, 2011

  	
   

  
	
  $

  	
  10,000,000

  	
   

  	
  July 31, 2011

  	
   

  
	
  $

  	
  20,000,000

  	
   

  	
  October 31, 2011

  	
   

  
	
  $

  	
  40,000,000

  	
   

  	
  January 31, 2012

  	
   

  
	
  $

  	
  50,000,000

  	
   

  	
  April 30, 2012

  	
   

  
	
  $

  	
  60,000,000

  	
   

  	
  July 31, 2012

  	
   

  
	
  $

  	
  70,000,000

  	
   

  	
  October 31, 2012

  	
   

  
	
  $

  	
  80,000,000

  	
   

  	
  January 31, 2013

  	
   

  
	
  $

  	
  90,000,000

  	
   

  	
  April 30, 2013

  	
   

  
	
  $

  	
  100,000,000

  	
   

  	
  July 31, 2013

  	
   

  
	
  $

  	
  100,000,000

  	
   

  	
  October 31, 2013

  	
   

  
	
  $

  	
  100,000,000

  	
   

  	
  January 31, 2014

  	
   

  
	
  $

  	
  100,000,000

  	
   

  	
  April 30, 2014

  	
   

  
	
  $

  	
  100,000,000

  	
   

  	
  July 31, 2014

  	
   

  
	
  $

  	
  100,000,000

  	
   

  	
  October 31, 2014

  	
   

  
	
  $

  	
  100,000,000

  	
   

  	
  January 31, 2015

  	
   

  

 

(b)  Minimum Pagoda Store
Contribution:  Pagoda Store Contribution, measured on the last day
of each Fiscal Quarter for the four consecutive Fiscal Quarters then ended, of
at least the required amount set forth in the following table for the
applicable measurement date set forth opposite thereto:

 

56

 

	
  Minimum Amount

  	
   

  	
  Measurement Date

  	
   

  
	
  $

  	
  18,000,000

  	
   

  	
  January 31, 2011

  	
   

  
	
  $

  	
  19,000,000

  	
   

  	
  April 30, 2011

  	
   

  
	
  $

  	
  20,000,000

  	
   

  	
  July 31, 2011

  	
   

  
	
  $

  	
  21,000,000

  	
   

  	
  October 31, 2011

  	
   

  
	
  $

  	
  22,000,000

  	
   

  	
  January 31, 2012

  	
   

  
	
  $

  	
  24,000,000

  	
   

  	
  April 30, 2012

  	
   

  
	
  $

  	
  26,000,000

  	
   

  	
  July 31, 2012

  	
   

  
	
  $

  	
  27,000,000

  	
   

  	
  October 31, 2012

  	
   

  
	
  $

  	
  30,000,000

  	
   

  	
  January 31, 2013

  	
   

  
	
  $

  	
  31,000,000

  	
   

  	
  April 30, 2013

  	
   

  
	
  $

  	
  32,000,000

  	
   

  	
  July 31, 2013

  	
   

  
	
  $

  	
  33,000,000

  	
   

  	
  October 31, 2013

  	
   

  
	
  $

  	
  33,000,000

  	
   

  	
  January 31, 2014

  	
   

  
	
  $

  	
  33,000,000

  	
   

  	
  April 30, 2014

  	
   

  
	
  $

  	
  33,000,000

  	
   

  	
  July 31, 2014

  	
   

  
	
  $

  	
  33,000,000

  	
   

  	
  October 31, 2014

  	
   

  
	
  $

  	
  33,000,000

  	
   

  	
  January 31, 2015

  	
   

  

 

(c)  Minimum Zale Canada Store
Contribution:  Zale Canada Store Contribution, measured on the last day
of each Fiscal Quarter for the four consecutive Fiscal Quarters then ended, of
at least the required amount set forth in the following table for the
applicable measurement date set forth opposite thereto:

 

	
  Minimum Amount (in CDN$)

  	
   

  	
  Measurement Date

  	
   

  
	
  $

  	
  27,000,000

  	
   

  	
  January 31, 2011

  	
   

  
	
  $

  	
  28,000,000

  	
   

  	
  April 30, 2011

  	
   

  
	
  $

  	
  30,000,000

  	
   

  	
  July 31, 2011

  	
   

  
	
  $

  	
  31,000,000

  	
   

  	
  October 31, 2011

  	
   

  
	
  $

  	
  33,000,000

  	
   

  	
  January 31, 2012

  	
   

  
	
  $

  	
  34,000,000

  	
   

  	
  April 30, 2012

  	
   

  
	
  $

  	
  36,000,000

  	
   

  	
  July 31, 2012

  	
   

  
	
  $

  	
  38,000,000

  	
   

  	
  October 31, 2012

  	
   

  
	
  $

  	
  40,000,000

  	
   

  	
  January 31, 2013

  	
   

  
	
  $

  	
  41,000,000

  	
   

  	
  April 30, 2013

  	
   

  
	
  $

  	
  43,000,000

  	
   

  	
  July 31, 2013

  	
   

  
	
  $

  	
  44,000,000

  	
   

  	
  October 31, 2013

  	
   

  
	
  $

  	
  45,000,000

  	
   

  	
  January 31, 2014

  	
   

  
	
  $

  	
  45,000,000

  	
   

  	
  April 30, 2014

  	
   

  
	
  $

  	
  45,000,000

  	
   

  	
  July 31, 2014

  	
   

  
	
  $

  	
  45,000,000

  	
   

  	
  October 31, 2014

  	
   

  
	
  $

  	
  45,000,000

  	
   

  	
  January 31, 2015

  	
   

  

 

57

 

(d)  Minimum Liquidity:  (i) For so long as the ABL Credit
Agreement is in effect, the Borrower shall not permit Liquidity to be less than
the required amount set forth in the following table for each day during the
applicable period:

 

 

	
  Minimum Amount

  	
   

  	
  Applicable Period

  	
   

  
	
  $

  	
  120,000,000

  	
   

  	
  Closing Date to December 31, 2010

  	
   

  
	
  $

  	
  135,000,000

  	
   

  	
  Thereafter

  	
   

  

 

(ii) If at any time the Borrower does
not maintain Liquidity of at least the required amount set forth in the above
table for the applicable period, the Borrower shall not request any Borrowings
(as defined in the ABL Credit Agreement) at such time.

 

SECTION 7.09.  Hedging Agreements.  The Borrower shall not, and shall not permit
any of its Subsidiaries to, enter into any Hedging Agreement except for Hedging
Agreements used solely as a part of its normal business operations as a risk
management strategy and/or to hedge against changes resulting from market
operations in accordance with its customary policies.

 

SECTION 7.10.  Fiscal Year.  The Borrower shall not, and shall not permit
any of its Subsidiaries to, change its Fiscal Year.

 

SECTION 7.11.  Negative Pledge; Subsidiary
Restrictions.  The Borrower
shall not, and shall not permit any of its Subsidiaries to, enter into or
suffer to exist any agreement that (a) limits the ability (i) of
any Subsidiary that is not a Loan Party to make Restricted Payments or other
distributions to any Loan Party or to otherwise transfer property to or invest
in a Loan Party, (ii) of any Subsidiary (other than any Zale Insurance
Subsidiary) to Guarantee the Obligations, (iii) of any Subsidiary that is
not a Loan Party to make or repay loans to a Loan Party or (iv) of the
Loan Parties to create, incur, assume or suffer to exist Liens on property of
such Person in favor of the Administrative Agent; or (b) requires the
grant of a Lien by a Loan Party to secure an obligation of such Person if a
Lien is granted to secure another obligation of such Person; provided that (1) the
foregoing shall not apply to (A) restrictions and conditions imposed by
law or by any Loan Document or by the Existing Revolving Credit Facility and (B) restrictions
and conditions existing as of the Closing Date and set forth on Schedule
7.11 and any extension or renewal thereof, or any amendment or modification
thereto, in each case that does not expand the scope of such restriction or
condition; provided that such restrictions and conditions apply only to
such Subsidiary, (2) clauses (a)(i) and (a)(iv) of the foregoing
shall not apply to restrictions or conditions imposed by any agreement relating
to secured Indebtedness permitted by clause (f) of Section 7.01A if
such restrictions or conditions 

 

58

 

apply only to the assets securing such Indebtedness, (3) clause
(a)(i) of the foregoing shall not apply to customary provisions in leases
and other agreements restricting the assignment thereof and (4) clauses
(a)(i) and (a)(iii) of the foregoing shall not apply to customary
restrictions and conditions contained in agreements relating to the sale of a
Subsidiary, or a business unit, division, product line or line of business,
that are applicable solely pending such sale; provided that such
restrictions and conditions apply only to the Subsidiary, or the business unit,
division, product line or line of business, that is to be sold and such sale is
permitted hereunder.

 

SECTION 7.12.  Amendments.  The Borrower shall not, and shall not permit
any of its Subsidiaries to, without the prior consent of the Administrative
Agent (which consent shall not be unreasonably withheld, conditioned or
delayed), amend any of the terms or provisions of:

 

(a)  the ABL Credit Agreement (other
than as permitted by the Intercreditor Agreement); or

 

(b)  the Organization Documents of any
Loan Party or any of its Subsidiaries other than to the extent that such
amendment would not, individually or in the aggregate, reasonably be expected
to be materially adverse to the interests of the Lenders; or

 

(c)  any Material Contract except to the
extent that such amendment would not, individually or in the aggregate,
reasonably be expected to be materially adverse to the interests of the Lenders.

 

SECTION 7.13.  Certain Matters Relating to Zale Insurance
Subsidiaries.  (a)  The Borrower
shall cause the Zale Insurance Subsidiaries not to: (A) enter into any
material intercompany agreements which require approval of a Governmental
Authority or (B) modify the material terms of any existing intercompany
agreements, in either case if such new agreement or amendment would reasonably
be expected to be adverse in any material respect to the Lenders.

 

(b)  The Borrower shall cause the Zale
Insurance Subsidiaries not to issue any of their Equity Interests or securities
convertible into or exchangeable for any such Equity Interests.

 

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

 

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

 

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ARTICLE
VIII

 

EVENTS OF DEFAULT

 

SECTION 8.01.  Events of Default.  If any of the following events (“Events of
Default”) shall occur:

 

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

 

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

 

(c)  any representation or warranty made
or deemed made by or on behalf of any Loan Party in or in connection with any
Loan Document or any amendment or modification thereof or waiver thereunder, or
in any certificate furnished pursuant to any Loan Document or any amendment or
modification thereof or waiver thereunder, shall prove to have been incorrect
in any material respect when made or deemed made;

 

(d)  any Loan Party shall fail to
observe or perform any covenant, condition or agreement contained in Section 6.02,
Section 6.03, Section 6.08, Section 6.10, Section 6.16 or
in Article VII;

 

(e)  any Loan Party shall fail to
observe or perform any covenant, condition or agreement contained in any Loan
Document (other than those specified in clause (a), (b), (c) or (d) of
this Article), and such failure shall continue unremedied for a period of 30 days
after notice thereof from the Administrative Agent to the Borrower (which
notice will be given at the request of any Lender);

 

(f)  any Loan Party shall fail to make
any payment (whether of principal or interest and regardless of amount) in
respect of any Material Indebtedness when and as the same shall become due and
payable (after giving effect to the expiration of any grace or cure period set
forth therein);

 

(g)  any event or condition occurs that
results in any Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits (with or without the giving of notice, the
lapse of time or both) the holder or holders of any such Material Indebtedness
or any trustee or agent on its or their behalf to cause any such Material Indebtedness
to become due, or to require the prepayment, repurchase, redemption or
defeasance thereof, prior to its scheduled maturity or, in the case of the
Existing Revolving Credit Facility, to terminate all commitments thereunder
prior to scheduled maturity; provided, however, that this
clause (g) shall not apply to secured Indebtedness that becomes due
as a result of the voluntary sale or transfer of the property or assets
securing such Indebtedness or to mandatory prepayments under Material
Indebtedness that do not involve a default thereunder;

 

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(h)  an involuntary proceeding shall be
commenced or an involuntary petition shall be filed seeking (i) liquidation,
reorganization or other relief in respect of any Loan Party or its debts, or of
a substantial part of its assets, under any federal, state or provincial
bankruptcy, insolvency, receivership or similar law now or hereafter in effect
or (ii) the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for any Loan Party or for a substantial part of
its assets, and, in any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect for 30 days;

 

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

 

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

 

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

 

(l)  any material provision of any Loan
Document, at any time after its execution and delivery and for any reason other
than as expressly permitted hereunder or thereunder or as a result of acts or
omissions by the Administrative Agent or any Lender or satisfaction in full of
all the Obligations, ceases to be in full force and effect; or any Loan Party
contests in any manner the validity or enforceability of any provision of any
Loan Document or the Intercreditor Agreement, or purports to revoke, terminate
or rescind any provision of any Loan Document or the Intercreditor Agreement,
or denies that it has any or further liability or obligation under any
provision of any Loan Document;

 

(m)  any challenge by or on behalf of
any Person other than any Loan Party to the validity of any Loan Document or
the Intercreditor Agreement or the applicability or enforceability of any Loan
Document or the Intercreditor Agreement strictly in accordance with the subject
agreement’s terms, in each case as to which an order or judgment has been
entered adverse to the Administrative Agent and the Lenders;

 

(n)  an ERISA Event or a Canadian
Pension Plan Event occurs that, when taken together with all other ERISA Events
or Canadian Pension Plan Events that have occurred, would reasonably be
expected to result in a Material Adverse Effect;

 

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(o)  any Lien purported to be created
under any Security Document shall cease to be, or shall be asserted by any Loan
Party not to be, a valid and perfected Lien on any Collateral, with the
priority required by the applicable Security Document, except (i) as a
result of the sale or other disposition of the applicable Collateral in a
transaction permitted under, or otherwise in accordance with the terms of, the
Loan Documents; (ii) as a result of the failure by the Administrative
Agent (or other possessory agent pursuant to the Intercreditor Agreement) to
maintain possession of any stock certificates, promissory notes or other
instruments delivered to it under any Security Document or to properly file
Uniform Commercial Code or other financing or continuation statements or
equivalent forms (unless such failure to file is attributable to a Loan Party’s
failure to comply with any of its obligations under the Loan Documents); or (iii) in
accordance with the terms of the Intercreditor Agreement;

 

(p)  a Change in Control shall occur;

 

(q)  except as otherwise permitted
hereunder, the determination by the Borrower, whether by vote of the Borrower’s
board of directors or otherwise, to (i) generally suspend the operation of
the Borrower’s and its Subsidiaries’ business in the ordinary course, (ii) liquidate
all or a material portion of the Borrower’s and its Subsidiaries’ assets or
Store locations or (iii) employ an agent or other third party to conduct
any so-called Store closing, Store liquidation or “Going-Out-Of-Business” sales
for the Borrower’s and its Subsidiaries’ Stores generally;

 

(r)  the occurrence of any uninsured
loss to the Collateral in an amount equal to $10,000,000 or greater;

 

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

 

(t)  the termination or attempted
termination of any Facility Guaranty or Canadian Facility Guaranty except as
expressly permitted hereunder or under any other Loan Document;

 

then, and in every such event (other than an
event with respect to any Loan Party described in clause (h) or (i) of
this Article), and at any time thereafter during the continuance of such event,
the Administrative Agent may, and at the request of the Required Lenders shall,
by notice to the Borrower, declare the Loans then outstanding to be due and
payable in whole (or in part, in which case any principal not so declared to be
due and payable may thereafter be declared to be due and payable), and
thereupon the principal of the Loans so declared to be due and payable,
together with accrued interest thereon and all fees and other obligations of
the Loan Parties accrued hereunder, shall become due and payable immediately,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Loan Parties, and in case of any event with respect to
any Loan Party described in clause (h) or (i) of this Article, the
principal of the Loans then outstanding, together with accrued interest thereon
and all fees and other obligations of the Loan Parties accrued hereunder, shall
automatically become due 

 

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and payable, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Loan Parties.

 

SECTION 8.02.  When Continuing.  For all purposes under this Agreement, each
Default and Event of Default that has occurred shall be deemed to be continuing
at all times thereafter unless it either (a) is cured or corrected or (b) is
waived in writing by the Lenders in accordance with Section 10.01.

 

SECTION 8.03.  Remedies on Default.  In case any one or more Events of Default
shall have occurred and be continuing, and whether or not the maturity of the
Loans shall have been accelerated pursuant hereto, the Administrative Agent may
proceed to protect and enforce its rights and remedies under this Agreement,
the Notes or any of the other Loan Documents by suit in equity, action at law
or other appropriate proceeding, whether for the specific performance of any
covenant or agreement contained in this Agreement and the other Loan Documents
or any instrument pursuant to which the Obligations are evidenced, and, if such
amount shall have become due, by declaration or otherwise, proceed to enforce
the payment thereof or any other legal or equitable right of the Administrative
Agent or the Lenders.  No remedy herein
is intended to be exclusive of any other remedy and each and every remedy shall
be cumulative and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute or any other
provision of law.

 

SECTION 8.04.  Application of Proceeds.  In the event that an Event of Default exists
and the Administrative Agent or any Lender, as the case may be, receives any
monies in connection with the enforcement of this Agreement or any of the
Security Documents, or otherwise with respect to the realization upon, or
disposition of, any of the Collateral, such monies shall be, subject to the
Intercreditor Agreement and applicable law, distributed for application as
follows:

 

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

 

(b)  Second, to all Obligations owing to
the Lenders and the Administrative Agent, in such order or preference as the
Required Lenders may determine; provided, however, that (i) distributions
shall be made (A) pari passu among Obligations with respect to fees owed
to the Administrative Agent and all other Obligations owed to the Lenders and (B) with
respect to each type of Obligation owing to the Lenders, such as interest,
principal, reasonable fees and expenses, among the Lenders pro rata, and (ii) the
Administrative Agent may in its reasonable discretion make proper allowance to
take into account any Obligations not then due and payable; and

 

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

ARTICLE IX

 

ADMINISTRATIVE AGENT AND LENDERS

 

SECTION 9.01.  Appointment of Administrative Agent and
Authority.

 

(a)  Each Lender hereby irrevocably
designates Z Investment Holdings, LLC as Administrative Agent under this
Agreement and the other Loan Documents. 
The general administration of the Loan Documents shall be by the
Administrative Agent.  Each Lender hereby
(a) irrevocably authorizes the Administrative Agent to (i) enter into
the Intercreditor Agreement and the Loan Documents to which it is a party,
including the Security Agreement, and (ii) at its discretion, take or
refrain from taking such actions as agent on its behalf and to exercise or
refrain from exercising such powers under the Loan Documents and the
Intercreditor Agreement as are delegated by the terms hereof or thereof, as
appropriate, together with all powers reasonably incidental thereto and (b) agrees
and consents to all the provisions of the Loan Documents and the Intercreditor
Agreement.  All Collateral shall be held
or administered by the Administrative Agent (or its duly-appointed agent) for
its own benefit and for the ratable benefit of the other Credit Parties.  Any proceeds received by the Administrative
Agent from the foreclosure, sale, lease or other disposition of any of the
Collateral and any other proceeds received pursuant to the terms of the
Security Documents or the other Loan Documents shall be paid over to the
Administrative Agent for application as provided in this Agreement and the
other Loan Documents, subject to the terms of the Intercreditor Agreement.  The Administrative Agent shall have no duties
or responsibilities except as set forth in this Agreement and the other Loan
Documents, nor shall it have any fiduciary relationship with any other Credit
Party, and no implied covenants, responsibilities, duties, obligations or
liabilities shall be read into the Loan Documents or otherwise exist against
the Administrative Agent.

(b)  The provisions of this Article IX
are solely for the benefit of the Administrative Agent and the Lenders, and no
Loan Party shall have rights as a third-party beneficiary of any of such
provisions (other than the provisions of Sections 9.06 and 9.10).

SECTION 9.02.  Rights as a Lender.  The Person serving as the Administrative
Agent hereunder shall have the same rights and powers in its capacity as a
Lender as any other Lender and may exercise the same as though it were not the
Administrative Agent, and the term “Lender” or “Lenders” shall, unless
otherwise expressly indicated or unless the context otherwise requires, include
the Person serving as the Administrative Agent hereunder in its individual
capacity.  Such Person and its Affiliates
may accept deposits from, lend money to, act as the financial advisor or in any
other advisory capacity for and generally engage in any kind of business with
the Loan Parties or any Affiliate thereof as if such Person were not the
Administrative Agent hereunder and without any duty to account therefor to the
Lenders.

 

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SECTION 9.03.  Exculpatory Provisions.

 

(a)  The Administrative Agent shall not
have any duties or obligations except those expressly set forth herein and in
the other Loan Documents.  Without
limiting the generality of the foregoing, the Administrative Agent:

 

(i) shall
not be subject to any fiduciary or other implied duties, regardless of whether
a Default has occurred and is continuing;

 

(ii) shall
not have any duty to take any discretionary action or exercise any
discretionary powers, except discretionary rights and powers expressly
contemplated hereby or by the other Loan Documents that the Administrative
Agent is required to exercise as directed in writing by the Required Lenders
(or such other number or percentage of the Lenders as shall be expressly
provided for herein or in the other Loan Documents); provided, however,
that the Administrative Agent shall not be required to take any action that, in
its opinion or the opinion of its counsel, may expose the Administrative Agent
to liability or that is contrary to any Loan Document or applicable law; and

 

(iii) shall
not, except as expressly set forth herein and in the other Loan Documents, have
any duty to disclose, and the Administrative Agent shall not be liable for the
failure to disclose, any information relating to the Loan Parties or any of
their Affiliates that is communicated to or obtained by the Person serving as
the Administrative Agent or any of its Affiliates in any capacity.

 

(b)  The Administrative Agent shall not
be liable to any Credit Party for any action taken or not taken by it (i) with
the consent or at the request of the Required Lenders (or such other number or
percentage of the Lenders as shall be necessary, or as the Administrative Agent
shall believe in good faith shall be necessary, under the circumstances as
provided in Section 8.03 and Section 10.01); or (ii) in the
absence of its own gross negligence or willful misconduct as determined by a
final and non-appealable judgment of a court of competent jurisdiction.

 

(c)  The Administrative Agent shall not
be deemed to have knowledge of any Default unless and until notice describing
such Default is given to the Administrative Agent by the Loan Parties or a
Lender.  In the event that the
Administrative Agent obtains such actual knowledge or receives such a notice,
the Administrative Agent shall give prompt notice thereof to each of the other
Lenders.  Upon the occurrence of an Event
of Default, the Administrative Agent shall take such action with respect to
such Default or Event of Default as shall be reasonably directed by the
Required Lenders.  Unless and until the
Administrative Agent shall have received such direction, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to any such Default or Event of Default as it
shall deem advisable in the best interests of the Credit Parties.  In no event shall the Administrative Agent be
required to comply with any such directions to the extent that the
Administrative Agent believes that its compliance with such directions would be
unlawful.

 

(d)  The Administrative Agent shall not
be responsible for or have any duty to ascertain or inquire into (i) any
statement, warranty or representation made in or in connection with this
Agreement or any other Loan Document, (ii) the contents of any
certificate, report or 

 

65

 

other document delivered hereunder or thereunder or in connection
herewith or therewith, (iii) the performance or observance of any of the
covenants, agreements or other terms or conditions set forth herein or therein
or the occurrence of any Default, (iv) the validity, enforceability,
effectiveness or genuineness of this Agreement, any other Loan Document or any
other agreement, instrument or document or the creation, perfection or priority
of any Lien purported to be created by the Security Documents, (v) the
value or the sufficiency of any Collateral or (vi) the satisfaction of any
condition set forth in Article IV or elsewhere herein, other than to
confirm receipt of items expressly required to be delivered to the Administrative
Agent.

 

SECTION 9.04.  Reliance by the Administrative Agent.  The Administrative Agent shall be entitled to
rely upon, and shall not incur any liability for relying upon, any notice,
request, certificate, consent, statement, instrument, document or other writing
(including any electronic message, Internet or intranet website posting or
other distribution) believed by it to be genuine and to have been signed, sent
or otherwise authenticated by the proper Person.  The Administrative Agent also may rely upon
any statement made to it orally or by telephone and believed by it to have been
made by the proper Person, and shall not incur any liability for relying
thereon.  In determining compliance with
any condition hereunder to the making of a Loan that by its terms must be
fulfilled to the satisfaction of a Lender, the Administrative Agent may presume
that such condition is satisfactory to such Lender unless the Administrative
Agent shall have received written notice to the contrary from such Lender prior
to the making of such Loan.  The
Administrative Agent may consult with legal counsel (who may be counsel for any
Loan Party), independent accountants and other experts selected by it, and
shall not be liable for any action taken or not taken by it in accordance with
the advice of any such counsel, accountants or experts.

 

SECTION 9.05.  Delegation of Duties.  The Administrative Agent may perform any and
all of its duties and exercise its rights and powers hereunder or under any
other Loan Document by or through any one or more sub-agents appointed by the
Administrative Agent.  The Administrative
Agent and any such sub-agent may perform any and all of their duties and
exercise their rights and powers by or through their respective Related
Parties.  The exculpatory provisions of
this Article shall apply to any such sub-agent and to the Related Parties
of the Administrative Agent and any such sub-agent, and shall apply to their
respective activities as such agent.

 

SECTION 9.06.  Resignation of the Administrative Agent.  The Administrative Agent may at any time give
written notice of its resignation to the Lenders and the Borrower.  Upon receipt of any such notice of
resignation, the Required Lenders shall have the right, in consultation with
the Borrower, to appoint a successor, which shall be a bank with an office in
the United States, or an Affiliate of any such bank with an office in the
United States and shall, unless an Event of Default has occurred and is
continuing at the time of such appointment, be reasonably acceptable to the
Borrower (whose consent shall not be unreasonably withheld or delayed).  If no such successor shall have been so
appointed by the Required Lenders and shall have accepted such appointment within
30 days after the retiring Administrative Agent gives notice of its
resignation, then the retiring Administrative Agent may on behalf of the
Lenders appoint a successor Administrative Agent meeting the qualifications set
forth above; provided that if the retiring Administrative Agent shall notify
the Borrower and the Lenders that no qualifying Person has accepted such
appointment, then such resignation shall nonetheless become effective in
accordance with such notice and (a) the retiring Administrative Agent
shall be discharged from its duties and obligations hereunder and under the 

 

66

 

other Loan Documents (except that in the case of any Collateral held by
the Administrative Agent on behalf of the Lenders under any of the Loan
Documents, the retiring Administrative Agent shall continue to hold such
Collateral on behalf of the Lenders until such time as a successor
Administrative Agent is appointed) and (b) all payments, communications
and determinations provided to be made by, to or through the retiring
Administrative Agent shall instead be made by or to each Lender directly, until
such time as the Required Lenders appoint a successor Administrative Agent as
provided for in this Section.  Upon the
acceptance of a successor’s appointment as an Administrative Agent hereunder,
such successor shall succeed to and become vested with all of the rights,
powers, privileges and duties of the retiring (or retired) Administrative
Agent, and the retiring Administrative Agent shall be discharged from all of its
duties and obligations hereunder or under the other Loan Documents (if not
already discharged therefrom as provided above in this Section).  After the retiring Administrative Agent’s
resignation hereunder and under the other Loan Documents, the provisions of
this Article and Section 10.04 shall continue in effect for the
benefit of such retiring Administrative Agent, its sub-agents and their
respective Related Parties in respect of any actions taken or omitted to be
taken by any of them while the retiring Administrative Agent was acting as an
Administrative Agent hereunder.

 

SECTION 9.07.  Non-Reliance on the Administrative Agent
and Other Lenders.  Each Lender
acknowledges that it has, independently and without reliance upon the
Administrative Agent or any other Lender or any of their Related Parties and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement.  Each Lender also acknowledges that it will,
independently and without reliance upon the Administrative Agent or any other
Lender or any of their Related Parties and based on such documents and
information as it shall from time to time deem appropriate, continue to make
its own decisions in taking or not taking action under or based upon this
Agreement, any other Loan Document or any related agreement or any document
furnished hereunder or thereunder.  The
Administrative Agent shall not have any duty or responsibility to provide any
Credit Party with any other credit or other information concerning the affairs,
financial condition or business of any Loan Party that may come into the
possession of the Administrative Agent.

 

SECTION 9.08.  [Intentionally Omitted].

 

SECTION 9.09.  Administrative Agent May File Proofs
of Claim.  In the case of the
pendency of any proceeding under any Debtor Relief Law or any other judicial
proceeding relative to any Loan Party, the Administrative Agent (irrespective
of whether the principal of any Loan shall then be due and payable as herein
expressed or by declaration or otherwise and irrespective of whether the
Administrative Agent shall have made any demand on the Loan Parties) shall be
entitled and empowered, by intervention in such proceeding or otherwise:

 

(a)  to file and prove a claim for the
whole amount of the principal and interest owing and unpaid in respect of the
Loans and all other Obligations that are owing and unpaid and to file such
other documents as may be necessary or advisable in order to have the claims of
the Lenders, the Administrative Agent and the other Credit Parties (including
any claim for the reasonable compensation, expenses, disbursements and advances
of the Lenders, the Administrative Agent, such other Credit Parties and their
respective agents and counsel and all other amounts due the Lenders, the
Administrative Agent and such other Credit Parties under Section 10.04)
allowed in such judicial proceeding; and

 

67

 

(b)  to collect and receive any monies
or other property payable or deliverable on any such claims and to distribute
the same;

 

and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar official in any such
judicial proceeding is hereby authorized by each Lender to make such payments
to the Administrative Agent and, if the Administrative Agent shall consent to
the making of such payments directly to the Lenders, to pay to the
Administrative Agent any amount due for the reasonable compensation, expenses,
disbursements and advances of the Administrative Agent and its agents and
counsel, and any other amounts due the Administrative Agent under Section 10.04.

 

Nothing contained herein shall be deemed to
authorize the Administrative Agent to authorize or consent to or accept or adopt
on behalf of any Lender any plan of reorganization, arrangement, adjustment or
composition affecting the Obligations or the rights of any Lender or to
authorize the Administrative Agent to vote in respect of the claim of any
Lender in any such proceeding.

 

SECTION 9.10.  Collateral and Guaranty Matters.  The Credit Parties irrevocably authorize the
Administrative Agent, and the Administrative Agent agrees, at its option and in
its discretion:

 

(a)  to release any Lien on any property
granted to or held by the Administrative Agent under any Loan Document (i) upon
payment in full of all Obligations (other than contingent indemnification
obligations for which no claim has been asserted), (ii) that is disposed
of or to be disposed of as part of or in connection with any disposition
permitted hereunder or under any other Loan Document, or (iii) if
approved, authorized or ratified by the Required Lenders in accordance with Section 10.01;

 

(b)  to subordinate any Lien on any
property granted to or held by the Administrative Agent under any Loan Document
to the holder of any Lien on such property that is permitted by Section 7.02(d) or
(m); and

 

(c)  to release any Guarantor from its
obligations under any Facility Guaranty or Canadian Facility Guaranty, as
applicable, and each other applicable Loan Document if such Person ceases to be
a Subsidiary as a result of a transaction permitted hereunder.

 

Upon request by the Administrative Agent at
any time, the Required Lenders (or such other number or percentage of the Lenders
as shall be expressly provided for herein or in the other Loan Documents) will
confirm in writing the Administrative Agent’s authority to release or
subordinate its interest in particular types or items of property, or to
release any Guarantor from its obligations under the Facility Guaranty or
Canadian Facility Guaranty, as applicable, and each other applicable Loan
Document pursuant to this Section 9.10. 
In each case as specified in this Section 9.10, the Administrative
Agent will, at the Loan Parties’ expense, execute and deliver to the applicable
Loan Party such documents it may reasonably request to evidence the release of
such item of Collateral from the Lien granted under the Security Documents or
to subordinate its interest in such item, or to release such Guarantor from its

 

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obligations under the
Facility Guaranty or Canadian Facility Guaranty, as applicable, in each case in
accordance with the terms of the Loan Documents and this Section 9.10.

 

SECTION 9.11.  Notice of Transfer.  The Administrative Agent may deem and treat a
Lender party to this Agreement as the owner of such Lender’s portion of the
Loans and Commitments for all purposes, unless and until, and except to the
extent, an Assignment and Assumption shall have become effective as set forth
in Section 10.06.

 

SECTION 9.12.  Agency for Perfection.  Each Lender hereby appoints the
Administrative Agent as agent for the purpose of perfecting Liens for the
benefit of the Lenders, in assets which, in accordance with Article 9 of
the Uniform Commercial Code or any other applicable law of the United States of
America or Canada, can be perfected only by possession.  Should any Lender (other than the
Administrative Agent) obtain possession of any such Collateral, such Lender
shall notify the Administrative Agent thereof and, promptly upon the
Administrative Agent’s request therefor, shall deliver such Collateral to the
Administrative Agent or otherwise deal with such Collateral in accordance with
the Administrative Agent’s instructions.

 

SECTION 9.13.  Intercreditor Agreement.  The Lenders acknowledge that the Existing
Revolving Credit Facility as currently in effect is, and any future
Indebtedness incurred pursuant to Section 7.01A(m) may be, secured by
Liens on the ABL Priority Collateral that have priority over the Liens under
the Loan Documents.  In connection with
the Borrower’s entry into this Agreement, the Administrative Agent shall enter
into the Intercreditor Agreement, establishing the relative rights of the
Credit Parties and the secured parties under the Existing Revolving Credit
Facility with respect to the Collateral, including the ABL Priority
Collateral.  Each Lender hereby
irrevocably (i) consents to the treatment of Liens to be provided for
under the Intercreditor Agreement, (ii) authorizes and directs the
Administrative Agent to execute and deliver the Intercreditor Agreement and any
documents relating thereto, in each case, on behalf of such Lender and without
any further consent, authorization or other action by such Lender, (iii) agrees
that, upon execution and delivery thereof, such Lender shall be bound by the
terms of the Intercreditor Agreement as if it were a signatory thereto and will
take no action contrary to the provisions of the Intercreditor Agreement and (iv) agrees
that no Lender shall have any right of action whatsoever against the
Administrative Agent as a result of any action taken by the Administrative
Agent pursuant to this Section or in accordance with the terms of the
Intercreditor Agreement.  Each Lender
hereby further irrevocably authorizes and directs the Administrative Agent to
enter into such amendments, supplements or other modifications to the
Intercreditor Agreement in connection with any extension, renewal or
refinancing of any Indebtedness incurred pursuant to Section 7.01A(m) or
any Loans as are reasonably acceptable to the Administrative Agent to give
effect thereto, in each case, on behalf of such Lender and without any further
consent, authorization or other action by such Lender.  The Administrative Agent shall have the
benefit of the provisions of this Article IX with respect to all actions
taken by it pursuant to this Section to the full extent thereof.

 

SECTION 9.14.  Indemnification of the Administrative
Agent.  The Lenders shall indemnify
the Administrative Agent (to the extent not reimbursed by the Loan Parties and
without limiting the obligations of the Loan Parties hereunder), ratably
according to their Applicable Percentages, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever that
may be imposed on, incurred by, or asserted against the Administrative Agent in
any way relating to or 

 

69

 

arising out of this Agreement or any other Loan Document or the
Intercreditor Agreement or any action taken or omitted to be taken by the
Administrative Agent in connection therewith; provided, that no Lender
shall be liable under this Section 9.14 for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements resulting from the Administrative Agent’s
gross negligence or willful misconduct as determined by a final and
non-appealable judgment of a court of competent jurisdiction.

 

SECTION 9.15.  Relation Among Lenders.  The Lenders are not, by virtue of their
status as Lenders, partners or co-venturers, and no Lender shall by virtue of
such status be liable for the acts or omissions of, or (except as otherwise set
forth herein in case of the Administrative Agent) authorized to act for, any
other Lender.

 

SECTION 9.16.  Defaulting Lender.

 

(a)  If for any reason any Lender shall
fail or refuse to abide by its obligations under this Agreement, and such
failure is not cured within two Business Days of receipt from the
Administrative Agent of written notice thereof, then, in addition to the rights
and remedies that may be available to the other Credit Parties, the Loan
Parties or any other party at law or in equity, and not at limitation thereof,
such Defaulting Lender’s right to participate in the administration of, or
decision-making rights related to, the Obligations, this Agreement or the other
Loan Documents shall be suspended during the pendency of such failure or
refusal.  Such decision-making and
participation rights shall be restored only upon the payment by the Defaulting
Lender of the expenses or other amounts as to which it is delinquent, together
with interest thereon at the rate set forth in Section 2.05(b) hereof
from the date when originally due until the date upon which any such amounts
are actually paid.

 

(b)  Each Defaulting Lender shall
indemnify the Administrative Agent and each non-Defaulting Lender from and
against any and all loss, damage or expenses, including reasonable attorneys’
fees and funds advanced by the Administrative Agent or by any non-Defaulting
Lender, on account of a Defaulting Lender’s failure to perform its obligations
under the Loan Documents.

 

SECTION 9.17.  Actions in Concert.  Anything in this Agreement to the contrary
notwithstanding, each Lender hereby agrees with each other Lender that no
Lender shall take any action to protect or enforce its rights arising out of
this Agreement or any other Loan Document (including exercising any rights of
setoff) without first obtaining the prior written consent of the Administrative
Agent and the Required Lenders, it being the intent of Lenders that any such
action to protect or enforce rights under this Agreement and the other Loan
Documents shall be taken in concert and at the direction or with the consent of
the Administrative Agent or the Required Lenders.

 

ARTICLE X

 

MISCELLANEOUS

 

SECTION 10.01.  Amendments.  No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent to any departure by
any Loan Party 

 

70

 

therefrom, shall be effective unless in writing signed by the Required
Lenders (or the Administrative Agent, with the consent of the Required Lenders)
and the Borrower, and each such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given; provided,
however, that no such amendment, waiver or consent shall:

 

(a)  postpone any date fixed by this
Agreement or any other Loan Document for any payment of principal, interest,
fees or premiums due to the Lenders (or any of them) hereunder or under any of the
other Loan Documents without the written consent of each Lender entitled to
such payment;

 

(b)  reduce the principal of, or the
rate of interest specified herein on, any Loan, or any fee or premium payable
hereunder, without the written consent of each Lender entitled to such amount;

 

(c)  change Section 2.03(a), Section 2.09,
Section 8.04 or the definition of “Applicable Percentage” in a manner that
would alter the pro rata sharing of payments required thereby or increase any
Lender’s Commitment without the written consent of each Lender affected
thereby;

 

(d)  change any provision of this Section or
reduce the percentage specified in the definition of “Required Lenders” or any
other provision hereof specifying the number or percentage of Lenders required
to amend, waive or otherwise modify any rights hereunder or make any
determination or grant any consent hereunder, without the written consent of
each Lender;

 

(e)  except as permitted hereunder or
under any other Loan Document, release, or limit the liability of, the Borrower
or any Loan Party without the written consent of each Lender; or

 

(f)  except as permitted hereunder or under any other Loan
Document or the Intercreditor Agreement, release all or substantially all of
the Collateral from the Liens of the Security Documents without the written
consent of each Lender;

 

provided  further that no amendment, waiver
or consent shall, unless in writing and signed by the Administrative Agent in
addition to the Lenders required above, affect the rights or duties of the
Administrative Agent under this Agreement or any other Loan Document.  Notwithstanding anything to the contrary
herein, no Defaulting Lender shall have any right to approve or disapprove any
amendment, waiver or consent hereunder other than those amendments, waivers or
consents requiring written consent of each Lender set forth in clauses (a) through
(f) above.

 

If any Lender does not consent (a “Non-Consenting
Lender”) to a proposed amendment, waiver, consent or release with respect
to any Loan Document that requires the consent of each or each affected Lender
and that has been approved by the Required Lenders, the Borrower may replace
such Non-Consenting Lender in accordance with Section 10.12;  provided, however, that such
amendment, waiver, consent or release can be effected as a result of the
assignment contemplated by such Section (together with all other such
assignments required by the Borrower to be made pursuant to this paragraph).

 

71

 

SECTION 10.02.  Notices; Effectiveness; Electronic
Communications.

 

(a)  Except as provided in clause (b) below,
all notices and other communications provided for herein shall be in writing
and shall be delivered by hand or overnight courier service, mailed by
certified or registered mail or sent by telecopier, as follows:

 

(i) if
to the Loan Parties or the Administrative Agent, to the address, telecopier
number or electronic mail address specified for such Person on Schedule 10.02;
and

 

(ii) if
to any other Lender, to the address, telecopier number or electronic mail
address specified in its Administrative Questionnaire.

 

Notices sent by hand or overnight courier
service, or mailed by certified or registered mail, shall be deemed to have
been given when received.  Notices sent
by telecopier shall be deemed to have been given when sent (except that, if not
given during normal business hours for the recipient, shall be deemed to have
been given at the opening of business on the next Business Day for the recipient).  Notices delivered through electronic
communications to the extent provided in subsection (b) below, shall be
effective as provided in such subsection (b).

 

(b)  Notices and other communications to
the Lenders hereunder may be delivered or furnished by electronic communication
(including e-mail and Internet or intranet websites) pursuant to procedures
approved by the Administrative Agent; provided, however, that the
foregoing shall not apply to notices to any Lender pursuant to Article II
if such Lender has notified the Administrative Agent that it is incapable of
receiving notices under such Article by electronic communication.  The Administrative Agent or the Borrower may,
in their discretion, agree to accept notices and other communications to them
hereunder by electronic communications pursuant to procedures approved by them
in writing; provided, however, that approval of such procedures
may be limited to particular notices or communications.

 

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

 

(d)  Each of the Loan Parties and the
Administrative Agent may change its address or telecopier number for notices
and other communications hereunder by notice to the Administrative Agent.  Each Lender may change its address or
telecopier number for notices and other communications hereunder by notice to
the Borrower and the Administrative Agent. 
In addition, each Lender agrees to notify the Administrative Agent from
time to time to ensure that the Administrative Agent has on record (i) an
effective address, contact name, telecopier number 

 

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and electronic mail address to which notices and other communications
may be sent and (ii) accurate wire instructions for such Lender.

 

(e)  The Administrative Agent and the
Lenders shall be entitled to rely and act upon any notices purportedly given by
or on behalf of the Loan Parties even if (i) such notices were not made in
a manner specified herein, were incomplete or were not preceded or followed by
any other form of notice specified herein or (ii) the terms thereof, as
understood by the recipient, varied from any confirmation thereof.  The Loan Parties shall indemnify the
Administrative Agent, each Lender and their respective Related Parties from all
losses, costs, expenses and liabilities resulting from the reliance by such
Person on each notice purportedly given by or on behalf of the Loan Parties.  All telephonic communications with the
Administrative Agent may be recorded by the Administrative Agent, and each of
the parties hereto hereby consents to such recording.

 

SECTION 10.03.  No Waiver; Cumulative Remedies.  No failure by any Credit Party to exercise,
and no delay by any such Person in exercising, any right, remedy, power or
privilege hereunder or under any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, power
or privilege hereunder or under any other Loan Document preclude any other or
further exercise thereof or the exercise of any other right, remedy, power or
privilege.  The rights, remedies, powers
and privileges provided herein and in the other Loan Documents are cumulative
and not exclusive of any rights, remedies, powers and privileges provided by
law.  Without limiting the generality of
the foregoing, the making of a Loan shall not be construed as a waiver of any
Default, regardless of whether any Credit Party may have had notice or
knowledge of such Default at the time.

 

SECTION 10.04.  Expenses; Indemnity; Damage Waiver.

 

(a)  The Loan Parties shall, jointly and
severally, pay all Credit Party Expenses.

 

(b)  The Loan Parties shall, jointly and
severally, indemnify the Administrative Agent and each Lender, and each Related
Party of any of the foregoing Persons (each such Person being called an “Indemnitee”),
against, and hold each Indemnitee harmless from, any and all losses, claims,
damages, liabilities and related expenses (other than with respect to Taxes),
including the reasonable and documented fees, charges and disbursements of
counsel for any Indemnitee, incurred by or asserted against any Indemnitee
arising out of, in connection with, or as a result of (i) the execution or
delivery of any Loan Document or any other agreement or instrument contemplated
hereby, the performance by the parties to the Loan Documents of their
respective obligations thereunder or the consummation of the transactions
contemplated by the Loan Documents or any other transactions contemplated
hereby, (ii) any Loan or the use of the proceeds therefrom, (iii) any
actual or alleged presence or release of Hazardous Materials on or from any
property currently or formerly owned or operated by any Loan Party or any of
their Subsidiaries, or any Environmental Liability related in any way to any
Loan Party or any of their Subsidiaries, or (iv) any actual or prospective
claim, litigation, investigation or proceeding relating to any of the
foregoing, whether based on contract, tort or any other theory and regardless
of whether any Indemnitee is a party thereto; provided, however,
that such indemnity shall not, as to any Indemnitee, be available to the extent
that such losses, claims, damages, liabilities or related expenses resulted
from the gross negligence, willful misconduct, bad faith or 

 

73

 

breach of contractual obligations of such Indemnitee or with respect to
a claim by one Indemnitee against another Indemnitee.

 

(c)  Without limiting their obligations
under Section 9.14 hereof, to the extent that any Loan Party for any
reason fails to indefeasibly pay any amount required under clause (a) or (b) of
this Section to be paid by it, each Lender severally agrees to pay to the
Administrative Agent or such Related Party, as the case may be, such Lender’s
Applicable Percentage (determined as of the time that the applicable
unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided,
however, that the unreimbursed expense or indemnified loss, claim,
damage, liability or related expense, as the case may be, was incurred by or
asserted against the Administrative Agent in its capacity as such, or against
any Related Party of any of the foregoing acting for the Administrative Agent
in connection with such capacity.

 

(d)  To the fullest extent permitted by
applicable law, the Loan Parties shall not assert, and hereby waive, any claim
against any Indemnitee, on any theory of liability, for special, indirect,
consequential or punitive damages (as opposed to direct or actual damages)
arising out of, in connection with, or as a result of, this Agreement, any
other Loan Document or any agreement or instrument contemplated hereby, the
transactions contemplated hereby or thereby, any Loan or the use of the
proceeds thereof.

 

(e)  All amounts due under this Section shall
be payable on demand (accompanied by back-up documentation) therefor.

 

(f)  The agreements in this Section shall
survive the resignation of the Administrative Agent, the assignment of any Loan
by any Lender, the replacement of any Lender and the repayment, satisfaction or
discharge of all the other Obligations and the termination of this Agreement.

 

SECTION 10.05.  Reinstatement; Payments Set Aside.  To the extent that any payment by or on
behalf of the Loan Parties is made to any Credit Party, or any Credit Party
exercises its right of setoff, and such payment or the proceeds of such setoff
or any part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required (including pursuant to any settlement
entered into by such Credit Party in its discretion) to be repaid to a trustee,
receiver or any other party, in connection with any proceeding under any Debtor
Relief Law or otherwise, then (a) to the extent of such recovery, the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such setoff had not occurred and (b) each Lender severally agrees to pay
to the Administrative Agent upon demand its Applicable Percentage (without
duplication) of any amount so recovered from or repaid by the Administrative
Agent, plus interest thereon from the date of such demand to the date such
payment is made at a rate per annum equal to the Federal Funds Effective Rate
from time to time in effect.  The
obligations of the Lenders under clause (b) of the preceding sentence
shall survive the payment in full of the Obligations and the termination of
this Agreement.

 

SECTION 10.06.  Successors and Assigns.

 

(a)  The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted hereby, except 

 

74

 

that no Loan Party may assign or otherwise transfer any of its rights
or obligations hereunder or under any other Loan Document without the prior
written consent of the Administrative Agent and each Lender and no Lender may
assign or otherwise transfer any of its rights or obligations hereunder except (i) to
an Eligible Assignee in accordance with the provisions of Section 10.06(b),
(ii) by way of participation in accordance with the provisions of Section 10.06(d) or
(iii) by way of pledge or assignment of a security interest subject to the
restrictions of Section 10.06(f) (and any other attempted assignment
or transfer by any party hereto shall be null and void).  Nothing in this Agreement, expressed or implied,
shall be construed to confer upon any Person (other than the parties hereto,
their respective successors and assigns permitted hereby, Participants to the
extent provided in Section 10.06(d) and, to the extent expressly
contemplated hereby, the Related Parties of each of the Credit Parties) any
legal or equitable right, remedy or claim under or by reason of this Agreement.

 

(b)  Any Lender may at any time assign
to one or more Eligible Assignees all or a portion of its rights and
obligations under this Agreement (including all or a portion of the Loans at
the time owing to it); provided, however, that any such
assignment shall be subject to the following conditions:

 

(i) Minimum Amounts:

 

(A) in the case of an assignment of the entire remaining amount of
the assigning Lender’s Loans at the time owing to it, no minimum amount need be
assigned; and

 

(B) in any case not described in subsection (b)(i)(A) of this
Section, the aggregate principal outstanding balance of the Loans of the
assigning Lender subject to each such assignment, determined as of the date the
Assignment and Assumption with respect to such assignment is delivered to the
Administrative Agent, shall not be less than $1,000,000 unless each of the
Administrative Agent and the Borrower otherwise consents, which consent of the
Borrower shall not be unreasonably withheld, delayed or conditioned and shall
not be required if an Event of Default has occurred and is continuing.

 

(ii) Proportionate
Amounts.  Each partial assignment
shall be made as an assignment of a proportionate part of all the assigning
Lender’s rights and obligations under this Agreement with respect to the Loans
or the Commitment assigned.

 

(iii) Required
Consents.  No consent shall be
required for any assignment except to the extent required by subsection (b)(i)(B) of
this Section and, in addition:

 

(A) the consent of the Borrower shall be required unless such
assignment is to an Eligible Assignee of the type described in clause (a) or
(b) of the definition thereof, which consent of the Borrower shall not be
required if any Event of Default has occurred and is continuing and, with
respect to any assignment after January 1, 2011, shall not be unreasonably
withheld, delayed or conditioned; and

 

75

 

(B) the consent of the Administrative Agent shall be required
unless such assignment is to a Lender or an Affiliate of a Lender.

 

(iv) Assignment
and Assumption. The parties to each assignment shall execute and deliver to
the Administrative Agent an Assignment and Assumption. The assignee, if it is
not a Lender, shall deliver to the Administrative Agent an Administrative
Questionnaire.

 

Subject to acceptance and recording thereof
by the Administrative Agent pursuant to subsection (c) of this Section,
from and after the effective date specified in each Assignment and Assumption,
the assignee thereunder shall be a party to this Agreement and, to the extent
of the interest assigned by such Assignment and Assumption, have the rights and
obligations of a Lender under this Agreement, and the assigning Lender
thereunder shall, to the extent of the interest assigned by such Assignment and
Assumption, be released from its obligations under this Agreement (and, in the
case of an Assignment and Assumption covering all of the assigning Lender’s
rights and obligations under this Agreement, such Lender shall cease to be a
party hereto) but shall continue to be entitled to the benefits of Section 3.01,
Section 3.02 and Section 10.04 with respect to facts and circumstances
occurring prior to the effective date of such assignment. Upon request, (a) the
Borrower (at its expense) shall execute and deliver a Note to the assignee
Lender and (b) the assignor Lender or, if applicable, the Administrative
Agent, shall return to the Borrower any Note made by the Borrower in favor of
such assignor Lender.

 

(c)  The Administrative Agent, acting
solely for this purpose as an agent of the Borrower, shall maintain at the
Administrative Agent’s Office a copy of each Assignment and Assumption
delivered to it and a register for the recordation of the names and addresses
of the Lenders and Participants and the Commitment of, and principal amount of
the Loans owing to, each Lender and Participant pursuant to the terms hereof
from time to time (the “Register”). The Loans are registered obligations
and the right, title and interest of any Lender, Participant or its assignees
in and to such obligations shall be transferable only upon notation of such
transfer in the Register.  The entries in
the Register shall be conclusive, absent manifest error, and the Borrower, the
Administrative Agent and the Lenders shall treat each Person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for
inspection by the Borrower and any Lender at any reasonable time and from time
to time upon reasonable prior notice. 
This Section 10.06(c) shall be construed so that the
Obligations are at all times maintained in “registered form” within the meaning
of Sections 163(f), 871(h)(2) and 881(c)(2) of the Code and any
regulations promulgated thereunder (and any other relevant or successor
provisions of the Code or such regulations).

 

(d)  Any Lender may at any time after January 1,
2011, sell participations to any Person (other than a natural Person or the
Loan Parties or any of the Loan Parties’ Affiliates or Subsidiaries) (each, a “Participant”)
in all or a portion of such Lender’s rights and/or obligations under this
Agreement (including all or a portion of its Loans); provided, however,
that (i) so long as no Default or Event of Default has occurred and is
continuing, the Initial Lender and its Affiliates shall not sell participations
exceeding 65.0% of the total Loans held by them at any time, (ii) such
Lender’s obligations under this Agreement shall remain unchanged, (iii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations and (iv) the Loan Parties, the
Administrative Agent and the other Lenders shall 

 

76

 

continue to deal solely and directly with such Lender in connection
with such Lender’s rights and obligations under this Agreement.  Any Participant shall agree in writing to
comply with all confidentiality obligations set forth in Section 10.07 as
if such Participant was a Lender hereunder.

 

Any agreement or instrument pursuant to which
a Lender sells such a participation shall provide that such Lender shall retain
the sole right to enforce this Agreement and to approve any amendment,
modification or waiver of any provision of this Agreement;  provided, however, that such
agreement or instrument may provide that such Lender will not, without the
consent of the Participant, agree to any amendment, waiver or other
modification described in the first proviso to Section 10.01 that affects
such Participant.  Subject to subsection (e) of
this Section, the Loan Parties agree that each Participant shall be entitled to
the benefits of Section 3.01 and Section 3.02 to the same extent as
if it were a Lender and had acquired its interest by assignment pursuant to Section 10.06(b);
provided, however, that such Participant’s participation is
recorded in the Register as set forth in Section 10.06(c) as though
it were a Lender.

 

(e)  A Participant shall not be entitled
to receive any greater payment under  Section 3.01 or Section 3.02
than the applicable Lender would have been entitled to receive with respect to
the participation sold to such Participant. 
A Participant shall not be entitled to the benefits of Section 3.01
unless the Borrower is notified of the participation sold to such Participant
and such Participant complies, for the benefit of the Loan Parties, with Section 3.01(e),
(f) or (g), as applicable, as though it were a Lender.

 

(f)  Any Lender may at any time pledge
or assign a security interest in all or any portion of its rights under this
Agreement (including under its Note, if any) to secure obligations of such
Lender, including any pledge or assignment to secure obligations to a Federal
Reserve Bank; provided, however, that no such pledge or
assignment shall release such Lender from any of its obligations hereunder or substitute
any such pledgee or assignee for such Lender as a party hereto.

 

(g)  The words “execution,” “signed,” “signature”
and words of like import in any Assignment and Assumption shall be deemed to
include electronic signatures or the keeping of records in electronic form,
each of which shall be of the same legal effect, validity or enforceability as
a manually executed signature or the use of a paper-based recordkeeping system,
as the case may be, to the extent and as provided for in any applicable law,
including the Federal Electronic Signatures in Global and National Commerce
Act, the New York State Electronic Signatures and Records Act or any other
similar state laws based on the Uniform Electronic Transactions Act.

 

SECTION 10.07.  Treatment of Certain Information;
Confidentiality.  Each of the Credit
Parties agrees, on behalf of itself and each of its Affiliates, directors,
officers, employees and representatives, to use reasonable precautions to keep
confidential, in accordance with their customary procedures for handling
confidential information of the same nature and in accordance with safe and
sound practices, any non-public information supplied to it by the Borrower or
any of its Subsidiaries pursuant to this Agreement that is identified by such
Person as being confidential at the time the same is delivered to such Credit
Party; provided that nothing herein shall limit the disclosure of any
such 

 

77

 

information (a) after such information
shall have become public other than through a violation of this Section 10.07,
(b) to the extent required by statute, rule, regulation or judicial
process, (c) to counsel for any of the Credit Parties, (d) to bank
examiners or any other U.S. Federal or foreign regulatory authority having
jurisdiction over any Credit Party or to auditors or accountants, (e) to
the Administrative Agent or any other Credit Party, (f) in connection with
any litigation to which the Administrative Agent or any other Credit Party is a
party, or in connection with the enforcement of rights or remedies hereunder or
under any other Loan Document, or (g) to any assignee or Participant (or
prospective assignee or participant) so long as such assignee or Participant
agrees to be bound by the provisions of this Section 10.07.

