-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C7Uuy+JOKzqgu+A6PWJAtAp5DGhkUPr09Fs+d9tWQfPOguFql0GpYxTAFIIfKbeR w/yxP8YuV1vaeR85d5Y7JA== 0000950134-99-008576.txt : 20000211 0000950134-99-008576.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950134-99-008576 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZALE CORP CENTRAL INDEX KEY: 0000109156 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 750675400 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04129 FILM NUMBER: 99720550 BUSINESS ADDRESS: STREET 1: 901 W WALNUT HILL LN CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 9725804000 MAIL ADDRESS: STREET 1: 901 WEST WALNUT HILL LANE CITY: IRVING STATE: TX ZIP: 75038-1003 FORMER COMPANY: FORMER CONFORMED NAME: ZALE JEWELRY CO INC DATE OF NAME CHANGE: 19710510 10-K405 1 FORM 10-K FOR FISCAL YEAR END JULY 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR FOR THE FISCAL YEAR ENDED JULY 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-04129 ZALE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-0675400 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
901 W. WALNUT HILL LANE IRVING, TEXAS 75038-1003 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 580-4000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.01 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of September 3, 1999, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was approximately $1,236,162,997. As of September 3, 1999, the registrant had outstanding 35,984,508 shares of its common stock, $.01 par value per share. DOCUMENTS INCORPORATED BY REFERENCE. Part III of this report incorporates information from the registrant's definitive Proxy Statement relating to the registrant's annual meeting of stockholders to be held on November 5, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL Zale Corporation and its wholly-owned subsidiaries (the "Company") is the largest specialty retailer of fine jewelry in North America. At July 31, 1999, the Company operated 1,333 retail jewelry stores located primarily in shopping malls throughout the United States, Canada and Puerto Rico. The Company operates under four brand names: Zales Jewelers(R), Gordon's Jewelers(R), Bailey Banks & Biddle Fine Jewelers(R), and Peoples Jewellers(R). Zales Jewelers provides traditional, moderately priced jewelry to a broad range of customers. Gordon's Jewelers offers contemporary merchandise targeted to regional preferences at somewhat higher price points than Zales Jewelers. Bailey Banks & Biddle Fine Jewelers operates upscale jewelry stores which are considered among the finest jewelry stores in their markets. Under the Zales Jewelers brand name, at July 31, 1999, the Company also operated 31 Zales Outlet stores in 17 states and offered online shopping at www.zales.com. The Company acquired substantially all of the assets of Peoples Jewellers Corporation, a Canadian company, effective May 23, 1999. Peoples Jewellers offers traditional moderately priced jewelry to customers across Canada. During the fiscal year ended July 31, 1999, the Company generated $1.4 billion of net sales. The Company believes it is well-positioned to compete in the approximately $41 billion, highly fragmented retail jewelry industry, leveraging its established brand names, economies of scale and geographic and demographic diversity. The Company enjoys significant brand name recognition as a result of its long-standing presence in the industry and its national and regional advertising campaigns. The Company believes that name recognition is an important advantage in jewelry retailing as products are generally unbranded and consumers must trust in a retailer's reliability and credibility. In addition, as the largest specialty retailer of fine jewelry in North America, the Company believes it realizes economies of scale in purchasing and distribution, real estate, advertising and administrative costs. The Company also believes that the geographic diversity of its retail distribution network through all 50 states and Canada and the demographic breadth of its target customer groups may serve to mitigate earnings volatility typically associated with local or regional conditions. The Company is incorporated in Delaware. Its principal executive offices are located at 901 W. Walnut Hill Lane, Irving, TX 75038-1003, its telephone number at that address is (972) 580-4000, and its internet address is www.zalecorp.com. BUSINESS INITIATIVES AND STRATEGY The Company has developed and implemented disciplined merchandising and marketing strategies to reestablish and promote its brand identities. Differentiated target customer segments have been emphasized for Zales, Gordon's, Bailey Banks & Biddle, and Peoples. Product assortments have been broadened to capitalize on year round gift giving: bridal, fashion and special occasions. Management has developed a key item strategy as the foundation for merchandising and marketing initiatives. Items have been identified from among the best selling products in the retail jewelry industry, such as tennis bracelets, diamond solitaires, diamond stud earrings, and bezel set style diamond pendants and earrings. The Company has ensured that these items are available in an appropriate variety of styles at a range of competitive price points. At the same time, the Company has adopted an aggressive approach to inventory management to keep key items in stock and inventories current. This goal is achieved through enhancements to the merchandise system which provides regular reporting to the Company's merchandise buyers on in-stock position and slow moving merchandise. The Company employs a consistent methodology which provides inventory turnover and profitability information to identify slow moving merchandise and determine appropriate merchandising actions on a timely basis. The Company's marketing efforts are product and event-focused. Television, radio, print advertising in nationally distributed newspapers and magazines, newspaper inserts, and direct mail advertising feature 3 selected key items at a variety of price points. The Company has also broadened its marketing efforts beyond the Christmas season to tie in with other gift-giving holidays, such as Valentine's Day and Mother's Day. In addition, advertising and in-store promotions are synchronized with mall marketing efforts to take advantage of other periods of high mall traffic, such as Labor Day, which are typically not considered jewelry oriented holidays. The Company has recruited experienced buyers and has centralized purchasing for each brand to ensure consistency of quality and cost. In addition, the Company leverages its size to achieve better prices, payment terms, return privileges and cooperative advertising arrangements with its suppliers for certain products. The Company has enhanced its image as a provider of fine jewelry at competitive prices by establishing price points for merchandise that are perceived by customers as good values. Certain items are labeled "Brilliant Buys," "Premier Values" and "Bailey's Classic Values" in Zales and Peoples, Gordon's and Bailey Banks & Biddle stores, respectively. These items are prominently displayed along with their prices throughout the store, a practice that is uncommon in the U.S. jewelry retailing industry and one that the Company believes enhances its reputation for pricing integrity. Over the past five years, the Company has opened approximately 325 stores. Approximately 70 percent of the Company's stores have received significant upgrades or investments within the last five years. Typically, these stores experience revenue growth in future years that is significantly higher than other stores. The Company has taken steps to provide upgraded sales and product training company-wide through employee and manager training programs. Staffing plans are coordinated to schedule employees during peak periods. The Company's strategy is to continue to increase store productivity and profitability by: (i) focusing on the core categories of bridal, fashion and watches; (ii) using key item merchandise to drive volume; (iii) remodeling and renovating all existing stores; (iv) enhancing merchandising systems to assist buyer decision making; (v) executing tailored staffing and training programs for store personnel; (vi) focusing advertising on brand building and product distinction; and (vii) providing exclusive products to develop brand distinction. The Company plans to open approximately 165 new stores, principally under the brand names Zales, Zales Outlet and Bailey Banks & Biddle, for which it will incur approximately $40 million in capital expenditures during the combined fiscal years 2000 and 2001. The Company expects these stores to solidify the Company's core mall business by further penetrating markets where the Company is underrepresented. The Company targets premier regional mall locations throughout the country and selects sites based on a variety of well-defined demographic and store profitability characteristics. The Company has identified the specific malls for this planned expansion which satisfy the Company's real estate strategy. The Company also plans to refurbish, remodel or relocate approximately 200 stores at a cost of approximately $45 million during the same period. Over the past five years the Company has reduced selling, general and administrative expenses as a percent of sales principally by leveraging its fixed store and corporate operating expenses while increasing sales in its stores. Additionally, the Company has continued a focused effort to reduce selling, general and administrative expenses where appropriate by streamlining processes and leveraging technology where possible. Initiatives include: (i) improving the return on credit operations, including establishing a national credit card bank which has allowed greater flexibility in establishing finance charge rates to customers and has simplified the regulatory requirements under which the Company operates; (ii) outsourcing certain non-strategic functions, including certain aspects of management information systems operations, credit services, and the internal audit department among other areas; and (iii) streamlining corporate operations through review and improvement of current processes and application of new technology in areas such as merchandising, credit, store point of sale and financial systems. The Company continues to apply a disciplined approach to its credit policies, which are controlled centrally for all stores. See "Business -- Credit Operations." 2 4 CURRENT YEAR EVENTS ACQUISITION OF PEOPLES JEWELLERS. Effective May 23, 1999, the Company acquired substantially all assets of Peoples Corporation, a privately owned chain consisting principally of 176 fine jewelry stores operating throughout Canada, for approximately $78 million cash and the assumption of certain liabilities. ZALE FUNDING TRUST SECURITIZATION. On July 15, 1999, the Company redeemed approximately $380.8 million, net of discount, aggregate principal amount of Receivables Backed Notes ("Receivables Notes") issued by Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust wholly owned by Zale Delaware, Inc. ("ZDel"), and formed to finance customer accounts receivable. The Receivables Notes were redeemed with available cash and proceeds of advances under the Company's Revolving Credit Agreement and through the issuance of Variable Funding Notes ("Variable Notes") to a purchaser group under a new securitization facility in the initial aggregate principal amount of $250 million. The Variable Notes are part of a 364-day liquidity facility and are secured by a lien on customer accounts receivable. The Variable Notes currently bear interest at the market commercial paper rate plus a dealer fee of 0.05 percent. In addition, the Company pays a fee of 0.375 percent per annum on the funded portion of the facility and a commitment fee of 0.25 percent per annum on the unfunded portion. As of July 31, 1999, the entire $250 million facility is classified as a Short-term Borrowing since it matures within the next twelve months. As originally entered into, the facility required the Company to reduce the outstanding amount of the Variable Notes to $150 million no later than October 15, 1999. On September 15, 1999, the Company entered into an amendment to the new securitization facility to reduce the commitment of the original Variable Note purchaser group to $150 million and to add two new note purchaser groups having an aggregate commitment of $200 million, thereby increasing the total outstanding amount under the Variable Notes facility to $350 million on terms consistent with the original facility. Additionally the Company paid down the approximate $103 million balance under the Revolving Credit Agreement. The Company expects to refinance the Variable Notes on or before their maturity date with a new transaction or, with the consent of the note purchaser groups, to extend the maturity of the outstanding Variable Notes. STOCK REPURCHASE PLAN. During September 1999, the Board of Directors approved a stock repurchase program pursuant to which the Company, from time to time and at management's discretion, may purchase through fiscal year 2000, up to an aggregate of $50 million of the Company's common stock on the open market. In June 1999, the Company completed a $50 million repurchase program, which was authorized during August 1998. Under this program, the Company repurchased 1.7 million shares in fiscal 1999. DEFERRED COMPENSATION. During February 1999, 180,692 shares of restricted Common Stock were granted to certain key employees valued at $5.7 million as of the grant date. The shares will vest ratably on each of the anniversaries ranging from three to four years from the date of grant and are subject to restrictions on their sale or transfer. The total cost of restricted stock is amortized to income as compensation expense ratably over the vesting period and amounted to $0.7 million for the twelve months ended July 31, 1999. INDUSTRY The U.S. retail jewelry industry's sales were approximately $41 billion in 1998. Specialty jewelry stores (such as the Company) account for almost half of the industry, according to publicly available data. Historically, retail jewelry store sales have exhibited only limited effects of cyclicality. According to the U.S. Bureau of the Census, retail jewelry store sales have increased every year for the past 15 years with the exception of 1991 which included both the Persian Gulf War and the introduction of the luxury tax. Other significant segments of the industry include national chain department stores (such as J.C. Penney Company, Inc. and Sears, Roebuck and Co.), mass merchant discount stores (such as Wal-Mart Stores, Inc.), other general merchandise stores and apparel and accessory stores. The remainder of the retail jewelry industry is composed primarily of catalog and mail order houses, direct-selling establishments, TV home shopping (such as QVC, Inc.) and computer on-line shopping. 3 5 The U.S. retail jewelry industry is highly fragmented with the 10 largest companies accounting for less than 25 percent of the market. The largest jewelry retailer is believed to be Wal-Mart Stores, Inc., followed by the Company. The Company is the largest specialty jewelry retail chain in North America, with approximately 3.4 percent of market share based on the United States Census Bureau estimate of 1998 U.S. Retail Jewelry and Watch Sales. Only two other specialty jewelry retailers had greater than 2 percent market share. OPERATIONS The Company operates principally under four brand names. The following table presents net sales, average sales per store and the number of stores for Zales, Gordon's, Bailey Banks & Biddle, and Peoples for the periods indicated.
YEAR ENDED JULY 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- NET SALES (IN THOUSANDS) Zales (including Outlet stores)................ $ 829,387 $ 733,395 $ 618,106 Gordon's....................................... 311,671 309,327 282,271 Bailey Banks & Biddle.......................... 264,315 241,441 226,323 Peoples(a)..................................... 21,237 -- -- Other(b)....................................... 2,258 29,547 127,118 ---------- ---------- ---------- $1,428,868 $1,313,710 $1,253,818 ========== ========== ========== AVERAGE SALES PER STORE(c) Zales (including Outlet store)................. $1,166,000 $1,092,000 $1,013,000 Gordon's....................................... 994,000 967,000 888,000 Bailey Banks & Biddle.......................... 2,497,000 2,290,000 1,990,000 Peoples(a)..................................... -- -- -- STORES OPENED DURING PERIOD Zales (including Outlet stores)................ 54 65 65 Gordon's....................................... 4 17 9 Bailey Banks & Biddle.......................... 6 7 16 Peoples(a)..................................... 0 -- -- ---------- ---------- ---------- 64 89 90 ========== ========== ========== STORES CLOSED DURING PERIOD Zales (including Outlet stores)................ 16 6 9 Gordon's....................................... 9 10 22 Bailey Banks & Biddle.......................... 7 13 15 Peoples(a)..................................... 0 -- -- ---------- ---------- ---------- 32 29 46 ========== ========== ========== TOTAL STORES Zales (including Outlet stores)................ 739 701 642 Gordon's....................................... 312 317 310 Bailey Banks & Biddle.......................... 106 107 113 Peoples(a)..................................... 176 -- -- ---------- ---------- ---------- 1,333 1,125 1,065 ========== ========== ==========
- --------------- (a) The Company acquired substantially all assets and certain operational liabilities of Peoples Jewellers Corporation effective May 23, 1999. See "Current Year Events -- Acquisition of Peoples Jewellers." (b) Other net sales: (i) includes sales from direct mail operations and (ii) includes sales from Diamond Park Fine Jewelers which was divested during fiscal year 1998. (c) Based on sales per store open a full twelve months during the respective year. 4 6 Zales Jewelers Zales is positioned as the Company's national flagship and is a leading brand name in jewelry retailing in the United States. At July 31, 1999, Zales had 708 Zales stores in 50 states and Puerto Rico. Average store size is approximately 1,470 square feet, and the average selling price per unit sold is $260. Zales accounted for approximately 58 percent of the Company's sales in fiscal year 1999. Zales' merchandise selection is generally standardized across the nation and targeted at customers representing a cross-section of mainstream America. In fiscal year 1999, bridal merchandise represented 35 percent of merchandise sales, while fashion jewelry and watches comprised the remaining 65 percent. The bridal merchandise category consists of solitaire engagement rings, various bridal sets and diamond and gold anniversary bands. Fashion jewelry consists generally of diamond fashion rings, earrings, gold chains, watches and various other items. The Company believes that the prominence of diamond jewelry in its product selection fosters an image of quality and trust among consumers. While maintaining a strong focus on the bridal segment of the business, Zales is placing added emphasis on the non-bridal merchandise such as the fashion and gift-giving aspects of the business. Innovative product categories, including platinum engagement rings, and tanzanite fashion jewelry, have been added. The combination of Zales' national presence and centralized merchandise selection allows it to use television advertising across the nation as its primary advertising medium, supplemented by newspaper inserts and direct mail. Zales is in the direct fulfillment business through its direct mail operations and Internet web site. The direct fulfillment operations currently account for less than 2 percent of the Company's sales. Leveraging brand recognition and national advertising, Zales Outlet represents the Company's Outlet Mall format. At July 31, 1999, the Company operated 31 Zales Outlet stores in 17 states. The Company has begun expanding its Zales Outlet concept and plans to continue to grow it over the next several years. The merchandise assortment in a Zales Outlet Store includes a wide selection of today's most fashion-forward looks, including name brand watches and fashion items like tanzanite jewelry. Zales Outlet accounted for less than 2 percent of the Company's net sales in fiscal 1999. Gordon's Jewelers Gordon's is positioned as a major regional brand with an upgraded product offering. At July 31, 1999, Gordon's had 312 stores in 35 states and Puerto Rico. Average store size is approximately 1,400 square feet and the average selling price per unit sold is $314. Gordon's accounted for approximately 22 percent of the Company's net sales in fiscal year 1999. Gordon's distinguishes itself from Zales by providing a more upscale, contemporary product mix and tailoring a portion of store inventory to regional tastes. A portion of the merchandise sold by Gordon's stores overlaps the Zales product line. Regional radio broadcast campaigns that emphasize key items are utilized to complement printed inserts. Gordon's will continue to emphasize its new image to match its customer base and will further tailor key items to customers' regional preferences. Steps to upgrade Gordon's have included store remodeling, a more distinctive and fashion-oriented product assortment, improved displays, exclusive and value oriented merchandise and the application of more stringent credit-approval standards. Bailey Banks & Biddle Fine Jewelers Established in 1832, Bailey Banks & Biddle offers high-end merchandise, exclusive designs and a prestigious shopping environment for the upscale customer. The stores are among the pre-eminent stores in their markets and carry both exclusive and recognized designer merchandise selections to appeal to the more affluent customer. The Bailey Banks & Biddle merchandise assortment emphasizes the classic and traditional look and focuses on diamonds, precious stone and gold jewelry, as well as watches and giftware. At July 31, 1999, Bailey Banks & Biddle operated 106 upscale jewelry stores in 29 states. During fiscal 1999, the Company converted stores not under the Bailey Banks & Biddle name to that name. This change will enable Bailey Banks & Biddle to market and advertise on a national scale. The Company also utilizes the trade name 5 7 Zell Bros.(R) for one store. The stores have an average selling price per unit sold of $651, an average store size of approximately 3,300 square feet and accounted for approximately 18 percent of the Company's net sales in fiscal year 1999. Bailey Banks & Biddle stores rely heavily on upscale direct-mail catalogs, enabling the stores to focus on specific products for specific customers. In fiscal year 1999, Bailey Banks & Biddle expanded its advertising reach with a repetitive presence in nationally distributed newspapers, such as the New York Times and The Wall Street Journal and high profile magazines such as Town & Country, Vanity Fair and Bon Appetit. Peoples Jewellers Effective May 23, 1999, the Company acquired substantially all assets and certain operational liabilities of Peoples Jewellers Corporation, a privately owned chain consisting principally of 176 fine jewelry stores operating throughout Canada under the Peoples and Mappins names. Peoples offers traditional jewelry and attracts the moderate customer segment in Canada. Peoples has the largest market share in Canada. Its closest specialty jewelry competitor has fewer than 40 locations. The Company believes that Peoples has a significant opportunity to improve store productivity by employing a focused merchandising strategy that offers the top 250 key items or "Brilliant Buys." Approximately 90 percent of this merchandise will overlap with Zales, allowing the Company to leverage its merchandising strength. The Company plans to execute an aggressive marketing strategy that includes many media channels and campaigns similar to those that Zales employs, including television advertising campaigns during key holiday periods. Beginning in late fiscal 2000 the Company expects to begin renovating existing Peoples' stores with an updated design, as well as targeting growth opportunities by identifying possible new store locations. STORE OPERATIONS The Company's stores are designed to create an attractive environment, maximize operating efficiencies and make shopping convenient and enjoyable. The Company pays careful attention to store layout, particularly in areas such as lighting, choice of materials and arrangement of display cases to maximize merchandise presentation. Promotional displays are changed periodically to provide variety, to reflect seasonal events or to complement a particular mall's promotions. Each of the Company's stores is led by a store manager who is responsible for certain store-level operations, including sales and some personnel matters. Non-sales administrative matters, including purchasing, credit operations and payroll are consolidated at the corporate level in an effort to maintain low operating costs at the store level. Each of the stores also offers standard warranties and return policies and provides extended warranty coverage which may be purchased at the customer's option. The Company has implemented inventory control systems, extensive security systems and loss prevention procedures to maintain low inventory losses. The Company screens employment applicants and provides all of its store personnel with training in loss prevention. Despite such precautions, the Company experiences losses from theft from time to time and maintains insurance to cover such losses. The Company believes it is important to provide knowledgeable and responsive customer service. The Company has implemented employee training programs, including training in sales techniques for new employees, on-the-job training and manager training for store managers. Under the banner of Zale Corporation University, the Company offers training to employees at every level of the organization, from store associate to buyer. PURCHASING AND INVENTORY The Company purchases substantially all of its merchandise in finished form from a network of established suppliers and manufacturers located primarily in the United States, Southeast Asia and Italy. All 6 8 purchasing is done through buying offices at the corporate headquarters. The Company either purchases merchandise from its vendors or obtains merchandise on consignment. The Company had approximately $126.2 million and $146.8 million of consignment inventory on hand at July 31, 1999 and 1998, respectively. The Company historically has not engaged in any substantial amount of hedging activities with respect to merchandise held in inventory, since the Company has been able to adjust retail prices to reflect price fluctuations in the commodities that are used in the merchandise it sells. The Company is not subject to substantial currency fluctuations because most purchases are dollar denominated. During fiscal years 1999 and 1998, the Company purchased approximately 33 percent of its merchandise from its top five vendors, including more than 11 percent from its top vendor. CREDIT OPERATIONS The Company's private label credit card programs help facilitate the sale of merchandise to customers who wish to finance their purchases rather than use cash or other sources. Approximately 48 percent of the Company's net sales were generated by credit sales on the private label credit cards in fiscal year 1999. The Company has found that opening a credit account allows its sales personnel to build customer relationships that generate customer loyalty and facilitate repeat purchases as well as enhancing the Company's target marketing capability. Peoples outsources its proprietary credit program to a third party provider. In October 1997, the Company established a national credit card bank, Jewelers National Bank ("JNB" or the "Bank"), for the granting of credit under its private label credit cards. The creation of the national bank allows the Company greater flexibility in establishing rates charged to customers and simplifies regulatory requirements. Credit extension, customer service and collections for the private label accounts are performed by JNB in Tempe, Arizona, and Service Centers in Clearwater, Florida, San Marcos, Texas and San Juan, Puerto Rico. The Bank uses credit scoring to assess risk in extending credit to customers. The Bank has enhanced the timeliness of its approval process for new accounts, whereby customers can be approved rapidly at point of sale. The Bank offers a variety of credit marketing programs to facilitate sales, with an emphasis on flexible repayment terms. The Company currently has approximately 1.5 million customer names on file to which it directs promotional material. The Company uses many of these customer names in its target marketing programs. The Company focuses collection efforts on delinquent accounts in a rapid and disciplined manner. Collectors are trained with state of the art Computer Based Training programs, which are developed in-house. Collection accounts are scored on a behavioral model at monthly billing. This statistical analysis allows for optimum collection and follow-up on delinquent accounts. Based on the behavioral score, the account is put into priority queuing for letter and/or personal phone call follow-up. Early stage delinquencies are handled with an approach which is sensitive to customer goodwill. If accounts progress into delinquency, more assertive action is taken. 7 9 The following table presents certain data concerning sales, credit sales and accounts receivable for the past three fiscal years, excluding Peoples and Diamond Park:
YEAR ENDED JULY 31, ------------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Net sales (thousands).............................. $1,407,631 $1,284,163 $1,126,700 Net credit sales (thousands)....................... $ 680,320 $ 638,277 $ 556,771 Credit sales as percentage of net sales............ 48.3% 49.7% 49.4% Average number of active customer accounts......... 806,000 755,000 715,000 Average balance per customer account............... $ 742 $ 742 $ 719 Customer receivables (thousands)................... $ 587,794 $ 562,952 $ 508,885 Average monthly collection percentage.............. 9.8% 9.6% 9.2% Bad debt expense as a percentage of total sales, excluding Peoples and Diamond Park............... 5.0% 5.1% 4.9% Accounts receivable greater than 90 days past due, excluding late fees.............................. 10.2%(a) 8.4% 8.9%
- --------------- (a) In May 1999, the Company began operating under a new credit system. Under this system, billing cycles were changed and aging criteria are slightly different. Management believes that the characteristics of the accounts at July 31, 1999 are relatively consistent with previous years. Accounts are automatically charged off when no full scheduled payment is made for a period of seven consecutive billing cycles. Additionally, accounts are charged off if twelve contract payments are missed. INSURANCE AFFILIATES The Company, through Zale Indemnity Company, Zale Life Insurance Company and Jewel Re-Insurance Ltd., provides insurance and reinsurance facilities for various types of insurance coverage, which typically are marketed to the Company's private label credit card customers. Additionally, the Company promotes the sale of credit insurance products to customers who use the private label credit card program. In fiscal year 1999, over 48 percent of the Company's private label credit card purchasers purchased some form of credit insurance. The three companies, which are wholly owned subsidiaries of ZDel, are the insurers (either through direct written or reinsurance contracts) of the Company's customer credit insurance coverages. In addition to providing replacement property coverage for certain perils, such as theft, credit insurance coverage provides protection to the creditor and cardholder for losses associated with the disability, involuntary unemployment, leave of absence or death of the cardholder. Zale Life Insurance Company also provides group life insurance coverage for eligible employees of the Company. Zale Indemnity Company, in addition to writing direct credit insurance contracts, also has certain discontinued business that it continues to run off. Credit insurance operations are dependent on the Company's retail sales on its private label credit cards and are not significant on a stand-alone basis. EMPLOYEES As of July 31, 1999, the Company had approximately 12,000 employees, less than 1 percent of whom were represented by unions. The Company usually hires a limited number of temporary employees during each Christmas season. COMPETITION The retailing industry is highly competitive. The industry is fragmented, and the Company competes with a large number of independent regional and local jewelry retailers, as well as national jewelry chains. The Company also competes with other types of retailers who sell jewelry and gift items, such as department stores, catalog showrooms, discounters, direct mail suppliers, online retailers and television home shopping programs. Certain of the Company's competitors are non-specialty retailers which are larger and have greater financial resources than the Company. The malls where the Company's stores are located typically contain 8 10 competing national chains, independent jewelry stores or department store jewelry departments. The Company believes that it is also competing for consumers' discretionary spending dollars and, therefore, competes with retailers who offer merchandise other than jewelry or giftware. Notwithstanding the national or regional reputation of its competition, the Company believes that it must compete on a mall-by-mall basis with other retailers of jewelry as well as with retailers of other types of discretionary items. Therefore, the Company competes primarily on the basis of reputation for high quality products, brand recognition, store location, distinctive and value-priced merchandise, personalized customer service and its ability to offer private label credit card programs to customers wishing to finance their purchases. The Company's success is also dependent on its ability to react to and create customer demand for specific merchandise categories. The Company holds no material patents, licenses, franchises or concessions; however, the established trademarks and trade names for stores and products in Zales, Gordon's, Bailey Banks & Biddle, and Peoples are important to the Company in maintaining its competitive position in the jewelry retailing industry. MANAGEMENT INFORMATION SYSTEMS The Company's information systems provide information necessary for: (i) management operating decisions; (ii) sales and margin management; (iii) inventory control; (iv) profitability monitoring by many measures (merchandise category, buyer, store); and (v) expense control programs. Data processing systems include point-of-sale reporting, purchase order management, receiving, merchandise planning and control, payroll, general ledger, credit card administration, and accounts payable. Bar code ticketing is used to ensure timely sales and margin data compilation and to provide for inventory control monitoring. Information is made available on-line to merchandising staff on a timely basis, thereby reducing the need for paper reports. The Company uses electronic data interchange ("EDI") with certain of its vendors to facilitate timely merchandise replenishment. The Company believes that the further use of EDI with its vendors will lower the administrative costs associated with invoice processing and settlement. The Company's information systems allow management to monitor and control the Company's operations, and to generate reports on a daily, monthly, quarterly and annual basis for each store and transaction. Senior management can therefore review and analyze activity by store, amount of sale, terms of sale or employees who made the sale. The Company entered into a five-year agreement during December 1996 with a third party for the management of the Company's mainframe processing operations, client server systems, LAN operations and desktop support. The Company believes that by outsourcing this portion of its management information systems it will be able to achieve additional efficiencies and allow the Company to focus its internal information technology efforts on developing new systems to enhance the performance of its core business. The Company has an operations services agreement for credit operations with a third-party servicer. The agreement, dated May 5, 1998, requires minimum annual payments based on credit activities. The Company has a commitment of approximately $15.2 million to be paid over the initial term of seven years. Additional annual payments will be paid based on credit volume for normal credit processing activities. The Company has historically upgraded, and expects to continue to upgrade, its information systems to improve operations and support future growth. The Company estimates it will make capital expenditures of approximately $21 million over the next two years for enhancements to its management information systems. A portion of these expenditures will assist the Company in maintaining Year 2000 compliant systems. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." REGULATION The Company's operations are affected by numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. In addition to the Company's private label credit cards, credit to the Company's customers is provided primarily through bank cards such as 9 11 Visa(R), MasterCard(R), and Discover(R), without recourse to the Company based upon a customer's failure to pay. Any change in the regulation of credit which would materially limit the availability of credit to the Company's traditional customer base could adversely affect the Company's results of operations or financial condition. The sale of insurance products by the Company is also highly regulated. State laws currently impose disclosure obligations with respect to the Company's sale of credit and other insurance. The Company's and its competitors' practices are also subject to review in the ordinary course of business by the Federal Trade Commission, and the Company's and other retail Companies credit cards are subject to regulation by the Office of the Comptroller of the Currency. See "Business -- Credit Operations." The Company believes that it is currently in material compliance with all applicable state and federal regulations. Merchandise in the retail jewelry industry is frequently sold at a discount to the "regular" or "original" price. A number of states in which the Company operates have regulations which require that retailers offering merchandise at discounted prices must offer the merchandise at regular or original prices for stated periods of time. Additionally, the Company is subject to certain truth-in-advertising and other various state and federal laws, including consumer protection regulations that regulate retailers generally and/or the promotion and sale of jewelry in particular. The Company undertakes to monitor changes in those laws and believes that it is in material compliance with all applicable federal and state laws with respect to such practices. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements, including statements regarding, among other items, (i) the Company's implementation of its merchandising strategies, (ii) the extension or replacement of the Revolving Credit Agreement, (iii) a refinancing of the Variable Notes on or before their maturity date with a new transaction or, with the consent of the note purchaser groups, an extension of the maturity of the outstanding Variable Notes, (iv) expected capital expenditures to be made in the future, (v) expected significant upgrades to the Company's management information systems over the next several years, (vi) the addition of new locations through new store openings, (vii) the renovation and remodeling of the Company's existing store locations, (viii) the Company's efforts to reduce costs, (ix) the adequacy of the Company's sources of cash to finance its current and future operations, (x) the terms of renewal of the Company's store leases, (xi) resolution of litigation without material adverse effect on the Company and (xii) the expected impact of the "Year 2000" issue. This notice is intended to take advantage of the "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. These forward-looking statements involve a number of risks and uncertainties. Among others, factors that could cause actual results to differ materially are the following: development of trends in the general economy; competition in the fragmented retail jewelry business; the variability of quarterly results and seasonality of the retail business; the ability to improve productivity in existing stores and to increase comparable store sales; the availability of alternate sources of merchandise supply during the three month period leading up to the Christmas season; the dependence on key personnel who have been hired or retained by the Company; the changes in regulatory requirements which are applicable to the Company's business; management's decisions to pursue new distribution channels and strategies which may involve additional costs; and the risk factors listed herein and from time to time in the Company's Securities and Exchange Commission reports, including but not limited to, its Annual Reports on Form 10-K. ITEM 2. PRINCIPAL PROPERTIES The Company leases a 430,000 square feet corporate headquarters facility, which extends through April 2008. The facility is located in Las Colinas, a planned business development in Irving, Texas, near the Dallas/ Fort Worth International Airport. During the fiscal year 1999, the Company sold a 120,000 square foot warehouse in Dallas, Texas, leasing back approximately 60,000 square feet of that warehouse. The Company leases a 32,000 square feet general office facility in Toronto, Ontario Canada for Peoples, which extends through April 2001. The Company leases a facility for the operations of JNB in Tempe, Arizona (24,200 square feet). 10 12 The Company also leases three credit service centers located in Clearwater, Florida (30,000 square feet), San Juan, Puerto Rico (2,900 square feet) and one national collections center located in San Marcos, Texas (9,000 square feet). The Company rents most of its retail spaces under leases that generally range from five to ten years and may contain minimum rent escalations. Most of the store leases provide for the payment of base rentals plus real estate taxes, insurance, common area maintenance fees and merchants association dues, as well as percentage rents based on store gross sales. The following table indicates the expiration dates of the current terms of the Company's leases as of July 31, 1999 (executed lease agreements, including non-stores and unopened stores):
PERCENTAGE TERM EXPIRES STORES OTHER TOTAL OF TOTAL - ------------ ------ ----- ----- ---------- 2000 and prior...................................... 194 -- 194 14% 2001................................................ 148 1 149 11 2002................................................ 120 2 122 9 2003................................................ 67 1 68 4 2004 and thereafter................................. 863 2 865 62 ----- -- ----- --- Total number of leases.............................. 1,392 6 1,398 100% ===== == ===== ===
Management believes substantially all of the store leases expiring in fiscal year 2000 that it wishes to renew (including leases which expired earlier and are on month-to-month extensions) will be renewed on terms not materially less favorable to the Company than the terms of the expiring leases. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain legal actions and claims arising in the ordinary course of business. The Company believes that such litigation and claims, both individually and in the aggregate, will be resolved without material effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the quarter ended July 31, 1999. EXECUTIVE OFFICERS OF THE REGISTRANT The following individuals serve as executive officers of the Company. Officers are elected by the Board of Directors annually, each to serve until their successor is elected and qualified, or until their earlier resignation, removal from office or death.
NAME AGE POSITION - ---- --- -------- Robert J. DiNicola........ 51 Chairman of the Board Beryl B. Raff............. 48 President and Chief Executive Officer, Director Alan P. Shor.............. 40 Executive Vice President and Chief Operating Officer Sue E. Gove............... 41 Executive Vice President and Chief Financial Officer Mary L. Forte............. 48 Executive Vice President and Chief Administrative Officer
The following is a brief description of the business experience of the executive officers of the Company for at least the past five years. Mr. Robert J. DiNicola relinquished his responsibilities as Chief Executive Officer to Beryl B. Raff, the Company's President and Chief Operating Officer on September 7, 1999. Mr. DiNicola continues to actively serve as Chairman of the Board of Directors. Mr. DiNicola had served as Chairman of the Board and Chief Executive Officer of the Company since April 18, 1994. For the three years prior to joining the Company, 11 13 Mr. DiNicola was a senior executive officer of The Bon Marche Division of Federated Department Stores, Inc., having served as Chairman and Chief Executive Officer of that Division from 1992 to 1994 and as its President and Chief Operating Officer from 1991 to 1992. From 1989 to 1991, Mr. DiNicola was a Senior Vice President of Rich's Department Store Division of Federated. For 17 years, prior to joining the Federated organization, Mr. DiNicola was associated with Macy's, where he held various executive, management and merchandising positions, except for a one-year period during which he held a division officer position with The May Department Stores Company, Inc. Ms. Beryl B. Raff was appointed Chief Executive Officer and a member of the Company's Board of Directors on September 7, 1999 while retaining her position as President. From July 15, 1998 to September 7, 1999, Ms. Raff served as President and Chief Operating Officer. From July 1997 to July 1998, she served as Executive Vice President and Chief Operating Officer. From November 1994 to July 1997, she served as President of Zales. From March 1991 through October 1994, Ms. Raff served as Senior Vice President of Macy's East with responsibilities for its jewelry business in a 12 state region. From April 1988 to March 1991, Ms. Raff served as Group Vice President of Macy's South/Bullocks. Prior to 1988, Ms. Raff had 17 years of retailing and merchandising experience with the Emporium and Macy's department stores. Mr. Alan P. Shor was named Executive Vice President and Chief Operating Officer on September 15, 1999 while retaining his position as Secretary. From November 17, 1997 to September 15, 1999, Mr. Shor served as Executive Vice President, Chief Logistics Officer, Secretary and General Counsel (he relinquished the General Counsel position August 1, 1999). From May 1997 to November 1997, Mr. Shor served as Executive Vice President and Chief Administrative Officer, General Counsel and Secretary. From June 1995 to May 1997, Mr. Shor served as Senior Vice President, General Counsel and Secretary. For two years prior to joining the Company, Mr. Shor was the managing partner of the Washington, D.C. office of the Troutman Sanders law firm, whose principal office is based in Atlanta, Georgia. Mr. Shor, a member of Troutman Sanders since 1983, was a partner of the firm from 1990 to 1995. Ms. Sue E. Gove was appointed Executive Vice President and Chief Financial Officer on July 15, 1998. From December 1997 to July 1998, she served as Group Vice President and Chief Financial Officer. From January 1996 to December 1997, she served as Senior Vice President, Corporate Planning and Analysis. From September 1996 through June 1997, Ms. Gove also served as Senior Vice President and Treasurer, overseeing Investor Relations and the Treasury, Tax and Control functions. Ms. Gove joined the Company in 1980 and served in numerous assignments until her appointment to Vice President in 1989. Ms. Mary L. Forte was appointed Executive Vice President and Chief Administrative Officer on January 13, 1998. From July 1994 to January 1998, Ms. Forte served as President of Gordon's. From January 1994 to July 1994, Ms. Forte served as Senior Vice President of QVC -- Home Shopping Network. From July 1991 through January 1994, Ms. Forte served as Senior Vice President of the Bon Marche, Home Division of the Federated Department Store. From July 1989 to July 1991, Ms. Forte was Vice President of Rich's Department Store, Housewares Division. In addition to the above, Ms. Forte has an additional 13 years of retailing and merchandising experience with Macy's, The May Department Stores Company, Inc. and Federated Department Stores. 12 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' EQUITY The Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol ZLC. The following table sets forth the high and low sale prices for the Common Stock for each fiscal quarter during the two most recent fiscal years.
1999 1998 ------------- ------------- HIGH LOW HIGH LOW ---- --- ---- --- First.......................................... $32 $19 1/2 $28 3/16 $21 Second......................................... 34 7/16 23 7/8 26 7/8 21 1/2 Third.......................................... 40 3/16 30 5/16 31 1/8 24 1/8 Fourth......................................... 44 5/8 34 1/2 34 1/8 28 3/8
As of September 3, 1999, the outstanding shares of Common Stock were held by approximately 1,126 holders of record. The Company has not paid dividends on the Common Stock since the initial issuance on July 30, 1993, and does not anticipate paying dividends on the Common Stock in the foreseeable future. In addition, the Company's Short-term Borrowings and Long-term Debt limit the Company's ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 13 15 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data is qualified in its entirety by the Consolidated Financial Statements of the Company (and the related Notes thereto) contained elsewhere in this Form 10-K and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The income statement and balance sheet data for each of the years ended July 31, 1999, 1998, 1997, 1996 and 1995, have been derived from the Company's audited Consolidated Financial Statements.
YEAR ENDED JULY 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales........................ $1,428,868 $1,313,710 $1,253,818 $1,137,377 $1,036,149 Cost of sales.................... 737,188 681,908 643,318 576,764 524,010 ---------- ---------- ---------- ---------- ---------- Gross margin..................... 691,680 631,802 610,500 560,613 512,139 Selling, general and administrative expenses........ 502,279 475,846 480,522 457,371 434,101 Depreciation and amortization expense........................ 29,478 22,565 14,022 7,538 381 Unusual items(a)................. -- (8,947) -- (4,486) -- ---------- ---------- ---------- ---------- ---------- Operating earnings............... 159,923 142,338 115,956 100,190 77,657 Interest expense, net............ 30,488 32,039 36,098 30,102 29,837 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes, extraordinary item............. 129,435 110,299 79,858 70,088 47,820 Income taxes..................... 48,503 41,362 29,305 25,094 16,350 ---------- ---------- ---------- ---------- ---------- Earnings before extraordinary items.......................... $ 80,932 $ 68,937 $ 50,553 $ 44,994 $ 31,470 ========== ========== ========== ========== ========== Net earnings................... $ 80,932 $ 68,937 $ 50,553 $ 43,898 $ 31,470 ========== ========== ========== ========== ========== Earnings per common share: Basic: Earnings before extraordinary item........ $ 2.24 $ 1.96 $ 1.44 $ 1.28 $ .90 Net earnings................ $ 2.24 $ 1.96 $ 1.44 $ 1.25 $ .90 Diluted: Earnings before extraordinary item........ $ 2.21 $ 1.84 $ 1.38 $ 1.23 $ .88 Net earnings................ $ 2.21 $ 1.84 $ 1.38 $ 1.20 $ .88 Weighted average number of common shares outstanding: Basic.......................... 36,059 35,201 35,054 35,068 34,970 Diluted........................ 36,688 37,368 36,632 36,465 35,849 BALANCE SHEET DATA: Working capital................ $ 556,886 $ 971,495 $ 877,130 $ 775,500 $ 781,802 Total assets................... 1,526,932 1,445,929 1,281,206 1,163,811 1,110,708 Total debt..................... 452,589 480,275 451,787 404,354 443,624 Total stockholders' investment.................. 699,611 648,061 541,574 476,258 391,890
- ------------------ (a) Unusual items consist of the gain on sale of Diamond Park Fine Jewelers of ($1.6 million) and a gain on sale of land of ($7.3 million) for the year ended July 31, 1998, and reorganization recoveries of ($4.5 million) for the year ended July 31, 1996. 14 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With respect to forward looking statements made in this Management's Discussion and Analysis of Financial Condition and Results of Operations see "Business -- Cautionary Notice Regarding Forward Looking Statements." RESULTS OF OPERATIONS The following table sets forth certain financial information from the Company's audited consolidated statements of operations expressed as a percentage of net sales and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.
YEAR ENDED JULY 31, --------------------- 1999 1998 1997 ----- ----- ----- Net Sales................................................... 100.0% 100.0% 100.0% Cost of Sales............................................... 51.6 51.9 51.3 ----- ----- ----- Gross Margin................................................ 48.4 48.1 48.7 Selling, General and Administrative Expenses................ 35.2 36.2 38.3 Depreciation and Amortization Expense....................... 2.0 1.7 1.2 Unusual Item -- Gain on Sale of Diamond Park Fine Jewelers.................................................. -- (0.1) -- Unusual Item -- Gain on Sale of Land........................ -- (0.5) -- ----- ----- ----- Operating Earnings.......................................... 11.2 10.8 9.2 Interest Expense, Net....................................... 2.1 2.5 2.9 ----- ----- ----- Earnings Before Income Taxes................................ 9.1 8.3 6.3 Income Taxes................................................ 3.4 3.1 2.3 ----- ----- ----- Net Earnings................................................ 5.7% 5.2% 4.0% ===== ===== =====
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998 Net Sales. Net Sales for the year ended July 31, 1999 increased by $115.2 million to $1.4 billion, a 8.8 percent increase compared to the previous year. Excluding sales from Diamond Park Fine Jewelers which was divested in fiscal year 1998, total sales for the year increased 10.9 percent. The sales increase primarily resulted from a 6.0 percent increase in sales from stores open for comparable periods, 64 new stores added during the year and two months of sales for Peoples which was acquired in May 1999. These factors were partially offset by 32 stores closed during the year. The Company believes that sales growth continues to be influenced by the execution of its merchandising, marketing and store operations strategies. Gross Margin. Gross Margin as a percentage of net sales was 48.4 percent for the year ended July 31, 1999 compared to 48.1 percent for the year ended July 31, 1998, an increase of 0.3 percent. This increase was principally due to more efficient purchasing, resulting in lower markdowns. The LIFO benefit was $0.7 million and $2.5 million for the years ended July 31, 1999 and 1998. Selling, General and Administrative Expenses. Selling, General and Administrative Expenses decreased to 35.2 percent of sales for the year ended July 31, 1999 from 36.2 percent for the year ended July 31, 1998, or 1.0 percent as a percentage of net sales. Store expenses as a percentage of sales decreased by 1.0 percent principally due to productivity improvements relating to the lowering of payroll costs as a percentage of sales. Net corporate expenses decreased by 0.2 percent of net sales. This decrease in expense was partially offset by Peoples, which had slightly higher store expenses as a percentage of sales. The selling, general and administrative expense reduction demonstrates the Company's ability to leverage its fixed store and corporate operating expenses while increasing sales in its stores. Earnings Before Interest, Taxes, Depreciation and Amortization Expense. Earnings Before Interest, Taxes, Depreciation and Amortization Expense were $189.4 million and $156.0 million for the years ended July 31, 1999 and 1998, respectively, an increase of 21.4 percent. 15 17 Depreciation and Amortization Expense. Depreciation and Amortization Expense increased by $6.9 million, primarily as a result of the purchase of new assets, principally for new store openings, renovation and refurbishment and the acquisition of Peoples. Due to fresh start reporting, the Company wrote-off substantially all fixed assets of the Company effective July 31, 1993. As a result, depreciation and amortization relates to capital expenditures since July 31, 1993. Interest Expense, Net. Interest Expense, Net was $30.5 million and $32.0 million for the years ended July 31, 1999 and 1998, respectively. The decrease is a result of higher interest income from investments due to an increase in net monthly average cash and cash equivalents for fiscal year 1999 as compared to fiscal year 1998. Income Taxes. The income tax expense for the years ended July 31, 1999 and 1998 was $48.5 million and $41.4 million, respectively, reflecting an effective tax rate of 37.5 percent for both years. The Company will realize a cash benefit from utilization of tax net operating loss carryforwards ("NOL") (after annual limitations) against current and future tax liabilities. As of July 31, 1999, the Company had a remaining NOL (after limitations) of approximately $181 million. YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997 Net Sales. Net Sales for the year ended July 31, 1998 increased by $60.0 million to $1.3 billion, a 4.8 percent increase compared to the previous year. The previous year included a full year of sales of the Company's Diamond Park Fine Jewelers stores, which the Company divested in the first and second quarters of fiscal year 1998. Excluding sales from Diamond Park Fine Jewelers, total sales for the year increased 14.2 percent. The sales increase primarily resulted from a 9.3 percent increase in sales from stores open for comparable periods and 89 new stores added during the year, which were partially offset by 29 stores closed during the year. The Company believes that the sales growth was influenced by enhanced merchandise assortments, successful product promotions and strong store level execution. Gross Margin. Gross Margin as a percentage of net sales was 48.1 percent for the year ended July 31, 1998 compared to 48.7 percent for the year ended July 31, 1997, a decrease of 0.6 percent. This decrease was primarily due to a shift in the mix to more diamond solitaire merchandise and the Company's planned competitive stance with regard to pricing in the current year. The LIFO (benefit)/provision was ($2.5) million and $3.7 million for the years ended July 31, 1998 and 1997. The benefit in fiscal 1998 is partially a result of a reduction in inventories during the current year. Selling, General and Administrative Expenses. Selling, General and Administrative Expenses decreased to 36.2 percent of sales for the year ended July 31, 1998 from 38.3 percent for the year ended July 31, 1997, or 2.1 percent as a percentage of net sales. Store expenses as a percentage of sales decreased by 1.9 percent principally due to productivity improvements and the divestiture of the Diamond Park Operations which had significantly higher payroll and rent costs as a percentage of sales. Corporate expenses decreased by 0.2 percent of net sales principally as a result of lower costs for payroll. The Selling, General and Administrative Expense reduction demonstrates the Company's ability to leverage its fixed store and corporate operating expenses while increasing sales in its stores. Earnings Before Interest, Taxes, Depreciation and Amortization Expense, and Unusual Items. Earnings Before Interest, Taxes, Depreciation and Amortization Expense, and Unusual Items were $156.0 million and $130.0 million for the years ended July 31, 1998 and 1997, respectively, an increase of 20.0 percent. Depreciation and Amortization Expense. Depreciation and Amortization Expense increased by $8.5 million, primarily as a result of the purchase of new assets, principally for new store openings, renovation and refurbishment. Due to fresh start reporting, the Company wrote-off substantially all fixed assets of the Company effective July 31, 1993. As a result, depreciation and amortization relates to capital expenditures since July 31, 1993. Unusual Items -- Gain on Sale of Diamond Park Fine Jewelers and Gain on Sale of Land. The Gain on Sale of Diamond Park Fine Jewelers was $1.6 million and the Gain on the Sale of Land was $7.3 million for fiscal 1998. 16 18 Interest Expense, Net. Interest Expense, Net was $32.0 million and $36.1 million for the years ended July 31, 1998 and 1997, respectively. The decrease is a result of higher interest income from investments due to an increase in cash and cash equivalents. The increase in cash and cash equivalents is primarily due to an increase in net earnings and effective inventory management resulting in the leveraging of accounts payable and accrued liabilities. Income Taxes. The income tax expense for the years ended July 31, 1998 and 1997 was $41.4 million and $29.3 million, respectively, reflecting an effective tax rate of 37.5 percent and 36.7 percent, respectively. As a result of guidelines regarding accounting for income taxes of companies utilizing fresh-start reporting, the Company reports earnings on a fully-taxed basis even though it has not paid any significant income taxes through fiscal 1998. The Company expects to begin paying more significant income taxes in fiscal 1999. The Company will realize a cash benefit from utilization of tax net operating loss carryforwards ("NOL") (after annual limitations) against current and future tax liabilities. As of July 31, 1998, the Company had a remaining NOL (after limitations) of approximately $250.8 million. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements consist principally of funding inventory and receivables growth, capital expenditures primarily for new store growth and renovations, upgrading its management information systems and debt service. As of July 31, 1999, the Company had cash and cash equivalents of $35.4 million, and $6.0 million of restricted cash. The retail jewelry business is highly seasonal, with a significant proportion of sales and operating income being generated in November and December of each year. Approximately 39.7 percent of the Company's annual sales were made during the three months ended January 31, 1999 and 1998, which includes the Christmas selling season. The Company's working capital requirements fluctuate during the year, increasing substantially during the fall season as a result of higher planned seasonal inventory levels. OPERATING ACTIVITIES Set forth below is certain summary information with respect to the Company's operations for the most recent eight fiscal quarters.