 

SECTION 10.08.  Interest Rate Limitation.  Notwithstanding anything to the contrary
contained in any Loan Document, the interest paid or agreed to be paid under
the Loan Documents shall not exceed the maximum rate of non-usurious interest
permitted by applicable law (the “Maximum Rate”).  If the Administrative Agent or any Lender
shall receive interest in an amount that exceeds the Maximum Rate, the excess
interest shall be applied to the principal of the Loans or, if it exceeds such
unpaid principal, refunded to the Borrower. 
In determining whether the interest contracted for, charged or received
by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person
may, to the extent permitted by applicable law, (a) characterize any
payment that is not principal as an expense, fee or premium rather than
interest, (b) exclude voluntary prepayments and the effects thereof and (c) amortize,
prorate, allocate and spread in equal or unequal parts the total amount of
interest throughout the contemplated term of the Obligations hereunder.

 

SECTION 10.09.  Counterparts; Integration; Effectiveness.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and the Intercreditor Agreement constitute
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof. Except as provided in Section 4.01,
this Agreement shall become effective when it shall have been executed by the
Administrative Agent and when the Administrative Agent shall have received
counterparts hereof that, when taken together, bear the signatures of each of
the other parties hereto. Delivery of an executed counterpart of a signature page of
this Agreement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually executed
counterpart of this Agreement.

 

SECTION 10.10.  Survival.  All representations and warranties made
hereunder and in any other Loan Document or other document delivered pursuant
hereto or thereto or in connection herewith or therewith shall survive the
execution and delivery hereof and thereof. Such representations and warranties
have been or will be relied upon by the Administrative Agent and the Lenders,
regardless of any investigation made by the Administrative Agent or any Lenders
or on their behalf and notwithstanding that the Administrative Agent and the
Lenders may have had notice or knowledge of any Default at the time of making the
Loans, and shall continue in full force and effect as long as any Loan or any
other Obligation hereunder (other than contingent indemnity obligations for
which claims have not been asserted) shall remain unpaid or unsatisfied.  Further, the provisions of Article III, Article IX
and Section 10.04 shall survive and remain in full force and effect after
the termination of this Agreement or any provision hereof and repayment of all
of the Obligations (including those arising under Article III, Article IX
and Section 10.04) hereunder.

 

78

 

SECTION 10.11.  Severability.  If any provision of this Agreement or the
other Loan Documents is held to be illegal, invalid or unenforceable, (a) the
legality, validity and enforceability of the remaining provisions of this
Agreement and the other Loan Documents shall not be affected or impaired
thereby and (b) the parties shall endeavor in good faith negotiations to
replace the illegal, invalid or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the illegal,
invalid or unenforceable provisions.  The
invalidity of a provision in a particular jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

 

SECTION 10.12.  Replacement of Lenders.  If any Lender requests compensation under Section 3.02,
or if the Borrower is required to pay any additional amount to any Lender or
any Governmental Authority for the account of any Lender pursuant to Section 3.01,
or if any Lender is a Defaulting Lender or a Non-Consenting Lender, then the
Borrower may, at the Borrower’s sole expense and effort, so long as no Event of
Default has occurred and is continuing, upon notice to such Lender and the
Administrative Agent, require such Lender to assign and delegate, without
recourse (in accordance with and subject to the restrictions contained in, and
consents required by, Section 10.06), all of its interests, rights and
obligations under this Agreement and the related Loan Documents to an assignee
that shall assume such obligations (which assignee may be another Lender, if a
Lender accepts such assignment); provided, however, that:

 

(a)  such Lender shall have received
payment of an amount equal to the outstanding principal amount of its Loans and
accrued interest thereon and all other amounts payable to it hereunder and
under the other Loan Documents from the assignee (to the extent of such
outstanding principal and accrued interest) or the Borrower (in the case of all
other amounts);

 

(b)  in the case of any
such assignment resulting from a claim for compensation under Section 3.02
or payments required to be made pursuant to Section 3.01, such assignment
will result in a reduction in such compensation or payments thereafter; and

 

(c)  such assignment does not conflict
with applicable law.

 

A Lender shall not be required to make any
such assignment or delegation if, prior thereto, as a result of a waiver by
such Lender or otherwise, the circumstances entitling the Borrower to require
such assignment and delegation cease to apply. 
Each party hereto agrees that an assignment or delegation required
pursuant to this Section may be effected pursuant to an Assignment and
Assumption executed by the Borrower, the Administrative Agent and the assignee
and that the Lender required to make such assignment need not be a party
thereto.

 

SECTION 10.13.  Governing Law; Consent to Service of
Process; Jurisdiction.

 

(a)  GOVERNING LAW.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY
OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN DOCUMENT AND THE
OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTIONS 5-1401 AND 

 

79

 

5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND ANY APPLICABLE LAWS
OF THE UNITED STATES OF AMERICA.

 

(b)  SERVICE OF PROCESS.  EACH PARTY TO THIS AGREEMENT IRREVOCABLY
CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.02.  NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS AGREEMENT TO SERVE PROCESS
IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

 

(c)  SUBMISSION TO JURISDICTION.  THE BORROWER, THE ADMINISTRATIVE AGENT AND
EACH LENDER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY
OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR ANY FEDERAL COURT SITTING
THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND
IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE
VENUE OF ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT FORUM.

 

SECTION 10.14.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT
OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY).  EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT
IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.

 

SECTION 10.15.  No Advisory or Fiduciary Responsibility.  In connection with all aspects of each
transaction contemplated hereby, the Borrower acknowledges and agrees that (i) the
credit facility provided for hereunder and any related arranging or other
services in connection therewith (including in connection with any amendment,
waiver or other modification hereof or of any other Loan Document) are an arm’s-length
commercial transaction between the Borrower, on the one hand, and the Credit
Parties, on the other hand, as the case may be, and the Borrower is capable of
evaluating and understanding and understands and accepts the terms, risks and
conditions of the transactions contemplated hereby and by the other Loan
Documents (including any amendment, waiver or other modification hereof or
thereof), (ii) in connection with the transactions contemplated hereby and
the process leading to such transactions, each Credit Party is and has been
acting solely as a principal and except as otherwise expressly agreed, is not
acting as an advisor, agent or fiduciary, for the Loan Parties or any of their
respective Affiliates, stockholders, creditors or employees or any other
Person, (iii) none of the Credit Parties has assumed or will assume an
advisory, agency or 

 

80

 

fiduciary responsibility in favor of the Loan Parties with respect to
any of the transactions contemplated hereby or the process leading thereto,
including with respect to any amendment, waiver or other modification hereof or
of any other Loan Document (irrespective of whether any of the Credit Parties
has advised or is currently advising any Loan Party or any of its Affiliates on
other matters) and none of the Credit Parties has any obligation to any Loan
Party or any of its Affiliates with respect to the transactions contemplated
hereby except those obligations expressly set forth herein and in the other
Loan Documents, (iv) the Credit Parties and their respective Affiliates
may be engaged in a broad range of transactions that involve interests that
differ from those of the Loan Parties and their respective Affiliates, and none
of the Credit Parties has any obligation to disclose any of such interests by
virtue of any advisory, agency or fiduciary relationship and (v) the
Credit Parties have not provided any legal, accounting, regulatory or tax
advice with respect to any of the transactions contemplated hereby (including
any amendment, waiver or other modification hereof or of any other Loan
Document) and each of the Loan Parties has consulted its own legal, accounting,
regulatory and tax advisors to the extent it has deemed appropriate.

 

SECTION 10.16.  USA Patriot Act Notice.  Each Lender that is subject to the Patriot
Act and the Administrative Agent (for itself and not on behalf of any Lender)
hereby notifies the Loan Parties that pursuant to the requirements of the
Patriot Act, it is required to obtain, verify and record information that
identifies each Loan Party, which information includes the name and address of
each Loan Party and other information that will allow such Lender or the
Administrative Agent, as applicable, to identify each Loan Party in accordance
with the Patriot Act.

 

SECTION 10.17.  No Strict Construction.  The parties hereto have participated jointly
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement.

 

SECTION 10.18.  Attachments.  The exhibits and schedules attached to this
Agreement are incorporated herein and shall be considered a part of this
Agreement for the purposes stated herein, except that in the event of any
conflict between any of the provisions of such exhibits and the provisions of
this Agreement, the provisions of this Agreement shall prevail.

 

SECTION 10.19.  Conflict of Terms.  Except as otherwise provided in this
Agreement or any of the other Loan Documents by specific reference to the
applicable provisions of this Agreement, if any provision contained in this
Agreement conflicts with any provision in any of the other Loan Documents, the
provision contained in this Agreement shall govern and control. Unless
otherwise defined therein, all capitalized terms contained in any exhibit or
schedule attached to this Agreement shall have the meanings assigned to such
terms in this Agreement

 

SECTION 10.20.  Headings.  Article and Section headings and
the Table of Contents used herein are for convenience of reference only, are
not part of this Agreement and shall not affect the construction of, or be
taken into consideration in interpreting, this Agreement.

 

81

 

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

 

	
   

  	
  ZALE
  CORPORATION, as Borrower,

  
	
   

  	
   

  
	
   

  	
  by

  
	
   

  	
   

  	
  /s/
  Matthew W. Appel

  
	
   

  	
   

  	
  Name:
  Matthew W. Appel

  
	
   

  	
   

  	
  Title:
  Executive Vice President and Chief Financial Officer

  

 

 

	
   

  	
  Z
  INVESTMENT HOLDINGS, LLC, as Administrative Agent

  
	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
  /s/
  Peter Morrow

  
	
   

  	
   

  	
  Name:
  Peter Morrow

  
	
   

  	
   

  	
  Title:
  Authorized Person

  

 

 

	
   

  	
  Z
  INVESTMENT HOLDINGS, LLC, as Lender

  
	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
  /s/
  Peter Morrow

  
	
   

  	
   

  	
  Name:
  Peter Morrow

  
	
   

  	
   

  	
  Title:
  Authorized Person

  

 

 

Exhibit A

 

Form of Note

 

[City], [State]

[·], 2010

 

FOR VALUE RECEIVED, the undersigned, ZALE
CORPORATION, a Delaware corporation (the “Borrower”), hereby promises to
pay to the order of [·] (the “Lender”)
or its registered permitted assigns, at the office of Z Investment Holdings,
LLC (the “Administrative Agent”) c/o Golden Gate Private Equity, Inc.,
One Embarcadero Center, 39th Floor, San Francisco, CA 94111, on the Maturity
Date the principal sum of [·] (or such
other amount as shall equal the aggregate unpaid principal amount of the Loans
made by the Lender to the Borrower under the Credit Agreement (as defined
below), as the aggregate principal amount of such Loans may be increased by any
PIK Amount in accordance with the terms of the Credit Agreement), in lawful
money of the United States of America and in immediately available funds, and
to pay interest on the unpaid principal amount of each such Loan, at such
office, in like money and funds, or, pursuant to Section 2.05(d) of
the Credit Agreement, in additional Loans, in each case for the period
commencing on the date of such Loan until such Loan shall be paid in full, at
the rates per annum and on the dates provided in the Credit Agreement.

 

Capitalized terms used but not defined herein
shall have the meanings assigned thereto in the Credit Agreement dated as of May 10,
2010, by and among the Borrower, the lenders from time to time party thereto
and Z Investment Holdings, LLC, as the Administrative Agent (as the same may
amended, supplemented or otherwise modified from time to time, the “Credit
Agreement”).  The submission to
jurisdiction and consent to service of process provisions set forth in Section 10.13
of the Credit Agreement are hereby incorporated herein by reference in their
entirety.

 

In case an Event of Default shall occur and
be continuing, the principal of and accrued interest on this Note may become or
be declared to be due and payable in the manner and with the effect provided in
the Credit Agreement.

 

The nonexercise by the holder hereof of any
of its rights hereunder in any particular instance shall not constitute a
waiver thereof in that or any subsequent instance.

 

The Borrower hereby waives presentment, demand,
protest or notice of any kind in connection with this Note.

 

 

All borrowings evidenced by this Note and all
payments and prepayments of the principal hereof and interest hereon and the
respective dates thereof shall be endorsed by the holder hereof on the schedule
attached hereto and made a part hereof or on a continuation thereof that shall
be attached hereto and made a part hereof, or otherwise recorded by such holder
in its internal records; provided, however, that the failure of
the holder hereof to make such a notation or any error in such a notation shall
not affect the obligations of the Borrower under this Note.

 

This Note is one of the promissory notes
referred to in Section 2.07 of the Credit Agreement.  This Note is entitled to the benefit of the
Credit Agreement and is guaranteed and secured as provided therein and in the
other Loan Documents.  This Note and the
Loans evidenced hereby may be transferred in whole or in part only by
registration of such transfer on the Register maintained for such purpose by or
on behalf of the undersigned as provided in Section 10.06 of the Credit
Agreement.  This Note shall be governed
by, and construed in accordance with, the laws of the State of New York.

 

 

	
   

  	
  ZALE
  CORPORATION,

  
	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

Exhibit B-1

 

[FORM OF]

 

SECURITY AGREEMENT

 

 

dated as of

 

May 10, 2010,

 

among

 

ZALE CORPORATION,

 

THE SUBSIDIARIES IDENTIFIED HEREIN

 

and

 

Z INVESTMENT HOLDINGS, LLC,

 

as Administrative Agent

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE I

  
	
   

  
	
  Definitions

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 1.01.

  	
   

  	
  Definition of Terms Used Herein

  	
   

  	
  1

  
	
  SECTION 1.02.

  	
   

  	
  Definition of Certain Terms Used Herein

  	
   

  	
  1

  
	
  SECTION 1.03.

  	
   

  	
  Rules of Interpretation

  	
   

  	
  7

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  
	
   

  
	
  Security Interest

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 2.01.

  	
   

  	
  Security Interest

  	
   

  	
  7

  
	
  SECTION 2.02.

  	
   

  	
  No Assumption of Liability

  	
   

  	
  8

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  
	
   

  
	
  Representations and Warranties

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 3.01.

  	
   

  	
  Title and Authority

  	
   

  	
  8

  
	
  SECTION 3.02.

  	
   

  	
  Filings

  	
   

  	
  8

  
	
  SECTION 3.03.

  	
   

  	
  Validity and Priority of Security Interest

  	
   

  	
  9

  
	
  SECTION 3.04.

  	
   

  	
  Absence of Other Liens

  	
   

  	
  9

  
	
  SECTION 3.05.

  	
   

  	
  Bailees, Warehousemen, Etc.

  	
   

  	
  9

  
	
  SECTION 3.06.

  	
   

  	
  Intellectual Property

  	
   

  	
  10

  
	
  SECTION 3.07.

  	
   

  	
  Commercial Tort Claims

  	
   

  	
  10

  
	
  SECTION 3.08.

  	
   

  	
  Pledged Collateral

  	
   

  	
  10

  
	
  SECTION 3.09.

  	
   

  	
  Nature of Certain Consignment Filings

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV

  
	
   

  
	
  Covenants

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 4.01.

  	
   

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

  	
   

  	
  12

  
	
  SECTION 4.02.

  	
   

  	
  Periodic Certification

  	
   

  	
  13

  
	
  SECTION 4.03.

  	
   

  	
  Protection of Security

  	
   

  	
  13

  
	
  SECTION 4.04.

  	
   

  	
  Further Assurances

  	
   

  	
  13

  
	
  SECTION 4.05.

  	
   

  	
  Taxes; Encumbrances

  	
   

  	
  13

  
	
  SECTION 4.06.

  	
   

  	
  Assignment of Security Interest

  	
   

  	
  14

  
	
  SECTION 4.07.

  	
   

  	
  Continuing Obligations of the Grantors

  	
   

  	
  15

  
	
  SECTION 4.08.

  	
   

  	
  Limitation on Modification of Accounts

  	
   

  	
  15

  
	
  SECTION 4.09.

  	
   

  	
  Insurance

  	
   

  	
  15

  
	
  SECTION 4.10.

  	
   

  	
  Legend

  	
   

  	
  15

  

 

 

TABLE OF CONTENTS, con’t.

 

	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 4.11.

  	
   

  	
  Intellectual Property

  	
   

  	
  16

  
	
  SECTION 4.12.

  	
   

  	
  Pledged Collateral

  	
   

  	
  18

  
	
  SECTION 4.13.

  	
   

  	
  Commercial Tort Claims

  	
   

  	
  18

  
	
  SECTION 4.14.

  	
   

  	
  Securities Accounts

  	
   

  	
  19

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V

  
	
   

  
	
  Collections

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 5.01.

  	
   

  	
  Deposit and Concentration Accounts

  	
   

  	
  19

  
	
  SECTION 5.02.

  	
   

  	
  Power of Attorney

  	
   

  	
  20

  
	
  SECTION 5.03.

  	
   

  	
  No Obligation to Act

  	
   

  	
  21

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI

  
	
   

  
	
  Remedies

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 6.01.

  	
   

  	
  Remedies upon Default

  	
   

  	
  22

  
	
  SECTION 6.02.

  	
   

  	
  Grant of Non-Exclusive License

  	
   

  	
  24

  
	
  SECTION 6.03.

  	
   

  	
  Application of Proceeds

  	
   

  	
  25

  
	
  SECTION 6.04.

  	
   

  	
  Voting Rights

  	
   

  	
  25

  
	
  SECTION 6.05.

  	
   

  	
  ULC Shares

  	
   

  	
  27

  
	
  SECTION 6.06.

  	
   

  	
  Disposition of Pledged Collateral by Administrative Agent

  	
   

  	
  27

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII

  
	
   

  
	
  Perfection of Security Interest

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 7.01.

  	
   

  	
  Perfection by Filing

  	
   

  	
  28

  
	
  SECTION 7.02.

  	
   

  	
  Other Perfection, etc.

  	
   

  	
  28

  
	
  SECTION 7.03.

  	
   

  	
  Savings Clause

  	
   

  	
  29

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  
	
   

  
	
  Miscellaneous

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 8.01.

  	
   

  	
  Notices

  	
   

  	
  29

  
	
  SECTION 8.02.

  	
   

  	
  Security Interest Absolute

  	
   

  	
  29

  
	
  SECTION 8.03.

  	
   

  	
  Suretyship Waivers by Grantors

  	
   

  	
  29

  
	
  SECTION 8.04.

  	
   

  	
  Marshalling

  	
   

  	
  30

  
	
  SECTION 8.05.

  	
   

  	
  Survival of Agreement

  	
   

  	
  30

  
	
  SECTION 8.06.

  	
   

  	
  Binding Effect; Several Agreement; Assignments

  	
   

  	
  30

  
	
  SECTION 8.07.

  	
   

  	
  Administrative Agent’s Fees and Expenses; Indemnification

  	
   

  	
  30

  

 

ii

 

TABLE OF CONTENTS, con’t.

 

	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 8.08.

  	
   

  	
  Governing Law

  	
   

  	
  31

  
	
  SECTION 8.09.

  	
   

  	
  Waivers; Amendment

  	
   

  	
  31

  
	
  SECTION 8.10.

  	
   

  	
  WAIVER OF JURY TRIAL

  	
   

  	
  32

  
	
  SECTION 8.11.

  	
   

  	
  Severability

  	
   

  	
  32

  
	
  SECTION 8.12.

  	
   

  	
  Counterparts

  	
   

  	
  32

  
	
  SECTION 8.13.

  	
   

  	
  Headings

  	
   

  	
  32

  
	
  SECTION 8.14.

  	
   

  	
  Jurisdiction; Consent to Service of Process

  	
   

  	
  33

  
	
  SECTION 8.15.

  	
   

  	
  Termination; Release of Collateral

  	
   

  	
  33

  
	
  SECTION 8.16.

  	
   

  	
  Additional Grantors

  	
   

  	
  34

  
	
  SECTION 8.17.

  	
   

  	
  Intercreditor Agreement

  	
   

  	
  34

  
	
  SECTION 8.18.

  	
   

  	
  Grantor Consent

  	
   

  	
  34

  

 

iii

 

	
  Schedules

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Schedule
  1

  	
   

  	
  Intellectual
  Property

  	
   

  	
   

  
	
  Schedule
  2

  	
   

  	
  Initial
  Subsidiary Grantors

  	
   

  	
   

  
	
  Schedule
  3

  	
   

  	
  Commercial
  Tort Claims

  	
   

  	
   

  
	
  Schedule
  4

  	
   

  	
  Pledged
  Collateral

  	
   

  	
   

  
	
  Schedule
  5

  	
   

  	
  Deposit
  Accounts and Concentration Accounts

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Annexes

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Annex
  1

  	
   

  	
  Form of
  Perfection Certificate

  	
   

  	
   

  
	
  Annex
  2

  	
   

  	
  Form of
  Supplement

  	
   

  	
   

  
	
  Annex
  3

  	
   

  	
  Form of
  Patent, Industrial Design and Trademark Security Agreement

  	
   

  	
   

  
	
  Annex
  4

  	
   

  	
  Form of
  Copyright Security Agreement

  	
   

  	
   

  
	
  Annex
  5

  	
   

  	
  Form of
  Pledged Collateral Addendum

  	
   

  	
   

  

 

 

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

 

W I T N E S S E T H:

 

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

 

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

 

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

 

ARTICLE I

 

Definitions

 

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

 

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

 

“ABL Agent” shall have the meaning
given that term in the Intercreditor Agreement.

 

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

 

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

 

“Administrative Agent’s Rights and
Remedies” shall have the meaning assigned to such term in Section 8.09(a).

 

 

“Blocked Account Agreement” shall have
the meaning assigned to such term in Section 5.01.

 

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

 

“Collateral” shall mean the following
assets of each Grantor: (a) all Accounts, (b) all Inventory, (c) all
Deposit Accounts, Concentration Accounts and cash, (d) all Documents, (e) all
Chattel Paper, (f) all Instruments, General Intangibles, Supporting
Obligations and Letter-of-Credit Rights, (g) all Goods, (h) Equipment
and Fixtures, (i) all Investment Property, (j) all Securities
Accounts and Commodity Accounts, (k) all Commercial Tort Claims, (l) all
Intellectual Property, (m) all other personal property not otherwise
described above, whether tangible or intangible and wherever located (except
for any property expressly excluded in this definition of “Collateral”), (n) all
policies and certificates of insurance and all insurance proceeds, refunds and
premium rebates, including proceeds of fire and credit insurance, with respect
to any of the foregoing, (o) all books, records and information relating
to any of the foregoing, and all rights of access to such books, records and
information, (p) all liens, guaranties, rights, remedies and privileges
pertaining to any of the foregoing ((a) through (o)), including the right
of stoppage in transit, and (q) any of the foregoing whether now
owned or now due, or in which any Grantor has an interest, or hereafter
acquired, arising or to become due, or in which any Grantor obtains an
interest, and all products, Proceeds, substitutions and accessions of or to any
of the foregoing.  Notwithstanding the
foregoing, the term “Collateral” shall expressly exclude (i) any
Trademark applications filed on an “intent to use” basis until the earlier of
the filing of a statement of use thereon or the first use in commerce thereof, (ii) any
Inventory or other Goods that have been delivered to any Grantor on a
consignment basis to the extent that the rights of such consignor have been
properly perfected under applicable law, (iii) any property to the extent
that such grant of a security interest is prohibited by any valid enforceable
law or regulation applicable thereto, requires a consent not obtained of any
Governmental Authority pursuant to such law or regulation or is prohibited by,
or constitutes a breach or default under or results in the termination of or
gives rise to a right on the part of the parties thereto other than such
Grantor to terminate (or materially modify) or requires any consent not
obtained under, any contract, license, agreement, instrument or other document
evidencing or giving rise to such property, except to the extent that such law
or regulation or the term in such contract, license, agreement, instrument or
other document providing for such prohibition, breach, default or right of
termination or modification or requiring such consent is ineffective under
applicable law, provided, however, that such security interest
shall attach immediately at such time as the condition causing such
prohibition, breach, default or right of termination or modification or requiring
such consent, as the case may be, shall be remedied and, to the extent
severable, shall attach immediately to any portion of such contract, license,
agreement, instrument or other document that does not result in any of such
consequences, including any proceeds of such contract, license, agreement,
instrument or other document, (iv) the Equity Interests of Dobbins
Jewelers, Inc., (v) the Equity Interests of Jewel Re-Insurance Ltd.
in excess of 65% of the issued and outstanding shares of any class of Equity
Interests of such Subsidiary, (vi) the voting Equity Interests of ZC
Partnership, LP in excess of 65% of the general partnership Equity Interests of
such Subsidiary and (vii) any property 

 

2

 

that the Administrative
Agent shall determine in its reasonable discretion in which the cost (including
adverse tax consequences) of obtaining a security interest would be excessive
in relation to the value of the security to be afforded thereby; provided,
further, that in all events, all Proceeds, substitutions or replacements
of the foregoing shall constitute “Collateral” hereunder.

 

“Commercial Tort Claim” shall have the
meaning given that term in the UCC.

 

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

 

“Concentration Account” shall mean all
Deposit Accounts and accounts maintained by the Grantors into which more than
one Deposit Account deposits or transfers funds.

 

“Copyright Licenses” shall mean
exclusive Licenses in respect of Copyrights where a Grantor is a licensee.

 

“Copyrights” shall mean, with respect
to any Person, all of such Person’s right, title and interest, now or hereafter
acquired, in and to the following:  (a) all
copyrights, rights and interests in copyrights, works protectable by copyright,
copyright registrations and copyright applications; (b) all extensions and
renewals of any of the foregoing; (c) all income, royalties, damages, and
payments now or hereafter due and/or payable under any of the foregoing,
including damages or payments for past, present or future infringements for any
of the foregoing; (d) the right to sue for past, present and future
infringements of any of the foregoing; and (e) all rights corresponding to
any of the foregoing.

 

“Credit Agreement” shall have the
meaning assigned to such term in the recitals to this Agreement.

 

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

 

“Distribution” shall have the meaning
assigned to such term in Section 6.04(a).

 

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

 

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

 

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

 

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

 

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

 

3

 

“General Intangibles” shall have the
meaning given that term in the UCC, and shall also include all: Payment
Intangibles; rights to payment for credit extended; deposits; amounts due to
any Grantor; credit memoranda in favor of any Grantor, tax refunds and
abatements; insurance refunds and premium rebates; records; customer lists;
telephone numbers; causes of action; judgments; payments under any settlement
or other agreement; licenses; internet addresses and domain names; computer
software programs; trade names, trademarks, service marks, together with all
goodwill connected with and symbolized by any of the foregoing; all other
general intangible property of any Grantor in the nature of Intellectual
Property, and any warranty claims.

 

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

 

“Grantor” shall mean, collectively, the
Borrower, the Subsidiaries of the Borrower identified as Grantors on Schedule
2 attached hereto and each other Subsidiary of the Borrower that becomes a
party to this Agreement as a Grantor after the Closing Date pursuant to Section 6.11
of the Credit Agreement; provided that if a Subsidiary is released from
its obligations as a Grantor, such Subsidiary shall cease to be a Grantor
hereunder effective upon such release.

 

“Industrial
Designs” shall mean, with respect to any Person, all of
such Person’s right, title and interest, now owned or hereafter acquired, in
and to: (a) any and all Canadian industrial designs and industrial design
applications; (b) all income, royalties, damages, claims, and payments now
or hereafter due or payable under and with respect thereto, including damages
and payments for past, present and future infringements thereof; (c) all
rights to sue for past, present and future infringements thereof; and (d) all
rights corresponding to any of the foregoing.

 

“Instruments” shall have the meaning
given that term in Article 9 of the UCC.

 

“Intellectual
Property” shall mean all intellectual property and similar
property of every kind and nature now owned or hereafter acquired by any
Person, including inventions, designs, Patents, Copyrights, Trademarks,
Industrial Designs, Licenses, trade secrets, confidential or proprietary
technical and business information, know-how, show-how or other data or
information and all related documentation, and all additions and improvements
to any of the foregoing.

 

“Inventory” shall include “inventory”
as defined in the UCC and also all: (a) Goods which (i) are leased by
a Person as lessor, (ii) are held by a Person for sale or lease or to be
furnished under a contract of service, (iii) are furnished by a Person
under a contract of service, or (iv) consist of raw materials, work in
process or materials used or consumed in a business; (b) Goods of said
description in transit; (c) Goods of said description which are returned,
repossessed and rejected; (d) packaging and shipping materials related to
any of the foregoing; and (e) all Documents which represent any of the
foregoing.

 

4

 

“Investment Property” shall have the
meaning given that term in the UCC and shall also include all Pledged
Collateral, Pledged Operating Agreements and Pledged Partnership Agreements.

 

“IP Agreements” shall have the meaning
assigned to such term in Section 3.02.

 

“License” shall mean,
with respect to any Person, all of such Person’s right, title and interest in
and to (a) any and all licensing agreements or similar arrangements in and
to any other Person’s Intellectual Property, (b) all income, royalties,
damages, claims and payments now or hereafter due or payable under and with
respect thereto, including damages and payments for past, present and future
breaches thereof, and (c) all rights to sue for past, present and future
breaches thereof.

 

“Material Trademark” shall mean any
Trademark of a Grantor that is material to the conduct of such Grantor’s
business.

 

“Patents” shall mean, with respect to
any Person, all of such Person’s right, title and interest, now owned or
hereafter acquired, in and to:  (a) any
and all patents and patent applications or Canadian industrial design
registrations and applications; (b) all inventions and improvements
described and claimed therein, including the right to make, use and/or sell the
inventions disclosed or claimed therein; (c) all reissues, divisions,
continuations, renewals, extensions, and continuations-in-part thereof; (d) all
income, royalties, damages, claims, and payments now or hereafter due or
payable under and with respect thereto, including damages and payments for
past, present and future infringements thereof; (e) all rights to sue for
past, present and future infringements thereof; and (f) all rights
corresponding to any of the foregoing.

 

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

 

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

 

“Pledged Collateral” shall mean all
Pledged Interests and Pledged Notes.

 

“Pledged Collateral Addendum” shall
mean a Pledged Collateral Addendum substantially in the form of Annex 5
to this Agreement.

 

“Pledged Companies” shall mean each
Person listed on Schedule 4 hereto as a “Pledged Company”, together with
each other Person, all or a portion of whose Equity Interests, is acquired or
otherwise owned by a Grantor after the Closing Date.

 

“Pledged Interests” shall mean all of
each Grantor’s right, title and interest in and to all of the Equity Interests
now or hereafter owned by such Grantor (other than such Equity Interests in
Dobbins Jewelers, Inc.), regardless of class or designation, 

 

5

 

including in each of the
Pledged Companies owned by it, and all substitutions therefor and replacements
thereof, all proceeds thereof and all rights relating thereto, also including
any certificates representing the Equity Interests, the right to receive any
certificates representing any of the Equity Interests, all warrants, options,
share appreciation rights and other rights, contractual or otherwise in respect
thereof, and the right to receive dividends, distributions of income, profits,
surplus, or other compensation by way of income or liquidating distributions,
in cash or in kind, and all cash, instruments, and other property from time to
time received, receivable, or otherwise distributed in respect of or in
addition to, in substitution of, on account of, or in exchange for any or all
of the foregoing.

 

“Pledged Notes” shall mean with
respect to any Grantor, all of the debt securities now or hereafter owned by
such Grantor and the promissory notes evidencing such debt securities.

 

“Pledged Operating Agreements” shall
mean all of each Grantor’s rights, powers, and remedies under the limited
liability company operating agreements of each of the Pledged Companies that
are limited liability companies.

 

“Pledged Partnership Agreements” shall
mean all of each Grantor’s rights, powers, and remedies under the partnership
agreements of each of the Pledged Companies that are partnerships.

 

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

 

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

 

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

 

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

 

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

 

“Security Interest” shall have the
meaning assigned to such term in Section 2.01 of this Agreement.

 

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

 

“Term Priority Collateral” shall have
the meaning given that term in the Intercreditor Agreement.

 

“Trademarks” shall mean, with respect
to any Person, all of such Person’s right, title and interest, now owned or
hereafter acquired, in and to the following: 
(a) all trademarks (including service marks), trade names, trade dress,
trade styles and other source indicators and the registrations and applications
for registration thereof and the 

 

6

 

goodwill of the business
symbolized by the foregoing; (b) all licenses of the foregoing, whether as
licensee or licensor; (c) all renewals of the foregoing; (d) all
income, royalties, damages and payments now or hereafter due or payable with
respect thereto, including damages, claims and payments for past and future
infringements thereof; (e) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (f) all rights corresponding
to any of the foregoing.

 

“ULC” shall mean an unlimited company
under the Companies Act (Nova Scotia).

 

“ULC Pledgor” has the meaning assigned
to such term in Section 6.05.

 

“ULC Shares” shall mean shares of
stock or other Equity Interests of one or more ULCs.

 

“Zale Canada” shall mean Zale Canada
Co., a Nova Scotia company.

 

SECTION 1.03.  Rules of Interpretation.  The rules of interpretation specified in
Section 1.02 of the Credit Agreement shall be applicable to this
Agreement.

 

ARTICLE II

 

Security Interest

 

SECTION 2.01.  Security Interest.  As security for the payment or performance,
as the case may be, in full of the Secured Obligations, each Grantor hereby
bargains, mortgages, pledges, hypothecates, and (except in the case of ULC
Shares) transfers and assigns to the Administrative Agent, its successors and
assigns, for the benefit of the Credit Parties, and hereby grants to the
Administrative Agent, its successors and assigns, for the benefit of the Credit
Parties, a security interest in, all of such Grantor’s right, title and
interest in, to and under the Collateral, wherever located, whether now owned
or hereafter acquired (the “Security Interest”).  Without limiting the foregoing, each Grantor
hereby designates the Administrative Agent as such Grantor’s true and lawful
attorney, exercisable by the Administrative Agent whether or not an Event of
Default exists, with full power of substitution, at the Administrative Agent’s
option, to file one or more financing statements or continuation statements, to
file with the United States Patent and Trademark Office, United States
Copyright Office, Canadian Intellectual Property Office or Canadian Industrial
Design Office (or any successor office or any similar office in any other
country) such documents as may be necessary or advisable, or to sign other
documents for the purpose of perfecting, confirming, continuing or protecting
the Security Interest granted by each Grantor, without the signature of any
Grantor (each Grantor hereby appointing the Administrative Agent as such Person’s
attorney to sign such Person’s name to any such document, whether or not an
Event of Default exists), and naming any Grantor or the Grantors as debtors and
the Administrative Agent as secured party, provided that the
Administrative Agent shall have the same rights as the applicable Grantor’s
true and lawful attorney referred to above to 

 

7

 

enforce the Security Interest granted by each Grantor, but only if an
Event of Default exists.

 

SECTION 2.02.  No Assumption of Liability.  The Security Interest is granted as security
only and shall not subject the Administrative Agent or any other Credit Party
to, or in any way alter or modify, any obligation or liability of any Grantor
with respect to or arising out of the Collateral.

 

ARTICLE III

 

Representations and Warranties

 

The Grantors jointly and
severally represent and warrant to the Administrative Agent and the Credit
Parties that:

 

SECTION 3.01.  Title and Authority.  Each Grantor has good and valid rights in,
and title to, the Collateral with respect to which it has purported to grant a
Security Interest hereunder and has full power and authority to grant to the
Administrative Agent the Security Interest in such Collateral pursuant hereto
and to execute, deliver and perform its obligations in accordance with the
terms of this Agreement, without the consent or approval of any other Person
other than any consent or approval which has been obtained.

 

SECTION 3.02.  Filings.  The Perfection Certificate has been duly
prepared, completed and executed, and the information set forth therein is
correct and complete in all material respects. 
Fully executed UCC and PRUCC financing statements, other than fixture
filings, or other appropriate filings, recordings or registrations containing a
description of the Collateral have been, or will be, filed in each
governmental, municipal or other office as is necessary to publish notice and
protect the validity of, and to establish a legal, valid and perfected security
interest in favor of the Administrative Agent (for the benefit of the Credit
Parties) with respect to all Collateral in which the Security Interest may be
perfected by filing, recording or registration pursuant to the UCC or the PRUCC
in the United States (or any political subdivision thereof) and its territories
and possessions, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration (other than filings required to be
made in the United States Patent and Trademark Office, the United States
Copyright Office, the Canadian Intellectual Property Office and the Canadian
Industrial Design Office in order to perfect the Security Interest in
Collateral consisting of United States and Canadian Patents, Industrial
Designs, Trademarks, Copyrights and Copyright Licenses, as the case may be) is
necessary in any such jurisdiction, except as provided under applicable law
with respect to the filing of continuation statements.  A fully executed Patent, Industrial Design
and Trademark Security Agreement, in the form attached as Annex 3
hereto, and a fully executed Copyright Security Agreement, in the form attached
as Annex 4 hereto (such agreements being collectively referred to as the
“IP Agreements”), covering the United States and Canadian registered
Patents, Industrial Designs, United States and Canadian registered Trademarks
and United States and Canadian registered Copyrights (and applications for any
of the foregoing) and Copyright 

 

8

 

Licenses, as applicable, have been delivered to the Administrative
Agent for recording by the United States Patent and Trademark Office and the
United States Copyright Office pursuant to 35 U.S.C. § 261,
15 U.S.C. § 1060 or 17 U.S.C. § 205 and the
regulations thereunder, and the Canadian Intellectual Property Office and the
Canadian Industrial Design Office, as applicable, as is necessary to protect
the validity of and to establish a legal, valid and perfected security interest
in favor of the Administrative Agent (for the benefit of the Credit Parties) in
respect of all Collateral consisting of Intellectual Property in which a
security interest may be perfected by filing, recording or registration in the
United States or Canada (or any political subdivision, province or territory
thereof) and its territories and possessions, and no further or subsequent
filing, refiling, recording, rerecording, registration or reregistration is
necessary (other than such actions as are necessary to perfect the Security
Interest with respect to any Intellectual Property acquired or developed after
the date hereof).

 

SECTION 3.03.  Validity and Priority of Security
Interest.  The Security Interest
constitutes (a) a legal and valid security interest in all of the
Collateral securing the payment and performance of the Secured Obligations, and
(b) subject to the filings described in Section 3.02 above, a
perfected security interest in all of the Collateral, to the extent that
perfection of the Security Interest can be achieved by filing or recording a
financing statement or analogous document in the United States or Canada (or
any political subdivision, province or territory thereof) and its territories
and possessions pursuant to the UCC or the PRUCC or by recording of the IP
Agreements with the United States Patent and Trademark Office, the United
States Copyright Office, the Canadian Intellectual Property Office and the
Canadian Industrial Design Office, as applicable.  The Security Interest is and shall be prior
to any other Lien on any of the Collateral, subject only to those Liens
expressly permitted pursuant to Section 7.02 of the Credit Agreement.

 

SECTION 3.04.  Absence of Other Liens.  The Collateral is owned by the Grantors free
and clear of any Lien, except for Liens expressly permitted pursuant to Section 7.02
of the Credit Agreement.  Except as
provided herein and in the Credit Agreement, disclosed in the Perfection
Certificate, no Grantor has filed or consented to the filing of (a) any
financing statement or analogous document under the UCC or the PRUCC or any
other applicable law covering any Collateral, (b) any assignment in which
any Grantor assigns any Collateral or any security agreement or similar
instrument covering any Collateral with the United States Patent and Trademark
Office, the United States Copyright Office, the Canadian Intellectual Property
Office or the Canadian Industrial Design Office, or (c) any assignment in
which any Grantor assigns any Collateral or any security agreement or similar
instrument covering any Collateral with any foreign governmental, municipal or
other office, which financing statement or analogous document, assignment,
security agreement or similar instrument is still in effect, except, in each
case, for Liens expressly permitted pursuant to Section 7.02 of the Credit
Agreement.

 

SECTION 3.05.  Bailees, Warehousemen, Etc.  Except as otherwise disclosed in the
Perfection Certificate, no Inventory or Equipment of any Grantor is in the care
or custody of any third party or stored or entrusted with a bailee or other
third party 

 

9

 

and none shall hereafter be placed under such care, custody, storage or
entrustment except for Equipment and Inventory (i) out for repair or
replacement in the ordinary course of business, (ii) being shipped, or
in-transit, from a supplier or to a customer or between suppliers in the
ordinary course of business or (iii) in the possession of suppliers,
subcontractors and licensees in the ordinary course of business, unless the
applicable Grantor complies with Section 4.01(c).

 

SECTION 3.06.  Intellectual Property.  Schedule 1 hereto sets forth, as of
the date hereof, (i) all of each Grantor’s registered Patents and Patent
applications (and for greater certainty, registered Industrial Designs and Industrial
Design applications), including the name of the registered owner, type,
registration or application number and the expiration date (if already
registered) of each such Patent and Patent application owned by any Grantor, (ii) all
of each Grantor’s registered Industrial Designs and Industrial Design
applications, including the name of the registered owner, registration or
application number and the expiration date (if already registered) of such
industrial design and industrial design application owned by any Grantor, (iii) all
of each Grantor’s registered Trademarks and Trademark applications,
including the name of the registered owner, the registration or application
number and the expiration date (if already registered) of each such Trademark
and Trademark application owned by any Grantor and (iv) all of each
Grantor’s registered Copyrights, Copyright applications and Copyright Licenses,
including the name of the registered owner, title and, if applicable, the
registration number of each such Copyright, Copyright application or Copyright
License owned by any Grantor.

 

SECTION 3.07.  Commercial Tort Claims.  Schedule 3 hereto sets forth, as of
the date hereof, each Commercial Tort Claim in respect of which a complaint or
a counterclaim has been filed by any Grantor seeking damages in an amount of
$1,000,000 or more.

 

SECTION 3.08.  Pledged Collateral.

 

(a)           Each
Grantor is the holder of record and the legal and beneficial owner, free and
clear of all Liens other than the Security Interest granted to the Administrative
Agent for the benefit of the Credit Parties hereunder and Permitted
Encumbrances, of the Pledged Collateral indicated on Schedule 4 as being
owned by such Grantor and any Pledged Collateral owned by such Grantor and
acquired after the Closing Date.

 

(b)           All
of the Pledged Collateral constituting Pledged Interests is duly authorized,
validly issued, fully paid and nonassessable (provided that Pledged
Interests which are ULC Shares will be assessable in accordance with the
provisions of the Companies Act (Nova Scotia)) and such Pledged Interests
constitute or will constitute the percentage of the issued and outstanding
Equity Interests of the Pledged Companies of each applicable Grantor identified
on Schedule 4, any Pledged Collateral Addendum or any Supplement to this
Agreement.  All of the Pledged Collateral
constituting Pledged Notes is duly authorized, validly issued and delivered by
the issuer of such Pledged Note and is the legal, valid and binding obligation
of such issuer and such issuer is not in 

 

10

 

default thereunder.  Each Grantor
has the right and requisite authority to pledge the Pledged Collateral pledged
by such Grantor to the Administrative Agent as provided herein.

 

(c)           All
actions necessary to perfect or establish the first priority of the
Administrative Agent’s Liens (subject to Permitted Encumbrances) in the Pledged
Collateral, and the proceeds thereof, have been duly taken, (A) upon the
execution and delivery of this Agreement; (B)(i) upon the taking of
possession by the Administrative Agent of any certificates constituting the
Pledged Interests, to the extent such Pledged Interests are represented by
certificates, together with undated powers endorsed in blank by the applicable Grantor
and (ii) upon the taking of possession by the Administrative Agent of any
promissory notes constituting the Pledged Notes, together with undated powers
endorsed in blank by the applicable Grantor; and (C) upon the filing of
Uniform Commercial Code financing statements in the applicable jurisdiction for
such Grantor with respect to the Pledged Interests of such Grantor that are not
represented by certificates.  Each
Grantor has delivered to and deposited with the Administrative Agent (or, with
respect to any Pledged Collateral created or obtained after the Closing Date,
will deliver and deposit in accordance with Section 4.12 hereof)
all certificates representing the Pledged Interests owned by such Grantor to
the extent such Pledged Interests are represented by certificates, all
promissory notes representing the Pledged Notes owned by such Grantor, and
undated powers endorsed in blank with respect to such certificates or
promissory notes.

 

(d)           None
of the Pledged Collateral owned or held by such Grantor has been issued or
transferred in violation of any securities registration, securities disclosure,
or similar laws of any jurisdiction to which such issuance or transfer may be
subject.

 

SECTION 3.09.  Nature of Certain Consignment
Filings.  Each of the Liens and other
filings set forth on Schedule 7.02 of the Credit Agreement which purports to
cover goods delivered to a Grantor on a consignment basis (a) evidences
arrangements entered into with such Grantor and its trade vendors in the
ordinary course of business, intended by such Grantor and vendor to be a “true”
consignment, (b) does not encumber any assets of such Grantor other than
the consigned goods to which it relates and the proceeds thereof, to the extent
owing to the vendor and (c) secures solely the obligation of such Grantor
to either return such consigned goods or pay the purchase price for such
consigned goods, in each case pursuant to a written consignment agreement on
terms substantially similar to those set forth in the Grantors’ standard form
of consignment agreement as in effect on or about the Closing Date (with the
exception of any such Liens and other filings made by any trade vendors in
connection with or relating to that certain Amendment to Existing Agreements
dated as of March 3, 2010 by and among Zale Delaware, Inc., TXDC,
L.P., Rosy Blue Jewelry, Inc. and Rosy Blue, Inc., relating to
consigned goods for such Grantor’s 2010 Spring season) , a copy of which has
been provided to the Administrative Agent.

 

11

 

ARTICLE IV

 

Covenants

 

SECTION 4.01.  Change of Name; Location of Collateral;
Records; Place of Business.  (a)  Each
Grantor agrees to furnish to the Administrative Agent (i) prompt written
notice of any change in (A) any Grantor’s trade name used to identify it
in the conduct of its business or in the ownership of its properties, (B) any
office in which it maintains books or records relating to Collateral owned by
it and having a value in excess of $1,000,000 or any office or facility at
which Collateral owned by it and having a value in excess of $1,000,000 is
located (including the establishment of any such new office or facility), other
than, in each case, (I) retail Store locations or (II) Equipment and
Inventory (1) out for repair or replacement in the ordinary course of
business, (2) being shipped, or in transit, from a supplier or to a
customer or between suppliers in the ordinary course of business or (3) in
the possession of suppliers, subcontractors and licensees in the ordinary
course of business, or (C) the acquisition by any Grantor of any property
for which additional filings or recordings are necessary to perfect and
maintain the Administrative Agent’s Security Interest therein, and (ii) prior
written notice of any change in (A) any Grantor’s corporate or partnership
name or the location of any Grantor’s chief executive office or its principal
place of business, (B) any Grantor’s identity or corporate or partnership
structure or (C) any Grantor’s jurisdiction of incorporation, amalgamation
or formation, Federal Taxpayer Identification Number or state organizational
number or similar taxation or organization number; provided, however,
that if any of the occurrences referred to in clauses (i) and (ii) shall
occur with respect to Zale Canada or any of its assets, Zale Canada shall
furnish the Administrative Agent with 30 days prior written notice
thereof.  The Borrower also agrees
promptly to notify the Administrative Agent if any material portion of the
Collateral is damaged, destroyed or lost, stolen or otherwise unaccounted
for.  Notwithstanding the foregoing, if
any Grantor’s Federal Taxpayer Identification Number or organizational
identification number assigned to it by its state of organization is changed by
the applicable Governmental Authority, such Grantor will furnish to the
Administrative Agent prompt written notice of any such change not later than 10
days from the date such Grantor has been notified by such Governmental
Authority of such change.  Each Grantor
agrees not to effect or permit any change referred to in the preceding sentence
unless all necessary filings have been made under the UCC or the PRUCC or
otherwise in order for the Administrative Agent to continue at all times
following such change to have a valid, legal and perfected first priority
security interest in all of the Collateral. 
Each of the Grantors organized under the laws of Canada acknowledges and
agrees that, except as disclosed on the Perfection Certificate, such Grantor
does not currently, nor will it in the future, have any assets that constitute
Collateral located in the United States.

 

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

 

12

 

(c)           Each
Grantor agrees that, to the extent it acquires any additional leased warehouses
or distribution centers after the Closing Date, the Grantors shall provide the
Administrative Agent with prompt notice thereof, and shall obtain a waiver and
collateral access agreement in form and substance reasonably satisfactory to
the Administrative Agent.

 

SECTION 4.02.  Periodic Certification.  Each year, at the time of delivery of annual
financial statements with respect to the preceding Fiscal Year pursuant to Section 6.01(a) of
the Credit Agreement, each Grantor shall deliver, or cause to be delivered, to
the Administrative Agent a certificate executed by a Financial Officer of such
Grantor confirming that there has been no change in the information contained
in the Perfection Certificate since the date of the Perfection Certificate
delivered on the Closing Date or the date of the most recent certificate
delivered pursuant to this Section 4.02 or, if any such change has
occurred, specifying such revised information.

 

SECTION 4.03.  Protection of Security.  Each Grantor shall, at its own cost and
expense, take any and all actions reasonably necessary to defend title to the
Collateral against all Persons and to defend the Security Interest of the
Administrative Agent in the Collateral and the priority thereof against any
Lien not expressly permitted pursuant to Section 7.02 of the Credit
Agreement.

 

SECTION 4.04.  Further Assurances.  Each Grantor agrees, at its own expense, to
execute, acknowledge, deliver and cause to be filed all such further
instruments and documents and to take all such actions as the Administrative
Agent may from time to time reasonably request to assure, preserve, protect and
perfect the Security Interest and the rights and remedies created hereby,
including the payment of any fees and taxes required in connection with the
execution and delivery of this Agreement, the granting of the Security Interest
and the filing of any financing statements or other documents in connection
herewith or therewith.  If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any promissory note, document, draft, chattel paper or instrument
in an amount in excess of $1,000,000, such note, document, draft, chattel paper
or instrument shall be immediately pledged and delivered to the Administrative
Agent, duly endorsed in a manner satisfactory to the Administrative Agent.

 

SECTION 4.05.  Taxes; Encumbrances.  The Administrative Agent may discharge past
due taxes, assessments, charges, fees or Liens (other than Liens permitted
under the Credit Agreement), at any time levied or placed on the Collateral,
and may take any other action which the Administrative Agent may deem necessary
or desirable to repair, maintain or preserve any of the Collateral to the
extent any Grantor fails to do so as required by the Credit Agreement or this
Agreement, and each Grantor jointly and severally agrees to reimburse the
Administrative Agent on demand for any payment made or any expense incurred by
the Administrative Agent pursuant to the foregoing authorization; provided
that, so long as no Event of Default shall have occurred and be continuing, if
such taxes, assessments, charges, fees or Liens are being contested in good
faith and by appropriate proceedings by such Grantor, the Administrative Agent
shall consult with such Grantor before making any such payment or taking any
such action; 

 

13

 

provided, however, that the Administrative Agent
shall not have any obligation to undertake any of the foregoing and shall have
no liability on account of any action so undertaken except to the extent that
any liability on account of any such action resulted from the gross negligence,
bad faith or breach of the contractual obligations of the Administrative Agent;
provided  further that the making of any such payments or the
taking of any such action by the Administrative Agent shall not be deemed to
constitute a waiver of any Default or Event of Default arising from the Grantor’s
failure to have made such payments or taken such action.  Nothing in this Section 4.05 shall be
interpreted as excusing any Grantor from the performance of any covenants or
other promises of any Grantor with respect to taxes, assessments, charges,
fees, Liens, security interests or other encumbrances and maintenance as set
forth herein or in the other Loan Documents.

 

SECTION 4.06.  Assignment of Security Interest.  (a)  If at any time any Grantor
shall take a security interest in any property of an Account Debtor or any
other Person to secure payment and performance of an Account and the property
securing payment and performance of the Account has a value in excess of
$1,000,000, such Grantor shall promptly assign such security interest to the
Administrative Agent.  Such assignment
need not be filed of public record unless necessary to continue the perfected
status of the security interest against creditors of, and transferees from, the
Account Debtor or other Person granting the security interest.

 

(b)           To
the extent that any Grantor is a beneficiary under any written letter of credit
relating to the Collateral in an amount in excess of $1,000,000 now or
hereafter issued in favor of such Grantor, such Grantor shall deliver such
letter of credit to the Administrative Agent. 
The Administrative Agent shall from time to time, at the request and
expense of such Grantor, make such arrangements with such Grantor as are in the
Administrative Agent’s reasonable judgment necessary and appropriate so that
such Grantor may make any drawing to which such Grantor is entitled under such
letter of credit, without impairment of the Administrative Agent’s perfected
security interest in such Grantor’s rights to proceeds of such letter of credit
or in the actual proceeds of such drawing. 
At the Administrative Agent’s request, such Grantor shall, for any
letter of credit relating to the Collateral in an amount in excess of
$1,000,000, whether or not written, now or hereafter issued in favor of such
Grantor as beneficiary, execute and deliver to the issuer and any confirmer of
such letter of credit an assignment of proceeds form, in favor of the
Administrative Agent and satisfactory to the Administrative Agent and such
issuer or (as the case may be) such confirmer, requiring the proceeds of any
drawing under such letter of credit to be paid directly to the Administrative
Agent.

 

(c)           If
any amount payable under or in connection with any of the Collateral shall
become evidenced by any Electronic Chattel Paper or any “transferable record”
(as that term is defined in Section 201 of the Federal Electronic
Signatures in Global and National Commerce Act, or in Section 16 of the
Uniform Electronic Transactions Act, as in effect in any relevant jurisdiction)
in an amount in excess of $250,000, other than such Electronic Chattel Paper
and transferable records listed in the Perfection Certificate attached hereto,
the Grantor acquiring such Electronic Chattel Paper or transferable record
shall promptly notify the Administrative Agent thereof and shall take such
action as the Administrative Agent may reasonably request to vest in the 

 

14

 

Administrative Agent “control” of such Electronic Chattel Paper under Section 9-105
of the UCC, under Section 201 of the Federal Electronic Signatures in
Global and National Commerce Act or under Section 16 of the Uniform
Electronic Transactions Act, as the case may be, as in effect in such
jurisdiction, of such transferable record.

 

SECTION 4.07.  Continuing Obligations of the Grantors.  Each Grantor shall remain liable to observe
and perform all the conditions and obligations to be observed and performed by
it under each contract, agreement or instrument relating to the Collateral, all
in accordance with the terms and conditions thereof, except where the failure
to do so would not have a Material Adverse Effect, and each Grantor jointly and
severally agrees to indemnify and hold harmless the Administrative Agent and
the Credit Parties from and against any and all liability for such performance.

 

SECTION 4.08.  Limitation on Modification of Accounts.  None of the Grantors will, without the
Administrative Agent’s prior written consent, grant any extension of the time
of payment of any of the Accounts, compromise, compound or settle the same for
less than the full amount thereof, release, wholly or partly, any Person liable
for the payment thereof or allow any credit or discount whatsoever thereon,
other than extensions, releases, credits, discounts, compromises or settlements
granted or made in the ordinary course of business and consistent with its
current practices.

 

SECTION 4.09.  Insurance.  Each Grantor hereby irrevocably makes,
constitutes and appoints the Administrative Agent (and all officers, employees
or agents designated by the Administrative Agent) as such Grantor’s true and
lawful agent (and attorney-in-fact), exercisable after the occurrence and
during the continuance of any Event of Default, for the purpose of making,
settling and adjusting claims in respect of Collateral under policies of
insurance, endorsing the name of such Grantor on any check, draft, instrument
or other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect thereto.  In the event that any Grantor at any time or
times shall fail to obtain or maintain any of the policies of insurance
required hereby or to pay any premium in whole or part relating thereto, the
Administrative Agent may, without waiving or releasing any obligation or
liability of the Grantors hereunder or any Default or Event of Default, in its
sole discretion, obtain and maintain such policies of insurance and pay such
premium and take any other actions with respect thereto as the Administrative
Agent deems advisable.  All sums
disbursed by the Administrative Agent in connection with this Section 4.09,
including reasonable attorneys’ fees, court costs, expenses and other charges
relating thereto, shall be payable, upon demand, by the Grantors to the
Administrative Agent and shall be additional Secured Obligations secured
hereby.

 

SECTION 4.10.  Legend.  At the request of the Administrative Agent if
an Event of Default shall occur and be continuing, each Grantor shall legend,
in form and manner satisfactory to the Administrative Agent, its Accounts and
its books, records and documents evidencing or pertaining thereto with an
appropriate reference to the fact that such Accounts have been assigned to the
Administrative Agent for the benefit of the Credit Parties and that the
Administrative Agent has a security interest therein.

 

15

 

SECTION 4.11.  Intellectual Property.

 

(a)           Each
Grantor agrees that it will not do any act or omit to do any act (and will
exercise commercially reasonable efforts to prevent its licensees and
sub-licensees from doing any act or omitting to do any act) whereby any Patent
or Industrial Design may become invalidated or dedicated to the public, and
agrees that it shall continue to mark any products covered by a Patent or
Industrial Design that is material to the conduct of such Grantor’s business
with the relevant patent number as necessary and sufficient to establish and
preserve its maximum rights under applicable patent laws.

 

(b)           Each
Grantor (either itself or through its licensees or its sublicensees) will, for
each Material Trademark, (i) maintain such Material Trademark in full
force free from any claim of abandonment or invalidity for non-use, (ii) maintain
the quality of products and services offered under such Material Trademark
including where applicable policing the use of such Material Trademarks by its
licensees and sublicensees, (iii) display such Material Trademark with
notice of Federal or foreign registration to the extent necessary and
sufficient to establish and preserve its maximum rights under applicable law
and (iv) not knowingly use or knowingly permit the use of such Material
Trademark in violation of any third party rights.

 

(c)           Each
Grantor (either itself or through its licensees or sublicensees) will, for each
work covered by a Copyright material to the conduct of such Grantor’s business,
continue to publish, reproduce, display, adopt and distribute the work with
appropriate copyright notice as necessary and sufficient to establish and
preserve its maximum rights under applicable copyright laws.

 

(d)           Each
Grantor shall notify the Administrative Agent promptly if it knows or has
reason to know that any Material Trademark or any Patent, Copyright or
Industrial Design material to the conduct of its business may become abandoned,
lost or dedicated to the public, or of any materially adverse determination or
development (including the institution of, or any such determination or
development in, any proceeding in the United States Patent and Trademark
Office, United States Copyright Office, Canadian Intellectual Property Office,
Canadian Industrial Design Office or any court or similar office of any
country) regarding such Grantor’s ownership of any Patent, Material Trademark,
Copyright or Industrial Design material to the conduct of its business, its
right to register the same, or its right to keep and maintain the same.

 

(e)           At the time of delivery of quarterly financial statements with respect to each Fiscal Quarter pursuant to Section 6.01(b) of
the Credit Agreement, each Grantor shall inform the Administrative Agent of any
application for any Patent, Trademark, Industrial Design or Copyright (or any
registration of any Patent, Trademark, Industrial Design or Copyright) such Grantor
has filed with the United States Patent and Trademark Office, United States
Copyright Office, Canadian Intellectual Property Office, Canadian Industrial
Design Office or any office or agency in any political subdivision of the
United States, Canada or in any other country or any political subdivision,
province or territory thereof or any Copyright License for which such Grantor
has become the licensee, in each case, during
such Fiscal Quarter, and, upon request of the 

 

16

 

Administrative Agent, execute and deliver any and all agreements,
instruments, documents and papers as the Administrative Agent may reasonably
request to evidence the Administrative Agent’s Security Interest in any of the
foregoing, and each Grantor hereby appoints the Administrative Agent as its
attorney-in-fact to execute and file such writings for the foregoing purposes,
all acts of such attorney being hereby ratified and confirmed; such power,
being coupled with an interest, is irrevocable.

 

(f)            Each
Grantor will take all necessary steps that are consistent with the practice in
any proceeding before the United States Patent and Trademark Office, United
States Copyright Office, Canadian Intellectual Property Office, Canadian
Industrial Design Office or any office or agency in any political subdivision
of the United States, Canada or in any other country or any political
subdivision, province or territory thereof, to maintain and pursue each
application relating to Material Trademarks and each material application
relating to the Patents and/or Copyrights and/or Industrial Designs (and to
obtain the relevant grant or registration) and to maintain each issued Patent
and each registration of Copyrights and/or Industrial Designs that is material
to the conduct of any Grantor’s business and each registration of Material
Trademarks, including timely filings of applications for renewal, affidavits of
use, affidavits of incontestability and payment of maintenance fees, and, if
consistent with good business judgment, to initiate opposition, interference
and cancelation proceedings against third parties.

 

(g)           In
the event that any Grantor has reason to believe that any Collateral consisting
of a Patent, Industrial Design or Copyright material to the conduct of any
Grantor’s business or a Material Trademark has been or is likely to be
infringed, misappropriated or diluted by a third party, such Grantor promptly
shall notify the Administrative Agent and shall, if consistent with reasonable
business judgment, promptly sue for infringement, misappropriation or dilution
and to recover any and all damages for such infringement, misappropriation or
dilution, and take such other actions as are appropriate under the
circumstances to protect such Collateral. 
Each Grantor further agrees not to abandon any Material Trademark or any
Patent, Industrial Design, Copyright or Copyright License that in such Grantor’s
reasonable business judgment is material to the operation of such Grantor’s
business without the prior written consent of the Administrative Agent.

 

(h)           Upon
and during the continuance of an Event of Default, each Grantor shall use its
best efforts to obtain all requisite consents or approvals by the licensor of
each Copyright License, Patent License, Industrial Design License or Material
Trademark License under which such Grantor is a licensee to effect the
assignment of all such Grantor’s right, title and interest thereunder to the
Administrative Agent or its designee.

 

(i)            Without
limiting the generality of any of the foregoing, each Grantor hereby authorizes
the Administrative Agent, with prompt notice thereof to the Grantors, to
supplement this Agreement by supplementing Schedule 1 or adding
additional schedules hereto to identify specifically any asset or item that may
constitute Copyrights, Copyright Licenses, Patents, Industrial Design or
Material Trademarks; 

 

17

 

provided that any Grantor shall,
within 10 days after it has been notified by the Administrative Agent of
the specific identification of such Collateral, advise the Administrative Agent
in writing of any inaccuracy of the representations and warranties made by such
Grantor hereunder with respect to such Collateral.

 

SECTION 4.12.  Pledged Collateral.  (a)  Subject to Section 4.04
and Section 4.12(e), if any Grantor shall receive or become entitled to
receive any Pledged Collateral after the Closing Date, it shall deliver to the
Administrative Agent (i) a duly executed Pledged Collateral Addendum
identifying such Pledged Collateral and (ii) to the extent such Pledged
Collateral is represented by certificates or promissory notes, such
certificates or promissory notes, together with undated powers endorsed in
blank by such Grantor.

 

(b)           Upon
the occurrence and continuance of an Event of Default, each Grantor shall
promptly deliver to the Administrative Agent a copy of each material written
notice or other material written communication received by it in respect of any
Pledged Collateral.

 

(c)           No
Grantor shall make or consent to any amendment or other modification or waiver
with respect to any Pledged Collateral, Pledged Operating Agreement, or Pledged
Partnership Agreement, or enter into any agreement or agree to any restriction
with respect to any Pledged Collateral which would materially adversely affect
either the rights of the Administrative Agent or the other Credit Parties
pursuant to the Loan Documents or the value of the Pledged Collateral, or that
would result in a material violation of any provision of the Credit Agreement
or any other Loan Document.

 

(d)           Each
Grantor agrees that it will assist the Administrative Agent in obtaining all
necessary approvals and making all necessary filings under federal, state,
local, or foreign law in connection with the Administrative Agent’s Liens on
the Pledged Collateral or any sale or transfer thereof.

 

(e)           As
to all limited liability company or partnership interests owned by a Grantor
and issued under any Pledged Operating Agreement or Pledged Partnership Agreement
which are not certificated (the “Uncertificated Interests”), each
Grantor hereby represents, warrants and covenants that such Uncertificated
Interests issued pursuant to such agreement (A) are not and shall not be
dealt in or traded on securities exchanges or in securities markets, (B) do
not and will not constitute investment company securities, and (C) are not
and will not be held by such Grantor in a securities account.  In addition, none of the Pledged Operating
Agreements, the Pledged Partnership Agreements, or any other agreements
governing any of the Uncertificated Interests issued under any Pledged
Operating Agreement or Pledged Partnership Agreement, provide or shall provide
that such Pledged Interests are securities governed by Article 8 of the
Uniform Commercial Code as in effect in any relevant jurisdiction.

 

SECTION 4.13.  Commercial Tort Claims.  If any Grantor shall at any time after the
date hereof hold or acquire a Commercial Tort Claim in respect of which a
complaint or counterclaim has been filed seeking damages in an amount in excess
of 

 

18

 

$1,000,000, the Grantor shall promptly notify the Administrative Agent
thereof in a writing signed by such Grantor, including a summary description of
such claim, and grant to the Collateral Agent in such writing a security
interest therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance reasonably
satisfactory to the Administrative Agent.

 

SECTION 4.14.  Securities Accounts.  With respect to (i) the Securities
Accounts (other than Securities Accounts with an aggregate value of less than
$10,000) and (ii) any Collateral that constitutes a Security Entitlement
as to which the financial institution acting as the Administrative Agent
hereunder is not the Securities Intermediary, the relevant Grantor will cause
the Securities Intermediary with respect to each such account or Security
Entitlement either (A) to identify in its records the Administrative Agent
as the Entitlement Holder thereof or (B) to agree with such Grantor and
the Administrative Agent that such Securities Intermediary will comply with
Entitlement Orders originated by the Administrative Agent without further
consent of such Grantor, such agreement to be in form and substance reasonably
satisfactory to the Borrower and Administrative Agent (which agreement may also
be for the benefit of the ABL Agent);  provided
that the Administrative Agent will not give any such orders except after the
occurrence and during the continuance of an Event of Default; provided  further
that no Grantor shall be required to take the foregoing actions with respect to
any Securities Account until the later of (A) 60 days after the Closing
Date and (B) in the case of Securities Accounts opened after the Closing
Date, at the time of establishment of such Securities Account (or, in each
case, such later date as the Administrative Agent shall in its reasonable
discretion agree).

 

ARTICLE V

 

Collections

 

SECTION 5.01.  Deposit and Concentration Accounts.

 

(a)           Schedule 5 hereto sets
forth, as of the date hereof, each Deposit Account and Concentration Account
that each Grantor maintains.  For each
Concentration Account that any Grantor at any time opens or maintains, such
Grantor shall cause the depositary bank to agree to comply with instructions
from the Administrative Agent to such depositary bank directing the disposition
of funds from time to time credited to such Concentration Account, without
further consent of such Grantor or any other Person, pursuant to an agreement
reasonably satisfactory to the Administrative Agent (such agreement, a “Blocked
Account Agreement”) (which Blocked Account Agreement may also be for the
benefit of the ABL Agent); provided that no Grantor shall be required to
take the foregoing actions with respect to any Concentration Account until the
later of (A) 60 days after the Closing Date and (B) in the case of
Concentration Accounts opened after the Closing Date, at the time of establishment
of such Concentration Account (or, in each case, such later date as the
Administrative Agent shall in its reasonable discretion agree).  The Administrative Agent agrees with each
Grantor that the Administrative Agent shall not give any such instructions or
withhold any withdrawal rights from any Grantor unless an Event of 

 

19

 

Default has occurred and is continuing.  Without the prior
written consent of the Administrative Agent, no Grantor shall modify or amend
the instructions pursuant to any Blocked Account Agreement.

 

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

 

SECTION 5.02.  Power of Attorney.  Each Grantor hereby irrevocably makes,
constitutes and appoints the Administrative Agent (and all officers, employees
or agents designated by the Administrative Agent) as such Grantor’s true and
lawful agent and attorney-in-fact, and in such capacity the Administrative
Agent shall have the right, with power of substitution for each Grantor and in
each Grantor’s name or otherwise, for the use and benefit of the Administrative
Agent and the Credit Parties, (a) at any time, whether or not a Default or
Event of Default has occurred, to take actions required to be taken by the
Grantors under Section 2.01 of this Agreement, (b) upon the
occurrence and during the continuance of an Event of Default or as otherwise
permitted under the Credit Agreement, (i) to receive, endorse, assign
and/or deliver any and all notes, acceptances, checks, drafts, money orders or
other evidences of payment relating to the Collateral or any part thereof; (ii) to
demand, collect, receive payment of, give receipt for and give discharges and
releases of all or any of the Collateral; and (iii) to take actions
required to be taken by Grantors in Section 5.01; and (c) upon the
occurrence and during the continuance of an Event of Default or as otherwise
permitted in the Credit Agreement, (i) to sign the name of any Grantor on
any invoices, schedules of Collateral, freight or express receipts, or bills of
lading storage receipts, warehouse receipts or other documents of title
relating to any of the Collateral; (ii) to sign the name of any Grantor on
any notice to such Grantor’s Account Debtors; (iii) to sign the name of
any Grantor on any proof of claim in bankruptcy against Account Debtors; (iv) to
the extent relating to the Collateral, to sign change of address forms to
change the address to which each Grantor’s mail is to be sent to such address
as the Administrative Agent shall designate; (v) to receive and open each
Grantor’s mail, remove any Proceeds of Collateral therefrom and turn over the
balance of such mail either to any of the Grantors or to any trustee in
bankruptcy or receiver of a Grantor, or other legal representative of a Grantor
whom the Administrative Agent determines to be the appropriate person to whom
to so turn over such mail; (vi) to commence and prosecute any and all
suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect or otherwise realize on all or any of the Collateral or
to enforce any rights in respect of any Collateral; (vii) to 

 

20

 

settle, compromise, compound, adjust or defend any actions, suits or
proceedings relating to all or any of the Collateral; (viii) to take all
such action as may be necessary to obtain the payment of any letter of credit
and/or banker’s acceptance of which any Grantor is a beneficiary to the extent
relating to Collateral; (ix) to repair, manufacture, assemble, complete,
package, deliver, alter or supply goods, if any, necessary to fulfill in whole
or in part the purchase order of any customer of any Grantor; (x) to use
for the purposes permitted by Section 6.01 hereof, any or all General
Intangibles of any Grantor relating to the Collateral; provided that the
Administrative Agent’s use of such General Intangibles will comply with all
applicable law; and (xi) to use, sell, assign, transfer, pledge, make any
agreement with respect to or otherwise deal with all or any of the Collateral,
and to do all other acts and things necessary to carry out the purposes of this
Agreement, as fully and completely as though the Administrative Agent were the
absolute owner of the Collateral for all purposes; provided, however,
that nothing herein contained shall be construed as requiring or obligating the
Administrative Agent or any other Credit Party to make any commitment or to
make any inquiry as to the nature or sufficiency of any payment received by the
Administrative Agent or any other Credit Party, or to present or file any claim
or notice.  It is understood and agreed
that the appointment of the Administrative Agent as the agent and
attorney-in-fact of the Grantors for the purposes set forth above is coupled
with an interest and is irrevocable. 
Notwithstanding the provisions of this Section 5.02, the power of
the Administrative Agent to act in any name other than the name of the Grantor
shall not apply to any Pledged Collateral that is ULC Shares.

 

SECTION 5.03.  No Obligation to Act.  The Administrative Agent shall not be
obligated to do any of the acts or to exercise any of the powers authorized by Section 5.02,
but if the Administrative Agent elects to do any such act or to exercise any of
such powers, it shall not be accountable for more than it actually receives as
a result of such exercise of power, and shall not be responsible to any Grantor
for any act or omission to act except for any act or omission to act which
constitutes gross negligence, bad faith or breach of the contractual
obligations of the Administrative Agent. 
The Administrative Agent shall be deemed to have exercised reasonable
care in the custody and preservation of the Pledged Collateral in its
possession if such Pledged Collateral is accorded treatment substantially
equivalent to that which the Administrative Agent in such Person’s individual
capacity, accords its own property consisting of similar instruments or
interests, which shall be no less than the treatment employed by a reasonable
and prudent agent in the industry, it being understood that none of the
Administrative Agent or any of the Lenders shall have responsibility for (i) ascertaining
or taking action with respect to calls, conversions, exchanges, maturities,
tenders or other matters relating to any Pledged Collateral, whether or not the
Administrative Agent or any Lender has or is deemed to have knowledge of such
matters or (ii) taking any necessary steps to preserve rights against any
Person with respect to any Pledged Collateral. 
The provisions of Section 5.02 shall in no event relieve any
Grantor of any of its obligations hereunder or under any other Loan Document
with respect to the Collateral or any part thereof or impose any obligation on
the Administrative Agent or any other Credit Party to proceed in any particular
manner with respect to the Collateral or any part thereof, or in any way limit
the exercise by the Administrative Agent or any other Credit Party of any other
or further right which it may have on the date of this 

 

21

 

Agreement or hereafter, whether hereunder, under any other Loan
Document, by law or otherwise.

 

ARTICLE VI

 

Remedies

 

SECTION 6.01.  Remedies upon Default.  Upon the occurrence and during the
continuance of an Event of Default, it is agreed that the Administrative Agent
shall have in any jurisdiction in which enforcement hereof is sought, in
addition to all other rights and remedies, the rights and remedies of a secured
party under the UCC, the PRUCC or other applicable law.  The rights and remedies of the Administrative
Agent shall include the right to take any of or all the following actions at
the same or different times upon the occurrence and during the continuance of
an Event of Default:

 

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

 

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

 

(c)           With respect to any Collateral
consisting of Intellectual Property, on demand, to cause the Security Interest
granted herein to become an assignment, transfer and conveyance of any of or
all such Collateral by the applicable Grantors to the Administrative Agent or
to license or sublicense, whether general, special or otherwise, and whether on
an exclusive or a nonexclusive basis, any such Collateral throughout the world
on such terms and conditions and in such manner as the Administrative Agent
shall reasonably determine (other than in violation of any then-existing
licensing arrangements to the extent that waivers thereunder cannot be
obtained).

 

(d)           With or without legal process and
with or without prior notice or demand for performance, the Administrative
Agent may enter upon, occupy and

 

22

 

use any premises owned or
occupied by each Grantor, and may exclude the Grantors from such premises or
portion thereof as may have been so entered upon, occupied or used by the
Administrative Agent.  The Administrative
Agent shall not be required to remove any of the Collateral from any such
premises upon the Administrative Agent’s taking possession thereof, and may
render any Collateral unusable to the Grantors. 
In no event shall the Administrative Agent be liable to any Grantor for
use or occupancy by the Administrative Agent of any premises pursuant to this Section 6.01,
nor for any charge (such as wages for the Grantors’ employees and utilities)
incurred in connection with the Administrative Agent’s exercise of the
Administrative Agent’s Rights and Remedies hereunder.

 

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

 

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

 

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

 

(h)           Any public sale shall be held at such
time or times within ordinary business hours and at such place or places as the
Administrative Agent may fix and state in the notice of such sale.  At any sale or other disposition, the
Collateral, or portion thereof, to be sold may be sold in one lot as an
entirety or in separate parcels, as the Administrative Agent may (in its sole
and absolute 

 

23

 

discretion) determine.  If any of the Collateral is sold, leased or
otherwise disposed of by the Administrative Agent on credit, the Secured
Obligations shall not be deemed to have been reduced as a result thereof unless
and until payment is finally received thereon by the Administrative Agent.

 

(i)            At any public (or, to the extent
permitted by applicable law, private) sale made pursuant to this Section 6.01,
the Administrative Agent or any other Credit Party may bid for or purchase,
free (to the extent permitted by applicable law) from any right of redemption,
stay, valuation or appraisal on the part of any Grantor, the Collateral or any
part thereof offered for sale and may make payment on account thereof by using
any claim then due and payable to the Administrative Agent or such other Credit
Party from any Grantor on account of the Secured Obligations as a credit
against the purchase price, and the Administrative Agent or such other Credit
Party may, upon compliance with the terms of sale, hold, retain and dispose of
such property without further accountability to any Grantor therefor.

 

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

 

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

 

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

 

SECTION 6.02.  Grant of Non-Exclusive License.  For the purpose of enabling the
Administrative Agent to exercise the Administrative Agent’s Rights and Remedies
under Section 6.01 (including in order to take possession of, hold,
preserve, process, assemble, prepare for sale, market for sale, sell or
otherwise dispose of the Collateral) at such time as the Administrative Agent
shall be lawfully entitled to exercise the Administrative Agent’s Rights and
Remedies under Section 6.01, each Grantor hereby (i) grants to the
Administrative Agent, for the benefit of the Administrative Agent and the other
Credit Parties, a royalty free, non-exclusive, irrevocable license, such
license being with respect to the Administrative Agent’s exercise of the
Administrative Agent’s Rights and Remedies under Section 6.01, including
in connection with any completion of the manufacture of Inventory or any sale
or other disposition of Inventory 

 

24

 

(a) to use, apply and affix any Trademark, trade name, logo or the
like in which any Grantor now or hereafter has rights, (b) to use, license
or sublicense any Intellectual Property, computer software now owned, held or
hereafter acquired by such Grantor, including in such license access to all
media and to the extent to which any of the licensed items may be recorded or
stored and to all such computer software programs and to the extent used for
the compilation or print out thereof, provided that the Administrative
Agent’s use of the property described in subclauses (a) and (b) above
will comply with all applicable law, and (c) to use any and all furniture,
fixtures and equipment contained in any premises owned or occupied by any
Grantor in connection with the exercise of the Administrative Agent’s Rights
and Remedies under Section 6.01, and (ii) without limiting the
provisions of Section 6.01(c), agrees to provide the Administrative Agent
and/or its agents with access to, and the right to use, any such premises owned
or occupied by any Grantor.

 

SECTION 6.03.  Application of Proceeds.  After the occurrence of an Event of Default
and acceleration of the Secured Obligations, the Administrative Agent shall
apply the proceeds of any collection or sale of the Collateral, as well as any
Collateral consisting of cash, or any Collateral granted under any other of the
Security Documents in the manner set forth in Section 8.04 of the Credit
Agreement.

 

SECTION 6.04.  Voting Rights.

 

(a)           So long as no Event of Default shall have occurred and be
continuing:

 

(i)            Each Grantor shall be entitled to
exercise any and all voting and other consensual rights pertaining to the
Pledged Collateral of such Grantor or any part thereof for any purpose.  For so long as any Grantor shall have the
right to vote the Pledged Interests of such Grantor, such Grantor covenants and
agrees that it will not, without the prior written consent of the
Administrative Agent, vote or take any consensual action with respect to the
Pledged Interests which would materially affect the rights of the
Administrative Agent or any other Credit Party or the value of the Pledged
Interests.  The Administrative Agent
shall execute and deliver to each Grantor, or cause to be executed and
delivered to such Grantor, all such proxies, powers of attorney and other
instruments as such Grantor may reasonably request for the purpose of enabling
such Grantor to exercise the voting and/or consensual rights and powers it is
entitled to exercise pursuant to this Section 6.04(a)(i).

 

(ii)           Each Grantor shall be entitled to
receive and retain any and all dividends, cash, options, warrants, rights,
instruments, distributions, returns of capital or principal, income, interest,
profits and other property, interests (debt or equity) or proceeds, including
as a result of a split, revision, reclassification or other like change of the
Pledged Collateral, from time to time received, receivable or otherwise
distributed to such Grantor in respect of or in exchange for any or all of the
Pledged Collateral (any of the foregoing, a “Distribution” and
collectively the “Distributions”) paid in respect of the Pledged
Collateral of such Grantor to 

 

25

 

the extent that the payment
thereof is not otherwise prohibited by the terms of the Loan Documents; provided,
however, that any and all Distributions paid or payable other than in
cash (other than in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in-surplus) in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for, any
Pledged Collateral, shall be, and, subject to the limitations in the definition
of “Collateral”, be promptly delivered to the Administrative Agent to hold as
Pledged Collateral and shall, if received by such Grantor, be received in trust
for the benefit of the Administrative Agent, be segregated from the other
property or funds of such Grantor and be promptly delivered to the
Administrative Agent as Pledged Collateral in the same form as so received
(with any necessary endorsement).

 

(b)           Upon the occurrence and during the
continuance of an Event of Default:

 

(i)            All rights of each Grantor (x) to
exercise or refrain from exercising the voting and other consensual rights that
it would otherwise be entitled to exercise pursuant to Section 6.04(a)(i) shall
automatically cease and (y) to receive Distributions that it would
otherwise be authorized to receive and retain pursuant to 6.04(a)(ii) shall
automatically cease, and all such rights shall thereupon become vested in the
Administrative Agent, which shall thereupon have the sole right to exercise or
refrain from exercising such voting and other consensual rights and to receive
and hold as Pledged Collateral such dividends, interest and other distributions;
provided that, unless otherwise directed by the Required Lenders, the
Administrative Agent shall have the right from time to time following and
during the continuance of an Event of Default to permit the Grantors to
exercise such rights.  Any and all money
and other property paid over to or received by the Administrative Agent
pursuant to the provisions of this Section 6.04(b)(i) shall be
retained by the Administrative Agent in an account to be established by the
Administrative Agent upon receipt of such money or other property and shall be
applied in accordance with the provisions of Section 6.03.  After all Events of Default have been cured
or waived and the Borrower has delivered to the Administrative Agent a
certificate to that effect, the Administrative Agent shall promptly repay to
each Grantor (without interest) all dividends or interest that such Grantor
would otherwise be permitted to retain pursuant to the terms of this Section 6.04
and that remain in such account.

 

(ii)           All Distributions that are received
by any Grantor contrary to the provisions of paragraph (i) of this Section 6.04(b) shall
be received in trust for the benefit of the Administrative Agent, shall be
segregated from other funds of such Grantor and shall be promptly paid over to
the Administrative Agent as Pledged Collateral in the same form as so received
(with any necessary endorsement).

 

(c)           This Section 6.04 shall not
apply to any Pledged Collateral that is ULC Shares or to any Distributions that
are paid in respect of ULC Shares.

 

26

 

SECTION 6.05.  ULC Shares.

 

(a)           Notwithstanding
any provisions to the contrary contained in this Agreement or any other
document or agreement among all or some of the parties hereto, each Grantor
that is the registered and beneficial owner of any Pledged Collateral which are
ULC Shares (“ULC Pledgor”) will remain so until such time as such ULC
Shares are effectively transferred into the name of the Administrative Agent,
any Credit Party or any other Person on the books and records of such ULC.  Accordingly, each ULC Pledgor shall be
entitled to receive and retain for its own account any Distribution in respect
of such Pledged Collateral (except insofar as such ULC Pledgor has granted a
security interest in such Distribution, and any shares which are Pledged
Collateral shall be delivered to the Administrative Agent to hold as Pledged
Collateral hereunder) and shall  have the
right to vote such Pledged Collateral and to control the direction, management
and policies of the applicable ULC issuer to the same extent as such ULC
Pledgor would if such Pledged Collateral were not pledged to the Administrative
Agent (for its own benefit and for the benefit of the Credit Parties) pursuant
hereto.  Nothing in this Agreement or any
other document or agreement among all or some of the parties hereto is intended
to, and nothing in this Agreement or any other document or agreement among all
or some of the parties hereto shall, constitute the Administrative Agent, any
Credit Party or any other Person other than a ULC Pledgor a member of a ULC for
the purposes of the Companies Act (Nova Scotia) until such time as notice is
given to such ULC Pledgor and further steps are taken pursuant hereto or
thereto so as to register the Administrative 
Agent, any Credit Party or any other Person as holder of the applicable
ULC Shares.  To the extent any provision
hereof would have the effect of constituting the Administrative  Agent or any Credit Party as a member of any
ULC prior to such time, such provision shall be severed therefrom and shall be
ineffective with respect to Pledged Collateral which are ULC Shares without
otherwise invalidating or rendering unenforceable this Agreement or
invalidating or rendering unenforceable such provision insofar as it relates to
Pledged Collateral which are not ULC Shares.

 

(b)           Except
upon the exercise of rights to sell, transfer or otherwise dispose of the
Pledged Stock issued by a ULC following the occurrence of an Event of Default
pursuant to Article VI, no ULC Pledgor shall cause or permit, or enable
any ULC in which they hold ULC Shares to cause or permit, the Administrative
Agent or any other Credit Party to:  (i) be
registered as shareholder or member of such ULC; (ii) accept or request
stock powers of attorney in respect of such Person endorsed or assigned in
favor of the Administrative Agent or other Credit Party; (iii) have any
notation entered in its favor in the share register of such ULC; (iv) be
held out as a shareholder or member of such ULC; (v) receive, directly or
indirectly, any dividends, property or other distributions from such ULC by
reason of the Administrative Agent or any other Credit Party holding a security
interest in such ULC; or (vi) act as a shareholder or member of such ULC,
or exercise any rights of a shareholder or member including the right to attend
a meeting of, or to vote the shares of, such ULC.

 

SECTION 6.06.  Disposition of Pledged Collateral by
Administrative Agent.  None of the
Pledged Collateral existing as of the date of this Agreement is, and none of
the Pledged Collateral hereafter acquired on the date of acquisition thereof
will 

 

27

 

be,
registered or qualified under the various federal or state securities laws of
the United States and disposition thereof after an Event of Default has
occurred and is continuing may be restricted to one or more private (instead of
public) sales in view of the lack of such registration.  Each Grantor understands that in connection
with such disposition, the Administrative Agent may approach only a restricted
number of potential purchasers and further understands that a sale under such
circumstances may yield a lower price for the Pledged Collateral than if the
Pledged Collateral were registered and qualified pursuant to federal and state
securities laws and sold on the open market. 
Each Grantor, therefore, agrees that: 
(a) if the Administrative Agent shall, pursuant to the terms of
this Agreement, sell or cause the Pledged Collateral or any portion thereof to
be sold at a private sale, the Administrative Agent shall have the right to
rely upon the advice and opinion of any nationally recognized brokerage or
investment firm (but shall not be obligated to seek such advice and the failure
to do so shall not be considered in determining the commercial reasonableness
of such action) as to the best manner in which to offer the Pledged Collateral
or any portion thereof for sale and as to the best price reasonably obtainable
at the private sale thereof; and (b) such reliance shall be conclusive
evidence that the Administrative Agent has handled the disposition in a
commercially reasonable manner.

 

ARTICLE VII

 

Perfection of Security Interest

 

SECTION 7.01.  Perfection by Filing.  This Agreement constitutes an authenticated
record, and each Grantor hereby authorizes the Administrative Agent, pursuant
to the provisions of Sections 2.01 and 5.02, to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Collateral, in such filing offices as the Administrative Agent shall deem
appropriate, including recording of the IP Agreements with the United States
Patent and Trademark Office, the United States Copyright Office, the Canadian
Intellectual Property Office and the Canadian Industrial Design Office and the
Grantors shall pay the Administrative Agent’s reasonable costs and expenses
incurred in connection therewith.  Any
such financing statement may indicate the Collateral as “all assets of the
Grantor” or words of similar effect, regardless of whether any particular asset
comprised in the Collateral falls within the scope of Article 9 of the
UCC.  Each Grantor hereby further agrees
that a carbon, photographic or other reproduction of this Agreement shall be
sufficient as a financing statement and may be filed as a financing statement
in any and all jurisdictions.

 

SECTION 7.02.  Other Perfection, etc.  The Grantors shall at any time and from time
to time take such steps as the Administrative Agent may reasonably request for
the Administrative Agent (a) to obtain an acknowledgment, in form and
substance reasonably satisfactory to the Administrative Agent, of any bailee
having possession of any of the Collateral that the bailee holds such
Collateral for the Administrative Agent, (b) to obtain “control” of any
Securities Accounts, Concentration Accounts, Letter-of-Credit Rights, or
Electronic Chattel Paper, with any agreements establishing control to be in
form and substance satisfactory to the Administrative Agent (and which may also
be for the benefit of the ABL Agent), and (c) otherwise to insure the
continued perfection of 

 

28

 

the Administrative Agent’s Security Interest in any of the Collateral
with the priority described in Section 3.03 and of the preservation of its
rights therein.

 

SECTION 7.03.  Savings Clause.  Nothing contained in this Article VII
shall be construed to narrow the scope of the Administrative Agent’s Security
Interest in any of the Collateral or the perfection or priority thereof or to
impair or otherwise limit any of the Administrative Agent’s Rights and Remedies
hereunder except (and then only to the extent) as mandated by the UCC or the
PRUCC.

 

ARTICLE VIII

 

Miscellaneous

 

SECTION 8.01.  Notices.  All communications and notices hereunder
shall (except as otherwise expressly permitted herein) be in writing and given
as provided in Section 10.02 of the Credit Agreement.

 

SECTION 8.02.  Security Interest Absolute.  All rights of the Administrative Agent
hereunder, the Security Interest and all obligations of the Grantors hereunder
shall be absolute and unconditional irrespective of (a) any lack of
validity or enforceability of the Credit Agreement, any other Loan Document,
any agreement with respect to any of the Secured Obligations or any other
agreement or instrument relating to any of the foregoing, (b) any change
in the time, manner or place of payment of, or in any other term of, all or any
of the Secured Obligations, or any other amendment or waiver of or any consent
to any departure from the Credit Agreement, any other Loan Document or any
other agreement or instrument, (c) any exchange, release or non-perfection
of any Lien on other collateral, or any release or amendment or waiver of or
consent under or departure from any guarantee, securing or guaranteeing all or
any of the Secured Obligations, or (d) any other circumstance that might
otherwise constitute a defense available to, or a discharge of, any Grantor in
respect of the Secured Obligations or this Agreement.

 

SECTION 8.03.  Suretyship Waivers by Grantors.  The Grantors waive demand, notice, protest,
notice of acceptance of this Agreement, notice of loans made, credit extended,
Collateral received or delivered or other action taken in reliance hereon and
all other demands and notices of any description.  With respect to both the Secured Obligations
and the Collateral, each Grantor assents to any extension or postponement of
the time of payment or any other indulgence, to any substitution, exchange or
release of or failure to perfect any security interest in any Collateral, to
the addition or release of any party or person primarily or secondarily liable,
to the acceptance of partial payment thereon and the settlement, compromising
or adjusting of any thereof, all in such manner and at such time or times as
the Administrative Agent may deem advisable. 
The Administrative Agent shall have no duty as to the collection or protection
of the Collateral or any income therefrom, the preservation of rights against
prior parties or the preservation of any rights pertaining thereto.  Each of the Grantors further waives any and
all other suretyship defenses.

 

29

 

SECTION 8.04.  Marshalling.  Neither the Administrative Agent nor any
Lender shall be required to marshal any present or future collateral security
(including the Collateral) for, or other assurances of payment of the Secured
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights and
remedies of the Administrative Agent or any Lender hereunder and of the
Administrative Agent or any Lender in respect of such collateral security and
other assurances of payment shall be cumulative and in addition to all other
rights and remedies, however existing or arising.  To the extent that it lawfully may, each
Grantor hereby agrees that it will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Administrative Agent’s Rights and Remedies under this Agreement or under
any other instrument creating or evidencing any of the Secured Obligations or
under which any of the Secured Obligations is outstanding or by which any of
the Secured Obligations is secured or payment thereof is otherwise assured,
and, to the extent that it lawfully may, each Grantor hereby irrevocably waives
the benefits of all such laws.

 

SECTION 8.05.  Survival of Agreement.  All covenants, agreements, representations
and warranties made by the Grantors herein and in the certificates or other
instruments prepared or delivered in connection with or pursuant to this
Agreement or any other Loan Document shall be considered to have been relied
upon by the Administrative Agent and the other Credit Parties and shall survive
the execution and delivery of this Agreement and the other Loan Documents and
the making of any Loans, and shall continue in full force and effect as long as
the Secured Obligations are outstanding and unpaid, and as long as the
Commitments have not expired or terminated.

 

SECTION 8.06.  Binding Effect; Several Agreement;
Assignments.  Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party (subject to the
provisions of the Credit Agreement), and all covenants, promises and agreements
by or on behalf of the Grantors that are contained in this Agreement shall bind
and inure to the benefit of each Grantor and its respective successors and
assigns.  This Agreement shall be binding
upon each Grantor and the Administrative Agent and their respective successors
and assigns, and shall inure to the benefit of each Grantor, the Administrative
Agent and the other Credit Parties and their respective successors and assigns,
except that no Grantor shall have the right to assign or transfer its rights or
obligations hereunder or any interest herein or in the Collateral (and any such
attempted assignment or transfer shall be void) except as expressly permitted
by this Agreement or the Credit Agreement. 
This Agreement shall be construed as a separate agreement with respect
to each Grantor and may be amended, modified, supplemented, waived or released
with respect to any Grantor without the approval of any other Grantor and
without affecting the obligations of any other Grantor hereunder.

 

SECTION 8.07.  Administrative Agent’s Fees and Expenses;
Indemnification.  (a)  Without
limiting any of their obligations under the Credit Agreement or the other Loan
Documents, the Grantors jointly and severally agree to pay all Credit Party
Expenses incurred in connection with this Agreement.

 

30

 

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

 

(c)           Any
such amounts payable as provided hereunder shall be additional Secured
Obligations secured hereby and by the other Security Documents.  All amounts due under this Section 8.07
shall be payable on written demand therefor.

 

SECTION 8.08.  Governing Law.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS AGREEMENT AND THE SECURED OBLIGATIONS SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS
LAW, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

 

SECTION 8.09.  Waivers; Amendment.  (a)  The rights, remedies, powers,
privileges and discretions of the Administrative Agent hereunder (herein, the “Administrative
Agent’s Rights and Remedies”) shall be cumulative and not exclusive of any
rights or remedies which it would otherwise have.  No delay or omission by the Administrative
Agent in exercising or enforcing any of the Administrative Agent’s Rights and
Remedies shall operate as, or constitute, a waiver thereof.  No waiver by the Administrative Agent of any
Event of Default or of any Default under any other agreement shall operate as a
waiver of any other Event of Default or other Default hereunder or under any
other agreement.  No single or partial
exercise of any of the Administrative Agent’s Rights or Remedies, and no
express or implied agreement or transaction of whatever nature entered into
between the Administrative Agent and any Person, at any time, shall preclude
the other or further exercise of the Administrative Agent’s Rights and
Remedies.  No waiver by the
Administrative Agent of any of the Administrative Agent’s Rights and Remedies
on any one occasion shall be deemed a waiver on any subsequent occasion, nor
shall it be deemed a continuing waiver. 
The Administrative Agent’s Rights and Remedies may be exercised at such
time or times and 

 

31

 

in such order of preference as the Administrative Agent may
determine.  The Administrative Agent’s
Rights and Remedies may be exercised without resort or regard to any other
source of satisfaction of the Secured Obligations.  No waiver of any provisions of this Agreement
or any other Loan Document or consent to any departure by any Grantor therefrom
shall in any event be effective unless the same shall be permitted by paragraph
(b) below, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given.  No notice to or demand on any Grantor in any
case shall entitle such Grantor or any other Grantor to any other or further
notice or demand in similar or other circumstances.

 

(b)           Neither
this Agreement nor any provision hereof may be waived, amended or modified
except pursuant to a written agreement entered into between the Administrative
Agent and the Grantor or Grantors with respect to whom such waiver, amendment
or modification is to apply, subject to any consent required in accordance with
Section 10.01 of the Credit Agreement.

 

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

 

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

 

SECTION 8.12.  Counterparts.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract. 
Delivery of an executed counterpart of a signature page to this
Agreement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually executed
counterpart to this Agreement.

 

SECTION 8.13.  Headings.  Article and Section headings and
the Table of Contents used herein are for the purpose of reference only, are
not part of this Agreement

 

32

 

and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.

 

SECTION 8.14.  Jurisdiction; Consent to Service of
Process.  (a)  EACH OF THE
GRANTORS AND THE ADMINISTRATIVE AGENT AGREES THAT ANY SUIT FOR THE ENFORCEMENT
OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE
COURTS OF THE STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR ANY
FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF
SUCH COURTS, AND IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER
HAVE TO THE VENUE OF ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT FORUM.

 

(b)           EACH
PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE
MANNER PROVIDED FOR NOTICES IN SECTION 8.01.  NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS AGREEMENT TO SERVE PROCESS
IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

 

SECTION 8.15.  Termination; Release of Collateral.  (a)  Except for those provisions which
expressly survive the termination thereof, this Agreement and the Security
Interest shall terminate when all the Secured Obligations have been paid in
full (excluding contingent obligations as to which no claim has been made) and
the Lenders have no further commitment to lend under the Credit Agreement.

 

(b)           The
Administrative Agent may release any Grantor (other than the Borrower) from its
obligations hereunder, and the Security Interest in the Collateral of such
Grantor shall automatically be released (i) if such Person ceases to be a
Subsidiary as a result of a transaction permitted by the Credit Agreement; provided that, if so required by
the Credit Agreement, the Required Lenders shall have consented to such
transaction and the terms of such consent did not provide otherwise or (ii) upon
the effectiveness of any written consent to such release pursuant to Section 10.01
of the Credit Agreement.

 

(c)           Upon
any disposition of Collateral in connection with any disposition permitted
under the Credit Agreement or any other Loan Document (other than a sale or
transfer to a Grantor), or upon the effectiveness of any written consent to the
release of the Security Interest granted hereby in any Collateral pursuant to Section 10.01
of the Credit Agreement, the Security Interest in such Collateral shall be
automatically released.

 

(d)           In
connection with any termination or release pursuant to paragraph (a), (b) or
(c) of this Section 8.15, the Administrative Agent shall execute and
deliver to the Grantors, at the Grantors’ expense, all UCC or PRUCC termination

 

33

 

statements and similar documents that the Grantors shall reasonably
request to evidence such termination. 
Any execution and delivery of termination statements or documents
pursuant to this Section 8.15 shall be without recourse to, or warranty
by, the Administrative Agent.

 

SECTION 8.16.  Additional Grantors.  Pursuant to Section 6.11 of the Credit
Agreement, after the Closing Date, each new direct or indirect Subsidiary of
the Borrower is required to enter into this Agreement as a Grantor.  Upon execution and delivery by the
Administrative Agent and a Subsidiary of an instrument in the form of Annex 2
hereto, such Subsidiary shall become a Grantor hereunder with the same force
and effect as if originally named as a Grantor herein.  The execution and delivery of any such
instrument shall not require the consent of any other Loan Party
hereunder.  The rights and obligations of
each Loan Party hereunder shall remain in full force and effect notwithstanding
the addition of any new Loan Party as a party to this Agreement.

 

SECTION 8.17.  Intercreditor Agreement.  Notwithstanding anything herein to the
contrary, the lien and Security Interest granted pursuant to this Agreement and
the exercise of any right or remedy hereunder are subject to the provisions of
the Intercreditor Agreement.  In the
event of any conflict between the terms of the Intercreditor Agreement and this
Agreement, the terms of the Intercreditor Agreement shall govern and
control.  Without limiting the generality
of the foregoing, and notwithstanding anything herein to the contrary, all rights
and remedies of the Administrative Agent (and the other Credit Parties) with
respect to the “ABL Priority Collateral” (as defined in the Intercreditor
Agreement) shall be subject to the terms of the Intercreditor Agreement, and
until the discharge of the “ABL Obligations” (as defined in the Intercreditor
Agreement), any obligation of the Borrower and any other Grantor hereunder or
under any other Loan Document with respect to the delivery or control of any
ABL Priority Collateral, the novation of any lien on any certificate of title,
bill of lading or other document, the giving of any notice to any bailee or
other Person, the provision of voting rights, the obtaining of any consent of
any Person or otherwise, in each case in connection with any ABL Priority
Collateral, shall be deemed to be satisfied if the Borrower or such other
Grantor, as applicable, complies with the requirements of the similar provision
of the applicable “ABL Document” (as defined in the Intercreditor
Agreement).  Until the discharge of the
ABL Obligations, the delivery of any ABL Priority Collateral to the “ABL
Priority Agent” (as defined in the Intercreditor Agreement) pursuant to the ABL
Documents shall satisfy any delivery requirement hereunder or under any other
Loan Document.

 

SECTION 8.18.  Grantor Consent.  Each Grantor which is not a ULC hereby
consents to the security interests granted herein by each other Grantor,
including any security interests in Equity Interests issued by such Grantor or
Equity Interests issued by any Person in which such Grantor owns any Equity
Interest.  Each Grantor which is not a
ULC hereby waives any rights of such Grantor to notice in connection with the
grant of any Security Interests by any Grantor hereunder.

 

[SIGNATURE PAGES FOLLOW]

 

34

 

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

 

GRANTORS:

 

	
   

  	
  ZALE
  CORPORATION,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  DELAWARE, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  INTERNATIONAL, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZAP,
  INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  PUERTO RICO, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  EMPLOYEES’ CHILD CARE ASSOCIATION, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZGCO,
  LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZCSC,
  LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  TXDC,
  L.P.,

  by
  ZALE DELAWARE, INC., its general partner,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  CANADA FINCO, LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  CANADA CO.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  CANADA DIAMOND SOURCING INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  CANADA HOLDING LP,

  by
  ZALE INTERNATIONAL, INC., its general partner,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  CANADA FINCO 1, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  CANADA FINCO 2, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  FINCO
  HOLDING LP,

  by
  ZALE CANADA FINCO 2, INC., its general partner,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  FINCO
  PARTNERSHIP LP,

  by
  ZALE CANADA FINCO 2, INC., its general partner,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

ADMINISTRATIVE AGENT:

 

	
   

  	
  Z
  INVESTMENT HOLDINGS, LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

Schedule 1 to the

Security Agreement

 

Intellectual Property

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

 

Schedule 2 to the

Security Agreement

 

Initial Subsidiary Grantors

 

 

Schedule 3 to the

Security Agreement

 

Commercial Tort Claims

 

 

Schedule 4 to the

Security Agreement

 

Pledged Interests

 

	
  Name of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage of

  Class Owned

  	
   

  	
  Certificate

  Nos.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pledged Notes

 

	
  Name of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Schedule 5 to the

Security Agreement

 

Deposit Accounts and Concentration Accounts

 

	
  Name
  of Grantor

  	
   

  	
  Name of Institution

  	
   

  	
  Account Number

  	
   

  	
  Check here if

  Account is a

  Concentration

  Account

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Annex 1 to the

Security Agreement

 

Form of Perfection Certificate

 

 

Annex 2 to the

Security Agreement

 

Form of Supplement

 

SUPPLEMENT NO.      dated as of
[·] (this “Supplement”),
to the Security Agreement dated as of [·] (the “Security
Agreement”), among ZALE CORPORATION, a Delaware corporation (the “Borrower”),
the Subsidiaries from time to time party thereto (each, including the Borrower,
a “Grantor”, and collectively, the “Grantors”) and Z INVESTMENT
HOLDINGS, LLC, in its capacity as 
administrative agent (in such capacity, the “Administrative Agent”).

 

Reference is made to the Credit Agreement
dated as of May 10, 2010 (as such may be amended, modified, supplemented
or restated hereafter, the “Credit Agreement”) by and among (i) the
Borrower, (ii) the Lenders party thereto and (iii) the Administrative
Agent.

 

Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to such terms in the
Credit Agreement and the Security Agreement referred to therein.

 

The Grantors have entered into the Security
Agreement in order to induce the Lenders to make Loans.  Section 8.16 of the Security Agreement
provides that new direct and indirect Subsidiaries of the Borrower may become
Grantors under the Security Agreement by execution and delivery of an
instrument in the form of this Supplement. 
The undersigned Subsidiary (the “New Subsidiary”) is executing
this Supplement in accordance with the requirements of the Credit Agreement to
become a Grantor under the Security Agreement as consideration for Loans
previously under made the Credit Agreement.

 

Accordingly,
the Administrative Agent and the New Subsidiary agree as follows:

 

SECTION 1.  In accordance with Section 8.16 of the
Security Agreement, the New Subsidiary by its signature below becomes a Grantor
under the Security Agreement with the same force and effect as if originally
named therein as a Grantor and the New Subsidiary hereby (a) agrees to all
the terms and provisions of the Security Agreement applicable to it as a
Grantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Grantor thereunder are true and
correct on and as of the date hereof.  In
furtherance of the foregoing, the New Subsidiary, as security for the payment
and performance in full of the Secured Obligations, does hereby create and
grant to the Administrative Agent, its successors and assigns, for the benefit
of the Credit Parties, a security interest in and lien on all of the New
Subsidiary’s right, title 

 

 

and interest in and to the
Collateral (as defined in the Security Agreement) of the New Subsidiary.  Each reference to a “Grantor” in the Security
Agreement shall be deemed to include the New Subsidiary.  The Security Agreement is hereby incorporated
herein by reference.

 

SECTION 2.  The New Subsidiary represents and warrants to
the Administrative Agent and the other Credit Parties that this Supplement has
been duly authorized, executed and delivered by it and constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its
terms.

 

SECTION 3.  This Supplement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Supplement shall become effective when the Administrative Agent shall have
received a counterpart of this Supplement that bears the signature of the New
Subsidiary and the Administrative Agent has executed a counterpart hereof.  Delivery of an executed signature page to
this Supplement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually signed
counterpart to this Supplement.

 

SECTION 4.  The New Subsidiary hereby represents and
warrants that, as of the date hereof, (a) set forth on Schedule 1
attached hereto is a schedule with the true and correct legal name of the New
Subsidiary, its jurisdiction of formation and the location of its chief
executive office, (b) set forth on Schedule 2 attached hereto
is a true and correct schedule of Intellectual Property consisting (i) all
of the New Subsidiary’s United States registered Patents and Patent
applications, including the name of the registered owner, type, registration or
application number and the expiration date (if already registered) of each such
Patent and Patent application owned by the New Subsidiary, (ii) all of the
New Subsidiary’s Canadian registered Industrial Designs and Industrial Design
applications including the name of the registered owner, registration or
application number and the expiration date (if already registered) of each
Industrial Design and Industrial Design application owned by the New
Subsidiary, (iii) all of the New Subsidiary’s United States
registered Trademarks and Trademark applications, including the name of the
registered owner, the registration or application number and the expiration
date (if already registered) of each such Trademark and Trademark application
owned by the New Subsidiary and (iv) all of the New Subsidiary’s United
States registered Copyrights, Copyright applications and Copyright Licenses,
including the name of the registered owner, title and, if applicable, the
registration number of each such Copyright, Copyright application or Copyright
License owned by the New Subsidiary, (c) set forth on Schedule 3
attached hereto is each Commercial Tort Claim in respect of which a complaint
or a counterclaim has been filed by the New Subsidiary seeking damages in an
amount of $1,000,000 or more, (d) set forth on Schedule 4 attached
hereto is the Pledged Collateral held by the New Subsidiary and (e) set
forth on Schedule 5 attached hereto are the Deposit Accounts and
Concentration Accounts that the New Subsidiary maintains.

 

 

SECTION 5.  Except as expressly supplemented hereby, the
Security Agreement shall remain in full force and effect.

 

SECTION 6.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS SUPPLEMENT AND THE SECURED OBLIGATIONS SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS
LAW, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

 

SECTION 7.  In the event any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and in the Security Agreement shall not
in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision in a particular jurisdiction shall not in
and of itself affect the validity of such provision in any other jurisdiction).

 

SECTION 8.  All communications and notices hereunder
shall be in writing and given as provided in Section 8.01 of the Security
Agreement.

 

SECTION 9.  The New Subsidiary agrees to reimburse the
Administrative Agent for its reasonable out-of-pocket expenses reasonably
incurred in connection with this Supplement, including the reasonable fees,
other charges and disbursements of counsel for the Administrative Agent.

 

IN
WITNESS WHEREOF, the New Subsidiary and the Administrative Agent have duly
executed this Supplement to the Security Agreement as of the day and year first
above written.

 

	
   

  	
  [NAME
  OF NEW SUBSIDIARY],

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  Z
  INVESTMENT HOLDINGS, LLC, as Administrative Agent

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  

 

 

Schedule 1

to Supplement No.      to the

Security Agreement

 

New Subsidiary Information

 

	
  Name

  	
   

  	
  Jurisdiction of Formation

  	
   

  	
  Chief Executive Office

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Schedule 2

to Supplement No.      to the

Security Agreement

 

Intellectual Property

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

 

Schedule 3

to Supplement No.      to the

Security Agreement

 

Commercial Tort Claims

 

 

Schedule 4

to Supplement No.      to the

Security Agreement

 

Pledged Interests

 

	
  Name
  of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage of

  Class Owned

  	
   

  	
  Certificate

  Nos.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pledged Notes

 

	
  Name
  of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Schedule 5

to Supplement No.      to the

Security Agreement

 

Deposit Accounts and Concentration Accounts

 

	
  Name
  of Grantor

  	
   

  	
  Name of

  Institution

  	
   

  	
  Account Number

  	
   

  	
  Check here if

  Account is a

  Concentration

  Account

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Annex 3 to the

Security Agreement

 

Form of Patent, Industrial Design and Trademark
Security Agreement

 

 

Annex 4 to the

Security Agreement

 

Form of Copyright Security Agreement

 

 

Annex 5 to the

Security Agreement

 

Form of Pledged
Collateral Addendum

 

This Pledged Collateral Addendum, dated as of
                  
      , 20      ,
is delivered pursuant to Section 4.12 of the Security Agreement referred
to below.  The undersigned hereby agrees
that this Pledged Collateral Addendum may be attached to that certain Security
Agreement, dated as of May 10, 2010, (as amended, restated, supplemented
or otherwise modified from time to time, the “Security Agreement”),
among the undersigned, the other Grantors named therein, to Z Investment
Holdings, LLC, as Administrative Agent. 
Initially capitalized terms used but not defined herein shall have the
meaning ascribed to such terms in the Security Agreement or the Credit
Agreement.  The undersigned hereby agrees
that the additional interests listed on this Pledged Collateral Addendum as set
forth below shall be and become part of the Pledged Collateral pledged by the
undersigned to the Administrative Agent in the Security Agreement and any pledged
company set forth on this Pledged Collateral Addendum as set forth below shall
be and become a “Pledged Company” under the Security Agreement, each with the
same force and effect as if originally named therein.

 

The undersigned hereby certifies that the representations and
warranties set forth in Section 3.08 of the Security Agreement of the
undersigned are true and correct as to the Pledged Collateral listed herein on
and as of the date hereof.

 

	
   

  	
   

  	
   

  
	
   

  	
  [                                      ]

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

Pledged Interests

 

	
  Name of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage of

  Class Owned

  	
   

  	
  Certificate

  Nos.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pledged Notes

 

	
  Name
  of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Exhibit B-2

 

THE SUBSIDIARIES OF ZALE CORPORATION IDENTIFIED
HEREIN

 

and

 

Z INVESTMENT HOLDINGS, LLC,

 

as Administrative Agent

 

 

 

[FORM OF]

 

CANADIAN SECURITY AGREEMENT

May 10, 2010

 

 

 

STIKEMAN ELLIOTT LLP

 

 

TABLE
OF CONTENTS

 

	
  Article I Definitions

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section 1.01

  	
  Definition of Terms Used Herein

  	
  1

  
	
  Section 1.02

  	
  Definition of Certain Terms Used
  Herein

  	
  1

  
	
  Section 1.03

  	
  Rules of Interpretation

  	
  7

  
	
   

  	
   

  	
   

  
	
  Article II Security Interest

  	
  7

  
	
   

  	
   

  	
   

  
	
  Section 2.01

  	
  Security Interest

  	
  7

  
	
  Section 2.02

  	
  No Assumption of Liability

  	
  8

  
	
  Section 2.03

  	
  Attachment

  	
  8

  
	
  Section 2.04

  	
  Scope of Security Interest

  	
  8

  
	
   

  	
   

  	
   

  
	
  Article III Representations and Warranties

  	
  8

  
	
   

  	
   

  	
   

  
	
  Section 3.01

  	
  Title and Authority

  	
  8

  
	
  Section 3.02

  	
  Filings

  	
  8

  
	
  Section 3.03

  	
  Validity and Priority of Security
  Interest

  	
  9

  
	
  Section 3.04

  	
  Absence of Other Liens

  	
  9

  
	
  Section 3.05

  	
  Bailees, Warehousemen, Etc.

  	
  10

  
	
  Section 3.06

  	
  Intellectual Property

  	
  10

  
	
  Section 3.07

  	
  Pledged Collateral

  	
  10

  
	
   

  	
   

  	
   

  
	
  Article IV Covenants

  	
  12

  
	
   

  	
   

  	
   

  
	
  Section 4.01

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

  	
  12

  
	
  Section 4.02

  	
  Periodic Certification

  	
  12

  
	
  Section 4.03

  	
  Protection of Security

  	
  13

  
	
  Section 4.04

  	
  Further Assurances

  	
  13

  
	
  Section 4.05

  	
  Taxes; Encumbrances

  	
  13

  
	
  Section 4.06

  	
  Assignment of Security Interest

  	
  14

  
	
  Section 4.07

  	
  Continuing Obligations of the
  Grantors

  	
  14

  
	
  Section 4.08

  	
  Limitation on Modification of
  Accounts

  	
  15

  
	
  Section 4.09

  	
  Insurance

  	
  15

  
	
  Section 4.10

  	
  Legend

  	
  15

  
	
  Section 4.11

  	
  Intellectual Property

  	
  15

  
	
  Section 4.12

  	
  Pledged Collateral

  	
  17

  
	
  Section 4.13

  	
  Securities Accounts

  	
  18

  
	
   

  	
   

  	
   

  
	
  Article V Collections

  	
  19

  
	
   

  	
   

  	
   

  
	
  Section 5.01

  	
  Deposit and Concentration
  Accounts

  	
  19

  
	
  Section 5.02

  	
  Power of Attorney

  	
  20

  
	
  Section 5.03

  	
  No Obligation to Act

  	
  21

  

 

i

 

	
  Article VI Remedies

  	
  21

  
	
   

  	
   

  	
   

  
	
  Section 6.01

  	
  Remedies upon Default

  	
  21

  
	
  Section 6.02

  	
  Grant of Non-Exclusive License

  	
  24

  
	
  Section 6.03

  	
  Application of Proceeds

  	
  25

  
	
  Section 6.04

  	
  Voting Rights

  	
  25

  
	
  Section 6.05

  	
  ULC Shares

  	
  27

  
	
  Section 6.06

  	
  Disposition of Pledged Collateral
  by Administrative Agent

  	
  28

  
	
  Section 6.07

  	
  Receiver’s Powers

  	
  28

  
	
   

  	
   

  	
   

  
	
  Article VII Perfection of Security Interest

  	
  28

  
	
   

  	
   

  	
   

  
	
  Section 7.01

  	
  Perfection by Filing

  	
  28

  
	
  Section 7.02

  	
  Other Perfection, etc.