FISCAL 1999 FISCAL 1998 FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED ------------------------------------------------ ------------------------------------------------ JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, 1999 1999 1999 1998 1998 1998 1998 1997 -------- --------- ----------- ----------- -------- --------- ----------- ----------- (IN THOUSANDS) Net sales................... $325,994 $280,736 $567,952 $254,186 $280,867 $258,300 $522,017 $252,526 Gross margin................ 157,441 136,028 276,122 122,089 134,980 124,458 251,441 120,923 Operating earnings.......... 21,879 17,793 109,920 10,331 19,471 10,491 102,556 9,820 Net earnings................ 8,542 6,267 63,960 2,163 7,451 1,503 58,937 1,046
Net cash provided by operating activities was $74.3 million, $112.8 million and $16.5 million for fiscal years 1999, 1998 and 1997 respectively. The net cash provided by operating activities decreased from the prior year principally due to the Company paying more taxes and to greater investment in inventory. In fiscal 1998, the net cash provided by operating activities resulted principally from an increase in net earnings and effective inventory management resulting in the leveraging of accounts payable and accrued liabilities. In fiscal 1997, net earnings, depreciation and amortization charges and the non-cash change in lieu of tax expense were offset by additional working capital needs for accounts receivable and inventory growth. Net cash used in investing activities was $154.3 million in fiscal 1999 principally related to the acquisition of Peoples, as well as expenditures for new store growth and expenditures for remodeling existing stores. Net cash provided by investing activities was $12.5 million in fiscal 1998, primarily related to proceeds from the sale of Diamond Park Fine Jewelers and proceeds from the sale of land offsetting capital expenditures for new store growth and existing store remodeling and refurbishment. Net cash used in investing activities was $49.1 million in fiscal 1997 principally related to capital expenditures for new store growth and existing store remodeling and refurbishment. 17 19 Net cash used in financing activities was $57.8 million in fiscal 1999, principally related to the refinancing and reduction of the Zale Funding Trust Securitization and repurchase of the Company's common stock on the open market. Net cash provided by financing activities for fiscal 1998 and fiscal 1997 was $15.2 million and $46.8 million, respectively. In fiscal 1998, the net cash provided by financing activities resulted principally from the issuance of the Senior Notes and proceeds from exercise of stock options and warrants, offset by the repayment of the Revolving Credit Agreement and purchase of Treasury Stock. Net cash provided by financing activities for fiscal 1997 is primarily related to borrowings under the Revolving Credit Agreement. There has been an increase of approximately $93 million in owned merchandise inventories at July 31, 1999 compared to the balance at July 31, 1998. This increase resulted principally from new store growth, the acquisition of Peoples and a broader assortment of merchandise at Bailey Banks and Biddle. FINANCE ARRANGEMENTS - - On July 15, 1999, the Company redeemed approximately $380.8 million, net of discount, aggregate principal amount of Receivables Backed Notes ("Receivables Notes") issued by Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust wholly owned by Zale Delaware, Inc. ("ZDel"), and formed to finance customer accounts receivable. The Receivables Notes were redeemed with available cash and proceeds of advances under the Company's Revolving Credit Agreement and through the issuance of Variable Funding Notes ("Variable Notes") to a purchaser group under a new securitization facility in the initial aggregate principal amount of $250 million. The Variable Notes are part of a 364-day liquidity facility and are secured by a lien on customer accounts receivable. The Variable Notes currently bear interest at the market commercial paper rate plus a dealer fee of 0.05 percent. In addition, the Company pays a fee of 0.375 percent per annum on the funded portion of the facility and a commitment fee of 0.25 percent per annum on the unfunded portion. As of July 31, 1999, the entire $250 million facility is classified as a Short-term Borrowing since it matures within the next twelve months. As originally entered into, the facility required the Company to reduce the outstanding amount of the Variable Notes to $150 million no later than October 15, 1999. On September 15, 1999, the Company entered into an amendment to the new securitization facility to reduce the commitment of the original Variable Note purchaser group to $150 million and to add two new note purchaser groups having an aggregate commitment of $200 million, thereby increasing the total outstanding amount under the Variable Notes facility to $350 million on terms consistent with the original facility. Additionally the Company paid down the approximate $103 million balance under the Revolving Credit Agreement. The Company expects to refinance the Variable Notes on or before their maturity date with a new transaction or, with the consent of the note purchaser groups, to extend the maturity of the outstanding Variable Notes. - - In order to support the Company's growth plans, the Company and ZDel (the "Borrowers") entered into a three year unsecured revolving credit agreement (the "Revolving Credit Agreement") with a group of banks on March 31, 1997. The Revolving Credit Agreement provides for revolving credit loans in an aggregate amount of up to $225.0 million, including a $30.0 million sublimit for letters of credit. The revolving credit loans bear interest at floating rates, currently, at the Borrowers' option of either (i) the Eurodollar Rate plus 1.25 percent or (ii) the higher of the annual rate of interest announced from time to time by the agent bank as its base rate or the Federal Funds Effective Rate plus 0.5 percent. The interest rate based on Eurodollar Rates and letter of credit commission rates can be reduced or increased based on certain future performance levels attained by the Borrowers. The Company pays a commitment fee of 0.25 percent per annum (subject to reduction or increase based on future performance) on the preceding month's unused Revolving Credit Agreement commitment. The Borrowers may repay the revolving credit loans at any time without penalty prior to the maturity date. The interest rates and commitment fee will also be reduced if the Company obtains an investment grade rating. The Revolving Credit Agreement may be extended by the Borrowers for one year upon obtaining appropriate consent. At July 31, 1999, approximately $103 million was outstanding under the Revolving Credit Agreement with a Eurodollar Rate of 6.4 percent. In addition, letters of credit in the amount of approximately $0.6 million were outstanding at July 31, 1999. The Company is currently in compliance with all of its covenant obligations under the Revolving Credit Agreement 18 20 and the instruments governing its other indebtedness. The Company expects to enter into a new transaction to replace the Revolving Credit Agreement on or before the maturity date. - - In order to support the Company's longer term capital financing requirements, the Company issued $100 million of Senior Notes (the "Senior Notes") on September 23, 1997. These notes bear interest at 8 1/2 percent and are due in 2007. The Senior Notes are unsecured and are fully and unconditionally guaranteed by ZDel. The proceeds were utilized to repay indebtedness under the Company's Revolving Credit Agreement and for general corporate purposes. The indenture relating to the Senior Notes contains certain restrictive covenants including but not limited to limitations on indebtedness, limitations on dividends and other restricted payments (including repurchases of the Company's common stock), limitations on transactions with affiliates, limitations on liens and limitations on disposition of proceeds of asset sales, among others. CAPITAL GROWTH During the year ended July 31, 1999, the Company made approximately $60 million in capital expenditures, a portion of which was used to open 64 new stores. Under its continued growth strategy, the Company plans to open approximately 165 new stores for which it will incur approximately $40 million in capital expenditures during the combined fiscal years 2000 and 2001. These stores are expected to solidify the Company's core mall business by further penetrating markets where the Company is underrepresented. During the combined fiscal years 2000 and 2001, the Company anticipates spending approximately $45 million to remodel, relocate or refurbish approximately 200 additional stores. The Company also estimates it will make capital expenditures of approximately $21 million during the combined fiscal years 2000 and 2001 for enhancements to its management information systems. In total, the Company anticipates spending approximately $132 million on capital expenditures during the combined fiscal years 2000 and 2001. The Revolving Credit Agreement limits the Company's capital expenditures to $75 million for fiscal year 2000. OTHER ACTIVITIES AFFECTING LIQUIDITY - - Effective May 23, 1999, the Company acquired substantially all assets of Peoples Jewellers Corporation, a privately owned chain consisting principally of 176 fine jewelry stores operating throughout Canada, for approximately $78 million cash and the assumption of certain liabilities. - - During September 1999, the Board of Director's authorized a stock repurchase program pursuant to which the Company, from time to time and at management's discretion, may purchase up to an aggregate of $50 million of the Company's common stock on the open market through fiscal year 2000. In June 1999, the Company completed the $50 million repurchase plan authorized on August 25, 1998. - - The Company has an operations services agreement for credit operations with a third-party servicer. The agreement, dated May 5, 1998, requires minimum annual payments based on credit activities. The Company has a commitment of approximately $15.2 million to be paid over the initial term of seven years. Additional annual payments will be paid based on credit volume for normal credit processing activities. - - The Company has an operations services agreement for management information systems with a third-party servicer. The agreement, which began in December 1996, requires fixed payments totaling $34.4 million over a 60 month term and a variable amount based on usage. - - Future liquidity will be enhanced to the extent that the Company is able to realize the cash benefit from utilization of its NOL against current and future tax liabilities. The cash benefit realized in fiscal year 1999 was approximately $13 million. As of July 31, 1999, the Company had a NOL (after limitations) of approximately $181 million, which represents up to $72 million in future tax benefits. The utilization of this asset is subject to limitations. The most restrictive is the Internal Revenue Code Section 382 annual limitation. The NOL can be utilized through 2008. Management believes that operating cash flow, amounts available under the Revolving Credit Agreement, the extension or replacement of the Revolving Credit Agreement, the Variable Notes and a refinancing of the Variable Notes (or an extension of the maturity of the outstanding Variable Notes) should 19 21 be sufficient to fund the Company's current operations, debt service and currently anticipated capital expenditure requirements for the foreseeable future. YEAR 2000 The Company's management has recognized the need to ensure, to the extent possible, that its operations and relationships with vendors and other third parties will not be adversely impacted by software processing errors arising from calculations using the year 2000 and beyond ("Year 2000"). Like those of many companies, a significant number of the Company's computer applications and systems required modification in order to render these systems Year 2000 compliant. The Company recognized that failure by the Company to timely resolve internal Year 2000 issues could result, in the worst case, in an inability of the Company to distribute its merchandise to its stores and to process its daily business for some period of time. However, Company management presently believes that scenario is unlikely based on the accomplishment of its Year 2000 remediation plan. Failure of one or more third party service providers on whom the Company relies to address Year 2000 issues could also result, in a worst case scenario, in some business interruption. However, to the extent possible, the Company has undertaken to ensure that its most critical vendors and service providers will be able to serve the Company without interruption. The lost revenues, if any, resulting from a worst case scenario such as those examples described above would depend on the time period in which the failure goes uncorrected and on how widespread the impact. Zale has used a combination of internal and external resources to assess and make the needed changes to its many different information technology ("IT") systems and personal computers, such as credit, point of sale, payroll, purchase ordering, merchandise distribution, management reporting, mainframe, and client/ server applications. In 1997 the Company launched a formal project using an industry standard process to address the Year 2000 problem. The process involved seven steps: 1) create awareness, 2) assess/inventory, 3) devise strategy/action plan, 4) replace/modify/outsource, 5) test/certify, 6) install and 7) provide post implementation support. The specialized software programs and hardware used throughout the corporation are now in the seventh phase of the process and will remain there until after the transition to Calendar Year 2000. Non-compliant programs and systems have been replaced, modified or outsourced, including credit processing, Store POS systems, inventory systems, distribution center systems, the EDI system, financial systems, HR systems, and Data Audit. The period from August 1, 1999 through December 31, 1999 will be used to perform additional testing, address exceptions and respond to issues, contingencies and/or third party concerns. Progress reports on the Year 2000 project are presented regularly to the Company's Board of Directors and senior management. With regard to non-IT systems, such as the General Office security systems, store security systems, environmental systems, and phone systems, the Company has remediated or replaced noncompliant systems. Since June 1998, the Company has sent approximately 3,500 inquiries to its vendors requesting compliance certification. The Company has collected responses to those inquiries. It continues to follow-up with those material vendors who either did not respond or whose response was insufficient. The Company has made and will continue to make site visits to critical vendors' facilities as appropriate. The Company outsources its MIS processing and credit processing and inquiry systems. These outsourcers have contractually committed to Year 2000 compliance, and the Company is monitoring their progress in that regard. The Company's primary delivery service has provided assurance that its systems will function correctly through the date change. The Company's payroll processing service provider has indicated that its major systems will operate with correct date logic for Year 2000. The Company's major benefits vendors and service providers have indicated they are or will be Year 2000 compliant, as have most of the Company's major merchandise vendors. Direct expenditures were approximately $1.7 million and internal costs were approximately $0.5 million, for a total cost of $2.2 million in expenditures associated with the Year 2000 in fiscal year 1998. Direct costs of $3.5 million and internal costs of $0.9 million, for a total cost of $4.4 million, were expended in fiscal year 1999. The Company has funded and will continue to fund these expenditures through its normal IT operations budget. As required by generally accepted accounting principles, these costs are expensed as incurred. The 20 22 Company is currently addressing the financial needs associated with the Year 2000 for fiscal year 2000, which began August 1, 1999, and expects these costs to be approximately $0.75 million. The Company has had each of its departments develop basic contingency plans to restore material functions in the case of a Year 2000 failure. The contingency plans cover critical functions within each business location, including the stores, the General Office, the credit centers and third party service providers. The Company will continue to refine these plans, test them as possible, and make them more comprehensive as more information becomes available from testing and from third party suppliers. In addition, the Company's two processing outsourcers also have contingency plans for the Company's processing should their primary systems fail. Additionally, in the normal course of business, the Company has made capital investments in certain third party software and hardware systems to address the financial and operational needs of the business. These systems, which will improve the efficiencies and productivity of the replaced systems, have also been certified Year 2000 compliant by either the vendor or the Company. To date all of these capital projects were part of the Company's long-term strategic capital plan and their timing has not been accelerated as a result of the Year 2000 issue. Prior to the acquisition of its assets by the Company, Peoples had launched a Year 2000 compliance initiative that included replacement of its core merchandising, accounting and distribution systems, inspection and upgrades of POS devices, and validation of the Year 2000 compliance of its vendors, suppliers and service providers. That initiative has been continued by Zale, and its review indicates that Peoples will meet its Year 2000 goals in a timely manner. Testing and documentation will continue during the third calendar quarter to minimize any Year 2000 exposure. The fourth calendar quarter will be spent mitigating any material risks discovered during the third quarter. Management does not expect any Year 2000 issues within Peoples to be material to the Company. Although there can be no assurance that unanticipated events will not occur, or that the Company has identified all Year 2000 issues, it is management's belief that the Company has taken and continues to take adequate action to address Year 2000 issues. Management does not expect the financial impact of being Year 2000 compliant to be material to the Company's consolidated financial position, results of operations or cash flows. INFLATION In management's opinion, changes in net sales and net earnings that have resulted from inflation and changing prices have not been material during the periods presented. There is no assurance, however, that inflation will not materially affect the Company in the future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities. The Company does not use financial instruments for trading or other speculative purposes and is not party to any leveraged financial instruments. The Company is exposed to interest rate risk primarily through its borrowing activities, which are described under "Short-term Borrowings" and "Long-term Debt" in the Notes to the Consolidated Financial Statements. The majority of the Company's borrowings are under variable rate arrangements. See "Short-term Borrowings" and "Long-term Debt" Notes to the Consolidated Financial Statements, which are incorporated herein by reference. The investments of the Company's insurance subsidiaries, primarily stocks and bonds in the amount of $27.7 million, approximate market value at July 31, 1999. 21 23 Based on the Company's market risk sensitive instruments (including variable rate debt) outstanding at July 31, 1999, the Company has determined that there was no material market risk exposure to the Company's consolidated financial position, results of operations or cash flows as of such date. Due to its Canadian operations, the Company is exposed to market risk from currency exchange rate exposure which may adversely affect the Company's financial position, results of operations and cash flows. In seeking to minimize this risk, the Company manages exposures through its regular operating and financing activities. Based on the Company's market risk from currency exchange rate exposure at July 31, 1999, the Company believes that there was no material market risk exposure to the Company's consolidated financial position, results of operations or cash flows on such date. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and supplementary data are included as pages F-1 through F-31 at the end of this Annual Report on Form 10-K:
PAGE INDEX NUMBER ----- ------ Management's Report......................................... F-2 Report of Independent Public Accountants.................... F-3 Consolidated Statements of Operations....................... F-4 Consolidated Balance Sheets................................. F-5 Consolidated Statements of Cash Flows....................... F-6 Consolidated Statements of Stockholders' Investment......... F-7 Notes to Consolidated Financial Statements.................. F-9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required to be included in Part III of this Annual Report on Form 10-K is incorporated by reference to the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report. 1. FINANCIAL STATEMENTS: The list of financial statements required by this item is set forth in Item 8. 2. INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER ------ Report of Independent Public Accountants.................... 26 Schedule II -- Valuation and Qualifying Accounts............ 27
22 24 All other financial statements and financial statement schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are not material or are not applicable and, therefore, have been omitted or are included in the consolidated financial statements or notes thereto. 3. EXHIBITS 2.1 -- Purchase of Assets Agreement, dated June 2, 1999, between Zale Canada Co. and Peoples Jewellers Corporation.(11) 3.1 -- Restated Certificate of Incorporation of Zale Corporation, dated July 30, 1993.(1) 3.2 -- Amended Bylaws of Zale Corporation, dated November 1, 1996.(5) 4.1 -- Revolving Credit Agreement dated March 31, 1997 among Zale Corporation and Zale Delaware, Inc. and The First National Bank of Boston, as agent for the lenders identified therein. The Schedules attached to the Agreement, as identified in the list of Schedules filed as a part of this exhibit, are omitted from this filing, but will be provided supplementally to the Commission upon request.(5) 4.2 -- Indenture, dated September 30, 1997, by and among Zale Corporation, Zale Delaware, Inc. and Bank One, N.A. as Trustee.(7) 4.3 -- Indenture, dated as of July 15, 1999, between Zale Funding Trust as Issuer and The Bank of New York as Indenture Trustee and Securities Intermediary.(11) 4.4 -- Series 1999 -- A Indenture Supplement, dated as of July 15, 1999, between Zale Funding Trust as Issuer and The Bank of New York as Indenture Trustee and Securities Intermediary.(11) 4.5 -- Purchase and Servicing Agreement, dated as of July 15, 1999, among Zale Funding Trust, Zale Delaware, Inc. and Jewelers National Bank.(11) *10.1 -- Class A Note Purchase Agreement, dated as of July 15, 1999, among Zale Funding Trust (Issuer), Zale Delaware, Inc. (Seller), Jewelers National Bank (Servicer), The Class A Purchasers Parties Thereto, Credit Suisse First Boston, New York Branch (Administrative Agent and Agent) and Other Agents Parties Thereto.(11) 10.2 -- Indemnification agreement, dated as of July 21, 1993, between Zale Corporation and certain present and former directors thereof.(3) *10.3 -- Zale Corporation Stock Option Plan.(1) *10.4 -- The Executive Severance Plan for Zale Corporation and Its Affiliates, as amended and restated as of February 10, 1994.(2) *10.4a -- Amendment to The Executive Severance Plan for Zale Corporation and Its Affiliates effective May 20, 1995.(4) *10.5 -- Settlement Agreement, dated as of November 30, 1997, between Zale Corporation and Louis J. Grabowsky.(8) 10.6 -- Lease Agreement Between Principal Mutual Life Insurance Company, As Landlord, and Zale Corporation, as Debtor and Debtor-In-Possession, As Tenant, dated as of September 17, 1992.(4) 10.6a -- First Lease Amendment and Agreement between Principal Mutual Life Insurance Company and Zale Delaware, Inc., dated as of February 1, 1996.(4) 10.7 -- Indemnification Agreement, executed on October 30, 1996, and dated as of June 6, 1996, between Zale Corporation and Andrea Jung.(5) *10.8 -- Form Change of Control Agreement dated as of October 30, 1996, but executed thereafter, between Zale Corporation and Key Employees.(6) 10.8a -- Modified list of parties to Change of Control Agreement.(9) 10.9 -- Asset Purchase Agreement, dated September 3, 1997, by and among Finlay Enterprises, Inc., Finlay Fine Jewelry Corporation, Zale Corporation and Zale Delaware, Inc.(9)
23 25 10.10 -- Seller Restrictive Covenant Agreement, dated as of June 2, 1999, between Peoples Jewellers Corporation, Zale Canada Co. and Zale Corporation.(11) *10.11 -- Amended and Restated Employment Agreement, dated September 7, 1999, between Zale Corporation and Robert J. DiNicola.(11) *10.12 -- Employment Agreement, dated as of August 1, 1998, between Zale Corporation and Beryl B. Raff. (9) *10.13 -- Employment Agreement, dated as of August 1, 1998, between Zale Corporation and Alan P. Shor. (9) *10.14 -- Employment Agreement, dated as of January 15, 1998 between Zale Corporation and Mary L. Forte. (9) *10.15 -- Employment Agreement, dated as of August 1, 1998, between Zale Corporation and Sue E. Gove. (9) *10.16 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Beryl B. Raff. (10) *10.17 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Alan P. Shor. (10) *10.18 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Mary L. Forte. (10) *10.19 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Sue E. Gove. (10) 21 -- Subsidiaries of the registrant. (11) 23 -- Consent of Independent Public Accountants.(11) 27 -- Financial data schedule.(11)
- --------------- (1) Previously filed as an exhibit to the registrant's Form 10-Q (No. 1-4129) for the quarterly period ended September 30, 1993, and incorporated herein by reference. (2) Incorporated by reference to the corresponding exhibit to the registrant's Registration Statement on Form S-1 (No. 33-73310) filed with the Commission on December 23, 1993, as amended. (3) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1995, and incorporated herein by reference. (4) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1996, and incorporated herein by reference. (5) Previously filed as an exhibit to the registrant's Form 10-Q for the quarterly period ended October 31, 1996, and incorporated herein by reference. (6) Previously filed as an exhibit to the registrant's Form 10-Q for the quarterly period ended January 31, 1997, and incorporated herein by reference. (7) Previously filed as an exhibit to the registrants' Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1997, and incorporated herein by reference. (8) Incorporated by reference to Exhibit 4.1 to the registrant's Registration Statement on Form S-4 (No. 33-39473) filed with the Commission on November 4, 1997. (9) Previously filed as an exhibit to the registrant's Form 10-K (No. 1-04129) for the fiscal year ended July 31, 1998, and incorporated herein by reference. (10) Previously filed as an exhibit to the registrant's Form 10-Q for the quarterly period ended October 31, 1998, and incorporated herein by reference. (11) Filed herewith. * Management Contracts and Compensatory Plans. 4. REPORTS ON FORM 8-K 99 Press Release issued by the Company on June 3, 1999. 24 26 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Management's Report......................................... F-2 Report of Independent Public Accountants.................... F-3 Consolidated Statements of Operations....................... F-4 Consolidated Balance Sheets................................. F-5 Consolidated Statements of Cash Flows....................... F-6 Consolidated Statements of Stockholders' Investment......... F-7 Notes to Consolidated Financial Statements.................. F-9
F-1 27 MANAGEMENT'S REPORT To the Stockholders of Zale Corporation: The integrity and consistency of the consolidated financial statements of Zale Corporation (the "Company"), which were prepared in accordance with generally accepted accounting principles, are the responsibility of management and properly include some amounts that are based upon estimates and judgments. The Company maintains a system of internal accounting controls to provide reasonable assurance, at appropriate cost, that the Company's assets are protected and transactions are properly recorded. Additionally, the integrity of the financial accounting system is based on careful selection and training of qualified personnel, organizational arrangements which provide for appropriate division of responsibilities and communication of established written policies and procedures. The consolidated financial statements of the Company have been audited by Arthur Andersen LLP, independent public accountants. Their report expresses their opinion as to the fair presentation, in all material respects, of the financial statements and is based upon their independent audit conducted in accordance with generally accepted auditing standards. The Audit Committee, composed solely of outside directors, meets periodically with the independent public accountants and representatives of management to discuss auditing and financial reporting matters. In addition, the independent public accountants meet periodically with the Audit Committee without management representatives present and have free access to the Audit Committee at any time. The Audit Committee is responsible for recommending to the Board of Directors the engagement of the independent public accountants, which is subject to stockholder approval, and the general oversight review of management's discharge of its responsibilities with respect to the matters referred to above. Robert J. DiNicola Beryl B. Raff Sue E. Gove Chairman of the Board President and Executive Vice President and Chief Executive Officer, Chief Financial Officer Director
F-2 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Zale Corporation: We have audited the accompanying consolidated balance sheets of Zale Corporation (a Delaware corporation) and subsidiaries as of July 31, 1999 and 1998, and the related consolidated statements of operations, cash flows, and stockholders' investment for each of the three years in the period ended July 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zale Corporation and subsidiaries as of July 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas September 1, 1999 (except with respect to the matter discussed in the Subsequent Event footnote, as to which the date is September 15, 1999) F-3 29 ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED YEAR ENDED YEAR ENDED JULY 31, JULY 31, JULY 31, 1999 1998 1997 ---------- ---------- ---------- Net Sales................................................ $1,428,868 $1,313,710 $1,253,818 Cost of Sales............................................ 737,188 681,908 643,318 ---------- ---------- ---------- Gross Margin............................................. 691,680 631,802 610,500 Selling, General and Administrative Expenses............. 502,279 475,846 480,522 Depreciation and Amortization Expense.................... 29,478 22,565 14,022 Unusual Item -- Gain on Sale of Diamond Park Fine Jewelers............................................... -- (1,634) -- Unusual Item -- Gain on Sale of Land..................... -- (7,313) -- ---------- ---------- ---------- Operating Earnings....................................... 159,923 142,338 115,956 Interest Expense, Net.................................... 30,488 32,039 36,098 ---------- ---------- ---------- Earnings Before Income Taxes............................. 129,435 110,299 79,858 Income Taxes............................................. 48,503 41,362 29,305 ---------- ---------- ---------- Net Earnings............................................. $ 80,932 $ 68,937 $ 50,553 ========== ========== ========== Earnings Per Common Share: Basic.................................................. $ 2.24 $ 1.96 $ 1.44 Diluted................................................ $ 2.21 $ 1.84 $ 1.38 Weighted Average Number of Common Shares and Common Share Equivalents Outstanding: Basic.................................................. 36,059 35,201 35,054 Diluted................................................ 36,688 37,368 36,632
See Notes to the Consolidated Financial Statements. F-4 30 ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS
JULY 31, JULY 31, 1999 1998 ---------- ---------- Current Assets: Cash and Cash Equivalents................................. $ 35,403 $ 173,069 Restricted Cash........................................... 6,029 6,192 Customer Receivables, Net................................. 510,714 495,468 Merchandise Inventories................................... 571,669 478,467 Other Current Assets...................................... 36,827 26,720 ---------- ---------- Total Current Assets........................................ 1,160,642 1,179,916 Property and Equipment, Net................................. 203,841 162,884 Other Assets................................................ 99,654 44,326 Deferred Tax Asset, Net..................................... 62,795 58,803 ---------- ---------- Total Assets................................................ $1,526,932 $1,445,929 ========== ========== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Short-term Borrowings..................................... $ 353,000 $ -- Accounts Payable and Accrued Liabilities.................. 237,392 187,621 Deferred Tax Liability, Net............................... 13,364 20,800 ---------- ---------- Total Current Liabilities................................... 603,756 208,421 Non-current Liabilities..................................... 70,892 50,190 Long-term Debt.............................................. 99,589 480,275 Excess of Revalued Net Assets Over Stockholders' Investment, Net....................................................... 53,084 58,982 Commitments and Contingencies Stockholders' Investment: Preferred Stock........................................... -- -- Common Stock.............................................. 392 380 Additional Paid-In Capital................................ 504,300 477,657 Accumulated Other Comprehensive Income.................... 376 2,851 Accumulated Earnings...................................... 292,273 211,341 Deferred Compensation..................................... (5,005) -- ---------- ---------- 792,336 692,229 Treasury Stock............................................ (92,725) (44,168) ---------- ---------- Total Stockholders' Investment.............................. 699,611 648,061 ---------- ---------- Total Liabilities and Stockholders' Investment.............. $1,526,932 $1,445,929 ========== ==========
See Notes to the Consolidated Financial Statements. F-5 31 ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED JULY 31, JULY 31, JULY 31, 1999 1998 1997 ---------- ---------- ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings............................................... $ 80,932 $ 68,937 $ 50,553 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization expense.................... 31,252 23,689 16,290 Amortization of deferred compensation.................... 709 -- -- Deferred taxes and utilization of NOL operating losses... 7,633 34,544 28,697 Unusual Item -- Gain on Sale of Diamond Park Fine Jewelers.............................................. -- (1,634) -- Unusual Item -- Gain on Sale of Land..................... -- (7,313) -- Changes in assets and liabilities, net of Peoples Jewellers acquisition: Restricted cash.......................................... 163 2,821 22,497 Customer receivables, net................................ (15,223) (41,198) (34,393) Merchandise inventories.................................. (57,976) (19,277) (53,840) Other current assets..................................... (7,966) 12,551 (13,736) Other assets............................................. 367 122 1,467 Accounts payable and accrued liabilities................. 34,628 45,144 (490) Non-current liabilities.................................. (173) (5,613) (580) --------- --------- ----------- Net Cash Provided by Operating Activities.................. 74,346 112,773 16,465 --------- --------- ----------- NET CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment........................ (59,538) (63,497) (54,025) Dispositions of property and equipment..................... 1,941 649 4,887 Acquisition of Peoples Jewellers, net of cash acquired..... (96,662) -- -- Proceeds from Sale of Diamond Park Fine Jewelers........... -- 62,443 -- Proceeds from Sale of Land................................. -- 12,911 -- --------- --------- ----------- Net Cash (Used in) Provided by Investing Activities........ (154,259) 12,506 (49,138) --------- --------- ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short term borrowings...................... 250,000 -- -- (Payments on) proceeds from long-term debt................. -- (410) 291 Payments on receivables securitization facility............ (380,760) -- -- Payments on revolving credit agreement..................... (3,500) (192,900) (1,027,700) Borrowings under revolving credit agreement................ 106,500 122,200 1,074,800 Net proceeds from issuance on senior notes................. -- 99,530 -- Debt issue and capitalized financing costs................. (1,094) (2,621) (945) Proceeds from exercise of stock options.................... 21,044 9,198 1,073 Proceeds from exercise of warrants......................... -- 20,170 -- Purchase of common stock................................... (49,943) (40,000) (759) --------- --------- ----------- Net Cash (Used in) Provided by Financing Activities........ (57,753) 15,167 46,760 --------- --------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents....... (137,666) 140,446 14,087 Cash and Cash Equivalents at Beginning of Period........... 173,069 32,623 18,536 --------- --------- ----------- Cash and Cash Equivalents at End of Period................. $ 35,403 $ 173,069 $ 32,623 ========= ========= =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid............................................ $ 35,956 $ 35,853 $ 34,914 Interest received........................................ $ 7,289 $ 7,776 $ 936 Income taxes paid (net of refunds received).............. $ 39,403 $ 1,741 $ 3,431
See Notes to the Consolidated Financial Statements. F-6 32 ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (AMOUNTS IN THOUSANDS)
ACCUMULATED NUMBER OF ADDITIONAL OTHER COMMON SHARES COMMON PAID-IN COMPREHENSIVE OUTSTANDING STOCK CAPITAL INCOME ------------- ------ ---------- ------------- Balance July 31, 1996........................ 35,199 $352 $383,042 $1,013 Net Earnings................................. -- -- -- -- Unrealized Gain on Securities, net........... -- -- -- 1,169 Reduction of Tax Valuation Allowance......... -- -- 13,280 -- Exercise of Stock Options.................... 113 1 1,072 -- Recoveries and Purchase of Common Stock...... (290) (3) 3,727 -- ------ ---- -------- ------ Balance, July 31, 1997....................... 35,022 350 401,121 2,182 ====== ==== ======== ====== Net Earnings................................. -- -- -- -- Unrealized Gain on Securities, net........... -- -- -- 669 Reduction of Tax Valuation Allowance......... -- -- 46,572 -- Exercise of Stock Options.................... 768 11 9,187 -- Exercise of Warrants......................... 1,945 19 20,151 -- Purchase of Common Stock..................... (1,365) -- -- -- Recoveries of Common Stock................... (5) -- 166 -- Contribution to 401(k) plan.................. 35 -- 460 -- ------ ---- -------- ------ Balance, July 31, 1998....................... 36,400 380 477,657 2,851 ====== ==== ======== ====== Net Earnings................................. -- -- -- -- Unrealized Loss on Securities, net........... -- -- -- (285) Cumulative Translation Adjustments........... -- -- -- (2,190) Exercise of Stock Options, including tax benefit.................................... 1,019 10 21,034 -- Purchase of Common Stock..................... (1,669) -- -- -- Contribution to 401(k) plan.................. 52 -- (104) -- Restricted Stock Awards...................... 181 2 5,713 -- Deferred Compensation Amortization........... -- -- -- -- ------ ---- -------- ------ Balance July 31, 1999........................ 35,983 $392 $504,300 $ 376 ====== ==== ======== ======
See Notes to the Consolidated Financial Statements. F-7 33 ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT -- (CONTINUED) (AMOUNTS IN THOUSANDS)
ACCUMULATED DEFERRED TREASURY TOTAL COMPREHENSIVE EARNINGS COMPENSATION STOCK INVESTMENT INCOME ----------- ------------ -------- ---------- ------------- Balance July 31, 1996............. $ 91,851 $ -- $ -- $476,258 $ -- Net Earnings...................... 50,553 -- -- 50,553 50,553 Unrealized Gain on Securities, net............................. -- -- -- 1,169 1,169 Reduction of Tax Valuation Allowance....................... -- -- -- 13,280 -- Exercise of Stock Options......... -- -- -- 1,073 -- Recoveries and Purchase of Common Stock........................... -- -- (4,483) (759) -- -------- ------- -------- -------- ------- Balance, July 31, 1997............ 142,404 -- (4,483) 541,574 51,722 ======== ======= ======== ======== ======= Net Earnings...................... 68,937 -- -- 68,937 68,937 Unrealized Gain on Securities, net............................. -- -- -- 669 669 Reduction of Tax Valuation Allowance....................... -- -- -- 46,572 -- Exercise of Stock Options......... -- -- -- 9,198 -- Exercise of Warrants.............. -- -- -- 20,170 -- Purchase of Common Stock.......... -- -- (40,000) (40,000) -- Recoveries of Common Stock........ -- -- (166) -- -- Contribution to 401(k) plan....... -- -- 481 941 -- -------- ------- -------- -------- ------- Balance, July 31, 1998............ 211,341 -- (44,168) 648,061 69,606 ======== ======= ======== ======== ======= Net Earnings...................... 80,932 -- -- 80,932 80,932 Unrealized Gain on Securities, net............................. -- -- -- (285) (285) Cumulative Translation Adjustments..................... -- -- -- (2,190) (2,190) Exercise of Stock Options, including tax benefit........... -- -- -- 21,044 -- Purchase of Common Stock.......... -- -- (49,943) (49,943) -- Contribution to 401(k) plan....... -- -- 1,386 1,282 -- Restricted Stock Awards........... -- (5,715) -- -- -- Deferred Compensation Amortization.................... -- 710 -- 710 -- -------- ------- -------- -------- ------- Balance July 31, 1999............. $292,273 $(5,005) $(92,725) $699,611 $78,457 ======== ======= ======== ======== =======
See Notes to the Consolidated Financial Statements. F-8 34 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS include the accounts of Zale Corporation and its wholly-owned subsidiaries (the "Company" or "Zale"). The Company consolidates substantially all its U.S. operations into Zale Delaware, Inc. ("ZDel"). ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to credit customers of the Company. The Company consolidates its Canadian retail operations (see Acquisition of Peoples Jewellers) into Zale International, Inc., which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS includes cash on hand, deposits in banks and short-term marketable securities at varying interest rates with maturities of three months or less. The carrying amount approximates fair value because of the short maturity of those instruments. At July 31, 1999, $6.0 million was restricted primarily by the capital requirements of Jewelers National Bank ("JNB"), the Company's national credit card bank and consignment arrangements with certain vendors. CUSTOMER RECEIVABLES are classified as current assets, including amounts which are due after one year, in accordance with industry practices. The allowance for doubtful accounts was $76.5 million and $67.3 million at July 31, 1999 and 1998, respectively. Finance charge income and net earnings from credit insurance subsidiaries of $118.5 million, $113.3 million and $101.0 million for the years ended July 31, 1999, 1998 and 1997, respectively, has been reflected as a reduction of Selling, General and Administrative Expenses. Finance charge and insurance charge income are recorded pursuant to the calculation set forth in the Company's credit card agreements. MERCHANDISE INVENTORIES are stated at the lower of cost or market. Cost for U.S. inventories is determined primarily in accordance with the retail inventory method. Substantially all U.S. inventories represent finished goods which are valued using the last-in, first-out ("LIFO") method. Merchandise inventory of Peoples Jewellers are valued using the first-in, first-out ("FIFO") method determined using the cost method. LONG LIVED ASSETS. In fiscal year 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes accounting standards for the impairment of long-lived assets and goodwill. Under the guidance of SFAS No. 121, intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Any impairment would be recognized in operating results if a permanent reduction were to occur. DEPRECIATION AND AMORTIZATION are computed using the straight-line method over the estimated useful lives of the assets or remaining lease life. Estimated useful lives of the assets range from three to twenty years. Original cost and related accumulated depreciation or amortization are removed from the accounts in the year assets are retired. Gains or losses on dispositions of property and equipment are included in operations in the year of disposal. Computer software costs related to the development of major systems are capitalized as incurred and are amortized over their useful lives. EXCESS OF REVALUED NET ASSETS OVER STOCKHOLDERS' INVESTMENT is being amortized over fifteen years. Amortization was $5.9 million for each of the years ended July 31, 1999, 1998 and 1997. Accumulated amortization was $35.4 million and $29.5 million at July 31, 1999 and 1998, respectively. F-9 35 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STORE PRE-OPENING COSTS are charged to results of operations when incurred. Store closing costs are estimated and recognized in the period in which the Company makes the decision that the store will close. Such costs include the present value of estimated future rentals net of anticipated sublease income, loss on retirement of property and equipment and other related occupancy costs. ADVERTISING EXPENSES are charged against operations when incurred. Cooperative advertising funds are received from certain merchandise vendors. Amounts charged against operations were $49.0 million, $45.8 million and $46.1 million for the years ended July 31, 1999, 1998 and 1997, respectively, net of amounts contributed by vendors to the Company. The amounts of prepaid advertising at July 31, 1999 and 1998 are $2.5 million and $4.4 million, respectively. RECLASSIFICATIONS. The classifications in use at July 31, 1999 have been applied to the financial statements for July 31, 1998 and 1997. FOREIGN CURRENCY. Translation adjustments result from translating foreign subsidiaries' financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. Resulting translation adjustments are included as a component of Comprehensive Income in the Consolidated Statements of Stockholders' Investment. ACQUISITION OF PEOPLES JEWELLERS Effective May 23, 1999, the Company acquired substantially all assets of Peoples Jewellers Corporation, a privately owned chain consisting principally of 176 fine jewelry stores operating throughout Canada, for approximately $78 million cash, payment of approximately $18 million to pay down existing bank debt and the assumption of certain liabilities. The excess of the purchase price over the fair value of the net assets acquired of approximately $57.1 million is classified as goodwill, and is included in other assets in the accompanying balance sheet and is being amortized on a straight-line basis over twenty years. Assets acquired and liabilities assumed have been recorded at their estimated fair values, and are subject to adjustment when additional information concerning the alignment of operations is finalized. The acquisition described above was accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of operations do not include any revenues or expenses related to the acquisition prior to May 23, 1999. The entire cost of the acquisition was funded through the Company's available cash. The following unaudited pro forma information presents a summary of our consolidated results of operations including Peoples Jewellers as if the acquisition was effective on August 1, 1997:
YEAR ENDED YEAR ENDED JULY 31, 1999 JULY 31, 1998 ------------- ------------- UNAUDITED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales............................................... $1,542,645 $1,452,326 Net Earnings........................................ 81,203 69,086 Earnings Per Common Share: Diluted........................................... 2.21 1.85
The unaudited pro forma information does not purport to represent what the results of operations of the Company would actually have been if the aforementioned transaction had occurred on August 1, 1997, nor do they project the results of operations or financial position for any future periods or at any future date. F-10 36 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) MERCHANDISE INVENTORIES The Company's U.S. operations use the LIFO method of accounting for inventory, which results in a matching of current costs with current revenues. The LIFO (benefit)/provision was ($0.7) million, ($2.5) million and $3.7 million for the years ended July 31, 1999, July 31, 1998 and July 31, 1997, respectively. The estimated cost of replacing the Company's inventories exceeds its net LIFO cost by approximately $12.7 million and $13.4 million at July 31, 1999 and 1998, respectively. Inventories on a first-in, first-out ("FIFO") basis were $546.8 million and $491.9 million at July 31, 1999 and 1998, respectively. The Company also maintained consigned inventory at its retail locations of approximately $126.3 million and $146.8 million at July 31, 1999 and 1998, respectively. This consigned inventory and related contingent obligation are not reflected in the Company's financial statements. At the time consigned inventory is sold, the Company records the purchase liability in accounts payable and the related cost of merchandise in Cost of Sales. The Company's Canadian operations use the FIFO method of accounting for inventory. Inventory net of reserves was approximately $37.6 million and consigned inventory was approximately $5.4 million at July 31, 1999. PROPERTY AND EQUIPMENT The Company's property and equipment consists of the following:
JULY 31, 1999 JULY 31, 1998 ------------- ------------- (AMOUNTS IN THOUSANDS) Buildings and Leasehold Improvements................ $111,141 $ 80,149 Furniture and Fixtures.............................. 176,258 129,145 Construction in Progress............................ 10,041 19,054 -------- -------- 297,440 228,348 Less: Accumulated Amortization and Depreciation..... (93,599) (65,464) -------- -------- Total Net Property and Equipment.................... $203,841 $162,884 ======== ========
ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NON-CURRENT LIABILITIES The Company's accounts payable and accrued liabilities consist of the following:
JULY 31, 1999 JULY 31, 1998 ------------- ------------- (AMOUNTS IN THOUSANDS) Accounts Payable.................................... $104,759 $ 77,711 Accrued Payroll..................................... 25,453 22,542 Accrued Taxes....................................... 18,210 18,601 Extended Warranty................................... 19,419 15,706 Accrued Percentage Rent............................. 16,162 11,093 Other Accruals...................................... 53,389 41,968 -------- -------- Total Accounts Payable and Accrued Liabilities...... $237,392 $187,621 ======== ========
The Company's non-current liabilities consist principally of the accumulated obligation for postretirement benefits under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," loss reserves for insurance subsidiaries and reserves for tax contingencies. POSTRETIREMENT BENEFITS. In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), "Employers' Disclosures F-11 37 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) about Pensions and Other Postretirement Benefits an amendment of FASB Statements No. 87, 88, and 106," which revises employers' disclosures about pensions and other postretirement benefit plans. The Company adopted the provisions of SFAS No. 132 for the year ended July 31, 1999. All prior year information has been restated in accordance with SFAS No. 132. The Company provides medical and dental insurance benefits for all eligible retirees and spouses with benefits to the latter continuing after the death of the retiree. Substantially all of the Company's full-time employees, who were hired on or before November 14, 1994, become eligible for those benefits upon reaching age 55 while working for the Company and having ten years continuous service. The medical and dental benefits are provided under two plans. The lifetime maximum on medical benefits is $500,000 up to the age of 65 and $50,000 thereafter. These benefits include deductibles, retiree contributions and co-insurance provisions that are assumed to grow with the health care cost trend rate. The costs of the postretirement benefits are recognized in the financial statements over an employee's active career on an accrual basis. The Company funds actual claims as they occur. Change in Benefit Obligation:
JULY 31, 1999 JULY 31, 1998 JULY 31, 1997 ------------- ------------- ------------- (AMOUNTS IN THOUSANDS) Benefit Obligation At Beginning Of Year......... $20,865 $20,920 $20,733 Service Cost.................................... 339 440 613 Interest Cost................................... 1,053 936 1,112 Actuarial Gain.................................. (572) (743) (582) Benefits Paid................................... (597) (688) (956) ------- ------- ------- Benefit Obligation At End of Year............... $21,088 $20,865 $20,920 ======= ======= =======
The weighted average assumption of the discount rate is 7.75 percent and 7.0 percent as of July 31, 1999, and 1998 respectively. For measurement purposes, a 10.0 percent and 11.0 percent annual rate of increase in the per capita cost covered health care benefits was assumed for July 31, 1999 and July 31, 1998 respectively. The rate was assumed to decrease gradually to 6.0 percent for 2006 and remain at that level thereafter. Components of Net Periodic Benefit Cost:
JULY 31, 1999 JULY 31, 1998 JULY 31, 1997 ------------- ------------- ------------- (AMOUNTS IN THOUSANDS) Service Cost.................................... $ 339 $ 440 $ 613 Interest Cost................................... 1,053 936 1,112 Amortization of Prior Service Cost.............. (572) (743) (582) ------ ----- ------ Net Periodic Benefit Cost....................... $ 820 $ 633 $1,143 ====== ===== ======
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT INCREASE DECREASE ------------------- ------------------ (DOLLARS IN THOUSANDS) Effect on total service and interest cost components................................ $ 178 13.5% $ (85) (6.4)% Effect on post retirement benefit obligation................................ 1,780 13.1% (1,619) (11.9)%
F-12 38 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SHORT-TERM BORROWINGS The Company's Short-term Borrowings consist of the following:
JULY 31, 1999 JULY 31, 1998 ------------- ------------- (AMOUNTS IN THOUSANDS) Revolving Credit Agreement............................... $103,000 $ -- Zale Funding Trust Securitization........................ 250,000 -- -------- ---- $353,000 $ -- ======== ====
REVOLVING CREDIT AGREEMENT. In order to support the Company's growth plans, the Company and ZDel (the "Borrowers") entered into a three year unsecured revolving credit agreement (the "Revolving Credit Agreement") with a group of banks on March 31, 1997. The Revolving Credit Agreement provides for revolving credit loans in an aggregate amount of up to $225.0 million, including a $30.0 million sublimit for letters of credit. The revolving credit loans bear interest at floating rates, currently, at the Borrowers' option of either (i) the Eurodollar Rate plus 1.25 percent or (ii) the higher of the annual rate of interest announced from time to time by the agent bank as its base rate or the Federal Funds Effective Rate plus 0.5 percent. The interest rate based on Eurodollar Rates and letter of credit commission rates can be reduced or increased based on certain future performance levels attained by the Borrowers. The Company pays a commitment fee of 0.25 percent per annum (subject to reduction or increase based on future performance) on the preceding month's unused Revolving Credit Agreement commitment. The Borrowers may repay the revolving credit loans at any time without penalty prior to the maturity date. The interest rates and commitment fee will also be reduced if the Company obtains an investment grade rating. The Revolving Credit Agreement may be extended by the Borrowers for one year upon obtaining appropriate consent. At July 31, 1999, approximately $103 million was outstanding under the Revolving Credit Agreement with a Eurodollar Rate of 6.4 percent. In addition, letters of credit in the amount of approximately $0.6 million were outstanding at July 31, 1999. The Company is currently in compliance with all of its covenant obligations under the Revolving Credit Agreement and the instruments governing its other indebtedness. The Company expects to enter into a new transaction to replace the Revolving Credit Agreement on or before the maturity date. See Notes to Consolidated Financial Statements -- Subsequent Event. The Revolving Credit Agreement contains certain restrictive covenants, which, among other things, restricts within certain limits the Borrowers' ability to pay dividends and make other payments, incur additional indebtedness, make capital expenditures, engage in certain transactions with affiliates, incur liens, make investments and sell assets. The Revolving Credit Agreement also requires the Borrowers to maintain certain financial ratios and specified levels of net worth. ZALE FUNDING TRUST SECURITIZATION. On July 15, 1999, the Company redeemed approximately $380.8 million, net of discount, aggregate principal amount of Receivables Backed Notes ("Receivables Notes") issued by Zale Funding Trust ("ZFT"), a limited purpose Delaware business trust wholly owned by Zale Delaware, Inc. ("ZDel"), and formed to finance customer accounts receivable. The Receivables Notes were redeemed with available cash and proceeds of advances under the Company's Revolving Credit Agreement and through the issuance of Variable Funding Notes ("Variable Notes") to a purchaser group under a new securitization facility in the initial aggregate principal amount of $250 million. The Variable Notes are part of a 364-day liquidity facility and are secured by a lien on customer accounts receivable. The Variable Notes currently bear interest at the market commercial paper rate plus a dealer fee of 0.05 percent. In addition, the Company pays a fee of 0.375 percent per annum on the funded portion of the facility and a commitment fee of 0.25 percent per annum on the unfunded portion. As of July 31, 1999, the entire F-13 39 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $250 million facility is classified as a Short-term Borrowing since it matures within the next twelve months. At that same time the effective borrowing rate was 5.6 percent. As originally entered into, the facility required the Company to reduce the outstanding amount of the Variable Notes to $150 million no later than October 15, 1999. The Company expects to refinance the Variable Notes on or before their maturity date with a new transaction or, with the consent of the note purchaser groups, to extend the maturity of the outstanding Variable Notes. See Notes to Consolidated Financial Statements -- Subsequent Event. Jewelers National Bank (the "Servicer"), a subsidiary of ZDel, is the servicing entity for the collection of the customer accounts receivable and its servicing obligations are guaranteed by ZDel. The Company has accounted for the Variable Notes as a secured borrowing in accordance with the provisions of SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." The ZFT Securitization imposes certain reporting obligations on the Company and limits ZFT's ability, among other things, to grant liens, incur certain indebtedness, or enter into other lines of business. Additionally, under certain conditions as defined, including among other things, failure to pay principal or interest when due, failure to cure a borrowing base deficiency and breach of any covenant that is not cured, the ZFT Securitization is subject to an early amortization whereby the ZFT Securitization may be declared due and payable immediately. The restricted cash balance shown on the Consolidated Balance Sheets as of July 31, 1999 and 1998 includes the restricted cash of ZFT of $1.2 million and $2.3 million as of July 31, 1999 and July 31, 1998 respectively, which is based on the relationship between the ZFT Securitization outstanding and gross accounts receivable as of July 31, 1999 and 1998. LONG-TERM DEBT The Company's long-term debt consists of the following:
JULY 31, 1999 JULY 31, 1998 ------------- ------------- (AMOUNTS IN THOUSANDS) Senior Notes................................................ $99,589 $ 99,556 Zale Funding Trust Securitization........................... -- 380,719 ------- -------- Total Long-Term Debt........................................ $99,589 $480,275 ======= ========
SENIOR NOTES. On September 23, 1997, the Company sold $100 million in aggregate principal amount of 8 1/2 percent Senior Notes (the "Senior Notes") due 2007 by means of an offering memorandum to qualified institutional buyers under Rule 144A promulgated under the Securities Act of 1933. All proceeds from the sale of the Senior Notes were used by the Company to repay outstanding indebtedness under its Revolving Credit Agreement and for general corporate purposes. The Senior Notes are unsecured and are fully and unconditionally guaranteed by ZDel. The Senior Notes are redeemable for cash at any time on or after October 1, 2002, at the option of the Company, in whole or in part, at redemption prices starting at 104.25 percent of the principal amount. The indenture relating to the Senior Notes contains certain restrictive covenants including, but not limited to, limitations on indebtedness, limitations on dividends and other restricted payments (including repurchases of the Company's common stock), limitation on transactions with affiliates, limitations on liens and limitations on disposition proceeds of asset sales, among others. Pursuant to a registration rights agreement relating to the Senior Notes, the Company has exchanged for the Senior Notes new notes of the Company registered with the Securities and Exchange Commission and with terms identical in all material respects to the Senior Notes. The Senior Notes are included in Long-term Debt on the accompanying balance sheet. F-14 40 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ZALE FUNDING TRUST SECURITIZATION. See Short-term Borrowings for description of Zale Funding Trust Securitization. LEASE COMMITMENTS The Company rents most of its retail space under leases that generally range from five to ten years and may contain base rent escalations. Lease incentives of approximately $4.3 million for reimbursement of certain leasehold improvement expenditures are being amortized against lease payments over the life of the lease. All existing real estate leases are treated as operating leases. Sublease rental income under noncancelable leases is not material. Rent expense is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED JULY 31, JULY 31, JULY 31, 1999 1998 1997 ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Retail Space: Minimum Rentals.................................. $ 88,943 $79,181 $ 70,344 Rentals Based on Sales........................... 12,069 13,046 27,762 -------- ------- -------- 101,012 92,227 98,106 Equipment and Corporate Headquarters............... 2,770 2,643 3,240 -------- ------- -------- Total Rent Expense................................. $103,782 $94,870 $101,346 ======== ======= ========
Contingent rentals paid to lessors of certain store facilities are determined principally on the basis of a percentage of sales in excess of contractual limits. Future minimum rent commitments as of July 31, 1999, for all noncancellable leases of ongoing operations were as follows: 2000 -- $91.2 million; 2001 -- $85.5 million; 2002 -- $78.7 million; 2003 -- $74.5 million; 2004 -- $70.6 million; thereafter -- $197.4 million; for a total of $597.9 million. INTEREST Interest expense for the years ended July 31, 1999, 1998 and 1997 was approximately $37.5 million, $37.2 million and $36.9 million, respectively. Interest income for the years ended July 31, 1999, 1998 and 1997 was $7.0 million, $5.2 million and $0.8 million, respectively. F-15 41 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Currently, the Company files a consolidated income tax return. The effective income tax rate varies from the federal statutory rate as follows:
YEAR ENDED YEAR ENDED YEAR ENDED JULY 31, JULY 31, JULY 31, 1999 1998 1997 ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Federal Income Tax Expense at Statutory Rate....... $45,495 $38,605 $27,950 Amortization of Excess of Revalued Net Assets Over Stockholders' Investment......................... (2,064) (2,064) (2,064) State Income Taxes, Net of Federal Income Tax Benefit.......................................... 5,128 4,635 3,243 Other.............................................. (56) 186 176 ------- ------- ------- Total Income Tax Expense........................... $48,503 $41,362 $29,305 ======= ======= ======= Effective Income Tax Rate.......................... 37.5% 37.5% 36.7% ======= ======= =======
YEAR ENDED YEAR ENDED YEAR ENDED JULY 31, JULY 31, JULY 31, 1999 1998 1997 ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Current Provision: Federal.......................................... $37,746 $ 6,405 $ 221 State............................................ 3,124 413 387 ------- ------- ------- Total Current Provision.......................... 40,870 6,818 608 Deferred Provision Federal.......................................... 5,629 30,322 25,841 State............................................ 2,004 4,222 2,856 ------- ------- ------- Total Deferred Provision......................... 7,633 34,544 28,697 ------- ------- ------- Total Income Tax Provision......................... $48,503 $41,362 $29,305 ======= ======= =======
Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh-start reporting as of the close of business on July 31, 1993. In connection with the adoption of fresh-start reporting, the net book values of substantially all non-current assets existing at July 30, 1993 (the "Effective Date") were eliminated. As a consequence, SFAS No. 109, in conjunction with SOP 90-7, requires that any tax benefits realized for book purposes after the Effective Date, from the reduction of the valuation allowance existing as of the Effective Date be reported as an increase to additional paid-in capital rather than as a reduction in the tax provision in the Consolidated Statements of Operations. However, the Company will realize the cash benefit from utilization of its tax net operating loss ("NOL") against current and future tax liabilities. The cash benefit realized was approximately $13 million, $38 million and $25 million for the years ended July 31, 1999, 1998 and 1997, respectively. As of July 31, 1999, the Company has a NOL carryforward (after limitations) of approximately $181 million. A majority of the tax basis NOL carryforward, which will be available to offset future taxable income of the Company, was determined based upon the initial equity valuation of the Company as determined upon the Effective Date. The utilization of this asset is subject to limitations. The most restrictive is the Internal Revenue Code Section 382 annual limitation. The NOL carryforward can be utilized through 2008. F-16 42 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets and liabilities are determined based on estimated future tax effects of the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates. Tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at July 31, 1999 and 1998 are presented below.
JULY 31, JULY 31, 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) Current Deferred Taxes: Assets -- Customer receivables................................... $ 19,632 $ 8,152 Accrued liabilities.................................... 25,438 20,690 State and local taxes.................................. 1,291 1,950 Net operating loss carryforward........................ 9,957 38,000 Other.................................................. 771 120 -------- -------- Total Assets........................................... 57,089 68,912 Less -- Valuation Allowance............................ (6,381) (22,073) -------- -------- 50,708 46,839 Liabilities -- Merchandise inventories, principally due to LIFO reserve.............................................. (64,072) (67,224) Other.................................................. -- (415) -------- -------- Deferred Current Tax Liability, Net......................... $(13,364) $(20,800) ======== ======== Non-Current Deferred Taxes: Assets -- Property and equipment,................................ $ 6,001 $ 13,976 Net operating loss carryforward........................ 63,960 59,813 Postretirement benefits................................ 8,828 9,815 Other.................................................. 1,850 2,726 -------- -------- Total Assets........................................... 80,639 86,330 Less -- Valuation Allowance............................ (8,619) (27,357) -------- -------- 72,020 58,973 Liabilities -- Other.................................................. -- (170) Goodwill............................................... (9,225) -- -------- -------- Deferred Non-Current Tax Asset, Net......................... $ 62,795 $ 58,803 ======== ========
Pursuant to the requirements of SFAS No. 109, a valuation allowance must be provided when it is more likely than not that the deferred income tax asset will not be realized. The valuation reserve was approximately $15 million and $49 million as of July 31, 1999 and 1998, respectively. The Company believes that, as of July 31, 1999, a sufficient history of earnings has been established to make realization of an approximately $49 million deferred income tax asset more likely than not. The change in valuation allowance from July 31, 1998 to July 31, 1999 was approximately $34 million. CAPITAL STOCK COMMON STOCK. At July 31, 1999 and 1998, 70,000,000 shares of Common Stock, par value of $0.01 per share, were authorized, 39,261,005 shares and 38,061,538 shares, respectively, were issued, of which F-17 43 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 35,982,708 shares and 36,400,047 shares, respectively, were outstanding. The Company held 3,278,297 and 1,661,491 treasury shares at July 31, 1999 and 1998, respectively. PREFERRED STOCK. At July 31, 1999 and 1998, 5,000,000 shares of Preferred Stock, par value of $0.01, were authorized. None are issued or outstanding. WARRANTS. During 1998, 1,945,420 Series A Warrants were exercised. The remaining 27,330 Series A Warrants expired July 30, 1998. Accordingly, at July 31, 1999 and July 31, 1998 there were no warrants outstanding. Each Series A Warrant entitled the holder to purchase one share of Zale common stock for $10.368 per share (subject to certain anti-dilution adjustments). TREASURY STOCK. During fiscal 1998 the Company repurchased approximately 1,364,971 shares at an aggregate cost of $40 million, related to a stock repurchase program authorized in February 1998. In June 1999, the Company completed a $50 million repurchase program, which was authorized during August 1998. Under this program, the Company repurchased 1,669,400 shares in fiscal 1999. During September 1999, the Board of Directors approved a stock repurchase program pursuant to which the Company, from time to time and at management's discretion, may purchase through fiscal year 2000, up to an aggregate of $50 million of common stock on the open market. INCENTIVE STOCK PLAN. As of July 31, 1999 the Company had two stock incentive plans. On July 30, 1993 the Company adopted an incentive stock option plan (the "Incentive Stock Plan") to enable the Company to attract, retain and motivate officers and key employees by providing for proprietary interest of such individuals in the Company. Stock awards to purchase an aggregate of 6,555,000 shares of common stock may be granted under the Incentive Stock Plan to eligible employees. The Incentive Stock Plan allows for the granting of restricted stock, stock options, stock bonuses and stock appreciation rights subject to the provisions of the Incentive Stock Plan. Restricted Stock granted under the Incentive Stock Plan vests ratably over a four year vesting period except for 103,846 shares granted which vest ratably over a three year period, and are non-transferable prior to vesting. Options granted under the Stock Option Plan (i) must be granted at an exercise price not less than the fair market value of the shares of common stock into which such options are exercisable, (ii) vest ratably over a four-year vesting period and (iii) expire ten years from the date of grant. The 1995 Outside Director Stock Option Plan, (the "Director Plan") authorizes the Company to grant common stock to non-employee directors at fair market value of the Company common stock on the date of grant. The options vest over a four year period and expire ten years from the date of grant. The maximum number of shares which may be granted under the Director Plan is 150,000 shares. During February 1999, 180,692 shares of restricted Common Stock were granted to certain key employees valued at $5.7 million as of the grant date. The shares will vest ratably on each of the anniversaries ranging from three to four years from the date of grant and are subject to restrictions on their sale or transfer. The total cost of restricted stock is amortized to income as compensation expense ratably over the vesting period and amounted to $0.7 million for the twelve month period ended July 31, 1999. Stock option transactions are summarized as follows:
SHARES GRANT PRICE ---------------------------------- ------------------------------------------ FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL 1999 1998 1997 1999 1998 1997 ---------- --------- --------- ------------ ------------ ------------ Outstanding, beginning of year............... 3,365,757 3,088,425 2,722,075 $ 8.68-33.44 $ 8.68-21.81 $ 8.68-19.00 Granted................. 643,500 1,295,000 615,700 23.88-43.50 25.13-33.44 17.56-21.81 Exercised............... (1,018,775) (767,968) (112,825) 8.68-33.44 8.68-19.31 8.73-17.69 Canceled................ (78,325) (249,700) (136,525) 9.74-33.44 9.00-21.81 9.00-17.69 ---------- --------- --------- ------------ ------------ ------------ Outstanding, end of year.................. 2,912,157 3,365,757 3,088,425 $ 8.68-43.50 $ 8.68-33.44 $ 8.68-21.81 ========== ========= ========= ============ ============ ============ WEIGHTED AVERAGE EXERCISE PRICE ------------------------ FISCAL FISCAL FISCAL 1999 1998 1997 ------ ------ ------ Outstanding, beginning of year............... $22.65 $15.16 $13.60 Granted................. 42.17 33.24 21.37 Exercised............... 14.00 11.72 11.67 Canceled................ 20.22 17.67 13.07 ------ ------ ------ Outstanding, end of year.................. $30.01 $22.65 $15.16 ====== ====== ======
F-18 44 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of July 31, 1999 and 1998, 918,448 and 1,155,257, respectively, of options outstanding were exercisable. In fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company accounts for the Stock Option Plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan been determined pursuant to the provisions of SFAS No. 123, the Company's pro-forma net earnings for fiscal years 1999, 1998 and 1997 would have been (amounts in thousands) $77,149, $67,002 and $48,587 respectively, resulting in diluted earnings per share of $2.10, $1.79 and $1.33, respectively. The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used for options granted in fiscal years 1999, 1998 and 1997 respectively: risk-free interest rate of 5.3 percent, 5.8 percent and 6.0 percent, expected dividend yield of zero, expected lives of 5 years, and expected volatility of 34.0 percent, 32.2 percent, and 35.8 percent. The weighted average fair value of options granted for fiscal years 1999, 1998 and 1997 is $17.34, $12.74 and $9.06, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to August 1, 1996, the resulting pro forma compensation cost may not be representative of that to be expected in future years. EARNINGS PER COMMON SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, restricted stock and warrants issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. For the years ended July 31, 1999, 1998 and 1997, there were antidilutive common stock equivalents of 593,000, 1,266,000 and 524,000, respectively.
YEAR ENDED JULY 31, ------------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings available to shareholders................ $80,932 $68,937 $50,553 BASIC: Weighted average number of common shares outstanding......................................... 36,059 35,201 35,054 Earnings per common share -- basic.................... $ 2.24 $ 1.96 $ 1.44 ======= ======= ======= DILUTED: Weighted average number of common shares outstanding......................................... 36,059 35,201 35,054 Effect of dilutive securities: Stock options......................................... 551 980 675 Restricted Stock...................................... 78 -- -- Warrants.............................................. -- 1,187 903 ------- ------- ------- Weighted average number of common shares outstanding as adjusted......................................... 36,688 37,368 36,632 Earnings per common share -- diluted.................. $ 2.21 $ 1.84 $ 1.38 ======= ======= =======
COMPREHENSIVE INCOME Effective August 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and display of comprehensive F-19 45 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity during a period from transactions and other events, except those resulting from investments by and distributions to stockholders. The components of comprehensive income are reported in the consolidated statements of stockholders' investment. SEGMENTS The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. The Company has one reportable segment given the similarities of economic characteristics and products offered between the operations represented by the Company's four brands. Revenues of international retail operations represent approximately 1.5 percent of the Company's revenues for fiscal 1999. Net property and equipment of international operations, represents approximately 8.0 percent of the Company's net property and equipment for fiscal 1999. The Company's international retail operations commenced with the acquisition of Peoples Jewellers effective May 23, 1999. UNUSUAL ITEM -- GAIN ON SALE OF DIAMOND PARK On September 3, 1997, the Company signed an agreement to sell Diamond Park Fine Jewelers (the "Diamond Park Sale"). Diamond Park Fine Jewelers, which managed leased fine jewelry departments in major department store chains including Marshall Field's, Dillard's, Mercantile and Parisian, had net sales of $125.3 million in fiscal year 1997. On October 6, 1997, the Company closed the Diamond Park Sale resulting in a gain of $1.6 million. The Company received $58.0 million in October 1997 and approximately $4.8 million was received in February 1998. UNUSUAL ITEM -- GAIN ON SALE OF LAND In fiscal 1998, the Company closed the sale of excess land surrounding the corporate headquarters facility for $12.9 million, resulting in a gain of $7.3 million. COMMITMENTS AND CONTINGENCIES The Company is involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company's financial position or results of operations. The Company has an operations services agreement for management information systems with a third-party servicer. The agreement, which began in December 1996, requires fixed payments totaling $34.4 million over a 60 month term and a variable amount based on usage. The Company has an operations services agreement for credit operations with a third-party servicer. The agreement, dated May 5, 1998, requires minimum annual payments based on credit activities. The Company has a commitment of approximately $15.2 million to be paid over the initial term of seven years. Additional annual payments will be paid based on credit volume for normal credit processing activities. BENEFIT PLANS Defined Contribution Retirement Plan At July 31, 1999, the Company maintains The Zale Corporation Savings & Investment Plan. Substantially all employees who are at least age 21 are eligible to participate in the plan. Effective August 1, 1998, new employees are required to complete one year of continuous service with the Company to be eligible F-20 46 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to participate in the plan. Each employee can contribute from one percent to fifteen percent of their annual salary. Under this plan, the Company matches one dollar in Zale stock for every dollar an employee contributes up to four percent of annual earnings, subject to Internal Revenue Service limitations. In order for an employee to be eligible for the Company match, the employee must have worked at least 1,000 hours during the plan year and be employed on the last day of the plan year. For matching contributions made through fiscal year 1998 an employee is 33.3 percent vested in the Zale stock after one year of service, 66.7 percent vested after two years of service and 100 percent vested after three years of service. Matching contributions subsequent to July 31, 1998, will immediately vest 100 percent. In order to be eligible for the contribution, employees must be employed by the Company at the time of the contribution. The Company's matching contributions were $1.3 million, $1.2 million and $1.2 million for fiscal years 1999, 1998 and 1997, respectively. The Company contributed 52,594 and 35,047 treasury shares to its 401(k) plan in fiscal year 1999 and 1998, respectively. Retirement Plan On September 14, 1995, the Boards of Directors of Zale and ZDel approved the preparation and implementation of the Zale Delaware, Inc. Supplemental Executive Retirement Plan (the "Plan"), which was executed on behalf of the Company February 23, 1996, to be effective as of September 15, 1995. The purpose of the Plan is to provide eligible executives with the opportunity to receive payments each year after retirement equal to a portion of their final average pay as defined. FINANCIAL INSTRUMENTS As cash and short-term cash investments, customer receivables, the revolving credit agreement, variable funding notes, trade payables and certain other short-term financial instruments are all short-term in nature, their carrying amount approximates fair value. Also, the carrying amount of the $99.6 million, net of discount, Senior Notes approximates fair value. The investments of the Company's insurance subsidiaries, primarily stocks and bonds in the amount of $27.7 million and $26.6 million, approximate market value at July 31, 1999 and July 31, 1998 respectively and are reflected in Other Assets on the Consolidated Balance Sheets. Investments are classified as available for sale and are carried at fair value. Changes in unrealized gains and losses are recorded directly to stockholders' investment. Net realized gains recognized for the years ended July 31, 1999, 1998 and 1997 were $1.6 million, $0.8 million, and $2.0 million, respectively. CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and customer receivables. The Company maintains cash and cash equivalents, short and long-term investments and certain other financial instruments with various financial institutions. These financial institutions are located throughout the country. Concentrations of credit risk with respect to customer receivables are limited due to the Company's large number of customers and their dispersion across many regions. As of July 31, 1999 and 1998, the Company had no significant concentrations of credit risk. RELATED-PARTY TRANSACTIONS One of the Company's directors serves as a director of a company from which the Company purchased approximately $2.6 million and $3.1 million of jewelry merchandise during fiscal year 1999 and 1998, respectively. The Company believes the terms were equivalent to those of unrelated parties. F-21 47 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The Company's payment obligations under the Senior Notes are guaranteed by ZDel (the "Guarantor Subsidiary"). Such guarantee is full and unconditional with respect to ZDel. ZFT, a limited purpose Delaware business trust wholly owned by ZDel which owns the customer accounts receivable of ZDel, is not a guarantor of the obligations under the Senior Notes. Separate financial statements of the Guarantor Subsidiary are not presented because the Company's management has determined that they would not be material to investors. The following supplemental financial information sets forth, on an unconsolidated basis, statements of operations, balance sheets, and statements of cash flow information for the Company ("Parent Company Only"), for the Guarantor Subsidiary and for the Company's other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial information reflects the investments of the Company and the Guarantor Subsidiary in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. Certain reclassifications have been made to provide for uniform disclosure of all periods presented. These reclassifications are not material. F-22 48 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED JULY 31, 1999 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ---------- ------------- ------------ ------------ Net Sales............................ $ -- $1,378,670 $50,198 $ -- $1,428,868 Cost of Sales........................ -- 712,072 25,116 -- 737,188 ------- ---------- ------- -------- ---------- Gross Margin......................... -- 666,598 25,082 -- 691,680 Selling, General, and Administrative Expenses (Income).................. 150 529,119 (26,990) -- 502,279 Depreciation and Amortization Expense............................ -- 26,193 3,285 -- 29,478 ------- ---------- ------- -------- ---------- Operating Earnings (Loss)............ (150) 111,286 48,787 -- 159,923 Interest Expense, Net................ -- (11,718) 42,206 -- 30,488 ------- ---------- ------- -------- ---------- Income (Loss) Before Income Taxes.... (150) 123,004 6,581 -- 129,435 Income Taxes......................... (56) 46,254 2,305 -- 48,503 ------- ---------- ------- -------- ---------- Earnings (Loss) Before Equity in Earnings of Subsidiaries........... (94) 76,750 4,276 -- 80,932 Equity in Earnings of Subsidiaries... 81,026 4,459 -- (85,485) -- ------- ---------- ------- -------- ---------- Net Earnings......................... $80,932 $ 81,209 $ 4,276 $(85,485) $ 80,932 ======= ========== ======= ======== ==========
F-23 49 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED JULY 31, 1998 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ---------- ------------- ------------ ------------ Net Sales.............................. $ -- $1,291,146 $22,564 $ -- $1,313,710 Cost of Sales.......................... -- 670,776 11,132 -- 681,908 ------- ---------- ------- -------- ---------- Gross Margin........................... -- 620,370 11,432 -- 631,802 Selling, General, and Administrative Expenses (Income).................... 158 509,123 (33,435) -- 475,846 Depreciation and Amortization Expense.............................. -- 21,352 1,213 -- 22,565 Unusual Item -- Gain on Sale of Diamond Park Fine Jewelers................... -- (1,634) -- -- (1,634) Unusual Item -- Gain on Sale of Land... -- (7,313) -- -- (7,313) ------- ---------- ------- -------- ---------- Operating Earnings (Loss).............. (158) 98,842 43,654 -- 142,338 Interest Expense, Net.................. -- (7,327) 39,366 -- 32,039 ------- ---------- ------- -------- ---------- Income (Loss) Before Income Taxes...... (158) 106,169 4,288 -- 110,299 Income Taxes........................... (59) 39,812 1,609 -- 41,362 ------- ---------- ------- -------- ---------- Earnings (Loss) Before Equity in Earnings of Subsidiaries............. (99) 66,357 2,679 -- 68,937 Equity in Earnings of Subsidiaries..... 69,036 2,619 -- (71,655) -- ------- ---------- ------- -------- ---------- Net Earnings........................... $68,937 $ 68,976 $ 2,679 $(71,655) $ 68,937 ======= ========== ======= ======== ==========