  	
  29

  
	
  Section 7.03

  	
  Savings Clause

  	
  29

  
	
   

  	
   

  	
   

  
	
  Article VIII Miscellaneous

  	
  29

  
	
   

  	
   

  	
   

  
	
  Section 8.01

  	
  Notices

  	
  29

  
	
  Section 8.02

  	
  Security Interest Absolute

  	
  29

  
	
  Section 8.03

  	
  Amalgamation

  	
  30

  
	
  Section 8.04

  	
  Suretyship Waivers by Grantors

  	
  30

  
	
  Section 8.05

  	
  Marshalling

  	
  30

  
	
  Section 8.06

  	
  Survival of Agreement

  	
  31

  
	
  Section 8.07

  	
  Binding Effect; Several
  Agreement; Assignments

  	
  31

  
	
  Section 8.08

  	
  Administrative Agent’s Fees and
  Expenses; Indemnification

  	
  31

  
	
  Section 8.09

  	
  Governing Law

  	
  32

  
	
  Section 8.10

  	
  Waiver of The Limitation of Civil Rights Act
  (Saskatchewan)

  	
  32

  
	
  Section 8.11

  	
  Waivers; Amendment

  	
  32

  
	
  Section 8.12

  	
  Waiver of Jury Trial

  	
  33

  
	
  Section 8.13

  	
  Severability

  	
  33

  
	
  Section 8.14

  	
  Counterparts

  	
  33

  
	
  Section 8.15

  	
  Headings

  	
  33

  
	
  Section 8.16

  	
  Jurisdiction; Consent to Service
  of Process

  	
  34

  
	
  Section 8.17

  	
  Termination; Release of
  Collateral

  	
  34

  
	
  Section 8.18

  	
  Additional Grantors

  	
  35

  
	
  Section 8.19

  	
  Intercreditor Agreement

  	
  35

  
	
  Section 8.20

  	
  Grantor Consent

  	
  35

  

 

ii

 

	
  ADDENDA

  
	
   

  	
   

  	
   

  
	
  SCHEDULE “1”

  	
  INTELLECTUAL PROPERTY

  	
   

  
	
   

  	
   

  	
   

  
	
  SCHEDULE “2”

  	
  INITIAL SUBSIDIARY GRANTORS

  	
   

  
	
   

  	
   

  	
   

  
	
  SCHEDULE “3”

  	
  PLEDGED INTERESTS AND PLEDGED NOTES

  	
   

  
	
   

  	
   

  	
   

  
	
  SCHEDULE “4”

  	
  DEPOSIT ACCOUNTS AND CONCENTRATION ACCOUNTS

  	
   

  
	
   

  	
   

  	
   

  
	
  ANNEX “1”

  	
  FORM OF PERFECTION
  CERTIFICATE

  	
   

  
	
   

  	
   

  	
   

  
	
  ANNEX “2”

  	
  FORM OF SUPPLEMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  ANNEX “3”

  	
  FORM OF PATENT, INDUSTRIAL
  DESIGN AND TRADEMARK SECURITY AGREEMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  ANNEX “4”

  	
  FORM OF COPYRIGHT SECURITY
  AGREEMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  ANNEX “5”

  	
  FORM OF PLEDGED COLLATERAL ADDENDUM

  	
   

  

 

iii

 

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

 

W I T N E S S E T H:

 

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

 

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

 

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

 

ARTICLE I

Definitions

 

Section 1.01           Definition of Terms Used Herein.

 

Unless the
context otherwise requires, all capitalized terms used but not defined herein
shall have the meanings set forth in the Credit Agreement, and all references
to the PPSA or the STA shall mean the Personal
Property Security Act or
Securities Transfer Act , as applicable, as in effect from time to
time in the Province of Ontario.  Terms
defined in the PPSA or the STA and used but not otherwise defined herein have
the same meanings.  For greater
certainty, the terms “financing statement”,
“financing change statement”, “money” and “personal property”
have the meanings given to them in the PPSA; and the terms “control” and “deliver” have
the meanings given to them in the STA.

 

Section 1.02           Definition of Certain Terms Used
Herein.

 

As used herein,
the following terms shall have the following meanings:

 

“ABL Agent” shall have the meaning given to that term in the
Intercreditor Agreement.

 

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

 

“Administrative Agent’s Rights and Remedies” shall have the
meaning assigned to such term in Section 8.11(a).

 

1

 

“Blocked Account Agreement” shall have the meaning assigned
to such term in Section 5.01.

 

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

 

“Collateral” shall mean the following assets of each Grantor:
(a) all Accounts, (b) all Inventory, (c) all Deposit Accounts,
Concentration Accounts and cash, (d) all Documents of Title, (e) all
Chattel Paper, (f) all Instruments, General Intangibles and
Letter-of-Credit Rights, (g) all Goods, (h) Equipment and fixtures, (i) all
Investment Property, (i) all Securities Accounts and Futures Accounts, (j) all
Intellectual Property, (k) all other personal property not otherwise
described above (including all goods, Investment Property, Instruments,
Documents of Title, Chattel Paper, intangibles and money), whether tangible or
intangible and wherever located (except for any property expressly excluded in
this definition of “Collateral”), (l) all
policies and certificates of insurance and all insurance proceeds, refunds and
premium rebates, including proceeds of fire and credit insurance, with respect
to any of the foregoing, (m) all books, records and information relating
to any of the foregoing, and all rights of access to such books, records and
information, (n) all liens, guaranties, rights, remedies and privileges
pertaining to any of the foregoing ((a) through (m)), including the right
of stoppage in transit, and (o) any of the foregoing whether now
owned or now due, or in which any Grantor has an interest, or hereafter
acquired, arising or to become due, or in which any Grantor obtains an
interest, and all products, Proceeds, substitutions and accessions of or to any
of the foregoing.  Notwithstanding the
foregoing, the term “Collateral”
shall expressly exclude (i) any Inventory or other Goods that have been
delivered to any Grantor on a consignment basis to the extent that the rights
of such consignor have been properly perfected under applicable law, (ii) any
property to the extent that such grant of a security interest is prohibited by
any valid enforceable law or regulation applicable thereto, requires a consent
not obtained of any Governmental Authority pursuant to such law or regulation
or is prohibited by, or constitutes a breach or default under or results in the
termination of or gives rise to a right on the part of the parties thereto
other than such Grantor to terminate (or materially modify) or requires any
consent not obtained under, any contract, license, agreement, instrument or
other document evidencing or giving rise to such property, except to the extent
that such law or regulation or the term in such contract, license, agreement,
instrument or other document providing for such prohibition, breach, default or
right of termination or modification or requiring such consent is ineffective
or is unenforceable against third parties under applicable law; provided,
however, that such security interest shall attach immediately at such
time as the condition causing such prohibition, breach, default or right of
termination or modification or requiring such consent, as the case may be,
shall be remedied and, to the extent severable, shall attach immediately to any
portion of such contract, license, agreement, instrument or other document that
does not result in any of such consequences, including any proceeds of such
contract, license, agreement, instrument or other document, (iii) the
voting Equity Interests of ZC Partnership, LP in excess of 65% of the general
partnership Equity Interests of such Subsidiary and (iv) any property that
the Administrative Agent shall determine in its reasonable discretion in which
the cost (including adverse tax consequences) of obtaining a security interest
would be excessive in relation to the value of the security to be afforded
thereby; provided, further, that in all events, all Proceeds, substitutions or
replacements of the foregoing shall constitute “Collateral” hereunder.

 

2

 

“Concentration Account” shall mean all Deposit Accounts and
accounts maintained by the Grantors into which more than one Deposit Account
deposits or transfers funds.

 

“Copyright Licenses” shall mean exclusive Licenses in respect
of Copyrights where a Grantor is a licensee.

 

“Copyrights” shall mean, with respect to any Person, all of
such Person’s right, title and interest, now or hereafter acquired, in and to
the following:  (a) all copyrights,
rights and interests in copyrights, works protectable by copyright, copyright
registrations and copyright applications subject to the copyright laws of
Canada; (b) all extensions and renewals of any of the foregoing; (c) all
income, royalties, damages, and payments now or hereafter due and/or payable
under any of the foregoing, including damages or payments for past, present or
future infringements for any of the foregoing; (d) the right to sue for
past, present and future infringements of any of the foregoing; and (e) all
rights corresponding to any of the foregoing.

 

“Credit Agreement” shall have the meaning assigned to such
term in the recitals to this Agreement.

 

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

 

“Distribution” shall have the meaning assigned to such term
in Section 6.04(a).

 

“Documents of Title” shall have the meaning given that term
in the PPSA.

 

“Entitlement Holder” shall have the meaning given that term
in the STA.

 

“Entitlement Orders” shall have the meaning given that term
in the STA.

 

“Equipment” shall have the meaning given that term in the
PPSA.

 

“Futures Accounts” shall have the meaning given that term in
the PPSA.

 

“General Intangibles” shall have the meaning given the term “intangibles”
in the PPSA, except that the term does not include Accounts.  The term shall also include all: rights to
payment for credit extended; deposits; amounts due to any Grantor; credit
memoranda in favour of any Grantor, tax refunds and abatements; insurance
refunds and premium rebates; records; customer lists; telephone numbers; causes
of action; judgments; payments under any settlement or other agreement;
licenses; internet addresses and domain names; computer software programs;
trade names, trademarks, service marks, together with all goodwill connected
with and symbolized by any of the foregoing; all other general intangible
property of any Grantor in the nature of Intellectual Property, and any
warranty claims.

 

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

 

“Governmental Authority” means (i) any international,
multinational, national, federal, provincial, state, municipal, local or other
governmental or public department, central bank, court, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) any 

 

3

 

subdivision or
authority of any of the above, (iii) any stock exchange and (iv) any
quasi-governmental or private body exercising any regulatory, expropriation or
taxing authority under or for the account of any of the above.

 

“Grantor” shall mean, collectively, the Subsidiaries of the
Borrower identified as Grantors on Schedule “2” attached hereto and each
other Subsidiary of the Borrower that becomes a party to this Agreement as a
Grantor after the Closing Date pursuant to Section 6.11 of the Credit
Agreement; provided that if a Subsidiary is released from its obligations as a
Grantor, such Subsidiary shall cease to be a Grantor hereunder effective upon
such release.

 

“Industrial Designs” shall mean, with respect to any Person,
all of such Person’s right, title and interest, now owned or hereafter
acquired, in and to: (a) any and all Canadian industrial designs and
industrial design applications; (b) all income, royalties, damages,
claims, and payments now or hereafter due or payable under and with respect
thereto, including damages and payments for past, present and future
infringements thereof; (c) all rights to sue for past, present and future
infringements thereof; and (d) all rights corresponding to any of the
foregoing.

 

“Instruments” means (i) a bill, note or cheque within
the meaning of the Bills of Exchange Act
(Canada) or any other writing that evidences a right to the payment of money
and is of a type that in the ordinary course of business is transferred by
delivery with any necessary endorsement or assignment, or (ii) a letter of
credit and an advice of credit if the letter or advice states that it must be
surrendered upon claiming payment thereunder, or (iii) chattel paper or
any other writing that evidences both a monetary obligation and a security
interest in or a lease of specific goods, or (iv) documents of title or
any other writing that purports to be issued by or addressed to a bailee and
purports to cover such goods in the bailee’s possession as are identified or
fungible portions of an identified mass, and that in the ordinary course of
business is treated as establishing that the Person in possession of it is
entitled to receive, hold and dispose of the document and the goods it covers,
or (v) any document or writing commonly known as an instrument, but
excludes investment property.

 

“Intellectual Property” shall mean all intellectual property
and similar property of every kind and nature now owned or hereafter acquired
by any Person, including inventions, designs, Patents, Copyrights, Trademarks,
Industrial Designs, Licenses, trade secrets, confidential or proprietary
technical and business information, know-how, show-how or other data or
information and all related documentation, and all additions and improvements
to any of the foregoing.

 

“Inventory” shall include “inventory” as defined in the PPSA
and also all: (a) Goods which (i) are leased by a Person as lessor, (ii) are
held by a Person for sale or lease or to be furnished under a contract of
service, (iii) are furnished by a Person under a contract of service, or (iv) consist
of raw materials, work in process or materials used or consumed in a business; (b) Goods
of said description in transit; (c) Goods of said description which are
returned, repossessed and rejected; (d) packaging and shipping materials
related to any of the foregoing; and (e) all Documents of Title which
represent any of the foregoing.

 

4

 

“Investment Property” shall have the meaning given that term
in the PPSA and shall also include all Pledged Collateral, Pledged Operating
Agreements and Pledged Partnership Agreements.

 

“IP Agreements” shall have the meaning assigned to such term
in Section 3.02.

 

“Letter of Credit Rights” means a right to payment or
performance under a letter of credit, whether or not the beneficiary has
demanded or is at the time entitled to demand payment or performance. The term
does not include the right of a beneficiary to demand payment or performance
under a letter of credit.

 

“License” shall mean, with respect to any Person, all of such
Person’s right, title and interest in and to (a) any and all licensing
agreements or similar arrangements in and to any other Person’s Intellectual
Property, (b) all income, royalties, damages, claims and payments now or
hereafter due or payable under and with respect thereto, including damages and
payments for past, present and future breaches thereof, and (c) all rights
to sue for past, present and future breaches thereof.

 

“Material Trademark” shall mean any Trademark of a Grantor
that is material to the conduct of such Grantor’s business.

 

“Patents” shall mean, with respect to any Person, all of such
Person’s right, title and interest, now owned or hereafter acquired, in and
to:  (a) any and all Canadian
industrial design registrations and applications, patents and patent
applications; (b) all inventions and improvements described and claimed
therein, including the right to make, use and/or sell the inventions disclosed
or claimed therein; (c) all reissues, divisions, continuations, renewals,
extensions, and continuations-in-part thereof; (d) all income, royalties,
damages, claims, and payments now or hereafter due or payable under and with
respect thereto, including damages and payments for past, present and future
infringements thereof; (e) all rights to sue for past, present and future
infringements thereof; and (f) all rights corresponding to any of the
foregoing.

 

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

 

“Pledged Collateral” shall mean all Pledged Interests and
Pledged Notes;

 

“Pledged Collateral Addendum” shall mean a Pledged Collateral
Addendum substantially in the form of Annex “5” to this Agreement.

 

“Pledged Companies” shall mean each Person listed on Schedule “3”
hereto as a “Pledged Company”, together with each other Person, all or a
portion of whose Equity Interests, is acquired or otherwise owned by a Grantor
after the Closing Date.

 

“Pledged Interests” shall mean all of each Grantor’s right,
title and interest in and to all of the Equity Interests now or hereafter owned
by such Grantor, regardless of class or designation, including in each of the
Pledged Companies owned by it, and all substitutions therefor and 

 

5

 

replacements
thereof, all proceeds thereof and all rights relating thereto, also including
any certificates representing the Equity Interests, the right to receive any
certificates representing any of the Equity Interests, all warrants, options,
share appreciation rights and other rights, contractual or otherwise in respect
thereof, and the right to receive dividends, distributions of income, profits,
surplus, or other compensation by way of income or liquidating distributions,
in cash or in kind, and all cash, instruments, and other property from time to
time received, receivable, or otherwise distributed in respect of or in
addition to, in substitution of, on account of, or in exchange for any or all
of the foregoing.

 

“Pledged Notes” shall mean with respect to any Grantor, all
of the debt securities now or hereafter owned by such Grantor and the
promissory notes evidencing such debt securities.

 

“Pledged Operating Agreements” shall mean all of each Grantor’s
rights, powers, and remedies under the limited liability company operating agreements
of each of the Pledged Companies that are limited liability companies.

 

“Pledged Partnership Agreements” shall mean all of each
Grantor’s rights, powers, and remedies under the partnership agreements of each
of the Pledged Companies that are partnerships.

 

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

 

“Secured Obligations” shall mean the Guaranteed Obligations
as defined in the Term Facility Canadian Guaranty Agreement.

 

“Securities Account” shall have the meaning given that term in
the STA.

 

“Securities Intermediary” shall have the meaning given that
term in the STA.

 

“Security Entitlement” shall have the meaning given that term
in the STA.

 

“Security Interest” shall have the meaning assigned to such
term in Section 2.01 of this Agreement.

 

“Taxes” means (i) any and all taxes, duties, fees,
excises, premiums, assessments, imposts, levies and other charges or
assessments of any kind whatsoever imposed by any Governmental Authority,
whether computed on a separate, consolidated, unitary, combined or other basis,
including those levied on, or measured by, or described with respect to,
income, gross receipts, profits, gains, windfalls, capital, capital stock,
production, recapture, transfer, land transfer, license, gift, occupation, wealth,
environment, net worth, indebtedness, surplus, sales, goods and services,
harmonized sales, use, value-added, excise, special assessment, stamp,
withholding, business, franchising, real or personal property, health, employee
health, payroll, workers’ compensation, employment or unemployment, severance,
social services, social security, education, utility, surtaxes, customs, import
or export,  and including all license and
registration fees and all employment insurance, health insurance and government
pension plan premiums or contributions; (ii) all interest, penalties,
fines, additions to tax or other additional amounts imposed by any Governmental
Authority on or in respect of amounts of the type described in clause (i) above
or this clause (ii); (iii) any liability for the payment of any amounts 

 

6

 

of the type
described in clauses (i) or (ii) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any  period; and (iv) any liability for the
payment of any amounts of the type described in clauses (i) or (ii) as
a result of any express or implied obligation to indemnify any other Person or
as a result of being a transferee or successor in interest to any party.

 

“Term Facility Canadian Guaranty Agreement” means the term
facility Canadian guaranty agreement of even date herewith by and among the
Grantors and the Administrative Agent, as such may be amended, modified,
supplemented or restated hereafter.

 

“Term Priority Collateral” shall have the meaning given to
that term in the Intercreditor Agreement;

 

“Trademarks” shall mean, with respect to any Person, all of
such Person’s right, title and interest, now owned or hereafter acquired, in
and to the following:  (a) all
Canadian trademarks (including service marks), trade names, trade dress, trade
styles and other source indicators and the registrations and applications for
registration thereof and the goodwill of the business symbolized by the
foregoing; (b) all licenses of the foregoing, whether as licensee or
licensor; (c) all renewals of the foregoing; (d) all income,
royalties, damages and payments now or hereafter due or payable with respect
thereto, including damages, claims and payments for past and future
infringements thereof; (e) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (f) all rights corresponding
to any of the foregoing.

 

“ULC” shall mean an unlimited company under the Companies Act (Nova Scotia).

 

“ULC Pledgor” has the meaning assigned to such term in Section 6.05.

 

“ULC Shares” shall mean shares of stock or other Equity
Interests in one or more ULCs.

 

“Zale Canada” shall mean Zale Canada Co., a Nova Scotia
company.

 

Section 1.03          Rules of
Interpretation.

 

The rules of
interpretation specified in Section 1.02 of the Credit Agreement shall be
applicable to this Agreement.

 

ARTICLE II

Security Interest

 

Section 2.01          Security
Interest.

 

As security for
the payment or performance, as the case may be, in full of its Secured
Obligations, each Grantor hereby bargains, mortgages, pledges, and hypothecates
and (except in the case of ULC Shares) assigns and transfers to the
Administrative Agent, its successors and assigns, for the benefit of the Credit
Parties, and hereby grants to the Administrative Agent, its successors and
assigns, for the benefit of the Credit Parties, a security interest in, all of
such Grantor’s right, title and interest in, to and under the Collateral,
wherever located whether now owned or hereafter acquired (the “Security
Interest”).

 

7

 

Section 2.02          No Assumption of
Liability.

 

The Security
Interest is granted as security only and shall not subject the Administrative
Agent or any other Credit Party to, or in any way alter or modify, any
obligation or liability of any Grantor with respect to or arising out of the
Collateral.

 

Section 2.03          Attachment.

 

Each Grantor
acknowledges that (i) value has been given, (ii) it has rights in the
Collateral or the power to transfer rights in the Collateral to the
Administrative Agent (other than after-acquired Collateral), and (iii) it
has not agreed to postpone the time of attachment of the Security Interest.

 

Section 2.04          Scope of Security
Interest.

 

(a)           The Security
Interest with respect to Trademarks constitutes a security interest in, and a
charge, hypothecation and pledge of, such Collateral in favour of the
Administrative Agent, but does not constitute an assignment or mortgage of such
Collateral to the Administrative Agent.

 

(b)           Until the
Security Interest is enforceable, the grant of the Security Interest in the
Intellectual Property does not affect in any way each of the Grantor’s rights
to commercially exploit the Intellectual Property, defend it, enforce the
Grantor’s rights in it or with respect to it against third parties in any court
or claim and be entitled to receive any damages with respect to any
infringement of it.

 

(c)           The Security Interest
does not extend to consumer goods.

 

(d)           The Security
Interest does not extend or apply to the last day of the term of any lease or
sublease of real property or any agreement for a lease or sublease of real
property, now held or hereafter acquired by each of the Grantors, but each of
the Grantors will stand possessed of any such last day upon trust to assign and
dispose of it as the Administrative Agent may reasonably direct.

 

ARTICLE III

Representations and Warranties

 

The Grantors
jointly and severally represent and warrant to the Administrative Agent and the
Credit Parties that:

 

Section 3.01          Title and
Authority.

 

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

 

Section 3.02          Filings.

 

The Perfection
Certificate has been duly prepared, completed and executed, and the information
set forth therein is correct and complete in all material respects.  Fully executed 

 

8

 

financing
statements or financing change statements, or other appropriate filings,
recordings or registrations containing a description of the Collateral have been,
or will be, filed in each governmental, municipal or other office as is
necessary to publish notice and protect the validity of, and to establish a
legal, valid and perfected security interest in favour of the Administrative
Agent (for the benefit of the Credit Parties) with respect to all Collateral in
which the Security Interest may be perfected by filing, recording or
registration pursuant to the PPSA or equivalent legislation in any Province or
Territory of Canada, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the
filing of financing change statements.  A
fully executed Patent, Industrial Design and Trademark Security Agreement, in
the form attached as Annex “3” hereto, and a fully executed Copyright
Security Agreement, in the form attached as Annex “4” hereto (such
agreements being collectively referred to as the “IP
Agreements”), covering the Canadian registered Patents, Canadian
registered Industrial Designs, Canadian registered Trademarks and Canadian
registered Copyrights (and applications for any of the foregoing) and Copyright
Licenses, as applicable, have been delivered to the Administrative Agent for
recording by any relevant offices of the Canadian Intellectual Property Office,
as is necessary to protect the validity of and to establish a legal and valid
security interest in favour of the Administrative Agent (for the benefit of the
Credit Parties) in respect of all Collateral consisting of Intellectual
Property in which a security interest may be perfected by filing, recording or
registration in Canada (or any Province or Territory thereof), and no further
or subsequent filing, refiling, recording, rerecording, registration or
reregistration is necessary (other than such actions as are necessary to
perfect the Security Interest with respect to any Intellectual Property
acquired or developed after the date hereof).

 

Section 3.03          Validity and Priority
of Security Interest.

 

The Security
Interest constitutes (a) a legal and valid security interest in all of the
Collateral securing the payment and performance of the Secured Obligations, and
(b) a perfected security interest in all of the Collateral, to the extent
that perfection of the Security Interest can be achieved by filing or recording
a financing statement, a financing change statement or analogous document in
Canada (or any Province or Territory thereof) pursuant to the PPSA or by
recording of the IP Agreements with any relevant offices of the Canadian
Intellectual Property Office.  The
Security Interest is and shall be prior to any other Lien on any of the
Collateral, subject only to those Liens expressly permitted pursuant to Section 7.02
of the Credit Agreement.

 

Section 3.04          Absence of Other
Liens.

 

The Collateral is
owned by the Grantors free and clear of any Lien, except for Liens expressly
permitted pursuant to Section 7.02 of the Credit Agreement.  Except as provided herein and in the Credit
Agreement, disclosed in the Perfection Certificate, no Grantor has filed or
consented to the filing of (a) any financing statement, a financing change
statement or analogous document under the PPSA or any other applicable law
covering any Collateral, (b) any assignment in which any Grantor assigns
any Collateral or any security agreement or similar instrument covering any
Collateral with any relevant offices of the Canadian Intellectual Property
Office, or (c) any assignment in which any Grantor assigns any Collateral
or any security agreement or similar instrument covering any Collateral with
any foreign governmental, municipal or other office, which financing statement,
financing change statement 

 

9

 

or analogous
document, assignment, security agreement or similar instrument is still in
effect, except, in each case, for Liens expressly permitted pursuant to Section 7.02
of the Credit Agreement.

 

Section 3.05          Bailees,
Warehousemen, Etc.

 

Except as otherwise
disclosed in the Perfection Certificate, no Inventory or Equipment of any
Grantor is in the care or custody of any third party or stored or entrusted
with a bailee or other third party and none shall hereafter be placed under
such care, custody, storage or entrustment except for Equipment and Inventory (i) out
for repair or replacement in the ordinary course of business, (ii) being
shipped, or in-transit, from a supplier or to a customer or between suppliers
in the ordinary course of business or (iii) in the possession of
suppliers, subcontractors and licensees in the ordinary course of business,
unless the applicable Grantor complies with Section 4.01(c).

 

Section 3.06          Intellectual
Property.

 

Schedule “1”
hereto sets forth, as of the date hereof, (i) all of each Grantor’s
registered Patents and Patent applications (and for greater certainty,
registered Industrial Designs and Industrial Design applications), including
the name of the registered owner, type, registration or application number and
the expiration date (if already registered) of each registration and
application owned by any Grantor, (ii) all of each Grantor’s registered
Industrial Designs and Industrial Design applications, including the name of
the registered owner, registration or application number and the expiration
date (if already registered) of such industrial design and industrial design
application owned by any Grantor, (iii) all of each Grantor’s registered
Trademarks and Trademark applications, including the name of the registered owner,
the registration or application number and the expiration date (if already
registered) of each such Trademark and Trademark application owned by any
Grantor and (iv) all of each Grantor’s registered Copyrights, Copyright
applications and Copyright Licenses, including the name of the registered
owner, title and, if applicable, the registration number of each such
Copyright, Copyright application or Copyright License owned by any Grantor.

 

Section 3.07          Pledged
Collateral.

 

(a)           Each Grantor is
the holder of record and the legal and beneficial owner, free and clear of all
Liens other than the Security Interest granted to the Administrative Agent for
the benefit of the Credit Parties hereunder and Permitted Encumbrances, of the
Pledged Collateral indicated on Schedule “3” as being owned by such
Grantor and any Pledged Collateral owned by such Grantor and acquired after the
Closing Date.

 

(b)           All of the
Pledged Collateral constituting Pledged Interests is duly authorized, validly
issued, fully paid and non-assessable (provided that Pledged Interests which
are ULC Shares will be assessable in accordance with the provisions of the Companies Act (Nova Scotia)) and such
Pledged Interests constitute or will constitute the percentage of the issued
and outstanding Equity Interests of the Pledged Companies of each applicable
Grantor identified on Schedule “3”, any Pledged Collateral Addendum or any
Supplement to this Agreement.  All of the
Pledged Collateral consisting of Pledged Notes is duly authorized, validly
issued and delivered by the issuer of such Pledged Note and is the legal, valid
and 

 

10

 

binding obligation of such
issuer and such issuer is not in default thereunder. Each Grantor has the right
and requisite authority to pledge the Pledged Collateral pledged by such
Grantor to the Administrative Agent as provided herein.

 

(c)           All actions
necessary to perfect or establish the first priority of the Administrative
Agent’s Liens (subject to Permitted Encumbrances) in the Pledged Collateral,
and the proceeds thereof, have been duly taken, (A) upon the execution and
delivery of this Agreement; (B) (i) upon the taking of possession by
the Administrative Agent of any certificates constituting the Pledged
Interests, to the extent such Pledged Interests are represented by
certificates, together with undated powers endorsed or transfer forms endorsed
in blank by the applicable Grantor and (ii) upon the taking of possession
by the Administrative Agent of any promissory notes constituting the Pledged
Notes, together with undated powers endorsed or transfer forms endorsed in
blank by the applicable Grantor; and (C) upon the filing of financing
statements or the financing change statements in the applicable jurisdiction
for such Grantor with respect to the Pledged Collateral of such Grantor that
are not represented by certificates. 
Each Grantor has delivered to and deposited with the Administrative
Agent (or, with respect to any Pledged Interests created or obtained after the
Closing Date, will deliver and deposit in accordance with Section 4.12
hereof) all certificates representing the Pledged Interests owned by such
Grantor to the extent such Pledged Interests are represented by certificates,
all promissory notes representing the Pledged Notes owned by such Grantor and
undated powers endorsed or transfer forms endorsed in blank with respect to
such certificates or promissory notes.

 

(d)           None of the
Pledged Collateral owned or held by such Grantor has been issued or transferred
in violation of any securities registration, securities disclosure, or similar
laws of any jurisdiction to which such issuance or transfer may be subject.

 

Section 3.08          Nature of Certain
Consignment Filings

 

Each of the Liens and other filings set forth on Schedule 7.02 of the
Credit Agreement which purports to cover goods delivered to a Grantor on a
consignment basis (a) evidences arrangements entered into with such
Grantor and its trade vendors in the ordinary course of business, intended by
such grantor and vendor to be a “true” consignment, (b) does not encumber
any assets of such Grantor other than the consigned goods to which it relates
and the proceeds thereof to the extent owing to the vendor and (c) secures
solely the obligation of such Grantor to either return such consigned goods or
pay the purchase price for such consigned goods, in each case pursuant to a
written consignment agreement (with the exception of any such Liens and other
filings made by any trade vendors in connection with or relating to that
certain Amendment to Existing Agreements dated as of March 3, 2010 by and
among Zale Delaware, Inc., TXDC, L.P., Rosy Blue Jewelry, Inc. and
Rosy Blue, Inc., relating to consigned goods for such Grantors’ 2010
Spring season) on terms substantially similar to those set forth in the
Grantors’ standard form of consignment agreement as in effect on or about the
Closing Date, a copy of which has been provided to the Administrative Agent.

 

11

 

ARTICLE IV

Covenants

 

Section 4.01          Change of Name;
Location of Collateral; Records; Place of Business.

 

(a)           Each Grantor
agrees to furnish to the Administrative Agent (i) prompt written notice of
any change in (A) any Grantor’s trade name or business name used to
identify it in the conduct of its business or in the ownership of its
properties, (B) any office in which it maintains books or records relating
to Collateral owned by it and having a value in excess of $1,000,000 or any
office or facility at which Collateral owned by it and having a value in excess
of $1,000,000 is located (including the establishment of any such new office or
facility) other than, in each case, (I) retail Store locations or (II) Equipment
and Inventory (1) out for repair or replacement in the ordinary course of
business, (2) being shipped, or in transit, from a supplier or to a
customer or between suppliers in the ordinary course of business or (3) in
the possession of suppliers, subcontractors and licensees in the ordinary
course of business, or (C) the acquisition by any Grantor of any property
for which additional filings or recordings are necessary to perfect and
maintain the Administrative Agent’s Security Interest therein, and (ii) prior
written notice of any change in (A) any Grantor’s corporate or partnership
name or the location of any Grantor’s chief executive office or its principal
place of business, (B) any Grantor’s identity or corporate or partnership
structure or (C) any Grantor’s jurisdiction of incorporation, amalgamation
or formation; provided however, that if any of the occurrences referred to in
clauses (i) and (ii) shall occur with respect to Zale Canada or any
of its assets, Zale Canada shall furnish to the Administrative Agent with 30
days prior written notice thereof.  Each
Grantor also agrees promptly to notify the Administrative Agent if any material
portion of the Collateral is damaged, destroyed or lost, stolen or otherwise
unaccounted for.  Each of the Grantors
acknowledges and agrees that, except as disclosed on the Perfection
Certificate, such Grantor does not currently, nor will it in the future, have
any assets that constitute Collateral located in the United States.

 

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

 

(c)           Each Grantor
agrees that, to the extent it acquires any additional leased warehouses or
distribution centers after the Closing Date, the Grantors shall provide the
Administrative Agent with prompt notice thereof, and shall obtain a waiver and
collateral access agreement in form and substance reasonably satisfactory to
the Administrative Agent.

 

Section 4.02          Periodic
Certification.

 

Each Grantor
shall deliver to the Administrative Agent, at least thirty (30) days prior to
setting up a location in the Province of Québec in which it intends on
maintaining tangible property, a 

 

12

 

deed of movable
hypothec in form and substance and on terms and conditions reasonably
satisfactory to the Administrative Agent which has been published in each
governmental, municipal or other appropriate office in the Province of Québec
to the extent necessary to protect, perfect and set-up the security interest
and hypothec.

 

Each year, at the
time of delivery of annual financial statements with respect to the preceding
Fiscal Year pursuant to Section 6.01(a) of the Credit Agreement, each
Grantor shall deliver, or cause to be delivered, to the Administrative Agent a
certificate executed by a Financial Officer of such Grantor confirming that
there has been no change in the information contained in the Perfection
Certificate since the date of the Perfection Certificate delivered on the
Closing Date or the date of the most recent certificate delivered pursuant to
this Section 4.02 or, if any such change has occurred, specifying such
revised information.

 

Section 4.03          Protection of
Security.

 

Each Grantor
shall, at its own cost and expense, take any and all actions reasonably
necessary to defend title to the Collateral against all Persons and to defend
the Security Interest of the Administrative Agent in the Collateral and the
priority thereof against any Lien not expressly permitted pursuant to Section 7.02.  of the Credit Agreement .

 

Section 4.04          Further Assurances.

 

Each Grantor
agrees, at its own expense, to execute, acknowledge, deliver and cause to be
filed all such further instruments and documents and to take all such actions
as the Administrative Agent may from time to time reasonably request to assure,
preserve, protect and perfect the Security Interest and the rights and remedies
created hereby, including the payment of any fees and taxes required in
connection with the execution and delivery of this Agreement, the granting of
the Security Interest and the filing of any financing statements, financing
change statements or other documents in connection herewith or therewith.  If any amount payable under or in connection
with any of the Collateral shall be or become evidenced by any promissory note,
document, draft, chattel paper or instrument in an amount in excess of
$1,000,000, such note, document, draft, chattel paper or instrument shall be
immediately pledged and delivered to the Administrative Agent, duly endorsed in
a manner satisfactory to the Administrative Agent.

 

Section 4.05          Taxes;
Encumbrances.

 

The
Administrative Agent may discharge past due taxes, assessments, charges, fees
or Liens (other than Liens permitted under the Credit Agreement), at any time
levied or placed on the Collateral, and may take any other action which the
Administrative Agent may deem necessary or desirable to repair, maintain or
preserve any of the Collateral to the extent any Grantor fails to do so as
required by the Credit Agreement or this Agreement, and each Grantor jointly
and severally agrees to reimburse the Administrative Agent on demand for any
payment made or any expense incurred by the Administrative Agent pursuant to
the foregoing authorization; provided that, so long as no Event of
Default shall have occurred and be continuing, if such taxes, assessments,
charges, fees or Liens are being contested in good faith and by appropriate
proceedings by such Grantor, the Administrative Agent shall consult with such
Grantor before making any such payment or taking any such action; provided,
however, that the Administrative Agent shall not have any obligation to
undertake any of the foregoing and shall have no liability on account of any
action so undertaken except to the extent that any liability on 

 

13

 

account of any
such action resulted from the gross negligence, bad faith or breach of the
contractual obligations of the Administrative Agent; provided  further
that the making of any such payments or the taking of any such action by the
Administrative Agent shall not be deemed to constitute a waiver of any Default
or Event of Default arising from the Grantor’s failure to have made such
payments or taken such action.  Nothing
in this Section 4.05 shall be interpreted as excusing any Grantor from the
performance of any covenants or other promises of any Grantor with respect to
taxes, assessments, charges, fees, Liens, security interests or other
encumbrances and maintenance as set forth herein or in the other Loan
Documents.

 

Section 4.06          Assignment of
Security Interest.

 

(a)           If at any time
any Grantor shall take a security interest in any property of an account debtor
or any other Person to secure payment and performance of an Account and the
property securing payment and performance of the Account has a value in excess
of $1,000,000, such Grantor shall promptly assign such security interest to the
Administrative Agent.  Such assignment
need not be filed of public record unless necessary to continue the perfected
status of the security interest against creditors of, and transferees from, the
account debtor or other Person granting the security interest.

 

(b)           To the extent
that any Grantor is a beneficiary under any written letter of credit relating
to the Collateral in an amount in excess of $1,000,000 now or hereafter issued
in favour of such Grantor, such Grantor shall deliver such letter of credit to
the Administrative Agent.  The
Administrative Agent shall from time to time, at the request and expense of
such Grantor, make such arrangements with such Grantor as are in the
Administrative Agent’s reasonable judgment necessary and appropriate so that
such Grantor may make any drawing to which such Grantor is entitled under such
letter of credit, without impairment of the Administrative Agent’s perfected
security interest in such Grantor’s rights to proceeds of such letter of credit
or in the actual proceeds of such drawing. 
At the Administrative Agent’s request, such Grantor shall, for any
letter of credit relating to the Collateral in an amount in excess of
$1,000,000, whether or not written, now or hereafter issued in favour of such
Grantor as beneficiary, execute and deliver to the issuer and any confirmer of
such letter of credit an assignment of proceeds form, in favour of the Administrative
Agent, and satisfactory to the Administrative Agent and such issuer or (as the
case may be) such confirmer, requiring the proceeds of any drawing under such
letter of credit to be paid directly to the Administrative Agent.

 

Section 4.07          Continuing
Obligations of the Grantors.

 

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

 

14

 

Section 4.08          Limitation on
Modification of Accounts.

 

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

 

Section 4.09          Insurance.

 

Each Grantor
hereby irrevocably makes, constitutes and appoints the Administrative Agent
(and all officers, employees or agents designated by the Administrative Agent)
as such Grantor’s true and lawful agent (and attorney-in-fact), exercisable
after the occurrence and during the continuance of any Event of Default, for
the purpose of making, settling and adjusting claims in respect of Collateral
under policies of insurance, endorsing the name of such Grantor on any check,
draft, instrument or other item of payment for the proceeds of such policies of
insurance and for making all determinations and decisions with respect
thereto.  In the event that any Grantor
at any time or times shall fail to obtain or maintain any of the policies of
insurance required hereby or to pay any premium in whole or part relating
thereto, the Administrative Agent may, without waiving or releasing any
obligation or liability of the Grantors hereunder or any Default or Event of
Default, in its sole discretion, obtain and maintain such policies of insurance
and pay such premium and take any other actions with respect thereto as the
Administrative Agent deems advisable. 
All sums disbursed by the Administrative Agent in connection with this Section 4.09,
including reasonable attorneys’ fees, court costs, expenses and other charges
relating thereto, shall be payable, upon demand, by the Grantors to the
Administrative Agent and shall be additional Secured Obligations secured
hereby.

 

Section 4.10          Legend.

 

At the request of
the Administrative Agent if an Event of Default shall occur and be continuing,
each Grantor shall legend, in form and manner satisfactory to the
Administrative Agent, its Accounts and its books, records and documents
evidencing or pertaining thereto with an appropriate reference to the fact that
such Accounts have been assigned to the Administrative Agent for the benefit of
the Credit Parties and that the Administrative Agent has a security interest
therein.

 

Section 4.11          Intellectual
Property.

 

(a)           Each Grantor
agrees that it will not do any act or omit to do any act (and will exercise commercially
reasonable efforts to prevent its licensees and sub-licensees from doing any
act or omitting to do any act) whereby any Patent or Industrial Design may
become invalidated or dedicated to the public, and agrees that it shall
continue to mark any products covered by a Patent or Industrial Design that is
material to the conduct of such Grantor’s business with the relevant patent
number as necessary and sufficient to establish and preserve its maximum rights
under applicable patent laws.

 

15

 

(b)           Each Grantor
(either itself or through its licensees or its sublicensees) will, for each
Material Trademark, (i) maintain such Material Trademark in full force
free from any claim of abandonment or invalidity for non use, (ii) maintain
the quality of products and services offered under such Material Trademark
including where applicable policing the use of such Material Trademarks by its
licensees and sublicensees, (iii) display such Material Trademark with
notice of Federal or foreign registration to the extent necessary and
sufficient to establish and preserve its maximum rights under applicable law
and (iv) not knowingly use or knowingly permit the use of such Material
Trademark in violation of any third party rights.

 

(c)           Each Grantor
(either itself or through its licensees or sublicensees) will, for each work
covered by a Copyright material to the conduct of such Grantor’s business,
continue to publish, reproduce, display, adopt and distribute the work with
appropriate copyright notice as necessary and sufficient to establish and
preserve its maximum rights under applicable copyright laws.

 

(d)           Each Grantor
shall notify the Administrative Agent promptly if it knows or has reason to
know that any Material Trademark or any Patent, 
Copyright or Industrial Design material to the conduct of its business
may become abandoned, lost or dedicated to the public, or of any materially
adverse determination or development (including the institution of, or any such
determination or development in, any proceeding in the Canadian Intellectual
Property Office or any court or similar office of any country) regarding such
Grantor’s ownership of any Patent, Material Trademark, Copyright or Industrial
Design material to the conduct of its business, its right to register the same,
or its right to keep and maintain the same.

 

(e)           At the time of
delivery of quarterly financial statements with respect to each Fiscal Quarter
pursuant to Section 6.01(b) of the Credit Agreement, each Grantor shall
inform the Administrative Agent of any application for any Patent, Trademark,
Industrial Design or Copyright (or any registration of any Patent, Trademark,
Industrial Design or Copyright) such Grantor has filed with the Canadian
Intellectual Property Office or in any other country or any political
subdivision thereof or any Copyright License for which such Grantor has become
the licensee, in each case, during such Fiscal Quarter, and, upon request of
the Administrative Agent, execute and deliver any and all agreements,
instruments, documents and papers as the Administrative Agent may reasonably
request to evidence the Administrative Agent’s Security Interest in any of the
foregoing, and each Grantor hereby appoints the Administrative Agent as its
attorney-in-fact to execute and file such writings for the foregoing purposes,
all acts of such attorney being hereby ratified and confirmed; such power,
being coupled with an interest, is irrevocable.

 

(f)            Each Grantor will
take all necessary steps that are consistent with the practice in any
proceeding before the Canadian Intellectual Property Office or in any other
country or any political subdivision thereof, to maintain and pursue each 

 

16

 

application relating to
Material Trademarks and each material application relating to the Patents
and/or Copyrights and/or Industrial Designs (and to obtain the relevant grant
or registration) and to maintain each issued Patent and each registration of
Copyrights and/or Industrial Designs that is material to the conduct of any
Grantor’s business and each registration of Material Trademarks, including
timely filings of applications for renewal, affidavits of use, affidavits of
incontestability and payment of maintenance fees, and, if consistent with good
business judgment, to initiate opposition, interference and cancellation
proceedings against third parties.

 

(g)           In the event that
any Grantor has reason to believe that any Collateral consisting of a Patent,
Industrial Design or Copyright material to the conduct of any Grantor’s
business or a Material Trademark has been or is likely to be infringed,
misappropriated or diluted by a third party, such Grantor promptly shall notify
the Administrative Agent and shall, if consistent with reasonable business
judgment, promptly sue for infringement, misappropriation or dilution and to
recover any and all damages for such infringement, misappropriation or
dilution, and take such other actions as are appropriate under the
circumstances to protect such Collateral. 
Each Grantor further agrees not to abandon any Material Trademark or any
Patent, Industrial Design, Copyright or Copyright License that in such Grantor’s
reasonable business judgment is material to the operation of such Grantor’s
business without the prior written consent of the Administrative Agent.

 

(h)           Upon and during
the continuance of an Event of Default, each Grantor shall use its best efforts
to obtain all requisite consents or approvals by the licensor of each Copyright
License, Patent License, Industrial Design License or Material Trademark
License under which such Grantor is a licensee to effect the assignment of all
such Grantor’s right, title and interest thereunder to the Administrative Agent
or its designee.

 

(i)            Without limiting
the generality of any of the foregoing, each Grantor hereby authorizes the
Administrative Agent, with prompt notice thereof to the Grantors, to supplement
this Agreement by supplementing Schedule “1” or adding additional
schedules hereto to identify specifically any asset or item that may constitute
Copyrights, Copyright Licenses, Patents, Industrial Designs or Material
Trademarks; provided that any Grantor shall within 10 days after it has been
notified by the Administrative Agent of the specific identification of such
Collateral, advise the Administrative Agent in writing of any Schedule “1”
inaccuracy of the representations and warranties made by such Grantor hereunder
with respect to such Collateral.

 

Section 4.12          Pledged
Collateral.

 

(a)           Subject to Section 4.04
and Section 4.12, if any Grantor shall receive or become entitled to
receive any Pledged Collateral after the Closing Date, it shall deliver to the
Administrative Agent (i) a duly executed Pledged Collateral Addendum
identifying such Pledged Collateral; (ii) to the extent such Pledged
Collateral is 

 

17

 

represented by certificates
or promissory notes, such certificates or promissory notes, together with
undated powers of transfer forms endorsed in blank by such Grantor, and (iii) to
the extent such Pledged Collateral is not certificated, an executed control
agreement, in form and substance satisfactory to the Administrative Agent.

 

(b)           Upon the
occurrence and continuance of an Event of Default, each Grantor shall promptly
deliver to the Administrative Agent a copy of each material written notice or
other material written communication received by it in respect of any Pledged
Collateral.

 

(c)           No Grantor shall
make or consent to any amendment or other modification or waiver with respect
to any Pledged Collateral, Pledged Operating Agreement, or Pledged Partnership
Agreement, or enter into any agreement or agree to any restriction with respect
to any Pledged Collateral which would materially adversely affect either the
rights of the Administrative Agent or the other Credit Parties pursuant to the
Loan Documents or the value of the Pledged Collateral, or that would result in
a material violation of any provision of the Credit Agreement or any other Loan
Document.

 

(d)           Each Grantor
agrees that it will assist the Administrative Agent in obtaining all necessary
approvals and making all necessary filings under federal, state, local,
provincial, territorial, or foreign law in connection with the Administrative
Agent’s Liens on the Pledged Collateral or any sale or transfer thereof.

 

(e)           As to all limited
liability company or partnership interests owned by a Grantor and issued under
any Pledged Operating Agreement or Pledged Partnership Agreement which are not
certificated (the “Uncertificated Interests”),
each Grantor hereby represents, warrants and covenants that such Uncertificated
Interests issued pursuant to such agreement (A) are not and shall not be
dealt in or traded on securities exchanges or in securities markets, (B) do
not and will not constitute investment company securities, and (C) are not
and will not be held by such Grantor in a securities account.  In addition, none of the Pledged Operating
Agreements, the Pledged Partnership Agreements, or any other agreements
governing any of the Uncertificated Interests issued under any Pledged
Operating Agreement or Pledged Partnership Agreement, provides or shall provide
that such Pledged Interests are securities governed by STA as in effect in any relevant
jurisdiction.  No Grantor has consented
to, nor will consent to, nor does any Grantor have any knowledge of control by
any other Person with respect to the Collateral other than the Administrative
Agent.

 

Section 4.13          Securities
Accounts.

 

With respect to (i) the
Securities Accounts (other than Securities Accounts with an aggregate value of
less than $10,000) and (ii) any Collateral that constitutes a Security
Entitlement as to which the financial institution acting as the Administrative
Agent hereunder is not the Securities Intermediary, the relevant Grantor will
cause the Securities Intermediary with respect to each such account or Security
Entitlement either (A) to identify in its records the 

 

18

 

Administrative
Agent as the Entitlement Holder thereof or (B) to agree with such Grantor
and the Administrative Agent that such Securities Intermediary will comply with
Entitlement Orders originated by the Administrative Agent without further
consent of such Grantor, such agreement to be in form and substance reasonably
satisfactory to the Borrower and Administrative Agent (which agreement may also
be for the benefit of the ABL Agent); provided that the Administrative Agent
will not give any such orders except after the occurrence and during the
continuance of an Event of Default; provided further that no Grantor shall be
required to take the foregoing actions with respect to any Securities Account
until the later of (A) 60 days after the Closing Date and (B) in the
case of Securities Accounts opened after the Closing Date, at the time of
establishment of such Securities Account (or, in each case, such later date as
the Administrative Agent shall in its reasonable discretion agree).

 

ARTICLE V

Collections

 

Section 5.01          Deposit and
Concentration Accounts.

 

(a)           Schedule “4”
hereto sets forth, as of the date hereof, each Deposit Account and
Concentration Account that each Grantor maintains. For each Concentration
Account that any Grantor at any time opens or maintains, such Grantor shall
cause the depositary bank to agree to comply with instructions from the
Administrative Agent to such depositary bank directing the disposition of funds
from time to time credited to such Concentration Account, without further consent
of such Grantor or any other Person, pursuant to an agreement reasonably
satisfactory to the Administrative Agent (such agreement, a “Blocked Account Agreement”) (which Blocked
Account Agreement may also be for the benefit of the ABL Agent), provided
that no Grantor shall be required to take the foregoing actions with respect to
any Concentration Account until the later of (A) 60 days after the Closing
Date and (B) in the case of Concentration Accounts opened after the
Closing Date, at the time of establishment of such Concentration Account (or,
in each case, such later date as the Administrative Agent shall in its
reasonable discretion agree).  The
Administrative Agent agrees with each Grantor that the Administrative Agent
shall not give any such instructions or withhold any withdrawal rights from any
Grantor unless an Event of Default has occurred and is continuing.  Without the prior written consent of the
Administrative Agent, no Grantor shall modify or amend the instructions
pursuant to any Blocked Account Agreement.

 

(b)           The Grantors
shall cause the ACH or wire transfer to a Concentration Account, no less
frequently than daily, of the then contents of each Deposit Account, each such
transfer to be net of any minimum balance, not to exceed $10,000, as may be
required to be maintained in the subject Deposit Account by the bank at which
such Deposit Account is maintained; provided, however, to the
extent a Deposit Account is maintained for the deposit of the receipts of a
Store, and such Deposit Account is maintained with a bank that either does not
provide daily balance information for such Deposit Account or cannot
accommodate daily ACH or wire transfers and there is not a suitable replacement
bank reasonably available for such Store, then such Deposit Account may be
swept on a monthly, rather 

 

19

 

than daily basis; provided,
further, that (x) the number of such Deposit Accounts swept on a
monthly basis shall not exceed 5% of all of the Store Deposit Accounts and (y) the
aggregate amounts maintained in such Deposit Accounts shall not exceed
$5,000,000 at any time.

 

Section 5.02          Power of
Attorney.

 

(a)           Each Grantor
hereby irrevocably makes, constitutes and appoints the Administrative Agent
(and all officers, employees or agents designated by the Administrative Agent)
as such Grantor’s true and lawful agent and attorney-in-fact, and in such
capacity the Administrative Agent shall have the right, with power of
substitution for each Grantor and in each Grantor’s name or otherwise, for the
use and benefit of the Administrative Agent and the Credit Parties, (a) upon
the occurrence and during the continuance of an Event of Default or as
otherwise permitted under the Credit Agreement, (i) to receive, endorse,
assign and/or deliver any and all notes, acceptances, checks, drafts, money
orders or other evidences of payment relating to the Collateral or any part
thereof; (ii) to demand, collect, receive payment of, give receipt for and
give discharges and releases of all or any of the Collateral; and (iii) to
take actions required to be taken by Grantors in Section 5.01 and (b) upon
the occurrence and during the continuance of an Event of Default or as
otherwise permitted in the Credit Agreement, (i) to sign the name of any
Grantor on any invoices, schedules of Collateral, freight or express receipts,
or bills of lading storage receipts, warehouse receipts or other documents of
title relating to any of the Collateral; (ii) to sign the name of any
Grantor on any notice to such Grantor’s account debtors; (iii) to sign the
name of any Grantor on any proof of claim in bankruptcy against account
debtors; (iv) to the extent relating to the Collateral, to sign change of
address forms to change the address to which each Grantor’s mail is to be sent
to such address as the Administrative Agent shall designate; (v) to
receive and open each Grantor’s mail, remove any Proceeds of Collateral
therefrom and turn over the balance of such mail either to any of the Grantors
or to any trustee in bankruptcy or receiver of a Grantor, or other legal
representative of a Grantor whom the Administrative Agent determines to be the
appropriate person to whom to so turn over such mail; (vi) to commence and
prosecute any and all suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect or otherwise realize on all or any
of the Collateral or to enforce any rights in respect of any Collateral; (vii) to
settle, compromise, compound, adjust or defend any actions, suits or
proceedings relating to all or any of the Collateral; (viii) to take all
such action as may be necessary to obtain the payment of any letter of credit
and/or banker’s acceptance of which any Grantor is a beneficiary to the extent
relating to Collateral; (ix) to repair, manufacture, assemble, complete,
package, deliver, alter or supply goods, if any, necessary to fulfill in whole
or in part the purchase order of any customer of any Grantor; (x) to use
for the purposes permitted by Section 6.01 hereof, any or all General
Intangibles of any Grantor relating to the Collateral; provided that the
Administrative Agent’s use of such General Intangibles will comply with all
applicable law; and (xi) to use, sell, assign, transfer, pledge, make any
agreement with respect to or otherwise deal with all 

 

20

 

or any of the Collateral,
and to do all other acts and things necessary to carry out the purposes of this
Agreement, as fully and completely as though the Administrative Agent were the
absolute owner of the Collateral for all purposes; provided, however,
that nothing herein contained shall be construed as requiring or obligating the
Administrative Agent or any other Credit Party to make any commitment or to
make any inquiry as to the nature or sufficiency of any payment received by the
Administrative Agent or any other Credit Party, or to present or file any claim
or notice.  It is understood and agreed
that the appointment of the Administrative Agent as the agent and attorney-in-fact
of the Grantors for the purposes set forth above is coupled with an interest
and is irrevocable.

 

(b)           Notwithstanding
the provisions of Section 5.02,  the
power of the Administrative Agent to act in any name other than the name of the
Grantor shall not apply to any Pledged Collateral that is ULC Shares.

 

Section 5.03          No Obligation to
Act.

 

The
Administrative Agent shall not be obligated to do any of the acts or to
exercise any of the powers authorized by Section 5.02, but if the
Administrative Agent elects to do any such act or to exercise any of such
powers, it shall not be accountable for more than it actually receives as a
result of such exercise of power, and shall not be responsible to any Grantor
for any act or omission to act except for any act or omission to act which
constitutes gross negligence, bad faith or breach of the contractual
obligations of the Administrative Agent. 
The Administrative Agent shall be deemed to have exercised reasonable care
in the custody and preservation of the Pledged Collateral in its possession if
such Pledged Collateral is accorded treatment substantially equivalent to that
which the Administrative Agent in such Person’s individual capacity, accords
its own property consisting of similar instruments or interests, which shall be
no less than the treatment employed by a reasonable and prudent agent in the
industry, it being understood that none of the Administrative Agent or any of
the Lenders shall have responsibility for (i) ascertaining or taking
action with respect to calls, conversions, exchanges, maturities, tenders or
other matters relating to any Pledged Collateral, whether or not the
Administrative Agent or any Lender has or is deemed to have knowledge of such
matters or (ii) taking any necessary steps to preserve rights against any
Person with respect to any Pledged Collateral. 
The provisions of Section 5.02 shall in no event relieve any
Grantor of any of its obligations hereunder or under any other Loan Document
with respect to the Collateral or any part thereof or impose any obligation on
the Administrative Agent or any other Credit Party to proceed in any particular
manner with respect to the Collateral or any part thereof, or in any way limit
the exercise by the Administrative Agent or any other Credit Party of any other
or further right which it may have on the date of this Agreement or hereafter,
whether hereunder, under any other Loan Document, by law or otherwise.

 

ARTICLE VI

Remedies

 

Section 6.01          Remedies upon
Default.

 

Upon the
occurrence and during the continuance of an Event of Default, the security
interest hereby constituted shall become enforceable and it is agreed that the
Administrative Agent shall 

 

21

 

have in any
jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the PPSA
or other applicable law.  The rights and
remedies of the Administrative Agent shall include the right to take any of or
all the following actions at the same or different times upon the occurrence
and during the continuance of an Event of Default:

 

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

 

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

 

(c)           With respect to
any Collateral consisting of Intellectual Property, on demand, to cause the
Security Interest granted herein to become an assignment, transfer and
conveyance of any of or all such Collateral by the applicable Grantors to the
Administrative Agent or to license or sublicense, whether general, special or
otherwise, and whether on an exclusive or a nonexclusive basis, any such
Collateral throughout the world on such terms and conditions and in such manner
as the Administrative Agent shall reasonably determine (other than in violation
of any then-existing licensing arrangements to the extent that waivers
thereunder cannot be obtained).

 

(d)           With or without
legal process and with or without prior notice or demand for performance, the
Administrative Agent may enter upon, occupy and use any premises owned or
occupied by each Grantor, and may exclude the Grantors from such premises or
portion thereof as may have been so entered upon, occupied or used by the
Administrative Agent.  The Administrative
Agent shall not be required to remove any of the Collateral from any such
premises upon the Administrative Agent’s taking possession thereof, and may
render any Collateral unusable to the Grantors. 
In no event shall the Administrative Agent be liable to any Grantor for
use or occupancy by the Administrative Agent of any premises pursuant to this Section 6.01,
nor for any charge (such as wages for the Grantors’

 

22

 

employees and utilities)
incurred in connection with the Administrative Agent’s exercise of the
Administrative Agent’s Rights and Remedies hereunder.

 

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

 

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

 

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

 

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

 

(i)                                     At
any public (or, to the extent permitted by applicable law, private) sale made
pursuant to this Section 6.01, the Administrative Agent or any other
Credit Party may bid for or purchase, free (to the extent permitted by
applicable law) from any right of redemption, stay, valuation or appraisal on
the part of any Grantor, 

 

23

 

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

 

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

 

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

 

(l)                                     The
Administrative Agent may appoint by instrument in writing a receiver (which
term as used herein includes a receiver and manager) or agent of all or any
part of the Collateral and remove or replace from time to time any receiver or
agent;

 

(m)                               The
Administrative Agent may institute proceedings in any court of competent
jurisdiction to appoint a receive of all or any part of the Collateral;

 

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

 

Section 6.02          Grant of Non-Exclusive
License.

 

For the purpose
of enabling the Administrative Agent to exercise the Administrative Agent’s
Rights and Remedies under Section 6.01 (including in order to take
possession of, hold, preserve, process, assemble, prepare for sale, market for
sale, sell or otherwise dispose of the Collateral) at such time as the
Administrative Agent shall be lawfully entitled to exercise the Administrative
Agent’s Rights and Remedies under Section 6.01, each Grantor hereby (i) grants
to the Administrative Agent, for the benefit of the Administrative Agent and
the other Credit Parties, a royalty free, non-exclusive, irrevocable license,
such license being with respect to the Administrative Agent’s exercise of the
Administrative Agent’s Rights and Remedies under Section 6.01, including in
connection with any completion of the manufacture of Inventory or any sale or
other disposition of Inventory (a) to use, apply and affix any Trademark,
trade name, logo or the like in which any Grantor now or hereafter has rights, (b) to
use, license or 

 

24

 

sublicense any
Intellectual Property, computer software now owned, held or hereafter acquired
by such Grantor, including in such license access to all media and to the
extent to which any of the licensed items may be recorded or stored and to all
such computer software programs and to the extent used for the compilation or
print out thereof, provided that the Administrative Agent’s use of the property
described in subclauses (a) and (b) above will comply with all
applicable law, and (c) to use any and all furniture, fixtures and
equipment contained in any premises owned or occupied by any Grantor in
connection with the exercise of the Administrative Agent’s Rights and Remedies
under Section 6.01, and (ii) without limiting the provisions of Section 6.01(c),
agrees to provide the Administrative Agent and/or its agents with access to,
and the right to use, any such premises owned or occupied by any Grantor.

 

Section 6.03          Application of Proceeds.

 

After the occurrence
of an Event of Default and acceleration of the Secured Obligations, the
Administrative Agent shall apply the proceeds of any collection or sale of the
Collateral, as well as any Collateral consisting of cash, or any Collateral
granted under any other of the Security Documents in the manner set forth in Section 8.04
of the Credit Agreement.

 

Section 6.04          Voting Rights.

 

(a)                                  So
long as no Event of Default shall have occurred and be continuing:

 

(i)                                     Each
Grantor shall be entitled to exercise any and all voting and other consensual
rights pertaining to the Pledged Collateral of such Grantor or any part thereof
for any purpose.  For so long as any
Grantor shall have the right to vote the Pledged Interests of such Grantor,
such Grantor covenants and agrees that it will not, without the prior written
consent of the Administrative Agent, vote or take any consensual action with
respect to the Pledged Interests which would materially affect the rights of
the Administrative Agent, or any other Credit Party or the value of the Pledged
Interests.  The Administrative Agent
shall execute and deliver to each Grantor, or cause to be executed and
delivered to such Grantor, all such proxies, powers of attorney and other
instruments as such Grantor may reasonably request for the purpose of enabling
such Grantor to exercise the voting and/or consensual rights and powers it is
entitled to exercise pursuant to this Section 6.04(a)(i).

 

(ii)                                  Each
Grantor shall be entitled to receive and retain any and all dividends, cash,
options, warrants, rights, instruments, distributions, returns of capital or
principal, income, interest, profits and other property, interests (debt or
equity) or proceeds, including as a result of a split, revision,
reclassification or other like change of the Pledged Interests, from time to
time received, receivable or otherwise distributed to such Grantor in respect
of or in exchange for any or all of the Pledged Collateral (any of the
foregoing, a “Distribution” and
collectively the “Distributions”)
paid in respect of the Pledged Collateral of such Grantor to the extent that
the payment thereof is not otherwise prohibited by the terms of the Loan
Documents; provided, however, that any and all Distributions paid
or payable other than in cash (other than in connection with a partial or total

 

25

 

liquidation or dissolution
or in connection with a reduction of capital, capital surplus or paid in
surplus) in respect of, and instruments and other property received, receivable
or otherwise distributed in respect of, or in exchange for, any Pledged
Collateral, shall be, and, subject to the limitations in the definition of “Collateral”,
promptly delivered to the Administrative Agent to hold as Pledged Collateral
and shall, if received by such Grantor, be received in trust for the benefit of
the Administrative Agent, be segregated from the other property or funds of
such Grantor and be promptly delivered to the Administrative Agent as Pledged
Collateral in the same form as so received (with any necessary endorsement).

 

(b)                                 Upon
the occurrence and during the continuance of an Event of Default:

 

(i)                                     All
rights of each Grantor (x) to exercise or refrain from exercising the
voting and other consensual rights that it would otherwise be entitled to
exercise pursuant to Section 6.04(a)(i) shall automatically cease and
(y) to receive Distributions that it would otherwise be authorized to
receive and retain pursuant to 6.04(a)(ii) shall automatically cease, and
all such rights shall thereupon become vested in the Administrative Agent,
which shall thereupon have the sole right to exercise or refrain from
exercising such voting and other consensual rights and to receive and hold as
Pledged Collateral such dividends, interest and other distributions; provided
that, unless otherwise directed by the Required Lenders, the Administrative
Agent shall have the right from time to time following and during the
continuance of an Event of Default to permit the Grantors to exercise such
rights.  Any and all money and other
property paid over to or received by the Administrative Agent pursuant to the
provisions of this Section 6.04(b)(i) shall be retained by the
Administrative Agent in an account to be established by the Administrative
Agent upon receipt of such money or other property and shall be applied in
accordance with the provisions of Section 6.03. After all Events of
Default have been cured or waived and the Borrower has delivered to the
Administrative Agent a certificate to that effect, the Administrative Agent
shall promptly repay to each Grantor (without interest) all dividends or
interest that such Grantor would otherwise be permitted to retain pursuant to
the terms of this Section 6.04 and that remain in such account.

 

(ii)                                  All
Distributions that are received by any Grantor contrary to the provisions of
paragraph (i) of this Section 6.04(b) shall be received in
trust for the benefit of the Administrative Agent, shall be segregated from
other funds of such Grantor and shall be promptly paid over to the
Administrative Agent as Pledged Collateral in the same form as so received
(with any necessary endorsement).

 

(c)                                  This
Section 6.04 shall not apply to any Pledged Collateral that is ULC Shares
or to any Distributions that are paid in respect of ULC Shares.

 

26

 

Section 6.05          ULC Shares.

 

(a)                                  Notwithstanding
any provisions to the contrary contained in this Agreement or any other
document or agreement among all or some of the parties hereto, each Grantor
that is the registered and beneficial owner of any Pledged Collateral which are
ULC Shares (“ULC Pledgor”) will
remain so until such time as such ULC Shares are effectively transferred into
the name of the Administrative Agent, any Credit Party or any other Person on
the books and records of such ULC. 
Accordingly, each ULC Pledgor shall be entitled to receive and retain
for its own account any Distribution in respect of such Pledged Collateral
(except insofar as such ULC Pledgor has granted a security interest in such
Distribution, and any shares which are Pledged Collateral shall be delivered to
the Administrative  Agent to hold as
Pledged Collateral hereunder) and shall  have
the right to vote such Pledged Collateral and to control the direction, management
and policies of the applicable ULC issuer to the same extent as such ULC
Pledgor would if such Pledged Collateral were not pledged to the Administrative
Agent (for its own benefit and for the benefit of the Credit Parties) pursuant
hereto.  Nothing in this Agreement or any
other document or agreement among all or some of the parties hereto is intended
to, and nothing in this Agreement or any other document or agreement among all
or some of the parties hereto shall constitute, the Administrative Agent, any
Credit Party or any other Person other than a ULC Pledgor a member of a ULC for
the purposes of the Companies Act
(Nova Scotia) until such time as notice is given to such ULC Pledgor and
further steps are taken pursuant hereto or thereto so as to register the
Administrative  Agent, any Credit Party
or any other Person as holder of the applicable ULC Shares.  To the extent any provision hereof would have
the effect of constituting the Administrative 
Agent or any Credit Party as a member of any ULC prior to such time,
such provision shall be severed therefrom and shall be ineffective with respect
to Pledged Collateral which are ULC Shares without otherwise invalidating or
rendering unenforceable this Agreement or invalidating or rendering unenforceable
such provision insofar as it relates to Pledged Collateral which are not ULC
Shares.

 

(b)                                 Except
upon the exercise of rights to sell, transfer or otherwise dispose of the
Pledged Collateral issued by a ULC following the occurrence of an Event of
Default pursuant to Article VI, no ULC Pledgor shall cause or permit, or
enable any ULC in which they hold ULC Shares to cause or permit, the
Administrative Agent or any other Credit Party to:  (a) be registered as shareholder or
member of such ULC; (b) accept or request stock powers of attorney in
respect of such Person endorsed or assigned in favour of the Administrative
Agent or other Credit Party; (c) have any notation entered in its favour
in the share register of such ULC; (d) be held out as a shareholder or
member of such ULC; (e) receive, directly or indirectly, any dividends,
property or other distributions from such ULC by reason of the Administrative
Agent or any other Credit Party holding a security interest in such ULC; or (f) to
act as a shareholder or member of such ULC, or exercise any rights of a
shareholder or member including the right to attend a meeting of, or to vote
the shares of, such ULC.

 

27

 

Section 6.06          Disposition of Pledged
Collateral by Administrative Agent.

 

None of the
Pledged Collateral existing as of the date of this Agreement is, and none of
the Pledged Collateral hereafter acquired on the date of acquisition thereof
will be, registered or qualified under the various provincial or territorial
securities laws of Canada and disposition thereof after an Event of Default has
occurred and is continuing may be restricted to one or more private (instead of
public) sales in view of the lack of such registration.  Each Grantor understands that in connection
with such disposition, the Administrative Agent may approach only a restricted
number of potential purchasers and further understands that a sale under such
circumstances may yield a lower price for the Pledged Collateral than if the
Pledged Collateral were registered and qualified pursuant to provincial and
territorial securities laws and sold on the open market.  Each Grantor, therefore, agrees that:  (a) if the Administrative Agent shall,
pursuant to the terms of this Agreement, sell or cause the Pledged Collateral
or any portion thereof to be sold at a private sale, the Administrative Agent
shall have the right to rely upon the advice and opinion of any nationally
recognized brokerage or investment firm (but shall not be obligated to seek such
advice and the failure to do so shall not be considered in determining the
commercial reasonableness of such action) as to the best manner in which to
offer the Pledged Collateral or any portion thereof for sale and as to the best
price reasonably obtainable at the private sale thereof; and (b) such
reliance shall be conclusive evidence that the Administrative Agent has handled
the disposition in a commercially reasonable manner.

 

Section 6.07          Receiver’s Powers.

 

(a)                                  Any
receiver appointed by the Administrative Agent is vested with the rights and
remedies which could have been exercised by the Administrative Agent in respect
of the Grantors or the Collateral and such other powers and discretions as are
granted in the instrument of appointment and any supplemental instruments.  The identity of the receiver, its replacement
and its remuneration are within the sole and unfettered discretion of the
Administrative Agent.

 

(b)                                 Any
receiver appointed by the Administrative Agent will act as agent for the
Administrative Agent for the purposes of taking possession of the Collateral,
but otherwise and for all other purposes (except as provided below), as agent
for the Grantors.  The receiver may sell,
lease, or otherwise dispose of Collateral as agent for the Grantors or as agent
for the Administrative Agent as the Administrative Agent may determine in its
discretion.  Each of the Grantors agrees
to ratify and confirm all actions of the receiver acting as agent for the
Grantors, and to release and indemnify the receiver in respect of all such
actions.

 

ARTICLE VII

Perfection of Security Interest

 

Section 7.01          Perfection by Filing.

 

This Agreement
constitutes an authenticated record, and each Grantor hereby authorizes the
Administrative Agent to file one or more financing or financing change
statements, and amendments thereto, relative to all or any part of the
Collateral, in such filing offices as the Administrative Agent shall deem
appropriate, including recording of the IP Agreements with any relevant offices
of the Canadian Intellectual Property Office, and the Grantors shall pay the
Administrative Agent’s reasonable costs and expenses incurred in connection
therewith.  Any 

 

28

 

such financing
statement may indicate the Collateral as “all assets of the Grantor”, or words
of similar effect.

 

Section 7.02          Other Perfection, etc.

 

The Grantors
shall at any time and from time to time take such steps as the Administrative
Agent may reasonably request for the Administrative Agent (a) to obtain an
acknowledgment, in form and substance reasonably satisfactory to the
Administrative Agent, of any bailee having possession of any of the Collateral
that the bailee holds such Collateral for the Administrative Agent, (b) to
obtain “control” of any Collateral, with any agreements establishing control to
be in form and substance satisfactory to the Administrative Agent (and which
may also be for the benefit of the ABL Agent) and (c) otherwise to insure
the continued perfection of the Administrative Agent’s Security Interest in any
of the Collateral with the priority described in Section 3.03 and of the
preservation of its rights therein. 
After the Security Interest becomes enforceable, the Grantors will do
all acts and things and execute and deliver all documents and instruments that
the Administrative Agent may require for facilitating the sale or other
disposition of the Collateral in connection with its realization.

 

Section 7.03          Savings Clause.

 

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

 

ARTICLE
VIII

Miscellaneous

 

Section 8.01          Notices.

 

All
communications and notices hereunder shall (except as otherwise expressly
permitted herein) be in writing and given as provided in Section 10.02 of
the Credit Agreement.

 

Section 8.02          Security Interest Absolute.

 

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

 

29

 

Section 8.03          Amalgamation.

 

Each Grantor
acknowledges and agrees that in the event it amalgamates with any other
corporation or corporations, it is the intention of the parties that the
Security Interest (i) extends to: (A) all of the property and
undertaking that any of the amalgamating corporations then owns, (B) all
of the property and undertaking that the amalgamated corporation thereafter
acquires, (C) all of the property and undertaking in which any of the
amalgamating corporations then has any interest and (D) all of the
property and undertaking in which the amalgamated corporation thereafter
acquires any interest; and (ii) secures the payment and performance of all
debts, liabilities and obligations, present or future, direct or indirect,
absolute or contingent, matured or unmatured, at any time or from time to time
due or accruing due and owing by or otherwise payable by each of the
amalgamating corporations and the amalgamated corporation to the Credit Parties
in any currency, however or wherever incurred, and whether incurred alone or
jointly with another or others and whether as principal, guarantor or surety
and whether incurred prior to, at the time of or subsequent to the
amalgamation.  The Security Interest
attaches to the additional collateral at the time of amalgamation and to any
collateral thereafter owned or acquired by the amalgamated corporation when
such becomes owned or is acquired.  Upon
any such amalgamation, the defined term “Grantor” means, collectively, each of
the amalgamating corporations and the amalgamated corporation, the defined term
“Collateral” means all of the property and undertaking and interests described
in (i) above, and the defined term “Secured Obligations” means the
obligations described in (ii) above.

 

Section 8.04          Suretyship Waivers by
Grantors.

 

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

 

Section 8.05          Marshalling.

 

Neither the
Administrative Agent nor any Lender shall be required to marshal any present or
future collateral security (including the Collateral) for, or other assurances
of payment of the Secured Obligations or any of them or to resort to such
collateral security or other assurances of payment in any particular order, and
all of the rights and remedies of the Administrative Agent or any Lender
hereunder and of the Administrative Agent or any Lender in respect of such
collateral security and other assurances of payment shall be cumulative and in
addition to all other rights and remedies, however existing or arising.  To the extent that it lawfully may, each
Grantor hereby agrees that it will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Administrative Agent’s Rights and Remedies under this Agreement or under
any other instrument creating or evidencing any 

 

30

 

of the Secured
Obligations or under which any of the Secured Obligations is outstanding or by
which any of the Secured Obligations is secured or payment thereof is otherwise
assured, and, to the extent that it lawfully may, each Grantor hereby
irrevocably waives the benefits of all such laws.

 

Section 8.06          Survival of Agreement.

 

All covenants,
agreements, representations and warranties made by the Grantors herein and in
the certificates or other instruments prepared or delivered in connection with
or pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Administrative Agent and the other Credit Parties
and shall survive the execution and delivery of this Agreement and the other
Loan Documents and the making of any Loans, and shall continue in full force
and effect as long as the Secured Obligations are outstanding and unpaid, and
as long as the Commitments have not expired or terminated.

 

Section 8.07          Binding Effect; Several
Agreement; Assignments.

 

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

 

Section 8.08          Administrative Agent’s Fees
and Expenses; Indemnification.

 

(a)                                  Without
limiting any of their obligations under the Credit Agreement or the other Loan
Documents, the Grantors jointly and severally agree to pay all Credit Party
Expenses incurred in connection with this Agreement.

 

(b)                                 Without
limiting any of their indemnification obligations under the Credit Agreement or
the other Loan Documents, the Grantors shall, jointly and severally, agree to
indemnify each Credit Party and their respective Affiliates (each such Person
being called an “Indemnitee”), and
hold each Indemnitee harmless from, any and all losses, claims, damages,
liabilities and related expenses (other than with respect to Taxes), including
the reasonable and documented fees, charges and disbursements of counsel for
any Indemnitee, incurred by or asserted against any Indemnitee arising out of,
in connection with or as a result of (i) the execution or delivery or
performance of this Agreement, the performance by any Grantor of its
obligations under this Agreement or the consummation of the transactions
contemplated hereby, or (ii) any actual or prospective claim, litigation,
investigation or proceeding relating to any of the 

 

31

 

foregoing or to the
Collateral, whether based on contract, tort or any other theory and regardless
of whether any Indemnitee is a party thereto; provided, however,
that such indemnity shall not, as to any Indemnitee, be available to the extent
that such losses, claims, damages, liabilities or related expenses resulted
from the gross negligence, willful misconduct, bad faith or breach of the
contractual obligations of such Indemnitee or with respect to a claim by one
Indemnitee against another Indemnitee.

 

(c)                                  Any
such amounts payable as provided hereunder shall be additional Secured
Obligations secured hereby and by the other Security Documents.  All amounts due under this Section 8.08
shall be payable on written demand therefor.

 

Section 8.09          Governing Law.

 

EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE SECURED
OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS OF CANADA
APPLICABLE THEREIN.

 

Section 8.10          Waiver of The Limitation of Civil Rights Act
(Saskatchewan)

 

Without limiting the generality of the foregoing, the Grantor agrees
that The Limitation of Civil Rights Act
(Saskatchewan) will not apply to this Security Agreement or any rights,
remedies or powers of the Collateral Agent, any Secured Party or any Receiver
hereunder.

 

Section 8.11          Waivers; Amendment.

 

(a)                                  The
rights, remedies, powers, privileges and discretions of the Administrative
Agent hereunder (herein, the “Administrative
Agent’s Rights and Remedies”) shall be cumulative and not exclusive
of any rights or remedies which it would otherwise have.  No delay or omission by the Administrative
Agent in exercising or enforcing any of the Administrative Agent’s Rights and
Remedies shall operate as, or constitute, a waiver thereof.  No waiver by the Administrative Agent of any
Event of Default or of any Default under any other agreement shall operate as a
waiver of any other Event of Default or other Default hereunder or under any
other agreement.  No single or partial
exercise of any of the Administrative Agent’s Rights or Remedies, and no
express or implied agreement or transaction of whatever nature entered into
between the Administrative Agent and any Person, at any time, shall preclude
the other or further exercise of the Administrative Agent’s Rights and
Remedies.  No waiver by the
Administrative Agent of any of the Administrative Agent’s Rights and Remedies
on any one occasion shall be deemed a waiver on any subsequent occasion, nor
shall it be deemed a continuing waiver. 
The Administrative Agent’s Rights and Remedies may be exercised at such
time or times and in such order of preference as the Administrative Agent may
determine.  The Administrative Agent’s
Rights and Remedies may be exercised without resort or regard to any other
source of satisfaction of the Secured Obligations.  No waiver of any provisions of this Agreement
or any other Loan Document or consent to any departure by any Grantor therefrom
shall in any event be effective unless the 

 

32

 

same shall be permitted by
paragraph (b) below, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which
given.  No notice to or demand on any
Grantor in any case shall entitle such Grantor or any other Grantor to any
other or further notice or demand in similar or other circumstances.

 

(b)                                 Neither
this Agreement nor any provision hereof may be waived, amended or modified
except pursuant to a written agreement entered into between the Administrative
Agent and the Grantor or Grantors with respect to whom such waiver, amendment
or modification is to apply, subject to any consent required in accordance with
Section 10.01 of the Credit Agreement.

 

Section 8.12          Waiver of Jury Trial.

 

EACH PARTY HERETO
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY
OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY).  EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT
IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS SET FORTH IN THIS
SECTION 8.12.

 

Section 8.13          Severability.

 

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

 

Section 8.14          Counterparts.

 

This Agreement
may be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which
when taken together shall constitute a single contract.  Delivery of an executed counterpart of a
signature page to this Agreement by telecopy or other electronic image
scan transmission (e.g., “pdf” or “tif” via e-mail) shall be as effective as
delivery of a manually executed counterpart to this Agreement.

 

Section 8.15          Headings.

 

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

 

33

 

Section 8.16          Jurisdiction;
Consent to Service of Process.

 

(a)           EACH OF THE
GRANTORS AND THE ADMINISTRATIVE AGENT IRREVOCABLY ATTORNS AND SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF ANY COURT OF COMPETENT JURISDICTION OF THE
PROVINCE OF ONTARIO SITTING IN TORONTO, ONTARIO IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT. 
THE GRANTOR IRREVOCABLY WAIVES OBJECTION TO THE VENUE OF ANY ACTION OR
PROCEEDING IN SUCH COURT OR THAT SUCH COURT PROVIDES AN INCONVENIENT FORUM.

 

(b)           EACH PARTY TO
THIS AGREEMENT IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER
PROVIDED FOR NOTICES IN SECTION 8.01. 
NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT WILL AFFECT THE
RIGHT OF ANY PARTY TO THIS AGREEMENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY APPLICABLE LAW.

 

Section 8.17          Termination;
Release of Collateral.

 

(a)           Except for those
provisions which expressly survive the termination thereof, this Agreement and
the Security Interest shall terminate when all the Secured Obligations have been
paid in full (excluding contingent obligations as to which no claim has been
made) and the Lenders have no further commitment to lend under the Credit
Agreement.

 

(b)           The
Administrative Agent may release any Grantor from its obligations hereunder,
and the Security Interest in the Collateral of such Grantor shall automatically
be released (i) if such Person ceases to be a Subsidiary as a result of a
transaction permitted by the Credit Agreement; provided that, if so required by
the Credit Agreement, the Required Lenders shall have consented to such
transaction and the terms of such consent did not provide otherwise or (ii) upon
the effectiveness of any written consent to such release pursuant to Section 10.01
of the Credit Agreement.

 

(c)           Upon any disposition
of Collateral in connection with any disposition permitted under the Credit
Agreement or any other Loan Document (other than a sale or transfer to a
Grantor), or upon the effectiveness of any written consent to the release of
the Security Interest granted hereby in any Collateral pursuant to Section 10.01
of the Credit Agreement, the Security Interest in such Collateral shall be
automatically released.

 

(d)           In connection
with any termination or release pursuant to paragraph (a), (b) or (c) of
this Section 8.17, the Administrative Agent shall execute and deliver to
the Grantors, at the Grantors’ expense, all releases, discharges, financing
statements and similar documents that the Grantors shall reasonably request to
evidence such termination or release. 
Any execution and delivery of releases, discharges, financing statements
or documents pursuant to the Section 8.17 shall be without recourse to, or
warranty by, the Administrative Agent.

 

34

 

Section 8.18          Additional
Grantors.

 

Pursuant to Section 6.11
of the Credit Agreement, after the Closing Date, each new direct or indirect
Canadian incorporated or created Subsidiary of the Borrower is required to
enter into this Agreement as a Grantor. 
Upon execution and delivery by the Administrative Agent and a Subsidiary
of an instrument in the form of Annex “2” hereto, such Subsidiary shall
become a Grantor hereunder with the same force and effect as if originally
named as a Grantor herein.  The execution
and delivery of any such instrument shall not require the consent of any other
Loan Party hereunder.  The rights and
obligations of each Loan Party hereunder shall remain in full force and effect
notwithstanding the addition of any new Loan Party as a party to this
Agreement.

 

Section 8.19          Intercreditor
Agreement.

 

Notwithstanding
anything herein to the contrary, the lien and Security Interest granted
pursuant to this Agreement and the exercise of any right or remedy hereunder
are subject to the provisions of the Intercreditor Agreement.  In the event of any conflict between the
terms of the Intercreditor Agreement and this Agreement, the terms of the
Intercreditor Agreement shall govern and control.  Without limiting the generality of the
foregoing, and notwithstanding anything herein to the contrary, all rights and
remedies of the Administrative Agent (and the other Credit Parties) with
respect to the ABL Priority Collateral (as defined in the Intercreditor
Agreement) shall be subject to the terms of the Intercreditor Agreement, and
until the discharge of the ABL Obligations (as defined in the Intercreditor
Agreement), any obligation of the Borrower and any Grantor hereunder or under
any other Loan Document with respect to the delivery or control of any ABL Priority
Collateral, the novation of any lien on any certificate of title, bill of
lading or other document, the giving of any notice to any bailee or other
Person, the provision of voting rights, the obtaining of any consent of any
Person, or otherwise, in each case in connection with any ABL Priority
Collateral, shall be deemed to be satisfied if the Borrower or such Grantor, as
applicable, complies with the requirements of the similar provision of the
applicable ABL Document (as defined in the Intercreditor Agreement).  Until the discharge of the ABL  Obligations, the delivery of any ABL Priority
Collateral to the ABL Priority Agent (as defined in the Intercreditor
Agreement) pursuant to the ABL Documents shall satisfy any delivery requirement
hereunder or under any other Loan Document.

 

Section 8.20          Grantor Consent.

 

Each Grantor
which is not a ULC hereby consents to the security interests granted herein by
each other Grantor, including any security interests in Equity Interests issued
by such Grantor or Equity Interests issued by any Person in which such Grantor
owns any Equity Interest.  Each Grantor
which is not a ULC hereby waives any rights of such Grantor to notice in
connection with the grant of any Security Interests by any Grantor hereunder.

 

[SIGNATURE
PAGES FOLLOW]

 

35

 

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

 

GRANTORS:

 

	
   

  	
  ZALE CANADA CO.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

GRANTORS:

 

	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

GRANTORS:

 

	
   

  	
  ZALE CANADA FINCO 1, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

GRANTORS:

 

	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

GRANTORS:

 

	
   

  	
  ZALE CANADA FINCO 2, INC.
  acting in its capacity as general partner of Finco Holding LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

GRANTORS:

 

	
   

  	
  ZALE CANADA FINCO 2, INC.
  acting in its capacity as general partner of Finco Partnership LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

GRANTORS:

 

	
   

  	
  ZALE INTERNATIONAL, INC.
  in its capacity as general partner of Zale Canada Holding LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Name: 

  
	
   

  	
   

  	
  Title:

  

 

 

ADMINISTRATIVE
AGENT:

 

	
   

  	
  Z INVESTMENT HOLDINGS, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  Name: 

  
	
   

  	
   

  	
  Title:

  

 

 

SCHEDULE “1”

 

INTELLECTUAL PROPERTY

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN
APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

1

 

SCHEDULE “2”

 

INITIAL SUBSIDIARY GRANTORS

 

1

 

SCHEDULE “3”

 

PLEDGED INTERESTS AND PLEDGED NOTES

 

PLEDGED INTERESTS

 

	
  Name of

  Grantor

  	
   

  	
  Name of

  Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage

  of Class

  Owned

  	
   

  	
  Certificate

  Nos.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

PLEDGED NOTES

 

	
  Name of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

2

 

SCHEDULE “4”

 

DEPOSIT ACCOUNTS AND CONCENTRATION ACCOUNTS

 

	
  NAME
  OF LOAN PARTY

  	
   

  	
  NAME OF INSTITUTION

  	
   

  	
  ACCOUNT

  NUMBER

  	
   

  	
  CHECK HERE IF

  ACCOUNT IS A

  CONCENTRATION

  ACCOUNT

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

3

 

ANNEX “1”

 

FORM OF PERFECTION CERTIFICATE

 

[Attached.]

 

 

ANNEX “2”

 

FORM OF SUPPLEMENT

 

SUPPLEMENT
NO.      dated as of [·] (this “Supplement”), to the Canadian Security Agreement dated as of
May 10,
2010 (the “Security Agreement”),
among each of the Subsidiaries of Zale Corporation (the “Borrower”)
from time to time party thereto (each a “Grantor”, and
collectively, the “Grantors”) and
Z Investment Holdings, LLC, in its capacity as administrative agent (in such
capacity, the “Administrative Agent”).

 

Reference is made
to the Credit Agreement dated as of May 10, 2010 (as
such may be amended, modified, supplemented or restated hereafter, the “Credit Agreement”) by and among (i) the Borrower, (ii) the
Lenders party thereto and (iii) the Administrative Agent.

 

Capitalized terms
used herein and not otherwise defined herein shall have the meanings assigned
to such terms in the Credit Agreement and the Security Agreement referred to
therein.

 

The Grantors have
entered into the Security Agreement in order to induce the Lenders to make
Loans.  Section 8.18 of the Security
Agreement provides that new direct and indirect Subsidiaries of the Borrower
may become Grantors under the Security Agreement by execution and delivery of
an instrument in the form of this Supplement. 
The undersigned Subsidiary (the “New Subsidiary”)
is executing this Supplement in accordance with the requirements of the Credit
Agreement to become a Grantor under the Security Agreement as consideration for
Loans previously under made the Credit Agreement.

 

Accordingly, the
Administrative Agent and the New Subsidiary agree as follows:

 

1.                                       In
accordance with Section 8.18 of the Security Agreement, the New Subsidiary
by its signature below becomes a Grantor under the Security Agreement with the
same force and effect as if originally named therein as a Grantor and the New
Subsidiary hereby (a) agrees to all the terms and provisions of the
Security Agreement applicable to it as a Grantor thereunder and (b) represents
and warrants that the representations and warranties made by it as a Grantor
thereunder are true and correct on and as of the date hereof.  In furtherance of the foregoing, the New
Subsidiary, as security for the payment and performance in full of the Secured
Obligations, does hereby create and grant to the Administrative Agent, its successors
and assigns, for the benefit of the Credit Parties, a security interest in and
lien on all of the New Subsidiary’s right, title and interest in and to the
Collateral (as defined in the Security Agreement) of the New Subsidiary.  Each reference to a “Grantor” in the Security Agreement shall be
deemed to include the New Subsidiary. 
The Security Agreement is hereby incorporated herein by reference.

 

2.                                       The
New Subsidiary represents and warrants to the Administrative Agent and the
other Credit Parties that this Supplement has been duly authorized, executed
and delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms.

 

1

 

3.                                       This
Supplement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all of
which when taken together shall constitute a single contract.  This Supplement shall become effective when
the Administrative Agent shall have received a counterpart of this Supplement
that bears the signature of the New Subsidiary and the Administrative Agent has
executed a counterpart hereof.  Delivery
of an executed signature page to this Supplement by telecopy or other
electronic image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be
as effective as delivery of a manually signed counterpart to this Supplement.

 

4.                                       The
New Subsidiary hereby represents and warrants that, as of the date hereof, (a) set
forth on Schedule “1”  attached
hereto is a Schedule with the true and correct legal name of the New
Subsidiary, its jurisdiction of formation and the location of its chief
executive office, (b) set forth on Schedule “2” attached hereto is a
true and correct Schedule of Intellectual Property consisting (i) all
of the New Subsidiary’s Canadian registered Patents and Patent applications,
including the name of the registered owner, type, registration or application
number and the expiration date (if already registered) of each such Patent and
Patent application owned by the New Subsidiary, (ii) all of the New
Subsidiary’s Canadian registered Industrial Designs and Industrial Design
applications including the name of the registered owner, registration or
application number and the expiration date (if already registered) of each such
Industrial Design and Industrial Design application owned by the New
Subsidiary, (iii) all of the New Subsidiary’s Canadian registered
Trademarks and Trademark applications, including the name of the registered
owner, the registration or application number and the expiration date (if
already registered) of each such Trademark and Trademark application owned by
the New Subsidiary and (iv) all of the New Subsidiary’s Canadian registered
Copyrights, Copyright applications and Copyright Licenses, including the name
of the registered owner, title and, if applicable, the registration number of
each such Copyright, Copyright application or Copyright License owned by the
New Subsidiary, (c) set forth on Schedule “3” attached hereto is the
Pledged Collateral held by the New Subsidiary, and (d) set forth on
Schedule “4” attached hereto are the Deposit Accounts and Concentration
Accounts that the New Subsidiary maintains.

 

5.                                       Except
as expressly supplemented hereby, the Security Agreement shall remain in full
force and effect.

 

6.                                       EXCEPT
AS OTHERWISE EXPRESSLY PROVIDED HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SUPPLEMENT AND THE SECURED OBLIGATIONS
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS
OF THE PROVINCE OF ONTARIO AND THE FEDERAL LAWS OF CANADA APPLICABLE THEREIN.

 

7.                                       In
the event any one or more of the provisions contained in this Supplement should
be held invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein and in
the Security Agreement shall not in any way be affected or impaired thereby (it
being understood 

 

2

 

that the invalidity of a
particular provision in a particular jurisdiction shall not in and of itself
affect the validity of such provision in any other jurisdiction).

 

8.                                       All
communications and notices hereunder shall be in writing and given as provided
in Section 8.01 of the Security Agreement.

 

9.                                       The
New Subsidiary agrees to reimburse the Administrative Agent for its reasonable
out-of-pocket expenses reasonably incurred in connection with this Supplement,
including the reasonable fees, other charges and disbursements of counsel for
the Administrative Agent.

 

IN
WITNESS WHEREOF, the New Subsidiary and the
Administrative Agent have duly executed this Supplement to the Security
Agreement as of the day and year first above written.

 

 

	
   

  	
  [NAME OF NEW SUBSIDIARY]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Z INVESTMENT HOLDINGS, LLC,
  as Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   Name:

  
	
   

  	
   

  	
  Title:

  

 

3

 

Schedule 1

 

New
Subsidiary Information

 

	
  Name

  	
   

  	
  Jurisdiction of Formation

  	
   

  	
  Chief Executive Office

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

4

 

Schedule 2

 

Intellectual
Property

 

PATENTS

 

PATENT APPLICATIONS

 

INDUSTRIAL DESIGNS

 

INDUSTRIAL DESIGN
APPLICATIONS

 

TRADEMARKS

 

TRADEMARK APPLICATIONS

 

COPYRIGHTS

 

COPYRIGHT APPLICATIONS

 

COPYRIGHT LICENSES

 

5

 

 

Schedule 3

 

Pledged
Interests and Pledged Notes

 

PLEDGED INTERESTS

 

	
  Name
  of

  Grantor

  	
   

  	
  Name of

  Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage

  of Class

  Owned

  	
   

  	
  Certificate

  Nos.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

PLEDGED NOTES

 

	
  Name of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

6

 

Schedule 4

 

Deposits
Accounts and Concentration Accounts

 

	
  NAME
  OF LOAN PARTY

  	
   

  	
  NAME OF INSTITUTION

  	
   

  	
  ACCOUNT

  NUMBER

  	
   

  	
  CHECK HERE IF

  ACCOUNT IS A

  CONCENTRATION

  ACCOUNT

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

7

 

Annex 3

 

Form of
Canadian Patent, Industrial Design and Trademark Security Agreement

 

CANADIAN PATENT, INDUSTRIAL DESIGN AND
TRADEMARK SECURITY AGREEMENT dated as of May 10, 2010, by and among each
of: the Subsidiaries from time to time party hereto (each a “Grantor”,
and collectively, the “Grantors”) and Bank of America, N.A., in its
capacity as administrative agent and collateral agent (in such capacity, the “Agent”)
for the Lenders, in consideration of the mutual covenants contained herein and
benefits to be derived herefrom.

 

WHEREAS the
Grantors entered into an Amended and Restated Credit Agreement dated as of May 10,
2010 (as such may be amended, modified, supplemented or restated hereafter, the
“Credit Agreement”) between, among others, Zale Delaware, Inc.,
Zale Corporation, ZGCO, LLC, TXDC, L.P. and Zale Puerto Rico, Inc.
(collectively, the “Borrowers”), as borrowers, each of the Grantors and certain
of their affiliates, as guarantors, the Lenders (as defined in the Credit
Agreement) party thereto from time to time as lenders, and Bank of America,
N.A., in its capacity as Administrative Agent and Collateral Agent (as such
terms are defined in the Credit Agreement); and

 

WHEREAS the
Grantors granted security interests over all of their property to and in favour
of the Agent pursuant to the terms of a Canadian Security Agreement dated as of
May 10, 2010 (as amended, supplemented or otherwise modified from time to
time, the “Canadian Security Agreement”).

 

AND WHEREAS, the
Lenders have agreed to make Loans to the Borrowers pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement, and the
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Grantors of this Agreement;

 

NOW THEREFORE,
the Grantors and the Collateral Agent, for and on behalf of itself and the
Lenders (and each of their respective successors or assigns), hereby agree as
follows:

 

SECTION 1.  Defined Terms.  Capitalized terms used in this Agreement and
not otherwise defined herein have the meanings specified in the Credit
Agreement or Canadian Security Agreement, as applicable.   The rules of interpretation specified
in Section 1.02 of the Credit Agreement also apply to this Agreement, mutatis
mutandis.

 

SECTION 2.  Grant of Security Interest.  As security for the payment or performance,
as the case may be, in full of its Secured Obligations, each of the Grantors,
pursuant to the Canadian Security Agreement, did and hereby does grant to the
Agent, its successors and assigns, for the benefit of the Credit Parties, a
security interest in, all right, title and interest in, to and under any and
all of the following assets and properties now owned or at any time hereafter
acquired by such Grantor or in which such Grantor now has or at any time in the
future may acquire any right, title or interest (collectively, the “Patent,
Industrial Design and Trademark Collateral”):

 

 

(a)(i) any and all Canadian patents and patent
applications, including those listed on Schedule I; (ii) all inventions
and improvements described and claimed therein, including the right to make,
use and/or sell the inventions disclosed or claimed therein; (iii) all
reissues, divisions, continuations, renewals, extensions, and continuations-in-part
thereof; (iv) all income, royalties, damages, claims, and payments now or
hereafter due or payable under and with respect thereto, including damages and
payments for past, present and future infringements thereof; (v) all
rights to sue for past, present and future infringements thereof; and (vi) all
rights corresponding to any of the foregoing;

 

(b)(i) all Canadian trademarks (including
service marks), trade names, trade dress, trade styles and other source
indicators, including those listed on Schedule II, and the registrations and
applications for registration thereof and the goodwill of the business
symbolized by the foregoing; (ii) all licenses of the foregoing, whether
as licensee or licensor; (iii) all renewals of the foregoing; (iv) all
income, royalties, damages and payments now or hereafter due or payable with
respect thereto, including damages, claims and payments for past and future
infringements thereof; (v) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (vi) all rights corresponding
to any of the foregoing; and

 

(c)(i) all Canadian industrial designs and
industrial design applications, including those listed on Schedule I; (ii) all
renewals of the foregoing, (iii) all income, royalties, damages and
payments now or hereafter due or payable with respect thereto, including
damages, claims and payments for past and future infringements thereof; (iv) all
rights to sue for past, present and future infringements of the foregoing,
including the right to settle suits involving claims and demands for royalties
owing; and (v) all rights corresponding to any of the foregoing.

 

SECTION 3. Security
Agreement.  The security interests
granted to the Agent herein are granted in furtherance, and not in limitation,
of the security interests granted to the Agent pursuant to the Canadian
Security Agreement.  Each Grantor hereby
acknowledges and affirms that the rights and remedies of the Agent with respect
to the Patent, Industrial Design and Trademark Collateral are more fully set
forth in the Canadian Security Agreement, the terms and provisions of which are
hereby incorporated herein by reference as if fully set forth herein.  In the event of any conflict between the
terms of this Agreement and the Canadian Security Agreement, the terms of the
Canadian Security Agreement shall govern.

 

SECTION 4. Counterparts.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and the Intercreditor Agreement constitute
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject 

 

 

matter
hereof.  Delivery of an executed
counterpart of a signature page to this Agreement by telecopy or other
electronic image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be
as effective as delivery of a manually executed counterpart of this Agreement.

 

SECTION 5. GOVERNING
LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN
DOCUMENT AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS
OF CANADA APPLICABLE THEREIN.

 

[signature page follows]

 

 

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

 

	
  ZALE
  CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
  ZALE CANADA FINCO 1, INC.

  	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
   

  	
   

  	
  Title: 

  

 

 

	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  	
  Name: 

  
	
   

  	
  Title: 

  	
   

  	
   

  	
  Title: 

  

 

 

	
  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  	
  Name: 

  
	
   

  	
  Title: 

  	
   

  	
   

  	
  Title: 

  

 

 

	
   

  	
   

  	
  BANK OF AMERICA, N.A.
  on its own behalf and as Agent  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
   

  	
   

  	
  Title: 

  

 

 

Annex 4

 

Form of Canadian Copyright Security Agreement

 

CANADIAN COPYRIGHT SECURITY
AGREEMENT dated as of May 10, 2010, by and among each of: the Subsidiaries
from time to time party hereto (each a “Grantor”, and collectively, the “Grantors”)
and Bank of America, N.A., in its capacity as administrative agent and
collateral agent (in such capacity, the “Agent”) for the Lenders, in
consideration of the mutual covenants contained herein and benefits to be
derived herefrom.

 

WHEREAS the
Grantors entered into an Amended and Restated Credit Agreement dated as of May 10
2010 (as such may be amended, modified, supplemented or restated hereafter, the
“Credit Agreement”) between, among others, Zale Delaware, Inc.,
Zale Corporation, ZGCO, LLC, TXDC, L.P. and Zale Puerto Rico, Inc.
(collectively, the “Borrowers”), as borrowers, each of the Grantors and certain
of their affiliates, as guarantors, the Lenders (as defined in the Credit
Agreement) party thereto from time to time as lenders, and Bank of America,
N.A., in its capacity as Administrative Agent and Collateral Agent (as such
terms are defined in the Credit Agreement); and

 

WHEREAS the
Grantors granted security interests over all of their property to and in favour
of the Agent pursuant to the terms of a Canadian Security Agreement dated as of
May 10, 2010 (as amended, supplemented or otherwise modified from time to
time, the “Canadian Security Agreement”).

 

AND WHEREAS, the
Lenders have agreed to make Loans to the Borrowers pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement, and the
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Grantors of this Agreement;

 

NOW THEREFORE,
the Grantors and the Collateral Agent, for and on behalf of itself and the
Lenders (and each of their respective successors or assigns), hereby agree as
follows:

 

SECTION 1.  Defined Terms.  Capitalized terms used in this Agreement and
not otherwise defined herein have the meanings specified in the Credit
Agreement or Canadian Security Agreement, as applicable.   The rules of interpretation specified
in Section 1.02 of the Credit Agreement also apply to this Agreement,
mutatis mutandis.

 

SECTION 2.  Grant of Security Interest.  As security for the payment or performance,
as the case may be, in full of its Secured Obligations, each of the Grantors,
pursuant to the Canadian Security Agreement, did and hereby does grant to the
Agent, its successors and assigns, for the benefit of the Credit Parties, a
security interest in, all right, title and interest in, to and under any and
all of the following assets and properties now owned or at any time hereafter
acquired by such Grantor or in which such Grantor now has or at any time in the
future may acquire any right, title or interest (collectively, the “Copyright
Collateral”):

 

 

(a) (a) all copyrights, rights and
interests in copyrights, works protectable by copyright, copyright
registrations and copyright applications subject to the copyright laws of
Canada, including those listed on Schedule I; (b) all extensions and
renewals of any of the foregoing; (c) all income, royalties, damages, and
payments now or hereafter due and/or payable under any of the foregoing,
including damages or payments for past, present or future infringements for any
of the foregoing; (d) the right to sue for past, present and future
infringements of any of the foregoing; and (e) all rights corresponding to
any of the foregoing;

 

SECTION 3. Security
Agreement.  The security interests
granted to the Agent herein are granted in furtherance, and not in limitation,
of the security interests granted to the Agent pursuant to the Canadian
Security Agreement.  Each Grantor hereby
acknowledges and affirms that the rights and remedies of the Agent with respect
to the Copyright Collateral are more fully set forth in the Canadian Security
Agreement, the terms and provisions of which are hereby incorporated herein by
reference as if fully set forth herein. 
In the event of any conflict between the terms of this Agreement and the
Canadian Security Agreement, the terms of the Canadian Security Agreement shall
govern.

 

SECTION 4. Counterparts.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and the Intercreditor Agreement constitute the
entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof. 
Delivery of an executed counterpart of a signature page to this
Agreement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually executed
counterpart of this Agreement.

 

SECTION 5. GOVERNING
LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN
DOCUMENT AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS
OF CANADA APPLICABLE THEREIN.

 

[signature page follows]

 

 

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

 

	
  ZALE
  CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ZALE CANADA FINCO 1,
  INC.

  	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
   

  	
   

  	
  Title: 

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
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  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
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  BANK OF AMERICA, N.A.
  on its own behalf and as Agent  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
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EXHIBIT C-2

 

AMENDED AND RESTATED CANADIAN SECURITY AGREEMENT

 

EXECUTED by the parties hereto as of the 10 day of May,
2010.

 

	
  TO:

  	
  BANK OF AMERICA, N.A.,
  a national banking association organized under the federal laws of the United
  States of America, having an office at 100 Federal Street, Floor 9, Boston,
  Massachusetts 02110, U.S.A., as administrative agent and collateral agent (in
  such capacity, including its successors and assigns, hereinafter the “Collateral Agent”) for the Secured Parties (as defined herein),
  in consideration of the mutual covenants contained herein and benefits
  derived herefrom;

  
	
   

  	
   

  
	
  GRANTED BY:

  	
  ZALE CANADA CO., a Nova Scotia unlimited liability company, having its
  registered office at 1959 Upper Water Street, Suite 900, Halifax, Nova Scotia,
  B3J 2X2 and its chief executive office and principal place of business
  at 901 West Walnut Hill Lane, Irving, Texas 75038

  
	
   

  	
   

  
	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.,
  a Nova Scotia limited liability company,
  having its registered office at 1959 Upper Water Street, Suite 900,
  Halifax, Nova Scotia, B3J 2X2 and its chief executive office and
  principal place of business at 901 West Walnut Hill Lane, Irving, Texas 75038

  
	
   

  	
   

  
	
   

  	
  ZALE CANADA FINCO 1, INC.,
  a Nova Scotia limited liability company,
  having its registered office at 1959 Upper Water Street, Suite 900,
  Halifax, Nova Scotia, B3J 2X2 and its chief executive office and
  principal place of business at 901 West Walnut Hill Lane, Irving, Texas 75038

  
	
   

  	
   

  
	
   

  	
  ZALE CANADA FINCO 2, INC.,
  a Nova Scotia limited liability company,
  having its registered office at 1959 Upper Water Street, Suite 900,
  Halifax, Nova Scotia, B3J 2X2 and its chief executive office and
  principal place of business at 901 West Walnut Hill Lane, Irving, Texas 75038

  
	
   

  	
   

  
	
   

  	
  FINCO HOLDING LP, a New Brunswick limited partnership, having its registered
  office at 44 Chipman Hill, Suite 1000, Saint-John, New Brunswick, E2L
  4S6 and its chief executive office and principal place of business at 901
  West Walnut Hill Lane, Irving, Texas 75038

  
	
   

  	
   

  
	
   

  	
  FINCO PARTNERSHIP LP,
  a New Brunswick limited partnership,
  having its registered office at 44 Chipman Hill, Suite 1000, Saint-John,
  New Brunswick, E2L 4S6 and its chief executive office and principal place of
  business at 901 West Walnut Hill Lane, Irving, Texas 75038

  

 

 

	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  ZALE CANADA HOLDING LP,
  a New Brunswick limited partnership,
  having its registered office at 44 Chipman Hill, Suite 1000, Saint-John,
  New Brunswick, E2L 4S6 and its chief executive office and principal place of
  business at 901 West Walnut Hill Lane, Irving, Texas 75038

  

 

(each a “Grantor”, and collectively, the “Grantors”)

 

WITNESSETH

 

WHEREAS, the Grantors are party to the Amended and Restated Credit
Agreement of even date herewith (as such may be amended, modified, supplemented
or restated hereafter, the “Credit Agreement”)
between, among others, Zale Delaware, Inc., Zale Corporation, ZGCO, LLC,
TXDC, L.P. and Zale Puerto Rico, Inc. (collectively, the “Borrowers”), as borrowers, each of the Grantors, as
guarantors, the Lenders (as defined in the Credit Agreement) party thereto from
time to time as lenders, and Bank of America, N.A., in its capacity as
Administrative Agent and Collateral Agent (as such terms are defined in the
Credit Agreement);

 

AND WHEREAS, the Lenders have agreed to make Loans to the Borrowers
pursuant to, and upon the terms and subject to the conditions specified in, the
Credit Agreement, and the obligations of the Lenders to make Loans are each
conditioned upon, among other things, the execution and delivery by the
Grantors of a guarantee granted by the Grantors in favour of the Collateral
Agent dated the date hereof and this Security Agreement;

 

NOW THEREFORE, the Grantors and the Collateral Agent, for and on behalf
of itself and the Lenders (and each of their respective successors or assigns),
hereby agree as follows:

 

SECTION 1 — GRANT
OF SECURITY INTEREST

 

1.1           Security
Interest

 

As a general and
continuing security for the payment and performance, as the case may be, in
full of the Secured Obligations, each Grantor, IN CONSIDERATION THEREOF, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
hereby bargains, mortgages, pledges, hypothecates and (except in the case of
ULC Shares) assigns and transfers to the Collateral Agent, including its
successors and assigns, for the benefit of the Secured Parties, and hereby
grants to the Collateral Agent, including its successors and assigns, for the
benefit of the Secured Parties, a continuing security interest (the “Security Interest”) in, all of its right, title and interest
in, to and under all of its property, assets and undertakings, whether now
owned 

 

2

 

or
hereafter-acquired by it or on its behalf, wherever located (hereinafter,
collectively, the “Collateral”),
including, without limitation, all of the its present and after acquired
personal property and including without limitation:

 

(a)           Accounts Receivable

 

All debts, book debts,
accounts, Deposit Accounts, Concentration Accounts, Supporting Obligations,
Letter of Credit Rights, claims, demands, moneys and choses in action
whatsoever including, without limitation, claims against the Crown and claims
under insurance policies, which are now owned by or are due, owing or accruing
due to it or which may  hereafter be
owned by or become due, owing or accruing due to it together with all
contracts, investment property, bills, notes, lien notes, judgments, chattel
mortgages, mortgages and all other rights, benefits and documents now or
hereafter taken, vested in or held by such Corporation in respect of or as
security for the same and the full benefit and advantage thereof, and all
rights of action or claims which such Corporation now has or may at any time
hereafter have against any Person in respect thereof (all of the foregoing
being herein collectively called the “Accounts Receivable”);

 

(b)           Inventory

 

All inventory of whatever
kind now or hereafter owned by such Corporation or in which such Corporation
now or hereinafter has an interest or right of any kind, and all accessions
thereto and products thereof, including, without limitation, all goods,
merchandise, raw materials, goods in process, finished goods, packaging and
packing material and other tangible personal property now or hereafter held for
sale, lease, rental or resale or that are to be furnished or have been
furnished under a contract of service or that are to be used or consumed in the
business of such Corporation (all of the foregoing being herein collectively
called the “Inventory”);

 

(c)           Equipment

 

All goods now or hereafter
owned by such Corporation which are not inventory or consumer goods as defined
in the PPSA including, without limitation, all machinery, equipment, furniture,
furnishings, fixtures, and other tangible personal property, including motor
vehicles with respect to which a certificate of title has been issued,
aircraft, dies, tools, jigs, and office equipment, as well as all of such types
of property leased by such Corporation and all of such Corporation’s rights and
interests with respect thereto under such leases (including, without
limitation, options to purchase); together with all present and future
additions and accessions thereto, replacements therefor, component and
auxiliary parts and supplies used or to be used in connection therewith, and
all substitutes for any of the foregoing, and all manuals, drawings,
instructions, warranties and rights with respect thereto; wherever any of the
foregoing is located (all of the foregoing being herein collectively called the
“Equipment”);

 

(d)           Chattel Paper, Instruments, Securities, etc.

 

All chattel paper,
instruments, warehouse receipts, bills of lading and other documents of title,
whether negotiable or non negotiable, share, stock, security 

 

3

 

entitlements, warrants,
bonds, debentures, debenture stock or other securities or investment property
and financial assets now or hereafter owned by such Corporation;

 

(e)           Intangibles

 

All intangibles now or
hereafter owned by such Corporation including, without limitation, Intellectual
Property, all goodwill connected with or symbolized by any of such general
intangibles; all contract rights, documents, applications, licenses, materials
and other matters related to such general intangibles; all tangible property
embodying or incorporating any such general intangibles; and all chattel paper
and instruments relating to such general intangibles (collectively, the “Intangibles”).

 

(f)            Books and Accounts, etc.

 

With respect to the personal
property described in Paragraphs (a) to (e) inclusive, all books,
accounts, invoices, deeds, documents, writings, letters, papers, security
certificates and other records in any form evidencing or relating thereto and
all contracts, securities, instruments and other rights and benefits in respect
thereof;

 

(g)           Other Property

 

The uncalled capital, money,
rights, bills of exchange, negotiable and non negotiable instruments, judgments
and securities not otherwise described in Paragraphs (a) to (f) inclusive;

 

(h)           Replacements, etc.

 

With respect to the personal
property described in Paragraphs (a) to (g) inclusive, all
substitutions and replacements thereof, increases, additions and accessions
thereto and any interest of such Corporation therein; and

 

(i)            Proceeds

 

With respect to the personal
property described in Paragraphs (a) to (h) inclusive, personal
property in any form or fixtures derived directly or indirectly from any
dealing with such property or that indemnifies or compensates for such property
destroyed or damaged and proceeds of proceeds whether of the same type, class
or kind as the original proceeds.