F-24 50 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED JULY 31, 1997 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ---------- ------------- ------------ ------------ Net Sales......................... $ -- $1,233,438 $ 20,380 $ -- $1,253,818 Cost of Sales..................... -- 633,208 10,110 -- 643,318 ------- ---------- -------- -------- ---------- Gross Margin...................... -- 600,230 10,270 -- 610,500 Selling, General, and Administrative Expenses (Income)........................ 150 497,636 (17,264) -- 480,522 Depreciation and Amortization Expense......................... -- 12,295 1,727 -- 14,022 ------- ---------- -------- -------- ---------- Operating Earnings (Loss)......... (150) 90,299 25,807 -- 115,956 Interest Expense, Net............. -- 1,739 34,359 -- 36,098 ------- ---------- -------- -------- ---------- Income (Loss) Before Income Taxes........................... (150) 88,560 (8,552) -- 79,858 Income Taxes...................... (55) 32,498 (3,138) -- 29,305 ------- ---------- -------- -------- ---------- Earnings (Loss) Before Equity in Earnings of Subsidiaries........ (95) 56,062 (5,414) -- 50,553 Equity in Earnings of Subsidiaries.................... 50,648 (6,040) -- (44,608) -- ------- ---------- -------- -------- ---------- Net Earnings (Loss)............... $50,553 $ 50,022 $ (5,414) $(44,608) $ 50,553 ======= ========== ======== ======== ==========
F-25 51 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JULY 31, 1999 (AMOUNTS IN THOUSANDS) ASSETS
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ------------- ------------ ------------ Current Assets: Cash and Cash Equivalents......... $ -- $ 22,294 $ 13,109 $ -- $ 35,403 Restricted Cash................... -- 1,533 4,496 -- 6,029 Customer Receivables, Net......... -- -- 510,714 -- 510,714 Merchandise Inventories........... -- 524,184 47,485 -- 571,669 Other Current Assets.............. -- 33,869 2,958 -- 36,827 -------- ---------- -------- ----------- ---------- Total Current Assets................ -- 581,880 578,762 -- 1,160,642 Investment in Subsidiaries.......... 698,197 47,880 -- (746,077) -- Property and Equipment, Net......... -- 183,789 20,052 -- 203,841 Intercompany Receivable............. 102,768 151,287 -- (254,055) -- Other Assets........................ -- 8,393 91,261 -- 99,654 Deferred Tax Assets, Net............ 58 67,335 (4,598) -- 62,795 -------- ---------- -------- ----------- ---------- Total Assets........................ $801,023 $1,040,564 $685,477 $(1,000,132) $1,526,932 ======== ========== ======== =========== ========== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Short-term borrowings............. $ -- $ 103,000 $250,000 $ -- $ 353,000 Accounts Payable and Accrued Liabilities.................... 2,784 216,101 18,507 -- 237,392 Deferred Tax Liability, Net....... 646 17,954 (5,236) -- 13,364 -------- ---------- -------- ----------- ---------- Total Current Liabilities........... 3,430 337,055 263,271 -- 603,756 Non-current Liabilities............. -- 59,294 11,598 -- 70,892 Intercompany Payable................ -- -- 254,055 (254,055) -- Long-term Debt...................... 99,589 -- -- -- 99,589 Excess of Revalued Net Assets Over Stockholders' Investment, Net..... -- 53,084 -- -- 53,084 Total Stockholders' Investment...... 698,004 591,131 156,553 (746,077) 699,611 -------- ---------- -------- ----------- ---------- Total Liabilities and Stockholders' Investment........................ $801,023 $1,040,564 $685,477 $(1,000,132) $1,526,932 ======== ========== ======== =========== ==========
F-26 52 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JULY 31, 1998 (AMOUNTS IN THOUSANDS) ASSETS
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ------------- ------------ ------------ Current Assets: Cash and Cash Equivalents....... $ -- $165,248 $ 7,821 $ -- $ 173,069 Restricted Cash................. -- 1,541 4,651 -- 6,192 Customer Receivables, Net....... -- -- 495,468 -- 495,468 Merchandise Inventories......... -- 468,076 10,391 -- 478,467 Other Current Assets............ -- 24,502 2,218 -- 26,720 -------- -------- -------- --------- ---------- Total Current Assets.............. -- 659,367 520,549 -- 1,179,916 Investment in Subsidiaries........ 648,160 52,493 -- (700,653) -- Property and Equipment, Net....... -- 158,807 4,077 -- 162,884 Intercompany Receivable........... 102,801 495 -- (103,296) -- Other Assets...................... -- 10,493 33,833 -- 44,326 Deferred Tax Assets, Net.......... 59 58,741 3 -- 58,803 -------- -------- -------- --------- ---------- Total Assets...................... $751,020 $940,396 $558,462 $(803,949) $1,445,929 ======== ======== ======== ========= ========== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Current Portion of Long-term Debt............................ $ -- $ -- $ -- $ -- $ -- Accounts Payable and Accrued Liabilities..................... 2,758 182,725 2,138 -- 187,621 Deferred Tax Liability, Net....... 646 20,154 -- -- 20,800 -------- -------- -------- --------- ---------- Total Current Liabilities......... 3,404 202,879 2,138 -- 208,421 Non-current Liabilities........... -- 38,420 11,770 -- 50,190 Intercompany Payable.............. -- -- 103,296 (103,296) -- Long-term Debt.................... 99,555 -- 380,720 -- 480,275 Excess of Revalued Net Assets Over Stockholders' Investment, Net... -- 58,982 -- -- 58,982 Total Stockholders' Investment.... 648,061 640,115 60,538 (700,653) 648,061 -------- -------- -------- --------- ---------- Total Liabilities and Stockholders' Investment........ $751,020 $940,396 $558,462 $(803,949) $1,445,929 ======== ======== ======== ========= ==========
F-27 53 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED JULY 31, 1999 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities................ $125,561 $ (86,411) $ 47,435 $ (12,239) $ 74,346 Net Cash Flows from Investing Activities: Additions to property and equipment... -- (58,418) (1,120) -- (59,538) Dispositions of property and equipment........................... -- 1,875 66 -- 1,941 Acquisition of Peoples Jewellers, net of cash acquired.................... (96,662) -- -- -- (96,662) -------- --------- --------- --------- --------- Net Cash Used in Investing Activities.......................... (96,662) (56,543) (1,054) -- (154,259) -------- --------- --------- --------- --------- Net Cash Flows from Financing Activities: Net increase in short-term borrowings.......................... -- -- 250,000 -- 250,000 Payments on receivables securitization facility............................ -- -- (380,760) -- (380,760) Payments on revolving credit agreement........................... -- (3,500) -- -- (3,500) Borrowings under revolving credit agreement........................... -- 106,500 -- -- 106,500 Debt issue and capitalized financing costs............................... -- -- (1,094) -- (1,094) Proceeds from exercise of stock options............................. 21,044 -- -- -- 21,044 Purchase of common stock.............. (49,943) -- -- -- (49,943) Proceeds from issuance of Common Stock............................... -- -- 103,000 (103,000) -- Dividends paid........................ -- (103,000) (12,239) 115,239 -- -------- --------- --------- --------- --------- Net Cash Used in Financing Activities.......................... (28,899) -- (41,093) 12,239 (57,753) -------- --------- --------- --------- --------- Net (Decrease) Increase in Cash and Cash Equivalents.................... -- (142,954) 5,288 -- (137,666) Cash and Cash Equivalents at Beginning of Period........................... -- 165,248 7,821 -- 173,069 -------- --------- --------- --------- --------- Cash and Cash Equivalents at End of Period.............................. $ -- $ 22,294 $ 13,109 $ -- $ 35,403 ======== ========= ========= ========= =========
F-28 54 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED JULY 31, 1998 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ------------- ------------ ------------ Net Cash Provided by Operating Activities........................... $ 10,632 $ 101,492 $ 13,922 $(13,273) $ 112,773 Net Cash Flows from Investing Activities: Additions to property and equipment.... -- (61,959) (1,538) -- (63,497) Dispositions of property and equipment............................ -- 548 101 -- 649 Proceeds from Sale of Diamond Park Fine Jewelers............................. -- 62,443 -- -- 62,443 Proceeds from Sale of Land............. -- 12,911 -- -- 12,911 -------- --------- -------- -------- --------- Net Cash Provided by (Used in) Investing Activities................. -- 13,943 (1,437) -- 12,506 -------- --------- -------- -------- --------- Net Cash Flows from Financing Activities: Proceeds from long-term debt........... -- (410) -- -- (410) Payments on revolving credit agreement............................ -- (192,900) -- -- (192,900) Borrowings under revolving credit agreement............................ -- 122,200 -- -- 122,200 Issuance of Senior Notes............... 99,530 -- -- -- 99,530 Loan from Zale Corporation to Zale Delaware, Inc. ...................... (99,530) 99,530 -- -- -- Debt issue and capitalized financing costs................................ -- (2,621) -- -- (2,621) Proceeds from exercise of stock options.............................. 9,198 -- -- -- 9,198 Proceeds from exercise of warrants..... 20,170 -- -- -- 20,170 Purchase of common stock............... (40,000) -- -- -- (40,000) Proceeds from issuance of common stock................................ -- -- 2,500 (2,500) -- Dividends paid......................... -- -- (15,773) 15,773 -- -------- --------- -------- -------- --------- Net Cash (Used in) Provided by Financing Activities................. (10,632) 25,799 (13,273) 13,273 15,167 -------- --------- -------- -------- --------- Net Increase (Decrease) in Cash and Cash Equivalents..................... -- 141,234 (788) -- 140,446 Cash and Cash Equivalents at Beginning of Period............................ -- 24,014 8,609 -- 32,623 -------- --------- -------- -------- --------- Cash and Cash Equivalents at End of Period............................... $ -- $ 165,248 $ 7,821 $ -- $ 173,069 ======== ========= ======== ======== =========
F-29 55 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED JULY 31, 1997 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ----------- ------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities............... $ (314) $ 23,764 $ 5,910 $(12,895) $ 16,465 Net Cash Flows from Investing Activities: Additions to property and equipment.......................... -- (54,025) -- -- (54,025) Dispositions of property and equipment.......................... -- 2,277 2,610 -- 4,887 ------ ----------- -------- -------- ----------- Net Cash (Used in) Provided by Investing Activities............... -- (51,748) 2,610 -- (49,138) ------ ----------- -------- -------- ----------- Net Cash Flows from Financing Activities: Proceeds from long-term debt......... -- 291 -- -- 291 Payments on revolving credit agreement.......................... -- (1,027,700) -- -- (1,027,700) Borrowings under revolving credit agreement.......................... -- 1,074,800 -- -- 1,074,800 Debt issue and capitalized financing costs.............................. -- (945) -- -- (945) Proceeds from exercise of stock options............................ 1,073 -- -- -- 1,073 Purchase of common stock............. (759) -- -- -- (759) Dividends paid....................... -- -- (12,895) 12,895 -- ------ ----------- -------- -------- ----------- Net Cash Provided by (Used in) Financing Activities............... 314 46,446 (12,895) 12,895 46,760 ------ ----------- -------- -------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents................... -- 18,462 (4,375) -- 14,087 Cash and Cash Equivalents at Beginning of Period................ -- 5,552 12,984 -- 18,536 ------ ----------- -------- -------- ----------- Cash and Cash Equivalents at End of Period............................. $ -- $ 24,014 $ 8,609 $ -- $ 32,623 ====== =========== ======== ======== ===========
F-30 56 ZALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUBSEQUENT EVENT As originally entered into, the facility required the Company to reduce the outstanding amount of the Variable Notes to $150 million no later than October 15, 1999. On September 15, 1999, the Company entered into an amendment to the new securitization facility to reduce the commitment of the original Variable Note purchaser group to $150 million and to add two new note purchaser groups having an aggregate commitment of $200 million, thereby increasing the total outstanding amount under the Variable Notes facility to $350 million on terms consistent with the original facility. Additionally the Company paid down the approximate $103 million balance under the Revolving Credit Agreement. The Company expects to refinance the Variable Notes on or before their maturity date with a new transaction or, with the consent of the note purchaser groups, to extend the maturity of the outstanding Variable Notes. See Notes to Consolidated Financial Statements -- Short-term Borrowings, Zale Funding Trust Securitization. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Unaudited quarterly results of operations for the years ended July 31, 1999 and 1998 were as follows (amounts in thousands except per share data):
FISCAL 1999 FOR THE THREE MONTHS ENDED ------------------------------------------------ JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, 1999 1999 1999 1998 -------- --------- ----------- ----------- Net sales......................................... $325,994 $280,736 $567,952 $254,186 Gross margin...................................... 157,441 136,028 276,122 122,089 Net earnings...................................... 8,542 6,267 63,960 2,163 Net earnings per diluted common share............. .23 .17 1.75 .06
FISCAL 1998 FOR THE THREE MONTHS ENDED ------------------------------------------------ JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, 1998 1998 1998 1997 -------- --------- ----------- ----------- Net sales......................................... $280,867 $258,300 $522,017 $252,526 Gross margin...................................... 134,980 124,458 251,441 120,923 Net earnings...................................... 7,451 1,503 58,937 1,046 Net earnings per diluted common share............. .20 .04 1.57 .03
F-31 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 30 day of September, 1999. ZALE CORPORATION By: /s/ ROBERT J. DINICOLA ---------------------------------- Robert J. DiNicola Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT J. DINICOLA Chairman of the Board September 30, 1999 - ----------------------------------------------------- Robert J. DiNicola /s/ BERYL B. RAFF President and Chief September 30, 1999 - ----------------------------------------------------- Executive Officer, Beryl B. Raff Director (principal executive officer of the registrant) /s/ SUE E. GOVE Executive Vice President and September 30, 1999 - ----------------------------------------------------- Chief Financial Officer Sue E. Gove (principal financial officer of the registrant) /s/ MARK R. LENZ Senior Vice President, September 30, 1999 - ----------------------------------------------------- Controller (principal Mark R. Lenz accounting officer of the registrant) /s/ GLEN ADAMS Director September 30, 1999 - ----------------------------------------------------- Glen Adams /s/ A. DAVID BROWN Director September 30, 1999 - ----------------------------------------------------- A. David Brown /s/ PETER P. COPSES Director September 30, 1999 - ----------------------------------------------------- Peter P. Copses /s/ ANDREA JUNG Director September 30, 1999 - ----------------------------------------------------- Andrea Jung /s/ RICHARD C. MARCUS Director September 30, 1999 - ----------------------------------------------------- Richard C. Marcus /s/ CHARLES H. PISTOR, JR. Director September 30, 1999 - ----------------------------------------------------- Charles H. Pistor, Jr. /s/ ANDREW H. TISCH Director September 30, 1999 - ----------------------------------------------------- Andrew H. Tisch
25 58 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Zale Corporation: We have audited in accordance with generally accepted auditing standards, the financial statements of Zale Corporation (a Delaware corporation) and subsidiaries included in this Form 10-K, and have issued our report thereon dated September 1, 1999 (except with respect to the matter discussed in the Subsequent Event footnote, as to which the date is September 15, 1999). Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Dallas, Texas, September 1, 1999 26 59 SCHEDULE II ZALE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT BEGINNING CHARGED TO END OF PERIOD EARNINGS DEDUCTIONS OF PERIOD ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Fiscal year ended July 31, 1999 Allowance for doubtful accounts.................. $67,285 $72,126 $62,877(1) $76,534 Fiscal year ended July 31, 1998 Allowance for doubtful accounts.................. $57,819 $66,066 $56,600(1) $67,285 Fiscal year ended July 31, 1997 Allowance for doubtful accounts.................. $51,402 $55,850 $49,433(1) $57,819
- --------------- (1) Accounts written off, less recoveries and other adjustments. 27 60 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Purchase of Assets Agreement, dated June 2, 1999, between Zale Canada Co. and Peoples Jewellers Corporation.(11) 3.1 -- Restated Certificate of Incorporation of Zale Corporation, dated July 30, 1993.(1) 3.2 -- Amended Bylaws of Zale Corporation, dated November 1, 1996.(5) 4.1 -- Revolving Credit Agreement dated March 31, 1997 among Zale Corporation and Zale Delaware, Inc. and The First National Bank of Boston, as agent for the lenders identified therein. The Schedules attached to the Agreement, as identified in the list of Schedules filed as a part of this exhibit, are omitted from this filing, but will be provided supplementally to the Commission upon request.(5) 4.2 -- Indenture, dated September 30, 1997, by and among Zale Corporation, Zale Delaware, Inc. and Bank One, N.A. as Trustee. (7) 4.3 -- Indenture, dated as of July 15, 1999, between Zale Funding Trust as Issuer and The Bank of New York as Indenture Trustee and Securities Intermediary.(11) 4.4 -- Series 1999 -- A Indenture Supplement, dated as of July 15, 1999, between Zale Funding Trust as Issuer and The Bank of New York as Indenture Trustee and Securities Intermediary.(11) 4.5 -- Purchase and Servicing Agreement, dated as of July 15, 1999, among Zale Funding Trust, Zale Delaware, Inc. and Jewelers National Bank. (11) *10.1 -- Class A Note Purchase Agreement, dated as of July 15, 1999, among Zale Funding Trust (Issuer), Zale Delaware, Inc. (Seller), Jewelers National Bank (Servicer), The Class A Purchasers Parties Thereto, Credit Suisse First Boston, New York Branch (Administrative Agent and Agent) and Other Agents Parties Thereto.(11) 10.2 -- Indemnification agreement, dated as of July 21, 1993, between Zale Corporation and certain present and former directors thereof.(3) *10.3 -- Zale Corporation Stock Option Plan.(1) *10.4 -- The Executive Severance Plan for Zale Corporation and Its Affiliates, as amended and restated as of February 10, 1994.(2) *10.4a -- Amendment to The Executive Severance Plan for Zale Corporation and Its Affiliates effective May 20, 1995.(4) *10.5 -- Settlement Agreement, dated as of November 30, 1997, between Zale Corporation and Louis J. Grabowsky.(8) 10.6 -- Lease Agreement Between Principal Mutual Life Insurance Company, As Landlord, and Zale Corporation, as Debtor and Debtor-In-Possession, As Tenant, dated as of September 17, 1992.(4) 10.6a -- First Lease Amendment and Agreement between Principal Mutual Life Insurance Company and Zale Delaware, Inc., dated as of February 1, 1996.(4) 10.7 -- Indemnification Agreement, executed on October 30, 1996, and dated as of June 6, 1996, between Zale Corporation and Andrea Jung.(5) *10.8 -- Form Change of Control Agreement dated as of October 30, 1996, but executed thereafter, between Zale Corporation and Key Employees.(6) 10.8a -- Modified list of parties to Change of Control Agreement.(9)
61
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.9 -- Asset Purchase Agreement, dated September 3, 1997, by and among Finlay Enterprises, Inc., Finlay Fine Jewelry Corporation, Zale Corporation and Zale Delaware, Inc.(9) 10.10 -- Seller Restrictive Covenant Agreement, dated as of June 2, 1999, between Peoples Jewellers Corporation, Zale Canada Co. and Zale Corporation.(11) *10.11 -- Amended and Restated Employment Agreement, dated September 7, 1999, between Zale Corporation and Robert J. DiNicola.(11) *10.12 -- Employment Agreement, dated as of August 1, 1998, between Zale Corporation and Beryl B. Raff. (9) *10.13 -- Employment Agreement, dated as of August 1, 1998, between Zale Corporation and Alan P. Shor. (9) *10.14 -- Employment Agreement, dated as of January 15, 1998 between Zale Corporation and Mary L. Forte. (9) *10.15 -- Employment Agreement, dated as of August 1, 1998, between Zale Corporation and Sue E. Gove. (9) *10.16 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Beryl B. Raff. (10) *10.17 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Alan P. Shor. (10) *10.18 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Mary L. Forte. (10) *10.19 -- Amendment to Employment Agreement, dated as of October 8, 1998, between Zale Corporation and Sue E. Gove. (10) 21 -- Subsidiaries of the registrant. (11) 23 -- Consent of Independent Public Accountants.(11) 27 -- Financial data schedule.(11)
- --------------- (1) Previously filed as an exhibit to the registrant's Form 10-Q (No. 1-4129) for the quarterly period ended September 30, 1993, and incorporated herein by reference. (2) Incorporated by reference to the corresponding exhibit to the registrant's Registration Statement on Form S-1 (No. 33-73310) filed with the Commission on December 23, 1993, as amended. (3) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1995, and incorporated herein by reference. (4) Previously filed as an exhibit to the registrant's Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1996, and incorporated herein by reference. (5) Previously filed as an exhibit to the registrant's Form 10-Q for the quarterly period ended October 31, 1996, and incorporated herein by reference. (6) Previously filed as an exhibit to the registrant's Form 10-Q for the quarterly period ended January 31, 1997, and incorporated herein by reference. (7) Previously filed as an exhibit to the registrants' Form 10-K (No. 0-21526) for the fiscal year ended July 31, 1997, and incorporated herein by reference. (8) Incorporated by reference to Exhibit 4.1 to the registrant's Registration Statement on Form S-4 (No. 33-39473) filed with the Commission on November 4, 1997. (9) Previously filed as an exhibit to the registrant's Form 10-K (No. 1-04129) for the fiscal year ended July 31, 1998, and incorporated herein by reference. 62 (10) Previously filed as an exhibit to the registrant's Form 10-Q for the quarterly period ended October 31, 1998, and incorporated herein by reference. (11) Filed herewith. * Management Contracts and Compensatory Plans. EX-2.1 2 PURCHASE OF ASSETS AGREEMENT DATED JUNE 2, 1999 1 EXHIBIT 2.1 - -------------------------------------------------------------------------------- ZALE CANADA CO. PURCHASE OF ASSETS OF PEOPLES JEWELLERS CORPORATION JUNE 2, 1999 MORRIS/ROSE/LEDGETT BARRISTERS AND SOLICITORS 161 BAY STREET, SUITE 2600 BCE PLACE, CANADA TRUST TOWER TORONTO, ON M5J 2S1 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS ARTICLE 1 INTERPRETATION..........................................................................................1 1.1 DEFINED TERMS.........................................................................................1 1.2 CURRENCY..............................................................................................6 1.3 SECTIONS AND HEADINGS.................................................................................6 1.4 NUMBER, GENDER AND PERSONS............................................................................6 1.5 ACCOUNTING PRINCIPLES.................................................................................6 1.6 ENTIRE AGREEMENT......................................................................................6 1.7 TIME OF ESSENCE.......................................................................................7 1.8 APPLICABLE LAW AND AGENT FOR SERVICE..................................................................7 1.9 SEVERABILITY..........................................................................................7 1.10 SUCCESSORS AND ASSIGNS................................................................................7 1.11 AMENDMENTS AND WAIVERS................................................................................7 1.12 INTERPRETATION........................................................................................7 1.13 DEFINITION OF KNOWLEDGE...............................................................................7 1.14 SCHEDULES AND EXHIBITS................................................................................8 ARTICLE 2 PURCHASE AND SALE OF ASSETS.............................................................................9 2.1 TRANSFER OF ASSETS....................................................................................9 2.2 EXCLUDED ASSETS......................................................................................11 2.3 ASSUMED LIABILITIES..................................................................................12 2.4 EXCLUDED LIABILITIES.................................................................................12 2.5 PURCHASE PRICE.......................................................................................13 2.6 PURCHASE PRICE ADJUSTMENT - INVENTORY COUNT..........................................................14 2.7 ALLOCATION OF PURCHASE PRICE.........................................................................15 2.8 GST ELECTIONS........................................................................................15 2.9 TRANSFER TAXES.......................................................................................15 2.10 INCOME TAX ELECTION..................................................................................15 2.11 REMITTANCE OF TAXES..................................................................................15 ARTICLE 3 CLOSING................................................................................................16 3.1 TRANSFER.............................................................................................16 3.2 CLOSING DATE.........................................................................................16 3.3 RISK OF LOSS.........................................................................................16 3.4 DELIVERIES OF SELLER.................................................................................16 3.5 PROCEDURES FOR CONTRACTS NOT TRANSFERABLE............................................................18 3.6 DELIVERIES OF PURCHASER..............................................................................18 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER...............................................................19 4.1 ORGANIZATION AND GOOD STANDING.......................................................................19 4.2 POWER AND AUTHORITY..................................................................................19 4.3 BINDING EFFECT.......................................................................................19 4.4 NO OTHER AGREEMENTS TO PURCHASE......................................................................20 4.5 NO VIOLATION; CONSENTS...............................................................................20 4.6 CONSENTS AND APPROVALS...............................................................................20 4.7 CANADIAN RESIDENCE...................................................................................20 4.8 GST REGISTRATION.....................................................................................20 4.9 FINANCIAL STATEMENTS.................................................................................20 4.10 LIABILITIES..........................................................................................21 4.11 TITLE TO ASSETS......................................................................................21 4.12 REAL PROPERTY........................................................................................21 4.13 INTELLECTUAL PROPERTY................................................................................22 4.13A ENVIRONMENTAL MATTER.................................................................................23
(i) 3 4.14 RECEIVABLES..........................................................................................23 4.15 CONTRACTS............................................................................................23 4.16 ORDINARY COURSE OF THE BUSINESS......................................................................24 4.17 LITIGATION...........................................................................................25 4.18 COMPLIANCE WITH LAWS.................................................................................25 4.19 PERMITS AND LICENSES.................................................................................25 4.20 TAXES................................................................................................26 4.21 INSURANCE............................................................................................26 4.22 EMPLOYEES............................................................................................26 4.23 EMPLOYEE BENEFITS....................................................................................27 4.23A ACCELERATED PAYMENTS.................................................................................27 4.24 GOVERNMENT WITHHOLDINGS..............................................................................27 4.25 EMPLOYMENT PAYMENTS BY SELLER TO DATE OF CLOSING.....................................................28 4.26 WORKER'S COMPENSATION................................................................................28 4.27 LABOUR MATTERS.......................................................................................28 4.28 HEALTH AND SAFETY....................................................................................28 4.29 BANK ACCOUNTS........................................................................................28 4.30 SUPPLIERS............................................................................................28 4.31 INVENTORY............................................................................................28 4.32 PRODUCT WARRANTIES ETC...............................................................................29 4.33 INSOLVENCY PROCEEDINGS...............................................................................29 4.34 BOOKS AND RECORDS....................................................................................29 4.35 YEAR 2000 COMPLIANCE.................................................................................29 4.36 SCHEDULES............................................................................................29 4.37 FULL DISCLOSURE......................................................................................29 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND ZALE...................................................29 5.1 ORGANIZATION AND GOOD STANDING.......................................................................29 5.2 POWER AND AUTHORITY..................................................................................30 5.3 BINDING EFFECT.......................................................................................30 5.4 NO VIOLATION; CONSENTS...............................................................................30 5.5 CONSENTS AND APPROVALS...............................................................................30 5.6 GST REGISTRATION.....................................................................................30 5.7 FULL DISCLOSURE......................................................................................30 ARTICLE 6 COVENANTS OF SELLER PENDING CLOSING....................................................................30 6.1 CONDUCT OF THE BUSINESS PENDING CLOSING..............................................................30 6.2 INTENTIONALLY DELETED................................................................................31 6.3 ACCESS TO THE BUSINESS...............................................................................31 6.4 UPDATES..............................................................................................32 6.5 DELIVERY OF BOOKS AND RECORDS........................................................................32 6.6 CHANGE THE USE OF NAME...............................................................................32 ARTICLE 7 CONDITIONS TO OBLIGATIONS OF PURCHASER.................................................................33 7.1 REPRESENTATIONS AND WARRANTIES.......................................................................33 7.2 PERFORMANCE OF AGREEMENTS............................................................................33 7.3 APPROVALS............................................................................................33 7.4 CONSENTS AND APPROVALS OF THIRD PARTIES..............................................................33 7.5 NO INJUNCTIONS.......................................................................................33 7.6 ORDINARY COURSE OF BUSINESS..........................................................................33
(ii) 4 ARTICLE 8 CONDITIONS TO OBLIGATIONS OF SELLER....................................................................34 8.1 REPRESENTATIONS AND WARRANTIES.......................................................................34 8.2 PERFORMANCE OF AGREEMENTS............................................................................34 8.3 APPROVALS............................................................................................34 8.4 CONSENTS AND APPROVALS OF THIRD PARTIES..............................................................34 8.5 NO INJUNCTIONS.......................................................................................34 ARTICLE 9 TERMINATION............................................................................................34 9.1 TERMINATION..........................................................................................34 9.2 CUT-OFF DATE.........................................................................................35 9.3 EFFECT OF TERMINATION................................................................................35 ARTICLE 10 OTHER AGREEMENTS OF THE PARTIES.......................................................................35 10.1 COMMERCIALLY REASONABLE EFFORTS......................................................................35 10.2 BROKERS; EXPENSES....................................................................................35 10.3 PUBLICITY AND CONFIDENTIALITY........................................................................35 10.4 TRANSFERRED EMPLOYEES................................................................................36 10.5 EXCLUSIVITY..........................................................................................36 10.6 BULK SALES ACT.......................................................................................37 10.7 TAX RETURNS AND AUDITS...............................................................................37 10.8 LITIGATION:..........................................................................................38 10.9 REIMBURSEMENT OF EXPENSES FOR SELLER POST-CLOSING....................................................38 10.10 ACKNOWLEDGEMENT......................................................................................38 ARTICLE 11 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION...........................................39 11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES...........................................................39 11.2 NON-WAIVER...........................................................................................40 11.3 INDEMNIFICATION BY SELLER............................................................................40 11.4 INDEMNIFICATION BY PURCHASER.........................................................................40 11.5 ADMINISTRATION OF THIRD PARTY CLAIMS.................................................................41 11.6 MONETARY LIMITATIONS.................................................................................41 11.7 INSURANCE AND TAX LIMITATION.........................................................................42 11.8 SET-OFF UNDER ESCROW AGREEMENT.......................................................................42 11.9 EXCLUSION OF OTHER RIGHTS............................................................................42 11.10 OBLIGATIONS OF ZALE..................................................................................42 ARTICLE 12 MISCELLANEOUS.........................................................................................42 12.1 NOTICES..............................................................................................42 12.2 REASONABLE EFFORTS TO SETTLE DISPUTES................................................................44 12.3 ARBITRATION..........................................................................................44 12.4 WAIVER; AMENDMENT....................................................................................45 12.5 FURTHER ASSURANCES...................................................................................45 12.6 COUNTERPARTS; FAX SIGNATURES.........................................................................46
(iii) 5 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into this 2nd day of June, 1999, by and between ZALE CORPORATION, a Delaware corporation ("Zale"), ZALE CANADA CO., a Nova Scotia corporation ("Purchaser"), and PEOPLES JEWELLERS CORPORATION, an Ontario corporation ("Seller"). RECITALS: A. Seller is engaged in the retail sale of fine jewelry and watches throughout Canada and all business which is incidental or ancillary thereto (collectively, the "Business"). B. Pursuant to the terms and conditions contained herein, Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, substantially all of the property and assets owned, leased or licensed by Seller and used by Seller in connection with the operation of the Business. NOW, THEREFORE, FOR AND IN CONSIDERATION of the premises, the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINED TERMS. For the purposes of this Agreement, unless the context otherwise requires, the following terms shall have the respective meanings set out below and grammatical variations of such terms shall have corresponding meanings: (a) "ACT" means the Business Corporations Act (Ontario) as in effect on the date hereof; (b) "AFFILIATE" has the meaning given to that term in the Act; (c) "AGREEMENT" means this asset purchase agreement and all Schedules and Exhibits attached hereto and which are incorporated herein by reference; (d) "ASSETS" has the meaning set out in section 2.1; (e) "ASSUMED LIABILITIES" has the meaning set out in section 2.3; (f) "ASSUMPTION AGREEMENT" has the meaning set out in section 3.6(b); (g) "AUDITED FINANCIAL STATEMENTS" means the audited financial statements of Seller as of March 28, 1998 and March 27, 1999, including the notes thereto and the report of Seller's auditors thereon, copies of which are annexed hereto as Schedule 4.9; 6 -2- (h) "BILL OF SALE" has the meaning set out in section 3.4(a); (i) "BNS" has the meaning set out in section 3.4(j); (j) "BNS LEASE" means the Scotia Leasing Lease-Fixed Rate between Seller and BNS dated April 5, 1999. (k) "BOOK INVENTORY" has the meaning set out in section 2.6(a); (l) "BRACEWELL CONSULTING AGREEMENT" means the consulting agreement between J.A. Bracewell Consulting Inc. and Seller dated December 19, 1997, as amended by agreement dated January 12, 1999; (m) "BULK SALES LEGISLATION" has the meaning set out in section 10.6; (n) "BUSINESS" has the meaning set out in paragraph A under the heading "Recitals" on page 1 of this Agreement; (o) "BUSINESS DAY" means any day, other than a Saturday or a Sunday, on which the main branch of Bank of Nova Scotia in Toronto is open for business; (p) "CLOSING" means the completion of the transaction of purchase and sale contemplated in this Agreement; (q) "CLOSING DATE" means June 2, 1999 or such other date as Seller and Purchaser may mutually determine; (r) "COMMISSIONER" means the Commissioner of Competition appointed under the Competition Act (Canada), as amended from time to time; (s) "COMPETITION ACT APPROVAL" means either (i) the issuance of an Advance Ruling Certificate by the Commissioner under section 102 of the Competition Act (Canada); or (ii) receipt by Purchaser of written notification from the Commissioner; to the effect that the Commissioner is satisfied that he would not have sufficient grounds upon which to apply to the Competition Tribunal for an order under section 92 of the Competition Act (Canada) with respect to the transaction contemplated by this Agreement; (t) "CONSIGNMENT INVENTORY" has the meaning set out in section 4.11; (u) "CONTRACT" has the meaning set out in section 2.1(e); (v) "CREDIT AGREEMENT" has the meaning set out in section 2.4(d); 7 -3- (w) "CUT-OFF DATE" has the meaning set out in section 9.2; (x) "DISPUTE" has the meaning set out in section 12.2; (y) "EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on May 23, 1999; (z) "EMPLOYEE PLANS" has the meaning set out in section 4.23; (aa) "EMPLOYEES" has the meaning set out in section 4.22; (bb) "ENVIRONMENTAL LAW" means the common law, any law, bylaw, order, ordinance, ruling, regulation, certificate, approval or consent of any applicable federal, provincial or municipal government, governmental department, agency or regulatory authority or any court of competent jurisdiction, relating to protection of the environment or public health; (cc) "ENVIRONMENTAL PERMITS" has the meaning set out in section 4.13A; (dd) "ESCROW AGENT" means CIBC Mellon Trust Company; (ee) "ESCROW AGREEMENT" means an escrow agreement substantially in the form of Exhibit A dated as of the Closing Date entered into among Seller, Purchaser and Escrow Agent; (ff) "ETA" means Part IX of the Excise Tax Act (Canada), as amended from time to time; (gg) "EXCLUDED ASSETS" has the meaning set out in section 2.2; (hh) "EXCLUDED LIABILITIES" has the meaning set out in section 2.4; (ii) "FACILITY LEASES" has the meaning set out in section 4.12; (jj) "GST" means all taxes payable under the ETA or under any provincial legislation similar to the ETA, and any reference to a specific provision of the ETA or any such provincial legislation shall refer to any successor provision thereto of like or similar effect; (kk) "INDEMNIFIED PARTY" has the meaning set out in section 11.5; (ll) "INDEMNIFYING PARTY" has the meaning set out in section 11.5; (mm) "INTELLECTUAL PROPERTY" has the meaning set out in section 2.1(c); (nn) "INTERIM FINANCIAL STATEMENTS" means the unaudited financial statements of Seller as at and for the two month period ended May 22, 1999; (oo) "INVENTORY AGENT" has the meaning set out in section 2.6; 8 -4- (pp) "INVENTORY COST" has the meaning set out in section 2.6(a); (qq) "LAWS" has the meaning set out in section 4.18; (rr) "LEASED ASSETS" has the meaning set out in section 4.11; (ss) "LEASE ASSIGNMENT AGREEMENT" has the meaning set out in section 3.4(h); (tt) "LICENCES" has the meaning set out in section 4.19; (uu) "LIENS" means any encumbrance, lien, charge, hypothec, pledge, mortgage, title retention agreement, adverse claim, security interest of any nature, or any other arrangement or condition, in each case which, in substance, secures payment or performance of an obligation; (vv) "LOSSES" means all claims, demands, losses, damages, liabilities, costs, penalties, fines, and expenses of any kind or nature (including, without limitation, all legal and other professional fees and disbursements, interest and penalties); (ww) "MATERIAL CONTRACT" means (i) any Contract involving payments to or by Seller in excess of $10,000; or (ii) any Contract the original term of which extends beyond one year and which cannot be terminated by Seller without penalty on less than 30 days notice; (xx) "OPERATING CREDIT" has the meaning given to such term in the Credit Agreement dated as of September 24, 1993 between Seller and BNS, as amended; (yy) "PARTIES" means, collectively, Seller, Purchaser and Zale, and "PARTY" means any one of them; (zz) "PERMITTED ENCUMBRANCES" means the Liens set out in Schedule 1.1(zz); (aaa) "PHYSICAL INVENTORY" has the meaning set out in section 2.6 (bbb) "PREMISES" means the premises leased under the Facility Leases as set out in Schedule 4.12; (ccc) "PRINCIPAL RESTRICTIVE COVENANT AGREEMENT" has the meaning set out in section 3.4(f); (ddd) "PROCEEDING" has the meaning set out in section 10.8(a); (eee) "PROHIBITED TRANSACTION" has the meaning set out in section 10.5; (fff) "PURCHASE PRICE" has the meaning set out in section 2.5; 9 -5- (ggg) "PURCHASER CLAIM" has the meaning set out in section 11.3; (hhh) "PURCHASE PRICE ADJUSTMENT" has the meaning set out in section 2.6; (iii) "REAL PROPERTY" has the meaning set out in section 4.12; (jjj) "RECEIVABLES" has the meaning set out in section 2.1(f); (kkk) "RECONCILIATION" has the meaning set out in section 2.6; (lll) "SAMPSON CONSULTING AGREEMENT" means the consulting agreement between Patrick Sampson & Associates and Seller dated February 16, 1998 as extended by the agreement dated February 16, 1999. (mmm) "SELLER RESTRICTIVE COVENANT AGREEMENT" has the meaning set out in section 3.4(e); (nnn) "SUPPLEMENT" has the meaning set out in section 6.4; (ooo) "SYSTEMS AND SOFTWARE" means computer hardware, software and firmware owned, licensed or leased by Seller and used in connection with the Business; (ppp) "TAX ACT" means the Income Tax Act (Canada), as amended from time to time; (qqq) "THIRD PARTY CLAIM" has the meaning set out in section 11.5; (rrr) "TIME OF CLOSING" has the meaning set out in section 3.2; (sss) "TRANSFERRED EMPLOYEES" has the meaning set out in section 10.4; (ttt) "YEAR 2000 COMPLIANT" means with respect to any of the Systems and Software, that the Systems and Software are able to correctly: (i) process date and time related data without causing any processing interruptions, abnormal terminations, or changes in performance characteristics including, without limitation, (A) process date and time related data before, during and after January 1, 2000, accepting date and time input, providing date and time output, and performing ongoing operations on dates and times and portions of dates and times including, but not limited to, calculating, comparing and sequencing of dates and times (in both forward and backward operations spanning century boundaries); and (B) process leap year calculations including, but not limited to, identification of leap years, interval calculations (in both forward and backward operations spanning century boundaries), day-in-year 10 -6- calculation, day-of-the-week calculations, and week-of-the-year calculations; and (ii) process and manipulate all date and time related functions including, without limitation, (A) manipulate all date and time related input in a manner that resolves ambiguity as to century, and (B) store, retrieve and provide output of date and time related data in a manner that is unambiguous as to century. (uuu) "YEAR 2000 PLAN" has the meaning set out in section 4.35. 1.2 CURRENCY. Unless otherwise indicated, all dollar amounts in this Agreement are expressed in Canadian funds. 1.3 SECTIONS AND HEADINGS. The titles, captions and headings contained in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect in any way the meaning or interpretation of this Agreement. Numbered or lettered Articles, sections, Schedules and Exhibits herein contained refer to Articles, sections, Schedules and Exhibits of this Agreement unless otherwise expressly stated. The words "herein," "hereof," "hereunder," "hereby," "this Agreement" and other similar references shall be construed to mean and include this Agreement and all amendments to this Agreement unless the context shall clearly indicate or require otherwise. 1.4 NUMBER, GENDER AND PERSONS. In this Agreement, words importing the singular number only shall include the plural and vice versa, words importing gender shall include all genders and words importing persons shall include individuals, corporations, partnerships, associations, trusts, unincorporated organizations, governmental bodies and other legal or business entities of any kind whatsoever. 1.5 ACCOUNTING PRINCIPLES. Any reference in this Agreement to generally accepted accounting principles refers to generally accepted accounting principles that have been established in Canada, including those approved from time to time by the Canadian Institute of Chartered Accountants or any successor body thereto. 1.6 ENTIRE AGREEMENT. This Agreement, any agreement, document or instrument delivered pursuant hereto and the confidentiality agreement referred to in section 10.3 contain the entire agreement and understanding concerning the subject matter hereof among the Parties and specifically supersede any other agreement or understanding among the Parties related to the subject matter hereof including, without limitation, the letter of intent dated March 16, 1999 between Seller and Zale. There are no conditions, covenants, agreements, representations, warranties or other provisions, express or implied, collateral, statutory or otherwise, relating to the subject hereof except as herein provided or as provided for in any agreement, document or instrument delivered pursuant hereto, or in such confidentiality agreement. If there is any inconsistency or conflict between the provisions of this Agreement and the provisions of any 11 -7- agreement, document or instrument delivered pursuant hereto, the provisions of this Agreement shall prevail. 1.7 TIME OF ESSENCE. Time shall be of the essence of this Agreement. 1.8 APPLICABLE LAW AND AGENT FOR SERVICE. This Agreement shall be construed, interpreted and enforced in accordance with, and the respective rights and obligations of the parties shall be governed by, the laws of the Province of Ontario and the federal laws of Canada applicable therein, and each Party irrevocably and unconditionally submits to the non-exclusive jurisdiction of the courts of such province and all courts competent to hear appeals therefrom. Zale hereby appoints Chris Eustace, a partner with the law firm Morris/Rose/Ledgett, as agent for service of process with respect to any matter arising under or related to this Agreement or any agreement, document or instrument delivered pursuant hereto, or the confidentiality agreement referred to in section 10.3. 1.9 SEVERABILITY. If any provision of this Agreement shall be held void, voidable, invalid or inoperative by a court of competent jurisdiction, no other provision of this Agreement shall be affected as a result thereof, and, accordingly, the remaining provisions of this Agreement shall remain in full force and effect as though such void, voidable, invalid or inoperative provision had not been contained herein. 1.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns. None of the Parties may assign this Agreement, in whole or in part, without the prior written consent of the other Parties provided, however, that Purchaser may assign this Agreement to a subsidiary of Zale at any time prior to the Time of Closing without the consent of Seller; provided further, that any such assignment shall not relieve Purchaser or Zale of any liability or obligation hereunder. Any attempted assignment not in accordance herewith shall be null and void and of no force or effect. 1.11 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement shall be binding on any Party unless consented to in writing by such Party. No waiver of any provision of this Agreement shall constitute a waiver of any other provision nor shall any waiver constitute a continuing waiver unless otherwise provided. 1.12 INTERPRETATION. This Agreement shall not be construed more strictly against any Party hereto regardless of which Party is responsible for its preparation, it being agreed that this Agreement was fully negotiated by the Parties. 1.13 DEFINITION OF KNOWLEDGE. Any reference in this Agreement or in any certificate delivered pursuant hereto to Seller's knowledge (whether to "the best of" Seller's knowledge or other similar expressions relating to the knowledge or awareness of Seller) means all matters which any officer of Seller actually knew or should reasonably have known after making diligent inquiry of: (a) Carolyn Leonetti, in respect of financial matters; (b) Pat Sampson, in respect of the Premises and the Facility Leases; 12 -8- (c) Judy Bracewell, in respect of Systems and Software forming part of the Intellectual Property; and (d) Anna DiRuscio and Susan Stitt, in respect of Employees and Employee Plans. For purposes hereof, the officers of Seller are E. Duff Scott, Clare R. Copeland, Howard E. Board, Dominic Guglielmi, Mary Kreuk, Tanya Boyd-Saffran and Brian C. Land. 1.14 SCHEDULES AND EXHIBITS. The following Schedules and Exhibits are attached to and form part of this Agreement: Schedule 1.1(zz) - Permitted Encumbrances Schedule 2.1(i) - Prepaid Expenses Schedule 2.1(j) - Telephone Numbers, etc. Schedule 2.3 - Assumed Liabilities Schedule 2.7 - Allocation of Purchase Price Schedule 3.4(g) - Security Interests to be Released Schedule 3.4(n) - BNS Lease - Payout Calculation Schedule 4.6 - Seller Consents and Approvals Schedule 4.9 - Financial Statements Schedule 4.11 - Inventory on Consignment Schedule 4.12 - Facility Leases and Lease Summaries Schedule 4.13 - Intellectual Property Schedule 4.14 - Receivables Written Off Schedule 4.15 - Material Contracts Schedule 4.16 - Ordinary Course of Business Schedule 4.17 - Litigation Schedule 4.19 - Permits and Licences Schedule 4.21 - Insurance Schedule 4.22 - Employees Schedule 4.22A - Employee Loans to be Assigned Schedule 4.22B - Employee Share Purchase Loans Schedule 4.23 - Employee Benefits Schedule 4.23A - Accelerated Payments Schedule 4.26 - Workers' Compensation Schedule 4.29 - Bank Accounts Schedule 4.32 - Product Warranties, etc. Schedule 4.35 - Year 2000 Plan Exhibit A - Form of Escrow Agreement Exhibit B - Form of Bill of Sale and General Conveyance Exhibit C - Form of Seller's Counsel's Opinion Exhibit C1 - Forms of Local Counsel Opinions Exhibit D - Form of Seller Restrictive Covenant Agreement Exhibit E - Form of Principal Restrictive Covenant Agreement Exhibit F - Form of Assumption Agreement Exhibit G - Form of Troutman Sanders LLP Opinion 13 -9- Exhibit H - Form of Morris/Rose/Ledgett Opinion Exhibit I - Form of Lease Assignment Agreement Exhibit J - Form of BNS Certificate Exhibit K - Form of Employee Release Exhibit L - Form of Offer of Employment (Share Purchase Loan Employees) Exhibit M - Form of BNS Release Exhibit N - Form of Offer of Employment (T. Boyd-Saffran and E. McGrath) ARTICLE 2 PURCHASE AND SALE OF ASSETS 2.1 TRANSFER OF ASSETS. Upon the terms and subject to the conditions contained herein, effective as at the Effective Time, Seller shall sell, assign and convey to Purchaser, and Purchaser shall purchase from Seller, all of its right, title and interest in and to the Assets, free and clear of any and all Liens save and except for the Permitted Encumbrances. For purposes of this Agreement, "Assets" shall mean all of the assets, properties and rights existing on the Closing Date owned, leased or licensed by Seller and used by Seller in connection with the operation of the Business, other than the Excluded Assets, whether real or personal, tangible or intangible, of every kind and description and wheresoever situate including, without limitation, the following: (a) all cash on hand (including the cash float at each of the Premises), amounts on deposit in bank accounts, amounts held in trust for or on behalf of Seller, cheques, credit card receipts and other cash equivalents and marketable securities, including cash on hand of Seller, collected as GST, provincial sales taxes and Employee source deductions; (b) all machinery, equipment, vehicles, office equipment, computer hardware, furniture, fixtures and other tangible personal property; (c) all registered and unregistered trademarks, trademark applications, service marks, logos, trade dress, trade names, business names, patents, patent applications, copyrightable works, copyrights, processes, designs, inventions, customer lists, dealer networks, trade secrets, know-how, computer programs and software (and to the extent assignable, all rights under licences and other agreements and instruments relating thereto), trade secrets, confidential business information, and other intellectual property owned or licensed and used by Seller in connection with the operation of the Business, including, without limitation, the names "Peoples Jewellers" and "Mappins Jewellers," and to the extent assignable all of Seller's rights in and to any intellectual property licensed to Seller by any other person (all of the foregoing referred to collectively as "Intellectual Property") including, without limitation, the Intellectual Property referred to in Schedule 4.13; (d) to the extent assignable, all Licences; 14 -10- (e) to the extent assignable, all of Seller's rights under all agreements, covenants, options, chattel leases, guaranties, orders or contracts (other than Facility Leases and any agreement, covenant, option, chattel lease, guarantee or contract relating to the Excluded Assets or the Excluded Liabilities) for the provision of goods or services and other similar instruments and arrangements, whether oral or written, to which Seller is a party or by which Seller or its assets (other than Excluded Assets) are bound (collectively, the "Contracts") including, without limitation, those referred to in Schedule 4.15; (f) all accounts receivable, notes receivable, book debts, amounts due from suppliers (including volume discount rebates and the net realizable value of warranty claims) undelivered refunds including any duty drawback and any other tax refunds (except for refunds in respect of Seller's income or capital taxes and those refunds relating to any of the other taxes referred to in section 2.4(b), the processing of which has not been commenced prior to the Closing Date) and other receivables and debts due or accruing due to Seller in connection with the Business including the Employee receivables set forth in Schedule 4.22A but excluding the Employee receivables set forth in Schedule 4.22B, and the benefit of all rights under all security documents, instruments and other agreements relating thereto (collectively, "Receivables"); (g) all inventories, merchandise, stock-in-trade, finished goods, work-in-process, raw materials, supplies, packaging materials and spare and replacement parts; (h) to the extent assignable, all of Seller's rights under the Facility Leases set forth in Schedule 4.12, together with all of Seller's rights in the leasehold improvements relating thereto; (i) all prepaid expenses and all prepaid security and other deposits which included, as at March 27, 1999, those referred to in Schedule 2.1(i); (j) all telephone and facsimile numbers which included, as of April 1, 1999, those referred to in Schedule 2.1(j) and all e-mail addresses and Internet websites, domain names and addresses including, without limitation, those listed in Schedule 2.1(j); (k) all books and records (other than the books and records of Peoples Jewellers Limited, the minute books of Seller, the income and capital tax books and records of Seller and books and records of Seller required by law to be retained by the Seller, copies of which books and records will be made available to Purchaser upon request), including, without limitation, customer lists and databases, sales records, price lists and catalogues, sales literature, advertising material, marketing materials, manufacturing data, production records, employee manuals, personnel records, supply records, inventory records and correspondence files related thereto (together with, in the case of any such information that is stored electronically, the media on which the same is stored); 15 -11- (l) all claims, refunds, causes of action, choses in action, rights of recovery, rights of set off and rights of recoupment relating to the Business or any of the other Assets (except in respect of Seller's income or capital tax refunds and those refunds relating to any of the other taxes referred to in section 2.4(b), the processing of which has not been commenced prior to the Closing Date) against any other person and the full benefit of all warranties and warranty rights (express, implied or otherwise) against manufacturers, suppliers or sellers which apply to any of the other Assets; (m) all goodwill related to the Business, together with the exclusive right for Purchaser to represent itself as carrying on the Business in succession to Seller and the right to use any words indicating that the Business is so carried on, including the exclusive right to use the names "Peoples Jewellers" and "Mappins Jewellers", or any variation thereof, as part of the corporate name, business name or style under which the Business or any part thereof is carried on by Purchaser; and (n) all other tangible and intangible assets of any kind or description, wherever located, that are owned and used by Seller in connection with the operation of the Business. 2.2 EXCLUDED ASSETS. Only the following assets (the "Excluded Assets") are being retained by Seller and not sold to Purchaser pursuant to this Agreement: (a) the books and records of Peoples Jewellers Limited; (b) the minute books and corporate records of Seller; (c) the original income and capital tax books and records of Seller; (d) books and records of Seller required by law to be retained by Seller; (e) any refunds in respect of Seller's income or capital tax and those refunds relating to any of the other taxes referred to in section 2.4(b), the processing of which has not commenced prior to the Closing Date; (f) any amounts owing to Seller by Employees or former employees of Seller or Peoples Jewellers Limited in respect of share purchase loans made to such persons by Seller or Peoples Jewellers Limited (predecessor to the Business), including those referred to in Schedule 4.22B; (g) all insurance policies relating to directors and officers liability including, without limitation, Chubb Insurance Company of Canada Policy Number 8141-57-98C, American Home Insurance Company Policy Number 4492108 and Reliance Insurance Company Policy Number TDO 0002730 and all insurance policies providing life insurance for E. Duff Scott, Clare R. Copeland or Howard E. Board 16 -12- including, without limitation, Canada Life Assurance Company Policy Numbers 3338841, 3338843 and 3338847; (h) the 1998 Audi A6, the 1998 Toyota Camry XLE and the 1998 Cadillac Seville STS Sedan leased by Seller pursuant to the Motor Vehicle Lease between Foss National Leasing (a division of Roy Foss Motors Ltd.) and Seller dated November 16, 1993; (i) the shareholders agreement relating to Seller; (j) the option agreement pursuant to which BNS holds options to acquire shares in Seller; and (k) the direction from KPMG Inc. (formerly Peat Marwick Thorne Inc.) in its capacity as Receiver and Manager of Peoples Jewellers Limited ("KPMG") to, among others, Seller and dated January 23, 1998 and the assignment agreement made as of the 8th day of August, 1998 between KPMG and Seller. 2.3 ASSUMED LIABILITIES. Upon the terms and subject to the conditions contained herein and subject to the Closing, Purchaser shall assume and shall pay, satisfy, perform, discharge and fulfil, as and from the Effective Time, all of the liabilities and obligations of Seller with respect to the Business and the Assets (other than the Excluded Liabilities) (collectively, the "Assumed Liabilities") listed on Schedule 2.3 in accordance with their respective terms. 2.4 EXCLUDED LIABILITIES. Notwithstanding anything else contained herein to the contrary, Purchaser shall not assume and shall have no obligation to pay, satisfy, perform, discharge or fulfil any of the following liabilities or obligations of Seller (whether known or unknown, liquidated or unliquidated, contingent or fixed) other than the Assumed Liabilities (collectively, the "Excluded Liabilities"). The Excluded Liabilities shall remain the liabilities and obligations of Seller and shall not be assumed by Purchaser pursuant hereto (regardless of whether any such liabilities or obligations are disclosed in this Agreement). Seller hereby agrees that it shall fully and timely pay, satisfy, perform and discharge all of the Excluded Liabilities in accordance with their respective terms. Without limiting the generality of the foregoing, Excluded Liabilities include the following: (a) any liability or obligation related to the Excluded Assets; (b) any liability or obligation for any of Seller's income or capital taxes owed by Seller and, subject to section 2.9, any liability or obligation for any sales, use, excise, GST or other taxes (including, without limitation, income taxes, withholding taxes and employment and payroll taxes) arising prior to or in connection with the consummation of the transactions contemplated by this Agreement, other than those liabilities and obligations of Seller included in Assumed Liabilities referred to in section 2.3; 17 -13- (c) except as otherwise expressly provided for herein, any liability or obligation of Seller for costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby; (d) any liability or obligation of Seller under the Credit Agreement dated as of September 24, 1993 between Seller and BNS, as amended (the "Credit Agreement") including, without limitation, liabilities and obligations relating to the Term Credit and the Vendor Take-Back Note (as those terms are defined in the Credit Agreement) but excluding liabilities and obligations relating to the Operating Credit; (e) any liability or obligation of Seller in respect of the employee share purchase loan arrangements with Seller including, without limitation, those on Schedule 4.22B; (f) any liability or obligation of Seller relating to the guaranty by Seller of any third party obligations; (g) if Euan McGrath and Tanya Boyd-Saffran accept Purchaser's offers of employment made in accordance with section 10.4, any liability or obligation arising out of the transactions contemplated by this Agreement including, without limitation, in respect of the change of control arrangements between each of Euan McGrath and Tanya Boyd-Saffran and Seller; (h) any liability or obligation in respect of Euan McGrath and Tanya Boyd-Saffran if either one does not accept Purchaser's offer of employment made in accordance with section 10.4 and substantially in the form of Exhibit N; (i) any liability or obligation in respect of any Employee listed in Schedule 4.22B who rejects the Purchaser's offer of employment made in accordance with section 10.4 and substantially in the form of Exhibit N; and (j) any liability or obligation in respect of the sale by Seller of the real property located on Sparks Street, Ottawa, Ontario. 2.5 PURCHASE PRICE. Subject to the terms and conditions contained herein, the aggregate purchase price payable by Purchaser to Seller for the Assets shall be $115,000,000 (the "Purchase Price"), subject to adjustment pursuant to sections 2.6 and 10.2. At Closing, the Purchase Price shall be paid as follows: (a) $110,000,000 (less any adjustment pursuant to sections 2.6 and 10.2) by bank draft payable to Seller or by wire transfer of immediately available funds to such bank account as may be designated to Purchaser in writing by Seller at least two (2) Business Days prior to the Closing; and (b) $5,000,000 by bank draft payable to Escrow Agent or by wire transfer of immediately available funds to an account designated to Purchaser by the Escrow Agent at least two (2) Business Days prior to the Closing, such $5,000,000 to be 18 -14- held (and released) by Escrow Agent pursuant to the terms of the Escrow Agreement 2.6 PURCHASE PRICE ADJUSTMENT - INVENTORY COUNT. (a) For purposes hereof, the following terms shall have the following meanings: (i) "BOOK INVENTORY" shall mean the amount of the Seller's inventory as per the Seller's accounting records as at the physical inventory cut-off date, valued at Inventory Cost net of reserves for damages, break-up or gold melt; but before any reserves for "shrink" or obsolescence; such reserves being listed on Seller's books and determined in accordance with past practice applied on a consistent basis; and (ii) "INVENTORY COST" shall mean the weighted average specific cost of each individual item or article of merchandise determined by Seller's SAP inventory system and in accordance with generally accepted accounting principles. (b) Prior to the Closing, the Parties shall cause Western Inventory Service or such other independent person or entity as the Parties may mutually agree (the "Inventory Agent") to conduct a physical count of Seller's inventory located at the Premises (the "Physical Inventory"). For the purposes hereof, Seller's inventory shall include all inventory on hand including Consignment Inventory. Any damaged inventory or inventory sent out for repair and listed on the store's repair log will be included in the count and identified with a specific location code which will allow for a separate detailed listing of all such inventory. Purchaser shall have the right to monitor any and all portions of the Physical Inventory. The Inventory Agent will use its best efforts to complete the Physical Inventory during the period from May 13 through May 19, 1999. The Seller shall properly identify to the Inventory Agent all merchandise that is not of quality useable and saleable in the ordinary course of the Business (the "Excluded Inventory") and the Inventory Agent shall be instructed not to include such Excluded Inventory in the Physical Inventory. (c) Immediately following the Inventory Count, the Parties shall prepare a reconciliation of the Seller's inventory (the "Reconciliation") comparing the amount of the Physical Inventory to the amount of inventory prior to any reserve listed on Seller's books as at the physical inventory cut-off date. In preparing the Reconciliation, the Parties shall initially value the Physical Inventory at the retail price and a comparison shall be made to the retail book inventory for each location. A preliminary overage or shortage will be calculated for each location using cost of sales percentage for the month of April 1999 applied against the above-noted retail overage or shortage. A cumulative summary of such overages and shortages will be maintained during the period of the physical counts. The final valuation for each location's Physical 19 -15- Inventory will be made using the Inventory Cost for each item. Damaged inventory or inventory sent out for repair and identified during the physical count will be revalued in aggregate at Inventory Cost net of an appropriate provision for damages, break-up or gold melt in accordance with the Seller's historical accounting practice for this type of merchandise and as agreed to by Purchaser. The aggregate Physical Inventory valued at Inventory Cost net of appropriate provisions for damages, break-up or gold melt will be compared to the Seller's Book Inventory. If there is a shortage as determined above, and if the amount of this shortage exceeds the sum of "shrink" reserves listed on Seller's books plus 0.5% of the Book Inventory; then the excess amount will be considered as the final inventory shortfall subject to a purchase price adjustment. The Purchase Price shall accordingly be reduced by the amount of such final inventory shortfall (such amount, the "Purchase Price Adjustment") and the allocation provided for in section 2.7 shall accordingly be adjusted. The Parties agree that the Closing is conditional upon the Physical Inventory and the Reconciliation having been completed and all matters in respect of Physical Inventory having been resolved to the satisfaction of the Parties in accordance herewith. (d) The cost of the Physical Inventory shall be borne by Purchaser. 2.7 ALLOCATION OF PURCHASE PRICE. Seller and Purchaser agree to allocate the Purchase Price among the Assets in accordance with Schedule 2.7 and to report the sale and purchase of the Assets for all federal, provincial and local tax purposes in a manner consistent with such allocation, subject to any adjustment made pursuant to Sections 2.6 and 10.2 hereof. 2.8 GST ELECTIONS. Purchaser and Seller shall elect jointly under subsection 167(1) of the ETA and section 75 of the Quebec Sales Tax ("QST") legislation, in the form prescribed for purposes of each of those sections, in respect of the sale and transfer of the Assets hereunder, and the Purchaser shall file such election in its GST and QST returns, respectively for its reporting period that includes the Closing Date. 2.9 TRANSFER TAXES. Purchaser shall be liable for and shall pay all federal and provincial sales taxes (including any retail sales taxes), GST and all other taxes, duties, fees or other like charges of any jurisdiction properly payable in connection with the transfer of the Assets by Seller to Purchaser, excluding any income taxes for which Seller is liable in connection with such transfer. Where applicable, Purchaser shall have the right to furnish to Seller at the Time of Closing appropriate certificates, exempting such transfer of Assets from any such taxes, duties, fees and other like charges. 2.10 INCOME TAX ELECTION. Purchaser and Seller agree to elect jointly in the prescribed form under section 22 of the Tax Act as to the sale of the accounts receivable and any other debt receivables described in section 22 of the Tax Act and to designate in such election the amount equal to the portion of the Purchase Price allocated to such receivables pursuant to section 2.7 hereof as the consideration paid by the Purchaser therefor. 2.11 REMITTANCE OF TAXES. Purchaser shall prepare and file all applicable returns, filings and reports relating to, and shall remit, all taxes or withholdings collected or deducted by Seller prior 20 -16- to the Closing Date and not required to be filed or remitted prior to the Closing Date including, without limitation, all sales, use or excise taxes, all GST, all employee income taxes, employment insurance contributions, Canada Pension Plan contributions, Quebec Pension Plan contributions, provincial employer and employee health taxes and other taxes and deductions. ARTICLE 3 CLOSING 3.1 TRANSFER. Subject to the terms and conditions hereof and to the Closing, the transfer of the Assets hereunder shall be deemed to take effect as at the Effective Time. 3.2 CLOSING DATE. Subject to the terms and conditions hereof, the Closing shall be held at the offices of Purchaser's Canadian counsel, Morris/Rose/Ledgett, located at Suite 2600, 161 Bay Street, Toronto, Ontario M5J 2S1 Canada, at 10:30 a.m. local time on the Closing Date, or at such other time (the "Time of Closing") or place as the Parties shall mutually agree. 3.3 RISK OF LOSS. From the date hereof up to the Time of Closing, the Assets shall be and remain at the risk of Seller. If, prior to the Time of Closing, all or any part of the Assets that are necessary to carry on the Business as currently conducted are destroyed or damaged by fire or any other casualty or shall be appropriated, expropriated or seized by governmental or other lawful authority, unless Purchaser terminates its obligations under this Agreement as contemplated by section 9.1, Purchaser shall complete the purchase without reduction of the Purchase Price, in which event all proceeds of insurance or compensation for expropriation or seizure received by Seller prior to the Closing Date shall be transferred to Purchaser at the Closing and all right and claim of Seller to any such amounts not received by Seller by the Closing Date shall be assigned at the Closing to Purchaser. 3.4 DELIVERIES OF SELLER. At the Closing, Seller shall deliver to Purchaser each of the following: (a) A bill of sale and general conveyance substantially in the form of Exhibit B (the "Bill of Sale"), and such other assignments, notices, documentation and other instruments of transfer and conveyance, in form and substance reasonably satisfactory to Purchaser, necessary to sell, transfer and assign the Assets to Purchaser; provided that the terms of such other assignments, notices, documents and instruments of transfer and conveyance are consistent with terms of this Agreement. (b) A copy of the Escrow Agreement executed by Seller. (c) An opinion of Stikeman, Elliott, counsel to Seller, dated as of the Closing Date, addressed to Purchaser, substantially in the form of Exhibit C, together with opinions of local counsel in support thereof substantially in the forms attached as Exhibit C1. 21 -17- (d) A certificate of an officer of Seller (without personal liability), in form and substance reasonably satisfactory to Purchaser, dated as of the Closing Date, certifying to the fulfilment of the conditions set forth in sections 7.1, 7.2 and 7.6. (e) A restrictive covenant agreement substantially in the form of Exhibit D (the "Seller Restrictive Covenant Agreement") which has been executed by Seller. (f) A restrictive covenant agreement substantially in the form of Exhibit E (the "Principal Restrictive Covenant Agreement") which has been executed by Clare R. Copeland and Howard E. Board. (g) A release and discharge of the security interests set forth in Schedule 3.4(g), and, if appropriate, a waiver by such secured parties of compliance with Bulk Sales Legislation, all in form and substance satisfactory to Purchaser, acting reasonably. (h) A lease assignment agreement executed by Seller, substantially in the form of Exhibit I (the "Lease Assignment Agreement"), in respect of all Facility Leases containing, or together with, any applicable required consent to the assignment, if obtained prior to the Closing Date. (i) An assignment of the employment agreements between Seller and each of Clare R. Copeland, Howard E. Board, E. Duff Scott and Mary Kreuk together with the applicable consent to such assignment required under each such agreement, in form and substance reasonably satisfactory to Purchaser. (j) A certificate from Bank of Nova Scotia ("BNS") confirming that as at the Closing Date, it has not exercised its option rights to acquire and hold, directly or indirectly, shares in the capital of Seller and confirmation that as at the Closing Date it is not an "Affiliate" of Seller as defined in the Competition Act (Canada), substantially in the form of Exhibit J. (k) Copies of the Interim Financial Statements, together with any other information reasonably requested by Purchaser in respect thereof. (l) A Statement of Expenses and corresponding Purchase Price Adjustment in accordance with Section 10.2, together with such supporting documentation as is reasonably requested by Purchaser in respect thereof. (m) An Assignment of the BNS Lease together with consent of BNS to such assignment, in form and substance satisfactory to Purchaser, acting reasonably. (n) Upon payment to BNS of the amount set forth in Schedule 3.4(n) in respect of the BNS Lease, a release substantially in the form of Exhibit M, from BNS in favour of Seller and Purchaser of any liabilities and obligations pursuant to the BNS Lease and of any right, title or interest of BNS in the Assets leased thereunder. (o) INTENTIONALLY DELETED 22 -18- (p) Copies of Articles of Amendment, in registerable form, changing names of Seller and any of its Affiliates that include the words "Peoples Jewellers" or any part thereof, together with any required filing fee, and cancellations of all business name registrations held by Seller (in registerable form) all in form and substance satisfactory to Purchaser, acting reasonably. (q) An assignment of the Sampson Consulting Agreement and the Bracewell Consulting Agreement together with consents to such assignments, in form and substance satisfactory to Purchaser, acting reasonably. (r) An assignment of the consulting agreements between Seller and each of Dennis Hunkin and Bassani Technical Solutions together with consents to such assignments, in form and substance satisfactory to Purchaser, acting reasonably. (s) Certificate(s) issued by the Minister of Revenue of Ontario under subsection 6(1) of the Retail Sales Tax Act (Ontario) and by comparable government agencies in such other applicable jurisdictions where the Business is conducted. (t) Evidence satisfactory to Purchaser that Seller has reduced the amount of the Operating Credit payable by Seller on Closing pursuant to section 3.6(g) by an amount equal to the Excess Cash Flow Payment of $3,468,000.00 paid by Seller to BNS on March 11, 1999. 3.5 PROCEDURES FOR CONTRACTS NOT TRANSFERABLE. If any Contract or Facility Lease is not assignable or transferable either by virtue of the provisions thereof or under applicable law without the consent of some other person or entity and such consents are not obtained by Seller at or before the Closing, nothing in this Agreement and the related instruments of transfer shall be construed as an assignment or transfer of such Contract or Facility Lease. Instead, Seller shall (i) at the request and expense and under direction of Purchaser continue to hold such non-assigned Contracts and Facility Leases in trust for the benefit of Purchaser and promptly pay over to Purchaser all monies collected by or paid to Seller in respect of every such non-assigned Contract and Facility Lease; and (ii) use all reasonable efforts to obtain any such required consents not previously obtained as soon as reasonably possible after the Closing or otherwise obtain for Purchaser the practical benefit of such property or rights. 3.6 DELIVERIES OF PURCHASER. At the Closing, Purchaser shall pay the Purchase Price (as adjusted pursuant to sections 2.6, and 10.2) in accordance with section 2.5 and shall deliver to Seller each of the following: (a) A copy of the Escrow Agreement executed by Purchaser and Escrow Agent. (b) An assumption agreement, substantially in the form of Exhibit F (the "Assumption Agreement") executed by Purchaser. (c) Each of the Seller Restrictive Covenant Agreement and the Principal Restrictive Covenant Agreement executed by Purchaser. 23 -19- (d) An opinion of Troutman Sanders, LLP, United States counsel to Zale, dated as of the Closing Date, substantially in the form of Exhibit G. (e) An opinion of Morris/Rose/Ledgett, Canadian counsel to Purchaser and Zale, dated as of the Closing Date, substantially in the form of Exhibit H. (f) A certificate of an officer of Purchaser (without personal liability), in form and substance reasonably satisfactory to Seller, dated as of the Closing Date, certifying to the fulfilment of the conditions set forth in sections 8.1 and 8.2; (g) A bank draft payable to BNS or wire transfer of immediately available funds to such bank account as may be designated to Purchaser in writing by BNS at least two (2) Business Days prior to the Closing in an amount equal to the amount owing by Seller to BNS pursuant to the Operating Credit as of 11:59 p.m. on the day immediately preceding the Closing Date; (h) A bank draft payable to BNS or wire transfer of immediately available funds to such bank account as may be designated to Purchaser in writing by BNS at least two (2) Business Days prior to the Closing in an amount equal to the amount set forth in Schedule 3.4(n); and (i) The Lease Assignment Agreement executed by Purchaser. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to the Purchaser as follows and acknowledges that Purchaser is relying on such representations and warranties in entering into this Agreement and in consummating the transactions contemplated herein: 4.1 ORGANIZATION AND GOOD STANDING. Seller is a corporation organized and existing under the laws of the Province of Ontario and has the corporate power to own or lease its assets and property, to carry on the Business as now being conducted by it and Seller is duly qualified as a corporation to do business in each jurisdiction in which the nature of the Business or the Assets makes such qualification necessary. 4.2 POWER AND AUTHORITY. Seller has the requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Seller and Seller's shareholders, and no other corporate proceedings on the part of Seller or Seller's shareholders are necessary to authorize the execution, delivery and performance of this Agreement by Seller. 4.3 BINDING EFFECT. This Agreement has been duly executed and delivered by Seller and constitutes a legal, valid and binding obligation of Seller, enforceable in accordance with its 24 -20- terms, except as enforcement may be limited by bankruptcy, insolvency and other laws affecting the rights of creditors generally and except that equitable remedies may be granted only in the discretion of a court of competent jurisdiction. 4.4 NO OTHER AGREEMENTS TO PURCHASE. No person other than Purchaser has any written or oral agreement or option or any right or privilege (whether by law, pre-emptive or contractual) capable of becoming an agreement or option for the purchase or acquisition from Seller of any of the Assets, other than inventory sold by Seller in the ordinary course of the Business. 4.5 NO VIOLATION; CONSENTS. Neither the execution and delivery of this Agreement by Seller, nor the performance by Seller of its obligations hereunder, will: (a) violate or conflict with any provision of the articles (including any amendments thereto) or by-laws or resolutions of the board of directors (or any committee thereof) or shareholders of Seller; (b) breach or otherwise constitute or give rise to a default under any Contract; (c) violate any Laws; (d) violate any Licences; or (e) create or impose any Lien, encumbrance or adverse claim of any kind on any of the Assets other than any such Lien, encumbrance or adverse claim in favour of Purchaser or Zale arising pursuant to this Agreement. 4.6 CONSENTS AND APPROVALS. There is no requirement to make any filing with, give any notice to or to obtain any licence, permit, certificate, registration, authorization, consent or approval of, any governmental or regulatory authority as a condition to the lawful consummation of the transactions contemplated by this Agreement, except for the filings, notifications, licences, permits, certificates, registrations, consents and approvals described in Schedule 4.6 or that relate solely to the identity of Purchaser or the nature of any business carried on by Purchaser. There is no requirement under any Material Contract or Facility Lease to give any notice to, or to obtain the consent or approval of, any party to any Material Contract or Facility Lease to the consummation of the transactions contemplated by this Agreement, except for the notifications, consents and approvals described in Schedule 4.6 or Schedule 4.12 or referred to in the insurance policies listed in Schedule 4.21. 4.7 CANADIAN RESIDENCE. Seller is not a non-resident of Canada for purposes of the Tax Act. 4.8 GST REGISTRATION. Seller is a registrant for purposes of the ETA whose registration number is 13632-6246RT0001. 4.9 FINANCIAL STATEMENTS. Attached hereto as Schedule 4.9 are true, correct and complete copies of the Audited Financial Statements. The Audited Financial Statements were prepared in accordance with generally accepted accounting principles consistently applied, and, subject to the 25 -21- BNS Lease being deemed to be a capital lease subsequent to March 27, 1999, present fairly in all material respects the assets and liabilities and the financial position of Seller as of the dates indicated therein and the results of operations of Seller for the periods covered thereby. The Interim Financial Statements will have been prepared in accordance with generally accepted accounting principles consistently applied, except for the change in accounting methodology for inventory (which change does not affect the accuracy of such Interim Financial Statements), and will present fairly in all material respects the assets and liabilities and the financial position of Seller as of the date indicated therein and the results of operations of Seller for the period covered thereby subject to adjustments to be made at the end of Seller's current fiscal year in the ordinary course of preparing Seller's audited financial statements for such fiscal year consistent with past practice. 4.10 LIABILITIES. Seller does not have any debt, liability, or obligation of any kind related to the Business, that, in accordance with generally accepted accounting principles, are required to be reflected in its financial statements, except (a) those reflected in the most recent Audited Financial Statements, and (b) liabilities incurred since the date of the most recent Audited Financial Statements in the ordinary course of business consistent with past practices and those relating to the BNS Lease which have been disclosed to Purchaser and any liabilities incurred in connection with items 1, 4, 5 or 6 on Schedule 4.16. Seller does not have any obligations (absolute or contingent) to provide funds on behalf of, or to guarantee or assume any debt, liability or obligation of, any person or entity. 4.11 TITLE TO ASSETS. Except for the Permitted Encumbrances set forth on Schedule 1.1(zz), Seller owns all of the Assets, other than the Premises, the Consignment Inventory, the Leased Assets and the Intellectual Property that is licensed by Seller, free and clear of all Liens. Schedule 4.11 identifies, as of the date of this Agreement, any inventory held by Seller on consignment, merchandise on approval or other similar arrangement (collectively, the "Consignment Inventory"). Schedule 4.11 also identifies, as of the date of this Agreement, all of the leased tangible personal property used by Seller in the conduct of the Business (collectively, the "Leased Assets"). The Assets constitute all assets (other than the Excluded Assets) needed to conduct the Business substantially in accordance with past practices. As of the date of this Agreement, Seller has the right to use all of the Leased Assets in connection with the operation of the Business pursuant to valid lease arrangements and Seller has provided to Purchaser a true and complete copy of each such written lease arrangement that is a Material Contract and all amendments, variations and extensions thereto. All of the machinery, equipment, vehicles, office equipment, computer hardware, furniture and fixtures included in the Assets are in good repair and operating condition, having a regard to their use and age (normal wear and tear excepted). 4.12 REAL PROPERTY. (a) Seller does not own and has not agreed to acquire any fee simple interest in any real property. (b) Schedule 4.12 lists all of the leased locations in respect of which Seller has entered into a lease, agreement to lease, or other form of tenancy agreement and, in certain cases, lease amending agreements, extensions, renewals and other 26 -22- related agreements (the "Facility Leases") of real property (the "Real Property") used, or to be used, by Seller in the operation of the Business. Save and except for any encumbrances registered against any owner's title to the Real Property and for Permitted Encumbrance, Seller's interest in the leasehold estate of all the Premises is not subject to any Lien and, subject to any limitations contained in any Facility Lease relating to the Premises, Seller has the exclusive right to possess, use and occupy the Premises free from any easement or other restriction of any kind. Except as set forth on Schedule 4.12, each Facility Lease is in good standing and is valid, in full force and effect and contains the entire agreement between each party and Seller has neither given nor received any notice of default, termination, or partial termination under any Facility Lease, which notice is currently outstanding, and there is no existing or continuing breach or default by Seller or, to the knowledge of Seller, any other party in the performance or payment of any obligation under any Facility Lease and Seller has complied in all material respects with the provisions of each Facility Lease. Schedule 4.12 also lists all of the locations in respect of which Seller has made an offer to lease to the owner, which offer to lease if accepted will constitute an agreement to lease on the terms set out therein. (c) Seller has not assigned, subleased or granted any right in rem of occupation or otherwise in respect of any portion of the Premises to any person or entity except for Seller's sublease of the Premises at Park Royal Shopping Centre in North Vancouver, British Columbia. (d) Subject to the terms of the Facility Leases, none of the Premises are subject to any easement, right of way, license, grant, building or use restriction, exception, reservation, limitation or other impediment which adversely interferes with or impairs the present and continued use thereof in the operation of the Business in a manner consistent with past practices, and Seller enjoys peaceful and undisturbed possession of all the Premises. (e) Schedule 4.12 sets out the parties to each of the Facility Leases, their expiry dates, any options to renew, the locations of the leased premises and the rates of Minimum (net) Rent payable thereunder. (f) Seller has provided to Purchaser access to its files to review a true and complete copy of each Facility Lease and all amendments, variations and extensions thereto. (g) There are no unresolved disputes of a material nature between Seller and any party to a Facility Lease. 4.13 INTELLECTUAL PROPERTY. Schedule 4.13 contains a correct and complete list as at April 27, 1999 of all Intellectual Property owned or licensed and used by Seller in connection with the operation of the Business and indicates whether such Intellectual Property is owned by or licensed to Seller. Except as referred to on Schedule 4.17, Seller owns all rights to use, or holds a valid license to use, all such Intellectual Property. Without limiting the generality of the foregoing, Seller owns all right, title and interest in and to the names "Peoples Jewellers" and 27 -23- "Mappins Jewellers" except as specifically referred to on Schedule 4.17. To the knowledge of Seller and except as specifically referred to on Schedule 4.17, Seller has not violated or infringed any patent, copyright, trade secret, trademark, service mark or other intellectual property rights of any other person or entity, and there are no claims pending or to the knowledge of Seller, threatened against Seller asserting that the use of any Intellectual Property by Seller infringes the rights of any other person or entity. Seller has not made or asserted any claim of violation or infringement of any Intellectual Property against any other person or entity, and Seller is not aware of any such violation or infringement. Seller has not granted any outstanding licenses or other rights to any Intellectual Property to any person or entity. Seller has provided to Purchaser a true and complete copy of all written agreements, and all amendments or variations thereto pursuant to which Seller has licensed from any person or entity any of the Intellectual Property. 4.13A ENVIRONMENTAL MATTERS. During Seller's occupancy of the Premises pursuant to each Facility Lease, Seller and those for whom in law it is responsible have complied in all material respects with Environmental Laws as they affect the Premises. Seller has obtained all licences, permits, approvals, consents, certificates, regulations and other authorizations ("Environmental Permits") under Environmental Laws required for the operation of the Business, all of which are described in Schedule 4.19 and all such Environmental Permits are valid, subsisting and in good standing and Seller is not in default or breach of any such Environmental Permits, which default or breach would have a material adverse effect on the Assets or the Business, and no proceeding is pending or, to the best of knowledge of Seller, threatened, to revoke or limit such Environmental Permits. All hazardous substances (as that term is defined under any Environmental Laws) and all other wastes and other materials and substances used in whole or in part by Seller in respect of the Business are used, stored and disposed of in compliance with all Environmental Laws, except to the extent that any such non-compliance would not have a material adverse effect on the Assets or the Business. 4.14 RECEIVABLES. All Receivables owned by or due to Seller are valid and represent bona fide claims against debtors for sales made, services performed or other charges, and, subject to any claims under any warranties or otherwise which may arise in the ordinary course of the Business, all of the goods delivered and services performed that gave rise to such Receivables were delivered or performed in all material respects in accordance with the applicable Contracts. To Seller's knowledge, no Receivables are subject to any defenses, counterclaims or rights of off-set, and Seller expects that all of such Receivables (net of any reserves therefor on Seller's books) will be collected in the ordinary course of the Business. Except as set forth on Schedule 4.14, Seller has not written off any such Receivables since March 27, 1999, except for non-material write-offs in the ordinary course of the Business consistent with past practices. 4.15 CONTRACTS. Schedule 4.15 contains a list of all Material Contracts to which Seller is a party or by which Seller or any of the Assets is bound. Each Contract to which Seller is a party or by which Seller or any of its Assets is bound, was entered into in the ordinary course of the Business and is in full force and effect. Seller is entitled to all benefits under such Contracts and, except as set forth in Schedule 4.15, has neither given nor received any notice of default, termination or partial termination under any such Contract, which notice is currently outstanding, and there is no existing or continuing breach or default by Seller or, to the knowledge of Seller, 28 -24- any other party in the performance or payment of any obligation under any Contract. Seller has complied in all material respects with the provisions of each Contract. In addition, neither the Business nor Seller is bound by any non-competition agreement or similar restrictive covenant except that, as of Closing, Seller will be bound by Seller Restrictive Covenant Agreement. Seller has provided to Purchaser a true and complete copy of each Material Contract listed in Schedule 4.15 and all amendments, variations and extensions relating thereto (except for any Material Contracts relating to key repair vendors listed in Schedule 4.15 provided; however, the form of such contract has been provided to Purchaser). 4.16 ORDINARY COURSE OF THE BUSINESS. Except as set forth on Schedule 4.16, Seller has operated the Business in the ordinary course of business consistent with past practices since December 31, 1998. Without limiting the generality of the foregoing, and except as set forth on Schedule 4.16, since December 31, 1998: (a) there has been no material adverse change in the Business or in the Assets, liabilities, results of operations, cash flow or financial condition of Seller; (b) there has been no destruction or loss of or to any of the Assets or properties of Seller, except for any destruction or losses which individually and in the aggregate do not have a material adverse effect on the Business; (c) there has been no sale, transfer or other disposition of any material asset of Seller, other than in the ordinary course of business consistent with past practices; (d) the books, accounts and records of Seller have been maintained in the usual, regular and ordinary manner on a basis consistent with prior years; (e) there has been no labour dispute, organizational effort by any union, unfair labor practice charge or employment discrimination charge, nor institution or, to the knowledge of the Seller, threatened institution of any effort, complaint or other proceeding in connection therewith, involving Seller or otherwise materially adversely affecting the operation of the Business; (f) there has been no amendment, termination or waiver of any right of Seller under any Material Contract or Licence, other than in the ordinary course of business consistent with past practices; (g) there has been no: (i) increase in the compensation or in the rate of compensation or commissions payable or to become payable by Seller to any director, officer, employee, salesman, independent contractor or agent of Seller, other than in the ordinary course of the Business consistent with past practices; or (ii) increase in any payment of or commitment to pay any bonus, profit sharing or other extraordinary compensation to any officer, director, salesman, agent, independent contractor or employee of Seller, other than in the ordinary course of business consistent with past practices; 29 -25- (h) there has been no Lien created on or in any of the Assets or assumed by Seller with respect to any of the Assets or the Business, other than in the ordinary course of business consistent with past practices; (i) there has been no creation of, amendment to or contribution, grant, payment or accrual for or to the credit of any employee of Seller with respect to any bonus, incentive compensation, deferred compensation, profit sharing, retirement, pension, group insurance or other benefit plan, or any union, employment or consulting agreement or arrangement, other than in the ordinary course of business consistent with past practices; (j) there has not been any forward purchase commitments in excess of the requirements of the Business for normal operating inventories or at prices higher than the current market prices; (k) there has not been any forward sales commitments or any failure to satisfy any accepted order for goods or services other than in the ordinary course of business consistent with past practices; (l) there has not been any change in the accounting or tax practices followed by Seller; (m) there has not been any change adopted in the depreciation or amortization policies or rates; or any change in the credit terms offered to customers of, or by suppliers to, the Business; and (n) Seller has not incurred any indebtedness for any liabilities or paid for or prepaid any liabilities incurred other than in the ordinary course of business consistent with past practices. 4.17 LITIGATION. Except as set forth on Schedule 4.17, there is no litigation, action, suit, proceeding, arbitration, mediation, hearing or governmental investigation pending or, to Seller's knowledge, threatened by or against Seller or the Business. Except as set forth on Schedule 4.17, no judgement, award, order or decree has been rendered against Seller which is still outstanding or, to Seller's knowledge, threatened against or involving Seller or the Business. 4.18 COMPLIANCE WITH LAWS. Seller is currently in compliance with and has in the past complied with all statutes, laws, rules, regulations, orders, decrees and ordinances applicable to it or the operation of the Business (collectively, the "Laws") except to the extent any such non-compliance would not have a material adverse effect on the Assets or the Business and no notice, claim, charge, complaint, action, suit, proceeding, investigation or hearing has been received by Seller which is still outstanding or, to the Seller's knowledge, filed, commenced or threatened against Seller alleging any such violation. 4.19 PERMITS AND LICENSES. Seller holds all required permits, licenses, registrations, approvals and authorizations from all governmental or regulatory authorities which are necessary to conduct the Business in a manner consistent with its past practices (the "Licences") and all of 30 -26- the Licences are listed on Schedule 4.19. Each Licence is valid, subsisting and in good standing and Seller is not in default or breach of any Licence which default or breach would have a material adverse effect on the Assets or the Business, and to the knowledge of Seller, no proceeding is pending or threatened to revoke or limit any Licence. 4.20 TAXES. Seller has paid all applicable Taxes with respect to any period of time prior to the date hereof, except for Taxes accrued but not yet due and payable. Seller has collected or deducted at source all applicable Taxes required to be collected or deducted at source prior to the date hereof. Seller has made adequate provision for Taxes accrued but not yet due and payable. No notice of assessment or reassessment and no notice of any pending action, proceeding or claim, relating to Taxes payable or collectable in respect of the Business has been received by Seller. No extension of a statute of limitations relating to Taxes is in effect with respect to Seller. For purposes of this section 4.20, "Tax and Taxes" shall include any taxes, fees, levies, duties, charges, premiums, contributions or similar assessments (including interest, penalties and additions) imposed by or payable to any governmental or other taxing authority, whether foreign, federal, state, provincial, local or otherwise. 4.21 INSURANCE. Schedule 4.21 contains a complete list and description (including the expiration date, premium amount and coverage thereunder) of all policies of insurance and bonds presently maintained by Seller with respect to the Assets and the Business. All material terms, obligations and provisions of each of such policies and bonds have been complied with, all premiums due thereon have been paid, and no notice of cancellation with respect thereto has been received by Seller. To Seller's knowledge, no state of facts exists with respect to which Seller would file any insurance claim other than any insurance claim which would be made in the ordinary course of the Business consistent with past practices. Seller has provided Purchaser with a complete list of all claims made within the last three (3) years and all pending claims under any policies of property and casualty insurance and bonds maintained by Seller. 4.22 EMPLOYEES. Schedule 4.22 contains a true and complete list of the names, titles, and salaries or hourly rates, date of hire, bonus arrangements and commissions of each full-time and part-time employee of Seller as of April 30, 1999 (collectively, the "Employees"). The list includes all persons who, pursuant to applicable workers' compensation, employment standards or similar legislation or otherwise at law or in equity are employees of Seller and all employees of Seller who have been laid off but retain recall or reinstatement rights pursuant to any statute. Except as indicated on Schedule 4.22, none of the Employees has a written employment agreement with Seller or any oral contract of employment which is not terminable on the giving of reasonable notice and/or severance pay in accordance with applicable law and, to the knowledge of Seller, no inducements to accept employment with the Seller were offered to any of the Employees which have the effect of materially increasing the period of notice of termination to which any such Employee is entitled. Schedule 4.22A contains a true and correct list of all loans owing by Employees (or former employees) and a summary of the terms of such loan and the security, if any, granted in respect thereof (except share purchase loans initially outstanding to Peoples Jewellers Limited). 31 -27- Schedule 4.22B contains a true and complete list of all current Employees of Seller who have entered into employee loan arrangements with Seller in respect of share purchase loans which were outstanding to Peoples Jewellers Limited. Also set forth in Schedule 4.22 is a complete list of all independent consultants who are presently engaged by Seller to provide services at Seller's head office located at 1440 Don Mills Road, Toronto, Ontario pursuant to any written Material Contract. No notice has been received by Seller of any complaint filed by any of the Employees or any independent consultant against Seller claiming that Seller has violated the Employment Standards Act (Ontario), the Human Rights Code (Ontario) (or any applicable employment standards or human rights or similar legislation in the other jurisdictions in which the Business is conducted) or of any complaints to or proceedings before any court, tribunal or governmental authority of any kind involving any of the Employees and Seller, except as disclosed in Schedule 4.22. There are no outstanding orders or charges against Seller under the Occupational Health and Safety Act (Ontario) (or any applicable occupational health and safety legislation in the other jurisdictions in which the Business is conducted). All levies, assessments and penalties made against Seller pursuant to the Workplace Safety and Insurance Act (Ontario) (and any applicable workers' compensation legislation in the other jurisdictions in which the Business is conducted) which are due and payable have been paid by Seller. 4.23 EMPLOYEE BENEFITS. Schedule 4.23 lists all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, pension, severance or other benefit plans, programs or arrangements to which Seller is a party or which are maintained, contributed to or sponsored by Seller for the benefit of any current or former employee, officer or director of Seller (the "Employee Plans"). Seller is not in default in any material respect of any of its obligations under the Employee Plans. Each Employee Plan has been maintained in compliance in all material respects with its terms and the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Employee Plan. Seller has provided to Purchaser a true and complete copy of each Employee Plan. 4.23A ACCELERATED PAYMENTS. Except as set forth in Schedule 4.23A, none of the Material Contracts contain any obligation to make a "change of control" payment to employees or consultants of Seller (including without limitation, severance, so-called "parachute" payments, bonuses or otherwise) or result in the acceleration of time of payment or vesting of any benefits under any Material Contract or give rise to any right of termination, or acceleration of indebtedness, under any Material Contract, or give rise to any restriction or limitation under any Material Contract. 4.24 GOVERNMENT WITHHOLDINGS. Seller has deducted and remitted to the relevant governmental authority all income taxes, employment insurance contributions, Canada Pension Plan contributions, Quebec Pension Plan contributions, provincial employer or employee health tax remittances and any taxes or deductions or other amounts which it is required by statute or Contract to deduct and remit to any governmental authority, prior to the date hereof. 32 -28- 4.25 EMPLOYMENT PAYMENTS BY SELLER TO DATE OF CLOSING. All accruals for unpaid vacation pay, premiums for unemployment insurance, health premiums, Canada Pension Plan premiums, accrued wages, salaries and commissions with respect to the Employees and payments by Seller under the Employee Plans have been accurately reflected in all material respects in the books and records of Seller. 4.26 WORKER'S COMPENSATION. There are no Employees in receipt of or who have outstanding claims for benefits under any long term disability or workers' compensation plan or arrangement or any other form of disability benefit program, other than those Employees identified on Schedule 4.26. 4.27 LABOUR MATTERS. Seller has not entered into any collective bargaining with any union or labour organization. There is no certification application outstanding with respect to the Employees. Except as disclosed in Schedule 4.17 or 4.22, there is no grievance proceeding relating to the Employees or arbitration proceeding (in respect of such a grievance) or governmental proceeding relating to the Employees pending, nor, to the knowledge of Seller, is there any such proceeding threatened against Seller which might have a material adverse effect on the conduct of the Business. 4.28 HEALTH AND SAFETY. To the knowledge of Seller, the Premises are in compliance, in all material respects, with applicable occupational health and safety legislation and regulations and are not subject to any orders or directions of an occupational health and safety authority or similar body which might have a material adverse effect on the conduct of the Business. 4.29 BANK ACCOUNTS. Schedule 4.29 lists the names and addresses of every bank and other institution in which Seller maintains an account or safety deposit box, the account numbers of each such account, and the names of all persons who are authorized to draw thereon or have access thereto. 4.30 SUPPLIERS. Seller has provided Purchaser with Seller's accounts payable master file and register as of May 22, 1999. Seller has no reason to believe that the benefits of any relationship with any of the major suppliers of the Business will not continue after the Closing Date in substantially the same manner as before this Agreement. 4.31 INVENTORY. Seller's inventory (including Consignment Inventory), included in the Assets has been acquired in the ordinary course of the Business. Subject to an allowance for obsolete, damaged inventory and shrinkage consistent with the allowances reflected in the most recent Audited Financial Statements and subject to inventory that is being repaired in the ordinary course of the Business, Seller's inventory (including Consignment Inventory) consists of items which are not damaged and are of a quality and quantity usable and saleable in the ordinary course of the Business. To the knowledge of Seller, Seller's inventories (including Consignment Inventory) are labelled, stored and sold in substantial compliance with all applicable manufacturer's warranties, consignment agreements, and all applicable federal, provincial and local laws. 33 -29- 4.32 PRODUCT WARRANTIES ETC. Schedule 4.32 is a complete list of all express warranties and store repair and return policies in respect of products and services sold and provided by Seller in connection with the Business. 4.33 INSOLVENCY PROCEEDINGS. No insolvency proceedings of any kind or nature, including, without limitation, bankruptcy, receivership, reorganization, or other arrangements with creditors, whether voluntary or involuntary, with respect to Seller are pending or, to Seller's knowledge, threatened. 4.34 BOOKS AND RECORDS. Subject to adjustments to be made at the end of Seller's current fiscal year in the ordinary course of preparing Seller's audited financial statements for such year consistent with past practices, the books and records of Seller fairly present, in all material respects, in accordance with generally accepted accounting principles, the financial position of Seller, and all material financial transactions of Seller relating to the Business have been recorded in such books and records. 4.35 YEAR 2000 COMPLIANCE. Seller has adopted and is diligently implementing a Year 2000 compliance plan (the "Year 2000 Plan"), a copy of which is attached hereto as Schedule 4.35. All remediation, testing and certification required by such plan will be completed by no later than December 31, 1999. To the knowledge of Seller, the Year 2000 Plan, including the remediation efforts and contingency plans therein, is reasonable and prudent in light of the Assets and Business. To the knowledge of Seller, if the Year 2000 Plan is completed in accordance with its terms, all material Systems and Software will be Year 2000 Compliant. 4.36 SCHEDULES. The Schedules in this Agreement contain certain information regarding Seller and are attached to and form a part of this Agreement, and all information set forth in the Schedules is true and correct in all material respects as of the date of this Agreement. The Schedules do not omit to state any material fact necessary in order to make the statements therein not misleading, and shall be deemed for all purposes of this Agreement to constitute part of Seller's representations and warranties under this Agreement. 4.37 FULL DISCLOSURE. No representation or warranty made by Seller in this Agreement contains any untrue statement of any material fact and such representations and warranties do not omit to state any material fact necessary in order to make such representations and warranties not misleading. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND ZALE Each of Purchaser and Zale hereby represents and warrants to Seller as follows and acknowledges that Seller is relying on such representations and warranties in entering into this Agreement and in consummating the transactions contemplated herein: 5.1 ORGANIZATION AND GOOD STANDING. Purchaser is a corporation organized and existing under the laws of the Province of Nova Scotia and Zale is a corporation organized and existing under the laws of the State of Delaware. 34 -30- 5.2 POWER AND AUTHORITY. It has the requisite power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on its part, and no other proceedings on its part are necessary to authorize the execution, delivery and performance of this Agreement by it. 5.3 BINDING EFFECT. This Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of it, enforceable in accordance with its terms. 5.4 NO VIOLATION; CONSENTS. Neither the execution and delivery of this Agreement by it nor the performance by it of its obligations hereunder will: (a) violate or conflict with any provision of its articles or by-laws or resolutions of its board of directors (or any committee thereof or its shareholders); (b) breach or otherwise constitute or give rise to a default under any contract, commitment or other obligation to or by which it is a party or by which it or its assets are bound; or (c) violate any statute, ordinance, law, rule, regulation, judgement, order or decree of any court or other governmental or regulatory authority to which it is subject. 5.5 CONSENTS AND APPROVALS. There is no requirement for it to make any filing with, give any notice to or obtain any licence, permit, certificate, registration, authorization, consent or approval of, any governmental or regulatory authority as a condition to the lawful consummation of the transactions contemplated by this Agreement. 5.6 GST REGISTRATION. Purchaser is a GST registrant for purposes of the ETA whose registration number is 86603 8425RT0001. 5.7 FULL DISCLOSURE. No representation or warranty made by it in this Agreement contains any untrue statement of any material fact and such representations and warranties do not omit to state any material fact necessary in order to make such representations and warranties not misleading. ARTICLE 6 COVENANTS OF SELLER PENDING CLOSING Seller agrees that, unless it shall have obtained the prior written approval of Purchaser, from the date hereof until the Closing, it shall comply with the following: 6.1 CONDUCT OF THE BUSINESS PENDING CLOSING. (a) Seller shall carry on the Business in the ordinary course of business consistent with past practices, will preserve intact the present organization of the Business, 35 -31- and will use all reasonable efforts to keep available the services of the present officers and employees of the Business and to preserve the Business's goodwill. (b) Seller will maintain all of the tangible assets comprising the Assets in good operating condition, having regard to their use and age (ordinary wear and tear excepted). (c) Seller will maintain and keep in full force and effect all of the insurance coverage currently maintained by it on the Assets and the Business. (d) Seller will not sell, mortgage, pledge, lease, or otherwise transfer or dispose of any of the Assets or enter into any agreement with respect to the foregoing, other than in the ordinary course of business consistent with past practices. (e) Seller will not increase the benefits or other compensation payable or to become payable to any of its employees, increase any payment of or commitment to pay any bonus, profit sharing or other extraordinary compensation to any of its employees, make any severance payments or enter into any agreement with respect to the foregoing, in each case other than in the ordinary course of business consistent with past practices; provided, however, that in no event shall Seller enter into any employment agreements nor any amendments to existing employment agreements with any store manager, any employee who works at Seller's head office or any officer of Seller. (f) Seller will maintain its books and records in the ordinary course of business consistent with past practices. (g) Seller will use reasonable commercial efforts to protect all confidential information and trade secrets of the Business. (h) Seller will not incur any indebtedness for any liabilities, or pay for or prepay any liabilities incurred, other than in the ordinary course of business consistent with past practices. (i) Seller shall not enter into any lease, offer to lease or commitment in respect of real property or any amendment, modification, renewal or variation of any existing Facility Lease. 6.2 INTENTIONALLY DELETED. 6.3 ACCESS TO THE BUSINESS. Seller shall permit Purchaser and its representatives, agents, counsel and accountants, to have full access at all reasonable times to the Premises, Assets, financial statements, Contracts, books, records and working papers of, and other relevant information pertaining to, Seller and the Business and to cause its officers and employees to furnish to Purchaser and its representatives, agents, counsel and accountants, such financial and operating data and other information with respect to Seller and the Business that is in the possession or under the control of Seller as Purchaser may reasonably request. 36 -32- At Purchaser's request, Seller shall co-operate with Purchaser in arranging any such meetings as Purchaser should reasonably request with: (a) senior employees employed in the Business; (b) customers, suppliers, distributors or others who have or have had a business relationship with Seller in respect of the Business; and (c) the auditors, solicitors or any other persons engaged or previously engaged to provide services to Seller who have knowledge of matters relating to the Business or Assets. 6.4 UPDATES. Seller shall promptly notify Purchaser by written updates (each a "Supplement") to each of its representations and warranties contained herein of any matters occurring after the date hereof which, if existing or occurring on the date hereof, would have been required to be set forth on a Schedule to this Agreement or which would render inaccurate any of the representations or warranties made by Seller in this Agreement and shall identify in such notice each such representation and warranty to which such Supplement applies. Upon Purchaser's written acceptance of each such Supplement, which acceptance shall be in the Purchaser's discretion, acting reasonably, the representations and warranties (expressly identified in such Supplement) contained herein and in the Schedules shall be deemed to have been amended as of the date of this Agreement as set forth in such Supplement and for greater certainty each such Supplement (as accepted) shall be deemed to have cured any breaches of any such representation or warranty to the extent of the additional disclosure in such Supplement for all purposes of this Agreement including, without limitation, for purposes of Article 11 hereof. 6.5 DELIVERY OF BOOKS AND RECORDS. At the Time of Closing, there shall be delivered to Purchaser by Seller all the books and records described in subsection 2.1(k) that are included in the Assets. Purchaser agrees that it will preserve the books and records so delivered to it for a period of three (3) years from the Closing Date or, if longer, for the period referred to in any applicable statute of limitations, or for such longer period as is required by any applicable law, and will permit Seller or its authorized representatives reasonable access thereto in connection with the affairs of Seller relating to its matters, but Purchaser shall not be responsible or liable to Seller for or as result of any accidental loss or destruction of or damage to any such books or records unless such loss, destruction or damage resulted from Purchaser's gross negligence or wilful misconduct. 6.6 CHANGE THE USE OF NAME. Seller agrees that contemporaneously with the Closing it shall change its name and the names of any of its Affiliates that include the words "Peoples Jewellers" to a name that does not include the words "Peoples Jewellers" or any part thereof or any similar words. Seller agrees that from and after the Closing Date neither Seller nor any of its Affiliates will use the words "Peoples Jewellers" or any other trade name or trademark set forth in Schedule 4.13 or any part thereof or any similar words. 37 -33- ARTICLE 7 CONDITIONS TO OBLIGATIONS OF PURCHASER The purchase and sale of the Assets pursuant to this Agreement is subject to the fulfilment prior to or at the Time of Closing of each of the following terms and conditions which are for the exclusive benefit of Purchaser, any of which may be waived in writing by Purchaser in its sole discretion: 7.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects as of the date hereof, and such representations and warranties (as amended pursuant to any Supplement accepted by Purchaser by section 6.4) shall be true and correct in all material respects as of the Time of Closing (as if made at and as of such time). 7.2 PERFORMANCE OF AGREEMENTS. Seller shall have performed and complied with all agreements and covenants required by this Agreement to be performed or complied with by it prior to or at the Time of Closing including, without limitation, the deliveries pursuant to section 3.4. 7.3 APPROVALS. Any and all governmental authorities, bodies or agencies having jurisdiction over the transactions contemplated by this Agreement shall have granted such consents, authorizations and approvals as are necessary for the consummation thereof, and all applicable waiting or similar periods required by law shall have expired including, without limitation, those described in Schedule 4.6, in each case in form and substance satisfactory to Purchaser, acting reasonably. 7.4 CONSENTS AND APPROVALS OF THIRD PARTIES. All consents, authorizations, notices and approvals to the transactions contemplated by this Agreement that are required from any third party pursuant to the terms of any Contract described in Schedule 4.6 or any Facility Leases shall have been duly obtained and all such consents, authorizations, notices and approvals shall be in form and substance reasonably satisfactory to Purchaser. 7.5 NO INJUNCTIONS. No preliminary or permanent injunction or other order by any federal, provincial or local court which acts to prevent the consummation of the transactions contemplated by this Agreement shall have been issued at the request of any person (other than Purchaser) and remain in effect, and no action to obtain any such injunction or order shall have been filed by any person (other than Purchaser) and remain pending. 7.6 ORDINARY COURSE OF BUSINESS. Except as set forth in Schedule 4.16, Seller shall have operated the Business in the ordinary course consistent with past practices since December 31, 1998, and there shall not have occurred any material adverse change in the Business or the Assets since such date. 38 -34- ARTICLE 8 CONDITIONS TO OBLIGATIONS OF SELLER The purchase and sale of the Assets pursuant to this Agreement is subject to the fulfilment prior to or at the Time of Closing of each of the following terms and conditions which are for the exclusive benefit of Seller, any of which may be waived in writing by Seller in its sole discretion: 8.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of Purchaser and Zale contained in this Agreement shall be true and correct in all material respects as of the date hereof, and such representations and warranties shall be true and correct in all material respects as of the Time of Closing (as if made at and as of such time). 8.2 PERFORMANCE OF AGREEMENTS. Purchaser shall have fully performed and complied with all agreements and covenants required by this Agreement to be performed or complied with by it prior to or at the Time of Closing including, without limitation, the deliveries pursuant to section 3.7. 8.3 APPROVALS. Any and all governmental authorities, bodies or agencies having jurisdiction over the transactions contemplated by this Agreement shall have granted such consents, authorizations and approvals as are necessary for the consummation thereof, and all applicable waiting or similar periods required by law shall have expired. 8.4 CONSENTS AND APPROVALS OF THIRD PARTIES. All consents, authorizations and approvals to the transactions contemplated by this Agreement that are required from any third party pursuant to the terms of any Material Contract or any Facility Lease shall have been duly obtained. 8.5 NO INJUNCTIONS. No preliminary or permanent injunction or other order by any federal, provincial or local court which acts to prevent the consummation of the transactions contemplated by this Agreement shall have been issued at the request of any person (other than Seller) and remain in effect, and no action to obtain any such injunction or order shall have been filed by any person (other than Seller) and remain pending. ARTICLE 9 TERMINATION 9.1 TERMINATION. This Agreement and the transactions contemplated hereby may be terminated as follows: (a) At any time prior to the Closing, by the mutual written consent of the Parties. (b) By Purchaser at the Time of Closing by notice in writing to the other Parties, if Purchaser is prepared to close and all conditions of Seller's obligations to close pursuant to Article 8 have been satisfied and Seller fails to deliver the documents referred to in section 3.4 or fails to satisfy any of the conditions to Closing set forth in Article 7 hereof. 39 -35- (c) By Purchaser on the Cut-Off Date by notice in writing to the other Parties, if Seller fails to cure any material breach of this Agreement by such date, after receiving written notice thereof on or before the Closing Date from Purchaser. (d) By Seller at the Time of Closing, by notice in writing to the other Parties, if Seller is prepared to close and all conditions to Purchaser's obligations to close pursuant to Article 7 have been satisfied and Purchaser fails to deliver the documents referred to in section 3.6 or fails to satisfy any of the conditions to Closing set forth in Article 8 hereof. (e) By Seller on the Cut-Off Date, by notice in writing to the other Parties, if Purchaser fails to cure any material breach of this Agreement by such date after receiving written notice thereof on or before the Closing Date from Seller. 9.2 CUT-OFF DATE. If the Closing shall not have occurred on or before June 15, 1999 or such other date as the parties may agree (the "Cut-Off Date"), either Party may terminate this Agreement by delivering written notice thereof to the other Party. 9.3 EFFECT OF TERMINATION. Each Party's right of termination under section 9.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination hereunder shall not be an election of remedies. ARTICLE 10 OTHER AGREEMENTS OF THE PARTIES 10.1 COMMERCIALLY REASONABLE EFFORTS. From the date hereof until the Closing Date, upon the terms and subject to the conditions of this Agreement, each Party shall use all commercially reasonable efforts to take or cause to be taken all actions and to do or cause to be done all things necessary to consummate the transactions contemplated by this Agreement. 10.2 BROKERS; EXPENSES. Except for the liability incurred by Seller for compensation owing to ScotiaMcLeod Inc. in connection with the transactions contemplated by this Agreement which compensation is $872,934.58 in the aggregate, the Parties hereby represents and warrants to the others that it has not incurred any liability for brokerage fees, finder's fees, agent's commissions or other similar forms of compensation in connection with or in any way related to the transactions contemplated by this Agreement. Each Party hereto shall pay its own fees and expenses (including the fees and expenses of its attorneys, accountants, investment bankers, brokers, financial advisors and other professionals) incurred in connection with this Agreement and the transactions contemplated hereby; provided, however, that if any fees and expenses of Seller in respect of this Agreement and the transaction contemplated hereby are paid by Seller prior to the Closing, such fees and expenses shall be identified by Seller to Purchaser prior to the Closing and the Purchase Price shall accordingly be reduced by the amount of such fees and expenses before any applicable GST in respect thereof. 10.3 PUBLICITY AND CONFIDENTIALITY. No Party shall issue any press release, written public statement or announcement relating to this Agreement or the transactions contemplated hereby 40 -36- without the written prior approval of the other Parties in each instance, except to the extent such disclosure is required by law (in which case such Party shall use all reasonable efforts to give the other Parties prior notice thereof). The Parties hereby agree to be bound by the terms of the confidentiality agreement entered into between Seller and Zale dated March 2, 1998 as if Purchaser was a party thereto in addition to Zale. 10.4 TRANSFERRED EMPLOYEES. (a) Purchaser shall, with effect from and after the Effective Time but conditional upon the Closing, offer employment to all Seller's employees (the "Transferred Employees"), on substantially the same terms and conditions as such Transferred Employees are presently employed by Seller, and Purchaser shall recognize and preserve, for all purposes (including for purposes of section 10.4(b)), the Transferred Employees' years of service with Seller and Peoples Jewellers Limited and any Affiliates thereof as set forth on Schedule 4.22. Without limiting the scope of the foregoing, Purchaser shall provide to the Transferred Employees employment conditions, benefits, responsibilities and duties which are substantially the same as those upon which the Transferred Employees are presently employed by Seller including, without limitation, the employment conditions and benefits set out in Schedules 4.22 and 4.23 and Purchaser shall, with respect to each Transferred Employee, honour his/her outstanding vacation entitlement. Such offers of employment shall be given to all of the Transferred Employees at least two (2) Business Days prior to Closing and shall be in form and substance satisfactory to Seller, acting reasonably. (b) Purchaser shall be responsible for all expenses, costs and other liabilities and obligations of any kind whatsoever arising out of or in connection with (i) the termination of employment of those Transferred Employees who do not accept Purchaser's offer of employment referred to in section 10.4(a), except for those Transferred Employees set forth in Schedule 4.22B and Tanya Boyd-Saffran and Euan McGrath and (ii) the employment or the termination of employment, subsequent to the Closing Date of those Transferred Employees who accept Purchaser's offer of employment referred to in section 10.4(a) above. (c) Purchaser shall assume the obligations of Seller pursuant to the Contracts set forth in Schedule 4.23A and shall upon termination of employment pursuant to such Contracts pay to such employees the amounts set forth in Schedule 4.23A, provided such employees provide a full and final release of any claims they may have under such agreements, substantially in the form of Exhibit J. 10.5 EXCLUSIVITY. Seller hereby agrees that, from March 16, 1999 until the Cut-Off Date, neither Seller nor any of its officers, directors, employees, representatives, attorneys, investment bankers, advisors or agents will directly or indirectly: (a) discuss, negotiate or enter into any agreements or understandings with, or solicit offers from or enter into negotiations with, any person or entity other than Purchaser (whether solicited or unsolicited) for the purchase and sale, regardless of structure, of any of the stock in the capital of Seller or any of the assets of Seller other than in the ordinary course of business, whether by merger, sale of shares or otherwise 41 -37- (each a "Prohibited Transaction"); (b) participate in any discussions or negotiations regarding, or furnish to any person or entity (other than Purchaser) any information with respect to, or otherwise assist, participate in, co-operate with, facilitate or encourage, any Prohibited Transaction; or (c) consummate or agree to consummate any Prohibited Transaction. In the event Seller breaches the provisions of this Section 10.5, then Seller shall immediately make a cash payment to Purchaser (as liquidated damages) in the amount of Canadian $5,000,000. 10.6 BULK SALES ACT. Purchaser agrees to waive compliance with the requirements of the Bulk Sales Act (Ontario) (and such other similar provincial legislation) (collectively, the "Bulk Sales Legislation") and Seller hereby indemnifies and agrees to promptly defend and hold harmless Purchaser, its Affiliates, and their respective directors, officers, employees and agents from any and all claims, demands, actions, causes of action, damages, losses, costs or expenses (including reasonable legal fees and disbursements) which any of them may suffer or incur by virtue of non-compliance with provisions of the Bulk Sales Legislation in connection with the transactions contemplated herein. 10.7 TAX RETURNS AND AUDITS. After the Closing, each of the Parties agrees to provide timely notice to all relevant taxing authorities of such Party's current address(es) and any changes thereto and: (a) provide the others with such assistance as may be reasonably requested by such others in connection with the preparation of any tax return, election, filing or report relating to liability for taxes, in respect of the Business or the Assets for taxable periods for which the requesting Party may have a liability under this Agreement; (b) make available to the requesting Party any records or information which may be relevant to such tax return, election, filing or report or any audit or examination referred to in section 10.7(c); (c) provide the others with such assistance as may be reasonably requested by such others in connection with any audit or examination by any taxing authority, or any judicial or administrative proceedings relating to liability for taxes in respect of the Business or the Assets; provided, however, if providing such assistance would otherwise unduly interfere with the Business of the Purchaser, the Purchaser may in its reasonable discretion charge the Seller with a reasonable fee for the provision of such assistance or, with the prior approval of Seller, temporarily hire such additional staff, at the expense of Seller, to provide such assistance; (d) use commercially reasonable efforts to provide timely notice in writing of any pending or threatened tax audits or assessments relating to the Business or the Assets for taxable periods for which the other may have a liability under this Agreement; and (e) use commercially reasonable efforts to furnish the other with copies of all correspondence received from or information requested by any taxing authority in 42 -38- connection with any tax audit with respect to any taxable period, for which the other may have a liability under this Agreement. The Parties must keep confidential (unless otherwise required by law or necessary for purposes of operating the Business in the ordinary course) any information obtained pursuant to this section 10.7. 10.8 LITIGATION. After the Closing, each of the Parties agrees to: (a) provide the others with such assistance as may be reasonably requested by such others in connection with any litigation, action, suit, proceeding, arbitration, mediation, hearing or governmental investigation (hereinafter called "Proceeding") relating to the Business or the Assets and for which the other Party may have a liability including, without limitation, making available to such other employees whose assistance, testimony or presence may be of assistance to such other in connection with evaluating, defending or preparing for any such Proceeding; (b) make available to the requesting Party all documents, records and other materials which may be relevant in connection with such Proceeding; (c) use commercially reasonable efforts to provide timely notice in writing of any pending or threatened Proceeding relating to the Business or the Assets for the periods prior to Closing; and (d) use commercially reasonable efforts to furnish the others with all copies of correspondence received from any governmental authority in connection with any governmental investigation or proceeding relating to the Business or the Assets for the periods prior to Closing. For purposes of (a) above, Seller shall make available such directors or officers of Seller that would have knowledge of the facts pertaining to any such Proceeding. The Parties must keep confidential (unless otherwise required by law or necessary for purposes of operating the Business in the ordinary course) any information obtained pursuant to this section 10.8. 10.9 REIMBURSEMENT OF EXPENSES FOR SELLER POST-CLOSING. Purchaser hereby covenants and agrees to reimburse Seller forthwith upon request for all reasonable out-of-pocket fees and expenses incurred in connection with the necessary operations of Seller relating to the period after Closing of Seller (other than any legal fees incurred by Seller in respect of a dispute between Seller and Purchaser regarding a Purchaser Claim) or the wind-up and/or dissolution of Seller (provided Seller is not engaged in any active business after Closing) up to a maximum of $50,000 in each of the two years following Closing, provided Seller provides Purchaser copies of all invoices for such fees and expenses. 10.10 ACKNOWLEDGEMENT. Notwithstanding anything contained herein to the contrary, each of Purchaser and Zale hereby acknowledge and agree that it shall not make any claim for indemnification pursuant to Article 11 of the Agreement in respect of any Losses (other than a 43 -39- Third Party Claim) suffered or incurred by Purchaser, its Affiliates or their respective directors, officers, employees or agents as a result of or arising directly or indirectly out of, or in connection with, (i) the allocation by Seller of the fixed assets portion of the purchase price paid by Seller for the acquisition of certain property and assets of Peoples Jewellers Limited/Les Bijoutiers Diamantaires Peoples Limitee pursuant to an agreement made as of September 2, 1993 between Seller and Peat Marwick Thorne Inc., Receiver and Manager of the undertaking, property and assets of Peoples Jewellers Limited/Les Bijoutiers Diamantaires Peoples Limitee or (ii) Seller's accounting policies for depreciation or amortization of such fixed assets. ARTICLE 11 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION 11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Parties contained in this Agreement and in all certificates and documents delivered pursuant to or contemplated by this Agreement shall survive the closing of the transactions contemplated hereby and shall continue for a period of eighteen (18) months from the Time of Closing and notwithstanding such Closing nor any investigation made by or on behalf of the Party entitled to the benefit thereof shall continue in full force and effect for the benefit of the Party entitled to the benefit thereof during such period except that: (a) the representations and warranties set out in section 4.20 (and the corresponding representations and warranties set out in the officer's certificate to be delivered on Closing) shall survive the closing of the transactions contemplated hereby and continue in full force and effect until 10 days after the expiration of the period, if any, during which an assessment, reassessment or other form of recognized document assessing liability for tax, interest or penalties under applicable tax legislation in respect of any taxation year to which such representations and warranties extend could be issued under such tax legislation to Seller; (b) the representations and warranties set out in section 4.13A (and the corresponding representations and warranties set out in the officer's certificate to be delivered on Closing) shall survive the closing of the transactions contemplated hereby and continue in full force and effect until 10 days after the expiration of the period, if any, during which any liability for environmental matters under applicable Environmental Law to which such representations and warranties extend could be issued under such environmental legislation applicable to Seller, provided Seller did not file at any time prior to Closing any waiver or other document extending such period; and (c) any claim for any breach of any representation and warranty contained in this Agreement or in any agreement, instrument, certificate or any other document executed or delivered pursuant hereto involving fraud or fraudulent misrepresentation may be made at any time following the Closing Date, subject only to applicable limitation periods imposed by law. 44 -40- 11.2 NON-WAIVER. No investigations made by or on behalf of a Party at any time shall have the effect of waiving, diminishing the scope of or otherwise affecting any representation or warranty made by the other Party herein or pursuant hereto. 11.3 INDEMNIFICATION BY SELLER. Seller hereby indemnifies and agrees to promptly defend and hold harmless Purchaser, its Affiliates and their respective directors, officers, employees and agents from all Losses (hereinafter called a "Purchaser Claim") suffered or incurred by any of them as a result of or arising directly or indirectly out of or in connection with: (a) any breach by Seller of or any inaccuracy of any representation or warranty of Seller contained in this Agreement or in any agreement, certificate or other document delivered pursuant hereto (provided that Seller shall not be required to indemnify or save harmless Purchaser, its Affiliates and their respective directors, officers, employees or agents in respect of any breach or inaccuracy of any representation or warranty unless Purchaser, its Affiliates or their respective directors, officers, employees or agents shall have provided notice to Seller in accordance with section 12.1 on or prior to the expiration of the applicable time period related to such representation and warranty as set out in section 11.1); (b) any breach or non-performance by Seller of any covenant to be performed by it that is contained in this Agreement or in any agreement, certificate or other document delivered pursuant hereto; and (c) any failure by Seller to pay, satisfy, discharge, perform or fulfil any of the Excluded Liabilities. 11.4 INDEMNIFICATION BY PURCHASER. Purchaser hereby indemnifies and agrees to promptly defend and hold harmless Seller and its directors, officers, employees and agents from all Losses suffered or incurred by any of them as a result of or arising directly or indirectly out of or in connection with: (a) any breach by Purchaser or Zale of or any inaccuracy of any representation or warranty contained in this Agreement or in any agreement, instrument, certificate or other document delivered pursuant hereto (provided that Purchaser shall not be required to indemnify or save harmless Seller, and its directors, officers, employees or agents in respect of any breach or inaccuracy of any representation or warranty unless Seller, or its directors, officers, employees or agents shall have provided notice to Purchaser in accordance with section 12.1 on or prior to the expiration of the applicable time period related to such representation and warranty as set out in section 11.1); (b) any breach or non-performance by Purchaser of any covenant to be performed by it that is contained in this Agreement or in any agreement, certificate or other document delivered pursuant hereto; and (c) any failure by Purchaser to pay, satisfy, discharge, perform or fulfil any of the Assumed Liabilities. 45 -41- 11.5 ADMINISTRATION OF THIRD PARTY CLAIMS. (a) Whenever any claim shall arise for indemnification under this Article 11, the Party entitled to indemnification (the "Indemnified Party") shall promptly notify the other Party (the "Indemnifying Party") of the claim and, when known, the facts constituting the basis for such claim. (b) In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceeding by a person who is not a party to this Agreement (a "Third Party Claim"), such notice shall also specify, if known, the amount or a good faith estimate of the amount of the Losses arising therefrom. (c) The Indemnified Party shall not settle or compromise or enter into any agreement to settle or compromise, or consent to entry of any judgement arising from, any Third Party Claim except in accordance with this section. With respect to any Third Party Claim, the Indemnifying Party shall undertake the defense thereof by representatives of its own choosing. The Indemnified Party shall have the right to participate (in a manner acceptable to the Indemnifying Party, acting reasonably) in any such defense of a Third Party Claim with advisory counsel of its own choosing at its own expense. Assuming it has received reasonably adequate advance notice of a Third Party Claim, in the event the Indemnifying Party, after two-thirds of the period for the presentation of a defense against any such Third Party Claim (taking into account any extensions to such period received by the Indemnifying Party pursuant to any order of a court of competent jurisdiction or otherwise), fails to begin to diligently defend it (or at any time thereafter ceases to diligently defend it), the Indemnified Party will have the right to undertake the defense, compromise or settlement of such Third Party Claim on behalf of, and for the account of, the Indemnifying Party, at the expense and risk of the Indemnifying Party. 11.6 MONETARY LIMITATIONS. (a) Seller shall not be liable to Purchaser in respect of a Purchaser Claim under section 11.3 unless the aggregate amount finally adjudicated or agreed as being payable under section 11.3 in respect of any one or more Purchaser Claims exceeds $100,000 in the aggregate, in which case Seller will be liable for the full amount with first dollar coverage. (b) The maximum aggregate amount which Purchaser may recover under this Agreement is an amount equal to $25,000,000. (c) Notwithstanding anything contained herein to the contrary, the monetary limitation contained in this section 11.6 does not apply to any Purchaser Claim for indemnification for Losses arising out of or relating to section 11.3(c). 46 -42- 11.7 INSURANCE AND TAX LIMITATION. (a) Seller shall not be liable to Purchaser for any Losses arising in respect of a Purchaser Claim to the extent recovered by Purchaser or any Affiliate under a policy of insurance; provided, however, Purchaser shall not be obliged to commence an action, claim, suit or proceeding against any person issuing such a policy of insurance in order to recover any such Losses. (b) If Purchaser suffers Losses and actually receives a monetary tax benefit or tax credit, solely arising out of or by virtue of the matters to which the Losses relate, any liability of Seller under section 11.6 will be reduced by the net amount of such tax benefit or credit actually received. 11.8 SET-OFF UNDER ESCROW AGREEMENT. The Parties hereby acknowledge and agree that the Purchaser may from time to time set-off amounts owing in respect of Purchaser Claim(s) against the amount held by the Escrow Agent from time to time, all in accordance with the terms and conditions set forth in the Escrow Agreement, provided however, the Seller shall be responsible for any shortfall or deficiency in respect of any Purchaser Claim(s). 11.9 EXCLUSION OF OTHER RIGHTS. No Party has the right to bring any proceeding (except for any claim for fraud, specific performance or injunctive relief) against any other party for a breach of any representation, warranty, covenant or agreement contained in this Agreement whether in contract, tort or otherwise, except pursuant to Article 11. 11.10 OBLIGATIONS OF ZALE. In consideration of Seller entering into this Agreement with Purchaser rather than with Zale as contemplated in the letter of intent referred to in section 1.6, Zale agrees to duly and punctually pay, satisfy, perform, discharge and fulfil all of the liabilities and obligations of Purchaser arising pursuant to this Agreement, the Escrow Agreement, the Assumption Agreement or any other agreement, document, or instrument delivered pursuant to this Agreement, as if Zale was a party to any such agreement, document, or instrument in the place of Purchaser. ARTICLE 12 MISCELLANEOUS 12.1 NOTICES. (a) All notices, consents, requests and other communications hereunder shall be in writing and shall be sent by hand delivery, by certified or registered mail (return-receipt requested), by a recognized national overnight courier service or by telecopy addressed as set forth below: (i) If to Purchaser or Zale: Zale Corporation 901 Walnut Hill Lane Irving, Texas 75038-1003 U.S.A. 47 -43- Attention: Alan P. Shor, Esq. Facsimile: (972) 580-5238 and a copy to: Morris/Rose/Ledgett 161 Bay Street, Suite 2600 Toronto, Ontario M5J 2S1 Canada Attention: Chris J. Eustace, Esq. Facsimile: (416) 863-9500 (ii) If to Seller: Peoples Jewellers Corporation 1440 Don Mill Road Don Mills, Ontario M3B 3M1 Canada Attention: E. Duff Scott, Esq. Facsimile: (416) 391-7871 and after Closing: with a copy to: Stikeman, Elliott Commerce Court West 53rd Floor Toronto, Ontario M5L 1B9 Canada Attention: Mihkel E. Voore, Esq. Facsimile: (416) 947-0866 (b) Notices delivered pursuant to section 12.1(a) shall be deemed given: (i) at the time delivered, if personally delivered or if delivered by overnight courier; (ii) at the time received, if mailed; and (iii) one (1) Business Day after transmission by telecopy. (c) Either Party hereto may change the address to which notice is to be sent by written notice to the other Party in accordance with this section 12.1. 48 -44- 12.2 REASONABLE EFFORTS TO SETTLE DISPUTES. In the event that a dispute, claim (save for a claim for fraud, specific performance or injunctive relief), question or difference (a "Dispute") arises out of or relating to this Agreement or the breach thereof, or relating to the interpretation or implementation of any of the provisions hereof or any document, agreement or instrument delivered hereunder (other than a Third Party Claim which shall be resolved in the manner set forth in section 11.5), the Parties shall use their reasonable endeavours to settle the Dispute. To this effect, they shall consult and negotiate with each other, in good faith and understanding of their mutual interest, to reach a just and equitable solution satisfactory to all Parties. 12.3 ARBITRATION. If the Parties do not reach a solution pursuant to section 12.2 within a period of 60 days following the first notice of Dispute by any Party to the others, then upon written notice by any Party to the other Parties, the Dispute shall be finally settled by arbitration in accordance with the provisions of the Arbitrations Act (Ontario) based upon the following: (a) the arbitration tribunal shall consist of one arbitrator appointed by mutual agreement of the Parties, or in the event of failure to agree within 10 Business Days following delivery of the written notice to arbitrate, any Party may apply to a judge of the Ontario Court (General Division) to appoint an arbitrator. The arbitrator shall be qualified by education and training to pass upon the particular matter to be decided; (b) the arbitrator shall be instructed that time is of the essence in the arbitration proceeding and, in any event, the arbitration award must be made within 30 days of the submission of the Dispute to arbitration; (c) after written notice is given to refer any Dispute to arbitration, the Parties will meet within 15 Business Days of delivery of the notice and will negotiate in good faith any changes in these arbitration provisions or the rules of arbitration which are herein adopted, in an effort to expedite the process and otherwise ensure that the process is appropriate given the nature of the Dispute and the values at risk; (d) the arbitration shall be conducted in English and shall take place in Toronto, Ontario; (e) the arbitration award shall be given in writing and shall be final and binding on the Parties, not subject to any appeal and the costs of any such arbitration shall be borne equally between Seller and Purchaser; (f) judgement upon any award may be entered in any court having jurisdiction or application may be made to the court for a judicial recognition of the award or an order of enforcement, as the case may be; (g) all Disputes referred to arbitration (including the scope of the agreement to arbitrate, any statute of limitations, set-off claims, conflict of laws rules, tort claims and interest claims) shall be governed by the substantive law of Ontario; and 49 -45- (h) the Parties agree that the arbitration shall be kept confidential and that the existence of the proceeding and any element of it (including any pleadings, briefs or other documents submitted or exchanged, any testimony or other oral submissions and any awards) shall not be disclosed beyond the arbitrator, the Parties, their counsel and any person necessary to the conduct of the proceeding, except as may lawfully be required in judicial proceedings relating to the arbitration or otherwise. 12.4 WAIVER; AMENDMENT. No waiver, termination or discharge of this Agreement, or any of the terms or provisions hereof, shall be binding upon any Party unless confirmed in writing. No waiver by any Party of any term or provision of this Agreement or of any default hereunder shall affect such Party's rights thereafter to enforce such term or provision or to exercise any right or remedy in the event of any other default, whether or not similar. This Agreement may not be modified or amended except by a writing executed by each Party. 12.5 FURTHER ASSURANCES. Each Party covenants and agrees that it will at all times after the Closing, at the expense and upon the request of the other Party, promptly execute and deliver all such documents, including, without limitation, all such additional conveyances, transfers, consents and other assurances and do all such other acts and things as the other Party, acting reasonably, may from time to time request be executed or done in order to better evidence or perfect or effectuate any provision of this Agreement or of any agreement or other document executed pursuant to this Agreement. 50 -46- 12.6 COUNTERPARTS; FAX SIGNATURES. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute the same Agreement. Any signature page of any such counterpart, or any electronic facsimile thereof, may be attached or appended to any other counterpart to complete a fully executed counterpart of this Agreement, and any telecopy or other facsimile transmission of any signature shall be deemed an original and shall bind each Party. IN WITNESS WHEREOF, the undersigned have caused their respective duly authorized representatives to execute this Agreement as of the day and year first above written. ZALE CANADA CO. Per: /s/ ROBERT J. DINICOLA -------------------------------------- Name: Robert J. DiNicola Title: Chairman and Chief Executive Officer ZALE CORPORATION Per: /s/ ALAN P. SHOR -------------------------------------- Name: Alan P. Shor Title: Executive Vice-President, Chief Logistics Officer and Secretary PEOPLES JEWELLERS CORPORATION Per: /s/ CLARE R. COPELAND -------------------------------------- Name: Clare R. Copeland Title: Chief Executive Officer EX-4.3 3 INDENTURE, DATED AS OF JULY 15, 1999 1 EXHIBIT 4.3 EXECUTION COPY ================================================================================ INDENTURE Dated as of July 15, 1999 Between ZALE FUNDING TRUST, as Issuer And THE BANK OF NEW YORK, as Indenture Trustee and Securities Intermediary ================================================================================ 2 TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS................................................................................1 Section 1.01. Definitions.......................................................................1 ARTICLE II ISSUE, EXECUTION, FORM, REGISTRATION AND PAYMENT OF NOTES..................................2 Section 2.01. [Reserved]........................................................................2 Section 2.02. Execution of Notes................................................................2 Section 2.03. Authentication and Delivery of Notes..............................................2 Section 2.04. Certificate of Authentication.....................................................2 Section 2.05. Book-Entry Notes..................................................................2 Section 2.06. Legends...........................................................................3 Section 2.07. Notices to Clearing Agency........................................................4 Section 2.08. Letter of Representations.........................................................4 Section 2.09. Definitive Notes..................................................................4 Section 2.10. Note Register; Persons Deemed Registered Noteholders..............................5 Section 2.11. [Reserved]........................................................................5 Section 2.12. [Reserved]........................................................................5 Section 2.13. [Reserved]........................................................................5 Section 2.14. Exchange and Transfer.............................................................5 Section 2.15. Mutilated, Defaced, Destroyed, Lost or Stolen Notes...............................7 Section 2.16. Cancellation of Notes, Disposition Thereof........................................8 Section 2.17. Temporary Notes...................................................................8 Section 2.18. Appointment of Indenture Trustee..................................................9 Section 2.19. Issuer and Affiliate..............................................................9 Section 2.20. [Reserved]........................................................................9 Section 2.21. Certain Certificates..............................................................9 Section 2.22. Issuance of Notes.................................................................9 Section 2.23. Uncertificated Classes...........................................................10 ARTICLE III SECURITY INTEREST.........................................................................12 Section 3.01. Security Interest................................................................12 Section 3.02. [Reserved].......................................................................13 Section 3.03. License..........................................................................13
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PAGE Section 3.04. The Issuer Remains Liable........................................................13 Section 3.05. Delivery of Certain Collateral...................................................13 ARTICLE IV BANK ACCOUNTS AND COLLECTIONS.............................................................15 Section 4.01. Post Office Boxes and Collection Deposit Accounts................................15 Section 4.02. Rights of Noteholders............................................................16 Section 4.03. Establishment of Collection Account and Excess Funding Account...................16 Section 4.04. Collections and Allocations......................................................19 Section 4.05. Shared Principal Collections.....................................................19 Section 4.06. Allocation of Trust Assets to Series or Groups...................................20 Section 4.07. Excess Finance Charge............................................................20 Section 4.08. Correction of Improper Deposits..................................................20 ARTICLE V DISTRIBUTIONS AND REPORTS TO NOTEHOLDERS..................................................22 ARTICLE VI SERVICING OF PURCHASED RECEIVABLES........................................................23 Section 6.01. Servicing of Purchased Receivables...............................................23 ARTICLE VII REPRESENTATIONS AND WARRANTIES............................................................24 Section 7.01. Representations and Warranties of the Issuer.....................................24 ARTICLE VIII COVENANTS.................................................................................26 Section 8.01. Affirmative Covenants of the Issuer..............................................26 Section 8.02. Negative Covenants of the Issuer.................................................29 ARTICLE IX REDEMPTIONS...............................................................................32 Section 9.01. Optional Redemption of the Notes.................................................32 Section 9.02. Legal Final Maturity Date of the Notes...........................................32 ARTICLE X REMEDIES OF THE TRUSTEE AND NOTEHOLDERS...................................................33 Section 10.01. Early Amortization Events........................................................33 Section 10.02. Remedies.........................................................................33 Section 10.03. Indenture Trustee May Enforce Claims Without Possession of the Notes.............34 Section 10.04. Restoration of Rights............................................................34 Section 10.05. Limitations on Suits by Noteholders..............................................34 Section 10.06. Control by Noteholders...........................................................35
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PAGE Section 10.07. Indenture Trustee To Give Notice of Early Amortization Event, But May Withhold in Certain Circumstances................................................35 ARTICLE XI CONCERNING THE TRUSTEE....................................................................36 Section 11.01. Duties and Responsibilities of the Indenture Trustee.............................36 Section 11.02. Certain Rights of the Indenture Trustee..........................................37 Section 11.03. Certificate of Authorized Officer and Opinion of Counsel.........................39 Section 11.04. Indemnification..................................................................39 Section 11.05. Fees and Expenses of the Indenture Trustee.......................................40 Section 11.06. Acts of Noteholders..............................................................40 Section 11.07. Payments on the Notes............................................................40 Section 11.08. Documents and Information........................................................40 Section 11.09. Application of Funds; Return of Unclaimed Funds..................................40 Section 11.10. Forwarding of Notices............................................................41 Section 11.11. Notes Held by the Indenture Trustee; Rights of Indenture Trustee.................41 Section 11.12. Inspection.......................................................................41 Section 11.13. Indenture Trustee; Resignation; Removal; Successors..............................41 Section 11.14. Merger and Consolidation.........................................................43 Section 11.15. Separate Indenture Trustees or Co-Trustees.......................................43 Section 11.16. The Securities Intermediary......................................................44 ARTICLE XII DISCHARGE OF INDENTURE....................................................................46 Section 12.01. Satisfaction and Discharge of Indenture..........................................46 ARTICLE XIII AMENDMENTS................................................................................47 Section 13.01. Modification of Terms without Consent of Noteholders.............................47 Section 13.02. Modifications of Terms with Consent of Noteholders...............................47 Section 13.03. Amendment of the Purchase and Servicing Agreement................................48 Section 13.04. Indenture Trustee................................................................48 Section 13.05. Notes............................................................................48 ARTICLE XIV MISCELLANEOUS.............................................................................49 Section 14.01. Notices..........................................................................49 Section 14.02. No Waiver; Remedies Cumulative...................................................50 Section 14.03. Binding Effect...................................................................50
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PAGE Section 14.04. GOVERNING LAW....................................................................51 Section 14.05. Headings.........................................................................51 Section 14.06. WAIVER OF JURY TRIAL.............................................................51 Section 14.07. Severability.....................................................................51 Section 14.08. No Petition in Bankruptcy........................................................51 Section 14.09. Counterparts.....................................................................51 Section 14.10. Jurisdiction; Consent to Service of Process......................................52 Section 14.11. No Recourse......................................................................52 Section 14.12. Limitation of Liability..........................................................52 Section 14.13. Independent Investigation........................................................53 Section 14.14. Institution of Insolvency Proceedings............................................53