 

1.2           Additional
Specification with respect to Security Interest

 

(a)           Notwithstanding
anything in Section 1.1, the term “Collateral” shall expressly exclude the
following: (i) any trademark applications filed on an “intent to use”
basis until the earlier of the filing of a statement of use thereon or the
first use in commerce thereof, (ii) any Inventory or other goods that have
been delivered to any Grantor on a consignment basis to the extent that the
rights of such consignor have been properly perfected under applicable law, (iii) any
property (including any goods, investment property, instruments, documents of
title, chattel paper, intangibles or money) to the extent that such grant of a
Security Interest is prohibited by any valid enforceable law or regulation
applicable thereto, requires a consent not obtained of any Governmental
Authority pursuant to such law or 

 

4

 

regulation or is prohibited
by, or constitutes a breach or default under or results in the termination of
or gives rise to a right on the part of the parties thereto other than such
Grantor to terminate (or materially modify) or requires any consent not
obtained under, any contract, license, agreement, instrument or other document
evidencing or giving rise to such property, except to the extent that such law
or regulation or the term in such contract, license, agreement, instrument or
other document or similar agreement providing for such prohibition, breach,
default or right of termination or modification or requiring such consent is
ineffective under applicable law, provided, however, that such
security interest shall attach immediately at such time as the condition
causing such prohibition, breach, default or right of termination or
modification or requiring such consent, as the case may be, shall be remedied
and, to the extent severable, shall attach immediately to any portion of such
contract, license, agreement, instrument or other document that does not result
in any of such consequences, including any proceeds of such contract, license,
agreement, instrument or other document, and (iv) the voting Equity
Interests of ZC Partnership, LP in excess of 65% of the general partnership
Equity Interests of such Subsidiary; provided  further  that,
in all events, all Proceeds, substitutions or replacements of the foregoing
shall constitute “Collateral” hereunder.

 

(b)           Without limiting
the foregoing and in addition to Section 4.2 herein, each Grantor hereby
designates the Collateral Agent as such Grantor’s true and lawful attorney,
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, to file one or more
financing statements or continuation statements, to file with the Canadian
Intellectual Property Office such documents as may be necessary or advisable,
or to sign other documents for the purpose of perfecting, confirming,
continuing, or protecting the Security Interest granted by each Grantor,
without the signature of such 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.  Any such financing statement may
indicate the Collateral as “all assets of the Grantor” or words of similar
effect.

 

(c)           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.

 

(d)           The Security
Interest with respect to Trademarks constitutes a Security Interest in, and a
charge, hypothecation and pledge of, such Collateral in favour of the
Collateral Agent, but does not constitute an assignment or mortgage of such
Collateral to the Collateral Agent.

 

(e)           Until the
Security Interest is enforceable, the grant of the Security Interest in the
Intellectual Property does not affect in any way any Grantor’s rights to
commercially exploit the Intellectual Property, defend it, enforce any Grantor’s

 

5

 

rights in it or with respect
to it against third parties in any court or claim and be entitled to receive
any damages with respect to any infringement of it.

 

(f)            The Security
Interest does not extend to consumer goods.

 

(g)           The Security
Interest does not extend or apply to the last day of the term of any lease or
sublease of real property or any agreement for a lease or sublease of real
property, now held or hereafter acquired by any Grantor, but any Grantor will
stand possessed of any such last day upon trust to assign and dispose of it as
the Collateral Agent may reasonably direct.

 

1.3           Definition
of Terms Used Herein

 

(a)           Terms defined in
the Personal Property Security Act (Ontario)
(as amended from time to time, the “PPSA”) and used
in this security agreement have the same meanings.  Any reference to the “STA”
is a reference to the Securities Transfer Act,
2006 (Ontario) or, to the extent applicable, similar legislation of any other
jurisdiction, as amended from time to time. 
Where a reference is made to the Collateral Agent, it includes, as
applicable, any nominee appointed by the Collateral Agent to hold or otherwise
take possession of the Collateral;

 

(b)           Capitalized terms
not otherwise defined herein shall have the same meanings as ascribed to them
in the Credit Agreement;

 

(c)           Any reference to “Collateral” shall, unless the context otherwise requires,
refer to “Collateral or any part thereof”;

 

(d)           The grant of the
Security Interest shall include, without limitation, a mortgage, hypothecation,
pledge, charge and assignment of the Collateral in favour of the Collateral
Agent (for itself and on behalf of the Secured Parties);

 

(e)           The term “encumbrance” shall include, without limitation, a security
interest, lien, hypothec, claim, charge, deemed trust or encumbrance of any
kind whatsoever;

 

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

 

(g)           “Copyrights” shall mean, with respect to any Person, all of
such Person’s right, title and interest, now or hereafter acquired, in and to
the following:  (a) all copyrights,
rights and interests in copyrights, works protectable by copyright, copyright
registrations and copyright applications; (b) all extensions and renewals
of any of the foregoing; (c) all income, royalties, damages, and payments
now or hereafter due and/or payable under any of the foregoing, including damages
or payments for past, present or future infringements for any of the foregoing;
(d) the right to sue for past, present and future infringements of any of
the foregoing; and (e) all rights corresponding to any of the foregoing.

 

(h)           “Copyright Licenses” shall mean exclusive Licenses in respect
of Copyrights where a Grantor is a licensee.

 

6

 

(i)                                     “Concentration Account” shall have the meaning assigned to
such term in the Credit Agreement;

 

(j)                                     “Deposit Account” shall mean any chequing or other demand
deposit account into which proceeds of Collateral are deposited, and shall
include any time, savings, passbook, or similar accounts maintained with a bank
or other financial institution;

 

(k)                                  “Equity Interests” means, with respect to any Person, all of
the shares of capital stock of (or other ownership or profit interests in) such
Person, and all of the warrants or options for the purchase or acquisition from
such Person of shares of capital stock of (or other ownership or profit
interests in) such Person (including partnership, member or trust interests
therein), whether voting or nonvoting (but excluding, for avoidance of doubt,
any Indebtedness convertible into or exchangeable for Equity Interests).

 

(l)                                     “Industrial Designs” shall mean, with respect to any Person,
all of such Person’s right, title and interest, now owned or hereafter
acquired, in and to: (a) any and all Canadian industrial designs and
industrial design applications; (b) all income, royalties, damages,
claims, and payments now or hereafter due or payable under and with respect
thereto, including damages and payments for past, present and future
infringements thereof; (c) all rights to sue for past, present and future
infringements thereof; and (d) all rights corresponding to any of the
foregoing.

 

(m)                               “Intellectual Property” shall mean all intellectual property
and similar property of every kind and nature now owned or hereafter acquired
by any Person, including inventions, designs, Patents, Copyrights, Trademarks,
Industrial Designs, Licenses, trade secrets, confidential or proprietary
technical and business information, know-how, show-how or other data or
information and all related documentation, and all additions and improvements
to any of the foregoing.

 

(n)                                 “Letter of Credit Right” shall mean a right to payment or
performance under a letter of credit, whether or not the beneficiary has
demanded or is at the time entitled to demand payment or performance;

 

(o)                                 “License” shall mean, with respect to any Person, all of such
Person’s right, title and interest in and to (a) any and all licensing
agreements or similar arrangements in and to any other Person’s Intellectual
Property, (b) all income, royalties, damages, claims and payments now or
hereafter due or payable under and with respect thereto, including damages and
payments for past, present and future breaches thereof, and (c) all rights
to sue for past, present and future breaches thereof.

 

(p)                                 “Material Trademark” shall mean any Trademark of a Grantor
that is material to the conduct of such Grantor’s business.

 

(q)                                 “Patents” shall mean, with respect to any Person, all of such
Person’s right, title and interest, now owned or hereafter acquired, in and
to:  (a) any and all patents and
patent applications or industrial design registrations and applications; (b) all
inventions and improvements described and claimed therein, including the right
to make, use and/or sell the inventions disclosed or claimed therein; (c) all
reissues, 

 

7

 

divisions, continuations,
renewals, extensions, and continuations-in-part thereof; (d) all income,
royalties, damages, claims, and payments now or hereafter due or payable under
and with respect thereto, including damages and payments for past, present and
future infringements thereof; (e) all rights to sue for past, present and
future infringements thereof; and (f) all rights corresponding to any of
the foregoing.

 

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

 

(s)                                  “Pledged Collateral” shall mean all Pledged Interests and
Pledged Notes.

 

(t)                                    “Pledged Collateral Addendum” shall mean a Pledged Collateral
Addendum substantially in the form of Annex 2 to this Security Agreement.

 

(u)                                 “Pledged Companies” shall mean each Person listed on Schedule
3 hereto as a “Pledged Company”, together with each other Person, all or a
portion of whose Equity Interests, is acquired or otherwise owned by a Grantor
after the Effective Date.

 

(v)                                 “Pledged Interests” shall mean all of each Grantor’s right,
title and interest in and to all of the Equity Interests now or hereafter owned
by such Grantor (other than such Equity Interests in Dobbins Jewelers, Inc.),
regardless of class or designation, including in each of the Pledged Companies
owned by it, and all substitutions therefor and replacements thereof, all
proceeds thereof and all rights relating thereto, also including any
certificates representing the Equity Interests, the right to receive any
certificates representing any of the Equity Interests, all warrants, options,
share appreciation rights and other rights, contractual or otherwise in respect
thereof, and the right to receive dividends, distributions of income, profits,
surplus, or other compensation by way of income or liquidating distributions,
in cash or in kind, and all cash, instruments, and other property from time to
time received, receivable, or otherwise distributed in respect of or in
addition to, in substitution of, on account of, or in exchange for any or all
of the foregoing.

 

(w)                               “Pledged Notes” shall mean, with respect to any Grantor, all
of the debt securities now or hereafter owned by such Grantor and the
promissory notes evidencing such debt securities.

 

(x)                                   “Secured Obligations” shall mean the Obligations and shall
include any obligations owed by the Facility Guarantors under the Facility
Guarantor Collateral Documents;

 

(y)                                 “Secured Parties” shall mean the Lenders, (b) the Agents
and their Affiliates, (c) the Issuing Banks, (d) the Arranger, (e) the
Co-Borrowing Base Agents, (f) the beneficiaries of each indemnification
obligation undertaken by any Grantor under any Loan Document, (g) any
other Person to whom Secured Obligations are owed or may become due and owing,
and (h) the successors and assigns of each of the foregoing.

 

8

 

(z)                                   “Supplement” shall mean a Supplement substantially in the
form of Annex 1 to this Security Agreement.

 

(aa)                             “Supporting Obligations” shall mean a Letter of Credit Right
and all other secondary obligation, including, namely, lien notes, judgments,
chattel mortgages, mortgages, security interests, hypothecs, assignments,
guarantees, suretyships, accessories, bills of exchange, negotiable
instruments, invoices, that supports the payment or performance of an Account
Receivable, chattel paper, a document of title, an intangible, an instrument or
investment property, and all other rights, benefits and documents now or
hereafter taken, vested in or held by a Grantor in respect of or as security
for the same and the full benefit and advantage thereof.

 

(bb)                          “Term Priority Collateral” shall have the meaning given to it
the Intercreditor Agreement.

 

(cc)                             “Trademarks” shall mean, with respect to any Person, all of
such Person’s right, title and interest, now owned or hereafter acquired, in
and to the following:  (a) all
trademarks (including service marks), trade names, trade dress, trade styles
and other source indicators and the registrations and applications for
registration thereof and the goodwill of the business symbolized by the
foregoing; (b) all licenses of the foregoing, whether as licensee or
licensor; (c) all renewals of the foregoing; (d) all income,
royalties, damages and payments now or hereafter due or payable with respect
thereto, including damages, claims and payments for past and future
infringements thereof; (e) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (f) all rights corresponding
to any of the foregoing.

 

(dd)                          “ULC” means an unlimited company under the Companies Act (Nova Scotia).

 

(ee)                            “ULC Pledgor” has the meaning assigned to such term in Section 6.17.

 

(ff)                                “ULC Shares” means shares of stock or other Equity Interests
in one or more ULCs.

 

1.4                                 Rules of
Interpretation.

 

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

 

1.5                                 Grantors
Remain Liable

 

Notwithstanding anything herein to the contrary:

 

(a)                                  each
Grantor shall remain liable under the contracts and agreements included in the
Collateral to the extent set forth therein to perform all its duties and
obligations thereunder to the same extent as if this Security Agreement had not
been executed;

 

(b)                                 the
exercise by the Collateral Agent of any of the rights or remedies hereunder
shall not release any Grantor from any of its duties or obligations under the
contracts and agreements included in the Collateral; and

 

9

 

(c)                                  the
Collateral Agent shall not have any obligation or liability under the contracts
and agreements included in the Collateral by reason of this Security Agreement,
nor shall the Collateral Agent be obligated to perform any of the obligations
or duties of any Grantor thereunder or to take any action to collect or enforce
any claim for payment assigned hereunder.

 

1.6                                 Perfection
Regarding Certain Term Priority Collateral

 

In the event that the Term Agent (as defined in the Intercreditor
Agreement) shall determine in its reasonable discretion that the cost
(including adverse tax consequences) of perfecting a security interest in any
Term Priority Collateral would be excessive in relation to the value of the
security to be afforded thereby, then the Collateral Agent shall not require
the perfection of its security interest in such Term Priority Collateral.

 

SECTION 2 — REPRESENTATIONS AND WARRANTIES

 

Each Grantor does hereby represent
and warrant that each representation, warranty, covenant and agreement made in
the Credit Agreement by the Grantor is hereby reiterated as if incorporated by
reference herein, and is hereby confirmed as true and correct,  and further represents and warrants to the Collateral
Agent:

 

2.1                                 Title
and Authority

 

The Grantor has good and valid
rights in, and title to, the Collateral with respect to which it has purported
to grant the Security Interest 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 Security Agreement, without the consent or approval of any other Person
other than any consent or approval which has been obtained.

 

2.2                                 Filings

 

The Perfection Certificate has
been duly prepared, completed and executed, and the information set forth
therein is correct and complete in all material respects. Fully executed PPSA
financing statements or other appropriate filings, recordings or registrations
containing a description of the Collateral (as and if required) have been filed
in each governmental, municipal or other office as is necessary to publish
notice of and protect the validity of and to establish a legal, valid and
perfected security interest in favour of the Collateral Agent (for the benefit
of the Secured Parties) in respect of all Collateral in which the security
interest may be perfected by filing, recording or registration in all the Provinces,
other than Québec, and Territories of Canada (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.  A fully executed Canadian Patent, Industrial
Design and Trademark Security Agreement, in the form attached as Annex 3
hereto, and a fully executed Copyright Security 

 

10

 

Agreement, in the form attached
as Annex 4 hereto, covering its Canadian registered Patents, Canadian
registered Industrial Designs, Canadian registered Trademarks and Canadian
registered Copyrights (and applications for any of the foregoing) and Copyright
Licenses, as applicable, have been delivered to the Collateral Agent for
recording by any relevant offices of the Canadian Intellectual Property Office,
as is necessary to protect the validity of and to establish a legal and valid
security interest in favour of the Collateral Agent (for the benefit of the
Credit Parties) in respect of all Collateral consisting of Intellectual
Property in which a security interest may be perfected by filing, recording or
registration in Canada (or any Province or Territory thereof), and no further
or subsequent filing, refiling, recording, rerecording, registration or
reregistration is necessary (other than such actions as are necessary to
perfect the Security Interest with respect to any Intellectual Property
acquired or developed after the date hereof).

 

2.3                                 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, (b) subject
to the filings described in Section 2.2 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 and (c) subject
to the obtaining of “control”, a perfected security interest in all the
Collateral, to the extent that perfection of the security interest in such
Collateral is required by the terms hereof or the Credit Agreement and may only
be accomplished through “control”. 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 and
which have priority by operation of law.

 

2.4                                 Absence
of Other Liens

 

The Collateral is owned by the Grantor 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 Certificate, the Grantor has not filed or
consented to the filing of (a) a registration application, financing
statement or analogous document under the Civil Code of Québec,
the PPSA (or any successor statute) or similar legislation of any other
jurisdiction, the Uniform Commercial Code, or any other applicable law covering
any Collateral, (b) any assignment or hypothecation in which the Grantor
assigns or hypothecates any Collateral or any security agreement or similar
instrument covering any Collateral with the United States Patent and Trademark
Office, the United States Copyright Office or the Canadian Intellectual
Property Office, or (c) any assignment or hypothecation in which the
Grantor assigns or hypothecates any Collateral or any security agreement or
similar instrument covering any Collateral with any foreign governmental,
municipal or other office, which registration application, financing statement
or analogous document, assignment, hypothecation, 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.

 

11

 

2.5                                 Bailees,
Warehousemen, Etc.

 

Except as otherwise disclosed in
the Perfection Certificate, no Inventory or Equipment of any Grantor is in the
care or custody of any third party or stored or entrusted with a bailee or
other third party and none shall hereafter be placed under such care, custody,
storage, or entrustment except for Equipment and Inventory (i) out for
repair or replacement in the ordinary course of business, (ii) being
shipped, or in-transit, from a supplier or to a customer or between suppliers,
in the ordinary course of business or (iii) in the possession of
suppliers, subcontractors and licensees, in the ordinary course of business,
unless the applicable Grantor complies with Section  3.1(c) below.

 

2.6                                 Intellectual
Property

 

Schedule 2 hereto sets forth, as
of the date hereof, (i) all of each Grantor’s registered Patents and
Patent applications, including the name of the registered owner, type,
registration or application number and the expiration date (if already
registered) of each such Patent and Patent application owned by any Grantor, (ii) all
of each Grantor’s registered Industrial Designs and Industrial Design
applications, including the name of the registered owner, registration or
application number and the expiration date (if already registered) of each such
Industrial Design and Industrial Design application owned by any Grantor, (iii) all
of each Grantor’s registered Trademarks and Trademark applications, including
the name of the registered owner, the registration or application number and
the expiration date (if already registered) of each such Trademark and
Trademark application owned by any Grantor and (iv) all of each Grantor’s
registered Copyrights, Copyright applications and Copyright Licenses, including
the name of the registered owner, title and, if applicable, the registration
number of each such Copyright, Copyright application or Copyright License owned
by any Grantor.

 

2.7                                 Pledged
Collateral

 

(a)                                  Each
Grantor is the holder of record and the legal and beneficial owner, free and
clear of all Liens other than the Security Interest granted to the Collateral
Agent for the benefit of the Secured Parties hereunder and Liens permitted by Section 6.2
of the Credit Agreement, of the Pledged Collateral indicated on Schedule 3 as
being owned by such Grantor and any Pledged Collateral owned by such Grantor
and acquired after the Effective Date. 
Except as otherwise disclosed on Schedule 3 attached hereto or the
Perfection Certificate attached hereto, no amounts payable under or in
connection with any of the Collateral are evidenced by any instruments or
chattel paper as of the Effective Date.

 

(b)                                 All
of the Pledged Collateral constituting Pledged Interests is duly authorized,
validly issued, fully paid and nonassessable (provided that Pledged Interests
which are ULC Shares will be assessable in accordance with the provisions of
the Companies Act (Nova Scotia)) and such
Pledged Interests constitute or will constitute the percentage of the issued
and outstanding Equity Interests of the Pledged Companies of each applicable
Grantor identified on Schedule 3, any Pledged Collateral Addendum or any
Supplement to this Agreement.  All of the
Pledged Collateral constituting Pledged Notes is duly authorized, validly
issued and delivered by the issuer of such Pledged Note and is the legal, valid
and binding obligation of such issuer and such issuer is not in default
thereunder.  

 

12

 

Each Grantor has the right
and requisite authority to pledge the Pledged Collateral pledged by such
Grantor to the Collateral Agent as provided herein.

 

(c)                                  All
actions necessary to perfect or establish the first priority of the Collateral
Agent’s Liens (subject to Permitted Encumbrances which have priority by
operation of law or as provided in the Intercreditor Agreement) in the Pledged
Collateral, and the proceeds thereof, have been duly taken, (A) upon the
execution and delivery of this Security Agreement; (B)(i) upon the taking
of possession by the Collateral Agent of any certificates constituting the
Pledged Interests, to the extent such Pledged Interests are represented by
certificates, together with undated powers endorsed in blank by the applicable
Grantor and (ii) upon the taking of possession by the Collateral Agent of
any promissory notes constituting the Pledged Notes, together with undated
powers endorsed in blank by the applicable Grantor; and (C) upon the
filing of PPSA financing statements in the applicable jurisdiction for such
Grantor with respect to the Pledged Interests of such Grantor that are not
represented by certificates.  Each
Grantor has delivered to and deposited with the Collateral Agent (or, with
respect to any Pledged Collateral created or obtained after the Effective Date,
will deliver and deposit in accordance with Section 3.13 hereof) all
certificates representing the Pledged Interests owned by such Grantor to the
extent such Pledged Interests are represented by certificates, all promissory
notes representing the Pledged Notes owned by such Grantor, and undated powers
endorsed in blank with respect to such certificates or promissory notes.

 

(d)                                 None
of the Pledged Collateral owned or held by such Grantor has been issued or
transferred in violation of any securities registration, securities disclosure,
or similar laws of any jurisdiction to which such issuance or transfer may be
subject.

 

2.8                                 Nature
of Certain Consignment Filings

 

Each of the Liens and other
filings set forth on Schedule 6.2 of the Credit Agreement which purports to
cover goods delivered to a Grantor on a consignment basis (a) evidences
arrangements entered into with such Grantor and its trade vendors in the
ordinary course of business, intended by such Grantor and vendor to be a “true”
consignment, (b) does not encumber any assets of such Grantor other than
the consigned goods to which its relates and the proceeds thereof, to the
extent owing to the vendor and (c) secures solely the obligation of such
Grantor to either return such consigned goods or pay the purchase price for
such consigned goods, in each case, pursuant to a written consignment agreement
on terms substantially similar to those set forth in the Grantors’ standard
form of consignment agreement as in effect on or about the Effective Date (with
the exception of any such Liens and other filings made by any trade vendors in
connection with or relating to that certain Amendment to Existing Agreements
dated as of March 3, 2010 by and among Zale Delaware, Inc., TXDC,
L.P., Rosy Blue Jewelry, Inc. and Rosy Blue, Inc., relating to
consigned goods for such Grantors’ 2010 Spring season), a copy of which has
been provided to the Collateral Agent.

 

13

 

SECTION 3 — COVENANTS OF THE GRANTORS

 

Each Grantor covenants and agrees with the Collateral Agent that so
long as there shall remain any Secured Obligations:

 

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

 

(a)                                  Each
Grantor agrees to furnish to the Collateral Agent (i) prompt written
notice of any change in (A) any Grantor’s trade name used to identify it
in the conduct of its business or in the ownership of its properties, (B) any
office in which it maintains books or records relating to Collateral owned by
it and having a value in excess of $1,000,000 or any office or facility at
which Collateral owned by it and having a value in excess of $1,000,000 is
located (including the establishment of any such new office or facility), other
than, in each case, (I) retail store locations or (II) Equipment and
Inventory (1) out for repair or replacement in the ordinary course of
business, (2) being shipped, or in transit, from a supplier or to a
customer or between suppliers, in the ordinary course of business or (3) in
the possession of suppliers, subcontractors and licensees, in the ordinary
course of business, or (C) the acquisition by any Grantor of any property
for which additional filings or recordings are necessary to perfect and
maintain the Collateral Agent’s Security Interest therein, and (ii) (x) 30
days prior written notice of any change in (A) any Grantor’s corporate or
partnership name or the location of any Grantor’s chief executive office or its
principal place of business, (B) any Grantor’s identity or corporate or
partnership structure, and (y) prior written notice of any Grantor’s
jurisdiction of incorporation, amalgamation or formation, Federal Taxpayer
Identification Number or organizational number or similar taxation
identification or organizational number. 
Each Grantor 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.  Each Grantor
acknowledges and agrees that, except as disclosed on the Perfection
Certificate, it does not currently, nor will it in the future, have any assets
that constitute Collateral located in the United States.

 

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

 

(c)                                  Each
Grantor agrees that, to the extent it acquires any additional leased warehouses
or distribution centers after the Effective Date, the Grantors shall provide
the Collateral Agent with prompt notice thereof, and shall obtain a waiver and
collateral access agreement in form and substance reasonably satisfactory to
the Collateral Agent.

 

14

 

3.2                                 Periodic
Certification

 

Each Grantor shall deliver to
the Collateral Agent, at least thirty (30) days prior to setting up a location
in the Province of Québec in which it intends on maintaining tangible property,
a deed of movable hypothec in form and substance and on terms and conditions
reasonably satisfactory to the Collateral Agent which has been published in
each governmental, municipal or other appropriate office in the Province of
Québec to the extent necessary to protect, perfect and set-up the security
interest and hypothec.

 

Without limiting the scope of
the foregoing, 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 date hereof or the date of the most recent certificate
delivered pursuant to this Section 3.2 or, if any such change has occurred
specifying such revised information.

 

3.3                                 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.

 

3.4                                 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 or the validity or priority of such Security Interest, including the
payment of any fees and taxes required in connection with the execution and
delivery of this Security Agreement, the granting of the Security Interest and
the filing of any financing statements or other documents in connection
herewith or therewith, as well as causing the Collateral Agent to have “control”
(as defined in the STA) of any such Collateral to the extent required
perfection is required under this Agreement and can only be accomplished
through Control.  If any amount payable
under or in connection with any of the Collateral shall be or become evidenced
by any promissory note, document, draft, chattel paper, or other instrument in
an amount in excess of $1,000,000, such note, document, draft, chattel paper,
or other Instrument shall be immediately pledged and delivered to the
Collateral Agent, duly endorsed in a manner satisfactory to the Collateral
Agent.

 

3.5                                 Taxes;
Encumbrances

 

The Collateral Agent may, at its
option, 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 

 

15

 

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 that, so long as no Event of Default shall have occurred and be
continuing, if such taxes, assessments, charges, fees or Liens are being
contested in good faith and by appropriate proceedings by such Grantor, the
Collateral Agent shall consult with such Grantor before making any such payment
or taking any such action; 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; 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
any Grantor’s failure to have made such payments or taken such action.  Nothing in this Section 3.5 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.

 

3.6                                 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 Receivable and the property securing payment and performance of the
Account Receivable has a value in excess of $1,000,000, 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 $1,000,000 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 Collateral in an amount in excess of $1,000,000, whether
or not written, now or hereafter issued in favour of such Grantor as
beneficiary, execute and deliver to the issuer and any confirmer of such letter
of credit an assignment of proceeds form, in favour of the 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.

 

16

 

3.7                                 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.

 

3.8                                 Use
and Disposition of the Collateral

 

None of the Grantors shall make or permit to be made
an assignment, pledge or hypothecation of the Collateral or shall grant any
other Lien in respect of the Collateral or shall grant “control” (as defined in
the STA) over any Collateral to any Person, except as expressly permitted by Section 6.2
of the Credit Agreement.  Except as
expressly permitted in the Credit Agreement, none of the Grantors shall make or
permit to be made any transfer of the Collateral, and each Grantor shall remain
at all times in possession of the Collateral owned by it, except that the
Grantors may use and dispose of the Collateral in any lawful manner permitted
by the terms of and not otherwise inconsistent with the provisions of this
Agreement, the Credit Agreement or any other Loan Document.

 

3.9                                 Limitation
on Modification of Accounts

 

No Grantor shall, 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.

 

3.10                           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 3.10, including 

 

17

 

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.

 

3.11                           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 Collateral Agent, its Accounts Receivable 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.

 

3.12                           Intellectual
Property

 

(a)                                  Each
Grantor agrees that it will not do any act or omit to do any act (and will
exercise commercially reasonable efforts to prevent its licensees and
sub-licensees from doing any act or omitting to do any act) whereby any Patent
or Industrial Design may become invalidated or dedicated to the public, and
agrees that it shall continue to mark any products covered by a Patent or
Industrial Design that is material to the conduct of such Grantor’s business
with the relevant patent number as necessary and sufficient to establish and
preserve its maximum rights under applicable patent laws.

 

(b)                                 Each
Grantor (either itself or through its licensees or its sublicensees) will, for
each Material Trademark, (i) maintain such Material Trademark in full
force free from any claim of abandonment or invalidity for non use, (ii) maintain
the quality of products and services offered under such Material Trademark
including where applicable policing the use of such Material Trademarks by its
licensees and sublicensees, (iii) display such Material Trademark with
notice of registration to the extent necessary and sufficient to establish and
preserve its maximum rights under applicable law and (iv) not knowingly
use or knowingly permit the use of such Material Trademark in violation of any
third party rights.

 

(c)                                  Each
Grantor (either itself or through its licensees or sublicensees) will, for each
work covered by a Copyright material to the conduct of such Grantor’s business,
continue to publish, reproduce, display, adopt and distribute the work with
appropriate copyright notice as necessary and sufficient to establish and
preserve its maximum rights under applicable copyright laws.

 

(d)                                 Each
Grantor shall notify the Collateral Agent promptly if it knows or has reason to
know that any Material Trademark or any Patent, Copyright or Industrial Design
material to the conduct of its business may become abandoned, lost or dedicated
to the public, or of any materially adverse determination or development
(including the institution of, or any such determination or development in, any
proceeding in the Canadian Intellectual Property Office or any court or similar
office of any country) regarding such Grantor’s ownership of any Patent,
Material Trademark, Copyright or Industrial Design material to the conduct of
its business, its right to register the same, or its right to keep and maintain
the same.

 

18

 

(e)                                  At
the time of delivery of quarterly financial statements with respect to each
Fiscal Quarter pursuant to Section 5.1(b) of the Credit Agreement,
each Grantor shall inform the Collateral Agent of any application for any
Patent, Trademark, Copyright or Industrial Design (or any registration of any
Patent, Trademark, Copyright or Industrial Design) such Grantor has filed with
the Canadian Intellectual Property Office or any office or agency in any
political subdivision of the Canada or in any other country or any political
subdivision thereof or any Copyright License for which such Grantor has become
the licensee, in each case, during such Fiscal Quarter, and, upon request of
the Collateral Agent, execute and deliver any and all agreements, instruments,
documents and papers as the Collateral Agent may reasonably request to evidence
the Collateral Agent’s Security Interest in any of the foregoing, and each
Grantor hereby appoints the Collateral Agent as its attorney-in-fact to execute
and file such writings for the foregoing purposes, all acts of such attorney
being hereby ratified and confirmed; such power, being coupled with an
interest, is irrevocable.

 

(f)                                    Each
Grantor will take all necessary steps that are consistent with the practice in
any proceeding before the Canadian Intellectual Property Office or any office
or agency in any political subdivision of the Canada or in any other country or
any political subdivision thereof, to maintain and pursue each application
relating to Material Trademarks and each material application relating to the
Patents and/or Copyrights and/or Industrial Designs (and to obtain the relevant
grant or registration) and to maintain each issued Patent and each registration
of Copyrights and/or Industrial Designs that is material to the conduct of any
Grantor’s business and each registration of Material Trademarks, including
timely filings of applications for renewal, affidavits of use, affidavits of
incontestability and payment of maintenance fees, and, if consistent with good
business judgment, to initiate opposition, interference and cancelation
proceedings against third parties.

 

(g)                                 In
the event that any Grantor has reason to believe that any Collateral consisting
of a Patent, Copyright or Industrial Design material to the conduct of any
Grantor’s business or a Material Trademark has been or is likely to be
infringed, misappropriated or diluted by a third party, such Grantor promptly
shall notify the Collateral Agent and shall, if consistent with reasonable
business judgment, promptly sue for infringement, misappropriation or dilution
and to recover any and all damages for such infringement, misappropriation or
dilution, and take such other actions as are appropriate under the
circumstances to protect such Collateral. 
Each Grantor further agrees not to abandon any Material Trademark or any
Patent, Copyright, Industrial Design or Copyright License that in such Grantor’s
reasonable business judgment is material to the operation of such Grantor’s
business without the prior written consent of the Collateral Agent.

 

(h)                                 Upon
and during the continuance of an Event of Default, each Grantor shall use its
best efforts to obtain all requisite consents or approvals by the licensor of
each Copyright License, Patent License, Industrial Design licence or Material
Trademark License under which such Grantor is a licensee to effect the 

 

19

 

assignment of all such
Grantor’s right, title and interest thereunder to the Collateral Agent or its
designee.

 

(i)                                     Without
limiting the generality of any of the foregoing, each Grantor hereby authorizes
the Collateral Agent, with prompt notice thereof to the Grantors, to supplement
this Agreement by supplementing Schedule 2 or adding additional schedules
hereto to identify specifically any asset or item that may constitute
Copyrights, Copyright Licenses, Patents and/or Industrial Designs or Material
Trademarks; provided that any Grantor shall within ten (10) days after it
has been notified by the Collateral Agent of the specific identification of
such Collateral, advise the Collateral Agent in writing of any inaccuracy of
the representations and warranties made by such Grantor hereunder with respect
to such Collateral.

 

3.13                           Pledged
Collateral

 

Subject to the Intercreditor Agreement:

 

(a)                                  If
any Grantor acquires Collateral consisting of chattel paper, instruments or
negotiable documents of title (collectively, “Negotiable
Collateral”), such Grantor shall, immediately upon receipt thereof,
deliver to the Collateral Agent the Negotiable Collateral and shall, at the
request of the Lender (i) endorse the same for transfer in blank or as the
Collateral Agent may direct, (ii) cause any transfer to be registered wherever,
in the opinion of the Lender, such registration may be required or advisable,
and (iii) deliver to the Collateral Agent any and all consents or other
documents which may be necessary or desirable to transfer the Negotiable
Collateral.

 

(b)                                 Each
Grantor shall not cause or permit any Person other than the Collateral Agent to
have control (as defined in the STA) of any investment property constituting
part of the Collateral, other than control in favour of a depositary bank or
securities intermediary which has subordinated its lien to the lien of the
Collateral Agent pursuant to documentation in form and substance satisfactory
to the Collateral Agent.

 

(c)                                  Provided
no Event of Default has occurred and is continuing, any Grantor has the right
to exercise all voting, consensual and other powers of ownership pertaining to
Collateral which is investment property (the “Pledged
Investment Property”) for all purposes not inconsistent with the
terms of this Security Agreement and each Grantor agrees that it will not vote
the Pledged Investment Property in any manner that is inconsistent with such
terms.

 

(d)                                 Provided
no Event of Default has occurred and is continuing, any Grantor may receive and
retain any dividends, distributions or proceeds on the Pledged Investment
Property.

 

(e)                                  If
an Event of Default has occurred and is continuing, whether or not the
Collateral Agent exercises any right to declare any Obligations due and payable
or seeks or pursues any other relief or remedy available to it under applicable
law or under this security agreement or otherwise, all dividends and other
distributions on the Pledged Investment Property shall be paid directly to the
Collateral Agent and retained by it as part of the Collateral, and, if the
Collateral Agent so requests 

 

20

 

in writing, the Corporation
will execute and deliver to the Collateral Agent any instruments or other
documents necessary or desirable to ensure that the Pledged Investment Property
is paid directly to the Collateral Agent.

 

(f)                                    With
respect to (i) the securities accounts (other than securities accounts
with an aggregate value of less than $10,000) and (ii) any Collateral that
constitutes a security entitlement as to which the financial institution acting
as Collateral Agent hereunder is not the securities intermediary, the relevant
Grantor will cause the securities intermediary with respect to each such
account or security entitlement to enter into a control agreement, such
agreement to be in form and substance reasonably satisfactory to the applicable
Grantor and the Collateral Agent (which agreement may also be for the benefit
of the agent for the Term Loan); provided that the Collateral Agent will not
exercise exclusive control over such accounts except after a Cash Control
Event; provided further that no Grantor shall be required to take the foregoing
actions with respect to any securities account until the later of (A) sixty
(60) days after the Effective Date and (B) in the case of securities
accounts opened after the Effective Date, at the time of establishment of such
securities account (or, in each case, such later date as the Collateral Agent
shall in its reasonable discretion agree).

 

3.14                           Payment

 

Each Grantor will pay duly and punctually all sums of money owed by it
to the Collateral Agent or any other Secured Party under this Security
Agreement at the times and places and in the manner provided for herein, the
Credit Agreement or any other Loan Document, as applicable.

 

3.15                           Credit
Agreement

 

Each Grantor acknowledges having reviewed the covenants contained in
the Credit Agreement which relate to such Grantor and its business, and hereby
covenants and agrees to observe and perform all covenants provided for in the
Credit Agreement which relate to it and to do all things necessary or
appropriate to ensure that it is in compliance with such covenants at all
times.

 

SECTION 4 — COLLECTIONS

 

4.1                                 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 Collection 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 

 

21

 

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 Collection 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.

 

4.2                                 Power
of Attorney

 

(a)                                  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 1.1 of this Security 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 4.1 of
this Security 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 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; (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 

 

22

 

Grantor; (x) to use,
license, or transfer, for the purposes permitted by Section 6 hereof, any
or all Intangibles of any Grantor, provided that the Collateral Agent’s use of
such 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 Security 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.

 

(b)                                 Notwithstanding
the provisions of Section 4.2,  the
power of the Collateral Agent to act in any name other than the name of a
Grantor shall not apply to any Pledged Collateral that is ULC Shares.

 

4.3                                 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 4.2 hereof, 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 4.2 hereof 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 which it may have on the date of this Agreement or
hereafter, whether hereunder, under any other Loan Document, by law or
otherwise

 

SECTION 5 — DEFAULT

 

Each Grantor agrees that, upon the occurrence and during the
continuance of an Event of Default, the security interests hereby constituted
shall become enforceable and the Collateral Agent shall be entitled to exercise
and enforce any or all of the remedies herein provided or which may otherwise
be available to the Collateral Agent by statute, at law or in equity and all
amounts secured hereby shall immediately be paid to the Collateral Agent (for
itself and on behalf of the Secured Parties) by such Grantor.

 

23

 

SECTION 6 — REMEDIES
ON DEFAULT

 

If the security interests hereby constituted become enforceable, the
Collateral Agent shall have, in addition to any other rights, remedies and
powers which it may have at law, in equity or under the PPSA, the Civil Code of Quebec (the “CCQ”)
or the Uniform Commercial Code (the “Code”) (whether
or not the CCQ or the Code applies to the affected Collateral), the following
rights, remedies and powers:

 

6.1                                 Power
of Entry

 

Each Grantor shall forthwith upon demand assemble and deliver to the
Collateral Agent possession of all of the Collateral at such place as may be
specified by the Collateral Agent. The Collateral Agent may take such steps as
it considers necessary or desirable to obtain possession of all or any part of
the Collateral and, to that end, each Grantor agrees that the Collateral Agent,
its servants or agents or Receiver (as hereinafter defined) may, at any time,
during the day or night, enter upon lands and premises where the Collateral may
be found for the purpose of taking possession of and/or removing the Collateral
or any part thereof. In the event of the Collateral Agent taking possession of
the Collateral, or any part thereof, the Collateral Agent shall have the right
to maintain the same upon the premises on which the Collateral may then be
situate.

 

6.2                                 Power
of Sale

 

The Collateral Agent may sell, lease or otherwise dispose of all or any
part of the Collateral, as a whole or in separate parcels, by public auction,
private tender or by private contract, with or without notice, except as
otherwise required by applicable law, with or without advertising and without
any other formality, all of which are hereby waived by each Grantor. Such sale,
lease or disposition shall be on such terms and conditions as to credit and
otherwise and as to upset or reserve bid or price as the Collateral Agent, in
its sole discretion, may deem advantageous. If such sale, transfer or
disposition is made on credit or part cash and part credit, the Collateral
Agent need only credit against the Secured Obligations the actual cash received
at the time of the sale. Any payments made pursuant to any credit granted at
the time of the sale shall be credited against the Secured Obligations as they
are received. The Collateral Agent may buy in or rescind or vary any contract
for sale of all or any of the Collateral and may reasonably resell without
being answerable for any loss occasioned thereby. Any such sale, lease or
disposition may take place whether or not the Collateral Agent has taken
possession of the Collateral. The Collateral Agent may, before any such sale,
lease or disposition, perform any commercially reasonable repair, processing or
preparation for disposition and the amount so paid or expended shall be deemed
advanced to the Grantors by the Collateral Agent, shall become part of the
Secured Obligations, shall bear interest at the highest rate per annum charged
by the Collateral Agent on the Secured Obligations or any part thereof and
shall be secured by this Security Agreement.

 

6.3                                 Validity
of Sale

 

No person dealing with the Collateral Agent or its servants or agents
shall be concerned to inquire whether the security hereby constituted has
become enforceable, whether the powers which the Collateral Agent is purporting
to exercise have become exercisable, whether any money remains due on the
security of the Collateral, as to the necessity or expedience of the
stipulations and conditions subject to which any sale, lease or disposition
shall be made, otherwise as to the propriety or regularity of any sale or any
other dealing by the Collateral 

 

24

 

Agent with the Collateral or to see to the application of any money
paid to the Collateral Agent. In the absence of fraud on the part of such
persons, such dealings shall be deemed, so far as regards the safety and
protection of such person, to be within the powers hereby conferred and to be
valid and effective accordingly.

 

6.4                                 Receiver-Manager

 

The Collateral Agent may, in addition to any other rights it may have,
appoint by instrument in writing a receiver, an interim receiver or receiver
and manager (each of which are herein called a “Receiver”)
of all or any part of the Collateral or may institute proceedings in any court
of competent jurisdiction for the appointment of such a Receiver. Any such
Receiver is hereby given and shall have the same powers and rights and
exclusions and limitations of liability as the Collateral Agent has under this
Security Agreement, at law or in equity. In exercising any such powers, any
such Receiver shall, to the extent permitted by law, act as and for all
purposes shall be deemed to be the agent of the applicable Grantor and the
Collateral Agent and the other Secured Parties shall not be responsible for any
act or default of any such Receiver. The Collateral Agent may appoint one or
more Receivers hereunder and may remove any such Receiver or Receivers and
appoint another or others in his or their stead from time to time. Any Receiver
so appointed may be an officer or employee of the Collateral Agent. A court
need not appoint, ratify the appointment by the Collateral Agent of or
otherwise supervise in any manner the actions of any Receiver. Upon a Grantor
receiving notice from the Collateral Agent of the taking of possession of the
Collateral or the appointment of a Receiver, all powers, functions, rights and
privileges of each of the directors and officers of such Grantor with respect
to the Collateral shall cease, unless specifically continued by the written
consent of the Collateral Agent.

 

6.5                                 Carrying
on Business

 

The Collateral Agent may carry on, or concur in the carrying on of, all
or any part of the business or undertaking of each Grantor, may, to the
exclusion of all others, including such Grantor and any other Grantor, enter
upon, occupy and use all or any of the premises, buildings, plant and
undertaking of or occupied or used by such Grantor and may use all or any of
the tools, machinery, equipment and intangibles of such Grantor for such time
as the Collateral Agent sees fit, free of charge, to carry on the business of
such Grantor and, if applicable, to manufacture or complete the manufacture of
any Inventory and to pack and ship the finished product.

 

6.6                                 Dealing
with Collateral

 

The Collateral Agent may seize, collect, realize, dispose of, enforce,
release to third parties or otherwise deal with the Collateral or any part
thereof in such manner, upon such terms and conditions and at such time or
times as may seem to it advisable, all of which without notice to any Grantor
except as otherwise required by any applicable law. The Collateral Agent may
demand, sue for and receive any Accounts Receivable with or without notice to
any Grantor, give such receipts, discharges and extensions of time and make
such compromises in respect of any Accounts Receivable which may, in the
Collateral Agent’s absolute discretion, seem bad or doubtful. The Collateral Agent
may charge on its own behalf and pay to others, sums for costs and expenses
incurred including, without limitation, legal fees and expenses on a solicitor
and his own client scale and Receivers’ and accounting fees, in or in
connection with seizing, collecting, realizing, disposing, enforcing or
otherwise dealing with the Collateral and in connection with the protection and
enforcement of the rights of the Collateral Agent hereunder 

 

25

 

including, without limitation, in connection with advice with respect
to any of the foregoing. The amount of such sums shall be deemed advanced to
such Grantor by the Collateral Agent, shall become part of the Secured
Obligations, shall bear interest at the highest rate per annum charged by the
Collateral Agent on the Secured Obligations or any part thereof and shall be
secured by this Security Agreement.

 

6.7                                 Right
to Use

 

For the purpose of enabling the Collateral Agent to exercise the
Collateral Agent’s Rights and Remedies under Section 6 (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, 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
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 such
Grantor now or hereafter has rights, (b) to use, license or sublicense any
Intellectual Property, computer software now owned, held or hereafter acquired
by such Grantor, including in such license access to all media and to the
extent to which any of the licensed items may be recorded or stored and to all
such computer software programs and to the extent used for the compilation or
print out thereof, provided that the 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 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, and (ii) without limiting the provisions of
Section 6.1, 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.

 

6.8                                 Retention
of Collateral

 

Upon notice to any Grantor and subject to any obligation to dispose of
any of the Collateral, as provided in the PPSA, the Collateral Agent may elect
to retain all or any part of the Collateral in satisfaction of the Secured
Obligations or any of them.

 

6.9                                 Pay
Encumbrances

 

The Collateral Agent may pay any encumbrance that may exist or be
threatened against the Collateral. In addition, the Collateral Agent may borrow
money, at standard commercial rates, required for the maintenance, preservation
or protection of the Collateral or for the carrying on of the business or
undertaking of any Grantor and may grant further security interests in the
Collateral in priority to the security interest created hereby as security for
the money so borrowed. In every such case the amounts so paid or borrowed
together with costs, charges and expenses incurred in connection therewith
shall be deemed to have been advanced to each Grantor by the Collateral Agent,
shall become part of the Secured Obligations, shall bear interest at the
highest rate per annum charged by the Collateral Agent on the Secured
Obligations or any part thereof and shall be secured by this Security
Agreement.

 

26

 

6.10                           Application
of Payments Against Secured Obligations

 

Any and all payments made in respect of the Secured Obligations from
time to time and moneys realized on the Collateral may be applied to such part
or parts of the Secured Obligations as the Collateral Agent may see fit,
subject to the terms of the Credit Agreement. The Collateral Agent shall, at
all times and from time to time, have the right to change any appropriation as
it may see fit, subject to the terms of the Credit Agreement. Any insurance moneys
received by the Collateral Agent pursuant to this Security Agreement may, at
the option of the Collateral Agent, be applied to rebuilding or repairing the
Collateral or be applied against the Secured Obligations in accordance with the
provisions of this Section.

 

6.11                           Set-Off

 

The Secured Obligations will be paid by each Grantor without regard to
any equities between such Grantor and the Collateral Agent and/or any other
Secured Party or any right of set-off or cross-claim. Any indebtedness owing by
the Collateral Agent and/or any other Secured Party to any Grantor may be set
off and applied by the Collateral Agent against the Secured Obligations at any
time or from time to time either before or after maturity, without demand upon
or notice to anyone.

 

6.12                           Deficiency

 

If the proceeds of the realization of the Collateral are insufficient
to repay the Collateral Agent and the other Secured Parties all moneys due to
them, each Grantor shall forthwith pay or cause to be paid to the Collateral
Agent (either for itself or on behalf of the Secured Parties) such deficiency.

 

6.13                           Collateral
Agent Not Liable

 

Neither the Collateral Agent nor any of the other Secured Parties shall
be liable or accountable for any failure to seize, collect, realize, dispose
of, enforce or otherwise deal with the Collateral. The Collateral Agent and the
other Secured Parties shall not be bound to institute proceedings for any such
purposes or for the purpose of preserving any rights of the Collateral Agent,
any Grantor or any other person, firm or corporation in respect of the
Collateral and shall not be liable or responsible for any loss, cost or damage
whatsoever which may arise in respect of any such failure including, without
limitation, resulting from the negligence of the Collateral Agent or any of its
officers, servants, agents, solicitors, attorneys, Receivers or otherwise other
than for any loss, cost or damage arising as a result of any such person’s
wilful misconduct or gross negligence. Neither the Collateral Agent nor any of
the other Secured Parties, nor their respective officers, servants, agents or
Receivers shall be liable by reason of any entry into possession of the
Collateral or any part thereof, to account as a mortgagee in possession, for
anything except actual receipts, for any loss on realization, for any act or
omission for which a mortgagee in possession might be liable, for any
negligence in the carrying on or occupation of the business or undertaking of
any Grantor as provided in Section 6.5 or for any loss, cost, damage or
expense whatsoever which may arise in respect of any such actions, omissions or
negligence other than for any loss, cost or damage arising as a result of any
such person’s wilful misconduct or gross negligence.

 

6.14                           Extensions
of Time

 

The Collateral Agent and any of the other Secured Parties may grant
renewals, extensions of time and other indulgences, take and give up
securities, accept compositions, grant releases and 

 

27

 

discharges, perfect or fail to perfect any securities, release any part
of the Collateral to third parties and otherwise deal or fail to deal with any
Grantor, debtors of any Grantor, guarantors, sureties and others and with the
Collateral and other securities as the Collateral Agent may see fit, all
without prejudice to the liability of any Grantor to the Collateral Agent and
the other Secured Parties or the Collateral Agent’s and the other Secured
Parties’ rights and powers under this Security Agreement.

 

6.15                           Rights
in Addition

 

The rights and powers conferred by this Section 6 are in
supplement of and in addition to and not in substitution for any other rights
or powers the Collateral Agent may have from time to time under this Security
Agreement or under applicable law. The Collateral Agent may proceed by way of
any action, suit, remedy or other proceeding at law or in equity and no such
remedy for the enforcement of the rights of the Collateral Agent shall be
exclusive of or dependent on any other such remedy. Any one or more of such
remedies may from time to time be exercised separately or in combination.

 

6.16                           Voting
Rights

 

(a)                                  So
long as no Event of Default shall have occurred and be continuing:

 

(i)                                     Each
Grantor shall be entitled to exercise any and all voting and other consensual
rights pertaining to the Pledged Collateral of such Grantor or any part thereof
for any purpose.  For so long as any
Grantor shall have the right to vote the Pledged Interests of such Grantor, such
Grantor covenants and agrees that it will not, without the prior written
consent of the Collateral Agent, vote or take any consensual action with
respect to the Pledged Interests which would materially affect the rights of
the Collateral Agent, any other Secured Party or the value of the Pledged
Interests.  The Collateral Agent shall
execute and deliver to each Grantor, or cause to be executed and delivered to
such Grantor, all such proxies, powers of attorney and other instruments as
such Grantor may reasonably request for the purpose of enabling such Grantor to
exercise the voting and/or consensual rights and powers it is entitled to
exercise pursuant to this Section 6.16(a)(i).

 

(ii)                                  Each
Grantor shall be entitled to receive and retain any and all dividends, cash,
options, warrants, rights, instruments, distributions, returns of capital or
principal, income, interest, profits and other property, interests (debt or
equity) or proceeds, including as a result of a split, revision,
reclassification or other like change of the Pledged Collateral, from time to
time received, receivable or otherwise distributed to such Grantor in respect
of or in exchange for any or all of the Pledged Collateral (any of the
foregoing, a “Distribution” and collectively the “Distributions”) paid in
respect of the Pledged Collateral of such Grantor to the extent that the
payment thereof is not otherwise prohibited by the terms of the Loan Documents;
provided, however, that any and all Distributions paid or payable other than in
cash (other than in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, 

 

28

 

capital surplus
or paid in surplus) in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for, any
Pledged Collateral, shall be, and, subject to the limitations in the definition
of “Collateral”, be promptly delivered to the Collateral Agent to hold as
Pledged Collateral and shall, if received by such Grantor, be received in trust
for the benefit of the Collateral Agent, be segregated from the other property
or funds of such Grantor and be promptly delivered to the Collateral Agent as
Pledged Collateral in the same form as so received (with any necessary
endorsement).

 

(b)                                 Upon
the occurrence and during the continuance of an Event of Default:

 

(i)                                     All
rights of each Grantor (x) to exercise or refrain from exercising the
voting and other consensual rights that it would otherwise be entitled to
exercise pursuant to Section 6.16(a)(i) shall automatically cease and
(y) to receive Distributions that it would otherwise be authorized to
receive and retain pursuant to 6.16(a)(ii) shall automatically cease, and
all such rights shall thereupon become vested in the Collateral Agent, which
shall thereupon have the sole right to exercise or refrain from exercising such
voting and other consensual rights and to receive and hold as Pledged
Collateral such dividends, interest and other distributions; provided that, unless
otherwise directed by the Required Lenders, the Collateral Agent shall have the
right from time to time following and during the continuance of an Event of
Default to permit the Grantors to exercise such rights.  Any and all money and other property paid
over to or received by the Collateral Agent pursuant to the provisions of this Section 6.16(b)(i) shall
be retained by the Collateral Agent in an account to be established by the
Collateral Agent upon receipt of such money or other property and shall be
applied in accordance with the provisions of the Credit Agreement.  After all Events of Default have been cured
or waived and the Borrowers have delivered to the Collateral Agent a
certificate to that effect, the Collateral Agent shall promptly repay to each
Grantor (without interest) all dividends or interest that such Grantor would
otherwise be permitted to retain pursuant to the terms of this Section 6.16
and that remain in such account.

 

(ii)                                  All
Distributions that are received by any Grantor contrary to the provisions of
paragraph (i) of this Section 6.16(b) shall be received in trust
for the benefit of the Collateral Agent, shall be segregated from other funds
of such Grantor and shall be promptly paid over to the Collateral Agent as
Pledged Collateral in the same form as so received (with any necessary
endorsement).

 

(c)                                  This
Section 6.16 shall not apply to any Pledged Collateral that is ULC Shares
or to any Distributions that are paid in respect of ULC Shares

 

29

 

6.17                           ULC
Shares

 

(a)                                  Notwithstanding
any provisions to the contrary contained in this Security Agreement or any
other document or agreement among all or some of the parties hereto, each
Grantor that is the registered and beneficial owner of any Pledged Collateral
which are ULC Shares (“ULC Pledgor”)
will remain so until such time as such ULC Shares are effectively transferred
into the name of the Collateral Agent, any Secured Party or any other Person on
the books and records of such ULC.  Accordingly,
each ULC Pledgor shall be entitled to receive and retain for its own account
any Distribution in respect of such Pledged Collateral (except insofar as such
ULC Pledgor has granted a security interest in such Distribution, and any
shares which are Pledged Collateral shall be delivered to the Collateral  Agent to hold as Pledged Collateral
hereunder) and shall  have the right to
vote such Pledged Collateral and to control the direction, management and
policies of the applicable ULC issuer to the same extent as such ULC Pledgor
would if such Pledged Collateral were not pledged to the Collateral Agent (for
its own benefit and for the benefit of the Credit Parties) pursuant
hereto.  Nothing in this Security
Agreement or any other document or agreement among all or some of the parties
hereto is intended to, and nothing in this Security Agreement or any other
document or agreement among all or some of the parties hereto shall constitute,
the Collateral Agent, any Secured Party or any other Person other than a ULC
Pledgor a member of a ULC for the purposes of the Companies
Act (Nova Scotia) until such time as notice is given to such ULC
Pledgor and further steps are taken pursuant hereto or thereto so as to
register the Collateral  Agent, any
Secured Party or any other Person as holder of the applicable ULC Shares.  To the extent any provision hereof would have
the effect of constituting the Collateral 
Agent or any Secured Party as a member of any ULC prior to such time,
such provision shall be severed therefrom and shall be ineffective with respect
to Pledged Collateral which are ULC Shares without otherwise invalidating or
rendering unenforceable this Security Agreement or invalidating or rendering
unenforceable such provision insofar as it relates to Pledged Collateral which
are not ULC Shares.

 

(b)                                 Except
upon the exercise of rights to sell, transfer or otherwise dispose of the
Pledged Collateral issued by a ULC following the occurrence of an Event of
Default pursuant to Section 6, no ULC Pledgor shall cause or permit, or
enable any ULC in which they hold ULC Shares to cause or permit, the Collateral
Agent or any other Secured Party to:  (a) be
registered as shareholder or member of such ULC; (b) accept or request
stock powers of attorney in respect of such Person endorsed or assigned in
favour of the Collateral Agent or other Secured Party; (c) have any
notation entered in its favour in the share register of such ULC; (d) be
held out as a shareholder or member of such ULC; (e) receive, directly or
indirectly, any dividends, property or other distributions from such ULC by
reason of the Collateral Agent or any other Secured Party holding a security
interest in such ULC; or (f) to act as a shareholder or member of such
ULC, or exercise any rights of a shareholder or member including the right to
attend a meeting of, or to vote the shares of, such ULC.