-iv- 6 Exhibits - -------- Exhibit A [Reserved] Exhibit B [Reserved] Exhibit C [Reserved] Exhibit D [Reserved] Exhibit E Form of Notice of Noteholders Exhibit F Reserved Exhibit G Form of Certificate of Transferor (Transfer of Beneficial Interest in Restricted Global Notes) Exhibit H Form of Assignment (Transfer of Notes) Exhibit I Form of Certificate of Transferor (Transfer of Notes) Exhibit J Form of Transferee Letter (Transfer of Notes) Exhibit K Form of Certificate of Transferor (NonRule 144A/Rule 904 Transfer of Notes) Exhibit L Form of Certificate of Transferee (NonRule 144A/Rule 904 Transfer of Notes) Exhibit M Form of Standing Delivery Order Exhibit N Form of Collection Deposit Account Letter Exhibit O Reserved Schedules - --------- Schedule I Post Office Boxes, Collection Deposit Account Banks, Collection Deposit Accounts, Collection Account, Excess Funding Account, Optional Redemption Account Schedule II Reserved Schedule III UCC Filing Jurisdictions Annexes - ------- Annex I Glossary of Terms Annex II Reserved Annex III Calculation of Partial Redemption Premium Annex IV Calculation of Pro Forma Net Yield 7 This INDENTURE (this "Indenture"), dated as of July 15, 1999, between ZALE FUNDING TRUST, a Delaware business trust (the "Issuer"), and THE BANK OF NEW YORK, a banking corporation organized under the laws of the State of New York, not in its individual capacity, but solely as Indenture Trustee (the "Indenture Trustee") and Securities Intermediary (in such capacity, the "Securities Intermediary"). W I T N E S S E T H WHEREAS, the Issuer, the Seller, the Servicer, the Indenture Trustee and the Noteholders desire to enter into a receivables financing facility pursuant to which, inter alia, (1) the Issuer shall purchase from the Seller and the Seller shall sell to the Issuer, Receivables, (2) the Issuer shall purchase Receivables with, inter alia, net cash proceeds received by the Issuer from the issuance and sale of the Notes and cash collections on the Purchased Receivables, (3) the repayment of the Notes shall be secured by a security interest in substantially all of the assets of the Issuer, including the Purchased Receivables, and (4) the Servicer shall service the Purchased Receivables, in each case in accordance with the terms and conditions set forth in the Transaction Documents; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01 Definitions. Capitalized terms used but not otherwise defined in this Indenture are used in this Indenture with the meanings assigned to such terms in the Glossary of Terms attached to this Indenture as Annex I. [END OF ARTICLE I] 8 ARTICLE II ISSUE, EXECUTION, FORM, REGISTRATION AND PAYMENT OF NOTES Section 2.01. [Reserved] Section 2.02. Execution of Notes. The Notes of each Series shall be signed on behalf of the Issuer by one of the Authorized Officers of the Owner Trustee. Such signatures may be the manual or facsimile signatures of the present or any future such officers of the Owner Trustee on behalf of the Issuer. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Note which has been duly authenticated and delivered by the Indenture Trustee. In case any such officer of the Owner Trustee on behalf of the Issuer who shall have signed any of the Notes shall cease to be such officer before the Note so signed shall be authenticated and delivered by the Indenture Trustee or disposed of by the Issuer, such Note nevertheless may be authenticated and delivered or disposed of as though the person who signed such Note had not ceased to be such officer of the Owner Trustee on behalf of the Issuer; and any Note may be signed on behalf of the Issuer by such officers as, at the actual date of the execution of such Note, shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Indenture any such officer was not such an officer. Section 2.03. Authentication and Delivery of Notes. Notes executed by the Owner Trustee on behalf of the Issuer as set forth in Section 2.02 of this Indenture shall be delivered to the Indenture Trustee for authentication, and upon such delivery and written direction, an Authorized Officer of the Indenture Trustee shall authenticate and deliver such Notes. Each Note shall be dated the date of its authentication. Section 2.04. Certificate of Authentication. Only such Notes as shall bear thereon a certificate of authentication substantially in the form set forth in the applicable Indenture Supplement, authenticated by the Indenture Trustee by manual signature of one of its Authorized Officers, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate of authentication by the Indenture Trustee upon any Note executed by the Issuer shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered under this Indenture and that the Noteholder thereof is entitled to the benefits of this Indenture. Section 2.05. Book-Entry Notes. Unless otherwise specified in the related Indenture Supplement for any Series or Class, the Notes, upon original issuance, will be issued in the form of one or more typewritten Notes representing the Book-Entry Notes, to be delivered to the Depository, as the initial Clearing Agency, by, or on behalf of, the Issuer. The Notes shall initially be registered on the Note Register in the name of Cede & Co., the nominee of the Depository, and no Noteholder will receive a Definitive Note representing such Noteholder's interest in the Notes, except as provided in Section 2.09. Unless and until certificated, fully registered Notes (the "Definitive Notes") have been issued to Noteholders pursuant to Section 2.09 or as otherwise specified in any related Indenture Supplement: (a) the provisions of this Section 2.05 shall be in full force and effect; 2 9 (b) the Issuer, the Servicer and the Indenture Trustee may deal with the Clearing Agency for all purposes (including the making of payments on the Notes) as the authorized representative of the Noteholders; (c) to the extent that the provisions of this Section 2.05 conflict with any other provisions of this Indenture, the provisions of this Section 2.05 shall control; and (d) the rights of Noteholders shall be exercised only through the Clearing Agency and the Clearing Agency Participants and shall be limited to those established by law and agreements between such Noteholders and the Clearing Agency and/or the Clearing Agency Participants. Unless and until Definitive Notes are issued pursuant to Section 2.09, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit distributions of principal and interest on the Notes to such Clearing Agency Participants. The Clearing Agency Participants shall have no rights under this Indenture under or with respect to any of the Notes held on their behalf by the Clearing Agency, and the Clearing Agency may be treated by the Issuer and the Indenture Trustee, and any of their respective agents, employees, officers and directors, as the absolute owner of the Notes for all purposes whatsoever. Notwithstanding the foregoing, nothing in this Indenture shall prevent the Issuer and the Indenture Trustee, or any of their respective agents, from giving effect to any written certification, proxy or other authorization furnished by the Clearing Agency, or shall impair, as between the Clearing Agency and the Clearing Agency Participants, the operation of customary practices governing the exercise of the rights of a Noteholder of any Notes issued pursuant to this Indenture. Subject to the foregoing provisions of this Section 2.05, any Noteholder may grant proxies and otherwise authorize any Person, including Clearing Agency Participants and Persons that may hold interests through Clearing Agency Participants, to take any action which a Noteholder is entitled to take under this Indenture or the Notes. Section 2.06. Legends. (a) Unless otherwise specified in the related Indenture Supplement for any Series or Class, the Book-Entry Notes shall bear a legend in substantially the following form: UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC"), NEW YORK, NEW YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC OR TO SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR 3 10 THEREOF OR SUCH SUCCESSOR'S NOMINEE, AND TRANSFERS OF BENEFICIAL INTERESTS IN THIS NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO HEREIN. (b) Unless otherwise specified in the related Indenture Supplement for any Series or Class, the Definitive Notes shall bear a legend in substantially the following form: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED (AND THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES THAT THIS NOTE MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED) EXCEPT (1) PURSUANT TO RULE 144A OR ANOTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, (2) IF SUCH OFFER FOR SALE OR OTHER TRANSFER IS MADE IN COMPLIANCE WITH STATE SECURITIES LAWS AND (3) IN ACCORDANCE WITH THE CONDITIONS TO TRANSFER SET FORTH IN THE INDENTURE REFERRED TO HEREIN. Section 2.07. Notices to Clearing Agency. Whenever notice or other communication to the Noteholders is required under this Indenture to be delivered as provided in Section 14.01, unless and until Definitive Notes shall have been issued to Noteholders pursuant to Section 2.09, the Issuer, the Indenture Trustee and the Servicer shall give all such notices and communications specified herein to be given to Noteholders to the Clearing Agency. Section 2.08. Letter of Representations. Notwithstanding anything to the contrary in this Indenture or any Indenture Supplement, the parties hereto shall comply with the terms of each Letter of Representations. Section 2.09. Definitive Notes. If Book-Entry Notes have been issued with respect to any Series or Class and (a) the Issuer advises the Indenture Trustee in writing that the Depositary is no longer willing or able to discharge properly its responsibilities as depository with respect to such Series or Class, and the Issuer is unable to locate a qualified successor, or (b) after the occurrence of a Servicer Default, Noteholders representing not less than 50% of the aggregate outstanding principal amount of such Series or Class advise the Indenture Trustee and the Clearing Agency (which notice may be made through Clearing Agency Participants), in writing, that the continuation of a book-entry system through the Clearing Agency is no longer in the best interests of Noteholders of such class, the Indenture Trustee shall notify the Clearing Agency of the occurrence of any such event and of the availability of Definitive Notes to Noteholders requesting the same. Upon surrender by the Clearing Agency of the Notes representing any Series or Class and instructions by the Clearing Agency to the Indenture Trustee for re-registration, the Indenture Trustee will authenticate and deliver such Definitive Notes to the Registered Noteholders or their respective nominees, and thereafter the Indenture Trustee will recognize the holders of such Definitive Notes as Registered Noteholders under the Transaction Documents. Neither the Issuer nor the Indenture Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected 4 11 in relying on, such instructions. Upon the issuance of Definitive Notes, the Indenture Trustee shall recognize the holders of the Definitive Notes as Noteholders hereunder. Section 2.10. Note Register; Persons Deemed Registered Noteholders. In the event any classes of Notes are issued as Definitive Notes, the Issuer shall keep, or shall cause to be kept by the Indenture Trustee, a note register (the "Note Register") in which, subject to reasonable regulations as the Issuer may prescribe, the Issuer shall provide for the registration of, and the registration of transfer and exchange of, the Notes. The Note Register shall be the definitive record in which shall be recorded the name, address, telephone number, facsimile number, contact person (if any) and taxpayer identification number of each registered holder of Notes (the "Registered Noteholders") as provided by the Noteholders by delivery by each Noteholder to the Indenture Trustee of a completed noteholder data sheet containing such information, together with the numbers of the Notes, the principal amount of each Note and details with respect to the registration of any transfer or exchange of Notes. The Indenture Trustee shall rely on the information set forth in such noteholder data sheets provided by the Noteholders (and shall be entitled to so rely absent manifest error), as may be modified in a written notice by any Noteholder received by the Indenture Trustee. The Issuer and the Indenture Trustee and any of their respective agents may deem and treat the Noteholder of any Note as the absolute owner of such Note for the purpose of receiving payment of the principal of and interest and premium, if any, on such Note and for all other purposes whatsoever, whether or not such Note may be overdue, and the Issuer and the Indenture Trustee and any of their respective agents shall not be affected by any notice to the contrary. Section 2.11. [Reserved] Section 2.12. [Reserved] Section 2.13. [Reserved]. Section 2.14. Exchange and Transfer. (a) Exchanges of Notes. Definitive Notes may be exchanged for one or more Definitive Notes of any authorized denomination in an aggregate principal amount equal to the aggregate principal amount of the Definitive Notes surrendered, upon surrender of the Definitive Notes to be exchanged at the Corporate Trust Office of the Indenture Trustee. Whenever any Definitive Notes are so surrendered for exchange, the Owner Trustee, on behalf of the Issuer, shall execute, and the Indenture Trustee shall authenticate and deliver, in exchange for the surrendered Definitive Notes, the Notes which the Noteholder making the exchange is entitled to receive, bearing numbers not contemporaneously outstanding. (b) Transfers. (i) Transfers of Beneficial Interests in the Book-Entry Notes. Transfers of all or any part of any beneficial interest in any of the Book-Entry Notes shall be made in accordance with the rules and procedures of the Clearing Agency. Unless and until Definitive Notes are issued pursuant to Section 2.09, the Clearing Agency will make book-entry transfers among the Clearing Agency Participants. 5 12 (ii) Transfers of Definitive Notes. Each Noteholder of a Definitive Note may, at any time, subject to the restrictions on transfer set forth in the Notes and this Indenture, transfer such Note, in whole or in part, to another Person. Subject to the requirements of the Issuer and the Indenture Trustee, upon receipt by the Indenture Trustee at its Corporate Trust Office of (A) a Note to be transferred, (B) the form of assignment attached to this Indenture as Exhibit H (or a written instrument of transfer in form satisfactory to the Indenture Trustee and to the Issuer), duly executed by the Noteholder thereof or its attorney duly authorized in writing and (C) written instructions from such Noteholder, requesting the Indenture Trustee to authenticate and deliver, in authorized denominations, one or more Notes of the same aggregate principal amount as the Notes to be transferred to a designated transferee or transferees, and setting forth appropriate delivery instructions, then, if all of the conditions set forth in any of Sections 2.14(b)(ii)(1), 2.14(b)(ii)(2), 2.14(b)(ii)(3) or 2.14(b)(ii)(4) below are satisfied, (x) the Indenture Trustee shall cancel or cause to be cancelled the Note to be transferred, (y) the Owner Trustee, on behalf of the Issuer shall execute, and the Indenture Trustee shall authenticate and deliver, one or more Notes which the Noteholder or the transferee or transferees thereof is entitled to receive in the same aggregate principal amount as the Notes so cancelled, in accordance with the instructions referred to above, and (z) the Indenture Trustee shall register such transfer. (1) Transfers at Least Two Years After Issuance or Pursuant to an Effective Registration Statement. The date of the requested transfer is at least two (2) years after the date of original issuance of the Note being transferred or the transfer is made under an effective Registration Statement under the Act; (2) Transfers Pursuant to Rule 144A. Such transfer is being made pursuant to the exemption from registration under the Securities Act provided by Rule 144A and (i) the transferor indicates on the form of assignment attached to this Indenture as Exhibit H that such transfer is being made in compliance with Rule 144A, (ii) the Indenture Trustee is provided with a certificate of the transferor substantially to the effect set forth in the form attached to this Indenture as Exhibit I and (iii) the Indenture Trustee is provided with an investment letter from the proposed transferee substantially to the effect set forth in the form attached to this Indenture as Exhibit J; (3) Transfers Pursuant to Rule 904. Such transfer is being made pursuant to the exemption from registration under the Securities Act provided by Rule 904 and (i) the transferor indicates on the form of assignment attached to this Indenture as Exhibit H that such transfer is being made in compliance with Rule 904, (ii) the Indenture Trustee is provided with a certificate of the transferor substantially to the effect set forth in the form attached to this Indenture as Exhibit I and (iii) the Indenture Trustee is provided with an investment letter from the proposed transferee substantially 6 13 to the effect set forth in the form attached to this Indenture as Exhibit J; or (4) Other Transfers. The proposed transfer is not being made within two (2) years after the date of original issuance of the Notes being transferred and is not being made pursuant to Rule 144A or Rule 904, and the Indenture Trustee and the Issuer shall have received: (i) an opinion of counsel satisfactory to the Issuer and Indenture Trustee, and satisfactory in form and substance to the Issuer, substantially to the effect that such transfer does not require registration under the Securities Act or qualification of this Indenture under the Trust Indenture Act, and that such transfer shall not otherwise violate any United States Federal or state securities laws; (ii) a certificate of the transferor substantially to the effect set forth in the form attached to this Indenture as Exhibit K; and (iii) a certificate of the transferee substantially to the effect set forth in the form attached to this Indenture as Exhibit L. (c) General. The Noteholders shall present directly to the Indenture Trustee all requests for registration of transfer of Notes. In connection with any registration of exchange or transfer of Notes, (1) the Issuer and the Indenture Trustee may require the payment of a sum sufficient to cover any fees and expenses (including without limitation any governmental charge or tax and the fees) that may be imposed in connection therewith and (2) the Issuer and the Indenture Trustee shall not be required to register the exchange or transfer of any Note selected, called or being called for redemption within three days of the redemption date. All Notes issued upon any exchange or transfer of Notes permitted by this Indenture (1) shall be delivered to the Noteholder thereof at the Corporate Trust Office of the Indenture Trustee or (at the risk of such Noteholder) sent by mail to such address as may be specified by such Noteholder in the related request for exchange or transfer; (2) shall be valid obligations of the Issuer, evidencing the same debt and entitled to the same benefits under this Indenture, as the Notes surrendered upon such exchange or transfer. All Notes presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuer or the Indenture Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer and the Indenture Trustee (including the form of assignment attached to this Indenture as Exhibit H) duly executed by, the Noteholder thereof or its attorney duly authorized in writing. Section 2.15. Mutilated, Defaced, Destroyed, Lost or Stolen Notes. In case any temporary or Definitive Note shall become mutilated, defaced, destroyed, lost or stolen, the Issuer, in its discretion, may execute, and upon the written order of the Issuer, an Authorized Officer of the Indenture Trustee shall authenticate and deliver, a new temporary or definitive Note bearing a number not contemporaneously outstanding, evidencing the same rights and obligations as such mutilated, defaced, destroyed, lost or stolen Note, in exchange and substitution for the mutilated or defaced Note, or in lieu of a substitution for the Note destroyed, lost or stolen. The applicant for such a substituted Note shall (1) furnish to the Issuer and to the Indenture Trustee and any agent of the Issuer or the Indenture Trustee such security or indemnity (which may be in the form of a bond) as may be required by the Issuer, the Indenture Trustee and such agent, (2) in each case of destruction, loss or theft, furnish to the Issuer and to the Indenture 7 14 Trustee evidence to the satisfaction of the Issuer and the Indenture Trustee of the destruction, loss or theft of the relevant Note and the ownership thereof and (3) in each case of mutilation or defacing, surrender the mutilated or defaced Note to the Issuer or to the Indenture Trustee for cancellation thereof. Upon the issuance of any substituted Note, the Issuer and the Indenture Trustee may require the payment of a sum sufficient to cover any fees and expenses (including without limitation any governmental charge or tax) that may be imposed in connection therewith. Every substitute Note issued pursuant to the provisions of this Section 2.15 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of and shall be subject to all the limitations of rights set forth in this Indenture equally and proportionately with any and all other Notes, of the class of Note destroyed, lost or stolen, duly authenticated and delivered under this Indenture. In the case of any Note which is mutilated, defaced, destroyed, lost or stolen within the fifteen (15) day period prior to any redemption of such Note, the Issuer may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated or defaced Note) if the applicant for such payment shall (1) furnish to the Issuer and to the Indenture Trustee and any agent of the Issuer or the Indenture Trustee such security or indemnity (which may be in the form of a bond) as may be required by the Issuer, the Indenture Trustee and such agent and (2) in each case of destruction, loss or theft, furnish to the Issuer and to the Indenture Trustee evidence to the satisfaction of the Issuer and the Indenture Trustee of the destruction, loss or theft of the relevant Note and the ownership thereof. All Notes shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without the surrender thereof. Section 2.16. Cancellation of Notes, Disposition Thereof. All Notes surrendered for payment, redemption or registration of transfer or exchange pursuant to any of the provisions of this Indenture, whether surrendered to the Issuer or to any agent of the Issuer or the Indenture Trustee, shall be delivered to the Indenture Trustee for cancellation and shall be promptly cancelled and disposed of by the Indenture Trustee in accordance with its standard procedures, and if surrendered to the Indenture Trustee, shall be promptly cancelled and disposed of by the Indenture Trustee in accordance with its standard procedures; and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Indenture Trustee shall promptly deliver a certificate of any such cancellation and disposition to the Issuer. Section 2.17. Temporary Notes. Pending the preparation of Definitive Notes, the Authorized Officers of the Issuer may execute, and the Indenture Trustee shall, upon the written order of the Issuer, authenticate and deliver temporary Notes (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Indenture Trustee). Temporary Notes shall be issuable as registered Notes without coupons, of any authorized denomination, and substantially in the form of the Definitive Notes, but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Issuer. Temporary Notes may contain such reference to any provisions of this Indenture as 8 15 may be appropriate. Every temporary Note shall be executed by the Issuer and be authenticated and delivered by the Indenture Trustee upon the same conditions and in substantially the same manner, and with like effect, as the Definitive Notes. Without unreasonable delay after the issuance of any temporary Notes, the Issuer shall execute and shall furnish Definitive Notes and thereupon temporary Notes may be surrendered in exchange for such Definitive Notes without charge at the Indenture Trustee's Corporate Trust Office, and the Indenture Trustee shall authenticate and deliver in exchange for such temporary Notes a like aggregate principal amount of Definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall be entitled to the same benefits under this Indenture as Definitive Notes. Section 2.18. Appointment of Indenture Trustee. Each Noteholder, by its acceptance of a Note, shall be deemed to have consented to the appointment of the Indenture Trustee to act, on the terms and conditions specified in this Indenture, as Indenture Trustee for the benefit of the Noteholders. To the extent permitted by the terms of the Notes and this Indenture and subject to Article XI herein, the Indenture Trustee shall follow the directions of the Seller, or if for federal income tax purposes, a different party or parties are deemed to be the holders of the equity interests in the Trust, the Indenture Trustee shall follow the directions of the holders of a majority of the equity interests in the Trust. Section 2.19. Issuer and Affiliate. Notwithstanding anything to the contrary contained in this Indenture or the Notes, the Issuer and any Affiliate thereof may at any time purchase any Notes, at any price or prices, in the open market or otherwise; provided, however, that their rights and remedies in respect of the Notes shall be subject to Section 10.13 of the Purchase and Servicing Agreement. Any Note held by the Issuer or an Affiliate thereof shall be deemed not to be outstanding for purposes of determining Majority Noteholders. Section 2.20. [Reserved] Section 2.21. Certain Certificates. The Issuer shall furnish the Indenture Trustee at closing, and thereafter, upon request, with a certificate of the Owner Trustee certifying the incumbency and specimen signatures of officers of the Owner Trustee authorized on behalf of the Owner Trustee to execute Notes and to give instructions or to make certain representations to the Indenture Trustee in accordance with the provisions of this Indenture, which certificate the Indenture Trustee shall be entitled to conclusively rely on until such time, if any, that the Indenture Trustee receives from the Owner Trustee a revised certificate. The Indenture Trustee shall furnish the Owner Trustee with a certificate of the Indenture Trustee certifying the incumbency of officers of the Indenture Trustee authorized on behalf of the Indenture Trustee to authenticate Notes, on which certificate the Owner Trustee shall be entitled to rely. Section 2.22. Issuance of Notes. (a) Pursuant to any one or more Indenture Supplements, the Issuer may, from time to time, issue a Series, subject to the conditions described below (each such issuance or sale, a "New Issuance"). The Issuer may designate, with respect to any newly issued Series, the Principal Terms of such new Series in any such Indenture Supplement. The terms of each Indenture Supplement may, subject to certain conditions described below, modify or amend the terms of the Indenture solely as applied to such new Series. None of the Issuer, the Servicer, the Indenture Trustee or the Seller is required or intends to obtain the consent of any Noteholder of any outstanding Series to issue any additional Series. 9 16 The Notes of all outstanding Series shall be equally and ratably entitled as provided herein to the benefits of this Indenture without preference, priority or distinction, all in accordance with the terms and provisions of this Indenture and the applicable Indenture Supplement except, with respect to any Series or Class, as provided in the related Indenture Supplement. (b) On or before the Series Issuance Date relating to any new Series, the parties hereto will execute and deliver an Indenture Supplement which will specify the Principal Terms of such new Series. The Indenture Trustee shall execute the Indenture Supplement and the Issuer shall execute the Notes of such Series and deliver such Notes to the Indenture Trustee for authentication. The issuance of any such Notes shall be subject to satisfaction of the following conditions: (i) on or before the fifth day immediately preceding the Series Issuance Date, such Issuer shall have given the Indenture Trustee, the Servicer and each Rating Agency notice (unless such notice requirement is otherwise waived) of such issuance and the Series Issuance Date or such Trust Certificate surrender and exchange, as the case may be; (ii) such Issuer shall have delivered to the Indenture Trustee any related Indenture Supplement in form satisfactory to the Indenture Trustee, executed by each party hereto other than the Indenture Trustee; (iii) such Issuer shall have delivered to the Indenture Trustee any related Enhancement Agreement executed by each of the parties thereto, other than the Indenture Trustee; (iv) the Rating Agency Condition shall have been satisfied; (v) such issuance will not result in any Adverse Effect and the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate, dated the Series Issuance Date, to the effect that the Issuer reasonably believes that such issuance will not, based on the facts at the time of such certification, have an Adverse Effect; (vi) the Issuer shall have delivered to the Indenture Trustee (with a copy to each Rating Agency) a Tax Opinion, dated the Series Issuance Date; (vii) the aggregate amount of Principal Receivables plus the principal amount of any Participation Interest theretofore conveyed to the Trust as of the Series Issuance Date shall be greater than the Required Minimum Principal Balance as of the Series Issuance Date and after giving effect to such issuance; and (viii) the Issuer shall deliver to the Indenture Trustee an Officer's Certificate to the effect that all conditions precedent to the execution of any Indenture Supplement and the authentication of the corresponding Notes have been complied with. Section 2.23. Uncertificated Classes. Notwithstanding anything to the contrary contained in this Article II or in Article XII, unless otherwise specified in any Indenture Supplement, any provisions contained in this Article II and in Article XII relating to the 10 17 registration, form, execution, authentication, delivery, presentation, cancellation and surrender of Notes shall not be applicable to any uncertificated Notes. [END OF ARTICLE II] 11 18 ARTICLE III SECURITY INTEREST Section 3.01. Security Interest. The Issuer hereby assigns and pledges to the Indenture Trustee, and the Indenture Trustee hereby accepts, for its benefit and for the benefit of the Noteholders, a security interest in all right, title and interest of the Issuer in and to the following collateral, whether now owned or hereafter acquired (collectively, the "Collateral"), to secure the payment of all obligations of the Issuer now or hereafter existing under this Indenture, whether for principal, interest, premium, indemnities or otherwise (collectively, the "Secured Obligations"): (a) the Purchased Receivables, including without limitation all accounts, contract rights, chattel paper, instruments, general intangibles and other obligations of any Obligor with respect to any Purchased Receivables, now or hereafter existing, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, including without limitation, the right to payment of any interest, Finance Charges, returned check fees or late charges and other obligations of an Obligor with respect to any Purchased Receivables, and all rights in and to all security agreements and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, general intangibles and obligations (any and all such security agreements and other contracts being the "Related Contracts"); (b) all guarantees, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of any Purchased Receivables; (c) the Purchase and Servicing Agreement, including without limitation, (1) all rights of the Issuer to receive moneys due and to become due under or pursuant to the Purchase and Servicing Agreement, (2) all rights of the Issuer to receive proceeds of any insurance, indemnity or warranty with respect to the Purchase and Servicing Agreement, (3) claims of the Issuer for damages arising out of or for breach of or default under the Purchase and Servicing Agreement and (4) the right of the Issuer to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (d) the following (the "Account Collateral"): (i) the Post Office Boxes, the Collection Deposit Accounts, the Collection Account (including all subaccounts thereof) and the Excess Funding Account, and all funds, and all certificates and instruments, if any, from time to time representing or evidencing funds, held in the Post Office Boxes, the Collection Deposit Accounts, the Collection Account and the Excess Funding Account; (ii) all Eligible Investments of funds in the Collection Account and the Excess Funding Account from time to time, and all certificates and instruments, if any, from time to time representing or evidencing such Eligible Investments; (iii) all notes, certificates of deposit and other instruments from time to time hereafter delivered to or otherwise possessed by the Indenture Trustee for and on behalf of the Issuer in substitution for or in addition to any of the then existing Account Collateral; 12 19 (iv) all interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any and all of the then existing Account Collateral; and (v) all additional property that may from time to time hereafter be assigned or pledged to the Indenture Trustee for the benefit of the Noteholders by the Issuer or by any Person on the Issuer's behalf, including without limitation the deposit with the Indenture Trustee of additional moneys by the Issuer; and (e) proceeds of any and all of the Collateral described in Sections 3.01(a) through 3.01(d) above (including without limitation Recoveries and proceeds that constitute property of the types described in clauses (a) through (d) above) and, to the extent not otherwise included, all payments under insurance (whether or not the Indenture Trustee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss of or damage to or otherwise with respect to any of such foregoing Collateral. Section 3.02. [Reserved]. Section 3.03. License. Upon the occurrence and during the continuance of an Early Amortization Event, the Issuer shall be deemed to have granted to the Indenture Trustee a non-exclusive and, except to the extent provided below in this Section 3.03, non-transferable license to use the Licensed Names, which license to use (1) may be transferred by the Indenture Trustee to the extent necessary to collect the Purchased Receivables in a commercially reasonable manner, (2) is limited to (a) such uses of the Licensed Names as are reasonably necessary to the collection by the Indenture Trustee in a commercially reasonable manner of the Purchased Receivables and (b) actions taken in accordance with the terms of this Indenture and (3) shall expire on the expiration of a reasonable time for the collection of all Purchased Receivables. Notwithstanding anything to the contrary in this Indenture or in any other agreement between the parties, no other uses or display of the Licensed Names shall be made by the Indenture Trustee except as granted in this Section 3.03. Section 3.04. The Issuer Remains Liable. Notwithstanding anything to the contrary in this Indenture, (a) prior to foreclosure on such Collateral, the Issuer shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Indenture had not been executed and (b) neither the Indenture Trustee nor any of the Noteholders shall, prior to foreclosure on such Collateral, have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Indenture or be obligated to perform any of the obligations or duties of the Issuer thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. Section 3.05. Delivery of Certain Collateral. All certificates or instruments, if any, representing or evidencing the Collateral, the possession of which by the Indenture Trustee is necessary to perfect the security interest of the Indenture Trustee therein, shall be delivered to and held by or on behalf of the Indenture Trustee pursuant to this Indenture and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank. The Indenture Trustee shall have the right, at any time in its 13 20 discretion and without notice to the Issuer, to transfer to or to register in the name of the Indenture Trustee or any of its nominees or custodians any or all of such Collateral. In addition, the Indenture Trustee shall have the right at any time to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. [END OF ARTICLE III] 14 21 ARTICLE IV BANK ACCOUNTS AND COLLECTIONS Section 4.01. Post Office Boxes and Collection Deposit Accounts. (a) Post Office Boxes. The Issuer has established or caused to be established the post office boxes listed on Schedule I to this Indenture (such post office boxes, or any successor post office boxes established in accordance with this Indenture, being referred to as the "Post Office Boxes") for the collection of Mail Payments. The Issuer (1) represents and warrants that no post office box other than the Post Office Boxes has been established for the collection of Mail Payments, (2) agrees that the Indenture Trustee is authorized to receive mail delivered to the Post Office Boxes, that a Standing Delivery Order in the form attached to this Indenture as Exhibit M has been filed with the United States Postal Service authorizing the Indenture Trustee to receive mail delivered to the Post Office Boxes, and that the Indenture Trustee, acting at the written direction of the Majority Noteholders, may deny the Issuer and the Servicer access to the Post Office Boxes following the occurrence and during the continuance of a Servicer Default (provided that, (i) no direction by the Majority Noteholders to the Indenture Trustee to deny the Issuer and the Servicer access to any Post Office Box shall be effective unless such Majority Noteholders provide prior written certification to the Issuer, the Servicer and the Indenture Trustee that a Servicer Default has occurred and is continuing and (ii) until such time as the Issuer and the Servicer have been denied access to any Post Office Box pursuant to this subsection, the Indenture Trustee shall have no obligations with respect to the mail delivered to any Post Office Box) and (3) agrees that no new post office box shall be established for the collection of Mail Payments unless and until a Standing Delivery Order has been filed with the United States Postal Service authorizing the Indenture Trustee to receive mail delivered to such post office box. The Servicer agrees to pay all fees for the use of the Post Office Boxes. (b) Establishment of Collection Deposit Accounts. The Issuer has established or caused to be established and maintained with the banks listed on Schedule I to this Indenture (the "Collection Deposit Account Banks") the blocked deposit accounts listed on such Schedule I in the name of the Indenture Trustee into which the Mail Payments shall be deposited, from the Post Office Boxes, from time to time (all such blocked deposit accounts, or any successor blocked deposit accounts established in accordance with this Indenture, together with all Collections, moneys, instruments and other property from time to time deposited therein being collectively referred to as the "Collection Deposit Accounts"). The Issuer hereby transfers to the Indenture Trustee the sole and exclusive dominion over and control of the Collection Deposit Accounts. Prior to or contemporaneously with the execution of this Indenture, the Issuer shall deliver or cause to be delivered to the Indenture Trustee fully executed letters in the form attached to this Indenture as Exhibit N (the "Collection Deposit Account Letters") from each of the Collection Deposit Account Banks. To the extent the Indenture Trustee may exercise any authority granted to it under a Collection Deposit Account Letter, it shall do so only at the written direction of the Majority Noteholders. (c) Termination of Collection Deposit Accounts; Successor Collection Deposit Accounts. In the event any Collection Deposit Account Bank shall, after the date of this Indenture, terminate a Collection Deposit Account for any reason, or if the Indenture Trustee, acting at the written direction of the Majority Noteholders, shall demand such termination, the 15 22 Issuer agrees to make all future deposits of Mail Payments to another Collection Deposit Account that has not been terminated or to a successor Collection Deposit Account established as provided below in this Section 4.01(c); provided, that, if the Indenture Trustee, acting at the written direction of the Majority Noteholders, shall demand termination of all Collection Deposit Accounts, the Issuer agrees to make all future deposits of Mail Payments directly to the Collection Account. No direction by the Majority Noteholders to the Indenture Trustee to demand the termination of a Collection Deposit Account shall be effective unless such Majority Noteholders give prior written notice to the Indenture Trustee and to the Issuer that (1) an Early Amortization Event has occurred and is continuing, (2) the subject Collection Deposit Account Bank is not performing in all material respects under the terms of the applicable Collection Deposit Account Letter or (3) such Majority Noteholders reasonably believe that the Collection Deposit Account Bank at which the subject Collection Deposit Account is maintained may become subject to insolvency, receivership or similar proceedings (it being understood that the Majority Noteholders shall have no obligation to give any such notice). No new Collection Deposit Account shall be established until and unless a successor Collection Deposit Account Bank shall have executed and delivered to the Issuer and to the Indenture Trustee a Collection Deposit Account Letter. The Indenture Trustee shall have sole and exclusive dominion over and control of any such successor Collection Deposit Account. Section 4.02. Rights of Noteholders. The indebtedness represented by the Notes shall include the right of the Noteholders to receive, to the extent necessary to make the required payments with respect to the Notes of such Series at the times and in the amounts specified in the related Indenture Supplement, the portion of Collections allocable to Noteholders of such Series pursuant to this Indenture and such Indenture Supplement, funds and other property credited to the Collection Account and the Excess Funding Account (or any subaccount thereof) allocable to Noteholders of such Series pursuant to this Indenture and such Indenture Supplement, funds and other property credited to any related Series Account and funds available pursuant to any related Series Enhancement (collectively, with respect to all Series, the "Noteholders' Interest"), it being understood that, except as specifically set forth in the Indenture Supplement with respect thereto, the Noteholders of any Series or Class shall not be entitled to any interest in any Series Account or Series Enhancement for the benefit of any other Series or Class. The Trust Certificate shall represent the ownership interest in the remainder of the Trust Assets not allocated pursuant to this Indenture or any Indenture Supplement to the Noteholders' Interest, including the right to receive Collections with respect to the Receivables and other amounts at the times and in the amounts specified in any Indenture Supplement to be paid to the Issuer on behalf of all holders of the Trust Certificate (the "Issuer's Interest"); provided, however, that the Trust Certificate shall not represent any interest in the Collection Account, any Series Account or any Series Enhancement, except as specifically provided in this Indenture or any Indenture Supplement. Section 4.03. Establishment of Collection Account and Excess Funding Account. The Issuer, for the benefit of the Noteholders, shall establish and maintain with the Indenture Trustee or its nominee in the name of the Indenture Trustee, on behalf of the Trust, a Qualified Account (including any subaccount thereof) bearing a designation clearly indicating that the funds and other property credited thereto are held for the benefit of the Noteholders (the "Collection Account"). The Collection Account shall consist of two segregated subaccounts: (a) the "Collection Account Securities Subaccount" to which financial assets credited to the Collection Account shall be credited, and as to which financial assets the Securities Intermediary 16 23 undertakes to treat the Indenture Trustee as entitled to exercise the rights that comprise such financial assets; and (b) the "Collection Account Cash Subaccount" to which money or instruments deposited in the Collection Account shall be credited. The Indenture Trustee shall possess all right, title and interest in all monies, instruments, securities, documents, certificates of deposit and other property credited from time to time to the Collection Account and in all proceeds, earnings, income, revenue, dividends and distributions thereof for the benefit of the Noteholders to the extent of any amounts owing with respect to the Notes. The Collection Account shall be under the sole dominion and control of the Indenture Trustee for the benefit of the Noteholders to the extent of any amounts owing with respect to the Notes. Except as expressly provided in this Agreement, the Servicer agrees that it shall have no right of setoff or banker's lien against, and no right to otherwise deduct from, any funds held in the Collection Account for any amount owed to it by the Indenture Trustee, the Trust, any Noteholder or any Series Enhancer. If, at any time, the Collection Account ceases to be a Qualified Account, the Indenture Trustee (or the Servicer on its behalf) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) of its obtaining actual knowledge that the Collection Account is no longer a Qualified Account establish a new Collection Account meeting the conditions specified above, transfer any monies, documents, instruments, securities, security entitlements, certificates of deposit and other property to such new Collection Account and from the date such new Collection Account is established, it shall be the "Collection Account." Funds on deposit in the Collection Account shall at the written direction of the Servicer be invested by the Indenture Trustee or its nominee (including the Securities Intermediary) in Eligible Investments selected by the Servicer. All such Eligible Investments shall be held by the Indenture Trustee for the benefit of the Noteholders. The Indenture Trustee shall cause each Eligible Investment to be delivered to it or its nominee to the extent of any amounts owing with respect to the Notes (including the Securities Intermediary) and will be credited to the Collection Account Securities Subaccount maintained by the Indenture Trustee with the Securities Intermediary. Investments of funds representing Collections collected during any Settlement Period shall be invested in Eligible Investments that will mature so that such funds will be available no later than the close of business on each monthly Transfer Date following such Settlement Period in amounts sufficient, to the extent of such funds, to make the required distributions on the following Payment Date. No such Eligible Investment shall be disposed of prior to its maturity; provided, however, that the Indenture Trustee may sell, liquidate or dispose of any such Eligible Investment before its maturity, at the written direction of the Servicer, if such sale, liquidation or disposal would not result in a loss of all or part of the principal portion of such Eligible Investment or if, prior to the maturity of such Eligible Investment, a default occurs in the payment of principal, interest or any other amount with respect to such Eligible Investment. Unless directed by the Servicer in writing, funds deposited in the Collection Account on a Transfer Date with respect to the immediately succeeding Payment Date shall not be required to be invested overnight. On each Payment Date, all interest and other investment earnings on funds on deposit in the Collection Account shall be paid to the Issuer, except as otherwise specified in any Indenture Supplement. The Indenture Trustee shall bear no responsibility or liability for any losses resulting from investment or reinvestment of any funds in accordance with this Section 4.03 nor for the selection of Eligible Investments in 17 24 accordance with the provisions of this Agreement except to the extent of any gross negligence or willful misconduct of the Indenture Trustee. The Issuer, for the benefit of the Noteholders, shall establish and maintain with the Indenture Trustee or its nominee in the name of the Indenture Trustee, on behalf of the Trust, a Qualified Account (including any subaccounts thereof) bearing a designation clearly indicating that the funds and other property credited thereto are held for the benefit of the Noteholders (the "Excess Funding Account"). The Excess Funding Account shall consist of two segregated subaccounts: (a) the "Excess Funding Account Securities Subaccount" to which financial assets credited to the Excess Funding Account shall be credited, and as to which financial assets the Securities Intermediary undertakes to treat the Indenture Trustee as entitled to exercise the rights that comprise such financial assets; and (b) the "Excess Funding Account Cash Subaccount" to which money or instruments deposited in the Excess Funding Account shall be credited. The Indenture Trustee shall possess all right, title and interest in all monies, instruments, securities, securities entitlements, documents, certificates of deposit and other property credited from time to time to the Excess Funding Account and in all proceeds, dividends, distributions, earnings, income and revenue thereof for the benefit of the Noteholders to the extent of any amounts owing with respect to the Notes. The Excess Funding Account shall be under the sole dominion and control of the Indenture Trustee for the benefit of the Noteholders. Except as expressly provided in this Indenture, the Servicer agrees that it shall have no right of setoff or banker's lien against, and no right to otherwise deduct from, any funds and other property held in the Excess Funding Account for any amount owed to it by the Indenture Trustee, the Trust, any Noteholder or any Series Enhancer. If, at any time, the Excess Funding Account ceases to be a Qualified Account, the Indenture Trustee (or the Servicer on its behalf) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) of its becoming aware that the Excess Funding Account is no longer a Qualified Account, establish a new Excess Funding Account meeting the conditions specified above, transfer any monies, documents, instruments, securities, securities entitlements, certificates of deposit and other property to such new Excess Funding Account and from the date such new Excess Funding Account is established, it shall be the "Excess Funding Account." Funds on deposit in the Excess Funding Account shall at the written direction of the Servicer be invested by the Indenture Trustee in Eligible Investments selected by the Servicer. All such Eligible Investments shall be held by the Indenture Trustee or its nominee (including the Securities Intermediary) for the benefit of the Noteholders. The Indenture Trustee shall cause each Eligible Investment to be delivered to it or its nominee (including the Securities Intermediary) and will be credited to the Excess Funding Account Securities Subaccount maintained by the Indenture Trustee with the Securities Intermediary. Funds on deposit in the Excess Funding Account on any Payment Date will be invested in Eligible Investments that will mature so that such funds will be available no later than the close of business on the Transfer Date following the related Settlement Period. No such Eligible Investment shall be disposed of prior to its maturity; provided, however, that the Indenture Trustee may sell, liquidate or dispose of an Eligible Investment before its maturity, at the written direction of the Servicer, if such sale, liquidation or disposal would not result in a loss of all or part of the principal portion of such Eligible Investment or if, prior to the maturity of such Eligible Investment, a default occurs in the payment of principal, interest or any other amount with respect to such Eligible Investment. Unless directed by the Servicer, funds deposited in the Excess Funding Account on a Transfer 18 25 Date with respect to the immediately succeeding Payment Date are not required to be invested overnight. On each Payment Date, all interest and other investment earnings (net of losses and investment expenses) on funds on deposit in the Excess Funding Account shall be treated as Finance Charge Collections with respect to the last day of the related Settlement Period except as otherwise specified in the related Indenture Supplement. On each Business Day on which funds are on deposit in the Excess Funding Account and on which no Series is in an Accumulation Period or Amortization Period, the Servicer shall determine the amount (if any) by which the Issuer's Interest exceeds the Required Issuer Amount on such date and shall instruct in writing the Indenture Trustee to withdraw any such excess from the Excess Funding Account and pay such amount to the holders of the Trust Certificate; provided, however, that, if an Accumulation Period or Amortization Period has commenced and is continuing with respect to one or more outstanding Series, any funds on deposit in the Excess Funding Account shall be treated as Shared Principal Collections and shall be allocated and distributed in accordance with Section 4.05 and the terms of each Indenture Supplement. Section 4.04. Collections and Allocations. (a) The Servicer will apply or will instruct in writing the Indenture Trustee to apply all funds on deposit in the Collection Account as described in this Article IV and in each Indenture Supplement. The Servicer shall deposit Collections into the Collection Account. (b) Collections of Finance Charges, Principal Receivables and Defaulted Receivables will be allocated to each Series on the basis of the Series Allocable Finance Charge Collections of such Series, Series Allocable Principal Collections of such Series and Series Allocable Defaulted Amount of such Series and amounts so allocated to any Series will not, except as specified in the related Indenture Supplement, be available to the Noteholders of any other Series. Allocations of the foregoing amounts between the Noteholders' Interest and the Issuer's Interest, among the Series and among the Classes in any Series, shall be set forth in the related Indenture Supplement or Indenture Supplements. Section 4.05. Shared Principal Collections. On each Payment Date, (a) the Servicer shall allocate Shared Principal Collections (as described below) to each Principal Sharing Series, pro rata, in proportion to the Principal Shortfalls, if any, with respect to each such Series and (b) the Servicer shall withdraw from the Collection Account and pay to the holder of the Trust Certificate an amount equal to the excess, if any, of (x) the aggregate amount for all outstanding Series of Collections of Principal Receivables which the related Supplements specify are to be treated as "Shared Principal Collections" for such Payment Date over (y) the aggregate amount for all outstanding Series which the related Indenture Supplements specify are "Principal Shortfalls" for such Series and for such Payment Date; provided, however, that if the Issuer's Interest as of such Payment Date (determined after giving effect to the Principal Receivables or Participation Interests transferred to the Trust on such date) is less than the Required Issuer Amount, the Servicer will not distribute to the holder of the Trust Certificate any such amounts that otherwise would be distributed to the holder of the Trust Certificate to the extent such amounts would cause the Issuer's Interest to be less than the Required Issuer Amount, but shall deposit such funds in the Excess Funding Account. The Issuer may, at its option, instruct the Indenture Trustee to deposit Shared Principal Collections which are 19 26 otherwise payable to the holder of the Trust Certificate pursuant to the provisions set forth above into the Excess Funding Account. Section 4.06. Allocation of Trust Assets to Series or Groups. To the extent so provided in the Indenture Supplement for any Series or in an amendment to this Indenture executed pursuant to Article XIII, Receivables conveyed to the Trust pursuant to the Purchase and Servicing Agreement and Receivables or Participation Interests conveyed to the Trust pursuant to the Purchase and Servicing Agreement or any Participation Interest Supplement, and all Collections received with respect thereto may be allocated or applied in whole or in part to one or more Series or Groups as may be provided in such Indenture Supplement or amendment, provided, however, that any such provision for allocation or application shall be effective only upon satisfaction of the following conditions: (i) on or before the fifth Business Day immediately preceding the effectiveness of such provision for such allocation, the Servicer shall have given the Indenture Trustee and each Rating Agency written notice of such provision; (ii) the Rating Agency Condition shall have been satisfied with respect to such provision; and (iii) the Servicer shall have delivered to the Indenture Trustee an Officer's Certificate, dated the date of the effectiveness of such provision, to the effect that the Servicer reasonably believes that such allocation will not have an Adverse Effect. Any such Indenture Supplement or amendment may provide that (i) such allocation to one or more particular Series or Groups may terminate upon the occurrence of certain events specified therein and (ii) upon the occurrence of any such event, such Receivables or Participation Interests, as the case may be, and any Collections with respect thereto, shall be reallocated to other Series or Groups or to all Series, all as shall be provided in such Indenture Supplement or amendment. Section 4.07. Excess Finance Charge. On each Payment Date, (a) the Servicer shall allocate Excess Finance Charge Collections (as described below) to each Excess Allocation Series pro rata, in proportion to the Finance Charge Shortfalls (as described below), if any, with respect to each such Series and (b) the Servicer shall withdraw from the Collection Account and pay to the holder of the Trust Certificate an amount equal to the excess, if any, of (x) the aggregate amount for all outstanding Series of Finance Charge Collections which the related Indenture Supplements specify are to be treated as "Excess Finance Charge Collections" for such Payment Date over (y) the aggregate amount for all outstanding Series which the related Indenture Supplements specify are "Finance Charge Shortfalls" for such Series and such Payment Date. Section 4.08. Correction of Improper Deposits. If the Issuer provides the Indenture Trustee with written notice that a deposit has been made improperly into the Collateral Account, the Excess Funding Account or the Collection Deposit Account, the Indenture Trustee shall promptly release the amount of the improper deposit, together with interest actually earned thereon (net of related losses and investment expenses), to correct such improper deposit. 20 27 [END OF ARTICLE IV] 21 28 ARTICLE V DISTRIBUTIONS AND REPORTS TO NOTEHOLDERS Distributions shall be made to, and reports shall be provided to, Noteholders as set forth in the applicable Indenture Supplement. The identity of the Noteholders with respect to distributions and reports shall be determined according to the immediately preceding Record Date. [END OF ARTICLE V] 22 29 ARTICLE VI SERVICING OF PURCHASED RECEIVABLES Section 6.01. Servicing of Purchased Receivables. The Noteholders of all Series are deemed to have consented to the appointment of JNB as Servicer of the Purchased Receivables pursuant to, and in accordance with the terms of, the Purchase and Servicing Agreement. [END OF ARTICLE VI] 23 30 ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.01. Representations and Warranties of the Issuer. On and as of the Initial Cut-Off Date, the Issuer represents and warrants to the Noteholders that: (a) Organization; Powers. The Issuer (1) is a business trust duly organized, validly existing and in good standing under the laws of Delaware, (2) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (3) is qualified to do business in every jurisdiction where such qualification is required, except where the failure to so qualify would not reasonably be expected to have an Adverse Effect and (4) has the power and authority to execute, deliver and perform its obligations under the Purchase and Servicing Agreement, this Indenture, each Indenture Supplement, and each other agreement or instrument contemplated thereby to which it is a party (collectively, the "Transaction Documents") and to issue the Notes. (b) Authorization. The execution, delivery and performance by the Issuer of each of the Transaction Documents to which it is a party and the performance by the Issuer of the other transactions contemplated thereby (collectively, the "Transactions") (1) have been duly authorized by the Issuer and (2) shall not (A) violate (i) any provision of law, statute, rule or regulation, which violation would have an Adverse Effect, (ii) any provision of the Certificate of Trust of the Issuer, (iii) any order of any Governmental Authority or (iv) any provision of any indenture, agreement or other instrument to which the Issuer is a party or by which it or any of its property is or may be bound, which violation would have an Adverse Effect, (B) result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, which conflict, breach or default would have an Adverse Effect or (C) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by the Issuer. (c) Enforceability. This Indenture has been duly executed and delivered by the Issuer and constitutes, and each other Transaction Document when executed and delivered by the Issuer shall constitute, a legal, valid and binding obligation of the Issuer enforceable against the Issuer in accordance with its terms, subject to general principles of equity and to bankruptcy, insolvency, reorganization, moratorium and similar laws now or hereafter in effect relating to creditors rights generally. (d) Governmental Approvals. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is required in connection with the Transactions, except such as have been made or obtained and are in full force and effect. (e) Investment Company Act. The Issuer is not an "investment company" as such term is defined in the Investment Company Act, and the issuance of the Notes, the repayment thereof by the Issuer and the consummation of the Transactions shall not violate any provision of the Investment Company Act or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. 24 31 (f) No Defaults. No default, breach, violation or event permitting acceleration under the terms of any Purchased Receivable exists. (g) No Fraudulent Transfer. The assignment or pledge of the security interest in the Collateral by the Issuer to the Indenture Trustee does not constitute a fraudulent transfer or fraudulent conveyance under the United States Bankruptcy Code or applicable state bankruptcy or insolvency laws. (h) No Proceedings. There are no proceedings or investigations, pending or, to the best knowledge of the Issuer, threatened against the Issuer before any Governmental Authority (i) asserting the invalidity of any of the Transaction Documents to which it is a party or the Notes, (ii) seeking to prevent the issuance of any of the Notes or the consummation of any of the transactions contemplated by any of the Transaction Documents to which it is a party or the Notes, (iii) seeking any determination or ruling that, in the reasonable judgment of the Issuer, would materially and adversely affect the performance by the Issuer of its obligations under any of the Transaction Documents to which it is a party or (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of any of the Transaction Documents to which it is a party or the Notes or (v) seeking to materially adversely affect the income or franchise tax attributes of the Trust under the United States federal or any state income or franchise tax systems. [END OF ARTICLE VII] 25 32 ARTICLE VIII COVENANTS Section 8.01. Affirmative Covenants of the Issuer. The Issuer covenants and agrees that, so long as the principal of (or premium, if any) or interest on any Notes shall be unpaid, unless the Majority Noteholders shall otherwise consent in writing, the Issuer shall: (a) Existence. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, rights and franchises as a Delaware Business Trust under the laws of the State of Delaware and maintain such legal existence separate from that of the Seller and any Affiliate thereof. (b) Obligations and Taxes. Pay its Indebtedness and other obligations promptly before the same shall become delinquent or in default and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided that, such payment and discharge shall not be required with respect to any such Indebtedness, obligation, tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Issuer shall have set aside on its books adequate reserves with respect thereto. (c) Litigation and Other Notices. Upon notice thereof, furnish to the Indenture Trustee prompt written notice of the following: (i) any Early Amortization Event, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (ii) the filing or commencement of, or receipt by the Issuer of any written threat or notice of intention of any Person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Issuer that, if adversely determined, would have an Adverse Effect; (iii) any notices received by the Issuer under the Purchase and Servicing Agreement (together with copies thereof); and (iv) any Lien asserted against any of the Collateral of which it is aware (other than any Lien created, imposed or contemplated by any of the Transaction Documents). (d) Information to the Noteholders. On each Payment Date upon receipt thereof from the Servicer, forward to the Indenture Trustee for distribution to each Noteholder of each Series subject to Rule 144A the Monthly Settlement Statement and for so long as any of such Notes are "restricted securities" within the meaning of Rule 144, to provide to such Noteholder and to any prospective purchaser of such Notes, upon the request of such Noteholder or prospective purchaser, any information in its possession required to be provided to such 26 33 Noteholder or prospective purchaser to satisfy the conditions, if applicable, set forth in Rule 144A(d)(4) under the Securities Act. (e) Daily Reports and Monthly Settlement Statements. Prepare or direct the Servicer to prepare and deliver each Daily Report and Monthly Settlement Statement pursuant to the Purchase and Servicing Agreement; and prepare or direct the Servicer to prepare such other monthly financial and statistical reports, cash flow reports and records of Purchased Receivables performance that may be reasonably requested by the Indenture Trustee, acting at the written direction of the Majority Noteholders. (f) Compliance with Laws. At all times observe and comply in all material respects with all laws, ordinances, orders, judgments, rules, regulations, certifications, franchises, permits, licenses, directions and requirements of any Governmental Authority that are now or may at any time be applicable to the Issuer, except (1) for any nonobservance or noncompliance that would not have an Adverse Effect or (2) for any observance or compliance that shall be contested in good faith and by appropriate proceedings diligently conducted by the Issuer. (g) Delivery of Materials for the Collection of Purchased Receivables. Upon the occurrence and during the continuance of an Early Amortization Event and upon the written request of the Indenture Trustee, acting at the written direction of the Majority Noteholders, make such arrangements with respect to the collection of the Purchased Receivables as may be reasonably requested by the Indenture Trustee, acting at the written direction of the Majority Noteholders. (h) Maintenance of Office or Agency. Maintain an office or agency within the United States of America where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served. The Issuer hereby initially appoints the Corporate Trust Office of the Indenture Trustee such office or agency. The Issuer shall give prompt written notice to the Indenture Trustee of the location, and of any change in the location, of any such office or agency. If at any time the Issuer shall fail to maintain any such office or agency or shall fail to furnish the Indenture Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office, and the Issuer hereby appoints the Indenture Trustee at its Corporate Trust Office as its agent to receive all such presentations, surrenders, notices and demands. (i) Inspection. From time to time, at any reasonable time during normal business hours and, so long as no Early Amortization Event has occurred and is continuing, upon at least two (2) Business Days prior notice, permit representatives of the Indenture Trustee, acting at the written direction of the Majority Noteholders, to examine and make copies of and abstracts from its records relating to the Purchased Receivables. (j) Collateral Records. Maintain or direct the Servicer to maintain satisfactory and complete records of the Collateral, including without limitation a record of all payments received and all credits granted with respect to the Collateral. 27 34 (k) Purchase and Servicing Agreement. Upon request of the Indenture Trustee, acting at the written direction of the Majority Noteholders, contact any party to the Purchase and Servicing Agreement to demand and request information and reports or action that the Issuer is entitled to under the Purchase and Servicing Agreement. (l) Further Assurances. At any time and from time to time, at its expense, promptly execute and deliver all further instruments and documents, and take all further action, that the Indenture Trustee, acting at the written direction of the Majority Noteholders, may reasonably request, to perfect and protect the assignments and security interests granted or purported to be granted by this Indenture or to enable the Indenture Trustee to exercise and enforce its rights and remedies under this Indenture with respect to any Collateral, including without limitation (1) the delivery and pledge to the Indenture Trustee of any Collateral evidenced by a promissory note or other instrument (which is not chattel paper), duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form satisfactory to the Indenture Trustee and (2) the execution and filing of such financing or continuation statements pertaining to the Collateral, or amendments thereto, which the Indenture Trustee acting at the written direction of the Majority Noteholders may file without the signature of the Issuer where permitted by law (the Indenture Trustee shall promptly send the Issuer copies of any such financing or continuation statements that it files without the signature of the Issuer). (m) Payment of Taxes. Pay all taxes, duties, fees or other charges levied or imposed by any Governmental Authority on the Issuer in respect of this Indenture or the issuance of the Notes, and pay any stamp duty, tax, required deduction or withholding or other amount required to be paid to introduce this document into evidence to enforce the Notes, except for any such payments that are being contested in good faith by appropriate proceedings and for which the Issuer shall have set aside on its books adequate reserves. (n) Compliance with Trust Agreement. At all times observe and comply in all material respects with the provisions of the Trust Agreement and conduct its business in accordance with the terms of the Trust Agreement. (o) Separate Corporate Existence. (i) Obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of any Transaction Document to which it is a party and each other instrument or agreement necessary or appropriate to proper administration hereof and permit and effectuate the transactions contemplated hereby. (ii) Maintain its own deposit, securities and other account or accounts, separate from those of any Affiliate of the Issuer. Except as permitted or contemplated by the Transaction Documents, the funds of the Issuer will not be diverted to any other Person or for other than the corporate use of the Issuer, and the funds of the Issuer shall not be commingled with those of any Affiliate of the Issuer. (iii) Ensure that, to the extent that it shares the same officers or other employees with any of the owners of beneficial interests in or Affiliates of the Issuer, the 28 35 salaries of and the expenses related to providing benefits to such officers and other employees shall, in the judgment of the Issuer, be fairly allocated among such entities. (iv) Ensure that, to the extent that it jointly contracts with any of its owners of beneficial interests in or Affiliates of the Issuer to do business with vendors or service providers or to share overhead expenses, the costs incurred in so doing shall, in the judgment of the Issuer, be allocated fairly among such entities. Except as permitted in or contemplated by the Transaction Documents, all material transactions between the Issuer and any of its Affiliates shall be only on an arm's-length basis. (v) Observe all necessary formalities to authorize all trust action and maintain accurate and separate books, records and accounts, including, but not limited to, intercompany transaction accounts. (vi) Ensure that decisions with respect to its business and daily operations shall be independently made by the Issuer (although the officer making any particular decision may also be an officer or director of an Affiliate of the Issuer) and shall not be dictated by an Affiliate of the Issuer. (vii) Act solely in its own name and through its own authorized officers, employees and agents. (viii) Other than as permitted or contemplated by the Transaction Documents, ensure that no Affiliate of the Issuer shall advance funds to the Issuer, and no Affiliate of the Issuer will otherwise guaranty debts of, the Issuer; provided, however, that an Affiliate of the Issuer may provide funds to the Issuer in connection with the capitalization of the Issuer, including capital necessary to assure that the Issuer has "substantial assets" as described in Treasury Regulation Section 301.7701-2(d)(2) as in existence prior to amendment by Treasury Decision 8697 on December 17, 1996. (ix) Other than organizational expenses and as expressly provided herein or contemplated hereby, pay all expenses, indebtedness and other obligations incurred by it using its own funds. (x) Not become liable with respect to any obligation of any Affiliate of the Issuer nor shall the Issuer make any loans to any Person. Section 8.02. Negative Covenants of the Issuer. The Issuer covenants and agrees that, so long as the principal of (or premium, if any) or interest on any Notes shall be unpaid, unless the Majority Noteholders shall otherwise consent in writing, the Issuer shall not: (a) Indebtedness. Incur, create, assume or permit to exist any Indebtedness, except: (1) Indebtedness evidenced by the Notes and any Enhancement provided by the Issuer pursuant to the terms of any Indenture Supplement; (2) Indebtedness representing fees, expenses, indemnities and other amounts payable pursuant to and in accordance with the Transaction Documents; and (3) Indebtedness for Issuer Expenses; provided that, nothing in this Section 8.02(a) shall prohibit or be deemed to prohibit the Issuer from receiving any capital contribution from the Seller. 29 36 (b) Liens. Incur, create, assume or permit to exist any Lien on any property or assets (including stock or other securities) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except the Liens created, imposed or contemplated by any of the Transaction Documents and any Lien created, imposed or contemplated in connection with any repurchase obligation which is an Eligible Investment; provided, that, nothing in this Section 8.02(b) shall prohibit or be deemed to prohibit the Issuer from suffering to exist upon any of the Purchased Receivables any Liens for municipal, local or state taxes if such taxes shall not at the time be due and payable or if the Issuer shall currently be contesting the validity thereof in good faith by appropriate proceedings and shall have set aside on its books adequate reserves with respect thereto. (c) Guarantee. Incur, create, assume or permit to exist any Guarantee. (d) Creditors. Create or permit to exist any creditors other than the holders of Indebtedness permitted by Section 8.02(a) of this Indenture. (e) Business of Issuer. Engage at any time in any business or business activity other than the acquisition of Receivables and/or Participation Interests pursuant to the Purchase and Servicing Agreement, the activities incidental to the purchase and ownership of such Receivables and/or Participation Interests, the issuance of the Notes, the Transactions, the making of any investments permitted under this Indenture, the other incidental and related transactions expressly permitted under the Transaction Documents, and the other activities permitted by the Trust Agreement. (f) Mergers, Consolidations, Sales of Assets and Acquisitions. Merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) any of its assets, including the Collateral (whether now owned or hereafter acquired), or purchase, lease or otherwise acquire (in one transaction or a series of transactions) any of the assets of any other Person, other than (i) the acquisition of Receivables and the sale of Purchased Receivables pursuant to the Purchase and Servicing Agreement, (ii) the repayment of the Notes pursuant to this Indenture and the Purchase and Servicing Agreement and (iii) the re-payment of any Indebtedness incurred pursuant to any Enhancement provided pursuant to the terms of any Indenture Supplement. (g) Transactions with Affiliates. Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates except as permitted under this Indenture and the Purchase and Servicing Agreement. (h) Other Agreements. Enter into or be a party to any agreement, instrument or transaction other than the Transaction Documents and the agreements, documents, instruments and transactions related thereto or contemplated thereby. 30 37 (i) No Powers of Attorney. Grant any powers of attorney to any Person for any purposes except (1) for the purpose of permitting any Person to perform any ministerial functions on behalf of the Issuer that are not prohibited by or inconsistent with the terms of the Transaction Documents or (2) as permitted or contemplated by the Transaction Documents. [END OF ARTICLE VIII] 31 38 ARTICLE IX REDEMPTIONS Section 9.01. Optional Redemption of the Notes. To the extent provided in the Indenture Supplement for any Series or Class, the Notes may be redeemed at the option of the Issuer, in whole or in part, on such date, in such manner and at such price, all as set forth in such Indenture Supplement. Section 9.02. Legal Final Maturity Date of the Notes. If the Issuer shall not have given notice by 30 days prior to the Legal Final Maturity Date of any Series that it will redeem the Notes of such Series in full on or before such Legal Final Maturity Date, the Servicer, on behalf of the Indenture Trustee and the Noteholders of such Series, will promptly solicit bids for the purchase of all or a portion of the Receivables for a purchase price that, together with funds on deposit in the Collection Account and the Excess Funding Account and any Series Account available for payment of such Notes on the Legal Final Maturity Date, will be sufficient to pay in full (a) the outstanding principal balance of such Notes and (b) accrued and unpaid interest on such Notes payable on the Legal Final Maturity Date. The Servicer shall promptly, after receipt of any offer to purchase the Receivables, inform the Seller of such offer and provide to the Seller a reasonably detailed description of the terms of such offer. The Servicer shall, not less than three Business Days prior to the Legal Final Maturity Date, sell such Receivables to (i) the Seller at the purchase price equal to the highest offer received by the Servicer for the sale of such Receivables, or (ii) the highest bidder for the sale of such Receivables if the Seller does not purchase such Receivables. The proceeds of any such sale of Receivables shall be deposited in the Collection Account and treated as Collections and shall be paid to the Noteholders of the Series being redeemed on the Legal Final Maturity Date to the extent necessary to pay such Notes. [END OF ARTICLE IX] 32 39 ARTICLE X REMEDIES OF THE TRUSTEE AND NOTEHOLDERS Section 10.01. Early Amortization Events. The occurrence of any of the following events shall constitute an "Early Amortization Event": (i) an involuntary petition or any other pleading shall be filed in a court of competent jurisdiction seeking (1) relief in respect of the Issuer, the Seller or the Servicer or of a substantial part of the property or assets thereof, under the Bankruptcy Code, or any other federal or state bankruptcy, insolvency, receivership or similar law, (2) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Issuer, the Seller or the Servicer or for a substantial part of the property or assets thereof or (3) the winding-up or liquidation of the Issuer, the Seller or the Servicer; and such proceeding, petition or pleading shall continue undismissed for sixty (60) days; (ii) the Issuer, the Seller or the Servicer shall (1) voluntarily commence any proceeding or file any petition seeking relief under the Bankruptcy Code, or any other federal or state bankruptcy, insolvency, receivership or similar law, (2) consent to the institution of, or fail to contest in a timely manner, any proceeding or the filing of any petition described in Section 10.01(a) above, (3) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Issuer, the Seller or the Servicer or for a substantial part of the property or assets thereof, (4) make a general assignment for the benefit of creditors or (5) become unable, admit in writing its inability or fail generally to pay its debts as they become due; (iii) the Issuer becomes subject to the requirement to register as an "investment company" under the Investment Company Act; and (iv) with respect to any Series, the occurrence of any other event determined to be an Early Amortization Event for such Series in the applicable Indenture Supplement. If any event described in clause (iv) of Section 10.01 occurs with respect to any Series, an Early Amortization Event shall be deemed to have occurred with respect to such Series only if an Early Amortization Event is declared to have occurred in the manner set forth in the applicable Indenture Supplement. If any event described in clauses (i) through (iii) of Section 10.01 occurs, an Early Amortization Event shall be deemed to have occurred immediately upon the occurrence of such event, without any notice or other action on the part of the Indenture Trustee or the Noteholders. The Early Amortization Period shall commence as of the day on which the Early Amortization Event occurs. Section 10.02. Remedies. (a) Following the occurrence of an Early Amortization Event specified in clauses (i) through (iii) of Section 10.01(a), the Indenture Trustee, acting at the written direction of the Majority Noteholders, may apply all or any part of the Collections to the payment of the Secured Obligations of the Issuer under this Indenture or under any of the other Transaction Documents, 33 40 as provided herein, and all rights and remedies provided under all other applicable laws, which rights, in the case of each and all of the foregoing, shall be cumulative. (b) The Issuer shall be deemed to have appointed the Indenture Trustee its attorney-in-fact with full authority in its place and stead, and in its name, to take any action and to execute any instrument necessary to accomplish the purposes of this Indenture pursuant to and in accordance with the terms of this Indenture, including without limitation to (1) ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in connection with the Collateral, (2) settle, compromise, compound, prosecute or defend any action or proceeding with respect to the Collateral, (3) receive, endorse and collect all drafts or other instruments and documents made payable to the Issuer in connection therewith or representing any payment, dividend or other distribution in respect of the Collateral or any part or proceeds thereof, and give full discharge for the same or (4) extend the time of payment of or make any allowance or adjustment with respect to any or all of the Collateral. Section 10.03. Indenture Trustee May Enforce Claims Without Possession of the Notes. All rights of action and claims under this Indenture and the Notes may be prosecuted and enforced by the Indenture Trustee without the possession of any of the Notes or the production thereof in any Proceeding relating thereto, and any such Proceeding instituted by the Indenture Trustee shall be brought in its own name as trustee of a trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, be for the ratable benefit of the Noteholders. In any Proceedings brought by the Indenture Trustee (including without limitation any Proceeding involving the interpretation of any provision of this Indenture), the Indenture Trustee shall be held to represent all the Noteholders, and it shall not be necessary to make any Noteholders parties to any such Proceeding. Section 10.04. Restoration of Rights. In the event the Indenture Trustee or any Noteholder has instituted any Proceeding to enforce any right or remedy under this Indenture, and such Proceeding shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Indenture Trustee or such Noteholder, then and in every such case the Issuer, the Indenture Trustee and the Noteholders shall, subject to any determination in such Proceeding, be restored severally and respectively to their former positions and rights under this Indenture, and all rights, remedies and powers of the Issuer, the Indenture Trustee and the Noteholders shall continue as though no such Proceeding had been instituted. Section 10.05. Limitations on Suits by Noteholders. No Noteholder shall have any right to institute any Proceeding, judicial or otherwise, upon, under or with respect to this Indenture or the Notes, or for the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official, or for any other remedy under this Indenture or the Notes, unless: (a) such Noteholder shall have previously given written notice to the Indenture Trustee and to the Issuer of a continuing Early Amortization Event; (b) the Majority Noteholders shall have previously (1) made written request to the Indenture Trustee to institute, or to cause the institution of, Proceedings in respect of such Early 34 41 Amortization Event in its own name as Indenture Trustee under this Indenture and (2) offered to the Indenture Trustee reasonable indemnity against the costs, expenses and liabilities that may reasonably be incurred by the Indenture Trustee in compliance with such request; (c) the Indenture Trustee, for sixty (60) days after its receipt of such notice, request and offer of indemnity, has failed to institute any such Proceeding; and (d) no direction inconsistent with such request has been given to the Indenture Trustee during such sixty (60) day period by the Majority Noteholders; it being understood and intended that no Noteholder or Noteholders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture or the Notes to affect, disturb or prejudice the rights of any other Noteholder or Noteholders, or to obtain or to seek to obtain priority or preference over any other such Noteholder or Noteholders (except as set forth in this Indenture) or to enforce any right under this Indenture or the Notes, except in the manner provided in this Indenture and for the equal and proportionate benefit of all the Noteholders. Section 10.06. Control by Noteholders. Pursuant to the terms and provisions of this Indenture, the Majority Noteholders are authorized to direct the Indenture Trustee to take all actions on behalf of the Noteholders under this Indenture, the Notes and the other Transaction Documents and to direct the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee or the Noteholders, or the exercising of any trust or power conferred on the Indenture Trustee under this Indenture, the Notes or the other Transaction Documents; provided that, such direction shall not conflict with any rule of law or this Indenture, the Notes or the other Transaction Documents; and provided further that, subject to the provisions of Section 11.01 of this Indenture, the Indenture Trustee shall have the right to decline to follow any such direction (1) if the Indenture Trustee is advised pursuant to the advice or an opinion of counsel that the action or Proceeding so directed may not lawfully be taken or (2) if an Authorized Officer of the Indenture Trustee determines in good faith that the action or Proceeding so directed would involve the Indenture Trustee in personal liability. Nothing in this Indenture shall impair the right of the Indenture Trustee in its discretion to take any action deemed proper by the Indenture Trustee and which is not inconsistent with any direction by the Majority Holders. Section 10.07. Indenture Trustee To Give Notice of Early Amortization Event, But May Withhold in Certain Circumstances. The Indenture Trustee shall transmit to the Noteholders and each Rating Agency notice of any Early Amortization Event actually known to an Authorized Officer of the Indenture Trustee, such notice to be transmitted within fifteen (15) days after obtaining actual knowledge of the occurrence thereof; provided, however, that the Indenture Trustee shall not be required to transmit to the Noteholders such notice if such Early Amortization Event shall have been cured before the giving of such notice. [END OF ARTICLE X] 35 42 ARTICLE XI CONCERNING THE TRUSTEE Section 11.01. Duties and Responsibilities of the Indenture Trustee. Except as otherwise required by law, the Indenture Trustee, prior to the occurrence of a Servicer Default and prior to and after the curing or waiving of all Early Amortization Events which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. The Indenture Trustee shall at all times exercise reasonable care with respect to the Collateral. The Indenture Trustee shall be deemed to have exercised reasonable care with respect to the Collateral if the Collateral is accorded treatment substantially equal to that which the Indenture Trustee accords its own property. If a Servicer Default of which an Authorized Officer has actual knowledge has occurred (which has not been cured or waived), the Indenture Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Indenture Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, provided that: (a) prior to the occurrence of a Servicer Default and after the curing or waiving of any Servicer Default which may have may occurred: (i) the duties and obligations of the Indenture Trustee shall be determined solely by the express provisions of this Indenture, and the Indenture Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Indenture Trustee; and (ii) in the absence of bad faith on the part of the Indenture Trustee, the Indenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision of this Indenture are specifically required to be furnished to the Indenture Trustee, the Indenture Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not conform or investigate the accuracy of mathematical calculations or other facts set forth therein). (b) the Indenture Trustee shall not be liable for any error of judgment made in good faith by an Authorized Officer of the Indenture Trustee, unless it shall be proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; (c) the Indenture Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the written direction of the Majority Noteholders relating to the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee, or exercising any trust or power conferred upon the Indenture Trustee, under this Indenture or any Indenture Supplement; 36 43 (d) the Indenture Trustee shall not be charged with knowledge of any failure by the Servicer to comply with any of its obligations under the Purchase and Servicing Agreement unless an Authorized Officer of the Indenture Trustee obtains actual knowledge of such failure or the Indenture Trustee receives written notice of such failure; (e) the Indenture Trustee shall not be charged with knowledge of a Servicer Default or an Early Amortization Event unless an Authorized Officer obtains actual knowledge of such event or the Indenture Trustee receives written notice of such event from the Servicer or the Majority Noteholders; (f) the Indenture Trustee shall have no duty to monitor the performance of the Servicer, nor shall it have any liability in connection with malfeasance or nonfeasance by the Servicer provided, however, that the Indenture Trustee shall forward to the Noteholders any reports, certificates, or other documents required to be delivered pursuant to this Indenture and the Purchase and Servicing Agreement; the Indenture Trustee shall have no liability in connection with compliance of the Servicer or the Seller with statutory or regulatory requirements related to the Receivables; the Indenture Trustee shall not make or be deemed to have made any representations or warranties with respect to the Receivables or the validity or sufficiency of any assignment of the Receivables to the Trust or the Indenture Trustee; and (g) the Indenture Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or under any Indenture Supplement or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 11.02. Certain Rights of the Indenture Trustee. Subject to Section 11.01 of this Indenture: (a) the Indenture Trustee may conclusively rely and shall be fully protected in acting or refraining from acting, as applicable, in accordance with any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) unless expressly required otherwise, any request or direction of the Issuer mentioned in this Indenture shall be sufficiently evidenced by a written request or order signed by an Authorized Officer of the Owner Trustee or the Servicer; (c) whenever in the administration of this Indenture the Indenture Trustee shall deem it desirable that a matter (including without limitation an Early Amortization Event be proved or established prior to taking, suffering or omitting any action hereunder, the Indenture Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon a certificate of a Financial Officer of the Servicer; (d) the Indenture Trustee may consult with counsel of its selection, and the advice of such counsel and any Opinion of Counsel shall be full and complete authorization and 37 44 protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Indenture Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Noteholders pursuant to this Indenture, unless such Noteholders shall have offered to the Indenture Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Indenture Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, unless so requested in writing by the Majority Noteholders, but the Indenture Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Indenture Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine, upon two (2) Business Days prior notice and during normal business hours, the books, records and premises of the Issuer, Seller or Servicer, personally or by agent or attorney and the Indenture Trustee shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; (g) the Indenture Trustee may execute any of the trusts or powers under this Indenture or perform any duties under this Indenture either directly or through agents, attorneys, custodians or nominees, and the Indenture Trustee shall not be responsible for any misconduct or negligence on the part of, or for the supervision of, any such agent, attorney, custodian or nominee appointed with due care by it hereunder; (h) the Indenture Trustee shall not be personally liable for any action taken, suffered or omitted by it in good faith, not involving its gross negligence and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture or any Supplement; (i) except as otherwise provided in this Indenture or any Indenture Supplement, the Indenture Trustee shall not be required to make any initial or periodic examination of any documents or records related to the Receivables for the purpose of establishing the presence or absence of defects, the compliance by the Seller with its representations and warranties or for any other purpose; (j) when the Indenture Trustee incurs expenses or renders services in connection with an Insolvency Event, such expenses (including the fees and expenses of its counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law; (k) the Indenture Trustee shall not be responsible for filing any financing or continuation statements or recording any documents or instruments in any public office at any time or times or otherwise perfecting or maintaining the perfection of any security interest in the Collateral; and (l) the rights, privileges, protections and benefits given to the Indenture Trustee, 38 45 including, without limitation, its rights to be indemnified, are extended to, and shall be enforceable by, the Indenture Trustee in each of its capacities hereunder, and to each agent, custodian and other Persons employed by it to act hereunder including but not limited to the Securities Intermediary. Section 11.03. Certificate of Authorized Officer and Opinion of Counsel. Upon any application or request by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Indenture Trustee a certificate of an Authorized Officer of the Issuer stating that all conditions precedent, if any (including any covenants, compliance with which constitutes a condition precedent), provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any (including any covenants, compliance with which constitutes a condition precedent), have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions in this Indenture relating thereto, (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 11.04. Indemnification. The Issuer agrees to indemnify and hold harmless the Indenture Trustee and each Noteholder and each of its respective directors, officers and employees from and against any and all liabilities, losses, claims, damages, actions, suits, judgments, demands, costs and expenses (including reasonable legal fees and expenses) (i) in any way relating to or arising out of this Indenture, any Indenture Supplement or the other Transaction Documents or (ii) sustained by reason of any acts, omissions or alleged acts or omissions relating to or arising out of the activities of the Issuer or the Indenture Trustee pursuant to this Indenture any Indenture Supplement or the Purchase and Servicing Agreement or in connection with the Issuer's performance under this Indenture, any Indenture Supplement or the Purchase and Servicing Agreement, except to the extent such liabilities, losses, claims, damages, actions, suits, judgments, demands, costs or expenses are caused by the gross negligence or willful misconduct of the Indenture Trustee or any Noteholder or any of their respective directors, officers or employees. Payments to the Indenture Trustee in respect of such indemnification shall be payable solely from amounts available for distribution to the Issuer pursuant to this Indenture and Section 8.01(b)(xii) of the Purchase and Servicing Agreement. The Indenture Trustee's rights and remedies in respect of claims for indemnification from the Issuer hereunder shall be subject to the provisions of Section 14.08 hereof. The indemnity set forth in this Section 11.04 shall survive the resignation or removal of the Indenture Trustee and the satisfaction, discharge or termination of this Indenture. 39 46 Section 11.05. Fees and Expenses of the Indenture Trustee. The fees and expenses of the Indenture Trustee will be paid by Z Del pursuant to Section 10.06 of the Purchase and Servicing Agreement. Section 11.06. Acts of Noteholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Indenture Trustee, and where it is hereby expressly required, to the Issuer or any other Person. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture or any other Transaction Document and (subject to Section 11.01 of this Indenture) conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section 11.06. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness to such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by an officer of a corporation or a member of a partnership, on behalf of such corporation or partnership, such certificate shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Indenture Trustee deems sufficient. Any request, demand, authorization, direction, notice, consent, waiver or other action by any Noteholder shall bind the Noteholder of every Note issued upon the transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon whether or not notation of such action is made upon such Note. The ownership of a Note for the purpose of this Section 11.06 shall be proved by the Note Register. Section 11.07. Payments on the Notes. On each Payment Date the Indenture Trustee shall effect all payments with respect to the Notes pursuant to and in accordance with the terms of this Indenture. Section 11.08. Documents and Information. Whenever the Indenture Trustee has the right to require the delivery of information pursuant to this Indenture or any other Transaction Document, the Indenture Trustee shall, acting at the written direction of the Majority Noteholders, request the delivery of such information pursuant to such document. The Indenture Trustee shall make available copies of any document, report or schedule delivered to it pursuant to this Indenture or any other Transaction Document for inspection upon the written request of any of the Noteholders, and shall forward a copy of any such document, report or schedule to any Noteholder, at such Noteholder's expense, upon the written request of such Noteholder. The Indenture Trustee shall also furnish a copy of any such document, report or schedule to each Rating Agency at the expense of the Issuer. Section 11.09. Application of Funds; Return of Unclaimed Funds. Until used or applied as provided in this Indenture, all funds received by the Indenture Trustee under this Indenture shall be held in trust for the purposes for which they were received, shall be uninvested 40 47 for as long as such funds are held in trust (unless otherwise provided by this Indenture) and shall be segregated from other funds of the Indenture Trustee to the extent required by law and under this Indenture. The Indenture Trustee shall be under no liability for interest on any funds received by it except as otherwise agreed with the Issuer. Any funds deposited with the Indenture Trustee for the payment of principal of, and premium (if any) or interest on, the Notes, and remaining unclaimed for two years after the date upon which such principal, premium or interest became due and payable, shall be repaid to the Issuer by the Indenture Trustee upon demand, and any Noteholder to which such deposit related previously entitled to receive payment thereof shall thereafter, as an unsecured general creditor, look only to the Issuer for the payment thereof, and all liability of the Indenture Trustee with respect to such funds shall thereupon cease. Section 11.10. Forwarding of Notices. If the Indenture Trustee shall receive any notice, demand or other written communication from any Noteholder pursuant or related to this Indenture, the Notes or any other Transaction Documents, the Indenture Trustee shall promptly forward a copy of such notice, demand or other written communication to the Issuer. Section 11.11. Notes Held by the Indenture Trustee; Rights of Indenture Trustee. The Indenture Trustee, in its individual or other capacity, may become the owner or pledgee of the Notes with the same rights it would have if it were not acting as Indenture Trustee under this Indenture. The Indenture Trustee may become a creditor, directly or indirectly, of the Issuer or any of its Affiliates or agencies, make any loan or loans thereto, hold or become a pledgee of any form of indebtedness thereof (including, without limitation, the Notes), own, accept or negotiate any drafts, bills of exchange, acceptances or obligations thereof, make disbursements therefor and enter into any commercial or business arrangement therewith without limitation, all without any liability on the part of the Indenture Trustee under this Indenture for any real or apparent conflict of interest by reason of any such dealing. Section 11.12. Inspection. Upon reasonable notice to the Indenture Trustee, the Issuer may, at its sole cost and expense, during normal business hours, inspect and photocopy any Notes held by the Indenture Trustee, any books of registration and transfer relating to the Notes, and any other books and records maintained by the Indenture Trustee under this Indenture or any other Transaction Document. Section 11.13. Indenture Trustee; Resignation; Removal; Successors. The Issuer agrees, for the benefit of the Noteholders, that there shall at all times be an Indenture Trustee under this Indenture until such time as there are no longer any Notes outstanding under this Indenture, which Indenture Trustee (1) shall be a bank or trust company organized, doing business and in good standing under the laws of the United States of America or of any state thereof with a combined capital and surplus of at least $50 million and (2) shall have a long-term debt rating not less than Baa3 and BBB- by Moody's and Standard & Poor's, respectively, or shall otherwise be acceptable to Moody's and Standard & Poor's. The Indenture Trustee may at any time resign by giving written notice to the Issuer and the Noteholders of its resignation (which notice shall also be delivered to each Rating Agency), specifying the date on which its resignation shall become effective (which shall not be less than thirty (30) days after the date on which such notice is given unless the Issuer and the Majority Noteholders shall agree to a shorter period); provided that, no resignation shall take effect until the appointment of a successor 41 48 Indenture Trustee and the acceptance of such appointment by such successor Indenture Trustee in accordance with this Section 11.13. The Indenture Trustee may at any time be removed by the Majority Noteholders by written notice (which notice shall also be delivered to each Rating Agency) from the Majority Noteholders to the Issuer and the Indenture Trustee specifying the date on which such removal shall become effective; provided that, no removal shall take effect until the appointment of a successor Indenture Trustee and the acceptance of such appointment by such successor Indenture Trustee in accordance with this Section 11.13. If at any time the Indenture Trustee shall resign, or shall be removed, or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or shall file a voluntary petition in bankruptcy or make an assignment for the benefit of its creditors or consent to the appointment of a receiver or conservator of all or any substantial part of its property, or shall generally not be paying its debts as they become due, or if an order of any court shall be entered approving any petition filed by or against it under the provisions of Chapter 7 or 11 of Title 11 of the Bankruptcy Code or under the provisions of any similar legislation, or if a receiver or custodian of it or of all or any substantial part of its property shall be appointed, or if any public officer shall have taken charge or control of the Indenture Trustee or of its property or affairs, for the purpose of rehabilitation, conservation or liquidation, a successor Indenture Trustee, qualified as aforesaid, shall be appointed as follows: (a) (i) so long as no Servicer Default shall have occurred and be continuing at the time of receipt by the Issuer of such resignation notice or removal notice, or the time of such incapability of acting, adjudication, filing, assignment, consent, nonpayment of debts, entry of court order, appointment, or taking of charge or control, as the case may be, the successor Indenture Trustee shall be appointed by the Issuer, with the consent of the Majority Noteholders (which consent shall not be unreasonably withheld); provided that, if the Issuer and the Majority Noteholders fail to agree on a successor Indenture Trustee within thirty (30) days after such receipt, incapability of acting, adjudication, filing, assignment, consent, nonpayment of debts, entry of court order, appointment, or taking of charge or control, as the case may be, the successor Indenture Trustee shall be appointed by the Majority Noteholders; and (ii) so long as a Servicer Default shall have occurred and be continuing at the time of receipt by the Issuer of such resignation notice or removal notice, or the time of such incapability of acting, adjudication, filing, assignment, consent, nonpayment of debts, entry of court order, appointment, or taking of charge or control, as the case may be, the successor Indenture Trustee shall be appointed by the Majority Noteholders; and (b) the successor Indenture Trustee shall accept its appointment as Indenture Trustee under this Indenture by the execution and delivery of an instrument of appointment, acceptance and succession, whereupon (1) the predecessor Indenture Trustee shall (A) cease to be the Indenture Trustee under this Indenture and (B) at the written direction of the Issuer and the Majority Noteholders deliver and pay over to the successor Indenture Trustee any and all securities, moneys and any other properties then in its possession as Indenture Trustee, and execute all such documents and take all such other actions as may be necessary or advisable to effect the succession and (2) the successor Indenture Trustee, without any further act, deed or conveyance, shall succeed to and become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor Indenture Trustee, with like effect as if originally named as such Indenture Trustee under this Indenture. 42 49 If no successor Indenture Trustee shall have been so appointed and shall have accepted such appointment within thirty (30) days after the receipt by the Issuer of the predecessor Indenture Trustee's notice of resignation or the removal of the predecessor Indenture Trustee, the predecessor Indenture Trustee may, on behalf of the Majority Noteholders, appoint a successor Indenture Trustee, which shall be qualified as required in this Section 11.13 or petition any court of competent jurisdiction for the appointment of a successor trustee. Upon any succession of the Indenture Trustee under this Indenture (notice of which shall be provided to each Rating Agency), the predecessor Indenture Trustee shall be entitled to the payment of compensation and reimbursement agreed to under this Indenture for services rendered and expenses incurred. After any succession of the Indenture Trustee under this Indenture, the provisions of Section 11.04 of this Indenture shall inure to the benefit of the predecessor Indenture Trustee as to any action taken or omitted to be taken by it while it was Indenture Trustee under this Indenture. The Majority Noteholders shall give prompt written notice of the appointment of a successor Indenture Trustee to all of the Noteholders. No Indenture Trustee under this Indenture shall be personally liable for any action or omission of any successor Indenture Trustee. Section 11.14. Merger and Consolidation. Any corporation into which the Indenture Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Indenture Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Indenture Trustee, shall be the successor of the Indenture Trustee under this Indenture, without the execution or filing of any paper or any further act on the part of any of the parties hereto and shall be required to meet the requirements of Section 11.13 of this Indenture. In case any Notes shall have been authenticated, but not delivered, by the Indenture Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Indenture Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Indenture Trustee had itself authenticated such Notes. Section 11.15. Separate Indenture Trustees or Co-Trustees. For purposes of meeting the legal requirements of certain local jurisdictions, the Indenture Trustee shall have the power to appoint a co-trustee or separate trustees of all or any part of the Issuer. The Indenture Trustee shall have the power and may execute and deliver all instruments necessary to appoint one or more Persons to act as such co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust and to vest in such Person or Persons, in such capacity and for the benefit of the Noteholders, such title to the Trust or any part hereof, and subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Indenture Trustee may reasonably consider necessary to perform its obligations hereunder. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor or trustee under Section 11.13 and no notice to Noteholders of the appointment of any co-trustee or separate trustee shall be required under Section 11.13. (b) Every separate trustee or co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon 43 50 the Indenture Trustee shall be conferred or imposed upon and exercised or performed by the Indenture Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Indenture Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed or to the extent the Indenture Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Indenture Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Indenture Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Indenture Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Indenture and the conditions of this Article 11.15. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Indenture Trustee or separately, as may be provided therein, subject to all provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection to, the Indenture Trustee. Every such instrument shall be filed with the Indenture Trustee and a copy thereof furnished by the Indenture Trustee to the Seller. (d) Any separate trustee or co-trustee may at any time constitute the Indenture Trustee its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Indenture on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Indenture Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. Section 11.16. The Securities Intermediary. (a) The Bank of New York is appointed as the initial Securities Intermediary hereunder and The Bank of New York accepts such appointment. (b) The Bank of New York represents and warrants that it is as of the date hereof and shall be for so long as it is the Securities Intermediary hereunder a corporation that (i) in the ordinary course of its business maintains securities accounts for others and is acting in that capacity hereunder, and (ii) maintains a Participant's Securities Account (as defined in the United States Regulations) with a Federal Reserve Bank. The Bank of New York agrees with the parties hereto that, as of the date hereof and for so long as it is the Securities Intermediary hereunder, the Collection Account Securities Subaccount and the Excess Funding Account Securities Subaccount 44 51 shall be an account to which financial assets may be credited. The Bank of New York undertakes that for so long as it is the Securities Intermediary it will treat the Indenture Trustee as entitled to exercise rights that comprise such financial assets, and to exercise the ordinary rights of an entitlement holder, in the fashion contemplated by the UCC. The Bank of New York agrees with the parties hereto that for so long as it is the Securities Intermediary hereunder each item of property credited to the Collection Account Securities Subaccount and the Excess Funding Account Securities Subaccount shall be treated as a "financial asset" within the meaning of the UCC. The Bank of New York covenants that so long as it is the Securities Intermediary hereunder it will not take any action inconsistent with the provisions of this Indenture applicable to it as Securities Intermediary and agrees that as long as it is the Securities Intermediary hereunder no item of property credited to the Collection Account or the Excess Funding Account shall be subject to any security interest, lien, or right of setoff in favor of the Securities Intermediary or anyone claiming through the Securities Intermediary (other than the Indenture Trustee). (c) It is the intent of the Indenture Trustee and the Issuer that each of the Collection Account and the Excess Funding Account shall be an account of the Indenture Trustee and not an account of the Issuer. If, despite such intent, either the Collection Account or the Excess Funding Account is determined to be an account of the Issuer, then (i) the Securities Intermediary shall agree to comply with entitlement orders originated by the Indenture Trustee without further consent by the Issuer, and (ii) The Bank of New York, as initial Securities Intermediary agrees that for so long as it is the Securities Intermediary hereunder, it will comply with entitlement orders originated by the Indenture Trustee without further consent by the Issuer. [END OF ARTICLE XI] 45 52 ARTICLE XII DISCHARGE OF INDENTURE Section 12.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect, and the Indenture Trustee, on demand of and at the expense of the Issuer, shall execute all proper instruments acknowledging satisfaction and discharge of this Indenture, when either (1) all Notes theretofore authenticated and delivered (other than Notes which have been destroyed, lost or stolen and which have been replaced and Notes for payment of which money has theretofore been deposited with the Indenture Trustee at the direction of the Issuer and held in trust by the Indenture Trustee and thereafter repaid to the Issuer and discharged from such trust, as provided in Section 11.09 of this Indenture) have been cancelled or delivered to the Indenture Trustee for cancellation, and the Issuer has paid all sums payable by it under this Indenture, any Indenture Supplement and under such Notes with respect to such Notes or (2) the Issuer has deposited or caused to be deposited with the Indenture Trustee as funds in trust for the benefit of the Noteholders an amount sufficient (without giving effect to any income or earnings therefrom), in the written opinion of a firm of nationally recognized, independent certified public accountants (which firm may also render other services to the Issuer or any Affiliate thereof) delivered to the Indenture Trustee, to pay and discharge the entire indebtedness on the Notes for principal and interest and premium, if any, and the Issuer has delivered to the Indenture Trustee an Opinion of Counsel stating that all conditions precedent herein provided for or relating to the satisfaction and discharge of this Indenture with respect to the Notes have been complied with. Notwithstanding the satisfaction and discharge of this Indenture with respect to the Notes, the obligations under Sections 11.04, 11.05 and 11.09 of this Indenture shall survive such satisfaction and discharge. [END OF ARTICLE XII] 46 53 ARTICLE XIII AMENDMENTS Section 13.01. Modification of Terms without Consent of Noteholders. Modifications of and amendments to this Indenture or the Notes may be made by the Issuer and the Indenture Trustee without the consent of any Noteholder for the purpose of (i) curing any ambiguity, or curing, correcting or supplementing any provisions contained in this Indenture or the Notes that may be defective or inconsistent with any other provision contained in this Indenture or the Notes or in any other manner which the Issuer may deem necessary or desirable and which shall not, as evidenced by an Officer's Certificate of the Issuer delivered to the Indenture Trustee, adversely affect the interests of the Noteholders or (ii) modifying, eliminating or adding to the provisions of this Indenture to such extent as shall be necessary, as evidenced by an Opinion of Counsel, to effect the qualification of this Indenture under the Trust Indenture Act or under any similar federal statute hereafter enacted and to add to this Indenture such other provisions as may be expressly required by the Trust Indenture Act to the extent such modifications and amendments do not adversely affect the interests of the Noteholders as evidenced by an Officer's Certificate of the Issuer delivered to the Indenture Trustee. In addition, except for the items set forth in Section 13.02 below, modifications of and amendments to this Indenture or the Notes may be made by the Issuer and the Indenture Trustee without the consent of any Noteholder (a) if each of the Rating Agencies has provided confirmation to the Issuer and the Indenture Trustee that such amendment or waiver shall not result in a reduction or removal of the rating of any class of the Notes or (b) in order to avoid a reduction in or a removal of the rating of the Notes. Any such modifications or waivers of or amendments to this Indenture or the Notes shall be conclusive and binding on all Noteholders. Section 13.02. Modifications of Terms with Consent of Noteholders. Modifications of and amendments to this Indenture or the Notes may also be made, and future compliance therewith or past default by the Issuer thereunder may be waived, with the consent of the Majority Noteholders affected by such modification, amendment or waiver; provided that, no such modification or amendment to the Indenture or any Note, and no waiver of the terms and conditions of the Indenture or any Note, may, (A) without the consent of the Noteholder of each such Note affected thereby, (1) change the scheduled maturity date or a Legal Final Maturity Date or the method of determining the required amounts of principal payments on, any Note, (2) reduce the amount of principal, premium (if any) or interest payable with respect to such Note, (3) change the date of payment of principal, premium (if any) or interest with respect to such Note, (4) change the currency in which the payment of principal, premium (if any) or interest with respect to such Note is payable, (5) impair the right to institute suit for the enforcement of any payment due and payable with respect to such Note, (6) reduce the above-stated percentage of the outstanding principal amount of Notes, the consent of whose Noteholders is necessary to modify or amend this Indenture or the Notes or to waive future compliance therewith or past default thereunder, (7) change the method of calculating any redemption price, (8) change any provision with respect to the redemption of the Notes or (9) change any provision regarding the law governing the Transaction Documents or (B) without the consent of 66 2/3% of the holders of the outstanding principal amount of the Notes of all Series, change Section 14.14 of this Indenture. Any such modifications of or amendments to, or waivers with respect to, this Indenture or the Notes shall be conclusive and binding on all Noteholders and on all future Noteholders, whether or not notation of such modifications, amendments or waivers is made 47 54 upon the Notes. Any instrument given by or on behalf of any Noteholder of a Note in connection with any consent to any such modification, amendment or waiver shall be irrevocable once given and shall be conclusive and binding on all subsequent Noteholders of such Note. Any amendment, waiver or modification consented to by the Noteholders shall not be effective unless each of the Rating Agencies has provided confirmation to the Issuer and the Indenture Trustee that such amendment, waiver or modification shall not result in the reduction or removal of the rating of any Class of the Notes affected by such amendment, waiver or modification. Section 13.03. Amendment of the Purchase and Servicing Agreement. Except as expressly provided otherwise in this Indenture, no amendment shall be made to the Purchase and Servicing Agreement that would adversely affect in any material respect the interests of the Noteholders or the Indenture Trustee unless the Majority Noteholders affected thereby or Indenture Trustee, as applicable, have consented to such amendment; provided, however, that such amendment shall be deemed to not adversely affect in any material respect the interests of the Noteholders (a) if each of the Rating Agencies has provided confirmation to the Issuer and the Indenture Trustee that such amendment or waiver shall not result in the reduction or removal of the rating of any class of the Notes or (b) if such amendment is necessary to maintain the ratings of the Notes. Section 13.04. Indenture Trustee. In accepting any additional trusts created by any modification of or amendment to this Indenture or the Notes, the Indenture Trustee shall be entitled to receive, and shall be fully protected in relying upon, an opinion of counsel stating that such modification or amendment is authorized or permitted by this Indenture. The Indenture Trustee may, but shall not be obligated to, enter into any such modified or amended Indenture or authenticate any such modified or amended Note, in either case that affects the Indenture Trustee's own rights, duties or immunities under this Indenture or otherwise. Section 13.05. Notes. Notes to be authenticated and delivered after the modification of, amendment to or waiver under this Indenture permitted by this Indenture may, and shall if required by the Indenture Trustee or the Noteholders thereof, bear a notation in the form approved by the Indenture Trustee and the Issuer as to any matter provided for in connection with such modification, amendment or waiver. If the Indenture Trustee or the Majority Noteholders shall so determine, new Notes so modified as to conform, in the opinion of the Indenture Trustee, the Majority Noteholders and the Issuer, to any such modification, amendment or waiver may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in connection with any registered transfer or exchange of Notes. [END OF ARTICLE XIII] 48 55 ARTICLE XIV MISCELLANEOUS Section 14.01. Notices. All notices and other communications provided under this Indenture shall be in writing (including telegraphic, telex, facsimile or cable communication) and shall be delivered in hand, mailed by United States certified or registered first class mail, sent by overnight courier, telegraphed, telexed, transmitted, telecopied or cabled: (a) If to the Issuer, to it at: Zale Funding Trust c/o Wilmington Trust Company, as Owner Trustee Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Telephone: (302) 651-1000 Telecopy: (302) 651-8882 with separate copies to: General Counsel and Secretary and Treasurer, Finance Department Zale Corporation 901 West Walnut Hill Lane Irving, Texas 75038 Telephone: (972) 580-4576 Telecopy: (972) 580-5238 (b) If to The Bank of New York, to it at: 101 Barclay Street 12th Floor East New York, New York 10286 Attention: Corporate Trust - Asset Backed Finance Unit, Telephone: (212) 815-2793 Telecopy: (212) 815-5544 49 56 (c) If to Moody's, to it at: Moody's Investor Services Inc. ABS Monitoring Department 99 Church Street New York, New York 10007 (d) If to Standard & Poor's, to it at: Standard & Poor's Ratings Group 55 Water Street New York, New York 10041 or, as to each such party, at such other address as shall be designated by such party in a written notice to the other party. All notices and other communications given under this Indenture in accordance with the provisions of this Indenture shall be deemed to have been given on the date of receipt. Except as set forth in Section 10.07 of this Indenture, the Indenture Trustee shall promptly forward to each Noteholder a copy of each notice it receives pursuant to this Indenture or any other Transaction Document. All such notices to Noteholders shall be given at the addresses set forth in the Note Register. In addition, upon the receipt thereof, the Indenture Trustee shall promptly forward to each Noteholder a copy of any proposed and final amendment, modification or waiver that the Indenture Trustee receives with respect to this Indenture or any other Transaction Document. In any case where notice to Noteholders is given by first-class mail, postage prepaid, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Noteholder shall affect the sufficiency of such notice with respect to any other Noteholder. Where this Indenture or any Note provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Section 14.02. No Waiver; Remedies Cumulative. No failure on the part of any party to this Indenture to exercise, and no delay by any such party in exercising, any right under this Indenture shall operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 14.03. Binding Effect. This Indenture shall become effective, as of the date first written above, when it shall have been executed by the Issuer and the Indenture Trustee. From and after the date this Indenture shall have so become effective, this Indenture shall be binding upon and inure to the benefit of the Issuer and the Indenture Trustee, and their respective successors and assigns; provided that, the Issuer shall not have the right to assign its rights under this Indenture or any interest in this Indenture without the prior written consent of the Indenture Trustee, and the Indenture Trustee shall not have the right to assign its rights under this Indenture or any interest in this Indenture without the prior written consent of the Issuer and the Majority Noteholders, except as may be otherwise expressly provided in Section 11.13 or 11.14 of this Indenture with respect to a successor Indenture Trustee. This Indenture is solely for the benefit of the parties hereto, their successors and permitted assigns and the Noteholders, and no other Person shall acquire or have any right hereunder or by virtue hereof. Upon the payment 50 57 in full of the Notes, the Issuer shall be entitled to the prompt return, upon its request and at its expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms of this Indenture, and upon such request the Indenture Trustee shall promptly reassign and deliver to the Issuer, or to such Person or Persons as the Issuer shall designate, against receipt, such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms of this Indenture, together with appropriate instruments of reassignment and release. Section 14.04. GOVERNING LAW. THIS INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS. Section 14.05. Headings. All section and subsection headings and the Table of Contents used in this Indenture are for convenience of reference only and shall not affect the construction or interpretation of this Indenture. Section 14.06. WAIVER OF JURY TRIAL. EACH PARTY TO THIS INDENTURE WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS INDENTURE. EACH PARTY TO THIS INDENTURE (1) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (2) ACKNOWLEDGES THAT IT AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS INDENTURE BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 14.06. Section 14.07. Severability. In the event any one or more of the provisions contained in this Indenture should be held invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby, and the parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid, legal and enforceable provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 14.08. No Petition in Bankruptcy. The Indenture Trustee covenants and agrees that it shall not institute against, or join any other Person in instituting against, the Issuer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. Section 14.09. Counterparts. This Indenture may be executed in one or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. 51 58 Section 14.10. Jurisdiction; Consent to Service of Process. Each party to this Indenture hereby irrevocably and unconditionally (1) submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Indenture, or for recognition or enforcement of any judgment arising out of or relating to this Indenture; (2) agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, federal court; (3) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law; (4) consents that any such action or proceeding may be brought in such courts and waives any objection it may now or hereafter have to the laying of venue of any such action or proceeding in any such court and any objection it may now or hereafter have that such action or proceeding was brought in an inconvenient court, and agrees not to plead or claim the same; (5) consents to service of process in the manner provided for notices in Section 14.01 of this Indenture (provided that, nothing in this Indenture shall affect the right of any such party to serve process in any other manner permitted by law); and (6) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any such action or proceeding any special, exemplary, punitive or consequential damages. Section 14.11. No Recourse. The obligations of the Issuer under this Indenture, the Notes and each other agreement, instrument, document or certificate executed and delivered or issued by the Issuer in connection herewith or therewith are solely the corporate obligations of the Issuer. Except as expressly provided for in Sections 7.03, 7.08 or 8.04(b) of the Trust Agreement, no recourse shall be had for the payment of any fee or any other obligations or claim arising out of or based upon this Indenture, the Notes or any other agreement, instrument, document or certificate executed and delivered or issued by the Issuer in connection herewith or therewith against any holder of a Trust Certificate, employee, officer, director, incorporator or agent of the Issuer or any Affiliate of the Issuer. Section 14.12. Limitation of Liability. It is expressly understood and agreed by the parties hereto that (a) this Indenture is executed and delivered by Wilmington Trust Company, not individually or personally but solely as the Owner Trustee of the Issuer under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, undertakings and agreements herein made on the part of the Issuer is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose of binding only the Issuer, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the Indenture Trustee and by any Person claiming by through or under the Indenture Trustee and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Indenture or the other Transaction Documents. 52 59 Section 14.13. Independent Investigation. Each of the Noteholders, by its purchase of the Notes, acknowledges that it has independently and without reliance upon any of the other Noteholders, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Issuer, the Seller and the Servicer, and made its own decision to enter into the Transaction Documents to which it is a party and to consummate the transactions contemplated thereby. Section 14.14. Institution of Insolvency Proceedings. The Issuer shall not, without the written consent of the Indenture Trustee, to be given only at the direction of not less than 66 2/3% of the holders of the outstanding principal amount of the Notes of all Series, institute proceedings to be adjudicated insolvent, or consent to the institution of any bankruptcy or insolvency case or proceedings against it, or file or consent to a petition under any applicable federal or state law relating to bankruptcy, seeking the Issuer's liquidation or reorganization or any other relief for the Issuer as debtor, or consent to the appointment of a receiver, liquidator, assignee, trustee, custodian or sequestrator (or other similar official) of the Issuer or a substantial part of its property, or make any assignment for the benefit of creditors, or admit in writing its inability to pay its debts generally as they become due, or take any action in furtherance of any such action. [END OF ARTICLE XIV] [SIGNATURE PAGE FOLLOWS] 53 60 IN WITNESS WHEREOF, each of the parties to this Indenture has caused this Indenture to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written. ZALE FUNDING TRUST By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee under the Amended and Restated Trust Agreement dated as of July 15, 1999 By /s/ JAMES P. LAWLER ------------------------------------- Name: -------------------------------- Title: ------------------------------- THE BANK OF NEW YORK, as Indenture Trustee and Securities Intermediary By /s/ ERWIN SORIANO ------------------------------------- Name: -------------------------------- Title: ------------------------------- [Signature page - Indenture] 54 61 EXHIBIT A Form of Class A Asset Backed Note UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC"), A NEW YORK CORPORATION, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE, AND TRANSFERS OF BENEFICIAL INTERESTS IN THIS NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO HEREIN. PRINCIPAL PAYMENTS OF THIS NOTE MAY BE MADE PRIOR TO THE SERIES TERMINATION DATE UNDER CERTAIN CONDITIONS AS SET FORTH IN THE INDENTURE REFERRED TO HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ZALE FUNDING TRUST CLASS A[ ]% ASSET BACKED NOTES No. 1 PRINCIPAL AMOUNT: $ ISSUANCE DATE: July 15, 1999 SERIES TERMINATION DATE: [ ] CLASS A NOTE RATE [ ]% Per Annum ZALE FUNDING TRUST (the "Issuer"), for value received, hereby promises to pay to Cede & Co., or its registered assigns, the principal amount of [ ] Dollars (as may be reduced by any payment of Monthly Principal), on the Series Termination Date. The Issuer agrees to pay the principal amount, if any, which is the Monthly Principal, on the fifteenth day of A-1 62 each calendar month or, if such fifteenth day is not a Business Day, the next succeeding Business Day (each, a "Payment Date"), commencing with the Amortization Commencement Date, until the outstanding principal amount hereof is paid or reduced to zero pursuant to the terms of the Indenture or payment therefor is made available pursuant to the Indenture (as referred to below). The Issuer further agrees to pay interest at the rate of [ ]% per annum (the "Class A Note Rate"), calculated on the basis of a 360-day year consisting of twelve 30-day months on each Payment Date, commencing with August 15, 1999, equal to the interest that accrued during the preceding Fixed Rate Interest Period on the principal balance of this Note outstanding during such calendar month after giving effect to payments of principal, if any, made on the preceding Payment Date. Interest on this Note will accrue from and including the 15th day of the month preceding the month in which such Payment Date occurs (or, in the case of the first Payment Date, from and including the Issuance Date) to and including the 14th day of the month in which such Payment Date occurs. Interest for any Payment Date due but not paid on such Payment Date will be due on the next succeeding Payment Date together with additional interest on such amount at the Class A Note Rate. The principal of, premium if any, and interest on this Note are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments made by the Issuer with respect to this Note shall be applied first to interest due and payable on this Note as provided above and then to the unpaid principal (and premium, if any) of this Note. This Note is one of the Notes referred to in the Indenture dated as of July [ ], 1999 (the "Indenture"), between the Issuer and The Bank of New York, as Indenture Trustee which, among other things contains provisions for the acceleration of the maturity hereof upon the occurrence of certain events, for the optional redemption of this Note by the Issuer and for the amendment or waiver of certain provisions of the Indenture, all upon the terms and conditions therein specified. Capitalized terms which are used herein that are not defined shall have the meaning assigned to such terms in the Indenture. Upon written request, the Indenture Trustee shall provide a copy of such Indenture to the holder of this Note. This Note shall not be subject to optional prepayment except as provided in the Indenture. A-2 63 EXHIBIT B [Reserved] B-1 64 EXHIBIT C [Reserved] C-1 65 EXHIBIT D [Reserved] D-1 66 EXHIBIT E to the Indenture [FORM OF NOTICE TO NOTEHOLDERS PURSUANT TO SECTION 10.03 OF THE INDENTURE] ZALE FUNDING TRUST TO: Holders of Zale Funding Trust Asset Backed Notes, Series [_______] Re: Event of Default Relating to Zale Funding Trust and Disposition of Trust Property THIS NOTICE CONTAINS IMPORTANT INFORMATION REGARDING ZALE FUNDING TRUST AND ZALE DELAWARE, INC. PLEASE READ THIS NOTICE CAREFULLY AND RETURN THE ATTACHED NOTEHOLDER INSTRUCTION TO THE INDENTURE TRUSTEE BY [DATE]. UNLESS THE TRUSTEE IS INSTRUCTED BY SUCH DATE BY HOLDERS OF A MAJORITY IN AGGREGATE PRINCIPAL AMOUNT OF THE ZALE FUNDING TRUST ASSET BACKED NOTES, SERIES [__] TO DISPOSE OF THE TRUST PROPERTY ALLOCABLE TO YOUR SERIES, THE TRUST PROPERTY WILL BE RETAINED AND NOT LIQUIDATED. [Describe circumstances of Zale Funding Trust Event of Default]. Section 10.03 of the Indenture under which the Notes were issued provides that the Trustee will sell the Trust Property allocable to a Series and distribute the proceeds thereof to the Noteholders of such Series if so instructed by a majority in principal amount of the Notes of such Series in the manner provided in the Indenture. If the net proceeds of the sale of such portion of the Trust Property are not sufficient to pay the Notes of your Series in full, Holders of one or more of the classes of Notes of your Series will fail to recover the outstanding principal amount of their Notes. Option A on the attached Noteholder Election Form is an instruction to the Trustee to retain the Trust Property. Option B on the attached Noteholder Election Form is an instruction to the Trustee to sell the Trust Property allocable to your Series and distribute the proceeds of such sale to the Noteholders of your Series in the manner provided in the Indenture. FAILURE TO RETURN THE ATTACHED NOTEHOLDER ELECTION FORM TO THE TRUSTEE BY [DATE], OR FAILURE TO SELECT EITHER OPTION A OR B ON THE ATTACHED NOTEHOLDER ELECTION FORM, WILL BE DEEMED TO BE A SELECTION OF OPTION A. E-1 67 NOTEHOLDER ELECTION FORM [ ] Option A -- The undersigned holder of Zale Funding Trust Asset Backed Notes, [Series 199_ - _] [20__-_] hereby instructs the Trustee to retain the Trust Property allocable to the Noteholder's Series. [ ] Option B -- The undersigned holder of Zale Funding Trust Asset Backed Notes, [Series 199__ - __] [20__-_] hereby instructs the Trustee to sell the Trust Property allocable to the Noteholder's Series and to distribute the net proceeds of such sale to the Noteholders of such Series in the manner provided in the Indenture. By: ---------------------------- Name of Noteholder E-2 68 EXHIBIT F [Reserved] F-1 69 EXHIBIT G [Reserved] G-1 70 EXHIBIT H to the Indenture (FORM OF ASSIGNMENT OF NOTE) ASSIGNMENT FOR VALUE RECEIVED, _______________ hereby sells, assigns, and transfers unto _____________________ Please insert Social Security or other identifying number of assignee: ------------------------- the attached Note of ZALE FUNDING TRUST (the "Issuer") standing in the name(s) of the undersigned in the Note Register maintained by the Indenture Trustee for the Issuer and does hereby irrevocably constitute and appoint _____________ Attorney to transfer such Note in such Note Register, with full power of substitution in the premises. This sale, assignment and transfer is made pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 144A promulgated thereunder, to a "qualified institutional buyer" as defined in such Rule 144A or pursuant to an exemption from registration under the Act pursuant to Rule 904 of Regulation S promulgated thereunder. Date: ------------------- ------------------------------ [Signature] Notice: The signature(s) to this assignment must correspond with the name(s) as written upon the face of the Note to be transferred in every particular without alteration or any change whatsoever. The signature(s) must be guaranteed by a commercial bank or trust company located, or having a correspondent location, in the City of New York or the city in which the corporate trust office of the Indenture Trustee is located, or by a member firm of a national securities exchange. Notarized or witnessed signatures are not acceptable as guaranteed signatures. H-1 71 Signature Guarantee: - ------------------------------------ Name of Institution - ------------------------------------ Authorized Officer H-2 72 [FORM OF TRANSFEROR LETTER] EXHIBIT I to the Indenture The Bank of New York, as Indenture Trustee under the Indenture Re: Zale Funding Trust Asset Backed Notes, Series [_____] Ladies and Gentlemen: In connection with our sale of the above-referenced notes (the "Notes") of Zale Funding Trust (the "Issuer"), we confirm that: (a) We reasonably believe that the purchaser of the Notes is a "qualified institutional buyer" as defined in Rule 144A under the Securities Act of 1933, as amended (the "Act"). (b) We, and any person acting on our behalf, have taken reasonable steps to ensure that the purchaser of the Notes is aware that we may rely on the exemption from the provisions of Section 5 of the Act provided by Rule 144A thereunder. (c) If the purchaser has made a request to us for information pursuant to Rule 144A(d)(4) under the Act, we confirm that the purchaser has received such information as has been provided by the Issuer in response to such request; it being understood that we make no representation as to whether such information complies with the requirements of such Rule. Very truly yours, [NAME OF INVESTOR] By: --------------------------- Name: Title: 73 [FORM OF TRANSFEREE LETTER] EXHIBIT J to the Indenture The Bank of New York, as Indenture Trustee under the Indenture Re: Zale Funding Trust Asset Backed Notes, Series [_______] Ladies and Gentlemen: In connection with our purchase of the above-referenced notes (the "Notes") of Zale Funding Trust (the "Issuer"), we hereby confirm that we are not an Affiliate (as such term is defined in the Indenture governing the Notes) of the Issuer. Very truly yours, [NAME OF TRANSFEREE) By: --------------------------- Name: Title: 74 EXHIBIT K Form of Certificate of Transferor (NonRule 144A/Rule 904 Transfer of Notes) [to come] 75 EXHIBIT L Form of Certificate of Transferee (NonRule 144A/Rule 904 Transfer of Notes) [to come] 76 EXHIBIT N Form of Collection Deposit Account Letter [to come] 77 SCHEDULE I [TO BE UPDATED] P.O. Boxes Zale Delaware, Inc. (Zales, Bailey & Outlet) P.O. Box 78102 Phoenix, AZ 85062-8102 (Gordon's) P.O. Box 78101 Phoenix, AZ 85062-8101 Collection Deposit Accounts Bank One, AZ 6010011963144 Collection Deposit Banks Bank One, AZ Phoenix, AZ Collection Account [TBD] Interest Sub-Account [TBD] Excess Funding Account [TBD] Optional Redemption Account [TBD] Concentration Accounts First Union Philadelphia, PA 2100012953658 Bank Boston Boston, MA 551-49011 78 SCHEDULE III UCC Filing Jurisdictions Texas Secretary of State Delaware Secretary of State EX-4.4 4 SERIES 1999 - A INDENTURE SUPPLEMENT 1 EXHIBIT 4.4 EXECUTION COPY ------------------------------------------------------------------- ZALE FUNDING TRUST Issuer and THE BANK OF NEW YORK Indenture Trustee and Securities Intermediary on behalf of the Series 1999-A Noteholders --------------------------------------------- SERIES 1999-A INDENTURE SUPPLEMENT Dated as of July 15, 1999 to INDENTURE Dated as of July 15, 1999 --------------------------------------------- ZALE FUNDING TRUST Floating Rate Class A Asset Backed Variable Funding Notes, Series 1999-A Class B Asset Backed Notes, Series 1999-A ------------------------------------------------------------------- 2 SERIES 1999-A INDENTURE SUPPLEMENT, dated as of July 15, 1999 (this "Supplement"), by and between ZALE FUNDING TRUST, a Delaware business trust (the "Issuer"), and THE BANK OF NEW YORK, a banking corporation organized and existing under the laws of the State of New York, not in its individual capacity, but solely as Indenture Trustee (the "Indenture Trustee") and Securities Intermediary (in such capacity, the "Securities Intermediary") under the Indenture, dated as of July 15, 1999 (the "Indenture"), by and between the Issuer, the Indenture Trustee and the Securities Intermediary. Section 2.22 of the Indenture provides, among other things, that the Issuer and the Indenture Trustee may at any time and from time to time enter into a supplement to the Indenture for the purpose of authorizing the issuance by the Issuer, for execution and redelivery to the Indenture Trustee for authentication, of one or more Series of Notes. Pursuant to this Supplement, the Issuer shall create a new Series of Investor Notes and shall specify the Principal Terms thereof. ARTICLE I CREATION OF THE SERIES 1999-A NOTES Section 1.01. Designation. There is hereby created a Series of Investor Notes to be issued pursuant to the Indenture and this Supplement to be known generally as the "Series 1999-A Notes." The Series 1999-A Notes shall be issued in two Classes, which shall be designated generally as the Floating Rate Class A Asset Backed Variable Funding Notes, Series 1999-A (the "Class A Notes") and the Class B Asset Backed Notes, Series 1999-A (the "Class B Notes"). The Class A Notes shall be substantially in the form of Exhibit A-1, and the Class B Notes shall be substantially in the form of Exhibit A-2. [END OF ARTICLE I] 3 ARTICLE II DEFINITIONS Section 2.01. Definitions. In the event that any term or provision contained herein shall conflict with or be inconsistent with any provision contained in the Indenture, the terms and provisions of this Supplement shall govern with respect to the Series 1999-A Notes. All Article, Section or subsection references herein shall mean Article, Section or subsections of this Supplement except as otherwise provided herein. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Indenture. Each capitalized term defined herein shall relate only to the Series 1999-A Notes and no other Series of Notes issued by the Trust. "Additional Interest" shall mean, at any time of determination, the sum of Class A Additional Interest and Class B Additional Interest. "Adjustment Payment Shortfall" shall mean, (a) with respect to any day during a Settlement Period, an amount equal to the product of (i) any adjustment payments which the Seller was required to make on such day pursuant to Section 2.06 of the Purchase and Servicing Agreement, times (ii) the Floating Allocation Percentage for such Settlement Period, and (b) with respect to any Settlement Period, an amount equal to the product of (i) any adjustment payments which the Seller was required to make during such Settlement Period pursuant to Section 2.06 of the Purchase and Servicing Agreement but failed to make on or prior to the last day of such Settlement Period, times (ii) the Floating Allocation Percentage as of the related Payment Date. "Administrative Agent" shall have the meaning specified in the Class A Purchase Agreement. "Agent" shall have the meaning specified in the Class A Purchase Agreement. "Amortization Date" shall mean the earliest to occur of (i) the date after [July 13], 2000 designated by the Issuer as the Amortization Date at any time upon seven (7) Business Days' written notice to the Agents, the Administrative Agent, the Indenture Trustee and the Servicer, (ii) the Early Amortization Commencement Date and (iii) the latest Purchase Termination Date, as such term is defined in the Class A Purchase Agreement. "Amortization Period" shall mean, with respect to Series 1999-A, an Early Amortization Period or a Controlled Amortization Period. "Available Series 1999-A Finance Charge Collections" shall have the meaning specified in subsection 4.06(a). "Base Rate" shall mean, with respect to any Settlement Period, the sum of (i) the average of the Class A Interest Rate and the Class B Interest Rate weighted by the unpaid principal amount of each respective Class of Notes, plus (ii) the Servicing Fee Rate, plus (iii) the Senior Class A Increased Costs Rate (if any). 2 4 "Carryover Class A Interest" shall mean, with respect to any Payment Date, (a) any Class A Interest due but not paid on any previous Payment Date plus (b) any Class A Additional Interest which is due and unpaid. "Carryover Class B Interest" shall mean, with respect to any Payment Date, (a) any Class B Interest due but not paid on any previous Payment Date plus (b) any Class B Additional Interest. "Carryover Interest" shall mean, with respect to any Payment Date, the sum of Carryover Class A Interest and Carryover Class B Interest. "Class A Additional Interest" shall have the meaning specified in subsection 4.03(b). "Class A Adjustment Payment Shortfall" shall mean, with respect to each Payment Date, an amount equal to the product of (a) the Class A Percentage for the related Settlement Period and (b) the Adjustment Payment Shortfall for such Settlement Period. "Class A Floating Allocation Percentage" shall mean, with respect to any Settlement Period, the percentage equivalent of a fraction, the numerator of which is the Class A Invested Amount as of (x) during a Revolving Period, the close of business on the last day of the immediately preceding Settlement Period (or, in the case of the first Settlement Period, the Class A Initial Invested Amount) and (y) during an Amortization Period or Partial Amortization Period (i) with respect to Collections of Finance Charges, the close of business on the last day of the most recent Revolving Period and (ii) with respect to the Investor Defaulted Amount, Invested Defaulted Amount Shortfall or the Adjustment Payment Shortfall, the close of business on the last day of the immediately preceding Settlement Period; provided, that with respect to any Settlement Period in which a Class A Note Principal Balance Increase or a Class A Special Reduction occurs, such numerator, on and after the date of such Class A Note Principal Balance Increase or a Class A Special Reduction, shall be the Class A Invested Amount on such date (after giving effect to the Class A Note Principal Balance Increase or the Class A Special Reduction, as applicable), and the denominator of which is the greater of (a) the total amount of Principal Receivables in the Trust and the amounts on deposit in the Excess Funding Account as of the close of business on such date (or, in the case of the first Settlement Period, the total amount of Principal Receivables in the Trust on the Closing Date) and (b) when used with respect to (x) Collections of Finance Charges during an Amortization Period or (y) Collections of Principal Receivables, the sum of the numerators with respect to all Classes of all Series then outstanding used to calculate the applicable allocation percentage. "Class A Increased Cost Amount" shall mean the aggregate amount, if any, payable by the Issuer pursuant to Sections 2.4 or 2.5 or subsection 2.6(c) of the Class A Purchase Agreement, together with any accrued and unpaid interest on such amount as provided therein. "Class A Initial Invested Amount" shall mean the aggregate initial principal amount of the Class A Notes, which is $250,000,000. "Class A Interest" shall mean the interest distributable in respect of the Class A Notes as calculated in accordance with subsection 4.03(a). 3 5 "Class A Interest Rate," with respect to any Interest Accrual Period, shall have the meaning specified in the Class A Purchase Agreement. "Class A Interest Shortfall" shall have the meaning specified in subsection 4.03(b). "Class A Invested Amount" shall mean, when used with respect to any date of determination, an amount equal to (a) the Class A Initial Invested Amount, plus (b) the aggregate amount of Class A Note Principal Balance Increases on or prior to such date, minus (c) the aggregate amount of principal payments made to Class A Noteholders prior to such date, minus (d) the aggregate amount of Class A Investor Charge-Offs for all prior Payment Dates, and plus (e) the sum of the aggregate amount allocated with respect to Class A Investor Charge-Offs and available on all prior Payment Dates pursuant to subsection 4.06(a)(vii) for the purpose of reinstating amounts reduced pursuant to the foregoing clause (d). "Class A Investor Charge-Offs" shall have the meaning specified in subsection 4.09(b). "Class A Investor Defaulted Amount" shall mean, with respect to each Payment Date, an amount equal to the product of (a) the Class A Percentage for the related Settlement Period and (b) the Defaulted Amount Shortfall for such Settlement Period. "Class A Mandatory Partial Amortization Amount" shall have the meaning specified in the Class A Purchase Agreement. "Class A Monthly Interest" shall have the meaning specified in the Class A Purchase Agreement. "Class A Note Principal Balance Increase" shall have the meaning set forth in subsection 7.04(a). "Class A Noteholder" shall mean the Person in whose name a Class A Note is registered in the Note Register. "Class A Noteholders' Interest" shall mean, with respect to any date, the portion of the Series 1999-A Noteholders' Interest evidenced by the Class A Notes. "Class A Notes" shall have the meaning specified in Section 1.01. "Class A Partial Amortization Principal" shall have the meaning specified in subsection 4.04(d). "Class A Percentage" shall mean (i) for any specified day, a fraction the numerator of which is the Class A Invested Amount and the denominator of which is the Series Invested Amount and (ii) for any specified period, a fraction, the numerator of which is the Weighted Average Class A Invested Amount for such period and the denominator of which is the Weighted Average Invested Amount for such period. "Class A Principal" shall have the meaning specified in subsection 4.04(b). 4 6 "Class A Principal Allocation Percentage" shall mean, with respect to any Settlement Period, the percentage equivalent of a fraction, the numerator of which is (a) during a Revolving Period, the Class A Invested Amount as of the close of business on the last day of the immediately preceding Settlement Period (or, in the case of the first Settlement Period, the Closing Date); provided, that with respect to any Settlement Period in which a Class A Note Principal Balance Increase or Class A Special Reduction occurs, such numerator, on and after the date of such Class A Note Principal Balance Increase or Class A Special Reduction, shall be the Class A Invested Amount on such date (after giving effect to the Class A Note Principal Balance Increase or Class A Special Reduction on such date), and (b) during an Amortization Period or Partial Amortization Period, the Class A Invested Amount as of the close of business on the last day of the most recent Revolving Period, and the denominator of which is the greater of (x) the sum of the total amount of Principal Receivables in the Trust and the principal amount on deposit in the Excess Funding Account as of the close of business on the last day of the immediately preceding Settlement Period (or, in the case of the first Settlement Period, the Closing Date) and (y) during an Amortization Period, the sum of the numerators used to calculate the principal allocation percentages for all Series outstanding as of the date as to which such determination is being made. "Class A Purchase Agreement" shall mean that certain Note Purchase Agreement dated as of July 15, 1999, among the Issuer, the Seller, the Servicer, the Agents, Class A Purchasers and the Administrative Agent named therein, as the same may be amended, supplemented, or modified from time to time. The Indenture Trustee shall not be bound by the provisions of the Class A Purchase Agreement and shall not be obligated to monitor the performance of or compliance with any of the terms of the Class A Purchase Agreement by any party thereto. "Class A Purchaser" shall have the meaning specified in the Class A Purchase Agreement. "Class A Required Amount" shall mean, with respect to each Payment Date, the amount determined by the Servicer equal to the excess, if any, of (a) the sum of (i) Class A Interest for the related Settlement Period, (ii) any Carryover Class A Interest, (iii) Senior Class A Increased Costs for the related Settlement Period and any Senior Class A Increased Costs previously due but not paid to the Class A Noteholders or the Agents on a prior Payment Date, (iv) the unpaid portion of the Indenture Trustee Fee for the related Settlement Period, (v) if JNB or an Affiliate of JNB is no longer the Servicer, the Class A Servicing Fee for the related Settlement Period, (vi) the Class A Investor Defaulted Amount Shortfall and (vii) the Class A Adjustment Payment Shortfall, over (b) the sum of (i) the Available Series 1999-A Finance Charge Collections plus (ii) any Excess Finance Charge Collections from other Series allocable to Series 1999-A (less, in each case, amounts allocated as Shared Principal Collections pursuant to 4.06(a)(v) or 4.06(a)(vi)), plus (iii) the amount applied to fund amounts described in clause (a) above on such Payment Date from the Reserve Account pursuant to Section 4.11. "Class A Servicing Fee" shall have the meaning specified in Section 3.01. "Class A Special Reduction Date" shall have the meaning specified in subsection 7.05(a). "Class A Special Reduction Notice" shall have the meaning specified in subsection 7.05(b). 5 7 "Class A Special Reduction Amount" shall have the meaning specified in subsection 7.05(b). "Class B Additional Interest" shall mean the amount of interest, if any, distributable in respect of the Class B Notes as calculated pursuant to a supplemental agreement entered into in accordance with Section 7.03. "Class B Adjustment Payment Shortfall" shall mean, with respect to each Payment Date, an amount equal to the product of (a) the Class B Percentage for the related Settlement Period and (b) the Adjustment Payment Shortfall for such Settlement Period. "Class B Enhancement Percentage" shall mean 33%. "Class B Floating Allocation Percentage" shall mean, with respect to any Settlement Period, the percentage equivalent of a fraction, the numerator of which is the Class B Invested Amount as of (x) during a Revolving Period, the close of business on the last day of the immediately preceding Settlement Period (or, in the case of the first Settlement Period, the Class B Initial Invested Amount) and (y) during an Amortization Period or Partial Amortization Period (i) with respect to Collections of Finance Charges, the close of business on the last day of the most recent Revolving Period and (ii) with respect to the Investor Defaulted Amount, Investor Defaulted Amount Shortfall or Adjustment Payment Shortfall, the close of business on the last day of the immediately preceding Settlement Period; provided, that with respect to any Settlement Period in which a Class B Note Principal Balance Increase or a Class B Special Reduction occurs, such numerator, on and after the date of such Class B Note Principal Balance Increase or date of such Class B Special Reduction, shall be the Class B Invested Amount on such date (after giving effect to the Class B Note Principal Balance Increase or the application of the Class B Special Reduction Amount on such date, as applicable), and the denominator of which is the greater of (a) the total amount of Principal Receivables in the Trust and the amounts on deposit in the Excess Funding Account as of the close of business on such date (or, in the case of the first Settlement Period, the total amount of Principal Receivables in the Trust on the Closing Date) and (b) when used with respect to (x) Collections of Finance Charges during an Amortization Period or (y) Collections of Principal Receivables, the sum of the numerators with respect to all Classes of all Series then outstanding used to calculate the applicable allocation percentage. "Class B Initial Invested Amount" shall mean the aggregate initial principal amount of the Class B Notes, which is $123,134,328.36. "Class B Interest" shall mean the interest, if any, distributable in respect of the Class B Notes as may be calculated pursuant to a supplemental agreement entered into in accordance with Section 7.03. "Class B Interest Rate" shall mean, with respect to any Interest Accrual Period, a per annum rate equal to 0%; provided, however such interest rate may be increased pursuant to the terms of a supplemental agreement entered into in accordance with Section 7.03. "Class B Interest Shortfall" shall have the meaning specified in Section 7.03. "Class B Invested Amount" shall mean, when used with respect to any date of determination, an amount equal to (a) the Class B Initial Invested Amount, minus (b) the 6 8 aggregate amount of principal payments made to Class B Noteholders prior to such date, minus (c) the aggregate amount of Class B Investor Charge-Offs for all prior Payment Dates, minus (d) the aggregate amount of Reallocated Class B Principal Collections for which the Class B Invested Amount has been reduced for all prior Payment Dates, and plus (e) the sum of the aggregate amount allocated with respect to Class B Investor Charge-Offs and available on all prior Payment Dates pursuant to subsection 4.06(a)(xi) for the purpose of reinstating amounts reduced pursuant to the foregoing clauses (c) and (d). "Class B Investor Charge-Offs" shall have the meaning specified in subsection 4.09(a). "Class B Investor Defaulted Amount" shall mean, with respect to each Payment Date, an amount equal to the product of (a) the Class B Percentage for the related Settlement Period and (b) the Investor Defaulted Amount Shortfall for such Settlement Period. "Class B Note Principal Balance Increase" shall have the meaning set forth in subsection 7.04(d). "Class B Noteholder" shall mean the Person in whose name a Class B Note is registered in the Note Register. "Class B Noteholders' Interest" shall mean, with respect to any date, the portion of the Series 1999-A Noteholders' Interest evidenced by the Class B Notes. "Class B Notes" shall have the meaning specified in Section 1.01. "Class B Partial Amortization Principal" shall have the meaning assigned in Section 4.04(e). "Class B Percentage" shall mean (i) for any specified day, a fraction the numerator of which is the Class B Invested Amount and the denominator of which is the Series Invested Amount and (ii) for any specified period, a fraction, the numerator of which is the Weighted Average Class B Invested Amount for such period and the denominator of which is the Weighted Average Invested Amount for such period. "Class B Principal" shall have the meaning specified in subsection 4.04(c). "Class B Principal Allocation Percentage" shall mean with respect to any Settlement Period, the percentage equivalent of a fraction, the numerator of which is (a) during a Revolving Period, the Class B Invested Amount as of the close of business on the last day of the immediately preceding Settlement Period (or, in the case of the first Settlement Period, the Closing Date); provided, that with respect to any Settlement Period in which a Class B Note Principal Balance Increase or a Class B Special Reduction occurs, such numerator, on and after the date of such Class B Note Principal Balance Increase or a Class B Special Reduction Date, shall be the Class B Invested Amount on such date (after giving effect to the Class B Note Principal Balance Increase or the application of the Class B Special Reduction Amount on such date, as applicable), and (b) during an Amortization Period or Partial Amortization Period, the Class B Invested Amount as of the close of business on the last day of the most recent Revolving Period, and the denominator of which is the greater of (x) the sum of the total amount of Principal Receivables in the Trust and the principal amount on deposit in the Excess Funding 7 9 Account as of the close of business on the last day of the immediately preceding Settlement Period (or, in the case of the first Settlement Period, the Closing Date) and (y) during an Amortization Period, the sum of the numerators used to calculate the principal allocation percentages for all Series outstanding as of the date as to which such determination is being made. "Class B Servicing Fee" shall have the meaning specified in Section 3.01. "Class B Special Reduction Date" shall mean the date of the first Class A Special Reduction, if such Class A Special Reduction occurs on or prior to October 15, 1999. "Class B Special Reduction Amount" shall mean the product of (i) the lesser of (A) the Class A Special Reduction Amount and (B) the excess, if any, of the Class A Invested Amount on the Class B Special Reduction Date (determined prior to giving effect to any reduction of the Invested Amount on such date) over $150,000,000, times (ii) a fraction, the numerator of which equals the Class B Enhancement Percentage and the denominator of which equals 100% minus the Class B Enhancement Percentage. "Closing Date" shall mean July 15, 1999. "Controlled Amortization Period" shall, unless the Early Amortization Commencement Date shall have occurred prior thereto, mean the period commencing with the Amortization Date and ending on the first to occur of (a) the date on which the Series Invested Amount is paid in full and (ii) the Series 1999-A Termination Date. "Early Amortization Commencement Date" shall mean the date on which an Early Amortization Event occurs or is deemed to have occurred pursuant to Section 10.01 of the Indenture or a Series 1999-A Early Amortization Event is deemed to occur pursuant to Section 6.01. "Early Amortization Period" shall mean the period beginning on the Early Amortization Commencement Date, and ending on the earlier of (i) the date on which the Series Invested Amount has been paid in full and (ii) the Series 1999-A Termination Date. "Excess Finance Charge Collections" shall mean, with respect to any Payment Date, as the context requires, either (x) the amount described in subsection 4.06(a)(xv) allocated to the Series 1999-A Notes but available to cover shortfalls in amounts paid from Collections of Finance Charges for other Series, if any or (y) the aggregate amount of Collections of Finance Charges allocable to other Series in excess of the amounts necessary to make required payments with respect to such Series, if any, and available to cover shortfalls with respect to the Series 1999-A Notes. "Floating Allocation Percentage" shall mean, with respect to any date of determination, the sum of the Class A Floating Allocation Percentage and the Class B Floating Allocation Percentage on such date. "Increase Date" shall have the meaning set forth in subsection 7.04(b). "Increase Notice" shall have the meaning set forth in subsection 7.04(b). 8 10 "Indenture Trustee Fee" shall have the meaning specified in Section 3.02. "Initial Invested Amount" shall mean the sum of the Class A Initial Invested Amount and the Class B Initial Invested Amount. "Interest Accrual Period" shall mean, with respect to a Payment Date, the period from and including the preceding Payment Date to and excluding such Payment Date; provided, however, that the initial Interest Accrual Period shall be the period from the Closing Date to and excluding the first Payment Date. "Investor Charge-Offs" shall mean the sum of Class A Investor Charge-Offs and Class B Investor Charge-Offs. "Investor Defaulted Amount" shall mean, with respect to any Settlement Period, an amount equal to the product of the Defaulted Amount and the Floating Allocation Percentage as of the related Payment Date. "Investor Defaulted Amount Shortfall" shall mean, (a) with respect to any day during a Settlement Period, an amount equal to the product of (i) the excess, if any, of the Defaulted Amount for such day over the Issuer Amount on such day (after giving effect to any changes in the Issuer Amount on such day), times (ii) the Floating Allocation Percentage for such Settlement Period, and (b) with respect to a Settlement Period, the excess, if any, of the Defaulted Amount for such Settlement Period over the Issuer Amount on the last day of such Settlement Period (after giving effect to any changes in the Issuer Amount on such day), times (ii) the Floating Allocation Percentage for such Settlement Period. "Investor Noteholder" shall mean the holder of record of an Investor Note. "Investor Notes" shall mean the Class A Notes and the Class B Notes. "Issuance Date" shall mean the Closing Date. "Issuer Retained Notes" shall mean investor Notes of any Series, including the Class B Notes, which the Issuer retains, but only to the extent that and for so long as the Issuer is the holder of such Notes. "Issuer's Percentage" shall mean 100% minus (a) the Floating Allocation Percentage, when used at any time with respect to Finance Charge Collections and Defaulted Receivables, and (b) the Principal Allocation Percentage, when used at any time with respect to Principal Receivables. "Legal Final Maturity Date" shall mean the seventy-second Payment Date which follows the Amortization Date. "Monthly Servicing Fee" shall have the meaning specified in Section 3.01. "Partial Amortization Amount" shall have the meaning specified in Section 7.02. "Partial Amortization Notice" shall have the meaning specified in Section 7.02. 9 11 "Partial Amortization Period" shall mean the period from and including the date specified in the first sentence of Section 7.02, to and including the earlier to occur of (a) the day during a Settlement Period on which Collections of Principal Receivables have been allocated to the Investor Noteholders (after taking into account the aggregate amount of Collections of Principal Receivables allocated to Investor Noteholders during any previous Settlement Period in the related Partial Amortization Period) in an amount equal to the Partial Amortization Amount during such Partial Amortization Period and (b) the day immediately preceding the Amortization Date. "Partial Expiration Event" shall have the meaning specified in the Class A Purchase Agreement. "Payment Date" shall mean August 16, 1999 and the fifteenth day of each month thereafter, or if such day is not a Business Day, the next succeeding Business Day. "Portfolio Yield" shall mean for the Series 1999-A Notes, with respect to any Settlement Period, the annualized percentage equivalent of a fraction, the numerator of which is an amount equal to the sum of (i) the aggregate amount of Available Series 1999-A Finance Charge Collections for such Settlement Period, (ii) Investment Proceeds and (iii) Recoveries, including without limitation, sales tax recoveries, minus the aggregate Investor Defaulted Amount for such Settlement Period and the Series Allocation Percentage of any adjustment payments required to be made by the Issuer pursuant to Section 2.06 of the Purchase and Servicing Agreement but not made on or prior to the related Payment Date, and the denominator of which is the Weighted Average Invested Amount as of the last day of the preceding Settlement Period. "Principal Allocation Percentage" shall mean, with respect to any date of determination, the sum of the Class A Principal Allocation Percentage and the Class B Principal Allocation Percentage on such date. "Principal Shortfalls" shall mean, on any Payment Date, (i) for Series 1999-A, the Class A Invested Amount if the Class A Notes are then receiving principal payments after the application of Collections of Principal Receivables on such Payment Date, plus the Class B Invested Amount if the Class B Notes are then receiving principal payments after the application of Collections of Principal Receivables on such Payment Date or (ii) for any other Series, the amounts specified as such in the Indenture Supplement for such other Series; provided that (a) for any Payment Date during a Revolving Period, the Principal Shortfall for Series 1999-A shall be zero, and (b) for any Payment Date during a Partial Amortization Period, the Principal Shortfall for Series 1999-A shall equal (x) the Class A Mandatory Partial Amortization Amount, if any, and otherwise (y) zero or such higher amount, not exceeding the Class A Invested Amount, as shall have been specified as the Principal Shortfall for Series 1999-A by the Issuer by notice to the Servicer and the Indenture Trustee not later than the Business Day preceding the Determination Date for such Payment Date. "Rating Agency" shall mean Standard & Poor's and Moody's. "Reallocated Principal Collections" shall have the meaning specified in Section 4.08. 10 12 "Reassignment Amount" shall mean, with respect to any Payment Date, after giving effect to any deposits and distributions otherwise to be made on such Payment Date, the sum of (i) the Series Invested Amount on such Payment Date, plus (ii) the sum of the Class A Interest and Class B Interest for such Payment Date, plus (iii) the amount of Carryover Interest, if any, plus (iv) the Class A Increased Cost Amount. "Required Amount" shall have the meaning specified in Section 4.07. "Required Issuer Percentage" shall mean 0%. "Reserve Account" means the account established pursuant to Section 4.11. "Reserve Account Funding Event" shall mean a reduction of Moody's senior implied issuer rating (if such rating is being maintained at such time) of Zale Corporation to below "B1." "Reserve Account Required Balance" shall mean, on any date of determination, (i) if a Reserve Account Funding Event shall have occurred and be continuing, 0.50% of the Series Invested Amount on such date, and (ii) otherwise, zero. "Revolving Period" shall mean (a) the period from and including the Closing Date to, but not including, the earlier of (i) the commencement of a Partial Amortization Period and (ii) the Amortization Date, and (b) each period, if any, from, but not including, the last day of the immediately preceding Partial Amortization Period which did not end on the Amortization Date to, but not including, the earlier of (i) the commencement of a Partial Amortization Period and (ii) the Amortization Date. "Senior Class A Increased Costs" shall mean, with respect to a Payment Date, the Class A Increased Costs for such Payment Date, to the extent such Class A Increased Costs may be paid pursuant to subsection 4.06(a)(ii) hereof without regard to any insufficiency of the amount of Available Series 1999-A Finance Charge Collections. "Senior Class A Increased Costs Rate" shall mean, with respect to a Settlement Period, the annualized percentage equivalents of a fraction, the numerator of which equals the Senior Class A Increased Costs for the related Payment Date, and the denominator of which is the Weighted Average Class A Investor Interest for such Settlement Period. "Series Allocable Finance Charge Collections" shall mean, with respect to the Series 1999-A Notes for any Settlement Period, the product of the Series Allocation Percentage and the amount of the Finance Charge Collections with respect to such Settlement Period. "Series Allocable Principal Collections" shall mean, with respect to the Series 1999-A Notes for any Settlement Period, the product of the Series Allocation Percentage and the amount of the Principal Collections with respect to such Settlement Period. "Series Allocation Percentage" shall mean, as of any date of determination, the percentage equivalent of a fraction, the numerator of which is the Series Invested Amount and the denominator of which is the invested amounts of all then outstanding Series. 11 13 "Series Invested Amount" shall mean, when used with respect to any date of determination, an amount equal to the sum of (a) the Class A Invested Amount as of such date and (b) the Class B Invested Amount as of such date. "Series Required Issuer Amount" shall mean an amount equal to the product of the Series Invested Amount and the Required Issuer Percentage. "Series 1999-A" shall mean the Series of the Zale Funding Trust represented by the Series 1999-A Notes. "Series 1999-A Early Amortization Event" shall have the meaning specified in Section 6.01. "Series 1999-A Noteholder" shall mean the holder of record of any Series 1999-A Investor Note. "Series 1999-A Noteholders' Interest" shall have the meaning specified in Section 4.01. "Series 1999-A Notes" shall have the meaning specified in Section 1.01. "Series 1999-A Termination Date" shall mean the earlier to occur of (i) the day after the Payment Date on which the Series 1999-A Notes are paid in full, and (ii) the Legal Final Maturity Date. "Servicing Base Amount" shall have the meaning specified in Section 3.01. "Servicing Fee Rate" shall mean 2% per annum. "Shared Principal Collections" shall mean, as the context requires, either (a) the amount allocated to the Series 1999-A Notes which, in accordance with Section 4.04 and subsection 4.06(b), may be applied in accordance with Section 4.05 of the Indenture or (b) the amounts allocated to the Notes (other than Issuer Retained Notes) of other Series which the applicable Supplements for such Series specify are to be treated as "Shared Principal Collections" and which may be applied to cover Principal Shortfalls with respect to the Series 1999-A Notes. "Special Reduction" shall have the meaning specified in subsection 7.05(a). "Weighted Average Class A Invested Amount" shall mean, with respect to any period, the sum of the Class A Invested Amount outstanding at the close of business on each day during such period divided by the actual number of days in such period. "Weighted Average Class B Invested Amount" shall mean, with respect to any period, the sum of the Class B Invested Amount outstanding at the close of business on each day during such period divided by the actual number of days in such period. "Weighted Average Invested Amount" shall mean, with respect to any period, the sum of the Series Invested Amount outstanding at the close of business on each day during such period divided by the actual number of days in such period. [END OF ARTICLE II] 12 14 ARTICLE III SERVICER Section 3.01. Servicing Compensation. The share of the Servicing Fee allocable to the Series 1999-A Noteholders with respect to any Payment Date (the "Monthly Servicing Fee") shall be equal to one-twelfth of the product of (a) the Servicing Fee Rate and (b) (i) the Weighted Average Invested Amount for the Settlement Period preceding such Payment Date, minus (ii) the product of (A) the sum of the amount, if any, on deposit in the Excess Funding Account as of the close of business on each day during such Settlement Period divided by the actual number of days in such Settlement Period and (B) the Floating Allocation Percentage with respect to such Settlement Period (the amount calculated pursuant to this clause (b) is referred to as the "Servicing Base Amount"), provided, however, that with respect to the first Payment Date, the Monthly Servicing Fee shall be equal to the product of (a) the Servicing Fee Rate, (b) the Servicing Base Amount and (c) a fraction, the numerator of which is 16 and the denominator of which is 360. The share of the Monthly Servicing Fee allocable to the Class A Noteholders with respect to any Payment Date (the "Class A Servicing Fee") shall be equal to one-twelfth of the product of (a) the Class A Percentage for the Settlement Period immediately preceding such Payment Date, (b) the Servicing Fee Rate and (c) the Servicing Base Amount; provided, however, that with respect to the first Payment Date, the Class A Servicing Fee shall be equal to the product of (a) the Class A Percentage for the Settlement Period preceding such Payment Date, (b) the Servicing Fee Rate, (c) the Servicing Base Amount and (d) a fraction, the numerator of which is 16 and the denominator of which is 360. The share of the Monthly Servicing Fee allocable to the Class B Noteholders with respect to any Payment Date (the "Class B Servicing Fee") shall be equal to one-twelfth of the product of (a) the Class B Percentage for the Settlement Period preceding such Payment Date, (b) the Servicing Fee Rate and (c) the Servicing Base Amount; provided, however, that with respect to the first Payment Date, the Class B Monthly Servicing Fee shall be equal to the product of (a) the Class B Percentage for the Settlement Period preceding such Payment Date, (b) the Servicing Fee Rate, (c) the Servicing Base Amount and (d) a fraction, the numerator of which is 16 and the denominator of which is 360. The remainder of the Servicing Fee shall be paid by the Issuer or the Noteholders of other Series (as provided in the related Indenture Supplements) and in no event shall the Indenture Trustee or the Series 1999-A Noteholders be liable for the share of the Servicing Fee to be paid by the Issuer or the Noteholders of any other Series. The Monthly Class A Servicing Fee shall be payable to the Servicer solely to the extent amounts are available for distribution in respect thereof pursuant to subsection 4.06(a)(iv) and (xiv). Section 3.02. Indenture Trustee Fee. The share of the regular annual fee of the Indenture Trustee allocable to the Series 1999-A Noteholders with respect to any Payment Date (the "Indenture Trustee Fee") shall be equal to one-twelfth of such regular annual fee (as agreed upon in writing from time to time by the Issuer, the Seller and the Indenture Trustee), times the Floating Allocation Percentage with respect to such Settlement Period, provided, however, that with respect to the first Payment Date, the Indenture Trustee Fee shall be equal to (a) such regular annual fee, times (b) the Floating Allocation Percentage with respect to such Settlement Period, times (c) a fraction, the numerator of which is 16 and the denominator of which is 360. The share of the Indenture Trustee Fee allocable to the Class A Noteholders with respect to any Payment Date shall be equal to the Indenture Trustee Fee for such Payment Date times the Class A Percentage for the Settlement Period immediately preceding such Payment Date, and the share 13 15 of the Indenture Trustee Fee allocable to the Class B Noteholders with respect to any Payment Date shall be equal to the Indenture Trustee Fee for such Payment Date times the Class B Percentage for the Settlement Period immediately preceding such Payment Date. The remainder of the Servicing Fee shall be paid by the Issuer or the Noteholders of other Series (as provided in the related Indenture Supplements) and in no event shall the Series 1999-A Noteholders be liable for the share of the portion of the annual fee payable to the Indenture Trustee to be paid by the Issuer or the Noteholders of any other Series. The Indenture Trustee Fee shall be payable to the Indenture Trustee solely to the extent amounts are available for distribution in respect thereof pursuant to subsection 4.06(a)(iii), and otherwise no Series 1999-A Noteholder shall have any liability with respect thereto. [END OF ARTICLE III] 14 16 ARTICLE IV RIGHTS OF NOTEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS Section 4.01. Rights of Noteholders. The indebtedness represented by the Series 1999-A Notes shall include the right of the Series 1999-A Noteholders to receive, to the extent necessary to make the required payments with respect to such Series 1999-A Notes at the times and in the amounts specified in this Supplement, the sum of (a) the Floating Allocation Percentage and the Principal Allocation Percentage (as applicable from time to time) of amounts available in the Collection Account and (b) funds allocable to the Series 1999-A Notes on deposit in the Excess Funding Account (such sum, the "Series 1999-A Noteholders' Interest"). The Class B Invested Amount shall be subordinated to the Class A Notes, to the extent provided in this Article IV. The Class B Notes will not have the right to receive payments of principal until the Class A Invested Amount has been paid in full, other than payments of the Class B Special Reduction Amount during a Partial Amortization Period as provided in this Supplement. Section 4.02. Collections and Allocation; Payments on Trust Certificate. (a) Collections. The Servicer will apply, or will instruct the Indenture Trustee to apply, all funds on deposit in the Collection Account and the Excess Funding Account allocable to the Series 1999-A Notes as described in this Article IV. (b) Payments to the Issuer. On each day funds are deposited into the Collection Account, the Servicer shall withdraw from the Collection Account and pay to the Issuer the following amounts: (i) an amount equal to the Issuer's Percentage for the related Settlement Period of Series Allocable Finance Charge Collections to the extent such amount is deposited in the Collection Account; and (ii) an amount equal to the Issuer's Percentage for the related Settlement Period of Series Allocable Principal Collections deposited in the Collection Account, if the Issuer's Interest on such day is greater than the Series Required Issuer Amount (after giving effect to all Principal Receivables Transferred to the Trust on such day). The withdrawals to be made from the Collection Account pursuant to this Section 4.02(b) do not apply to deposits into the Collection Account that do not represent Collections, including proceeds from the sale, disposition or liquidation of Receivables pursuant to Section 9.02 or 10.03 of the Indenture. (c) Allocations. The Servicer will apply, or will instruct the Indenture Trustee to apply, all collections and other funds on deposit in the Collection Account that are allocated to the Investor Notes as follows: 15 17 (i) Daily Allocations During a Revolving Period. During a Revolving Period, the Servicer shall, prior to the close of business on any Date of Processing, allocate the following amounts as set forth below: (x) Allocate to the Investor Noteholders and retain in the Collection Account an amount equal to the product of (i) the Floating Allocation Percentage and (ii) the aggregate amount of Collections of Finance Charges on such Date of Processing, provided, however, that, with respect to each Settlement Period, such amount shall only be allocated until such time as the amount retained in the Collection Account equals the amount of (i) Class A Interest (based on the rate on which Class A Interest is calculated on such day), Class B Interest and Carryover Interest, if any, (ii) the Class A Increased Cost Amount, if any (based, if applicable, on the rate at which the Class A Increased Cost Amount is calculated on such day), (iii) at any time that JNB or an Affiliate of JNB is not the Servicer, the Servicing Fee, due on the next Payment Date, (iv) the Investor Defaulted Amount Shortfall due on the next Payment Date and (v) the Investor Uncovered Dilution Amount due on the next Payment Date; provided further, however, that if any rate at which any amounts described in clause (i) or (ii) of the preceding proviso shall change during such Settlement Period, the amount required to be allocated and retained pursuant to this subsection 4.02(c)(i)(x) shall be appropriately adjusted. (y) Allocate to the Investor Noteholders an amount equal to the product of (A) the Principal Allocation Percentage on such Date of Processing and (B) the aggregate amount of Collections of Principal Receivables on such Date of Processing and, after satisfaction of any requirements of Section 4.08, if any other Principal Sharing Series are outstanding and in their Accumulation Period or Amortization Period, apply such amount as Shared Principal Collections to the extent necessary, and then pay any remaining amount to the Trust; provided, however, that the amount to be paid to the Trust pursuant to this subsection 4.02(c)(i)(y) on any Date of Processing shall be paid to the Trust only if the Issuer's Interest on such Date of Processing is greater than the Series Required Issuer Amount (after giving effect to all Principal Receivables transferred to the Trust on such day) and otherwise shall be deposited in the Excess Funding Account to the extent of the difference between the Issuer's Interest and the Series Required Issuer Amount. (ii) Daily Allocations During an Amortization Period or Partial Amortization Period. During an Amortization Period or any Partial Amortization Period, the Servicer shall, prior to the close of business on any Date of Processing, allocate the following amounts as set forth below: 16 18 (x) Allocate to the Investor Noteholders and retain in the Collection Account an amount equal to the product of (A) the Floating Allocation Percentage on such Date of Processing and (B) the aggregate amount of Collections of Finance Charges on such Date of Processing. (y) Allocate to the Investor Noteholders and retain in the Collection Account an amount equal to the product of (A) the Principal Allocation Percentage on such Date of Processing and (B) the aggregate amount of Collections of Principal Receivables on such Date of Processing; provided, however, that (I) during a Partial Amortization Period so long as the Amortization Date has not occurred, after the date on which an amount of such Collections equal to the sum of the Partial Amortization Amount plus the Class B Special Reduction Amount (if any) has been deposited into the Collection Account and allocated to the Investor Noteholders and any requirements of Section 4.08 are satisfied, and (II) from and after the Amortization Date, after the date on which an amount of such Collections equal to the Series Invested Amount has been deposited into the Collection Account and allocated to the Investor Noteholders and any requirements of Section 4.08 are satisfied, the amount determined in accordance with this subsection 4.02(c)(ii)(y) shall be first, if any other Principal Sharing Series is outstanding and in its Accumulation Period or Amortization Period, retained in the Collection Account for application, to the extent necessary, as Shared Principal Collections on the related Payment Date, and, second, shall be paid to the Trust only if the Issuer's Interest on such Date of Processing is greater than the Series Required Issuer Amount (after giving effect to all Principal Receivables transferred to the Trust on such day) and otherwise shall be deposited in the Excess Funding Account to the extent of the difference between the Issuer's Interest and the Series Required Issuer Amount. (d) Notwithstanding anything to the contrary in this Section 4.02, if on any date the aggregate amount of Principal Receivables is less than the Required Minimum Principal Balance, all Collections of Principal Receivables on such date shall, unless such Collections are to be retained in the Collection Account, be deposited in the Excess Funding Account in a sufficient amount such that, after giving effect to such deposits, the aggregate amount of Principal Receivables plus the amount so deposited equals or exceeds the Required Minimum Principal Balance on such date. The allocations to be made pursuant to this Section 4.02 also apply to deposits into the Collection Account that are treated as Collections, including adjustment payments made in accordance with Section 2.06 of the Purchase and Servicing Agreement, payment of the reassignment price pursuant to Section 2.05 or subsection 6.10(c) of the Purchase and Servicing Agreement and proceeds from the sale, disposition or liquidation of the Receivables pursuant to 17 19 Sections 9.02 of the Indenture. Such deposits to be treated as Collections will be allocated as Finance Charges or Principal Receivables as provided in the Purchase and Servicing Agreement. Section 4.03. Determination of Monthly Interest for the Series 1999-A Notes. (a) The amount of monthly interest allocable to the Class A Notes with respect to any Interest Accrual Period shall be the Class A Monthly Interest. (b) On the Determination Date preceding each Payment Date, the Servicer shall determine an amount (the "Class A Interest Shortfall") equal to the excess, if any, of (x) the Class A Monthly Interest for the Interest Accrual Period applicable to the Payment Date over (y) the amount available to be paid to the Class A Noteholders in respect of interest on such Payment Date. If there is a Class A Interest Shortfall with respect to any Payment Date, an additional amount ("Class A Additional Interest") shall be payable as provided herein with respect to the Class A Notes on each Payment Date following such Payment Date, to and including the Payment Date on which such Class A Interest Shortfall is paid to Class A Noteholders, at the applicable rate or rates specified in the Class A Purchase Agreement. Notwithstanding anything to the contrary herein, Class A Additional Interest shall be payable or distributed to Class A Noteholders only to the extent permitted by applicable law. Section 4.04. Determination of Principal Amounts. (a) No later than 1:00 p.m. (New York City time) on the Legal Final Maturity Date, the Issuer shall deposit funds into the Collection Account in the amounts required to pay to the Series 1999-A Noteholders the Series Invested Amount in accordance with Section 5.01. (b) The amount of principal (the "Class A Principal") to be deposited into the Collection Account with respect to the Class A Notes on each Payment Date with respect to an Amortization Period shall be equal to an amount calculated by the Servicer as follows: the sum of (i) an amount equal to the product of the Principal Allocation Percentage and the aggregate amount of Collections of Principal Receivables with respect to the preceding Settlement Period, (ii) any amount on deposit in the Excess Funding Account allocated to the Class A Notes pursuant to subsection 4.06(d) with respect to the preceding Settlement Period, (iii) the amount, if any, allocated to the Class A Notes pursuant to subsections 4.06(a)(v), (vi) and (vii), and (iv) the amount of Shared Principal Collections allocated to the Class A Notes with respect to the preceding Settlement Period pursuant to Section 4.05 of the Indenture; provided, however, that (i) with respect to any Payment Date, Class A Principal shall not exceed the Class A Invested Amount and (ii) with respect to the Legal Final Maturity Date, the Class A Principal shall be an amount equal to the Class A Invested Amount. (c) The amount of principal (the "Class B Principal") to be deposited into the Collection Account with respect to the Class B Notes on each Payment Date with respect to an Amortization Period shall equal an amount calculated by the Servicer as follows: the sum of (i) an amount equal to the product of the Class B 18 20 Principal Allocation Percentage and the aggregate amount of Collections of Principal Receivables with respect to the preceding Settlement Period, (ii) any amount on deposit in the Excess Funding Account allocated to the Class B Notes pursuant to subsection 4.06(d) with respect to the preceding Settlement Period, (iii) the amount, if any, allocated to the Class B Notes pursuant to subsections 4.06(a)(xi), (xii) and (xiii) with respect to such Payment Date, and (iv) the amount of Shared Principal Collections allocated to the Class B Notes with respect to the preceding Settlement Period pursuant to Section 4.05 of the Indenture on and after the date on which the Class A Invested Amount is paid in full; provided, however, that (i) prior to the date on which the Class A Invested Amount is paid in full, the Class B Principal shall equal zero, (ii) with respect to any Payment Date, Class B Principal shall not exceed the Class B Invested Amount and (iii) with respect to the Legal Final Maturity Date, the Class B Principal shall be an amount equal to the Class B Invested Amount. (d) The amount of principal (the "Class A Partial Amortization Principal") to be deposited into the Collection Account with respect to the Class A Notes on each Payment Date with respect to a Partial Amortization Period shall be equal to the lesser of (i) the Partial Amortization Amount for such Partial Amortization Period, and (ii) an amount calculated by the Servicer as follows: the sum of (A) an amount equal to the product of the Principal Allocation Percentage and the aggregate amount of Collections of Principal Receivables with respect to the preceding Settlement Period, (B) any amount on deposit in the Excess Funding Account allocated to the Class A Notes pursuant to subsection 4.06(d) with respect to the preceding Settlement Period, (C) the amount, if any, allocated to the Class A Notes pursuant to subsections 4.06(a)(v), (vi) and (vii), and (D) the amount of Shared Principal Collections allocated to the Class A Notes with respect to the preceding Settlement Period pursuant to Section 4.05 of the Indenture, over (B) the Class B Special Reduction Amount (if any); provided, however, that with respect to any Payment Date, the Class A Partial Amortization Principal shall not exceed the Class A Invested Amount. (e) The amount of principal (the "Class B Partial Amortization Principal") to be deposited into the Collection Account with respect to the Class B Notes on each Payment Date with respect to a Partial Amortization Period shall be equal to the lesser of (i) the Class B Special Reduction Amount, if any, for such Partial Amortization Period, and (ii) an amount calculated as follows: the sum of (A) an amount equal to the product of the Class B Principal Allocation Percentage and the aggregate amount of Collections of Principal Receivables with respect to the preceding Settlement Period, (B) any amount on deposit in the Excess Funding Account allocated to the Class B Notes pursuant to subsection 4.06(d) with respect to the preceding Settlement Period, (C) the amount, if any, allocated to the Class B Notes pursuant to subsections 4.06(a)(xi), (xii) and (xiii), and (D) the amount of Shared Principal Collections allocated to the Class B Notes with respect to the preceding Settlement Period pursuant to Section 4.05 of the Indenture; provided, however, that with respect to any Payment Date, the Class B Partial Amortization Principal shall not exceed the Class B Invested Amount. 