 

30

 

SECTION 7 — PERFECTION
OF SECURITY INTEREST

 

7.1                                 Perfection
by Filing.

 

Each Grantor hereby authorizes the Collateral Agent, pursuant to the
provisions of Section 1 and Section 4.2, 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,
where applicable, a carbon, photographic, or other reproduction of this
Security Agreement shall be sufficient as a financing statement and may be
filed as a financing statement in any and all jurisdictions.

 

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”
(as defined in the STA) of any Deposit Accounts, securities accounts,
Concentration Accounts, Letter-of-Credit Rights, investment property, or
electronic chattel paper, with any agreements establishing control to be in
form and substance satisfactory to the Collateral Agent (and which may also be
for the benefit of the agent for the Term Loan), 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 2.3 and of
the preservation of its rights therein. The Grantors acknowledge that
notwithstanding anything to the contrary contained therein, the Blocked Account
Agreements, Credit Card Notifications, and landlord waivers and consents
previously executed and delivered to, or for the benefit of, the Collateral
Agent shall remain in full force and effect until all Secured Obligations
(including, without limitation, on account of the obligations owed by the
Facility Guarantors under the Facility Guarantor Security Documents) are 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 Banks and the Collateral Agent, and the
Issuing Banks have no further obligation to issue Letters of Credit under the
Credit Agreement, and any Obligations related to Letters of Credit, Cash
Management Services or Bank Products have been fully cash collateralized in a
manner reasonably satisfactory to the respective Lender to whom such
Obligations are owed.

 

7.3                                 Savings
Clause.

 

Nothing contained in this Section 7 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 (as hereinafter defined) hereunder
except (and then only to the extent) as mandated by the PPSA.

 

31

 

SECTION 8 — GENERAL

 

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.

 

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
SecurityAgreement.

 

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.

 

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 the extent that
it lawfully may, each Grantor hereby agrees that it will not invoke any law
relating to the marshalling of 

 

32

 

collateral which might cause delay in or impede the enforcement of the
Collateral Agent’s Rights and Remedies under this Security 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.

 

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 Security 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 subject to the provisions of Section 9.6 of the Credit
Agreement and 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 Banks and the Collateral
Agent, and as long as the Commitments have not expired or terminated.

 

8.6                                 Binding
Effect; Several Agreement; Assignments

 

Whenever in this Security 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 Security 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 Security
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.

 

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 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 Security 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 Remedies 

 

33

 

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 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 Security Agreement or any other Loan Document, the
performance by any Grantor of its obligations under this Security 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 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.

 

8.8                                 Governing
Law

 

This Security Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein, except as required by mandatory provisions of law.

 

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 and
any Person, at any time, shall preclude the other 

 

34

 

or further exercise of the
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 Security 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

 

8.10                           Severability

 

In the event any one or more of the provisions contained in this
Security 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).

 

8.11                           Counterparts.

 

This Security Agreement may be executed in two or more counterparts
(and by different parties on different counterparts), each of which shall
constitute an original but all of which, when taken together, shall constitute
a single contract. Delivery of an executed counterpart of a signature page to
this Security Agreement by telecopy, facsimile or other electronic image scan
transmission (e.g. “pdf” or “tif” via e-mail) shall
be as effective as delivery of a manually executed counterpart to this Security
Agreement.

 

8.12                           Sections
and Headings

 

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

 

8.13                           Jurisdiction

 

(a)                                  Each
Grantor agrees that any suit for the enforcement of this Security Agreement may
be brought in the courts of the Province of Ontario and consent to the non-

 

35

 

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

 

8.14                           Termination;
Release of Collateral

 

(a)                                  (a)           Upon any
disposition of Collateral in connection with any disposition permitted under
the Credit Agreement or any other Loan Document (other than a sale or transfer
to a Grantor), or upon the effectiveness of any written consent to the release
of the security interest granted hereby in any Collateral pursuant to Section 9.2
of the Credit Agreement, the security interest in such Collateral shall be
automatically released.

 

(b)                                 Except
for those provisions which expressly survive the termination thereof, the
Credit Agreement, this Security Agreement and the security interest shall,
subject to Section 9.6 of the Credit Agreement, terminate when all the
Secured Obligations (other than any of the Secured Obligations which are not
Loan Agreement Obligations, and which are not then due and owing) 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 Banks and the Collateral Agent,
and the Issuing Banks have no further obligation to issue Letters of Credit
under the Credit Agreement, and any Obligations related to Letters of Credit,
Cash Management Services or Bank Products have been fully cash collateralized
in a manner reasonably satisfactory to the respective Lender to whom such
Obligations are owed, at which time the Collateral Agent shall execute and
deliver to the Grantors, at the Grantors’ expense, all PPSA discharges,
releases and similar documents that the Grantors shall reasonably request to
evidence such termination. Any execution and delivery of discharges or
documents pursuant to this Section 8.14 shall be without recourse to, or
warranty by, the Collateral Agent; provided, however, that the
Credit Agreement, this Security Agreement, and the Security Interest granted
herein shall be reinstated if at any time payment, or any part thereof, of any
Secured Obligation is rescinded or must otherwise be restored by any Secured
Party upon the bankruptcy or reorganization of any Grantor; and provided
further that the Security Interest granted herein shall not terminate as to any
indemnification obligation of any Grantor which expressly survives the
termination of the Credit Agreement and this Security Agreement, including,
without limitation, the obligations of the Grantors set forth in Section 9.3
of the Credit Agreement and the obligations of the Grantors set forth in Section 8.7
of this Agreement (in each case with respect to obligations other than
contingent obligations with respect to then unasserted claims) unless such
obligations have been cash collateralized or otherwise provided for to the 

 

36

 

satisfaction of the
Collateral Agent.  Any execution and
delivery of discharges or other documents pursuant to this Section 8.14
shall be at the expense of the Grantors and without recourse to, or warranty
by, the Collateral Agent or any other Secured Party.

 

8.15                           Additional
Grantors

 

Pursuant to Section 5.13 of the Credit Agreement, the Grantors
shall each cause any new direct or indirect Subsidiary (other than an Excluded
Subsidiary) of any Grantor incorporated, formed or becoming resident in Canada
to enter into this Security Agreement as a Grantor.  Upon execution and delivery by the Collateral
Agent and a Subsidiary of an instrument in the form of Annex 1 hereto, such
Subsidiary shall become a Grantor hereunder with the same force and effect as
if originally named as a Grantor herein. 
The execution and delivery of any such instrument shall not require the
consent of any other Loan Party hereunder. 
The rights and obligations of each Loan Party hereunder shall remain in
full force and effect notwithstanding the addition of any new Loan Party as a
party to this Security Agreement.

 

8.16                           Intercreditor
Agreement

 

Notwithstanding anything herein to the contrary, the Lien and Security
Interest granted pursuant to this Security Agreement and the exercise of any
right or remedy hereunder are subject to the provisions of the Intercreditor
Agreement.  In the event of any conflict between
the terms of the Intercreditor Agreement and this Security Agreement, the terms
of the Intercreditor Agreement shall govern and control. Without limiting the
generality of the foregoing, and notwithstanding anything herein to the
contrary, all rights and remedies of the Collateral Agent (and the other
Secured Parties) with respect to the Term Priority Collateral shall be subject
to the terms of the Intercreditor Agreement, and until the discharge of the “Term
Obligations” (as defined in the Intercreditor Agreement), any obligation of any
Grantor hereunder or under any other Loan Document with respect to the delivery
or control of any Term Priority Collateral, the novation of any lien on any
certificate of title, bill of lading or other document, the giving of any
notice to any bailee or other Person, the provision of voting rights, the
obtaining of any consent of any Person or otherwise, in each case in connection
with any Term Priority Collateral, shall be deemed to be satisfied if such
Grantor, as applicable, complies with the requirements of the similar provision
of the applicable “Term Document” (as defined in the Intercreditor Agreement).
Until the discharge of the Term Obligations, the delivery of any Term Priority
Collateral to the “Term Priority Agent” (as defined in the Intercreditor
Agreement) pursuant to the Term Documents shall satisfy any delivery
requirement hereunder or under any other Loan Document.

 

8.17                           Grantor
Consent

 

Each Grantor which is not a ULC hereby consents to the security
interests granted herein by each other Grantor, including any security
interests in Equity Interests issued by such Grantor or Equity Interests issued
by any Person in which such Grantor owns any Equity Interest.  Each Grantor which is not a ULC hereby waives
any rights of such Grantor to notice in connection with the grant of any
Security Interests by any Grantor hereunder.

 

37

 

8.18                           Amendment
and Restatement

 

This Security Agreement shall be deemed to amend, restate and replace
in its entirety the security agreement in existence between the Collateral
Agent and any Grantor prior to the date hereof. 
It is expressly understood and agreed by each of the parties hereto that
this Security Agreement is in no way intended and shall not be deemed or
construed to constitute a novation agreement. 
Each Grantor acknowledges and agrees that each reference in the Loan
Documents to the “Security Agreement” shall be a reference to this Security
Agreement.

 

8.19                           No
Merger

 

Neither the taking of any judgment nor the exercise of any power of
seizure or sale shall operate to extinguish the liability of any Grantor to
make payment of or satisfy the Secured Obligations. The acceptance of any
payment or alternate security shall not constitute or create any novation and
the taking of a judgment or judgments under any of the covenants herein
contained shall not operate as a merger of such covenants.

 

8.20                           Security
Interest Effective Immediately

 

Neither the execution or registration of this
Security Agreement nor any partial advances by the Collateral Agent shall bind
the Collateral Agent to advance any other amounts to any Grantor. The parties
intend the security interest created hereby to attach and take effect forthwith
upon execution of this Security Agreement by each Grantor and each Grantor
acknowledges that value has been given and that each Grantor has rights in its
Collateral.

 

8.21                           Provisions
Reasonable

 

Each Grantor expressly acknowledges and agrees that the provisions of
this Security Agreement and, in particular, those respecting remedies and
powers of the Collateral Agent against such Grantor, its business and the
Collateral upon default, are commercially reasonable and not manifestly
unreasonable.

 

8.22                           Number
and Gender

 

In this Security Agreement, words importing the singular number include
the plural and vice-versa and words importing gender include all genders.

 

8.23                           Precedence

 

Except as limited herein, in the event that any provisions of this
Security Agreement contradict and are otherwise incapable of being construed in
conjunction with the provisions of the Credit Agreement, the provisions of the
Credit Agreement, as applicable, shall take precedence over those contained in
this Security Agreement.

 

8.24                           Receipt
of Copy

 

Each Grantor acknowledges receipt of an executed copy of this Security
Agreement.

 

38

 

8.25                           Judgment
Currency

 

If, for the purposes of obtaining or enforcing judgment in any court or
for any other purpose hereunder or in connection herewith, it is necessary to
convert a sum due hereunder in any currency into another currency, such
conversion shall be carried out to the extent and in the manner provided in the
Credit Agreement.

 

8.26                           Waiver of The Limitation of Civil Rights Act
(Saskatchewan)

 

Without limiting the generality of the foregoing, each Grantor agrees
that The Limitation of Civil Rights Act
(Saskatchewan) will not apply to this Security Agreement or any rights,
remedies or powers of the Collateral Agent, any Secured Party or any Receiver
hereunder.

 

8.27                           Language

 

The parties hereto
acknowledge that they have requested and are satisfied that the foregoing, as
well as all notices, actions and legal proceedings be drawn up in the English
language. Les parties à cette
convention reconnaissent qu’elles ont exigé que ce qui précède ainsi que tous
avis, actions et procédures légales soient rédigés et exécutés en anglais et s’en
déclarent satisfaites.

 

[signature page follows]

 

39

 

IN
WITNESS WHEREOF, the parties hereto have duly
executed this Security Agreement as of the date first above written.

 

 

	
  ZALE
  CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
  ZALE CANADA FINCO 1, INC.

  	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

 

	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

40

 

	
   

  	
   

  	
  BANK OF AMERICA, N.A.
  on its own behalf and as Collateral Agent  

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

41

 

SCHEDULE  1

 

FORM OF PERFECTION CERTIFICATE

 

Attached.

 

42

 

 

SCHEDULE  2

 

INTELLECTUAL PROPERTY

 

PATENTS

 

None

 

PATENT APPLICATIONS

 

None.

 

INDUSTRIAL DESIGNS

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  TYPE

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  DESIGN PATENT

  	
   

  	
  111,357

  	
   

  	
  09/29/2016

  	
   

  

 

INDUSTRIAL DESIGN APPLICATIONS

 

None.

 

TRADEMARKS

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP.

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  ARCTIC IDEAL

  	
   

  	
  1,187,773

  	
   

  	
  645,250

  	
   

  	
  08/02/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  ARIANNA

  	
   

  	
  1,121,991

  	
   

  	
  601,375

  	
   

  	
  02/04/2019

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  COLLECTORS 1

  	
   

  	
  444,488

  	
   

  	
  247,729

  	
   

  	
  7/4/2010

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  CROWN DESIGN

  	
   

  	
  661,766

  	
   

  	
  407,911

  	
   

  	
  2/12/2023

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  FASHION COMES FULL CIRCLE

  	
   

  	
  1,307,824

  	
   

  	
  743,567

  	
   

  	
  7/26/2024

  	
   

  

 

43

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP.

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  FOR PEOPLE WHO
  LOVE DIAMONDS

  	
   

  	
  705,458

  	
   

  	
  433,001

  	
   

  	
  09/09/2024

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  JEWELLER’S
  WORKSHOP & Design

  	
   

  	
  1,012,025

  	
   

  	
  546,105

  	
   

  	
  6/1/2016

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  LES BIJOUTIERS DIAMANTAIRES PEOPLES

  	
   

  	
  435,725

  	
   

  	
  278,507

  	
   

  	
  3/31/2013

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MACKENZIE

  	
   

  	
  174,250

  	
   

  	
  UCA11718

  	
   

  	
  9/30/2013

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MACKENZIE’S & Design

  	
   

  	
  284,953

  	
   

  	
  140,778

  	
   

  	
  6/11/2010

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  Maple Leaf & Circular Geometric Design

  	
   

  	
  1,417,833

  	
   

  	
  758,355

  	
   

  	
  1/29/2025

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPINS

  	
   

  	
  1,176,161

  	
   

  	
  605,395

  	
   

  	
  3/16/2019

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPIN’S

  	
   

  	
  380,832

  	
   

  	
  574,844

  	
   

  	
  1/31/2018

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPINS & Design

  	
   

  	
  1,176,162

  	
   

  	
  605,424

  	
   

  	
  3/16/2019

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  MAPPINS & CHINESE CHARACTERS &
  Design

  	
   

  	
  1,159,767

  	
   

  	
  605,118

  	
   

  	
  3/15/2019

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES

  	
   

  	
  342,965

  	
   

  	
  183,418

  	
   

  	
  5/26/2017

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES II

  	
   

  	
  1,217,230

  	
   

  	
  645,031

  	
   

  	
  7/28/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES ANGELS FOUNDATION & Design

  	
   

  	
  874,111

  	
   

  	
  520,666

  	
   

  	
  12/16/2014

  	
   

  

 

44

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP.

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES - BRINGING PEOPLE CLOSER FOR OVER 75 YEARS

  	
   

  	
  770,596

  	
   

  	
  448,734

  	
   

  	
  10/6/2010

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES CANADA’S DIAMOND STORE SINCE
  1919 & Design

  	
   

  	
  1,403,666

  	
   

  	
  750,553

  	
   

  	
  10/20/2024

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES CANADIAN DIAMOND

  	
   

  	
  1,162,325

  	
   

  	
  639,719

  	
   

  	
  5/12/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES & CHINESE CHARACTERS DESIGN

  	
   

  	
  853,462

  	
   

  	
  501,614

  	
   

  	
  9/30/2013

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES CREDIT

  	
   

  	
  175,515

  	
   

  	
  UCA12368

  	
   

  	
  4/18/2014

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES & Design

  	
   

  	
  342,969

  	
   

  	
  183,249

  	
   

  	
  5/19/2017

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES DIAMOND

  	
   

  	
  1,159,626

  	
   

  	
  605,256

  	
   

  	
  3/16/2019

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES – FOR EVERYONE

  	
   

  	
  740,555

  	
   

  	
  445,967

  	
   

  	
  8/11/2010

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES JEWELLERS

  	
   

  	
  436,328

  	
   

  	
  246,037

  	
   

  	
  6/6/2010

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES
  JEWELLERS THE DIAMOND PEOPLE

  	
   

  	
  466,248

  	
   

  	
  278,511

  	
   

  	
  3/31/2013

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES THE DIAMOND STORE

  	
   

  	
  793,592

  	
   

  	
  466,305

  	
   

  	
  11/26/2011

  	
   

  

 

45

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP.

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  ROYAL PAIR

  	
   

  	
  175,514

  	
   

  	
  UCA11770

  	
   

  	
  4/18/2014

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE DIAMOND PEOPLE PEOPLES

  	
   

  	
  672,154

  	
   

  	
  401,130

  	
   

  	
  8/7/2022

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE EXCLUSIVE MAPPINS CANADIAN DIAMOND

  	
   

  	
  1,174,742

  	
   

  	
  644,129

  	
   

  	
  7/12/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE EXCLUSIVE PEOPLES LOVE BAND

  	
   

  	
  1,175.569

  	
   

  	
  639,609

  	
   

  	
  5/11/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE MAPPINS PREMIER DIAMOND

  	
   

  	
  1,205,545

  	
   

  	
  645,133

  	
   

  	
  7/29/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE MAPPINS ROYAL DIAMOND

  	
   

  	
  1,205,543

  	
   

  	
  645,436

  	
   

  	
  8/8/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE MAPPINS SUPERIOR DIAMOND

  	
   

  	
  1,205,544

  	
   

  	
  645,279

  	
   

  	
  8/3/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE PEOPLES CROWN DIAMOND

  	
   

  	
  1,205,540

  	
   

  	
  645,195

  	
   

  	
  8/2/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE PEOPLES ELITE DIAMOND

  	
   

  	
  1,205,542

  	
   

  	
  639,537

  	
   

  	
  5/10/2020

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THE PEOPLES PRESTIGE DIAMOND

  	
   

  	
  1,205,541

  	
   

  	
  639,538

  	
   

  	
  5/10/2020

  	
   

  

 

46

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP.

  NO.

  	
   

  	
  REG. NO.

  	
   

  	
  EXPIRATION

  DATE

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  WHEN WORDS ARE NOT ENOUGH

  	
   

  	
  708,059

  	
   

  	
  416,756

  	
   

  	
  9/10/2023

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  YOUNG’S JEWELLERS

  	
   

  	
  1,012,026

  	
   

  	
  541,076

  	
   

  	
  2/12/2016

  	
   

  

 

TRADEMARK APPLICATIONS

 

	
  OWNER

  	
   

  	
  COUNTRY

  	
   

  	
  MARK

  	
   

  	
  APP. NO.

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  BRILLIANT VALUE

  	
   

  	
  1,446,083

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  BRILLIANT VALUE

  	
   

  	
  1,445,055

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  CELEBRATION CANADIAN DIAMOND & Design

  	
   

  	
  1,403,667

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  LOVE CHANGES EVERYTHING

  	
   

  	
  1,456,672

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES THE DIAMOND STORE SINCE 1919 &
  Design

  	
   

  	
  1,475,161

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  PEOPLES
  LE MAGASIN DE DIAMANT DU CANADA DEPUIS 1919 & DESIGN

  	
   

  	
  1,406,481

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  SAY “I LOVE YOU” LIKE NEVER BEFORE

  	
   

  	
  1,457,149

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  THIS HOLIDAY SAY “I LOVE YOU” LIKE NEVER BEFORE

  	
   

  	
  1,457,144

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  CANADA

  	
   

  	
  WEDDING DAY

  	
   

  	
  1,270,667

  	
   

  

 

COPYRIGHTS

 

None.

 

COPYRIGHT APPLICATIONS

 

None.

 

47

 

COPYRIGHT LICENSES

 

None.

 

48

 

 

SCHEDULE  3

 

Pledged
Interests

 

	
  Name of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage of

  Class Owned

  	
   

  	
  Certificate

  Nos.

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  	
   

  	
  100

  	
   

  	
  Common

  	
   

  	
  100%

  	
   

  	
  C2

  	
   

  
	
  FINCO HOLDING LP

  	
   

  	
  ZALE CANADA CO.

  	
   

  	
  21,536,297

  	
   

  	
  Common

  	
   

  	
  11.44%

  	
   

  	
  C1

  	
   

  
	
  FINCO HOLDING
  LP

  	
   

  	
  FINCO PARTNERSHIP LP

  	
   

  	
  99

  	
   

  	
  Limited Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  	
   

  
	
  FINCO HOLDING
  LP

  	
   

  	
  ZC PARTNERSHIP, LP

  	
   

  	
  65

  	
   

  	
  General Partner Units

  	
   

  	
  100%(1)

  	
   

  	
  1

  	
   

  
	
  FINCO
  PARTNERSHIP LP

  	
   

  	
  ZALE CANADA CO.

  	
   

  	
  166,753,858

  	
   

  	
  Common

  	
   

  	
  88.56%

  	
   

  	
  C2

  	
   

  
	
  FINCO
  PARTNERSHIP LP

  	
   

  	
  ZC PARTNERSHIP, LP

  	
   

  	
  9900

  	
   

  	
  Limited Partner Units

  	
   

  	
  100%

  	
   

  	
  1 & 2

  	
   

  
	
  ZALE CANADA
  FINCO 2, INC.

  	
   

  	
  FINCO HOLDING LP

  	
   

  	
  1

  	
   

  	
  General Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  	
   

  
	
  ZALE CANADA
  FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP

  	
   

  	
  1

  	
   

  	
  General Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  	
   

  
	
  ZALE CANADA
  FINCO 1, INC.

  	
   

  	
  FINCO HOLDING LP

  	
   

  	
  99

  	
   

  	
  Limited Partner Units

  	
   

  	
  100%

  	
   

  	
  1

  	
   

  
	
  ZALE CANADA HOLDING LP

  	
   

  	
  ZALE CANADA
  FINCO 1, INC.

  	
   

  	
  100,000

  	
   

  	
  Common

  	
   

  	
  100%

  	
   

  	
  2 & 3

  	
   

  
	
  ZALE CANADA HOLDING LP

  	
   

  	
  ZALE CANADA
  FINCO LLC

  	
   

  	
  —

  	
   

  	
  LLC

  	
   

  	
  100%

  	
   

  	
  —

  	
   

  

 

(1) Finco Holding LP holds all of the
General Partner Units, for a total of 100, but will only be pledging 65 General
Partner Units in connection herewith.

 

49

 

Pledged Notes

 

	
  Name of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  	
   

  
	
  ZALE CANADA CO.

  	
   

  	
  ZALE CORPORATION

  	
   

  	
  $

  	
  100,000,000

  	
   

  
							

 

50

 

ANNEX 1

 

FORM OF SUPPLEMENT

 

SUPPLEMENT NO.     dated as of [                     ]
(this “Supplement”), to the Amended and Restated Security Agreement dated as of
May 10, 2010 (as such may be amended, modified, supplemented or restated
hereafter, the “Security Agreement”), among ZALE CANADA CO., ZALE CANADA
DIAMOND SOURCING INC., ZALE CANADA FINCO 1, INC., ZALE CANADA FINCO 2, INC.,
FINCO HOLDING LP, FINCO PARTNERSHIP LP and ZALE CANADA HOLDING LP (each, a “Grantor”,
and collectively, the “ Grantors”) and the other grantors party thereto
from time to time, as grantors, and Bank of America, N.A., in its capacity
as  Collateral Agent (in such capacity,
the “Collateral Agent”).

 

Reference is made to the Amended and Restated Credit Agreement dated as
of May 10, 2010 (as such may be amended, modified, supplemented or
restated hereafter, the “Credit Agreement”) by and between, among
others, Zale Corporation and certain of its subsidiaries, as borrowers, the
Grantors and certain of their affiliates, as guarantors, the Lenders party
thereto and the Collateral Agent.

 

Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Credit Agreement and the
Security Agreement referred to therein.

 

The Grantors have entered into the Security Agreement in order to
induce the Lenders to make Loans.  Section 8.15
of the Security Agreement provides that new direct and indirect Subsidiaries of
the Grantors may become Grantors under the Security Agreement by execution and
delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary (the “New
Subsidiary”) is executing this Supplement in accordance with the
requirements of the Credit Agreement to become a Grantor under the Security
Agreement as consideration for Loans previously under made the Credit
Agreement.

 

Accordingly, the Collateral Agent and the New Subsidiary agree as
follows:

 

SECTION 1.  In accordance
with Section 8.15 of the Security Agreement, the New Subsidiary by its
signature below becomes a Grantor under the Security Agreement with the same
force and effect as if originally named therein as a Grantor and the New
Subsidiary hereby (a) agrees to all the terms and provisions of the
Security Agreement applicable to it as a Grantor thereunder and (b) represents
and warrants that the representations and warranties made by it as a Grantor
thereunder are true and correct on and as of the date hereof.  In furtherance of the foregoing, the New
Subsidiary, as security for the payment and performance in full of the Secured
Obligations, does hereby create and grant to the Collateral Agent, its
successors and assigns, for the benefit of the Secured Parties, a security
interest in and lien on all of the New Subsidiary’s right, title and interest
in and to the Collateral (as defined in the Security Agreement) of the New
Subsidiary.  Each reference to a “Grantor”
in the Security Agreement 

 

51

 

shall be deemed to include the New Subsidiary.  The Security Agreement is hereby incorporated
herein by reference.

 

SECTION 2.  The New
Subsidiary represents and warrants to the Collateral Agent and the other Secured
Parties that this Supplement has been duly authorized, executed and delivered
by it and constitutes its legal, valid and binding obligation, enforceable
against it in accordance with its terms.

 

SECTION 3.  This Supplement
may be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which
when taken together shall constitute a single contract.  This Supplement shall become effective when
the Collateral Agent shall have received a counterpart of this Supplement that
bears the signature of the New Subsidiary and the Collateral Agent has executed
a counterpart hereof.  Delivery of an
executed signature page to this Supplement by telecopy or other electronic
image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be effective as
delivery of a manually signed counterpart to this Supplement.

 

SECTION 4.  The New
Subsidiary hereby represents and warrants that, as of the date hereof, (a) set
forth on Schedule 1 attached hereto is a fully executed Perfection
Certificate in the form annexed to the Security Agreements, (b) set forth
on Schedule 2 attached hereto is a true and correct schedule of
Intellectual Property consisting (i) all of the New Subsidiary’s Canadian
registered Patents and Patent applications, including the name of the
registered owner, type, registration or application number and the expiration
date (if already registered) of each such Patent and Patent application owned
by the New Subsidiary, (ii) all of the New Subsidiary’s Canadian
registered Industrial Designs and Industrial Design applications including the
name of the registered owner, registration or application number and the
expiration date (if already registered) of each Industrial Design and Industrial
Design application owned by the New Subsidiary, (iii) all of the New
Subsidiary’s Canadian registered Trademarks and Trademark applications,
including the name of the registered owner, the registration or application
number and the expiration date (if already registered) of each such Trademark
and Trademark application owned by the New Subsidiary and (iv) all of the
New Subsidiary’s Canadian registered Copyrights, Copyright applications and
Copyright Licenses, including the name of the registered owner, title and, if
applicable, the registration number of each such Copyright, Copyright
application or Copyright License owned by the New Subsidiary, and (c) set
forth on Schedule 3 attached hereto is the Pledged Collateral held by
the New Subsidiary.

 

SECTION 5.  Except as
expressly supplemented hereby, the Security Agreement shall remain in full
force and effect.

 

SECTION 6.  EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SUPPLEMENT AND THE SECURED
OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE LAWS OF THE PROVINCE OF ONTARIO AND THE FEDERAL LAWS OF CANADA
APPLICABLE THEREIN.

 

52

 

SECTION 7.  In the event any
one or more of the provisions contained in this Supplement should be held
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and in the Security
Agreement shall not in any way be affected or impaired thereby (it being
understood that the invalidity of a particular provision in a particular
jurisdiction shall not in and of itself affect the validity of such provision
in any other jurisdiction).

 

SECTION 8.  All
communications and notices hereunder shall be in writing and given as provided
in Section 8.01 of the Security Agreement.

 

SECTION 9.  The New
Subsidiary agrees to reimburse the Collateral Agent for its reasonable
out-of-pocket expenses reasonably incurred in connection with this Supplement,
including the reasonable fees, other charges and disbursements of counsel for
the Collateral Agent.

 

IN WITNESS WHEREOF, the New Subsidiary and the Collateral Agent have
duly executed this Supplement to the Security Agreement as of the day and year
first above written.

 

 

	
  COLLATERAL AGENT:

  	
  BANK OF
  AMERICA, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
  NEW SUBSIDIARY:

  	
  [                                                                    ]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

53

 

Annex 2

 

Form of
Pledged Collateral Addendum

 

This Pledged Collateral Addendum, dated as of
                  
      , 20      ,
is delivered in connection with the Security Agreement referred to below.  The undersigned hereby agrees that this
Pledged Collateral Addendum may be attached to that certain Amended and
Restated Security Agreement, dated as of May 10, 2010, (as amended,
restated, supplemented or otherwise modified from time to time, the “Security
Agreement”), among the undersigned, the other Grantors named therein, to
Bank of America, N.A., as Collateral Agent. 
Initially capitalized terms used but not defined herein shall have the
meaning ascribed to such terms in the Security Agreement or the Credit
Agreement (as defined in the Security Agreement).  The undersigned hereby agrees that the
additional interests listed on this Pledged Collateral Addendum as set forth
below shall be and become part of the Pledged Collateral pledged by the undersigned
to the Collateral Agent in the Security Agreement and any pledged company set
forth on this Pledged Collateral Addendum as set forth below shall be and
become a “Pledged Company” under the Security Agreement, each with the same
force and effect as if originally named therein.

 

The undersigned hereby certifies that the
representations and warranties set forth in Section 2.08 of the Security
Agreement of the undersigned are true and correct as to the Pledged Collateral
listed herein on and as of the date hereof.

 

	
   

  	
  [                                      ]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

Pledged Interests

 

	
  Name of Grantor

  	
   

  	
  Name of Pledged

  Company

  	
   

  	
  Number of

  Shares/Units

  	
   

  	
  Class of

  Interests

  	
   

  	
  Percentage

  of Class

  Owned

  	
   

  	
  Certificate

  Nos.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pledged Notes

 

	
  Name of Grantor

  	
   

  	
  Name of Issuer

  	
   

  	
  Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

 

Annex 3

 

Form of
Canadian Patent, Industrial Design and Trademark Security Agreement

 

CANADIAN PATENT, INDUSTRIAL DESIGN AND
TRADEMARK SECURITY AGREEMENT dated as of May 10, 2010, by and among each
of: the Subsidiaries from time to time party hereto (each a “Grantor”,
and collectively, the “Grantors”) and Bank of America, N.A., in its
capacity as administrative agent and collateral agent (in such capacity, the “Agent”)
for the Lenders, in consideration of the mutual covenants contained herein and
benefits to be derived herefrom.

 

WHEREAS the
Grantors entered into an Amended and Restated Credit Agreement dated as of May 10,
2010 (as such may be amended, modified, supplemented or restated hereafter, the
“Credit Agreement”) between, among others, Zale Delaware, Inc.,
Zale Corporation, ZGCO, LLC, TXDC, L.P. and Zale Puerto Rico, Inc.
(collectively, the “Borrowers”), as borrowers, each of the Grantors and certain
of their affiliates, as guarantors, the Lenders (as defined in the Credit
Agreement) party thereto from time to time as lenders, and Bank of America,
N.A., in its capacity as Administrative Agent and Collateral Agent (as such
terms are defined in the Credit Agreement); and

 

WHEREAS the
Grantors granted security interests over all of their property to and in favour
of the Agent pursuant to the terms of a Canadian Security Agreement dated as of
May 10, 2010 (as amended, supplemented or otherwise modified from time to
time, the “Canadian Security Agreement”).

 

AND WHEREAS, the
Lenders have agreed to make Loans to the Borrowers pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement, and the
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Grantors of this Agreement;

 

NOW THEREFORE,
the Grantors and the Collateral Agent, for and on behalf of itself and the
Lenders (and each of their respective successors or assigns), hereby agree as
follows:

 

SECTION 1.  Defined Terms.  Capitalized terms used in this Agreement and
not otherwise defined herein have the meanings specified in the Credit
Agreement or Canadian Security Agreement, as applicable.   The rules of interpretation specified
in Section 1.02 of the Credit Agreement also apply to this Agreement, mutatis
mutandis.

 

SECTION 2.  Grant of Security Interest.  As security for the payment or performance,
as the case may be, in full of its Secured Obligations, each of the Grantors,
pursuant to the Canadian Security Agreement, did and hereby does grant to the
Agent, its successors and assigns, for the benefit of the Credit Parties, a
security interest in, all right, title and interest in, to and under any and
all of the following assets and properties now owned or at any time hereafter
acquired by such Grantor or in which such Grantor now has or at any time in the
future may acquire any right, title or interest (collectively, the “Patent,
Industrial Design and Trademark Collateral”):

 

 

(a)(i) any and all Canadian patents and patent
applications, including those listed on Schedule I; (ii) all inventions
and improvements described and claimed therein, including the right to make,
use and/or sell the inventions disclosed or claimed therein; (iii) all
reissues, divisions, continuations, renewals, extensions, and continuations-in-part
thereof; (iv) all income, royalties, damages, claims, and payments now or
hereafter due or payable under and with respect thereto, including damages and
payments for past, present and future infringements thereof; (v) all
rights to sue for past, present and future infringements thereof; and (vi) all
rights corresponding to any of the foregoing;

 

(b)(i) all Canadian trademarks (including
service marks), trade names, trade dress, trade styles and other source
indicators, including those listed on Schedule II, and the registrations and
applications for registration thereof and the goodwill of the business
symbolized by the foregoing; (ii) all licenses of the foregoing, whether
as licensee or licensor; (iii) all renewals of the foregoing; (iv) all
income, royalties, damages and payments now or hereafter due or payable with
respect thereto, including damages, claims and payments for past and future
infringements thereof; (v) all rights to sue for past, present and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (vi) all rights corresponding
to any of the foregoing; and

 

(c)(i) all Canadian industrial designs and
industrial design applications, including those listed on Schedule I; (ii) all
renewals of the foregoing, (iii) all income, royalties, damages and
payments now or hereafter due or payable with respect thereto, including
damages, claims and payments for past and future infringements thereof; (iv) all
rights to sue for past, present and future infringements of the foregoing,
including the right to settle suits involving claims and demands for royalties
owing; and (v) all rights corresponding to any of the foregoing.

 

SECTION 3. Security
Agreement.  The security interests
granted to the Agent herein are granted in furtherance, and not in limitation,
of the security interests granted to the Agent pursuant to the Canadian
Security Agreement.  Each Grantor hereby
acknowledges and affirms that the rights and remedies of the Agent with respect
to the Patent, Industrial Design and Trademark Collateral are more fully set
forth in the Canadian Security Agreement, the terms and provisions of which are
hereby incorporated herein by reference as if fully set forth herein.  In the event of any conflict between the
terms of this Agreement and the Canadian Security Agreement, the terms of the
Canadian Security Agreement shall govern.

 

SECTION 4. Counterparts.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and the Intercreditor Agreement constitute
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject 

 

 

matter
hereof.  Delivery of an executed
counterpart of a signature page to this Agreement by telecopy or other
electronic image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be
as effective as delivery of a manually executed counterpart of this Agreement.

 

SECTION 5. GOVERNING
LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN
DOCUMENT AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS
OF CANADA APPLICABLE THEREIN.

 

[signature page follows]

 

 

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

 

	
  ZALE
  CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
  ZALE CANADA FINCO 1, INC.

  	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

 

	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
   

  	
  BANK OF AMERICA, N.A.
  on its own behalf and as Agent  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

 

Annex 4

 

Form of
Canadian Copyright Security Agreement

 

CANADIAN COPYRIGHT SECURITY AGREEMENT dated
as of May 10, 2010, by and among each of: the Subsidiaries from time to
time party hereto (each a “Grantor”, and collectively, the “Grantors”)
and Bank of America, N.A., in its capacity as administrative agent and
collateral agent (in such capacity, the “Agent”) for the Lenders, in
consideration of the mutual covenants contained herein and benefits to be
derived herefrom.

 

WHEREAS the
Grantors entered into an Amended and Restated Credit Agreement dated as of May 10
2010 (as such may be amended, modified, supplemented or restated hereafter, the
“Credit Agreement”) between, among others, Zale Delaware, Inc.,
Zale Corporation, ZGCO, LLC, TXDC, L.P. and Zale Puerto Rico, Inc.
(collectively, the “Borrowers”), as borrowers, each of the Grantors and certain
of their affiliates, as guarantors, the Lenders (as defined in the Credit
Agreement) party thereto from time to time as lenders, and Bank of America,
N.A., in its capacity as Administrative Agent and Collateral Agent (as such
terms are defined in the Credit Agreement); and

 

WHEREAS the
Grantors granted security interests over all of their property to and in favour
of the Agent pursuant to the terms of a Canadian Security Agreement dated as of
May 10, 2010 (as amended, supplemented or otherwise modified from time to
time, the “Canadian Security Agreement”).

 

AND WHEREAS, the
Lenders have agreed to make Loans to the Borrowers pursuant to, and upon the
terms and subject to the conditions specified in, the Credit Agreement, and the
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Grantors of this Agreement;

 

NOW THEREFORE,
the Grantors and the Collateral Agent, for and on behalf of itself and the
Lenders (and each of their respective successors or assigns), hereby agree as
follows:

 

SECTION 1.  Defined Terms.  Capitalized terms used in this Agreement and
not otherwise defined herein have the meanings specified in the Credit
Agreement or Canadian Security Agreement, as applicable.   The rules of interpretation specified
in Section 1.02 of the Credit Agreement also apply to this Agreement,
mutatis mutandis.

 

SECTION 2.  Grant of Security Interest.  As security for the payment or performance,
as the case may be, in full of its Secured Obligations, each of the Grantors,
pursuant to the Canadian Security Agreement, did and hereby does grant to the
Agent, its successors and assigns, for the benefit of the Credit Parties, a
security interest in, all right, title and interest in, to and under any and
all of the following assets and properties now owned or at any time hereafter
acquired by such Grantor or in which such Grantor now has or at any time in the
future may acquire any right, title or interest (collectively, the “Copyright
Collateral”):

 

 

(a) (a) all copyrights, rights and
interests in copyrights, works protectable by copyright, copyright
registrations and copyright applications subject to the copyright laws of
Canada, including those listed on Schedule I; (b) all extensions and
renewals of any of the foregoing; (c) all income, royalties, damages, and
payments now or hereafter due and/or payable under any of the foregoing,
including damages or payments for past, present or future infringements for any
of the foregoing; (d) the right to sue for past, present and future
infringements of any of the foregoing; and (e) all rights corresponding to
any of the foregoing;

 

SECTION 3. Security
Agreement.  The security interests
granted to the Agent herein are granted in furtherance, and not in limitation,
of the security interests granted to the Agent pursuant to the Canadian
Security Agreement.  Each Grantor hereby
acknowledges and affirms that the rights and remedies of the Agent with respect
to the Copyright Collateral are more fully set forth in the Canadian Security
Agreement, the terms and provisions of which are hereby incorporated herein by
reference as if fully set forth herein. 
In the event of any conflict between the terms of this Agreement and the
Canadian Security Agreement, the terms of the Canadian Security Agreement shall
govern.

 

SECTION 4. Counterparts.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and the Intercreditor Agreement constitute
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof. 
Delivery of an executed counterpart of a signature page to this
Agreement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually executed
counterpart of this Agreement.

 

SECTION 5. GOVERNING
LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN
DOCUMENT AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO, AND THE FEDERAL LAWS
OF CANADA APPLICABLE THEREIN.

 

[signature page follows]

 

 

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

 

	
  ZALE
  CANADA CO.

  	
   

  	
  ZALE CANADA DIAMOND SOURCING INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
   

  	
  Title:

  

 

 

	
  ZALE CANADA FINCO 1, INC.

  	
   

  	
  ZALE CANADA FINCO 2, INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

 

	
  FINCO HOLDING LP by its general
  partner ZALE CANADA FINCO 2, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title: 

  	
   

  	
   

  	
  Title:

  

 

 

	
  ZALE CANADA HOLDING LP
  by its general partner ZALE INTERNATIONAL, INC.

  	
   

  	
  FINCO PARTNERSHIP LP by
  its general partner ZALE CANADA FINCO 2,
  INC.

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
  Name: 

  	
   

  	
   

  	
  Name:

  
	
   

  	
  Title: 

  	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
   

  	
  BANK OF AMERICA, N.A.
  on its own behalf and as Agent  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Per:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

 

Exhibit C

 

Form of
Assignment and Assumption

 

This
Assignment and Assumption (this “Assignment and Assumption”) is dated as
of the Effective Date set forth below and is entered into by and between [·] (the “Assignor”) and [·] (the “Assignee”).  Capitalized terms used but not defined herein
shall have the meanings given to them in the Credit Agreement (as defined
below), receipt of a copy of which is hereby acknowledged by the Assignee.  The Terms and Conditions set forth in Annex
1 attached hereto (the “Terms and Conditions”) are hereby agreed to
and incorporated herein by reference and made a part of this Assignment and
Assumption as if set forth herein in full.

 

The
Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee
hereby irrevocably purchases and assumes from the Assignor, subject to and in
accordance with the Terms and Conditions and the Credit Agreement, as of the
Effective Date (i) all of the Assignor’s rights and obligations in its
capacity as a Lender under the Credit Agreement and any other Loan Documents
and (ii) to the extent permitted to be assigned under applicable law, all
claims, suits, causes of action and any other right of the Assignor (in its
capacity as a Lender) against any Person, whether known or unknown, arising
under or in connection with the Credit Agreement or any Loan Document,
including contract claims, tort claims, malpractice claims, statutory claims
and all other claims at law or in equity related to the rights and obligations
sold and assigned pursuant to clause (i) above (the rights and obligations
sold and assigned pursuant to clauses (i) and (ii) above being
referred to herein collectively as the “Assigned Interest”).  Such sale and assignment is without recourse
to the Assignor and, except as expressly provided in this Assignment and
Assumption, without representation or warranty by the Assignor.

 

	
  1.

  	
   

  	
  Assignor:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Assignee:

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  Borrower:

  	
   

  	
  Zale Corporation

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Administrative Agent:

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Credit Agreement:

  	
   

  	
  The Credit Agreement dated as of May 10,
  2010, by and among Zale Corporation, as Borrower, the lenders from time to
  time party thereto and Z Investment Holdings, LLC,
  as the Administrative Agent

  

 

(1)               Select as applicable.

 

 

	
  6.

  	
   

  	
  Assigned Interest:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Aggregate Amount of

  All Outstanding Loans

  	
   

  	
  Amount of Loans

  Assigned

  	
   

  	
  Percentage of

  Loans Assigned(2)

  	
   

  
	
   

  	
   

  	
  Term Loan
  Facility

  	
   

  	
  $

  	
    

  	
   

  	
  $

  	
    

  	
   

  	
   

  	
  %

  
														

 

Effective Date: 
                          
      , 20      
[TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE
OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

 

The Assignee, if not already
a Lender, agrees to deliver to the Administrative Agent a completed
Administrative Questionnaire in which the Assignee designates one or more
credit contacts to whom all syndicate-level information (which may contain
material non-public information about the Loan Parties and their Related
Parties) shall be made available and who shall receive such information in
accordance with the Assignee’s compliance procedures and applicable laws,
including federal, state and provincial securities laws.

 

The terms set forth in this
Assignment and Assumption are hereby agreed to:

 

 

	
   

  	
  [ASSIGNOR]

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [ASSIGNEE]

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

(2)               Set forth, to at least 9
decimals, as a percentage of the Loans of all Lenders thereunder.

 

 

	
  [Consented to by:

  
	
   

  	
   

  
	
   

  	
  Z INVESTMENT HOLDINGS, LLC, as Administrative
  Agent

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ZALE CORPORATION,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
  ](3)

  

 

(3) To be included if
required under Section 10.06(b) of the Credit Agreement.

 

 

TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

 

1.            Representations and Warranties.

 

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

 

(b)          Assignee.  The Assignee (a) represents and warrants
that (i) it has full power and authority, and has taken all action
necessary, to execute and deliver this Assignment and Assumption and to
consummate the transactions contemplated hereby and to become a Lender under
the Credit Agreement, (ii) it satisfies the requirements specified in the
Credit Agreement that are required to be satisfied by it in order to acquire
the Assigned Interest and become a Lender, (iii) from and after the
Effective Date, it shall be bound by the provisions of the Credit Agreement as
a Lender thereunder and, to the extent of the Assigned Interest, shall have the
obligations of a Lender thereunder, (iv) it has received a copy of the
Credit Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 6.01 thereof, as applicable, and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Assumption and to
purchase the Assigned Interest, on the basis of which it has made such analysis
and decision independently and without reliance on the Administrative Agent or
any other Lender and (v) attached to the Assignment and Assumption is any
documentation required to be delivered by it pursuant to the terms of the
Credit Agreement, duly completed and executed by the Assignee and (b) agrees
that (i) it will, independently and without reliance on the Administrative
Agent, the Assignor or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Loan Documents and (ii) it
will perform in accordance with the terms of the Loan Documents all obligations
required to be performed by it as a Lender thereunder.

 

2.            Payments.  From and after the Effective Date, the
Administrative Agent shall make all payments in respect of the Assigned
Interest (including payments of principal, interest, fees and other amounts) to
the Assignor for amounts which have accrued to but excluding the Effective Date
and to the Assignee for amounts which have accrued from and after the Effective
Date.

 

 

3.            General
Provisions.  This
Assignment and Assumption shall be binding upon and inure to the benefit of,
the parties hereto and their respective successors and assigns.  This Assignment and Assumption may be
executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which,
when taken together, shall constitute one instrument.  Delivery of an executed counterpart of a
signature page of this Assignment and Assumption by telecopy or other
electronic image scan transmission (e.g., “pdf” or “tif” via e-mail) shall be
as effective as delivery of a manually executed counterpart of this Assignment
and Assumption.  This Assignment and
Assumption shall be governed by, and construed in accordance with, the laws of
the State of New York.

 

 

 

Exhibit D-1

 

[FORM OF] TERM FACILITY
GUARANTY AGREEMENT (this “Agreement”) dated as of May 10, 2010 by
and among each of: ZALE CORPORATION, a Delaware corporation (the “Borrower”),
the Subsidiaries from time to time party hereto and Z INVESTMENT HOLDINGS, LLC,
as administrative agent (in such capacity, the “Administrative Agent”),
on behalf of itself and the other Credit Parties (as defined herein), in
consideration of the mutual covenants contained herein and benefits to be
derived herefrom.

 

Reference is made to the Credit Agreement of
even date herewith (as such may be amended, modified, supplemented or restated
hereafter, the “Credit Agreement”) by and among (i) the Borrower, (ii) the
Lenders named therein and (iii) Z Investment Holdings, LLC, as Administrative
Agent.

 

The Lenders have agreed to make Loans to the
Borrower pursuant to, and upon the terms and subject to the conditions
specified in, the Credit Agreement.  The
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Guarantors of this Agreement.

 

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

 

ARTICLE I

 

Definitions

 

SECTION 1.01.  Definition of Terms Used Herein.  All capitalized terms used but not defined
herein shall have the meanings set forth in the Credit Agreement.

 

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

 

“Credit
Agreement” shall have the meaning assigned to such term in
the recitals to this Agreement.

 

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

 

“Guarantors” shall mean, collectively,
the Subsidiaries of the Borrower identified as Guarantors on Schedule 1
attached hereto and each other Subsidiary of the Borrower that becomes a party
to this Agreement as a Guarantor after the Closing Date pursuant to Section 5.13;
provided that if a Subsidiary is released from its obligations as a
Guarantor hereunder as provided in Section 5.12(b), such Subsidiary shall
cease to be a Guarantor hereunder effective upon such release.

 

 

SECTION 1.03.  Rules of Interpretation.  The rules of
interpretation specified in Section 1.02 of the Credit Agreement
also apply to this Agreement.

 

ARTICLE II

 

The Guarantees

 

SECTION 2.01.  Guarantee.  Each Guarantor unconditionally guarantees to
each of the Credit Parties, jointly with the other Guarantors and severally, as
a primary obligor and not merely as a surety, by way of an independent payment
obligation, the due and punctual payment and performance of its Guaranteed
Obligations.  Each Guarantor further
agrees that its Guaranteed Obligations may be extended or renewed, in whole or
in part, without notice to or further assent from it, and that it will remain
bound upon its guarantee notwithstanding any extension or renewal of any such
Guaranteed Obligation.  Each Guarantor
waives presentment to, demand of payment from and protest to the Borrower or
any other Loan Party of any of its Guaranteed Obligations, and also waives
notice of acceptance of its guarantee and notice of protest for nonpayment.

 

SECTION 2.02.  Guarantee of Payment.  Each Guarantor further agrees that its
guarantee hereunder constitutes a guarantee of payment when due and not of
collection, and waives any right to require that any resort be had by the
Administrative Agent or any other Credit Party to any security held for the
payment of any of its Guaranteed Obligations or to any balance of any deposit
account or credit on the books of any Credit Party in favor of the Borrower,
any other Loan Party or any other Person.

 

SECTION 2.03.  No Limitations.  (a) 
Except for termination or release of a Guarantor’s obligations hereunder as
expressly provided in Section 5.12, the obligations of each Guarantor
hereunder shall not be subject to any reduction, limitation, impairment or
termination for any reason, including any claim of waiver, release, surrender,
alteration or compromise, and shall not be subject to any defense or set-off,
counterclaim, recoupment or termination whatsoever by reason of the invalidity,
illegality or unenforceability of the Guaranteed Obligations or otherwise.  Without limiting the generality of the
foregoing, except for termination or release of its obligations hereunder as
expressly provided in Section 5.12, the obligations of each Guarantor
hereunder shall not be discharged or impaired or otherwise affected by:

 

(i)        the
failure of any Credit Party to assert any claim or demand or to enforce any
right or remedy under the provisions of any Loan Document or otherwise,

 

(ii)       any
rescission, waiver, amendment or modification of, or any release from any of
the terms or provisions of, any Loan Document or any other agreement, including
with respect to any other Guarantor under this Agreement,

 

(iii)      the
release of any security held by any Credit Party for any of the Guaranteed
Obligations,

 

2

 

(iv)      any
default, failure or delay, wilful or otherwise, in the performance of the
Guaranteed Obligations,

 

(v)       any
other act or omission that may or might in any manner or to any extent vary the
risk of any Guarantor or otherwise operate as a discharge of any Guarantor as a
matter of law or equity (other than the indefeasible payment in full in cash of
all the Obligations (excluding contingent obligations as to which no claim has
been made)),

 

(vi)      any
illegality, lack of validity or lack of enforceability of any Guaranteed
Obligation,

 

(vii)     any
change in the corporate existence, structure or ownership of any Loan Party, or
any insolvency, bankruptcy, reorganization or other similar proceeding
affecting any Loan Party or its assets or any resulting release or discharge of
any Obligation,

 

(viii)    the
existence of any claim, set-off or other rights that any Guarantor may have at
any time against the Borrower, the Administrative Agent, any other Credit Party
or any other Person, whether in connection with the Credit Agreement or any
unrelated transaction,

 

(ix)       any
action permitted or authorized hereunder, or

 

(x)        any
other circumstance (including any statute of limitations), or any existence of
or reliance on any representation by the Administrative Agent, any Credit Party
or any other Person, that might otherwise constitute a defense to, or a legal
or equitable discharge of, the Borrower, any Guarantor or any other guarantor
or surety (other than the indefeasible payment in full in cash of all the
Obligations (excluding contingent obligations as to which no claim has been
made)).

 

(b) To the fullest extent permitted by
applicable Laws, each Guarantor waives any defense based on or arising out of
any defense of the Borrower or any other Loan Party or the unenforceability of
the Guaranteed Obligations or any part thereof from any cause, or the cessation
from any cause of the liability of the Borrower or any other Loan Party, other
than the indefeasible payment in full in cash of all the Guaranteed Obligations
(excluding contingent obligations as to which no claim has been made).  The Administrative Agent and the other Credit
Parties may, at their election, foreclose on any security held by one or more
of them by one or more judicial or nonjudicial sales, accept an assignment of
any such security in lieu of foreclosure, compromise or adjust any part of the
Guaranteed Obligations, make any other accommodation with the Borrower or any
other Loan Party or exercise any other right or remedy available to them
against the Borrower or any other Loan Party, without affecting or impairing in
any way the liability of any Guarantor hereunder except to the extent the
Guaranteed Obligations have been indefeasibly paid in full in cash (excluding
contingent obligations as to which no claim has been made); provided
that the foregoing shall not be construed to grant any right or remedy other
than those set forth elsewhere in the Loan Documents.  To the fullest extent 

 

3

 

permitted by applicable law, each Guarantor waives any defense arising
out of any such election even though such election operates, pursuant to
applicable law, to impair or to extinguish any right of reimbursement or
subrogation or other right or remedy of such Guarantor against the Borrower or
any other Loan Party, as the case may be, or any security.

 

SECTION 2.04.  Reinstatement.  Each Guarantor agrees that, unless released
pursuant to Section 5.12(b), its guarantee hereunder shall continue to be
effective or be reinstated, as the case may be, if at any time payment, or any
part thereof, of any its Guaranteed Obligations is rescinded or must otherwise
be restored by any Credit Party upon the bankruptcy or reorganization of the
Borrower or any other Loan Party.

 

SECTION 2.05.  Agreement to Pay; Subrogation.  In furtherance of the foregoing and not in
limitation of any other right that the Administrative Agent or any other Credit
Party has at law or in equity against any Guarantor by virtue hereof, upon the
failure of the Borrower or any other Loan Party to pay any Guaranteed
Obligation when and as the same shall become due, whether at maturity, by
acceleration, after notice of prepayment or otherwise, each Guarantor
guaranteeing such Guaranteed Obligation hereby promises to and will forthwith
pay, or cause to be paid, to the Administrative Agent for distribution to the
applicable Credit Parties in cash the amount of such unpaid Guaranteed
Obligation.  Upon payment by any
Guarantor of any sums to the Administrative Agent as provided above, all rights
of such Guarantor against the Borrower or any other Loan Party arising as a
result thereof by way of right of subrogation, contribution, reimbursement,
indemnity or otherwise shall in all respects be subject to Article III.

 

SECTION 2.06.  Information.  Each Guarantor assumes all responsibility for
keeping itself informed of the Borrower’s and each other Loan Party’s financial
condition and assets, and of all other circumstances bearing upon the risk of
nonpayment of its Guaranteed Obligations and the nature, scope and extent of
the risks that such Guarantor assumes and incurs hereunder, and agrees that
none of the Credit Parties will have any duty to advise such Guarantor of
information known to it or any of them regarding such circumstances or risks.

 

SECTION 2.07.  Payments Free of Taxes.  Any and all payments by or on account of any
obligation of any Guarantor hereunder or under any other Loan Document shall be
made free and clear of and without deduction or withholding for any Indemnified
Taxes on the same terms and to the same extent that payments by the Borrower
are required to be so made pursuant to the terms of Section 3.01 of the
Credit Agreement. The provisions of Section 3.01 of the Credit Agreement
shall apply to each Guarantor, mutatis
mutandis.

 

4

 

ARTICLE III

 

Indemnity, Subrogation and Subordination

 

SECTION 3.01.  Indemnity and Subrogation.  In addition to all such rights of indemnity
and subrogation as the Guarantors may have under applicable law (but subject to
Section 3.03) in respect of any payment hereunder, the Borrower agrees
that (a) in the event a payment of any obligation of the Borrower shall be
made by any Guarantor under this Agreement, the Borrower shall indemnify such
Guarantor for the full amount of such payment and such Guarantor shall be
subrogated to the rights of the Person to whom such payment shall have been
made to the extent of such payment and (b) in the event any assets of any
Guarantor shall be sold pursuant to any Security Document to satisfy in whole
or in part a Secured Obligation (as defined in the Security Agreement) owed to
any Credit Party, the Borrower shall indemnify such Guarantor in an amount
equal to the greater of the book value or the fair market value of the assets
so sold.