19 21 Section 4.05. Shared Principal Collections. Shared Principal Collections allocated to the Series 1999-A Notes and to be applied pursuant to subsections 4.04(b), (c) and (d) shall mean an amount equal to the product of (x) Shared Principal Collections for all Series for such date and (y) a fraction, the numerator of which is the Principal Shortfall for the Series 1999-A Notes for such date (determined after giving effect to reduction of the Invested Amount otherwise occurring on such date) and the denominator of which is the aggregate amount of Principal Shortfalls for all Series for such date. For any Payment Date with respect to any Revolving Period, Shared Principal Collections allocated to the Series 1999-A Notes shall be zero. Section 4.06. Application of Funds on Deposit in the Collection Account for the Notes. (a) On each Payment Date, the Servicer shall instruct the Indenture Trustee to withdraw, and the Indenture Trustee, acting in accordance with such instructions, shall withdraw, to the extent of the Floating Allocation Percentage of Collections of Finance Charges available in the Collection Account with respect to the preceding Settlement Period (the "Available Series 1999-A Finance Charge Collections"), in the following priority: (i) Class A Interest. An amount equal to the lesser of (x) the Available Series 1999-A Finance Charge Collections and (y) the sum of Class A Interest and Carryover Class A Interest shall be paid to the Class A Noteholders in accordance with Section 5.01. (ii) Senior Class A Increased Costs. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawal pursuant to subsection 4.06(a)(i), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the Class A Increased Costs shall be paid to the applicable Agents for the account of the parties under the Class A Purchase Agreement to which such Class A Increased Costs are payable; provided, the amount determined pursuant to this subsection 4.06(a)(ii) shall not exceed one-twelfth of the product of (x) 0.50% and (y) the Weighted Average Class A Invested Amount for such Settlement Period. (iii) Indenture Trustee Fee. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) and (ii), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the excess of (i) the Indenture Trustee Fee, if any, for such Settlement Period plus any unpaid portion of the Indenture Trustee Fee from prior Settlement Periods over (ii) any amounts with respect thereto previously distributed to the Indenture Trustee during such Settlement Period shall be paid to the Indenture Trustee; provided that the aggregate amount determined pursuant to this subsection 4.06(a)(iii) for any calendar year shall not exceed $20,000. 20 22 (iv) Servicing Fee. On each Payment Date on which JNB or an Affiliate of JNB is not the Servicer, to the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) and (iii), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the excess of (i) the Monthly Servicing Fee for such Settlement Period plus any unpaid Monthly Servicing Fees from prior Settlement Periods over (ii) any amounts with respect thereto previously distributed to the Servicer during such Settlement Period shall be paid to the Servicer. (v) Class A Investor Defaulted Amount Shortfalls. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (iv), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the aggregate Class A Investor Defaulted Amount Shortfall for such Settlement Period, shall be treated as Shared Principal Collections and applied in accordance with Section 4.05 of the Indenture and Section 4.05 of this Supplement. (vi) Class A Adjustment Payment Shortfalls. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (v), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the Class A Adjustment Payment Shortfall for such Settlement Period, shall be treated as Shared Principal Collections and applied in accordance with Section 4.05 of the Indenture and Section 4.05 of this Supplement. (vii) Reimbursement of Class A Investor Charge-Offs. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (vi), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the unreimbursed Class A Investor Charge-Offs, if any, will be applied to reimburse Class A Investor Charge-Offs and shall be treated as Shared Principal Collections and applied in accordance with Section 4.05 of the Indenture and Section 4.05 of this Supplement. (viii) Reserve Account. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) and (vii), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the excess, if any, of (i) the Reserve Account Required Balance over (ii) the amount on deposit in the Reserve Account. 21 23 (ix) Remaining Class A Increased Costs. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsection 4.06(a)(i) through (viii), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) any Class A Increased Costs remaining unpaid shall be paid to the applicable Agents for the account of the parties under the Class A Purchase Agreement to which such Class A Increased Costs are payable. (x) Unpaid Class B Interest. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (ix), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the sum of (1) the amount of interest which has accrued with respect to the outstanding aggregate principal amount of the Class B Notes at the Class B Interest Rate but which has not been paid to the Class B Noteholders and (2) any Class B Additional Interest shall be paid to the Class B Noteholders in accordance with Section 5.01. (xi) Class B Investor Defaulted Amount Shortfalls. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (x), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the Class B Investor Defaulted Amount Shortfall for such Settlement Period, shall be treated as Shared Principal Collections and applied in accordance with Section 4.05 of the Indenture and Section 4.05 of this Supplement. (xii) Class B Adjustment Payment Shortfalls. To the extent of any Available Series 1999-1 Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (xi), an amount equal to the lesser of (x) any such remaining Available Series 1999-1 Finance Charge Collections and (y) the Class B Adjustment Payment Shortfall for such Settlement Period, shall be treated as Shared Principal Collections and applied in accordance with Section 4.05 of the Indenture and Section 4.05 of this Supplement. (xiii) Reimbursement of Class B Investor Charge-Offs. To the extent of any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (xii), an amount equal to the lesser of (x) any such remaining Available Series 1999-A Finance Charge Collections and (y) the unreimbursed amount by which the Class B Invested Amount has been reduced on prior Payment Dates pursuant to clauses (c) and (d) of the definition of Class B Invested Amount, if any, shall be treated as Shared 22 24 Principal Collections and applied in accordance with Section 4.05 of the Indenture and Section 4.05 of this Supplement. (xiv) Servicing Fee. On each Payment Date on which JNB or an Affiliate of JNB is the Servicer, to the extent of Available Series 1999-A Finance Charge Collections for such Payment Date (after giving effect to the withdrawals pursuant to subsections 4.06(a)(i) through (xiii)), the Servicing Fee accrued since the preceding Payment Date plus any Servicing Fee due with respect to any prior Payment Date but not distributed to the Servicer shall be paid to the Servicer. (xv) Excess Finance Charge Collections. Any Available Series 1999-A Finance Charge Collections remaining after giving effect to the withdrawals pursuant to subsection 4.06(a)(i) through (xiv), shall be treated as Excess Finance Charge Collections, and the Servicer shall direct the Indenture Trustee in writing on each Payment Date to withdraw such amounts from the Collection Account and to first make such amounts available to pay to Noteholders of other Series to the extent of shortfalls, if any, in amounts payable to such Noteholders from Collections of Finance Charges allocated to such other Series, and then pay any remaining Excess Finance Charge Collections to the Issuer. (b) For each Payment Date with respect to a Revolving Period, the product of (i) the Floating Allocation Percentage and (ii) Collections of Principal Receivables with respect to such Payment Date (subtracting from such product the amount of Reallocated Class B Principal Collections on such Payment Date) will be treated as Shared Principal Collections and applied, for such Payment Date, as provided in Section 4.05 of the Indenture. (c) For each Payment Date during an Amortization Period, the Indenture Trustee, acting pursuant to the Servicer's instructions, will distribute the amount of funds on deposit in the Collection Account available for payment of principal to Series 1999-A Noteholders in accordance with Section 4.04 in the following priority: (i) to the Class A Noteholders, an amount equal to Class A Principal, subject to the proviso in subsection 4.04(b); (ii) to the Class B Noteholders, on and after the Class A Invested Amount has been reduced to zero, an amount equal to Class B Principal, subject to the proviso in subsection 4.04(c); (iii) an amount equal to the excess, if any, of (A) the sum of the amounts described in subsections 4.04(b)(i) and (iii) and 4.04(c)(i) and (iii) over (B) the sum of Class A Principal and Class B Principal shall be treated as Shared Principal Collections and applied as provided in Section 4.05 of the Indenture. 23 25 (d) On the first Payment Date of an Amortization Period, funds on deposit in the Excess Funding Account allocable to Series 1999-A will be deposited in the Collection Account. Such amounts will be allocated in the following order of priority: (i) to the Class A Noteholders an amount equal to Class A Principal, subject to the proviso in subsection 4.04(b); and (ii) to the Class B Noteholders, on and after the Class A Invested Amount has been reduced to zero, an amount equal to Class B Principal, subject to the proviso in subsection 4.04(c). (e) On each Payment Date during a Partial Amortization Period, the Indenture Trustee, acting pursuant to the Servicer's instructions, will distribute the amount of funds on deposit in the Collection Account available for the payment of principal to the Series 1999-A Noteholders in accordance with Section 4.04 in the following priority: (i) to the Class A Noteholders, an amount equal to Class A Partial Amortization Principal, subject to the proviso in subsection 4.04(b); and (ii) to the Class B Noteholders, an amount equal to Class B Partial Amortization Principal, subject to the proviso in subsection 4.04(c); and (iii) an amount equal to the excess, if any, of (A) the sum of (x) the Principal Allocation Percentage and the aggregate amount of Collections of Principal Receivables with respect to the preceding Settlement Period, plus (y) the amount, if any, allocated to the Series 1999-A Notes pursuant to subsections 4.06(a)(v), (vi), (vii), (viii), (xi), (xii), and (xiii), over (B) the sum of Class A Partial Amortization Principal and Class B Partial Amortization Principal shall be treated as Shared Principal Collections and applied as provided in Section 4.05 of the Indenture. Section 4.07. Coverage of Required Amount for the Series 1999-A Notes. To the extent that on any Payment Date payments are being made pursuant to any of subsections 4.06(a)(i) through (xiv), respectively, and the full amount to be paid pursuant to any such subsection on such Payment Date is not paid in full on such Payment Date, the Servicer shall apply all or a portion of the Excess Finance Charge Collections from other Series with respect to such Payment Date allocable to the Series 1999-A Notes in an amount equal to the excess of the full amount to be allocated or paid pursuant to the applicable subsection over the amount applied with respect thereto from Available Series 1999-A Finance Charge Collections on such Payment Date (the "Required Amount"). Excess Finance Charge Collections allocated to the Series 1999-A Notes for any Payment Date shall mean an amount equal to the product of (x) Excess Finance Charge Collections available from all other Series for such Payment Date and (y) a fraction, the numerator of which is the Required Amount for such Payment Date and the denominator of 24 26 which is the aggregate amount of shortfalls in required amounts or other amounts to be paid from Collections of Finance Charges for all Series for such Payment Date. Section 4.08. Reallocated Principal Collections for the Series 1999-A Notes On each Payment Date, the Servicer will apply or cause the Indenture Trustee to apply an amount equal to the lesser of (i) the Class B Invested Amount, (ii) the product of (x)(I) during a Revolving Period, the Class B Floating Allocation Percentage or (II) during an Amortization Period or Partial Amortization Period, the Class B Principal Allocation Percentage and (y) the amount of Collections of Principal Receivables with respect to such Payment Date and (iii) an amount equal to the Class A Required Amount for such Payment Date (such amount called "Reallocated Class B Principal Collections") in the same priority as amounts are applied to such components from Available Series 1999-A Finance Charge Collections pursuant to subsection 4.06(a). Section 4.09. Investor Charge-Offs. (a) If, on any Determination Date, the aggregate Investor Defaulted Amount Shortfall plus the aggregate Investor Adjustment Payment Shortfall for the related Settlement Period exceeded the Available Series 1999-A Finance Charge Collections applied to the payment thereof pursuant to subsections 4.06(a)(v), (vi), (xi), and (xii) and the amount of Excess Finance Charge Collections allocated thereto pursuant to Section 4.07, and the amount of Reallocated Principal Collections applied with respect thereto pursuant to Section 4.08(a), the Class B Invested Amount will be reduced by the amount by which the remaining aggregate Investor Defaulted Amount Shortfall plus the aggregate Investor Adjustment Payment Shortfall for the related Settlement Period exceed the amount applied with respect thereto during such preceding Settlement Period (a "Class B Investor Charge-Off"). (b) In the event that any such reduction of the Class B Invested Amount would cause the Class B Invested Amount to be a negative number, the Class B Invested Amount will be reduced to zero, and, the Class A Invested Amount will be reduced by the amount by which the Class B Invested Amount would have been reduced below zero, but not more than the remaining aggregate Investor Defaulted Amount Shortfall plus the aggregate Investor Adjustment Payment Shortfall for the related Settlement Period (a "Class A Investor Charge-Off"). Section 4.10. Discount Option Percentage. The Issuer may increase, reduce or withdraw the Discount Percentage applicable to Receivables arising after the date of such change, at any time and from time to time. Any such increase, reduction or withdrawal shall become effective on the date designated therein only if: (a) the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate of the Issuer stating that the Issuer reasonably believes that such increase, reduction or withdrawal will not, based on the facts at the time of such certification, cause an Early Amortization Event or any event that, after the giving of notice or the lapse of time, would constitute an Early Amortization Event with respect to any Series; 25 27 (b) if such designation would cause the Discount Percentage to be less than 6% or more than 8%, the Rating Agency Condition shall have been satisfied; and (c) with respect to any reduction of the Discount Option Percentage, the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate stating that the Issuer reasonably believes that such reduction of the Discount Option Percentage will not, based on the facts known to such officer at the time of such certification, cause the Servicing Fee to exceed Available Series 1999-A Finance Charge Collections allocable to the Servicing Fee. Section 4.11. Establishment of Reserve Account . Within five Business Days following the occurrence of a Reserve Account Funding Event, the Issuer, for the benefit of the Series 1999-A Noteholders, shall establish and maintain with the Indenture Trustee or its nominee in the name of the Indenture Trustee, on behalf of the Trust, a Qualified Account (including any subaccount thereof) bearing a designation clearly indicating that the funds and other property credited thereto are held for the benefit of the Series 1999-A Noteholders (the "Reserve Account"). The Reserve Account shall consist of two segregated subaccounts: (a) the "Reserve Account Securities Subaccount" to which financial assets credited to the Reserve Account shall be credited, and as to which financial assets the Securities Intermediary undertakes to treat the Indenture Trustee as entitled to exercise the rights that comprise such financial assets; and (b) the "Reserve Account Cash Subaccount" to which money or instruments deposited in the Reserve Account shall be credited. The Indenture Trustee shall possess all right, title and interest in all monies, instruments, securities, documents, certificates of deposit and other property credited from time to time to the Reserve Account and in all proceeds, earnings, income, revenue, dividends and distributions thereof for the benefit of the Series 1999-A Noteholders to the extent of any amounts owing with respect to the Series 1999-A Notes. The Reserve Account shall be under the sole dominion and control of the Indenture Trustee for the benefit of the Series 1999-A Noteholders to the extent of any amounts owing with respect to the Series 1999-A Notes. Except as expressly provided in this Supplement, the Servicer agrees that it shall have no right of setoff or banker's lien against, and no right to otherwise deduct from, any funds held in the Reserve Account for any amount owed to it by the Indenture Trustee, the Trust, or any Series 1999-A Noteholder. If, at any time, the Reserve Account ceases to be a Qualified Account, the Indenture Trustee (or the Servicer on its behalf) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) of its obtaining actual knowledge that the Reserve Account is no longer a Qualified Account establish a new Reserve Account meeting the conditions specified above, transfer any monies, documents, instruments, securities, security entitlements, certificates of deposit and other property to such new Reserve Account and from the date such new Reserve Account is established, it shall be the "Reserve Account." Funds on deposit in the Reserve Account shall at the written direction of the Servicer be invested by the Indenture Trustee or its nominee (including the Securities Intermediary) in Eligible Investments selected by the Servicer. All such Eligible Investments shall be held by the Indenture Trustee for the benefit of the Series 1999-A Noteholders. The Indenture Trustee shall cause each Eligible Investment to be delivered to it or its nominee to the extent of any amounts owing with respect to the Series 1999-A Notes (including the Securities 26 28 Intermediary) and will be credited to the Reserve Account Securities Subaccount maintained by the Indenture Trustee with the Securities Intermediary. Funds in the Reserve Account shall be invested in Eligible Investments that will mature so that such funds will be available no later than the close of business on each monthly Transfer Date following such Settlement Period in amounts sufficient, to the extent of such funds, to make the required distributions on the following Payment Date. No such Eligible Investment shall be disposed of prior to its maturity; provided, however, that the Indenture Trustee may sell, liquidate or dispose of any such Eligible Investment before its maturity, at the written direction of the Servicer, if such sale, liquidation or disposal would not result in a loss of all or part of the principal portion of such Eligible Investment or if, prior to the maturity of such Eligible Investment, a default occurs in the payment of principal, interest or any other amount with respect to such Eligible Investment. Unless directed by the Servicer in writing, funds deposited in the Reserve Account on a Transfer Date with respect to the immediately succeeding Payment Date shall not be required to be invested overnight. The Indenture Trustee shall bear no responsibility or liability for any losses resulting from investment or reinvestment of any funds in accordance with this Section 4.11 nor for the selection of Eligible Investments in accordance with the provisions of this Supplement except to the extent of any gross negligence or willful misconduct of the Indenture Trustee. On each Determination Date, the Servicer shall direct the Indenture Trustee to withdraw from the Reserve Account and apply and, in accordance with such directions, the Indenture Trustee on the related Payment Date shall withdraw from the Reserve Account and apply, an amount equal to the lesser of (a) amounts then on deposit in the Reserve Account and (b) the amount determined by the Servicer equal to the excess, if any, of (x) the sum of (i) Class A Interest for the related Settlement Period, (ii) any Carryover Class A Interest, (iii) Senior Class A Increased Costs for the related Settlement Period and any Senior Class A Increased Costs previously due but not paid to the Class A Noteholders or the Agents on a prior Payment Date, (iv) the Indenture Trustee Fee for the related Settlement Period, (v) if JNB or an Affiliate of JNB is no longer the Servicer, the Class A Servicing Fee for the related Settlement Period, (vi) the Class A Investor Defaulted Amount and (vii) the Class A Adjustment Payment Shortfall, over (y) the Available Series 1999-A Finance Charge Collections plus any Excess Finance Charge Collections from other Series allocable to Series 1999-A (less, in each case, amounts allocated as Shared Principal Collections pursuant to subsection 4.06(a)(v) or 4.06(a)(vi)), in the same priority as amounts are applied to such components from Available Series 1999-A Finance Charge Collections pursuant to subsection 4.06(a). In addition, on each Determination Date with respect to a Payment Date prior to the Early Amortization Commencement Date, the Servicer shall direct the Indenture Trustee to withdraw from the Reserve Account and apply and, in accordance with such directions, the Indenture Trustee on the related Payment Date shall withdraw from the Reserve Account and apply, an amount equal to the excess, if any, of (i) the amount remaining on deposit in the Reserve Account after giving effect to withdrawals therefrom pursuant to the preceding sentence on such Payment Date, over (ii) the Reserve Account Required Balance. [END OF ARTICLE IV] 27 29 ARTICLE V DISTRIBUTIONS AND REPORTS TO SERIES 1999-A INVESTOR NOTEHOLDERS Section 5.01. Distributions. (a) On each Payment Date, the Indenture Trustee, at the direction of the Servicer, shall distribute to each Class A Noteholder of record on the related Record Date such Class A Noteholder's share, as determined pursuant to the Class A Purchase Agreement, of the amounts that are allocated and available on such Payment Date to pay interest on the Class A Notes pursuant to this Supplement. (b) On each Payment Date, the Indenture Trustee shall, at the direction of the Servicer, distribute to each Class A Noteholder of record on the related Record Date or to each Agent, such Class A Noteholder's or such Agent's share, as determined pursuant to the Class A Purchase Agreement, of the amounts that are allocated and available on such Payment Date to pay Class A Increased Costs pursuant to this Supplement. (c) On each Payment Date during a Partial Amortization Period until the Payment Date on which the aggregate amount paid pursuant to this subsection 5.01(c) with respect to such Partial Amortization Period shall have equaled the Partial Amortization Amount for such Partial Amortization Period, the Indenture Trustee shall, at the direction of the Servicer, distribute the amounts on deposit in the Collection Account or otherwise held by the Indenture Trustee that are allocated and available on such date to pay principal of the Class A Notes pursuant to this Supplement up to a maximum amount on any such date equal to the unpaid portion of such Partial Amortization Amount on such date, to the Class A Noteholders of record on the related Record Date which are entitled to receive such payments in accordance with the Class A Purchase Agreement; provided that, if there has been an optional redemption of the Series 1999-A Noteholders' Interest pursuant to Section 7.01, the provisions of this subsection 5.01(c) shall not apply to such Payment Date. (d) On each Payment Date following the Amortization Date or in respect of which there has been an optional redemption of the Series 1999-1 Noteholders' Interest pursuant to Section 7.01, the Indenture Trustee, at the direction of the Servicer, shall distribute to each Class A Noteholder of record on the related Record Date the amounts on deposit in the Collection Account and Excess Funding Account or otherwise held by the Indenture Trustee that are allocated and available on such date to pay principal of the Class A Notes pursuant to this Supplement up to a maximum amount on any such date equal to the Class A Invested Amount on such date (unless there has been an optional redemption of the Series 1999-A Noteholders' Interest pursuant to Section 7.01, in which event the foregoing limitation will not apply). 28 30 (e) On each Payment Date, the Indenture Trustee shall, at the direction of the Servicer, distribute to each Class B Noteholder of record on the related Record Date such Class B Noteholder's pro rata share of the amounts that are allocated and available on such Payment Date to pay interest on the Class B Notes pursuant to this Supplement. (f) On each Payment Date during a Partial Amortization Period as to which there is a Class B Special Reduction Amount until the Payment Date on which the aggregate amount paid pursuant to this subsection 5.01(f) with respect to such Partial Amortization Period equals the Class B Special Reduction Amount, the Indenture Trustee, at the direction of the Servicer, shall distribute to the Class B Noteholder of record on the related Record Date the amounts on deposit in the Collection Account or otherwise held by the Indenture Trustee that are allocated and available on such date to pay principal of the Class B Notes pursuant to this Supplement up to a maximum amount on any such date equal to the unpaid portion of such Class B Special Reduction Amount on such date; provided that, if there has been an optional redemption of the Series 1999-A Noteholders' Interest pursuant to Section 7.01, the provisions of this subsection 5.01(f) shall not apply to such Payment Date. (g) On each Payment Date (i) which follows the Amortization Date or in respect of which there has been an optional redemption of the Series 1999-A Noteholders' Interest pursuant to Section 7.01 and (ii) prior to which the Class A Invested Amount was paid in full, the Indenture Trustee shall, at the direction of the Servicer, distribute to each Class B Noteholder of record on the related Record Date the amounts on deposit in the Collection Account and Excess Funding Account or otherwise held by the Indenture Trustee that are allocated and available on such date to pay principal of the Class B Notes pursuant to this Supplement up to a maximum amount on any such date equal to the Class B Invested Amount on such date (unless there has been an optional redemption of the Series 1999-A Noteholders' Interest pursuant to Section 7.01, in which event the foregoing limitation will not apply). (h) The distributions to be made pursuant to this Section 5.01 are subject to the provisions of Section 10.03 of the Indenture and Section 8.01. (i) The Servicer shall direct that distributions to Class A Noteholders or the Agents hereunder shall be made as provided in the Class A Purchase Agreement. Distributions to Class B Noteholders hereunder shall be made by check mailed to each Class B Noteholder at such Class B Noteholder's address appearing in the Note Register without presentation or surrender of any Class B Note or the making of any notation thereon or as otherwise agreed between the Indenture Trustee and such Class B Noteholder. Section 5.02. Reports and Statements to Series 1999-A Noteholders. (a) On each Payment Date, the Indenture Trustee shall forward to each Class A Noteholder and each Class B Noteholder, a statement substantially in the form of Exhibit B prepared by the Servicer. 29 31 (b) Not later than each Determination Date, the Servicer shall deliver to the Indenture Trustee and each Rating Agency (i) statements substantially in the form of Exhibit B prepared by the Servicer and (ii) a certificate of a Servicing Officer substantially in the form of Exhibit C. (c) On or before January 31 of each calendar year, beginning with calendar year 2000, the Indenture Trustee shall furnish or cause to be furnished to each Person who at any time during the preceding calendar year was a Series 1999-A Noteholder, a statement prepared by the Servicer containing such information as is required to be provided by an issuer of indebtedness under the Code with respect to such calendar year; provided, however, that such information need not be provided with respect to the Class B Notes prior to any transfer thereof pursuant to Section 7.03(b). Such obligation of the Servicer shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Indenture Trustee pursuant to any requirements of the Code as from time to time in effect. [END OF ARTICLE V] 30 32 ARTICLE VI EARLY AMORTIZATION EVENTS Section 6.01. Series 1999-A Early Amortization Events. If any one of the following events shall occur with respect to the Series 1999-A Notes: (a) failure on the part of the Issuer (i) to make any payment or deposit required to be made by the Issuer by the terms of the Indenture or this Supplement, on or before the date occurring two Business Days after the date such payment or deposit is required to be made herein, (ii) to perform in all material respects the Issuer's covenant not to sell, pledge, assign, or transfer to any person, or grant any unpermitted lien on, any Purchased Receivable; or (iii) duly to observe or perform in any material respect any covenants or agreements of the Issuer set forth in the Indenture or this Supplement, which failure has a material adverse effect on the Series 1999-A Noteholders or the Class A Noteholders and which continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Issuer by the Indenture Trustee, or to the Issuer and the Indenture Trustee by Series 1999-A Noteholders evidencing undivided interests aggregating more than 40% of the Series Invested Amount; (b) any representation or warranty made by the Issuer in the Purchase and Servicing Agreement, Indenture or this Supplement (i) shall prove to have been incorrect in any material respect when made, which continues to be incorrect in any material respect for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Issuer by the Indenture Trustee, or to the Issuer and the Indenture Trustee by Series 1999-A Noteholders evidencing undivided interests aggregating more than 40% of the Series Invested Amount and (ii) as a result of which the interests of the Series 1999-A Noteholders or the Class A Noteholders are materially and adversely affected; provided, however, that a Series 1999-A Early Amortization Event pursuant to this subsection 6.01(b) shall not be deemed to have occurred hereunder if the Issuer has accepted reassignment of the related Receivable, or all of such Receivables, if applicable, during such period in accordance with the provisions of the Purchase and Servicing Agreement or a purchase price adjustment has been made pursuant to Section 2.05 of the Purchase and Servicing Agreement during such period; (c) failure on the part of the Servicer to make any payment or deposit or to give any instruction relating to payments required to be made by the Servicer by the terms of the Indenture, this Supplement or the Purchase and Servicing Agreement, on or before the date occurring two Business Days after the date such payment or deposit is required to be made or such instruction is required to be given herein or therein, (d)(i) failure on the part of the Issuer, the Servicer or the Seller duly to observe or perform in any material respect any of the covenants set forth in 31 33 subsections (k), (l), (m), (o) or (s) of Section 5.1 of the Class A Purchase Agreement or subsection 5.02(a) of the Purchase and Servicing Agreement, or (iii) failure on the part of the Issuer, the Servicer or the Seller duly to observe or perform in any material respect any other covenants or agreements of the Issuer, the Servicer or the Seller set forth in the Class A Purchase Agreement or the Purchase and Servicing Agreement, which failure has a material adverse effect on the Series 1999-A Noteholders and which continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Issuer, the Seller and the Servicer by Class A Noteholders holding undivided interests aggregating more than 40% of the Class A Invested Amount; (e) any representation or warranty made by the Issuer, the Servicer or the Seller in the Class A Purchase Agreement (i) shall prove to have been incorrect in any material respect when made, which continues to be incorrect in any material respect for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Issuer by Class A Noteholders holding undivided interests aggregating more than 40% of the Class A Invested Amount, and (ii) as a result of which the interests of the Class A Noteholders are materially and adversely affected; (f) the average of the Portfolio Yields for any three consecutive Settlement Periods is reduced to a rate which is less than the average of the Base Rates for such three consecutive Settlement Periods; (g) any Servicer Default shall occur which would have a material adverse effect on the Series 1999-A Noteholders or the Class A Noteholders; (h) the failure or inability of Z Del to transfer Receivables to the Trust in accordance with the Purchase and Servicing Agreement; (i) the Issuer Amount shall be less than the Required Issuer Amount for a period of more than two consecutive Business Days; or (j) the occurrence and continuation of any event of default or other circumstance (and the expiration of any applicable grace period with respect thereto), the result of which will permit the acceleration of any outstanding indebtedness of Zale Corporation or its consolidated subsidiaries in an amount greater than $10,000,000; then, the Indenture Trustee shall, within five Business Days of obtaining knowledge of such event, provide to the Series 1999-A Noteholders written notification of such Early Amortization Event and in the case of any event described in subparagraph (a), (b), (c), (d) or (e), after the applicable grace period, if any, set forth in such subparagraphs, the Series 1999-A Noteholders evidencing undivided interests aggregating more than 50% of the Series Invested Amount by notice then given in writing to the Indenture Trustee, the Issuer and the Servicer may declare that an early amortization event (a "Series 1999-A Early Amortization Event") has occurred with respect to Series 1999-A as of the date of such notice, and in the case of any event described in subparagraphs (f) or (h), a Series 1999-A Early Amortization Event shall occur without any 32 34 notice or other action on the part of the Indenture Trustee or the Series 1999-A Noteholders immediately upon the occurrence of such event. [END OF ARTICLE VI] 33 35 ARTICLE VII OPTIONAL REDEMPTION; PARTIAL AMORTIZATION; PRINCIPAL BALANCE INCREASES Section 7.01. Optional Redemption. The Series 1999-A Notes shall be subject to redemption in full by the Issuer at its option on any Payment Date on or after July 13, 2000, upon notice delivered to the Indenture Trustee, the Servicer and the Agents not later than 5:00 p.m. (New York City time) on the second Business Day prior to the redemption date. The deposit required in connection with any such redemption and final distribution shall be equal to (i) the sum of the Class A Invested Amount and the Class B Invested Amount, plus (ii) accrued and unpaid interest and (without duplication) Carryover Interest on the Series 1999-A Notes through the day prior to the Payment Date on which the final distribution occurs, plus (iii) all unpaid Class A Increased Costs. Section 7.02. Partial Amortization. A Partial Amortization Period shall commence (i) subject to the terms and conditions of the Class A Purchase Agreement, on any date specified by the Seller prior to the Amortization Date at its election by notice given to each of the Indenture Trustee, the Issuer, the Servicer, the Administrative Agent and each Agent not more than 30 days, and not later than 5:00 p.m. (New York City time) on the second Business Day, prior to such date, (ii) on the date on which any Partial Expiration Event shall occur and (iii) on any date specified by the Seller prior to the Amortization Date at its election by not less than five Business Days' prior notice given to each of the Indenture Trustee, the Issuer, the Servicer, the Administrative Agent and each Agent if, on or prior to such date the Class B Special Reduction Date (if any) has occurred and the Class B Special Reduction Amount exceeds zero; provided that the Seller may designate only one Partial Amortization Period pursuant to this clause (iii). The Seller shall give notice to each of the Indenture Trustee, the Servicer, the Administrative Agent and each Agent on or before each date on which any Partial Expiration Event shall occur (such notice and any notice given pursuant to clause (i) or clause (iii) of the preceding sentence, a "Partial Amortization Notice"). Each Partial Amortization Notice shall specify (A) the date on which the related Partial Amortization Period commenced or will commence, (B) the Partial Amortization Amount for such Partial Amortization Period, (C) the Class B Special Reduction Amount, if any, and (D) whether a Partial Expiration Event shall have occurred upon the commencement of such Partial Amortization Period. The "Partial Amortization Amount" for a Partial Amortization Period shall be equal to the amount by which the Class A Invested Amount is to be reduced in respect of such Partial Amortization Period, as specified by the Issuer in the related Partial Amortization Notice, which shall equal at least $5,000,000 and be an integral multiple of $1,000,000; provided that if a Partial Expiration Event shall have occurred, the Partial Amortization Amount shall at least equal the Class A Mandatory Partial Amortization Amount specified in or pursuant to the Class A Note Purchase Agreement in respect of such Partial Expiration Event. The Issuer shall have the right from time to time to increase or decrease the Partial Amortization Amount with respect to a Partial Amortization Period by giving at least two Business Day's prior notice to the Indenture Trustee, the Servicer and each Agent; provided that the Partial Amortization Amount shall not be reduced below the applicable Class A Mandatory Partial Amortization Amount, if any. Section 7.03. Designation of Class B Note Terms; Sale of Class B Notes. The Issuer may at any time, subject to the provisions of the Class A Purchase Agreement, (i) sell or 34 36 transfer all or a portion of the Class B Notes and (ii) in connection with any such sale or transfer, enter into a supplemental agreement with the Indenture Trustee pursuant to which the Issuer may amend the Class B Interest Rate, set forth the amount of monthly interest due Class B Noteholders (the "Class B Interest"), provide for the payment of additional amounts to the Class B Noteholders (the "Class B Additional Interest") with respect to any shortfall in such Class B Interest (the "Class B Interest Shortfall") and provide for such other provisions with respect to the Class B Notes as may be specified in each such supplemental agreement, provided that in each such case (A) the Issuer shall have given notice to the Indenture Trustee, the Servicer and the Rating Agencies of such proposed sale or transfer of the Class B Notes and each such supplemental agreement at least five Business Days prior to the consummation of each such sale or transfer and the execution of such proposed supplemental agreement; (B) the Rating Agency Condition shall have been satisfied; (C) no Early Amortization Event shall have occurred prior to the consummation of such proposed sale or transfer of Class B Notes or the execution of either such supplemental agreement; (D) the Issuer shall have delivered an Officer's Certificate, dated the date of the consummation of either such sale or transfer and the effectiveness of either such supplemental agreement, to the effect that, in the reasonable belief of the Issuer, such action will not, based on the facts at the time of such certification, cause an Early Amortization Event to occur with respect to any Series, (E) the Issuer will have delivered a Tax Opinion, dated the date of such certificate with respect to such action; provided, further, as a condition to the sale or transfer of all or a portion of the Class B Notes the transferee shall be required to agree not to institute against, or join any other Person in instituting against, the Issuer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and one day after all Investor Notes are paid in full and (F) the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate and an Opinion of Counsel to the effect that all conditions precedent to the execution of such supplemental agreement have been complied with. Section 7.04. Note Principal Balance Increases. (a) Subject to the terms and conditions of the Indenture, this Supplement and the Class A Purchase Agreement, the Seller may from time to time request an increase on any Payment Date during the Revolving Period in the outstanding principal balance of the Class A Notes to an amount not exceeding the Class A Purchase Limit then in effect, (any such increase being referred to herein as a "Class A Note Principal Balance Increase"). (b) A request for a Class A Note Principal Balance Increase shall be made by notice (an "Increase Notice") from the Seller to each Agent, with a copy thereof concurrently delivered to the Servicer and the Indenture Trustee, no later than 5:00 p.m. (New York City time) on the fourth Business Day prior to the Payment Date on which such increase is to occur (an "Increase Date"), which notice shall be irrevocable unless waived in accordance with the Class A Purchase Agreement. Any Increase Notice shall be substantially in the form of Exhibit D, and shall specify (i) the aggregate amount of the requested Class A Note Principal Balance Increase, which shall equal $5,000,000 or an integral multiple of $1,000,000 in excess of such amount, (ii) the Purchaser Group or Purchaser Groups (as defined in the Class A Purchase Agreement) which are requested to purchase such requested Class A Note Principal Balance Increase, and the portion 35 37 thereof requested from each such Purchaser Group, as determined by the Issuer; provided that the portion of such Class A Note Principal Balance Increase requested from any Purchaser Group shall equal $5,000,000 or an integral multiple of $1,000,000 in excess of such amount, (iii) the date on which such Class A Note Principal Balance Increase is to occur (an "Increase Date"), which shall be the next following Payment Date, and (iv) the payment instructions for remittance of the proceeds of such requested Class A Note Principal Balance Increase, in each case subject to the provisions of the Class A Purchase Agreement. (c) On the Increase Date for such Class A Note Principal Balance Increase, after satisfaction of all conditions to such Class A Note Principal Balance Increase herein and in the Class A Purchase Agreement, the Class A Noteholders shall remit the amount of such Class A Note Principal Balance Increase, to the extent it has otherwise agreed or committed to fund such Class A Note Principal Balance Increase, no later than 4:00 p.m. (New York City time) in immediately available funds in accordance with the payment instructions specified in the request with respect to such Class A Note Principal Balance Increase, and upon such remittance the aggregate outstanding principal balance of the Class A Notes shall be increased by the amount of such remittance in respect of the Class A Note Principal Balance Increase. Nothing in this Supplement or any Series 1999-A Note shall be construed as constituting a commitment on the part of the Series 1999-A Noteholders to fund any Note Principal Balance Increase, except as otherwise set forth in, and subject to the terms and conditions of, the Class A Purchase Agreement. (d) Subject to the terms and conditions of the Indenture, this Supplement, the Issuer may from time to time request an increase on any Payment Date during the Revolving Period in the outstanding principal balance of the Class B Notes (any such increase being referred to herein as a "Class B Note Principal Balance Increase"). A request for a Class B Note Principal Balance Increase shall be made by notice from the Seller to the Issuer and the Indenture Trustee, with a copy thereof concurrently delivered to the Servicer, the Administrative Agent and each Agent, no later than 5:00 p.m. (New York City time) on the Business Day prior to the Payment Date on which such increase is to occur. Any Increase Notice shall specify the aggregate amount of the requested Class B Note Principal Balance Increase and the requested date thereof. On the requested date for such Class B Note Principal Balance Increase, the Class B Noteholders may elect (but shall not be obligated) to remit the amount of such Class B Note Principal Balance Increase in immediately available funds as agreed upon among the Issuer, the the Seller and the Indenture Trustee. It shall be a condition to any Class B Note Principal Balance Increase that the sum of the Class B Note Principal Balance Increase, plus the amount of any Class A Note Principal Balance Increase to be purchased on the date thereof, shall not exceed an amount equal to the excess of the aggregate amount of Principal Receivables in the Trust over the Required Minimum Principal Balance. Section 7.05. Special Reduction of Class A Invested Amount. 36 38 (a) The outstanding principal amount of Class A Notes may be prepaid in whole or in part, without premium or penalty, but together with accrued and unpaid interest on the principal amount prepaid, from time to time during the Revolving Period at the option of the Trust (each, a "Class A Special Reduction"), on any Business Day (a "Class A Special Reduction Date") occurring not earlier than three Business Days after the related Special Reduction Notice has been given in accordance with this Section 7.05 from the proceeds of the issuance by the Trust of one or more other Series of Notes. In the event of a prepayment in part, the aggregate principal amount to be prepaid shall be allocated pro rata in accordance with the outstanding principal amount of each Class A Note. It shall be a condition to any Class A Special Reduction that, after giving effect to the payments being made on the applicable Class A Special Reduction Date by the Issuer pursuant to Section 5.01 or by the Seller pursuant to the Class A Purchase Agreement, (i) there shall be no Early Amortization Event, Series 1999-A Early Amortization Event or Servicer Default, or the occurrence of an event or condition which would be an Early Amortization Event, Series 1999-A Early Amortization Event or Servicer Default, and (ii) the Seller shall concurrently pay with such Special Reduction any related amount payable pursuant to subsection 2.6(c) of the Class A Purchase Agreement. (b) The Issuer, at its expense, shall provide a written notice thereof to the Indenture Trustee and each Agent not less than three Business Days prior to the Class A Special Reduction Date (a "Class A Special Reduction Notice"), which Special Reduction Notice shall be irrevocable and shall specify the principal amount of Class A Notes to be prepaid on the Class A Special Reduction Date (the "Class A Special Reduction Amount"). (c) Not later than 10:00 a.m. (New York City time) on the Class A Special Reduction Date, the Issuer shall deposit or cause to be deposited with the Indenture Trustee, an amount of immediately available funds equal to the Class A Special Reduction Amount, and the Trustee shall distribute to each Class A Noteholder of record on the related Record Date such Class A Noteholders' pro rata share thereof as determined pursuant to subsection 7.05(a) above. [END OF ARTICLE VII] 37 39 ARTICLE VIII FINAL DISTRIBUTION Section 8.01. Sale of Receivables or Noteholders' Interest pursuant to Section 2.05 of the Purchase and Servicing Agreement and Section 10.03 of the Indenture. (a) The amount to be paid by the Issuer or the Seller with respect to Series 1999-A in connection with a purchase of the Receivables pursuant to Section 6.10(c) of the Purchase and Servicing Agreement shall equal the Reassignment Amount for the first Payment Date following the Settlement Period in which the reassignment obligation arises under the Purchase and Servicing Agreement. (b) With respect to the Reassignment Amount deposited into the Collection Account pursuant to this Section 8.01, the Issuer shall, not later than 10:00 a.m., New York City time, on the related Payment Date, make deposits or distributions of the following amounts (in the priority set forth below and, in each case after giving effect to any deposits and distributions otherwise to be made on such date) in immediately available funds: (i) (x) the Class A Invested Amount on such Payment Date will be distributed to the Indenture Trustee for payment to the Class A Noteholders and (y) an amount equal to the sum of (A) Class A Interest for such Payment Date, and (B) any Class A Carryover Interest will be distributed to the Indenture Trustee for payment to the Class A Noteholders, and (z) an amount equal to all unpaid Class A Increased Costs will be distributed to the Indenture Trustee for payment to the Class A Noteholders or the Agents, as applicable, at the direction of the Servicer in accordance with the Class A Purchase Agreement; (ii) (x) the Class B Invested Amount on such Payment Date will be distributed to the Indenture Trustee for payment to the Class B Noteholders and (y) an amount equal to the sum of (A) Class B Interest for such Payment Date, and (B) any Class B Carryover Interest will be distributed to the Indenture Trustee for payment to the Class B Noteholders, and (iii) the balance, if any, will be distributed to the Trust. (c) Notwithstanding anything to the contrary in this Supplement or the Agreement, all amounts distributed to the Indenture Trustee pursuant to subsection 8.01(b) for payment to the Series 1999-A Noteholders shall be deemed distributed in full to the Series 1999-A Noteholders on the date on which such funds are distributed to the Indenture Trustee pursuant to this Section and shall be deemed to be a final distribution pursuant to Section 12.01 of the Indenture. [END OF ARTICLE VIII] 38 40 ARTICLE IX MISCELLANEOUS PROVISIONS Section 9.01. Delivery and Payment for the Series 1999-A Notes. The Issuer shall execute and deliver the Series 1999-A Notes to the Indenture Trustee for authentication in accordance with Section 2.03 of the Indenture. The Indenture Trustee shall deliver the Series 1999-A Notes to or upon the order of the Issuer when authenticated in accordance with Section 2.03 of the Indenture. Section 9.02. Legend on Series 1999-A Notes. Each Series 1999-A Note will bear a legend substantially in the following form: THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ANY OTHER APPLICABLE SECURITIES LAW. Section 9.03. Ratification of Indenture. As supplemented by this Supplement, the Indenture is in all respects ratified and confirmed and the Indenture as so supplemented by this Supplement shall be read, taken, and construed as one and the same instrument. Section 9.04. Counterparts. This Supplement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. Section 9.05. GOVERNING LAW. THIS SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. 39 41 Section 9.06. Instructions in Writing. All instructions, notices or other communications given by the Servicer, the Issuer or any other Person to the Indenture Trustee pursuant to this Supplement shall be in writing and shall be effective upon actual receipt by an Authorized Officer of the Indenture Trustee. Section 9.07. Tax Treatment. The Issuer has entered into this Supplement with the intention that, for federal, state and local income and franchise tax purposes, the Class A Notes will be characterized as indebtedness of the Seller secured by the Receivables, and, prior to the occurrence of a transfer under Section 7.03 hereof, the Class B Notes will not be treated as having been issued. Clauses (a) and (c) of the definitions of Tax Opinion shall be inapplicable with respect to such Class B Notes prior to any such issuance. 40 42 IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed. ZALE FUNDING TRUST Issuer By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Amended and Restated Trust Agreement dated as of July 15, 1999 By: /s/ JAMES P. LAWLER ----------------------------------- Name: Title: THE BANK OF NEW YORK Indenture Trustee and Securities Intermediary By: /s/ ERWIN SORIANO ----------------------------------- Name: Title: 43 TABLE OF CONTENTS
PAGE ARTICLE I CREATION OF THE SERIES 1999-A NOTES............................1 Section 1.01. Designation..........................................1 ARTICLE II DEFINITIONS....................................................2 Section 2.01. Definitions..........................................2 ARTICLE III SERVICER......................................................13 Section 3.01. Servicing Compensation..............................13 Section 3.02. Indenture Trustee Fee...............................13 ARTICLE IV RIGHTS OF NOTEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS................................15 Section 4.01. Rights of Noteholders...............................15 Section 4.02. Collections and Allocation; Payments on Trust Certificate.........................................15 Section 4.03. Determination of Monthly Interest for the Series 1999-A Notes........................................18 Section 4.04. Determination of Principal Amounts..................18 Section 4.05. Shared Principal Collections........................20 Section 4.06. Application of Funds on Deposit in the Collection Account for the Notes...............................20 Section 4.07. Coverage of Required Amount for the Series 1999-A Notes........................................24 Section 4.08. Reallocated Principal Collections for the Series 1999-A Notes........................................25 Section 4.09. Investor Charge-Offs................................25 Section 4.10. Discount Option Percentage..........................25 Section 4.11. Establishment of Reserve Account....................26 ARTICLE V DISTRIBUTIONS AND REPORTS TO SERIES 1999-A INVESTOR NOTEHOLDERS...................................................28 Section 5.01. Distributions.......................................28 Section 5.02. Reports and Statements to Series 1999-A Noteholders.........................................29 ARTICLE VI EARLY AMORTIZATION EVENTS.....................................31 Section 6.01. Series 1999-A Early Amortization Events.............31 ARTICLE VII OPTIONAL REDEMPTION; PARTIAL AMORTIZATION; PRINCIPAL BALANCE INCREASES.............................................34 Section 7.01. Optional Redemption.................................34 Section 7.02. Partial Amortization................................34 Section 7.03. Designation of Class B Note Terms; Sale of Class B Notes...............................................34 Section 7.04. Note Principal Balance Increases....................35
44 TABLE OF CONTENTS (CONTINUED)
PAGE Section 7.05. Special Reduction of Class A Invested Amount........36 ARTICLE VIII FINAL DISTRIBUTION............................................38 Section 8.01. Sale of Receivables or Noteholders' Interest pursuant to Section 2.05 of the Purchase and Servicing Agreement and Section 10.03 of the Indenture...........................................38 ARTICLE IX MISCELLANEOUS PROVISIONS......................................39 Section 9.01. Delivery and Payment for the Series 1999-A Notes....39 Section 9.02. Legend on Series 1999-A Notes.......................39 Section 9.03. Ratification of Indenture...........................39 Section 9.04. Counterparts........................................39 Section 9.05. GOVERNING LAW.......................................39 Section 9.06. Instructions in Writing.............................40 Section 9.07. Tax Treatment.......................................40
-II- 45 CLASS A NOTE THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ANY OTHER APPLICABLE SECURITIES LAW. ZALE FUNDING TRUST SERIES 1999-A FLOATING RATE CLASS A ASSET BACKED VARIABLE FUNDING NOTE REGISTERED No. RA-1 ZALE FUNDING TRUST, a Delaware business trust (the "Issuer") hereby promises to pay to the order of CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH, AS AGENT, or registered assigns (the "Noteholder"), the outstanding principal balance of this Note, as determined pursuant to Indenture, dated as of July 15, 1999 (as amended or otherwise modified from time to time, the "Base Indenture"), as supplemented by the Series 1999-A Indenture Supplement, dated as of July 15, 1999 (as amended or otherwise modified from time to time, the "Supplement;" the Base Indenture, as so supplemented, the "Indenture") between the Issuer and The Bank of New York, as Indenture Trustee (in such capacity, the "Indenture Trustee"), and to pay interest on the outstanding principal balance of this Note at the rate or rates and at the times specified in the Indenture. The outstanding principal balance of this Note shall be repaid from time to time on the dates and in the manner set forth in the Indenture, and in any event on Legal Final Maturity Date (as defined in the Indenture). The Class A Initial Invested Amount of this Note is set forth on the grid attached hereto. The Noteholder or its agent is authorized from time to time to record the amount and date of each Class A Note Principal Balance Increase and each payment of principal of this Note on such grid or on a continuation thereof which shall be attached thereto and made a part thereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Issuer's obligations hereunder or under the Indenture Note or the validity of any payment or prepayment hereof. This Note does not purport to summarize the Indenture and reference is made to that Agreement for information with respect to the interests, rights, benefits, obligations, proceeds, and duties evidenced hereby and the rights, duties and obligations of the Issuer and the 46 Indenture Trustee. To the extent not defined herein, the capitalized terms used herein have the meanings ascribed to them in the Indenture. This Note is one of a series and class of Notes entitled "Zale Funding Trust Floating Rate Class A Asset Backed Variable Funding Notes, Series 1999-A" (the "Class A Notes"), issued under and is subject to the terms, provisions and conditions of the Indenture, to which Indenture the Noteholder by virtue of the acceptance hereof assents and by which the Noteholder is bound. The Issuer has also issued its "Zale Funding Trust Class B Asset Backed Notes, Series 1999-A" (the "Class B Notes" and collectively with the Class A Notes, the "Series 1999-A Notes") pursuant to the Indenture. The Class B Notes are subordinated to the Class A Notes as and to the extent provided in the Indenture. The indebtedness represented by the Series 1999-A Notes shall include the right of the Series 1999-A Noteholders to receive, to the extent necessary to make the required payments with respect to such Series 1999-A Notes at the times and in the amounts specified in the Supplement, the Series 1999-A Noteholders' Interest. In general, payments of principal with respect to the Class A Notes are limited to the Class A Invested Amount, which may be less than the unpaid principal balance of the Class A Notes. The Class B Notes are subordinated to the Class A Notes, to the extent provided in the Supplement. The Class B Notes will not have the right to receive payments of principal until the Class A Invested Amount has been paid in full, other than payments of the Class B Special Reduction Amount during a Partial Amortization Period as provided in the Supplement. The Seller has structured the Indenture and the Series 1999-A Notes and with the intention that the Class A Notes will qualify under applicable tax law as debt, and the Seller, the Issuer and each holder of a Note or of any interest therein by acceptance of its Note or any interest therein, agrees to treat the Class A Notes for purposes of federal, state and local income or franchise taxes and any other tax imposed on or measured by income, as debt. The obligations of the Issuer under this Note, the Indenture or any other agreement, instrument, document or certificate executed and delivered or issued by the Issuer in connection herewith are solely the corporate obligations of the Issuer. Except as expressly provided for in Sections 7.03, 7.08 or 8.04(b) of the Trust Agreement, no recourse shall be had for the payment of any fee or any other obligations or claim arising out of or based upon this Note, the Indenture or any other agreement, instrument, document or certificate executed and delivered or issued by the Issuer in connection herewith against any holder of a Trust Certificate, employee, officer, director, incorporator, agent or trustee of the Issuer or any Affiliate of the Issuer. It is expressly understood and agreed by the parties hereto that (i) this Note and the Indenture are executed and delivered by Wilmington Trust Company, not individually or personally but solely as the Owner Trustee of the Issuer under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (ii) each of the representations, undertakings and agreements made on the part of the Issuer in this Note or the Indenture is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose of binding only the Issuer, (iii) nothing herein or in the Indenture contained shall be construed as creating any liability on Wilmington -2- 47 Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the Indenture Trustee and by any Person claiming by, through or under the Indenture Trustee and (iv) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Note, the Indenture or the other Transaction Documents. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICTS OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE ISSUER AND THE NOTEHOLDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. Unless the Note of authentication hereon has been executed by or on behalf of the Trustee, by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid for any purpose. [Remainder of page intentionally left blank] -3- 48 IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed. ZALE FUNDING TRUST By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Amended and Restated Trust Agreement dated as of July 15, 1999 By: /s/ JAMES P. LAWLER ----------------------------------- Name: Title: Dated: July 15, 1999 -4- 49 CERTIFICATE OF AUTHENTICATION This is one of the Class A Notes referred to in the within-mentioned Indenture. THE BANK OF NEW YORK By: /s/ ERWIN SORIANO ----------------------------------- Name: Title: -5- 50 GRID TO CLASS A NOTE NO. RA-1
- ---------------------------------------------------------------------------------------------------------------------- Class A Note Principal Date of Transaction Balance Increase Amount of Payment Notation Made By - ---------------------------------------------------------------------------------------------------------------------- July 15, 1999 $250,000,000 (Class A N/A N/A Initial Invested Amount) - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
-6- 51 CLASS B NOTE THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ANY OTHER APPLICABLE SECURITIES LAW. ZALE FUNDING TRUST SERIES 1999-A CLASS B ASSET BACKED NOTE REGISTERED No. RB-1 ZALE FUNDING TRUST, a Delaware business trust (the "Issuer") hereby promises to pay to the order of ZALE FUNDING TRUST, or registered assigns (the "Noteholder"), the outstanding principal balance of this Note, as determined pursuant to Indenture, dated as of July 15, 1999 (as amended or otherwise modified from time to time, the "Base Indenture"), as supplemented by the Series 1999-A Indenture Supplement, dated as of July 15, 1999 (as amended or otherwise modified from time to time, the "Supplement;" the Base Indenture, as so supplemented, the "Indenture") between the Issuer and The Bank of New York, as Indenture Trustee (in such capacity, the "Indenture Trustee"), and to pay interest on the outstanding principal balance of this Note at the rate or rates and at the times specified in the Indenture. The outstanding principal balance of this Note shall be repaid from time to time on the dates and in the manner set forth in the Indenture, and in any event on Legal Final Maturity Date (as defined in the Indenture). The Class B Initial Invested Amount of this Note is set forth on the grid attached hereto. The Noteholder or its agent is authorized from time to time to record the amount and date of each payment of principal of this Note on such grid or on a continuation thereof which shall be attached thereto and made a part thereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such notations shall not affect the validity of the Issuer's obligations hereunder or under the Indenture Note or the validity of any payment or prepayment hereof. This Note does not purport to summarize the Indenture and reference is made to that Agreement for information with respect to the interests, rights, benefits, obligations, 52 proceeds, and duties evidenced hereby and the rights, duties and obligations of the Issuer and the Indenture Trustee. To the extent not defined herein, the capitalized terms used herein have the meanings ascribed to them in the Indenture. This Note is one of a series and class of Notes entitled "Zale Funding Trust Class B Asset Backed Notes, Series 1999-A" (the "Class B Notes"), issued under and is subject to the terms, provisions and conditions of the Indenture, to which Indenture the Noteholder by virtue of the acceptance hereof assents and by which the Noteholder is bound. The Issuer has also issued its "Zale Funding Trust Floating Rate Class A Asset Backed Variable Funding Notes, Series 1999-A" (the "Class A Notes" and collectively with the Class B Notes, the "Series 1999-A Notes") pursuant to the Indenture. The Class B Notes are subordinated to the Class A Notes as and to the extent provided in the Indenture. The indebtedness represented by the Series 1999-A Notes shall include the right of the Series 1999-A Noteholders to receive, to the extent necessary to make the required payments with respect to such Series 1999-A Notes at the times and in the amounts specified in the Supplement, the Series 1999-A Noteholders' Interest. In general, payments of principal with respect to the Class B Notes are limited to the Class B Invested Amount, which may be less than the unpaid principal balance of the Class B Notes. The Class B Notes are subordinated to the Class A Notes, to the extent provided in the Supplement. The Class B Notes will not have the right to receive payments of principal until the Class A Invested Amount has been paid in full, other than payments of the Class B Special Reduction Amount during a Partial Amortization Period as provided in the Supplement. The Seller has structured the Indenture and the Series 1999-A Notes and with the intention that the Class A Notes will qualify under applicable tax law as debt, and the Seller, the Issuer and each holder of a Note or of any interest therein by acceptance of its Note or any interest therein, agrees to treat the Class A Notes for purposes of federal, state and local income or franchise taxes and any other tax imposed on or measured by income, as debt. The obligations of the Issuer under this Note, the Indenture or any other agreement, instrument, document or certificate executed and delivered or issued by the Issuer in connection herewith are solely the corporate obligations of the Issuer. Except as expressly provided for in Sections 7.03, 7.08 or 8.04(b) of the Trust Agreement, no recourse shall be had for the payment of any fee or any other obligations or claim arising out of or based upon this Note, the Indenture or any other agreement, instrument, document or certificate executed and delivered or issued by the Issuer in connection herewith against any holder of a Trust Certificate, employee, officer, director, incorporator, agent or trustee of the Issuer or any Affiliate of the Issuer. It is expressly understood and agreed by the parties hereto that (i) this Note and the Indenture are executed and delivered by Wilmington Trust Company, not individually or personally but solely as the Owner Trustee of the Issuer under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (ii) each of the representations, undertakings and agreements made on the part of the Issuer in this Note or the Indenture is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose of binding only the Issuer, (iii) nothing 2 53 herein or in the Indenture contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the Indenture Trustee and by any Person claiming by, through or under the Indenture Trustee and (iv) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Note, the Indenture or the other Transaction Documents. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICTS OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE ISSUER AND THE NOTEHOLDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. Unless the Note of authentication hereon has been executed by or on behalf of the Trustee, by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid for any purpose. [Remainder of page intentionally left blank] 3 54 IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed. ZALE FUNDING TRUST By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Amended and Restated Trust Agreement dated as of July 15, 1999 By: /s/ JAMES P. LAWLER ----------------------------------- Name: Title: Dated: July 15, 1999 4 55 CERTIFICATE OF AUTHENTICATION This is one of the Class B Notes referred to in the within-mentioned Indenture. THE BANK OF NEW YORK By: /s/ ERWIN SORIANO ----------------------------------- Name: Title: 5 56 GRID TO CLASS B NOTE NO. RB-1
- ---------------------------------------------------------------------------------------------------------------------- Class B Initial Date of Transaction Invested Amount Amount of Payment Notation Made By - ---------------------------------------------------------------------------------------------------------------------- July 15, 1999 $123,134,328.36 N/A N/A - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