 

SECTION 3.02.  Contribution and Subrogation.  Each Guarantor (a “Contributing Party”)
agrees (subject to Section 3.03) that, in the event a payment shall be
made by any other Guarantor hereunder in respect of any Guaranteed Obligation
that is guaranteed by the Contributing Party or any assets of any other
Guarantor (other than the Borrower) shall be sold pursuant to any Security
Document to satisfy any Secured Obligation owed to any Credit Party and such
other Guarantor (the “Claiming Party”) shall not have been fully
indemnified as provided in Section 3.01, each Contributing Party shall
indemnify the Claiming Party in an amount equal to the amount of such payment,
multiplied by a fraction of which the numerator shall be the net worth of the
Contributing Party on the date hereof and the denominator shall be the sum of
the respective net worths of all the Guarantors on the date hereof (or, in the case
of any Guarantor becoming a party hereto pursuant to Section 5.13, the
date of the Supplement pursuant to which such Guarantor became a party
hereto).  Any Contributing Party making
any payment to a Claiming Party pursuant to this Section 3.02 shall be subrogated
to the rights of such Claiming Party under Section 3.01 to the extent of
such payment.  For purposes of this
Agreement, “net worth” of any Guarantor as of any date shall mean (a) the
amount of the total assets of such Guarantor as of such date minus (b) the
amount of the total liabilities of such Guarantor as of such date, in each case
that would be reflected on a balance sheet prepared on a consolidated basis as
of such date in accordance with GAAP.

 

SECTION 3.03.  Subordination.  (a)  Notwithstanding any provision of
this Agreement to the contrary, each Guarantor hereby agrees not to exercise
any rights under Sections 3.01 and 3.02 or any other rights of indemnity,
contribution or subrogation under applicable Laws or otherwise in respect of
payments hereunder unless and until all of the Guaranteed Obligations shall
have been indefeasibly paid in full in cash. 
No failure on the part of the Borrower or any Guarantor to make the
payments required by Sections 3.01 and 3.02 (or any other payments required
under applicable law or otherwise) shall in any respect limit the obligations
and liabilities of any Guarantor with respect to its obligations hereunder, and
each Guarantor shall remain liable for the full amount of the obligations of
such Guarantor hereunder.

 

5

 

(b)  Each Guarantor hereby agrees that
all Indebtedness and other monetary obligations owed by it to any other
Guarantor or any Subsidiary that is not a Guarantor shall be fully subordinated
to the indefeasible payment in full in cash of the Obligations; provided
that such subordination shall not operate to prevent the payment of such
Indebtedness and other monetary obligations (including, without limitation, to
the extent permitted by the Credit Agreement, dividends) between the Guarantors
and/or any Subsidiary except after and during the continuation of an Event of
Default.

 

ARTICLE IV

 

Representations and Warranties

 

SECTION 4.01.  Each Guarantor represents and warrants to the
Administrative Agent and the other Credit Parties that (a) the execution,
delivery and performance by such Guarantor of this Agreement have been duly
authorized by all necessary corporate or other organizational action, and that
this Agreement has been duly and validly executed by such Guarantor and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms, except to the extent enforcement may be limited by
applicable bankruptcy, insolvency and other similar laws affecting creditor’s
rights generally, and (b) all representations and warranties set forth in
the Credit Agreement as to such Guarantor are true and correct in all material
respects.

 

ARTICLE V

 

Miscellaneous

 

SECTION 5.01.  Notices.  All communications and notices hereunder
shall (except as otherwise expressly permitted herein) be in writing and given
as provided in Section 10.02 of the Credit Agreement.

 

SECTION 5.02.  Waivers; Amendment.  (a)  The rights, remedies, powers,
privileges and discretions of the Administrative Agent hereunder (herein, the “Administrative
Agent’s Rights and Remedies”) shall be cumulative and not exclusive of any
rights or remedies which it would otherwise have.  No delay or omission by the Administrative
Agent in exercising or enforcing any of the Administrative Agent’s Rights and
Remedies shall operate as, or constitute, a waiver thereof.  No waiver by the Administrative Agent of any
Event of Default or of any Default under any other agreement shall operate as a
waiver of any other Event of Default or other Default hereunder or under any
other agreement.  No single or partial
exercise of any of the Administrative Agent’s Rights or Remedies, and no
express or implied agreement or transaction of whatever nature entered into
between the Administrative Agent and any Person, at any time, shall preclude
the other or further exercise of the Administrative Agent’s Rights and
Remedies.  No waiver by the
Administrative Agent of any of the Administrative Agent’s Rights and Remedies
on any one occasion shall be deemed a waiver on any subsequent occasion, nor
shall it be deemed a continuing waiver. 
The Administrative Agent’s Rights and Remedies may be exercised at such
time or times and in such order of preference as the Administrative Agent may
determine.  The 

 

6

 

Administrative Agent’s Rights and Remedies may be exercised without
resort or regard to any other source of satisfaction of the Obligations.  No waiver of any provisions of this Agreement
or any other Loan Document or consent to any departure by any Guarantor
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 Guarantor in
any case shall entitle such Guarantor or any other Guarantor to any other or
further notice or demand in similar or other circumstances.

 

(b) Neither this Agreement nor any
provision hereof may be waived, amended or modified except pursuant to a
written agreement entered into between the Administrative Agent and the
Guarantor or Guarantors with respect to whom such waiver, amendment or
modification is to apply, subject to any consent required in accordance with Section 10.01
of the Credit Agreement.

 

SECTION 5.03.  Administrative Agent’s Fees and Expenses;
Indemnification.  (a)  Without
limiting any of their obligations under the Credit Agreement or the other Loan
Documents, the Guarantors shall, jointly and severally, pay all Credit Party
Expenses incurred in connection with this Agreement.

 

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

 

(c) Any such amounts payable as provided
hereunder shall be additional Guaranteed Obligations.  All amounts due under this Section 5.03
shall be payable on written demand therefor.

 

SECTION 5.04.  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 Guarantors that are contained in this Agreement shall bind and
inure to the benefit 

 

7

 

each Guarantor and of its respective successors and assigns.  This Agreement shall be binding upon each
Guarantor and the Administrative Agent and their respective successors and
assigns, and shall inure to the benefit of each Guarantor, the Administrative
Agent and the other Credit Parties and their respective successors and assigns,
except that no Guarantor shall have the right to assign or transfer its rights
or obligations hereunder (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 Guarantor and may be
amended, modified, supplemented, waived or released with respect to any
Guarantor without the approval of any other Guarantor and without affecting the
obligations of any other Guarantor hereunder.

 

SECTION 5.05.  Survival of Agreement.  All covenants, agreements, representations
and warranties made by the Guarantors herein and in the certificates or other
instruments prepared or delivered in connection with or pursuant to this
Agreement or any other Loan Document shall be considered to have been relied
upon by the Administrative Agent and the Credit Parties and shall survive the
execution and delivery of this Agreement and the other Loan Documents and the
making of any Loans, and shall continue in full force and effect as long as the
Obligations are outstanding and unpaid, and as long as the Commitments have not
expired or terminated.

 

SECTION 5.06.  Counterparts.  This Agreement may be executed counterparts
(and by different parties hereto on different counterparts), each of which
shall constitute an original, but all of which when taken together shall
constitute a single contract.  Delivery
of an executed counterpart of a signature page to this Agreement by
telecopy or other electronic image scan transmission (e.g., “pdf” or “tif” via
e-mail) shall be as effective as delivery of a manually executed counterpart to
this Agreement.

 

SECTION 5.07.  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 5.08.  Governing Law.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS AGREEMENT AND THE GUARANTEED OBLIGATIONS SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS
LAW, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

 

SECTION 5.09.  Jurisdiction; Consent to Service of
Process.  (a)  EACH OF THE
GUARANTORS AND THE ADMINISTRATIVE AGENT AGREES THAT ANY SUIT FOR THE
ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE 

 

8

 

OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR ANY FEDERAL COURT SITTING
THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND
IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE
VENUE OF ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT FORUM.

 

(b) EACH PARTY TO THIS AGREEMENT
IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES
IN SECTION 5.01.  NOTHING IN THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS
AGREEMENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

 

SECTION 5.10.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT
OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY).  EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT
IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS SET FORTH IN THIS
SECTION 5.10.

 

SECTION 5.11.  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 5.12.  Termination.  (a)  Subject to Section 2.04, and
except for those provisions which expressly survive the termination thereof,
this Agreement and the Guarantees made herein shall terminate when all the
Obligations have been paid in full (excluding contingent obligations as to
which no claim has been made) and the Lenders have no further commitment to
lend under the Credit Agreement.

 

(b) The Administrative Agent may release
any Guarantor from its obligations hereunder (i) if such Person ceases to
be a Subsidiary as a result of a transaction permitted by the Credit Agreement;
provided that, if so
required by the Credit Agreement, the Required Lenders shall have consented to
such transaction and the terms of such consent did not provide otherwise or (ii) upon
the effectiveness of any written consent to such release pursuant to Section 10.01
of the Credit Agreement.

 

9

 

SECTION 5.13.  Additional Guarantors.  Pursuant to Section 6.11 of the Credit
Agreement, after the Closing Date, each new direct or indirect Subsidiary of
the Borrower is required to enter into this Agreement as a Guarantor.  Upon execution and delivery by the
Administrative Agent and a Subsidiary of an instrument in the form attached as
Annex 1 hereto, such Subsidiary shall become a Guarantor hereunder, with the
same force and effect as if originally named as such herein.  The execution and delivery of any such
instrument shall not require the consent of any other Guarantor hereunder.  The rights and obligations of each Guarantor
hereunder shall remain in full force and effect notwithstanding the addition of
any Subsidiary as a party to this Agreement.

 

10

 

 

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

 

 

	
   

  	
  ZALE
  CORPORATION,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

GUARANTORS:

 

 

	
   

  	
  ZALE
  DELAWARE, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  INTERNATIONAL, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZAP,
  INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  PUERTO RICO, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  EMPLOYEES’ CHILD CARE ASSOCIATION, INC.,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZGCO,
  LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZCSC,
  LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  TXDC,
  L.P.,

  by ZALE DELAWARE, INC., its general partner,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  ZALE
  CANADA FINCO, LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

 

	
   

  	
  Z
  INVESTMENT HOLDINGS, LLC,

  
	
   

  	
   

  	
   

  
	
   

  	
  by

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

Schedule to the

Term Facility Guaranty Agreement

 

Initial Guarantors

 

 

Annex 1 to the

Term Facility Guaranty Agreement

 

Form of Supplement

 

SUPPLEMENT NO.      dated as of
[·] (this “Supplement”),
to the Term Facility Guaranty Agreement dated as of [·] (the “Facility Guaranty”), among ZALE
CORPORATION, a Delaware corporation (the “Borrower”), the Subsidiaries
from time to time party thereto (each, a “Guarantor”, and collectively,
the “Guarantors”) and Z INVESTMENT HOLDINGS, LLC, in its capacity as
administrative agent (in such capacity, the “Administrative Agent”).

 

Reference is made to the Credit Agreement
dated as of May 10, 2010 (as such may be amended, modified, supplemented
or restated hereafter, the “Credit Agreement”), by and among (i) the
Borrower, (ii) the Lenders named therein and (iii) Z Investment Holdings,
LLC, as Administrative Agent.

 

Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to such terms in the
Credit Agreement and the Facility Guaranty referred to therein.

 

The Guarantors have entered into the Facility
Guaranty in order to induce the Lenders to make Loans.  Section 5.13 of the Facility Guaranty
provides that new direct and indirect Subsidiaries of the Borrower may become
Guarantors under the Facility Guaranty by execution and delivery of an
instrument in the form of this Supplement. 
The undersigned Subsidiary (the “New Subsidiary”) is executing
this Supplement to become a Guarantor under the Facility Guaranty as
consideration for Loans previously made under the Credit Agreement.

 

Accordingly,
the Administrative Agent and the New Subsidiary agree as follows:

 

SECTION 1.  In accordance with Section 5.13 of the
Facility Guaranty, the New Subsidiary by its signature below becomes a
Guarantor under the Facility Guaranty with the same force and effect as if
originally named therein as a Guarantor, and the New Subsidiary hereby (a) agrees
to all the terms and provisions of the Facility Guaranty applicable to it as a
Guarantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Guarantor thereunder are true
and correct on and as of the date hereof. 
Each reference to a “Guarantor” in the Facility Guaranty shall be deemed
to include the New Subsidiary.  The
Facility Guaranty is hereby incorporated herein by reference.

 

SECTION 2.  The New Subsidiary represents and warrants to
the Administrative Agent and the other Credit Parties that this Supplement has
been duly 

 

 

authorized, executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms.

 

SECTION 3.  This Supplement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Supplement shall become effective when the Administrative Agent shall have
received a counterpart of this Supplement that bears the signature of the New
Subsidiary and the Administrative Agent has executed a counterpart hereof.  Delivery of an executed signature page to
this Supplement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually signed
counterpart to this Supplement.

 

SECTION 4.  Except as expressly supplemented hereby, the
Facility Guaranty shall remain in full force and effect.

 

SECTION 5.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS SUPPLEMENT AND THE GUARANTEED OBLIGATIONS SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS
LAW, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

 

SECTION 6.  In the event any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions contained herein and in the Facility Guaranty 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 7.  All communications and notices hereunder
shall be in writing and given as provided in Section 5.01 of the Facility
Guaranty.

 

SECTION 8.  The New Subsidiary agrees to reimburse the
Administrative Agent for its reasonable out-of-pocket expenses in connection
with this Supplement, including the reasonable fees, other charges and
disbursements of counsel for the Administrative Agent.

 

 

IN WITNESS WHEREOF, the New Subsidiary and
the Administrative Agent have duly executed this Supplement to the Facility
Guaranty as of the day and year first above written.

 

 

	
   

  	
  [NAME
  OF NEW SUBSIDIARY],

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  [·], as Administrative
  Agent, on behalf of itself and the other Credit Parties,

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

 

Exhibit D-2

 

[FORM OF] TERM FACILITY
CANADIAN GUARANTY AGREEMENT (this “Agreement”) dated as of May 10,
2010 by and among each of: ZALE CORPORATION, a Delaware corporation (the “Borrower”),
the Subsidiaries from time to time party hereto and Z INVESTMENT HOLDINGS, LLC,
as administrative agent (in such capacity, the “Administrative Agent”),
on behalf of itself and the other Credit Parties (as defined herein), in
consideration of the mutual covenants contained herein and benefits to be
derived herefrom.

 

Reference is made to the Credit Agreement of
even date herewith (as such may be amended, modified, supplemented or restated
hereafter, the “Credit Agreement”) by and among (i) the Borrower, (ii) the
Lenders named therein and (iii) Z Investment Holdings, LLC, as
Administrative Agent.

 

The Lenders have agreed to make Loans to the
Borrower pursuant to, and upon the terms and subject to the conditions
specified in, the Credit Agreement.  The
obligations of the Lenders to make Loans are each conditioned upon, among other
things, the execution and delivery by the Guarantors of this Agreement.

 

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

 

ARTICLE I

 

Definitions

 

SECTION 1.01.  Definition of Terms Used Herein.  All capitalized terms used but not defined
herein shall have the meanings set forth in the Credit Agreement.

 

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

 

“Credit
Agreement” shall have the meaning assigned to such term in
the recitals to this Agreement.

 

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

 

“Guarantors” shall mean, collectively,
the Subsidiaries of the Borrower identified as Guarantors on Schedule 1
attached hereto and each other Subsidiary of the Borrower that becomes a party
to this Agreement as a Guarantor after the Closing Date pursuant to SECTION 5.14.  ; provided that if a Subsidiary is
released from its obligations as a Guarantor hereunder as provided in SECTION 5.13.  (b), such Subsidiary shall cease to be a
Guarantor hereunder effective upon such release.

 

 

“US Guarantors” shall mean,
collectively, the Subsidiaries of the Borrower identified as guarantors in the
Term Facility Guaranty Agreement, and each other Subsidiary of the Borrower
that becomes a party to said Term Facility Guaranty Agreement as a guarantor
after the Closing Date.

 

“Term Facility Guaranty Agreement”
means the term facility guaranty agreement of even date herewith by and among
the Borrower, the US Guarantors and the Administrative Agent, as such may be
amended, modified, supplemented or restated hereafter.

 

SECTION 1.03.  Rules of Interpretation.  The rules of
interpretation specified in Section 1.02 of the Credit Agreement
also apply to this Agreement.

 

ARTICLE II

 

The Guarantees

 

SECTION 2.01.  Guarantee.  Each Guarantor unconditionally guarantees to
each of the Credit Parties, jointly with the other Guarantors and the US
Guarantors and severally, as a primary obligor and not merely as a surety, by
way of an independent payment obligation, the due and punctual payment and
performance of its Guaranteed Obligations. 
Each Guarantor further agrees that its Guaranteed Obligations may be
extended or renewed, in whole or in part, without notice to or further assent
from it, and that it will remain bound upon its guarantee notwithstanding any
extension or renewal of any such Guaranteed Obligation.  Each Guarantor waives presentment to, demand
of payment from and protest to the Borrower or any other Loan Party of any of
its Guaranteed Obligations, and also waives notice of acceptance of its
guarantee and notice of protest for nonpayment.

 

SECTION 2.02.  Guarantee of Payment.  Each Guarantor further agrees that its
guarantee hereunder constitutes a guarantee of payment when due and not of
collection, and waives any right to require that any resort be had by the
Administrative Agent or any other Credit Party to any security held for the
payment of any of its Guaranteed Obligations or to any balance of any deposit
account or credit on the books of any Credit Party in favor of the Borrower, any
other Loan Party or any other Person, and each Guarantor renounces all benefits
of discussion and division.

 

SECTION 2.03.  Indemnity.  If any or all of the Guaranteed Obligations
are not duly performed by the Borrower and are not performed by the Guarantors
under SECTION 2.01.  for any reason
whatsoever, each Guarantor will, as a separate and distinct obligation,
indemnify and save harmless the Agent and the other Credit Parties from and
against all losses resulting from the failure of the Borrower to duly perform
such Guaranteed Obligations.

 

SECTION 2.04.  No Limitations.  (a) 
Except for termination or release of a Guarantor’s obligations hereunder as
expressly provided in SECTION 5.13. 
, the obligations of each Guarantor hereunder shall not be subject to
any reduction, limitation, 

 

 

impairment or termination for any reason, including any claim of
waiver, release, surrender, alteration or compromise, and shall not be subject
to any defense or set-off, counterclaim, recoupment or termination whatsoever
by reason of the invalidity, illegality or unenforceability of the Guaranteed
Obligations or otherwise.  Without
limiting the generality of the foregoing, except for termination or release of
its obligations hereunder as expressly provided in SECTION 5.13.  , the obligations of each Guarantor hereunder
shall not be discharged or impaired or otherwise affected by:

 

(i)        the
failure of any Credit Party to assert any claim or demand or to enforce any
right or remedy under the provisions of any Loan Document or otherwise,

 

(ii)       any
rescission, waiver, amendment or modification of, or any release from any of
the terms or provisions of, any Loan Document or any other agreement, including
with respect to any other Guarantor under this Agreement or the lack of validity
or enforceability of any terms of any Loan Document,

 

(iii)      the
release of any security held by any Credit Party for any of the Guaranteed
Obligations,

 

(iv)      any
default, failure or delay, wilful or otherwise, in the performance of the
Guaranteed Obligations,

 

(v)       any
other act or omission that may or might in any manner or to any extent vary the
risk of any Guarantor or otherwise operate as a discharge of any Guarantor as a
matter of law or equity (other than the indefeasible payment in full in cash of
all the Obligations (excluding contingent obligations as to which no claim has
been made)),

 

(vi)      any
illegality, lack of validity or lack of enforceability of any Guaranteed
Obligation,

 

(vii)     any
change in the corporate existence, structure or ownership of any Loan Party, or
any insolvency, bankruptcy, reorganization or other similar proceeding
affecting any Loan Party or its assets or any resulting release or discharge of
any Obligation,

 

(viii)    the
existence of any claim, set-off or other rights that any Guarantor may have at
any time against the Borrower, the Administrative Agent, any other Credit Party
or any other Person, whether in connection with the Credit Agreement or any
unrelated transaction,

 

(ix)       any
action permitted or authorized hereunder, or

 

(x)        any
other circumstance (including any statute of limitations), or any existence of
or reliance on any representation by the Administrative Agent, any Credit Party
or any other Person, that might otherwise constitute a defense to, or a legal
or equitable discharge of, the Borrower, any Guarantor, any US Guarantor or 

 

 

any other guarantor or surety (other than the indefeasible payment in
full in cash of all the Obligations (excluding contingent obligations as to
which no claim has been made)).

 

(b) To the fullest extent permitted by
applicable Laws, each Guarantor waives any defense based on or arising out of
any defense of the Borrower or any other Loan Party or the unenforceability of
the Guaranteed Obligations or any part thereof from any cause, or the cessation
from any cause of the liability of the Borrower or any other Loan Party, other
than the indefeasible payment in full in cash of all the Guaranteed Obligations
(excluding contingent obligations as to which no claim has been made).  The Administrative Agent and the other Credit
Parties may, at their election, foreclose on any security held by one or more
of them by one or more judicial or nonjudicial sales, accept an assignment of
any such security in lieu of foreclosure, compromise or adjust any part of the
Guaranteed Obligations, make any other accommodation with the Borrower or any
other Loan Party or exercise any other right or remedy available to them
against the Borrower or any other Loan Party, without affecting or impairing in
any way the liability of any Guarantor hereunder except to the extent the
Guaranteed Obligations have been indefeasibly paid in full in cash (excluding
contingent obligations as to which no claim has been made); provided
that the foregoing shall not be construed to grant any right or remedy other
than those set forth elsewhere in the Loan Documents.  To the fullest extent permitted by applicable
law, each Guarantor waives any defense arising out of any such election even
though such election operates, pursuant to applicable law, to impair or to
extinguish any right of reimbursement or subrogation or other right or remedy
of such Guarantor against the Borrower or any other Loan Party, as the case may
be, or any security.

 

(c) Notwithstanding any other provision
contained in this Agreement or any other Loan Document, with respect to the
Guarantors (in their capacity as such) incorporated, formed or established in
Canada or any province or territory thereof (the “Canadian Guarantors”),
if a “secured creditor” (as that term is defined under the Bankruptcy
and Insolvency Act (Canada)) is determined by a court of competent
jurisdiction not to include a Person to whom obligations are owed on a joint or
joint and several basis, then the obligations of each Canadian Guarantor under
this Agreement, to the extent such obligations are secured, only shall be
several obligations and not joint or joint and several obligations.

 

SECTION 2.05.  Reinstatement.  Each Guarantor agrees that, unless released
pursuant to SECTION 5.13.  (b), its
guarantee hereunder shall continue to be effective or be reinstated, as the
case may be, if at any time payment, or any part thereof, of any its Guaranteed
Obligations is rescinded or must otherwise be restored by any Credit Party upon
the bankruptcy or reorganization of the Borrower or any other Loan Party.

 

SECTION 2.06.  Agreement to Pay; Subrogation.  In furtherance of the foregoing and not in
limitation of any other right that the Administrative Agent or any other Credit
Party has at law or in equity against any Guarantor by virtue hereof, upon the
failure of the Borrower or any other Loan Party to pay any Guaranteed
Obligation when and as the same shall become due, whether at maturity, by
acceleration, after notice of 

 

 

prepayment or otherwise, each Guarantor guaranteeing such Guaranteed
Obligation hereby promises to and will forthwith pay, or cause to be paid, to
the Administrative Agent for distribution to the applicable Credit Parties in
cash the amount of such unpaid Guaranteed Obligation.  Upon payment by any Guarantor of any sums to
the Administrative Agent as provided above, all rights of such Guarantor
against the Borrower or any other Loan Party arising as a result thereof by way
of right of subrogation, contribution, reimbursement, indemnity or otherwise
shall in all respects be subject to Article III.

 

SECTION 2.07.  Information.  Each Guarantor assumes all responsibility for
keeping itself informed of the Borrower’s and each other Loan Party’s financial
condition and assets, and of all other circumstances bearing upon the risk of
nonpayment of its Guaranteed Obligations and the nature, scope and extent of
the risks that such Guarantor assumes and incurs hereunder, and agrees that
none of the Credit Parties will have any duty to advise such Guarantor of
information known to it or any of them regarding such circumstances or risks.

 

SECTION 2.08.  Payments Free of Taxes.  Any and all payments by or on account of any
obligation of any Guarantor hereunder or under any other Loan Document shall be
made free and clear of and without deduction or withholding for any Indemnified
Taxes on the same terms and to the same extent that payments by the Borrower
are required to be so made pursuant to the terms of Section 3.01 of the
Credit Agreement. The provisions of Section 3.01 of the Credit Agreement
shall apply to each Guarantor, mutatis
mutandis.

 

SECTION 2.09.  Interest Act (Canada). The Guarantors
acknowledge that certain of the rates of interest applicable to the Guaranteed
Obligations may be computed on the basis of a year of 360 days or 365 days, as
the case may be and paid for the actual number of days elapsed.  For purposes of the Interest Act (Canada),
whenever any interest is calculated using a rate based on a year of 360 days or
365 days, as the case may be, such rate determined pursuant to such
calculation, when expressed as an annual rate is equivalent to (i) the
applicable rate based on a year of 360 days or 365 days, as the case may be, (ii) multiplied
by the actual number of days in the calendar year in which the period for such
interest is payable (or compounded) ends, and (iii) divided by 360 or 365,
as the case may be.

 

SECTION 2.10.  No Prejudice to Credit Parties or
Administrative Agent. The Credit Parties and the Administrative Agent are
not prejudiced in any way in the right to enforce any provision of this
Agreement by any act or failure to act on the part of the Borrower, the Credit
Parties or the Administrative Agent.  The
Administrative Agent and the Credit Parties may, at any time and from time to
time, in such manner as any of them may determine is expedient, without any
consent of, or notice to, any Guarantor and without impairing or releasing the
obligations of any Guarantor (i) change the manner, place, time or terms
of payment or performance of the Guarantee Obligations, (ii) renew or
alter the Guaranteed Obligations, (iii) amend, vary, modify, supplement or
replace any Loan Document or any other related document or instrument, (iv) discontinue,
reduce, renew, increase, abstain from renewing or otherwise vary any credit or
credit facilities to, 

 

 

any transaction with, the Borrower or any other Person, (v) release,
compound or vary the liability of the Borrower or any other Person liable in
any manner under or in respect of the Guaranteed Obligations, (vi) take or
abstain from taking securities or collateral from any other Person, or from
perfecting securities or collateral of any other Person, (vii) exercise or
enforce or refrain from exercising or enforcing any right or security against
the Borrower, the Guarantors or any other Person, (viii) accept
compromises or arrangement from any Person, (ix) apply any sums from time
to time received to the Guaranteed Obligations, or any part thereof, and change
any such application in whole or in part from time to time, (x) otherwise
deal with, or waiver or modify their right to deal with, any Person and
security.  In their dealings with the
Borrower, the Administrative Agent and the Credit Parties need not enquire into
the authority or power of any Person purporting to act for or on behalf of the
Borrower.

 

SECTION 2.11.  Successors of the Borrower. The
guarantee made under this Agreement will not be revoked by any change in the
constitution of the Borrower.

 

SECTION 2.12.  Continuing Guarantee and Continuing
Obligations.  The obligation of the
Guarantors under SECTION 2.01.  is a
continuing guarantee, and the obligations of the Guarantors under SECTION 2.02.  and SECTION 2.03.  are continuing obligations.  Each of SECTION 2.01.  , SECTION 2.02.  and SECTION 2.03.  extends to all present and future Guaranteed
Obligations, applies to and secures the ultimate balance of the Guaranteed
Obligations due or remaining due to the Administrative Agent and the Credit
Parties and is binding as a continuing obligation of the Guarantors until the
Administrative Agent and the Credit Parties release the Guarantors.  This Agreement will continue to be effective
or be reinstated, as the case may be, if at any time any payment of any of the
Guaranteed Obligations is rescinded or must otherwise be returned by the
Administrative Agent or the Credit Parties upon the insolvency, bankruptcy or
reorganization of the Borrower or otherwise, all as though the payment had not
been made.

 

ARTICLE III

 

Indemnity, Subrogation and Subordination

 

SECTION 3.01.  Indemnity and Subrogation.  In addition to all such rights of indemnity
and subrogation as the Guarantors may have under applicable law (but subject to
SECTION 3.03.  ) in respect of any
payment hereunder, the Borrower agrees that (a) in the event a payment of
any obligation of the Borrower shall be made by any Guarantor under this
Agreement, the Borrower shall indemnify such Guarantor for the full amount of
such payment and such Guarantor shall be subrogated to the rights of the Person
to whom such payment shall have been made to the extent of such payment and (b) in
the event any assets of any Guarantor shall be sold pursuant to any Security
Document to satisfy in whole or in part a Secured Obligation (as defined in the
Security Agreement) owed to any Credit Party, the Borrower shall indemnify such
Guarantor in an amount equal to the greater of the book value or the fair
market value of the assets so sold.

 

 

SECTION 3.02.  Contribution and Subrogation.  Each Guarantor (a “Contributing Party”)
agrees (subject to SECTION 3.03.  )
that, in the event a payment shall be made by any other Guarantor hereunder in
respect of any Guaranteed Obligation that is guaranteed by the Contributing
Party or any assets of any other Guarantor (other than the Borrower) shall be
sold pursuant to any Security Document to satisfy any Secured Obligation owed
to any Credit Party and such other Guarantor (the “Claiming Party”)
shall not have been fully indemnified as provided in SECTION 3.01.  , each Contributing Party shall indemnify the
Claiming Party in an amount equal to the amount of such payment, multiplied by
a fraction of which the numerator shall be the net worth of the Contributing
Party on the date hereof and the denominator shall be the sum of the respective
net worths of all the Guarantors on the date hereof (or, in the case of any
Guarantor becoming a party hereto pursuant to SECTION 5.14.  , the date of the Supplement pursuant to
which such Guarantor became a party hereto). 
Any Contributing Party making any payment to a Claiming Party pursuant
to this SECTION 3.02.  shall be
subrogated to the rights of such Claiming Party under SECTION 3.01.  to the extent of such payment.  For purposes of this Agreement, “net worth”
of any Guarantor as of any date shall mean (a) the amount of the total
assets of such Guarantor as of such date minus (b) the amount of the total
liabilities of such Guarantor as of such date, in each case that would be
reflected on a balance sheet prepared on a consolidated basis as of such date
in accordance with GAAP.

 

SECTION 3.03.  Subordination.  (a)  Notwithstanding any provision of
this Agreement to the contrary, each Guarantor hereby agrees not to exercise
any rights under SECTION 3.01.  and SECTION 3.02.  or any other rights of indemnity,
contribution or subrogation under applicable Laws or otherwise in respect of
payments hereunder unless and until all of the Guaranteed Obligations shall
have been indefeasibly paid in full in cash. 
No failure on the part of the Borrower or any Guarantor to make the
payments required by SECTION 3.01. 
and SECTION 3.02.  (or any
other payments required under applicable law or otherwise) shall in any respect
limit the obligations and liabilities of any Guarantor with respect to its
obligations hereunder, and each Guarantor shall remain liable for the full
amount of the obligations of such Guarantor hereunder.

 

(b)  Each Guarantor hereby agrees that
all Indebtedness and other monetary obligations owed by it to any other
Guarantor or any Subsidiary that is not a Guarantor shall be fully subordinated
to the indefeasible payment in full in cash of the Obligations; provided
that such subordination shall not operate to prevent the payment of such
Indebtedness and other monetary obligations (including, without limitation, to
the extent permitted by the Credit Agreement, dividends) between the Guarantors
and/or any Subsidiary except after and during the continuation of an Event of
Default.

 

ARTICLE IV

 

Representations and Warranties

 

SECTION 4.01.  Each Guarantor represents and warrants to the
Administrative Agent and the other Credit Parties that (a) the execution,
delivery and performance by such Guarantor of this Agreement have been duly
authorized by all

 

 

 

necessary corporate or other organizational action, and that this
Agreement has been duly and validly executed by such Guarantor and constitutes
its legal, valid and binding obligation, enforceable against it in accordance
with its terms, except to the extent enforcement may be limited by applicable
bankruptcy, insolvency and other similar laws affecting creditor’s rights
generally, and (b) all representations and warranties set forth in the
Credit Agreement as to such Guarantor are true and correct in all material
respects.

 

ARTICLE V

 

Miscellaneous

 

SECTION 5.01.  Notices.  All communications and notices hereunder
shall (except as otherwise expressly permitted herein) be in writing and given
as provided in Section 10.02 of the Credit Agreement.

 

SECTION 5.02.  Waivers; Amendment.  (a)  The rights, remedies, powers,
privileges and discretions of the Administrative Agent hereunder (herein, the “Administrative
Agent’s Rights and Remedies”) shall be cumulative and not exclusive of any
rights or remedies which it would otherwise have.  No delay or omission by the Administrative
Agent in exercising or enforcing any of the Administrative Agent’s Rights and
Remedies shall operate as, or constitute, a waiver thereof.  No waiver by the Administrative Agent of any
Event of Default or of any Default under any other agreement shall operate as a
waiver of any other Event of Default or other Default hereunder or under any
other agreement.  No single or partial
exercise of any of the Administrative Agent’s Rights or Remedies, and no
express or implied agreement or transaction of whatever nature entered into
between the Administrative Agent and any Person, at any time, shall preclude
the other or further exercise of the Administrative Agent’s Rights and
Remedies.  No waiver by the
Administrative Agent of any of the Administrative Agent’s Rights and Remedies
on any one occasion shall be deemed a waiver on any subsequent occasion, nor
shall it be deemed a continuing waiver. 
The Administrative Agent’s Rights and Remedies may be exercised at such
time or times and in such order of preference as the Administrative Agent may
determine.  The Administrative Agent’s
Rights and Remedies may be exercised without resort or regard to any other
source of satisfaction of the Obligations. 
No waiver of any provisions of this Agreement or any other Loan Document
or consent to any departure by any Guarantor 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 Guarantor in any case shall entitle such Guarantor
or any other Guarantor to any other or further notice or demand in similar or
other circumstances.

 

(b) Neither this Agreement nor any
provision hereof may be waived, amended or modified except pursuant to a
written agreement entered into between the Administrative Agent and the
Guarantor or Guarantors with respect to whom such waiver, amendment or modification
is to apply, subject to any consent required in accordance with Section 10.01
of the Credit Agreement.

 

 

SECTION 5.03.  Administrative Agent’s Fees and Expenses;
Indemnification.  (a)  Without
limiting any of their obligations under the Credit Agreement or the other Loan
Documents, the Guarantors shall, jointly and severally, pay all Credit Party
Expenses incurred in connection with this Agreement.

 

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

 

(c) Any such amounts payable as provided
hereunder shall be additional Guaranteed Obligations.  All amounts due under this SECTION 5.03.  shall be payable on written demand therefor.

 

SECTION 5.04.  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 Guarantors that are contained in this Agreement shall
bind and inure to the benefit each Guarantor and of its respective successors
and assigns.  This Agreement shall be
binding upon each Guarantor and the Administrative Agent and their respective
successors and assigns, and shall inure to the benefit of each Guarantor, the
Administrative Agent and the other Credit Parties and their respective
successors and assigns, except that no Guarantor shall have the right to assign
or transfer its rights or obligations hereunder (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
Guarantor and may be amended, modified, supplemented, waived or released with
respect to any Guarantor without the approval of any other Guarantor and
without affecting the obligations of any other Guarantor hereunder.

 

SECTION 5.05.  Survival of Agreement.  All covenants, agreements, representations
and warranties made by the Guarantors herein and in the certificates or other
instruments prepared or delivered in connection with or pursuant to this
Agreement 

 

 

or any other Loan Document shall be considered to have been relied upon
by the Administrative Agent and the Credit Parties and shall survive the
execution and delivery of this Agreement and the other Loan Documents and the
making of any Loans, and shall continue in full force and effect as long as the
Obligations are outstanding and unpaid, and as long as the Commitments have not
expired or terminated.

 

SECTION 5.06.  Counterparts.  This Agreement may be executed counterparts
(and by different parties hereto on different counterparts), each of which
shall constitute an original, but all of which when taken together shall
constitute a single contract.  Delivery
of an executed counterpart of a signature page to this Agreement by
telecopy or other electronic image scan transmission (e.g., “pdf” or “tif” via
e-mail) shall be as effective as delivery of a manually executed counterpart to
this Agreement.

 

SECTION 5.07.  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 5.08.  Governing Law. Except as otherwise
expressly provided herein, in all respects, including all matters of
construction, validity and performance, this Agreement and the Guaranteed
Obligations shall be governed by, and construed and enforced in accordance with
the laws of the Province of Ontario and the federal laws of Canada applicable
therein.

 

SECTION 5.09.  Jurisdiction; Consent to Service of
Process.  (a) Each of the
Guarantors and the Administrative Agent agrees that any suit for the
enforcement of this Agreement may be brought in the courts of the Province of
Ontario sitting in Toronto, Ontario and consents to the nonexclusive jurisdiction
of such courts and irrevocably and unconditionally waives, to the fullest
extent permitted by applicable Law, any objection that it may now or hereafter
have to the venue of any such court or that such suit is brought in an
inconvenient forum.

 

(b) Each party to this Agreement
irrevocably consents to service of process in the manner provided for notices
in SECTION 5.01.  Nothing in this
Agreement or any other Loan Document will affect the right of any party to this
Agreement to serve process in any other manner permitted by applicable Law.

 

(c) WAIVER OF JURY
TRIAL.  EACH PARTY HERETO HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY
OR 

 

 

OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT
IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS SET FORTH IN THIS
SECTION 5.09.

 

SECTION 5.10.  Judgment Currency

 

(a) If for the purposes of obtaining
judgment in any court it is necessary to convert all or any part of the
Guaranteed Obligations or any other amount due to a Credit Party or the
Administrative Agent in respect of any of the Guarantors’ obligations under
this Agreement in any currency (the “Original
Currency”) into another currency (the “Other Currency”), each Guarantor, to the fullest extent that
it may effectively do so, agrees that the rate of exchange used shall be that
at which, in accordance with normal banking procedures, the Credit Party or
Administrative Agent, as the case may be, could purchase the Original Currency
with the Other Currency on the Business Day preceding that on which final
judgment is paid or satisfied.

 

(b) The obligations of each Guarantor in
respect of any sum due in the Original Currency from it to any Credit Party or
the Administrative Agent shall, notwithstanding any judgment in any Other
Currency, be discharged only to the extent that on the Business Day following
receipt by such Credit Party or the Administrative Agent, as the case may be,
of any sum adjudged to be so due in such Other Currency such Credit Party or
Administrative Agent, as the case may be, may, in accordance with its normal
banking procedures, purchase the Original Currency with such Other
Currency.  If the amount of the Original
Currency so purchased is less than the sum originally due to the Credit Party in
the Original Currency, each Guarantor agrees, as a separate obligation and
notwithstanding any such judgment, to indemnify the Credit Party or
Administrative Agent, as the case may be, against such loss, and if the amount
of the Original Currency so purchased exceeds the sum originally due to the
Credit Party or Administrative Agent, as the case may be, in the Original
Currency, the Credit party or Administrative Agent, as the case may be, agrees
to remit such excess to such Guarantor

 

SECTION 5.11.  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 5.12.  Limitations Act.  Notwithstanding the provisions of the Limitations Act, 2002 (Ontario), a claim
may be brought on this Agreement at any time within 6 years from the date on
which demand for payment of the Guaranteed Obligations is made to the
Guarantors in accordance with the terms of this Agreement.

 

SECTION 5.13.  Termination.  (a)  Subject to SECTION 2.04.  , and except for those provisions which
expressly survive the termination thereof, this Agreement and the Guarantees
made herein shall terminate when all the Obligations have 

 

 

been paid in full (excluding contingent obligations as to which no
claim has been made) and the Lenders have no further commitment to lend under
the Credit Agreement.

 

(b) The Administrative Agent may release
any Guarantor from its obligations hereunder (i) if such Person ceases to
be a Subsidiary as a result of a transaction permitted by the Credit Agreement;
provided that, if so
required by the Credit Agreement, the Required Lenders shall have consented to
such transaction and the terms of such consent did not provide otherwise or (ii) upon
the effectiveness of any written consent to such release pursuant to Section 10.01
of the Credit Agreement.

 

SECTION 5.14.  Additional Guarantors.  Pursuant to Section 6.11 of the Credit
Agreement, after the Closing Date, each new direct or indirect Subsidiary of
the Borrower formed under the laws of Canada or any Province thereof is
required to enter into this Agreement as a Guarantor.  Upon execution and delivery by the
Administrative Agent and a Subsidiary of an instrument in the form attached as
Annex 1 hereto, such Subsidiary shall become a Guarantor hereunder, with the
same force and effect as if originally named as such herein.  The execution and delivery of any such
instrument shall not require the consent of any other Guarantor hereunder.  The rights and obligations of each Guarantor
hereunder shall remain in full force and effect notwithstanding the addition of
any Subsidiary as a party to this Agreement.

 

[signature pages follow]

 

 

Schedule to the

Term Facility Canadian Guaranty Agreement

 

Initial Guarantors

 

Zale
Canada Co.

Zale
Canada Diamond Sourcing Inc.

Zale Canada Finco 1, Inc.

Zale Canada Finco 2, Inc.

Finco
Holding LP

Finco
Partnership LP

Zale
Canada Holding LP

 

 

Annex 1 to the

Term Facility Canadian Guaranty Agreement

 

Form of Supplement

 

SUPPLEMENT NO.      dated as of
[·] (this “Supplement”),
to the Term Facility Canadian Guaranty Agreement dated as of [·] (the “Facility Guaranty”), among ZALE
CORPORATION, a Delaware corporation (the “Borrower”), the Subsidiaries
from time to time party thereto (each, a “Guarantor”, and collectively,
the “Guarantors”) and Z INVESTMENT HOLDINGS, LLC, in its capacity as
administrative agent (in such capacity, the “Administrative Agent”).

 

Reference is made to the Credit Agreement
dated as of [·], 2010 (as
such may be amended, modified, supplemented or restated hereafter, the “Credit
Agreement”), by and among (i) the Borrower, (ii) the Lenders
named therein and (iii) Z INVESTMENT HOLDINGS, LLC, as Administrative
Agent.

 

Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to such terms in the
Credit Agreement and the Facility Guaranty referred to herein.

 

The Guarantors have entered into the Facility
Guaranty in order to induce the Lenders to make Loans.  SECTION 5.14.  of the Facility Guaranty provides that new
direct and indirect Subsidiaries of the Borrower may become Guarantors under
the Facility Guaranty by execution and delivery of an instrument in the form of
this Supplement.  The undersigned
Subsidiary (the “New Subsidiary”) is executing this Supplement to become
a Guarantor under the Facility Guaranty as consideration for Loans previously
made under the Credit Agreement.

 

Accordingly,
the Administrative Agent and the New Subsidiary agree as follows:

 

SECTION 1.  In accordance with SECTION 5.14.  of the Facility Guaranty, the New Subsidiary
by its signature below becomes a Guarantor under the Facility Guaranty with the
same force and effect as if originally named therein as a Guarantor, and the
New Subsidiary hereby (a) agrees to all the terms and provisions of the
Facility Guaranty applicable to it as a Guarantor thereunder and (b) represents
and warrants that the representations and warranties made by it as a Guarantor
thereunder are true and correct on and as of the date hereof.  Each reference to a “Guarantor” in the
Facility Guaranty shall be deemed to include the New Subsidiary.  The Facility Guaranty is hereby incorporated
herein by reference.

 

SECTION 2.  The New Subsidiary represents and warrants to
the Administrative Agent and the other Credit Parties that this Supplement has
been duly 

 

 

authorized, executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms.

 

SECTION 3.  This Supplement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Supplement shall become effective when the Administrative Agent shall have
received a counterpart of this Supplement that bears the signature of the New
Subsidiary and the Administrative Agent has executed a counterpart hereof.  Delivery of an executed signature page to
this Supplement by telecopy or other electronic image scan transmission (e.g., “pdf”
or “tif” via e-mail) shall be as effective as delivery of a manually signed
counterpart to this Supplement.

 

SECTION 4.  Except as expressly supplemented hereby, the
Facility Guaranty shall remain in full force and effect.

 

SECTION 5.  Except as otherwise expressly provided
herein, in all respects, including all matters of construction, validity and
performance, this Agreement and the Guaranteed Obligations shall be governed
by, and construed and enforced in accordance with the laws of the Province of
Ontario and the federal laws of Canada applicable therein.

 

SECTION 6.  In the event any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions contained herein and in the Facility Guaranty 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 7.  All communications and notices hereunder
shall be in writing and given as provided in SECTION 5.01.  of the Facility Guaranty.

 

SECTION 8.  The New Subsidiary agrees to reimburse the
Administrative Agent for its reasonable out-of-pocket expenses in connection
with this Supplement, including the reasonable fees, other charges and
disbursements of counsel for the Administrative Agent.

 

 

IN WITNESS WHEREOF, the New Subsidiary and
the Administrative Agent have duly executed this Supplement to the Facility
Guaranty as of the day and year first above written.

 

 

	
   

  	
  [NAME
  OF NEW SUBSIDIARY],

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [·], as Administrative
  Agent, on behalf of itself and the other Credit Parties,

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

 

Exhibit E

 

Brand Contribution Levels

 

 

Schedule 1.01(a) to the

Credit Agreement

 

Guarantors

 

Zale Delaware, Inc.

Zale Puerto Rico, Inc.

ZGCO, LLC

TXDC, L.P.

Zale Canada Co.

Zale Canada Finco, LLC

Zale
International, Inc.

Zale
Employees’ Child Care Association, Inc.

ZAP, Inc.

ZCSC,
LLC

Finco
Holding LP

Finco
Partnership LP

Zale
Canada Diamond Sourcing Inc.

Zale Canada Finco 1, Inc.

Zale Canada Finco 2, Inc.

Zale Canada Holding LP

 

 

Scheedule 1.01(b) to the

Credit Agreement

 

Canadian Loan Parties

 

Zale Canada Co. 

Zale Canada Diamond Sourcing Inc. 

Finco Holding LP

Finco Partnership LP

Zale Canada Finco 1, Inc.

Zale Canada Finco 2, Inc.

Zale Canada Holding LP

 

 

Schedule 2.01 to the

Credit Agreement

 

Lender and Commitments

 

	
  Lender

  	
   

  	
  Commitment

  	
   

  
	
  Z Investment Holdings, LLC

  	
   

  	
  $

  	
  150,000,000.00

  	
   

  
					

 

 

Schedule 4.01(a)(viii) to the

Credit Agreement

 

Security Documents

 

1.  Security Agreement

 

2.  Canadian Security Agreement

 

3.  Patent and Trademark Security Agreement dated
as of the Closing Date, by and among each of the grantors party thereto and Z
Investment Holdings, LLC, in its capacity as administrative agent

 

4.  Copyright Security Agreement dated as of the
Closing Date, by and among each of the grantors party thereto and Z Investment
Holdings, LLC, in its capacity as administrative agent

 

5.  Canadian Patent and Trademark Security
Agreement dated as of the Closing Date, by and among each of the grantors party
thereto and Z Investment Holdings, LLC, in its capacity as administrative agent

 

6.  Canadian Copyright Security Agreement dated
as of the Closing Date, by and among each of the grantors party thereto and Z
Investment Holdings, LLC, in its capacity as administrative agent

 

7.  Ratification to Security Agreement dated as
of the Closing Date, between Zale Puerto Rico, Inc. and Z Investment
Holdings, LLC, in its capacity as administrative agent

 

 

Schedule 4.01(a)(ix) to the

Credit Agreement

 

Loan Documents

 

1.  Facility Guaranty

 

2.  Canadian Facility

 

3.  Intercompany Subordination Agreement

 

 

Schedule 5.05(c) to the

Credit Agreement

 

Real Property

 

[SEE ATTACHED]

 

 

Schedule 5.05(d) to the

Credit Agreement

 

Inventory on Consignment and Subject to Liens

 

[SEE ATTACHED]

 

 

Schedule 5.06 to the

Credit Agreement

 

Litigation and Environmental Matters

 

NONE.

 

 

Schedule 5.12 to the

Credit Agreement

 

Subsidiaries

 

	
  Subsidiary

  	
   

  	
  Owner

  
	
   

  	
   

  	
   

  
	
  Zale
  Canada Co.

  	
   

  	
  Finco
  Holding LP (11.44% common)

  Finco Partnership LP (88.56% common)

  Zale Puerto
  Rico, Inc. (100% preferred)

  
	
   

  	
   

  	
   

  
	
  ZC
  Partnership, LP

  	
   

  	
  Finco
  Partnership LP (100% LP)

  Finco Holding LP (100% GP)

  
	
   

  	
   

  	
   

  
	
  Zale
  Canada Diamond Sourcing Inc.

  	
   

  	
  Zale
  Canada Co.

  
	
   

  	
   

  	
   

  
	
  Finco
  Partnership LP

  	
   

  	
  Finco Holding LP (100% LP)

  Zale Canada Finco 2, Inc. (100% GP)

  
	
   

  	
   

  	
   

  
	
  Finco Holding LP

  	
   

  	
  Zale Canada Finco 1, Inc. (100% LP)

  Zale Canada Finco 2, Inc. (100% GP)

  
	
   

  	
   

  	
   

  
	
  Zale Canada Finco 1, Inc.

  	
   

  	
  Zale Canada Holding LP

  
	
   

  	
   

  	
   

  
	
  Zale Canada Finco, LLC

  	
   

  	
  Zale Canada Holding LP

  
	
   

  	
   

  	
   

  
	
  Zale
  International, Inc.

  	
   

  	
  Zale Corporation

  
	
   

  	
   

  	
   

  
	
  Zale
  Delaware, Inc.

  	
   

  	
  Zale
  Corporation

  
	
   

  	
   

  	
   

  
	
  Zale
  Canada Holding LP

  	
   

  	
  Zale
  Corporation (88.36% LP)

  Zale International, Inc. (11.64% GP)

  
	
   

  	
   

  	
   

  
	
  Zale
  Puerto Rico, Inc.

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  ZGCO,
  LLC

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  ZAP, Inc.

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  ZCSC,
  LLC

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  Zale
  Life Insurance Company

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  Zale
  Indemnity Company

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  Jewel
  Re-Insurance Ltd.

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  Zale
  Employees’ Child Care Association, Inc.

  	
   

  	
  Zale
  Delaware, Inc.

  

 

 

	
  Subsidiary

  	
   

  	
  Owner

  
	
   

  	
   

  	
   

  
	
  Dobbins
  Jewelers, Inc.

  	
   

  	
  Zale
  Delaware, Inc.

  
	
   

  	
   

  	
   

  
	
  Zale
  Canada Finco 2, Inc.

  	
   

  	
  Zale
  International, Inc.

  
	
   

  	
   

  	
   

  
	
  TXDC,
  L.P.

  	
   

  	
  ZGCO, LLC (100% LP)

  Zale Delaware, Inc. (100% GP)

  

 

 

Schedule 5.13 to the

Credit Agreement

 

Insurance

 

	
  Type
  of Coverage

  	
   

  	
  Carrier

  	
   

  	
  Policy Number

  	
   

  	
  Broker

  
	
  Primary
  Property

  	
   

  	
  Lexington
  Insurance Company

  	
   

  	
  25031426

  	
   

  	
  Lockton
  Companies

  
	
  Excess
  Property

  	
   

  	
  Continental
  Casualty Company

  	
   

  	
  RMP2057299215

  	
   

  	
  Lockton
  Companies

  
	
  Excess
  Property

  	
   

  	
  One
  Beacon (Homeland Insurance Company of NY)

  	
   

  	
  YSP2718

  	
   

  	
  Lockton
  Companies

  
	
  Boiler &
  Machinery

  	
   

  	
  Zurich
  American Insurance Company

  	
   

  	
  BM930949306

  	
   

  	
  Lockton
  Companies

  

 

 

Schedule 5.20 to the

Credit Agreement

 

Material Contracts

 

1. 
Merchant
Services Agreement dated as of July 10, 2000, between Zale Delaware, Inc.,
Zale Puerto Rico, Inc. , and Citibank USA, N.A, successor-in-interest to
Hurley State Bank;  Amendment to the
Merchant Services Agreement dated as of April 4, 2003;  Amendment to the Merchant Services Agreement
dated as of June 8, 2009

 

2.  Private Label Credit Card Program Agreement
dated as of March 1, 2007, between Zale Canada Co., TXDC, L.P. and Citi
Commerce Solutions of Canada Ltd.; Amendment Number One to the Private Label
Credit Card Program Agreement dated as of June 8th, 2009

 

3.  E-Commerce Agreement dated as of May 24,
2005, between Zale Delaware, Inc., Zale Canada Co. and GSI Commerce
Solutions, Inc.

 

4.  Master Agreement for Information Technology
Services dated August 1, 2005, between ACS Commercial Solutions, Inc.
and Zale Delaware, Inc.

 

 

Schedule 7.01A to the

Credit Agreement

 

Indebtedness

 

Indebtedness
consisting of intercompany loans listed on Schedule 7.07

 

 

Schedule 7.02 to the

Credit Agreement

 

Liens

 

[SEE ATTACHED]

 

 

Schedule 7.04A to the

Credit Agreement

 

Investments

 

Account
No. 487498743 held by Zale Delaware, Inc. with Fidelity Brokerage
Services LLC

 

Investments
consisting of intercompany loans listed on Schedule 7.07

 

Investments
consisting of equity interests in Schedule 5.12

 

 

Schedule 7.07 to the

Credit Agrement

 

Transactions with Affiliates

 

Transactions
pursuant to the Warrant Agreement

 

Purchases

 

TXDC,
L.P. sells finished and manufactured goods to Zale Delaware, Inc. for a
mark-up.

TXDC,
L.P. sells finished and manufactured goods to Zale Puerto Rico, Inc. for a
mark-up.

TXDC,
L.P. sells manufactured goods to Zale Canada Co. currently at cost.  New Transfer Pricing Study will determine
proper mark-up.

 

Intercompany Loans

 

	
  Holder

  	
   

  	
  Instrument

  
	
   

  	
   

  	
   

  
	
  Zale
  Corporation

  	
   

  	
  Amended
  and Restated Promissory Note dated May 4, 2010 made by Zale Canada
  Holding LP in the original principal amount of CDN$112,802,464

  
	
   

  	
   

  	
   

  
	
  Zale
  Canada Co.

  	
   

  	
  Amended
  and Restated Intercompany Promissory Note dated July 15, 2009 made by
  Zale Corporation in the original principal amount of CDN$100,000,000

  
	
   

  	
   

  	
   

  
	
  Zale
  Corporation

  	
   

  	
  Amended
  and Restated Intercompany Note dated May 4, 2010 made by Zale
  Delaware, Inc. in the original principal amount of $750,000,000

  
	
   

  	
   

  	
   

  
	
  Zale
  International, Inc.

  	
   

  	
  Amended
  and Restated Promissory Note dated May 4, 2010 made by Zale Canada
  Holding LP in the original principal amount of CDN$14,863,249

  
	
   

  	
   

  	
   

  
	
  ZC
  Partnership, LP

  	
   

  	
  Amended
  and Restated Term Promissory Note dated May 10, 2010 made by Zale Canada
  Co. in the original principal amount of Cdn. $114,175,500

  
	
   

  	
   

  	
   

  
	
  ZC
  Partnership, LP

  	
   

  	
  Amended
  and Restated Term Promissory Note dated May 10, 2010 made by Zale Canada
  Co. in the original principal amount of Cdn. $35,000,000

  

 

License Agreement

 

Intercompany
License agreement between TXDC, L.P. and Zale Delaware, Inc.

 

 

Schedule 7.11 to the

Credit Agreement

 

Subsidiary Restrictions

 

NONE.

 

 

Schedule 10.02 to
the

Credit Agreement

 

Addresses For Notice

 

FOR
ANY LOAN PARTY:

 

901
West Walnut Hill Lane

Irving,
Texas  75038-1003

 

Attention:  Stephen C. Massanelli, SVP and Treasurer

 

Fax No.: 
972-580-5547

Telephone: 
972-580-5032

E-mail: 
smassane@zalecorp.com

 

With
a copy to:

 

901
West Walnut Hill Lane

Irving,
Texas  75038-1003

 

Attention:  General Counsel

 

FOR
ADMINISTRATIVE AGENT:

 

Z
Investment Holdings, LLC

One
Embarcadero Center, 39th Floor

San Francisco, CA 94111

Attention:
Stefan Kaluzny

Fax
No.: (415) 983-2701

 

With
a copy to:

 

Kirkland &
Ellis LLP

555
California Street

San
Francisco, CA  94104

Attention:
John E. Friedrichs, Esq.

Fax
No.: (415) 439-1500

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