6 EX-4.5 5 PURCHASE & SERVICING AGREEMENT 1 EXHIBIT 4.5 EXECUTION COPY ================================================================================ PURCHASE AND SERVICING AGREEMENT Dated as of July 15, 1999 Among ZALE FUNDING TRUST, ZALE DELAWARE, INC., And JEWELERS NATIONAL BANK ================================================================================ 2 PURCHASE AND SERVICING AGREEMENT (this "Agreement"), dated as of July 15, 1999, among ZALE FUNDING TRUST, a Delaware statutory business trust (the "Issuer"), ZALE DELAWARE, INC., a Delaware corporation (the "Seller"), and JEWELERS NATIONAL BANK, a national banking association ("JNB" or the "Servicer"). W I T N E S S E T H: WHEREAS, the Issuer, the Seller and the Servicer desire to enter into a receivables financing facility pursuant to which, inter alia, (1) the Issuer will purchase Receivables with a combination of net cash proceeds received by the Issuer from the issuance and sale of one or more Series of Notes, cash collections on the Purchased Receivables and increases to the value of the Certificate of Beneficial Interest, (2) the repayment of all Series of Notes will be secured by a security interest in substantially all of the assets of the Issuer, including the Purchased Receivables, and (3) the Servicer will service the Purchased Receivables, in each case in accordance with the terms and conditions set forth in the Transaction Documents; WHEREAS, this Agreement will replace the Purchase and Servicing Agreement (the "Prior Agreement"), dated as of July 1, 1994, as amended, among the Issuer, the Seller, Jewelers Financial Services, Inc., as prior servicer (the "Prior Servicer") and Diamond Funding Corp. as seller of original Receivables. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. Capitalized terms used but not otherwise defined in this Agreement are used in this Agreement with the meanings assigned to such terms in the Glossary of Terms attached as Annex I to this Agreement. ARTICLE II PURCHASE OF RECEIVABLES; CONSIDERATION AND PAYMENT Section 2.01. Purchase of Receivables. (a) The Seller hereby sells, assigns, transfers and conveys to the Issuer, on each Purchase Date, on the terms and subject to the conditions specifically set forth herein, all of its right, title and interest, in, to and under (i) all Eligible Receivables (other than (A) Eligible Receivables arising under Removed Accounts, (B) following a New Accounts Termination Date, Eligible Receivables under newly originated Accounts which the Seller has elected to exclude pursuant to subsection 2.12(c) hereof and (C) following the imposition by either Rating Agency of an Aggregate Addition Limit, Eligible Receivables in newly originated Accounts which either 3 Rating Agency has elected to exclude pursuant to subsection 2.12(d)) of the Seller now existing and hereafter originated by the Originator and all payment and enforcement rights (but not any obligations) to, in and under the related Credit Card Agreements, (ii) all Collections in respect of such Receivables credited to the related Account and all monies due or to become due with respect to the foregoing and all collateral security therefor, (iii) all proceeds of the foregoing, including without limitation Insurance Proceeds relating thereto and (iv) all Recoveries (collectively, the "Trust Assets"). Subject to subsections 2.12(c) and 2.12(d), after the Initial Cut-off Date, all the Seller's right, title and interest in and to all Eligible Receivables (other than Eligible Receivables arising under Removed Accounts) newly originated by the Originator, including, without limitation, all Eligible Receivables set forth in the most recent Daily Report shall be sold, assigned, transferred and conveyed to the Issuer by the sale, assignment, transfer and conveyance set forth in the immediately preceding sentence without any further action by the Seller. (b) All sales of Receivables hereunder shall be without recourse to, or representation or warranty of any kind (express or implied) by, the Seller, except as otherwise specifically provided herein. The foregoing sale, assignment, transfer and conveyance does not constitute and is not intended to result in a creation or assumption by the Issuer of any obligation of the Seller or any other Person in connection with the Accounts, the Receivables, the Credit Card Agreements or any other agreement relating thereto, including without limitation any obligation to Obligors. It is understood and agreed that no purchases of Receivables hereunder shall occur after the Purchase Termination Date. Section 2.02. Termination. The Seller's obligation to sell the Receivables under this Agreement shall terminate on the satisfaction and discharge of the Indenture pursuant to Section 12.01 thereof (notwithstanding the survival of certain obligations as set forth in such Section 12.01) (such date of Termination, the "Purchase Termination Date"). Section 2.03. Purchase Price. On any Purchase Date, the amount payable by the Issuer (the "Purchase Price") for Eligible Receivables sold to the Issuer by the Seller on such date shall be equal to the fair market value of the aggregate amount of such Receivables, in each case as adjusted pursuant to Sections 2.05, 2.06, 2.13 and 2.14 of this Agreement. Section 2.04. Payments. (a) Payment of Purchase Price. The Purchase Price for Receivables shall be paid to the Seller on each day that a Daily Report is prepared and delivered to the Issuer in accordance with Section 6.03(a) of this Agreement (each, a "Purchase Date"). On each Purchase Date, the Purchase Price shall be paid by the Issuer to the Seller with a combination of net cash proceeds received by the Issuer from the issuance and sale of one or more Series of Notes, cash collections on the Purchased Receivables and to the extent the Purchase Price exceeds such cash proceeds and cash collections, increases to the value of the Certificate of Beneficial Interest. (b) Time; Date; Location. Unless otherwise specified in this Agreement, all payments under this Agreement shall be made (1) not later than 1:00 p.m. (New York City time) on the date specified therefor in lawful money of the United States of America in same day funds, (2) if to the Seller, to the bank account designated in writing by the Seller to the Issuer and 2 4 (3) if to the Issuer, to the bank account designated in writing by the Issuer to the Seller. Amounts not paid by the Seller when due under this Agreement shall be payable on demand and shall bear interest at a rate equal at all times to the lesser of (1) the prime rate as reported in The Wall Street Journal or any successor publication thereto or, if The Wall Street Journal is not then published, as reported in any similar publication with national circulation and (2) the maximum rate permitted under applicable law. Whenever any payment to be made under this Agreement shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day. Section 2.05. Adjustments for Ineligible Receivables. In the event of a breach of (i) the representation and warranty set forth in subsection 4.03(a) hereof, then promptly upon the earlier to occur of the discovery of such breach by the Seller or Servicer or receipt by the Seller of written notice from the Indenture Trustee of such breach, or (ii) the representations and warranties set forth in subsection 4.03(b) through 4.03(o), and such breach has a material adverse effect on the Noteholders, unless cured within 60 days of receipt of notice by the Seller or Servicer, or (iii) the Seller shall fail to deliver on or before the January 2000 Payment Date and the Payment Date in each July and January thereafter an Opinion of Counsel with respect to the perfection of the transfer of Receivables in Eligible Accounts designated to the Issuer during the six month period preceding such month (or in the case of the first such period, since the Closing Date), substantially similar to the perfection opinions delivered to the Rating Agency on the Closing Date, the Purchase Price for Receivables to be purchased from the Seller on such day shall be reduced by the outstanding principal amount of the Receivables with respect to which such breach occurred (which, in the case of clause (iii), consists of all Receivables in Eligible Accounts designated during the period referred to therein) and the Servicer shall deduct the outstanding principal amount of such Receivables from the aggregate balance of Principal Receivables. In the event such reduction would cause the Issuer Amount to be less than the Required Issuer Amount, on the date of such reduction the Seller shall make a deposit (the "Transfer Deposit Amount") to the Collection Account in immediately available funds in an amount equal to the amount by which the Issuer Amount would otherwise be reduced below the Required Issuer Amount. The obligation of the Seller to accept adjustment of the Purchase Price as herein provided or to deposit the Transfer Deposit Amount shall be the sole remedy respecting breach of the representations and warranties identified in the first sentence of this Section 2.05 available to the Noteholders of any Series or the Indenture Trustee on behalf of the Noteholders of any Series. Section 2.06. Returns. The Servicer or Seller may accept returns of goods for full or partial credit (a "Credit Return") or make a daily adjustment in the principal amount or finance or other charges accrued or payable with respect to an Account if such adjustment is permitted by and made in accordance with the Credit Card Guidelines (a "Credit Adjustment"); provided, however, that Credit Adjustments may not be utilized for the intended purpose of mitigating losses to the Trust. Each Credit Return and Credit Adjustment (including any Credit Adjustment required by any Requirement of Law) shall be made by the Servicer or Seller on the applicable Date of Processing. All Credit Returns and Credit Adjustments on any Date of Processing shall be in an amount equal to the aggregate amount of all such returns and adjustments made with respect to the Purchased Receivables on such Date of Processing (the "Return Amount"). The Servicer or Seller shall deduct the Return Amount from the aggregate balance of Principal Receivables outstanding on such Date of Processing. To the extent such 3 5 reduction reduces the Issuer Amount below the Required Issuer Amount for the immediately preceding Determination Date (after giving effect to the allocations, distributions, withdrawals and deposits to be made on the Payment Date immediately following such Determination Date), the Seller shall deposit a cash amount equal to such deficiency into the Collection Account in immediately available funds (an "Adjustment Payment") on the day on which such adjustment occurs. Section 2.07. Finance Charges. Finance Charges, whenever created and whenever received, accrued in respect of Purchased Receivables, shall be the property of the Issuer and all Collections with respect thereto shall be allocated and treated as Collections in respect of Purchased Receivables. Section 2.08. [Reserved]. Section 2.09. Recovery of Sales Tax. The Seller may, at its option, repurchase any Purchased Receivables from the Issuer that have been charged off in accordance with the Credit Card Guidelines to the extent necessary to recover state sales tax related to such Purchased Receivables, at a price equal to the sum of (a) the amount of Recoveries with respect to such Purchased Receivables plus (b) the proceeds from such state sales tax. Upon any such repurchase, the Seller (1) agrees, to the extent not paid at the time of repurchase, to pay promptly to the Issuer the amount of any Recoveries received in respect of such repurchased-charged off Purchased Receivables and, immediately upon crediting of such amount to the Seller by offset or otherwise, the amount of state sales tax recovered with respect thereto, and (2) shall grant a security interest to the Issuer in such repurchased Receivables and any proceeds thereof (including any Recoveries therefrom) to secure the repurchase price of such Receivables. Section 2.10. Addition of Sellers. Any Affiliate of Zale Corporation may sell, directly or indirectly, its Receivables hereunder to the Issuer if the Rating Agency Condition is satisfied with respect to such addition. Zale Corporation or its Affiliate that proposes to sell Receivables shall give to the Issuer and the Rating Agencies not less than thirty days' prior written notice of the effective date of the addition of such Affiliate as a seller of Receivables. Once such notice has been given, any addition of an Affiliate of Zale Corporation as a seller of Receivables pursuant to this Section 2.10 shall become effective on the first Business Day following the expiration of such thirty-day period (or such later date as may be specified in such notice), provided that (i) the Rating Agency Condition has been satisfied and (ii) such Affiliate and the parties hereto shall have executed and delivered such agreements, instruments and other documents and such amendments or other modifications to the Transaction Documents (in form and substance reasonably satisfactory to the Issuer and the Indenture Trustee) that the Issuer and the Indenture Trustee reasonably determine are necessary to effect such addition. 4 6 Section 2.11 Addition of Participation Interests. (a) The Seller may (but shall not be required to) convey to the Issuer participations (including 100% participations) representing undivided interests in a pool of assets primarily consisting of revolving credit card receivables, consumer loan receivables (secured and unsecured), charge card receivables, and any interests in any of the foregoing, including securities representing or backed by such receivables, and other self-liquidating financial assets including any "Eligible Assets" as such term is defined in Rule 3a-7 (or any successor to such Rule) under the Investment Company Act and collections, together with all earnings, revenue, dividends, distributions, income, issues and profits thereon ("Participation Interests"). Receivables shall not be treated as a Participation Interest for purposes of this Agreement. The addition of Participation Interests in the Trust shall be effected by a Participation Interest Supplement, dated the applicable addition date and entered into pursuant to Subsection 13.01(a) of the Indenture. (b) Any Participation Interests designated to be conveyed to the Issuer pursuant to clause (a) above may only be so included if each Rating Agency shall have notified the Issuer, the Servicer and the Indenture Trustee in writing that such addition will not result in a reduction or withdrawal of the then existing rating of any outstanding Series or Class. Section 2.12. Removal of Accounts and Participation Interests; Termination of Automatic Addition of Accounts. (a) On any day of any Settlement Period, the Seller shall have the right to require the reassignment to it or its designee of all the Trust's right, title and interest in, to and under the Receivables then existing and thereafter created, all monies due or to become due and all amounts received thereafter with respect thereto and all proceeds thereof in or with respect to the Accounts (the "Removed Accounts") or Participation Interests (the "Removed Participation Interests") (unless otherwise set forth in the applicable Participation Interest Supplement or Indenture Supplement) and designated for removal by the Seller, upon satisfaction of the conditions set forth in clauses (i) through (v) below; provided, however, that the conditions listed in clauses (iv), (v), (vi) and (vii) below need not be satisfied if the Removed Accounts relate to a terminated affinity agreement and the related merchant or co-branding participant has elected to purchase the Receivables in such Removed Accounts: (i) on or before the eighth Business Day immediately preceding the Removal Date, the Seller shall have given written notice to the Indenture Trustee, the Servicer, the Issuer, the Rating Agency and each Series Enhancer (unless such notice requirement is otherwise waived) of such removal and specifying the date for removal of the Removed Accounts and Removed Participation Interests (the "Removal Date"); (ii) on or prior to the date that is five Business Days on or before the Removal Date, the Seller shall deliver to the Indenture Trustee a computer file or microfiche list (in a format compatible with the Indenture Trustee's systems) containing a true and complete list of the Removed Accounts specifying for each such Account, as of the date notice of the Removal Date is given, its account number, the aggregate amount outstanding in such Account and the aggregate amount of Principal Receivables outstanding in such Account; 5 7 (iii) the Seller shall have represented and warranted to the Indenture Trustee, as of the Removal Date, that the list of Removed Accounts delivered pursuant to paragraph (ii) above, as of the Removal Date, is true and complete in all material respects; (iv) the Rating Agency Condition shall have been satisfied with respect to the removal of the Removed Accounts and Removed Participation Interests; (v) the Seller shall have delivered to the Indenture Trustee an Officer's Certificate, dated the Removal Date, to the effect that the Seller reasonably believes that (A) such removal will not have an Adverse Effect, (B) such removal will not result in the occurrence of an Early Amortization Event, (C) no selection procedures believed by such Seller to be materially adverse to the interests of the Noteholders have been used in selecting the Removed Accounts and (D) all conditions precedent to the removal of the Removed Accounts have been complied with; (vi) all Removed Accounts shall be purchased by the Seller at fair market value; and (vii) the Seller shall not utilize a selection procedure solely intended to include a disproportionately higher level of Defaulted Receivables in the Removed Accounts than exist in the Accounts and shall not remove such Accounts for the intended purpose of mitigating losses to the Trust. Upon satisfaction of the above conditions, the Indenture Trustee shall execute and deliver to such Issuer a written reassignment in substantially the form of Exhibit D (the "Reassignment") and shall, without further action, be deemed to transfer, assign, set over and otherwise convey to such Issuer or its designee, effective as of the Removal Date, without recourse, representation or warranty, all the right, title and interest of the Trust in and to the Receivables arising in the Removed Accounts and Removed Participation Interests, all monies due and to become due and all amounts received with respect thereto and all proceeds thereof and any Insurance Proceeds relating thereto. The Indenture Trustee may conclusively rely on the Officer's Certificate delivered pursuant to this Section 2.12 and shall have no duty to make inquiries with regard to the matters set forth therein and shall incur no liability in so relying. Further, the Issuer shall deliver to the Indenture Trustee, and the Indenture Trustee shall execute, copies of UCC termination statements and any other documents, if any, required to release the security interest in the Removed Accounts, and the Issuer shall file such financing statements in the appropriate jurisdictions on the Removal Date. In addition to the foregoing, on the date when any Receivable in an Account becomes a Defaulted Receivable, the Issuer shall automatically and without further action or consideration be deemed to transfer, set over and otherwise convey to the Seller with respect to such Account, without recourse, representation or warranty, all right, title and interest of the Trust in and to the Defaulted Receivables in such Account, all monies due or to become due with respect thereto, all proceeds thereof and any Insurance Proceeds relating thereto; provided, that Recoveries of such Account shall be applied as provided herein. 6 8 (b) Anything to the contrary herein notwithstanding, the Seller shall be entitled to purchase all Receivables in Accounts designated for purchase or re-purchase by a merchant or co-branding participant pursuant to the termination of an affinity agreement to which such merchant or co-branding participant is a party; provided, however, that the Issuer shall use its best efforts to ensure that any such removal shall not result in the occurrence of an Early Amortization Event hereunder. Any repurchase of Receivables pursuant to this Subsection 2.12(b) shall be effected in the manner, and at a price determined in accordance with Section 2.05 as if the Receivables being repurchased were Ineligible Receivables. Further, the Issuer shall deliver to the Indenture Trustee, and the Indenture Trustee shall execute, copies of UCC termination statements and any other documents, if any, required to release the security interest in the Removed Accounts, and the Issuer shall file such financing statements in the appropriate jurisdictions on the Removal Date. Amounts deposited in the Collection Account in connection therewith shall be deemed to be Collections of Principal Receivables and shall be applied in accordance with Article IV of the Indenture and the terms of each Indenture Supplement. (c) On any day of any Settlement Period, the Seller shall have the right to terminate its obligation to transfer all or less than all newly originated Eligible Accounts to the Issuer (such date, the "New Account Termination Date"), upon satisfaction of the conditions set forth in clauses (i) through (iv) below: (i) on or before the eighth Business Day immediately preceding the New Account Termination Date, the Seller shall have given written notice to the Indenture Trustee, the Servicer, the Issuer, the Rating Agency and each Series Enhancer (unless such notice requirement is otherwise waived) of such termination and specifying the New Account Termination Date; (ii) on or prior to the date that is five Business Days on or before the New Account Termination Date, such Transferor shall deliver to the Indenture Trustee a written notice specifying the New Account Termination Date; (iii) the Rating Agency Condition shall have been satisfied with respect to the termination of such obligation; and (iv) the Seller shall have delivered to the Indenture Trustee an Officer's Certificate, dated the New Account Termination Date, to the effect that the Seller reasonably believes that (A) such termination will not have an Adverse Effect, (B) such termination will not result in the occurrence of an Early Amortization Event, and (C) if such termination relates to less than all newly originated Eligible Accounts, no selection procedures believed by the Seller to be materially adverse to the interests of the Noteholders have been used in selecting such Accounts. (d) Standard & Poor's consent shall be required to the designation, subsequent to the Closing Date, of Eligible Accounts to the Issuer if the number of such Accounts either (x) with respect to any three consecutive months commencing in January, April, July and October of each calendar year commencing in July 1999 equal or exceed 15% of the number of Accounts as of the first day of the calendar year during which such periods commence (or the Cut-Off Date in the case of 1999) or (y) with respect to any twelve-month period, equal or exceed 20% of the 7 9 number of accounts as of the first day of such twelve-month period (the "Aggregate Addition Limit"). Within ten Business Days of exceeding the Aggregate Addition Limit, the Seller or Servicer shall provide written notification of such event to Standard & Poor's. Upon receipt of such notice, Standard & Poor's shall provide written notification as to (i) whether it consents, and (ii) if it consents, such higher Aggregate Addition Limit to which it consents for such period. Section 2.13. Discount Option. (a) Subject to the satisfaction of any conditions set forth in any related Indenture Supplement, the Seller shall have the option to designate at any time and from time to time a percentage or percentages, which may be a fixed percentage or a variable percentage based on a formula (the "Discount Percentage"), of all or any specified portion of Principal Receivables created after the Discount Option Date to be treated as Finance Charge Receivables ("Discount Option Receivables"). The initial Discount Percentage shall be 6% and the initial Discount Option Date shall be the Initial Issuance Date. The Seller shall also have the option of increasing, reducing or withdrawing the Discount Percentage, at any time and from time to time, on and after such Discount Option Date, subject to the satisfaction of any conditions set forth in any related Indenture Supplement. (b) After any Discount Option Date, Discount Option Receivable Collections shall be treated as Collections of Finance Charge Receivables. Section 2.14. Premium Option. (a) Subject to the satisfaction of any conditions set forth in any related Indenture Supplement, the Seller shall have the option to designate at any time and from time to time a percentage or percentages, which may be a fixed percentage or a variable percentage based on a formula (the "Premium Percentage"), of all or any specified portion of Finance Charge Receivables created after the Premium Option Date to be treated as Principal Receivables ("Premium Option Receivables"). The Seller shall also have the option of reducing or withdrawing the Premium Percentage, at any time and from time to time, on and after such Premium Option Date, subject to the satisfaction of any conditions set forth in any related Indenture Supplement. (b) After any Premium Option Date, Premium Option Receivable Collections shall be treated as Collections of Principal Receivables. Section 2.15. Account Allocations. In the event that the Seller is unable for any reason to transfer Receivables to the Trust in accordance with the provisions of this Agreement, (a) the Seller and the Servicer agree to allocate and pay to the Trust, after the date of such inability, all Collections, including Collections of Receivables transferred to the Trust prior to the occurrence of such event, and all amounts which would have constituted Collections but for the Seller's inability to transfer Receivables (up to an aggregate amount equal to the amount of Receivables transferred to the Trust by the Seller in the Trust on such date), (b) the Seller and the Servicer agree that such amounts will be applied as Collections in accordance with Article IV of the Indenture and the terms of each Indenture Supplement and (c) for so long as the allocation and application of all 8 10 collections and all amounts that would have constituted Collections are made in accordance with clauses (a) and (b) above, Principal Receivables and all amounts which would have constituted Principal Receivables but for the Seller's inability to transfer Receivables to the Trust which are written off as uncollectible in accordance with this Agreement shall continue to be allocated in accordance with Article IV of the Indenture and the terms of each Indenture Supplement. For the purpose of the immediately preceding sentence, the Seller and the Servicer shall treat the first received Collections with respect to the Accounts as allocable to the Trust until the Trust shall have been allocated and paid Collections in an amount equal to the aggregate amount of Principal Receivables in the Trust as of the date of the occurrence of such event. If the Seller and the Servicer are unable pursuant to any Requirement of Law to allocate Collections as described above, the Seller and the Servicer agree that, after the occurrence of such event, payments on each Account with respect to the principal balance of such Account shall be allocated first to the oldest principal balance of such Account and shall have such payments applied as Collections in accordance with Article IV of the Indenture and the terms of each Indenture Supplement. The parties hereto agree that Finance Charges, wherever created, accrued in respect of Principal Receivables which have been conveyed to the Trust shall continue to be a part of the Trust notwithstanding any cessation of the transfer of additional Principal Receivables to the Trust and Collections with respect thereto shall continue to be allocated and paid in accordance with Article IV of the Indenture and the terms of each Indenture Supplement. Section 2.16. Assumption of JNB's Obligations as Owner of the Accounts. Notwithstanding the provisions of Section 6.12, JNB may assign, convey or transfer all of its right, title and interest in, to and under the Accounts in which it has an interest (collectively, the "Assigned Assets"), together with all servicing functions and other obligations, if any, under this Agreement or relating to the transactions contemplated hereby (collectively, the "Assumed Obligations"), to another entity (the "Assuming Entity") which may be an entity that is not affiliated with JNB, and JNB may assign, convey and transfer the Assigned Assets and the Assumed Obligations to the Assuming Entity, without the consent or approval of the holders of any Notes, upon satisfaction of the following conditions: (a) the Assuming Entity, JNB and the Indenture Trustee shall have entered into a supplement to this Purchase and Servicing Agreement or an assumption agreement (either, the "Assumption Agreement") providing for the Assuming Entity to assume the Assumed Obligations, including the obligation under this Agreement to transfer the Receivables arising under the Accounts and the Receivables arising under any Additional Accounts to the Trust, and such Transferor shall have delivered to the Indenture Trustee an Officer's Certificate and an Opinion of Counsel each stating that such transfer and assumption comply with this Section 2.16, that such Assumption Agreement is a valid and binding obligation of such Assuming Entity enforceable against such Assuming Entity in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship or other similar laws affecting creditors' rights generally from time to time in effect and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity), and that all conditions precedent herein provided for relating to such transaction have been complied with; 9 11 (b) all UCC filings required to perfect the interest of the Indenture Trustee, on behalf of the Trust, in the Receivables to be conveyed by the Assuming Entity shall have been duly made and copies thereof shall have been delivered to the Indenture Trustee; (c) JNB shall have delivered copies of each such written notice to the Servicer and the Indenture Trustee and the Rating Agency Condition shall have been satisfied; and (d) the Indenture Trustee shall have received one or more Opinions of Counsel to the effect that (i) the transfer of such Receivables by the Assuming Entity shall constitute either a sale of, or the granting of a security interest in, such Receivables by the Assuming Entity to the Trust, (ii) the condition specified in paragraph (b) shall have been satisfied, and (iii) if the Assuming Entity shall be subject to the FDIA, the interest of the Trust in such Receivables should not be subject to avoidance by the FDIC if the FDIC were to become the receiver or conservator of the Assuming Entity. Notwithstanding such assumption, JNB shall continue to be liable for all representations and warranties and covenants made by it and all obligations performed or to be performed by it in its capacity as Owner of the Accounts prior to such transfer. ARTICLE III CONDITIONS TO PURCHASES OF RECEIVABLES Section 3.01. [Reserved]. Section 3.02. Conditions Precedent to the Issuer's Purchases of Receivables. The obligation of the Issuer to purchase each Receivable on each Purchase Date from the Seller shall be subject to the following conditions precedent: (a) The following statement shall be true (and delivery by the Seller or the Servicer of the Daily Report and the acceptance by the Seller of the Purchase Price for any Receivables on any Purchase Date shall constitute a representation and warranty by the Seller that on such Purchase Date such statement is true): the representations and warranties of the Seller and the Servicer contained in Sections 4.01, 4.02 and 4.03 of this Agreement shall be true and correct in all material respects on and as of such Purchase Date as though made on and as of such date (except to the extent that such representations or warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date). (b) No material change shall have occurred after the Initial Cut-Off Date with respect to the Seller's and the Servicer's systems, computer programs, related materials, computer tapes, disks and cassettes, procedures and record keeping relating to and required for the collection of the Purchased Receivables by the Servicer which makes them not sufficient and satisfactory in order to permit the identification, purchase, administration and collection of the 10 12 Purchased Receivables by the Servicer in accordance with the terms and intent of this Agreement. (c) The Issuer shall have received payment in full of all amounts for which payment has been requested by the Issuer pursuant to Section 10.06 of this Agreement. (d) The Issuer shall have received such other approvals, opinions or documents as the Issuer may reasonably request in connection with the purchase and sale of Receivables hereunder. (e) The Seller and the Servicer shall have complied in all material respects with their respective covenants and obligations under this Agreement required to be complied with as of such date. Section 3.03. [Reserved]. Section 3.04. Conditions Precedent to the Seller's Obligations on Purchase Dates. The obligations of the Seller on any Purchase Date shall be subject to the further conditions precedent that on such Purchase Date (and the payment by the Issuer of the Purchase Price shall constitute a representation and warranty by the Issuer that on such date such statements are true) the representations and warranties of the Issuer contained in Section 4.04 of this Agreement are true and correct in all material respects on and as of such Purchase Date as though made on and as of such date (except to the extent that such representations or warranties expressly relate to an earlier date, in which case such representations or warranties shall be true and correct in all material respects as of such earlier date). ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Certain Representations and Warranties of the Parties. Each of the Seller and the Servicer represents and warrants as to itself, as follows: (a) Organization and Good Standing. (1) (i) the Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required, except where the failure to so qualify would not reasonably be expected to have a material adverse effect on its condition (financial or otherwise), operations or properties and (ii) the Servicer is a national banking association duly organized and validly existing in good standing under the laws of the United States, (2) the Seller and the Servicer each have all the requisite corporate power and authority to execute, deliver and perform its obligations under and effect the transactions contemplated by this Agreement and (3) the Seller and the Servicer each have all requisite corporate power and authority and the legal right to own, pledge, mortgage and operate its properties, and to conduct its business as now or currently proposed to be conducted. (b) Due Authorization and No Conflict. The execution, delivery and performance by it of this Agreement, and all instruments and documents to which it is a party and which are to 11 13 be delivered hereunder by it, and the transactions contemplated hereby and thereby, (1) are within its corporate powers, (2) have been duly authorized by all necessary corporate action, including the consent of stockholders and shareholders where required, (3) do not (A) contravene its charter or bylaws, (B) violate any law or regulation (including without limitation Regulation T, Regulation U or Regulation X of the Board) or any order or decree of any Governmental Authority, which violation would have a material adverse effect on the rights and remedies of the Indenture Trustee and the Noteholders of any Series under any Transaction Document, (C) result in the breach of, or constitute a default under, any indenture, mortgage or deed of trust enforceable against it or any lease, agreement or other instrument binding on or affecting it or any of its properties, which breach or default would have a material adverse effect on the rights and remedies of the Indenture Trustee and the Noteholders of any Series under any Transaction Document, or (D) result in or require the creation or imposition of any Lien upon any of its property, including without limitation pursuant to any agreement or instrument referred to in clause (C) above, except as created, imposed or contemplated by any of the Transaction Documents and (4) do not require compliance on its part with any bulk sales act or similar law. (c) Enforceability. This Agreement and the other Transaction Documents to which it is a party have been validly executed and delivered by it, and this Agreement and the other Transaction Documents to which it is a party constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to general principles of equity and subject to bankruptcy, insolvency, reorganization, moratorium and similar laws now or hereafter in effect relating to creditors' rights generally and the rights of creditors of national banking associations from time to time in effect. (d) No Proceedings. There is no unstayed action, suit or proceeding pending or, to its knowledge, threatened against or affecting it, before any court, governmental agency or arbitrator that (1) is reasonably likely to be determined adversely to it and that, if so determined, would have a material adverse effect on the rights and remedies of the Indenture Trustee and the noteholders of any Series under any Transaction Document, or (2) that purports to affect in any material respect the legality, validity or enforceability of this Agreement, any of the other Transaction Documents or the transactions contemplated hereby or thereby. Section 4.02. Additional Representations and Warranties of the Seller and the Servicer. Each of the Seller and the Servicer additionally represents and warrants as to itself as follows: (a) Statements Made. The written statements of its senior officers that have been or will be furnished to the Indenture Trustee and the Noteholders of all Series in connection with this Agreement and any other Transaction Document, and any financial statement delivered pursuant hereto or thereto (other than to the extent such statements constitute projections), taken as a whole and in light of the circumstances in which made, at the time so furnished contained no untrue statement of a material fact and did not omit to state a material fact necessary to make the statements therein not misleading; and, to the extent that any such statements constitute projections, such projections were prepared in good faith on the basis of fully disclosed material assumptions, believed by it to be reasonable at the time such projections were furnished to the Indenture Trustee or the Noteholders of all Series, as the case may be. 12 14 (b) Location of Office and Records. The chief place of business and chief executive office of the Seller is located at 901 West Walnut Hill Lane, Irving, Texas 75038; and the offices where the Seller keeps all its original books, records and documents evidencing Purchased Receivables or the related Credit Card Agreements are located at such addresses, except that the Credit Card Agreements and substantially all charge slips for each Account are located at the Originator's stores. The chief place of business and chief executive office of JNB and the offices where JNB keeps all its original books, records and documents evidencing the Purchased Receivables is located at 2035 West 4th Street, Tempe, Arizona 85281. The respective locations set forth in this subsection (b) for the Seller and JNB have been the same locations for the four months immediately prior to the date of this Agreement. (c) Indenture Trustee Can Perform. Upon the delivery by the Seller or Servicer to the Indenture Trustee of the Transaction Documents and related materials relating to the administration of the Purchased Receivables pursuant to Section 7.01(b) of this Agreement, the Indenture Trustee shall have been furnished with all data and materials necessary to permit collection of the Purchased Receivables by the Indenture Trustee in accordance with the terms of such Receivables, without the participation of the Seller, the Servicer or the Issuer in such collection; and it is not restricted by agreement, law, regulation or otherwise from granting the license to the Issuer contained in Section 10.08 of this Agreement. (d) Bank Accounts and Post Office Boxes. Set forth on Schedule I to the Indenture is a complete and accurate description, as of the Issuance Date, of each Post Office Box, Collection Deposit Account, the Collection Account and the Excess Funding Account; each of the Collection Deposit Accounts has been validly and effectively assigned to the Indenture Trustee pursuant to the Collection Deposit Account Letters; and all cash and other proceeds of the Collateral are subject to the terms and conditions of this Agreement and the Indenture. (e) No Consent. No action, authorization, qualification, license, permit, consent or approval of, registration or filing with, or any other action by, any Governmental Authority is or will be required in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement by the Seller or the Servicer, other than (i) such as have been made or obtained and are in full force and effect and (ii) such actions, authorizations, qualifications, licenses, permits, consents, approvals, registrations or filings for which the failure to make or obtain would not have a material adverse effect to the rights and remedies of the Indenture Trustee or Noteholders of any Series under any Transaction Documents. (f) Taxes. It has filed or caused to be filed all tax returns and reports required by law to have been filed by it and has paid all taxes, assessments and governmental charges thereby shown to be owing, except any such taxes, assessments or charges (i) which are being diligently contested in good faith by appropriate proceedings, (ii) for which adequate reserves in accordance with GAAP shall have been set aside on its books and (iii) with respect to which no Lien has been imposed upon any Receivables or related assets. Section 4.03. Additional Representations and Warranties of the Seller. The Seller additionally represents and warrants as follows: 13 15 (a) Eligible Receivables. As of the Purchase Date with respect to each Purchased Receivable, each such Receivable, unless otherwise identified to the Issuer by the Servicer in the Daily Report for such date, will be an Eligible Receivable. (b) Sale of Receivables. On each Purchase Date, the Seller is and will be the sole legal and beneficial owner of the Receivables being sold by it; upon the sale of each Receivable by the Seller to the Issuer, the Issuer will become the sole legal and beneficial owner of the Purchased Receivables and the Collections with respect thereto, free and clear of any Liens (except for Liens created, imposed or contemplated by any of the Transaction Documents); and no effective financing statement or other instrument similar in effect covering all or any part of the Purchased Receivables or Collections with respect thereto will at such time be on file in any filing or recording office except such as have been filed pursuant to or as contemplated by the Transaction Documents or with respect to which the Indenture Trustee has received effective UCC termination statements. (c) Tradenames. Schedule I to this Agreement sets forth, as of the date of this Agreement, a complete and accurate list of the tradenames of the Originators for the six-year period preceding the date of this Agreement. (d) Financial Statements. The Indenture Trustee has previously been furnished copies of the audited consolidated financial statements of Zale Corporation and its consolidated subsidiaries for the fiscal year ended July 31, 1998. (e) UCC Classification. The Receivables, at the time of sale thereof by the Seller to the Issuer, are "accounts," "chattel paper" or "general intangibles" as defined in the UCC and no part of the Seller's right to payment for goods sold or leased is evidenced by an "instrument" which is not also a security agreement. (f) No Material Adverse Change. As of the date of this Agreement, no material adverse change in the business, assets, operations or condition (financial or otherwise) of Zale Corporation and its subsidiaries taken as a whole has occurred from that set forth in Zale Corporation's audited consolidated financial statements for the fiscal year ended July 31, 1998. (g) Information Provided in Computer Files. All material information with respect to the Accounts and the Receivables provided to the Indenture Trustee on the computer file or microfiche list listing all of the Purchased Accounts was true and correct in all material respects as of the Initial Issuance Date. (h) Account Schedule. Schedule III to this Agreement sets forth all Accounts as of the Initial Issuance Date. (i) Valid Transfer and Assignment. The transfer of Receivables by the Seller to the Issuer under this Agreement constitutes a valid transfer and assignment to the Issuer of all right, title and interest of the Seller in and to the Receivables, whether now existing or hereafter created, and the proceeds thereof (including amounts in any of the accounts established for the benefit of Noteholders of all Series). 14 16 (j) Return Policy. The Seller currently has a 30-day return policy. The Seller shall notify the Rating Agencies of any material change in such policy no later than seven Business Days prior to such change. (k) Valid Reasons for Sale. It has valid business reasons for selling its interests in the Purchased Receivables rather than obtaining a loan with such Receivables as collateral. (l) Receivables Not Satisfied, Etc. Each Purchased Receivable has not been satisfied, subordinated or rescinded and no material provision of such Receivable has been waived, altered or modified in any respect. (m) No Fraudulent Transfer. No purchase of an interest in any Purchased Receivable or related asset by the Issuer from it constitutes a fraudulent transfer or fraudulent conveyance under the United States Bankruptcy Code or applicable state bankruptcy or insolvency laws or is otherwise void or voidable or subject to subordination under similar laws or principles or for any other reason. (n) Chattel Paper. With respect to any document constituting "chattel paper", only one original of any such document exists. (o) Receivables Not To Be Evidenced by Promissory Notes or Instruments. Except in connection with its enforcement or collection of an Account, the Seller or Servicer will take no action to cause any Receivable conveyed by it to the Trust to be evidenced by any promissory note or instrument (as defined in the UCC). Section 4.04. Representations and Warranties of the Issuer. The Issuer represents and warrants to the Seller and the Servicer as follows: (a) Organization; Powers. The Issuer (1) is a business trust duly organized, validly existing and in good standing under the laws of Delaware, (2) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (3) is qualified to do business in every jurisdiction where such qualification is required, except where the failure to so qualify would not reasonably be expected to have an Adverse Effect and (4) has the power and authority to execute, deliver and perform its obligations under this Agreement and each other Transaction Document or instrument contemplated thereby to which it is a party and to issue the Notes. (b) Authorization. The execution, delivery and performance by the Issuer of this Agreement and the other Transaction Documents to which it is a party and the performance by the Issuer of the other transactions contemplated thereby (1) have been duly authorized by the Issuer and (2) will not (A) violate (i) any material provision of law, statute, rule or regulation, which violation would have an Adverse Effect, (ii) any provision of the Trust Agreement, (iii) any order of any Governmental Authority, which violation would have an Adverse Effect or (iv) any provision of any indenture, agreement or other instrument to which the Issuer is a party or by which it or any of its property is or may be bound, which violation would have an Adverse Effect, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, which conflict, breach or default would have an Adverse Effect or (C) result in the creation or imposition of any 15 17 Lien upon or with respect to any property or assets now owned or hereafter acquired by the Issuer, except the Liens created, imposed or contemplated by any of the Transaction Documents. (c) Enforceability. This Agreement has been duly executed and delivered by the Issuer and constitutes, and each other Transaction Document when executed and delivered by the Issuer will constitute, a legal, valid and binding obligation of the Issuer, enforceable against the Issuer in accordance with its terms, subject to general principles of equity and to bankruptcy, insolvency, reorganization, moratorium and similar laws now or hereafter in effect relating to creditors' rights generally. (d) Litigation. There is no action, suit, investigation, litigation or proceeding at law or in equity or by or before any Governmental Authority now pending against, or, to the knowledge of the Issuer, threatened against, the Issuer or any of its business, property or rights (1) that involves any of the Transaction Documents or the Transactions or (2) as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would, individually or in the aggregate, have an Adverse Effect. ARTICLE V COVENANTS Section 5.01. Affirmative Covenants of the Seller and Servicer. So long as the Issuer shall have any interest in any Purchased Receivable, unless the Issuer and the Majority Noteholders otherwise consent in writing: (a) Financial Statements. The Seller shall deliver or cause to be delivered to the Issuer, the Servicer, and the Indenture Trustee, and each noteholder of any Series who has provided to the Seller a written request therefor: (1) Annual Financial Statements. Within 100 days after the end of each fiscal year of Zale Corporation, the consolidated Balance Sheet and related Statements of Income and Cash Flows of Zale Corporation and its consolidated subsidiaries, showing the financial condition of Zale Corporation and its consolidated subsidiaries as of the close of such fiscal year and the results of the operations of Zale Corporation and its consolidated subsidiaries during such year, all audited by Arthur Andersen LLP or other independent public accountants of recognized national standing; (2) Quarterly Financial Statements. Within 50 days after the end of the first three fiscal quarters of Zale Corporation, (A) the unaudited consolidated Balance Sheet and related Statement of Income and Cash Flows of Zale Corporation and its consolidated subsidiaries, showing the financial condition of Zale Corporation and its consolidated subsidiaries as of the close of such fiscal quarter and the results of the operations of Zale Corporation and its consolidated subsidiaries during such fiscal quarter and the then elapsed portion of such fiscal year, and (B) a certificate of a Financial Officer of Zale Corporation certifying that such financial statements fairly present in all material respects the financial condition and results of operations of Zale Corporation and its consolidated subsidiaries on a 16 18 consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments without GAAP footnotes; and (3) Monthly Financial Statements. Not later than the last day of the month (or, if such day is not a Business Day, the next succeeding Business Day) following each fiscal month of Zale Corporation (or, notwithstanding the foregoing, 50 days in the case of the last month of each fiscal quarter and 100 days in the case of the last month of each fiscal year), beginning with the end of the first fiscal month following the Initial Issuance Date, (A) the unaudited consolidated Balance Sheet and related Statements of Income and Cash Flows of Zale Corporation and its consolidated subsidiaries, showing the financial condition of Zale Corporation and its consolidated subsidiaries as of the close of such fiscal month and the results of the operations of Zale Corporation and its consolidated subsidiaries during such fiscal month and the then elapsed portion of the fiscal year of Zale Corporation and (B) a certificate of a Financial Officer of Zale Corporation certifying that such financial statements fairly present in all material respects the financial condition and results of operations of Zale Corporation and its consolidated subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and without GAAP footnotes. (b) Compliance with Laws, etc. Each of the Seller and the Servicer shall comply in all material respects with all applicable laws, rules and regulations of any Governmental Authority, including without limitation rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity and fair debt collection practices and privacy, except where the failure to so comply would not have an Adverse Effect. (c) Preservation of Existence. The Seller and the Servicer shall do or cause to be done all things necessary (1) to preserve, renew and keep in full force and effect its legal existence and (2) to maintain such legal existence separate from that of the Issuer. (d) Inspection Rights. Each of the Seller and the Servicer shall, from time to time, at any reasonable time during normal business hours, upon at least two Business Days' prior notice, permit the Issuer or any of its agents or representatives or the Indenture Trustee, acting at the written direction of the Majority Noteholders, (1) to examine and make copies of and abstracts from the records, books of account and documents (including without limitation computer tapes and disks) of the Seller and the Servicer relating to the Purchased Receivables and the underlying Credit Card Agreements; and (2) to visit the properties of the Seller and the Servicer for the purpose of determining compliance under the Transaction Documents, and to discuss the affairs, finances and accounts of the Seller and the Servicer relating to the Purchased Receivables or the Seller's or the Servicer's performance under this Agreement with any of the Seller's or the Servicer's senior officers, directors, independent certified public accountants and consultants. (e) Keeping of Records and Books of Account. Each of the Seller and the Servicer shall maintain and implement, or cause to be maintained and implemented, administrative and operating procedures reasonably necessary or advisable for the transfer, administration, servicing and collection of amounts owing on all Purchased Receivables, and, unless and until delivery to the Issuer, keep and maintain, or cause to be kept and maintained, all documents, books, records and other information reasonably necessary or advisable for the 17 19 transfer, identification, administration, servicing and collection of amounts owing on all such Purchased Receivables. (f) Location of Records. Each of the Seller and the Servicer shall (1) keep its chief place of business and chief executive office and the offices where it keeps its original books, records and documents evidencing Purchased Receivables (other than the Credit Card Agreements and substantially all charge slips for each Account) at the addresses specified in subsection 4.02(b) of this Agreement, or upon 30 days' prior written notice to the Issuer and the Indenture Trustee, at such other locations in a jurisdiction where all action required by subsection 5.01(n) of this Agreement shall have been taken and completed and be in full force and effect, and (2) cause each retail store to keep all Credit Card Agreements and substantially all charge slips for each Account of customers of such store in a centralized, segregated and marked location at such store or any off-site storage facility maintained by the Servicer or Seller. (g) Computer Files. The Seller shall direct the Servicer to, and the Servicer shall, at its own cost and expense, retain the electronic ledger used by the Seller and the Servicer as a master record of the Accounts and copies of all material documents relating to each Account as custodian for the Issuer and the Indenture Trustee and other Persons with interests in the Purchased Receivables. The Seller and the Servicer shall indicate in the appropriate computer files by an identifiable code all Accounts the Receivables of which have been conveyed to the Issuer. If the Seller or the Servicer at any time alters the code by which Purchased Accounts have been so designated, the Seller or the Servicer shall be obligated to indicate the revised code to the Indenture Trustee in a written statement to accompany the Monthly Settlement Statement due on the Determination Date immediately following the alteration of such code. (h) Credit Card Agreements and Credit Card Guidelines. Each of the Seller and the Servicer shall comply with and perform its obligations in accordance with the Credit Card Guidelines, except (1) insofar as any failure so to comply or perform would not have a material adverse effect on the rights and remedies of the Noteholders of any Series under any Transaction Document or (2) if such failure to comply is necessary under any Requirement of Law. With respect to any change to the Credit Card Guidelines that is material and that is not necessary under any Requirement of Law, (1) the Seller and the Servicer shall, prior to making any such change, give 30 days' written notice to the Noteholders of any Series and to each Rating Agency of any such change, (2) the Majority Noteholders shall have such 30-day period to notify the Seller and the Servicer that such Majority Noteholders deem the change to have a material adverse effect on the rights and remedies of the Noteholders of such Series (any which notice shall state in reasonable detail the reasons for such opinion) and (3) if such notice is given in such 30-day period and such change would have such effect, such change shall not be made; provided that, if no such notice is received by the Seller and the Servicer within such 30-day period, such change shall be deemed not to have such effect and the Noteholders of all Series shall be deemed to have consented to such change. (i) Daily Reports; Monthly Settlement Statements; Other Reports. The Servicer shall furnish (or, if JNB is not the Servicer, JNB shall provide the Servicer with such information as may be required by the Servicer to furnish) the Seller, the Issuer, and the Indenture Trustee with each Daily Report and Monthly Settlement Statement required by Sections 6.03(a) and 6.03(b) of this Agreement and other records that show the performance of the Purchased 18 20 Receivables and such other reports as may be reasonably requested by the Issuer and by the Indenture Trustee, acting at the direction of the Majority Noteholders. (j) Insurance. Except to the extent failure to do so would not reasonably be expected to have a material adverse effect on the rights and remedies of the Indenture Trustee and the Noteholders of any Series under any Transaction Document, each of the Seller and the Servicer shall (1) keep its insurable properties adequately insured at all times by financially sound and responsible insurers, and maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies of the same or similar size in the same or similar businesses; (2) maintain in full force and effect public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it in such amounts and with such deductibles as are customary with companies of the same or similar size in the same or similar businesses and in the same geographic area; and (3) maintain such other insurance as may be required by law. (k) Obligations and Taxes. Each of the Seller and the Servicer shall (1) pay any material obligations enforceable against or binding on it promptly and in accordance with terms thereof and (2) pay and discharge promptly when due all sales tax and all material taxes, assessments and governmental charges or levies imposed upon, and enforceable against or binding on, it or upon its income or profits or in respect of its property, before the same shall become in default, as well as all material lawful claims enforceable against or binding on it for labor, materials and supplies or otherwise which, if unpaid, might become a Lien or charge upon such properties or any part thereof; provided that, with respect to both clauses (1) and (2) in this Section 5.01(k), it shall not be required to pay and discharge or to cause to be paid and discharged any such obligation, tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and it shall have set aside on its books adequate reserves with respect thereto. (l) Furnishing Copies, etc. Each of the Seller and the Servicer shall furnish to the Issuer and to the Indenture Trustee promptly following request therefor, such information, documents, records or reports with respect to the Purchased Receivables or the underlying Credit Card Agreements or the operations or conditions (financial or otherwise) of the Seller or the Servicer as the Issuer or the Indenture Trustee, acting at the written direction of the Majority Noteholders, may from time to time reasonably request. (m) Obligations with Respect to Accounts. Each of the Seller and the Servicer shall (1) duly fulfill all obligations on its part to be fulfilled under or in connection with each Account, except where the failure to so fulfill (A) would not have a material adverse effect on the rights and remedies of the Indenture Trustee and the Noteholders of any Series or (B) is necessary under any Requirement of Law and (2) not do anything to impair, in any material respect, the rights of the Issuer in the Purchased Receivables or under the underlying Credit Card Agreements. (n) Continuing Compliance with the UCC. Each of the Seller and the Servicer shall, at its expense, preserve, continue and maintain or cause to be preserved, continued and maintained the Issuer's valid and properly protected and perfected title to each Purchased 19 21 Receivable, including without limitation filing or recording UCC financing statements in each relevant jurisdiction. (o) Further Action Evidencing Purchases. Each of the Seller and the Servicer shall, at its expense, promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary and that the Issuer may reasonably request, in order to protect or more fully evidence the Issuer's right, title and interest in the Purchased Receivables and its rights under the Credit Card Agreements with respect thereto, or to enable the Issuer to exercise or enforce any such rights, and without limiting the generality of the foregoing, (1) the Seller shall, upon the request of the Issuer, execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices as may be necessary or, in the opinion of the Issuer, advisable, (2) the Seller shall provide to the Issuer upon request copies of any records relating to the Purchased Receivables and any records reasonably related to determining compliance with the Transaction Documents, (3) the Seller shall hereby irrevocably authorize the Issuer to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Purchased Receivables sold or to be sold by the Seller, or the underlying Credit Card Agreements with respect thereto, without the signature of the Seller where permitted by law, (4) if the Seller or the Servicer fails to perform any of its agreements or obligations under this Agreement, the Issuer may (but shall not be required to) perform, or cause the performance of, such agreements or obligations, and the costs and expenses of the Issuer incurred in connection therewith shall be payable by the Seller as provided in Section 10.06 of this Agreement and (5) each of the Seller and the Servicer shall (A) indicate on its books and records that the Purchased Receivables have been sold and assigned to the Issuer, and provide to the Issuer and the Indenture Trustee, upon request, copies of such records, (B) obtain the agreement of any Person having a Lien in and to any Receivable owned by the Seller and to be sold to the Issuer hereunder (other than any Lien created, imposed or contemplated by any of the Transaction Documents) to release such Lien upon the sale of any such Receivable to the Issuer and (C) notify the Issuer promptly after obtaining knowledge that any Purchased Receivable has become subject to a Lien other than any Lien created, imposed or contemplated by any of the Transaction Documents. (p) Receivables Processing Facility; Storage Facility. JNB shall (1) maintain its facilities from which it services the Purchased Receivables in substantially its present condition, ordinary wear and tear excepted, or in better condition, or such other facility of similar quality, security and safety as JNB may select from time to time, (2) make all property tax payments, lease payments and all other payments with respect to such facility, including any indebtedness secured by such facility, whether JNB shall be the Servicer or a Successor Servicer shall have been appointed, and (3) (A) ensure that any Successor Servicer shall have complete and unrestricted access, at JNB's expense, to such facility and all computers and other systems relating to the servicing of the Purchased Receivables, (B) use its best efforts to retain the employees based at such facility to provide assistance to any Successor Servicer after the appointment of such Successor Servicer and (C) continue to store on a daily basis all back-up files relating to the Purchased Receivables and the servicing of the Purchased Receivables at ARCUS, 7430 Whitehall Street, Richland Hills, Texas 76118, or such other storage facility of similar quality, security and safety as JNB may select from time to time, until, in the case of clauses (3)(A), (3)(B) and (3)(C) of this Section 5.01(p), the earlier of (x) the indefeasible payment in full in cash of the principal and interest of the Notes of all Series payable in 20 22 accordance with the Indenture, (y) the receipt by the Indenture Trustee of all Collections in respect of all Purchased Receivables and (z) the time that a Successor Servicer is able to perform its obligations under this Agreement without the assistance of JNB. (q) Tradenames. The Seller shall promptly notify the Issuer and the Indenture Trustee of any tradenames of the Originators additional to those set forth on Schedule I to this Agreement. (r) Sale Treatment. The Seller and the Servicer shall perform the transactions contemplated by this Agreement in a manner that is consistent in all material respects with the Issuer's ownership interest in the Purchased Receivables under applicable law. (s) Non-consolidation with Issuer. The Seller shall operate its business in such a manner that the Issuer will not be substantively consolidated with the Seller or any Affiliate of the Seller. Section 5.02. Negative Covenants of the Seller and Servicer. So long as the Issuer shall have any interest in any Purchased Receivable, unless the Issuer and the Majority Noteholders otherwise consent in writing: (a) Liens. Neither the Seller nor the Servicer shall, except as otherwise provided in or contemplated by this Agreement, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Lien upon or with respect to, any Purchased Receivables, any Accounts or any Credit Card Agreements with respect thereto, or assign any right to receive proceeds in respect thereof, except as set forth in or as contemplated by, and for Liens created, imposed or contemplated by, any of the Transaction Documents; provided that, nothing in this Section 5.02(a) or in any other provision hereof or in any other Transaction Document shall prohibit or be deemed to prohibit the Seller or an Affiliate of the Seller from selling, assigning or otherwise transferring, or financing, any accounts or chattel paper (other than the Purchased Receivables) of the Seller or such Affiliate pursuant to any factoring or other arrangements. (b) Change in Business. Neither the Seller nor the Servicer shall make any material change in the type of business it conducts on the Initial Issuance Date that would have a material adverse effect on the rights and remedies of the Indenture Trustee and the Noteholders of any Series under any Transaction Document. (c) Change in Payment Instructions to Obligors. Neither the Seller nor the Servicer shall instruct the Obligors of any Purchased Receivables to make any payments with respect to such Purchased Receivables other than as described in this Agreement or in the Indenture. 21 23 ARTICLE VI ADMINISTRATION AND SERVICING OF PURCHASED RECEIVABLES Section 6.01. Appointment of and Acceptance by the Servicer of Servicing Obligations. The Issuer hereby appoints JNB as Servicer of the Purchased Receivables. JNB agrees to act as the Servicer under this Agreement, pursuant to and in accordance with the terms of this Agreement and the Indenture, on behalf of the Issuer and the Indenture Trustee, it being understood that the relationship of the Servicer to the Indenture Trustee is intended by the parties to be that of an independent contractor and not that of a joint venturer, partner or agent. The Servicer shall (1) service and administer each Account and collect and enforce the Purchased Receivables due thereunder, (2) except as otherwise limited by this Agreement, exercise all discretionary powers involved in such management, administration and collection and (3) except as otherwise provided in the Transaction Documents, bear all costs and expenses incurred in connection therewith that may be necessary or advisable and permitted for carrying out the transactions contemplated by this Agreement and the Indenture. Servicing activities to be performed by the Servicer include collecting and recording payments, communicating with Cardholders, investigating payment delinquencies and maintaining internal records with respect to each Cardholder. Managerial services performed by the Servicer on behalf of the Issuer include providing related data processing and reporting services for Noteholders of any Series and on behalf of the Indenture Trustee and, with respect to any Series, performing any other services required pursuant to the related Indenture Supplement. Although physical possession of the agreements, documents and files relating to the Receivables may be held by the respective stores generating the Accounts, the Servicer, pursuant to the terms of this Agreement, will be responsible for maintaining custody of such documents relating to the Receivables. In the servicing and administration of the Accounts and the collection and enforcement of the Purchased Receivables due thereunder, the Servicer shall exercise a degree of skill and care consistent with those of a reasonable and prudent servicer of retail credit card receivables, but in any event at least comparable with the policies and procedures and the degree of skill and care that it has exercised in servicing Receivables of the Seller and Affiliates of the Seller, and the Servicer shall comply and perform in accordance with the Credit Card Guidelines, except to the extent that failure to so comply or perform (1) would not have a material adverse effect on the rights and remedies of the Indenture Trustee and the Noteholders of any Series under any Transaction Document or (2) is necessary under any Requirement of Law. In the ordinary course of business, the Servicer may at any time delegate or subcontract any of its duties under this Section 6.01 to any Person who agrees to conduct such duties in accordance with the terms of this Agreement and the Credit Card Guidelines; provided that, such delegation or subcontract shall not relieve the Servicer of any of its liabilities and responsibilities with respect to such duties, and shall not constitute a resignation within the meaning of Section 6.10(a) of this Agreement. Section 6.02. Servicing Compensation. As compensation for its servicing activities hereunder and reimbursement for its expenses incurred as the Servicer, the Servicer shall be entitled to receive on each Payment Date (i) from any funds available for such payment, the Monthly Servicing Fee payable with respect to each Series, pursuant to the applicable Indenture Supplement and (ii) from the Issuer, an amount equal to one-twelfth of the Servicing 22 24 Fee less the Monthly Servicing Fee. The Servicer shall bear all costs and expenses (without right of reimbursement other than the Servicing Fee) incurred in connection with performing its servicing activities under this Agreement, including, without limitation, fees and disbursements of independent accountants, fees and expenses incurred in collecting Purchased Receivables and generating Recoveries, and all other expenses incurred by the Servicer in connection with its servicing activities under this Agreement; provided that, in no event shall the Servicer be liable for any Federal, state or local income or franchise tax, or any interest or penalties with respect thereto, assessed on the Indenture Trustee, any Noteholder of any Series or the Issuer. The Servicer shall be required to pay such costs and expenses for its own account, and shall not be entitled to any payment therefor other than the Servicing Fee. Section 6.03. Reports and Statements. (a) Daily Report. On each Business Day, the Servicer shall prepare a Daily Report on the basis of the sales and collections figures reported the previous day or days from the Servicer's central computer processing center. The Daily Report shall report, among other things, the dollar amount of Receivables originations reported to the Servicer since the preceding Daily Report and the dollar amount of Collections and Recoveries received in the Collection Account for the applicable day or applicable days covered by such Daily Report (or, in the case of a Daily Report delivered on a day following a Saturday, Sunday or other non-Business Day, the aggregate of such activity for the preceding Business Day and such non-Business Days). By 12:00 Noon (New York City time) on each Business Day, the Servicer shall deliver the Daily Report to the Issuer, the Seller and the Indenture Trustee, which Daily Report shall be certified by a Financial Officer of the Servicer; provided that, if a Force Majeure or a "system failure" or other similar technical failure in the operations of the Servicer shall occur that prevents the preparation or delivery of any Daily Report within such time, the Servicer shall use its best efforts to recreate Daily Reports not produced as a result thereof or, if the Servicer is unable to recreate such Daily Reports, the Servicer shall prepare a composite Daily Report for each missed day and, in either case, the Servicer shall deliver such Daily Reports to the Issuer, the Seller and the Indenture Trustee within three Business Days of the date such Daily Report(s) were otherwise required to be delivered. Upon the discovery of any material error in any Daily Report by the Issuer, the Seller, the Servicer or the Indenture Trustee, the Issuer, the Seller, the Servicer and the Indenture Trustee shall confer and shall agree upon any necessary adjustments to correct any such error. Unless the Issuer and the Indenture Trustee have received actual notice of any such error, the Issuer and the Indenture Trustee may rely on any Daily Report for all purposes under this Agreement and the other Transaction Documents. (b) Monthly Settlement Statement. With respect to each Series, the Servicer shall on each Determination Date, by 12:00 Noon (New York City time), prepare and deliver to the Issuer, the Seller, the Indenture Trustee and each Rating Agency, the Monthly Settlement Statement for the related Settlement Period, certified by a Financial Officer of the Servicer; provided that, with respect to any Monthly Settlement Statement, if a Force Majeure or a "system failure" or other similar technical failure in the operations of the Servicer shall occur that prevents the preparation or delivery of any Monthly Settlement Statement, a Monthly Settlement Statement containing all information for each day required to be included therein shall be prepared and delivered to the Issuer, the Seller and the Indenture Trustee within three 23 25 Business Days of the date such Monthly Settlement Statement was otherwise required to be delivered. (c) Annual Independent Public Accountant's Servicing Report. The Servicer shall, no later than September 30 of each year (commencing September 30, 2000), cause either Arthur Andersen LLP, PricewaterhouseCoopers LLP, Deloitte Touche Tohmatsu, Ernst & Young LLP or KPMG LLP (or any of their successors in interest) (which firm may also render other services to the Servicer or any Affiliate thereof) to furnish a report, as of July 31 of such year, to the Issuer, the Seller, each Rating Agency and the Indenture Trustee, performing certain agreed upon procedures with respect to certain documents and records relating to the servicing of the Receivables and that, based upon such agreed-upon procedures, no matters came to their attention that caused them to believe that such servicing was not conducted in compliance with certain applicable terms and conditions set forth in this Agreement except for such exceptions or errors as such firm shall believe to be immaterial and such other exceptions as shall be set forth in such statement. Each such accountants' report shall state that the accountants have compared the amounts contained in one randomly selected Daily Report from each fiscal quarter and two randomly selected Monthly Settlement Statements delivered by the Servicer during the period covered by such report with the records from which such amounts were derived and that, on the basis of such comparison, such accountants are of the opinion that the amounts are in agreement with such records, except for such exceptions as they believe to be immaterial and such other exceptions as shall be set forth in such report. (d) Compliance Statements. The Servicer shall deliver to the Issuer and to the Indenture Trustee, on or before September 30 of each year (beginning September 30, 2000) a certificate signed by a Financial Officer of the Servicer stating that (1) a review of its activities relating to the servicing of the Accounts during the prior year ending July 31 and performance under this Agreement and the Indenture has been made under such officer's supervision, and (2) to the best of such officer's knowledge, based on such review, it has fulfilled all its obligations under this Agreement throughout the period covered by such certificate, or, if there has been a material default in the fulfillment of any such obligations, specifying each such default known to such officer and the nature and status thereof. Section 6.04. Collection Procedures. (a) Collection Deposits and Transfers. On or before the Initial Issuance Date, the Servicer, the Seller and the Issuer shall have established and shall maintain thereafter the system of collecting and processing Collections of Purchased Receivables set forth in this Section 6.04. The Obligors may make payments on Purchased Receivables only (1) by check mailed to the Post Office Boxes (such payments, upon receipt in the Post Office Boxes being referred to as "Mail Payments") or (2) by cash or check to the Servicer or at stores operated by the Originators as the case may be (such payments, upon receipt by such stores, being referred to as "Store Payments"). With respect to all Mail Payments, the Servicer shall (A) remove such Mail Payments, or cause such Mail Payments to be removed, from the Post Office Boxes on each Business Day, and process such payments by recording the amount of the payment received from each Obligor and the applicable Account number, (B) no later than one Business Day following the receipt of any Mail Payments in the Post Office Boxes, deposit such Mail Payments, or cause such Mail Payments to be deposited, in a Collection Deposit Account and (C) transfer, or cause 24 26 to be transferred, such Mail Payments to the Collection Account (excluding, with certain exceptions, certain portions thereof allocable to the Seller) on the same day that such funds become available. With respect to all Store Payments, the Servicer and the Seller shall (1) cause all Store Payments to be (A) processed as soon as possible after such payments are received by the Seller or the Servicer and (B) deposited in the Local Store Bank Accounts no later than one local (with respect to the location of the applicable Local Store Bank Account) business day following the day of such receipt and (2) no later than two local (with respect to the location of the applicable Local Store Bank Account) business days following such initial receipt by such store, transfer, or cause to be transferred, such Store Payments to the Collection Account (excluding, with certain exceptions, certain portions thereof allocable to the Seller). (b) Force Majeure. If any deposits or transfers prescribed by Section 6.04(a) of this Agreement cannot be made within the time period specified in such Section 6.04(a) as a result of a Force Majeure or a depository institution's failure to so deposit or transfer, so long as such deposits or transfers are made promptly after the cessation of such Force Majeure or a depository institution's failure to so deposit or transfer, but in no event later than three Business Days or local business days (with respect to the location of the applicable Local Store Bank Account), as the case may be, after such time period specified, the provisions of such Section 6.04(a) shall be deemed to have been fully complied with. (c) Deposit of Recoveries. The Servicer shall deposit, or cause to be deposited, all Recoveries in accordance with Section 6.04(a) of this Agreement. (d) Funds Held in Trust. Any funds held by the Seller or the Servicer representing Collections of Purchased Receivables shall, until deposited in a Collection Deposit Account or the Collection Account, be held in trust by the Seller or the Servicer, as the case may be, for and as the Indenture Trustee's property pursuant to the terms of the Indenture, and, except as provided in Section 6.04(a) of this Agreement with respect to Store Payments, shall not be commingled with the Seller's or the Servicer's other funds or property. (e) Waiver of Set-off. The Seller and the Servicer irrevocably waive any right to set off against, or otherwise deduct from, any Collections. (f) Bank Accounts. The Seller agrees that it shall have no bank account, deposit account or trust account for the collection of Purchased Receivables other than the Local Store Bank Accounts, and that it shall not make or maintain any deposits from Collections in any bank account, deposit account or trust account other than the Local Store Bank Accounts and Collection Deposit Accounts. Section 6.05. Allocations and Applications of Collections. Collections deposited into the Collection Account shall be allocated, transferred and distributed in accordance with the Indenture. Section 6.06. Maintenance of Property; Insurance. The Servicer shall (1) maintain all property and assets necessary to its business as Servicer in good working order and condition (normal wear and tear excepted), (2) furnish to the Issuer such information as may be reasonably requested by the Issuer as to the insurance carried by the Servicer with respect to its 25 27 business, (3) within five days of receipt of notice from any insurer, furnish the Issuer with a copy of any notice of cancellation or material change in coverage from that existing on the Issuance Date, (4) promptly, furnish the Issuer with notice of any cancellation or nonrenewal of such insurance coverage, (5) maintain disaster recovery systems and back-up computer and other information management systems that, in the Servicer's reasonable judgment, are sufficient to protect its business as Servicer against material interruption or loss in the event of damage to, or loss or destruction of, its primary computer and information management systems and (6) furnish to the Issuer and to the Indenture Trustee, acting at the written direction of the Majority Noteholders, upon written request, all relevant information as to such disaster recovery systems and back-up computer and information management systems, except, in the case of clause (1) of this Section 6.06, to the extent failure of the Servicer to so maintain such property and assets would not have an Adverse Effect. Section 6.07. Access to Certain Documentation Regarding the Purchased Receivables. The Servicer shall provide the Issuer and the Indenture Trustee, and their respective representatives, access to the documentation regarding the Accounts and the Purchased Receivables in such cases where the Issuer is required, in connection with the enforcement of the rights of the Issuer, the Indenture Trustee or any Noteholder of any Series, or by applicable statutes or regulations, to review such documentation, such access being afforded without charge but only (1) upon two Business Days prior notice (provided that, no such prior notice shall be required if an Early Amortization Event has occurred and is continuing) , (2) during normal business hours, (3) subject to the Servicer's normal security and confidentiality procedures and (4) at offices designated by the Servicer. The obligation of the Servicer to provide access to such documentation shall survive the Servicer's termination as Servicer. Nothing in this Section 6.07 shall derogate from any obligation to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Servicer to provide access as provided in this Section 6.07 as a result of any such obligation shall not constitute a breach of this Section 6.07. Section 6.08. Certain Responsibilities of the Servicer and the Seller. Notwithstanding anything in this Agreement to the contrary, (1) the Seller shall perform all its obligations under the Credit Card Guidelines related to the Purchased Receivables to the same extent as if such Purchased Receivables had not been transferred to the Issuer hereunder, (2) the exercise by the Issuer of any of its rights under this Agreement shall not relieve the Seller or the Servicer from such of its obligations under this Agreement with respect to such Purchased Receivables (other than the obligations of any predecessor Servicer under this Agreement with respect to which the Issuer has terminated the appointment of such Servicer as the Servicer) and (3) except as provided by law, the Issuer shall not have any obligation or liability with respect to any Purchased Receivables or the underlying Credit Card Agreements, nor shall the Issuer be obligated to perform any of the obligations or duties of the Seller or the Servicer thereunder. Section 6.09. Limitation on Liability of the Seller and Others. No recourse under or upon any obligation or covenant of this Agreement, or the Purchased Receivables, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, shareholder, employee, officer or director, in its capacity as such, past, present or future, of any party hereto or of any successor party, either directly or through such party, whether by virtue of any constitution or statute or rule of law, or by the enforcement of 26 28 any assessment or penalty or otherwise, it being expressly understood that this Agreement and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by the incorporators, stockholders, shareholders, employees, officers or directors, as such, of any such party or of any successor party, or any of them, because of the creation of the obligations hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Agreement or in the Purchased Receivables or implied therefrom, and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, shareholder, employee, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations or covenants contained in this Agreement or in the Purchased Receivables or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Agreement. The Issuer, the Seller, the Servicer, the Indenture Trustee and any of their respective directors, officers or employees may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising under this Agreement. Section 6.10. Successor Servicer. (a) Servicer Resignation. The Servicer shall not resign from its obligations and duties under this Agreement except either (i) upon a determination that the performance of its duties hereunder is no longer permissible under applicable law or (ii) upon satisfaction of the Rating Agency Condition. Any such determination permitting the resignation of the Servicer pursuant to clause (i) of the immediately preceding sentence shall be evidenced by an opinion of counsel to such effect delivered to the Issuer, the Seller and the Indenture Trustee. No such resignation shall become effective until a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with this Section 6.10 of this Agreement. (b) Servicer Default. Any of the following events shall constitute a "Servicer Default": (i) failure by the Servicer to make any payment, transfer or deposit, or to give instructions to the Indenture Trustee to make certain payments, transfers or deposits, on the date the Servicer is required to do so under this Agreement or any Indenture Supplement and the continuation of such failure for five Business Days after it became aware or should have become aware of such failure; (ii) failure on the part of the Servicer duly to observe or perform in any respect any other covenants or agreements of the Servicer hereunder which has a material adverse effect on the Noteholders of any Series issued and outstanding and which continues unremedied for a period of sixty days after written notice and continues to have a material adverse effect on such Noteholders of any Series then outstanding; or the delegation by the Servicer of its duties under this Agreement, except as specifically permitted hereunder; 27 29 (iii) any representation, warranty or certification made by the Servicer in this Agreement, or in any certificate delivered pursuant to this Agreement, proves to have been incorrect when made which has a material adverse effect on the Noteholders of any Series then outstanding, and which continues to be incorrect in any material respect for a period of sixty days after written notice and continues to have a material adverse effect on such Noteholders; or (iv) one of the events set forth in subsections 10.01(a)(i) or (ii) of the Indenture shall have occurred with respect to the Servicer. Notwithstanding the foregoing, a delay in or failure of performance referred to in clause (i) above for a period of ten Business Days, or referred to under clause (ii) or (iii) for a period of sixty Business Days (in addition to any period provided in (i), (ii) or (iii)), shall not constitute a Servicer Default until the expiration of such additional ten or sixty Business Days, respectively, if such delay or failure could not be prevented by the exercise of reasonable diligence by the Servicer and such delay or failure was caused by Force Majeure. Upon the occurrence of any such event, the Servicer shall not be relieved from using its best efforts to perform its obligations in a timely manner in accordance with the terms of this Agreement, and the Servicer shall provide the Indenture Trustee, any provider of Enhancement, the Seller and Noteholders of each Series issued and outstanding prompt notice of such failure or delay by it, together with a description of the cause of such failure or delay and its efforts to perform its obligations. In the event of any Servicer Default, either the Indenture Trustee or the Majority Noteholders, by written notice to the Servicer (and to the Indenture Trustee if given by the Noteholders of each Series), may terminate all of the rights and obligations of the Servicer as servicer under this Agreement and in and to the Receivables and the proceeds thereof and the Indenture Trustee may appoint a new Servicer (a "Service Transfer"), provided that, notwithstanding any such termination, such terminated Servicer shall remain responsible for any acts or omissions to act by it as Servicer prior to such termination. On and after the receipt by the Servicer of a Servicer Termination Notice, the Servicer shall continue to perform all servicing functions under this Agreement until the date specified in the Servicer Termination Notice or, if no such date is specified in the Servicer Termination Notice, until a date mutually agreed upon by the Servicer and the Issuer. (c) Appointment of Successor Servicer; Optional Repurchase of Purchased Receivables. As promptly as possible after the giving of a notice to the Servicer of the termination of the rights and obligations of the Servicer as servicer under this Agreement pursuant to Section 6.10(b) hereof, the Indenture Trustee shall, acting at the written direction of the Majority Noteholders, or if no such direction is received the Indenture Trustee may appoint an Eligible Servicer as a successor servicer (the "Successor Servicer") and such Successor Servicer shall accept its appointment by a written assumption in a form acceptable to the Issuer and the Indenture Trustee. On the date that a Successor Servicer shall have been so appointed and shall have accepted such appointment, all authority and power of the Servicer under this Agreement shall pass to and be vested in such Successor Servicer. The Indenture Trustee, acting at the written direction of the Majority Noteholders, is hereby authorized and empowered to (1) upon the failure of the predecessor Servicer to cooperate, execute and deliver, on behalf of the predecessor Servicer as attorney-in-fact or otherwise, all documents and other instruments upon 28 30 the failure of the predecessor Servicer to execute or deliver such documents or instruments and (2) do and accomplish all other acts or things necessary or appropriate, in either case to effect the purposes of such transfer of servicing rights. If no such Servicer has been appointed and has accepted such appointment by the time the Servicer ceases to act as Servicer, all authority, power and obligations of the Servicer under this Agreement shall pass to and be vested in the Indenture Trustee. As compensation therefor, the Indenture Trustee shall be entitled to such compensation as the Servicer would have been entitled to under this Agreement if no such notice of termination or resignation had been given. The Successor Servicer shall not be liable in any respect for any duties, responsibilities, obligations or liabilities of any predecessor Servicer except as set forth in this Section. In the event the Indenture Trustee becomes the Successor Servicer, the prior Servicer must agree to indemnify the Indenture Trustee against any claims or expenses arising out of such prior servicing performance. The Issuer and the Indenture Trustee may obtain bids from any potential Successor Servicer. If the Issuer and the Indenture Trustee are unable to obtain any bids from any potential Successor Servicer and the Servicer delivers to the Issuer and the Indenture Trustee an Officer's Certificate to the effect that it cannot in good faith cure the Servicer Default which gave rise to a transfer of servicing, and if the Indenture Trustee is legally unable to act as Successor Servicer, then the Indenture Trustee shall give the Seller the right of first refusal to purchase the Purchased Receivables on terms equivalent to the best purchase offer as determined by the Indenture Trustee, but in no event less than an amount equal to the Invested Amount on the date of such purchase plus all interest accrued but unpaid on all of the outstanding Notes at the applicable interest rate through the date of such purchase; provided, however, that no such purchase by the Seller shall occur unless the Seller shall deliver to the Indenture Trustee and each Rating Agency an Opinion of Counsel reasonably acceptable to the Indenture Trustee that such purchase would not constitute a fraudulent conveyance of the Seller. The proceeds of such sale shall be deposited in the Collection Account for distribution to the holders of each outstanding Series of Notes. Notwithstanding the above, the Indenture Trustee shall, if it is legally unable so to act, petition a court of competent jurisdiction to appoint any established financial institution qualifying as an Eligible Servicer as the Successor Servicer hereunder. (d) Agreement to Cooperate; Servicing Transfer. In connection with any succession of servicing under this Agreement, the predecessor Servicer agrees to cooperate with the Issuer and the Indenture Trustee and the Successor Servicer in effecting such succession under this Agreement, including without limitation (1) the transfer to the Successor Servicer of all authority of the Servicer to service the Accounts provided for under this Agreement (including without limitation all authority over all Collections which shall on the date of transfer be held by the predecessor Servicer for deposit, or which shall thereafter be received by the predecessor Servicer with respect to the Accounts) and (2) the prompt transfer by the predecessor Servicer to the Successor Servicer of (a) the predecessor Servicer's electronic records relating to the Accounts and the Purchased Receivables in such electronic form as the Successor Servicer may reasonably request and (b) all other records, correspondence and documents necessary for the continued servicing of the Accounts in the manner and at such times as the Successor Servicer shall reasonably request. To the extent that compliance with this Section 6.10(d) shall require the predecessor Servicer to disclose to the Successor Servicer information of any kind which the predecessor Servicer reasonably deems to be confidential, the Successor Servicer shall be required to enter into such customary licensing and confidentiality agreements as the predecessor Servicer shall deem necessary to protect its interests. All costs and expenses incurred 29 31 in connection with a transfer of servicing under this Agreement shall be borne by the predecessor Servicer. The Seller shall, upon request at all times, provide such information and assistance to the predecessor Servicer or the Successor Servicer as shall be required for the predecessor Servicer or the Successor Servicer to perform its obligations under this Agreement. (e) Successor Servicer. Upon its appointment, any Successor Servicer shall be the successor in all respects to the predecessor Servicer with respect to all servicing functions under this Agreement and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions of this Agreement, and all references in this Agreement to the Servicer shall be deemed to refer to the Successor Servicer. The Successor Servicer shall expressly be authorized to delegate any of its duties under this Agreement to the predecessor Servicer on and after the date of any transfer of servicing pursuant to Section 6.01 of this Agreement; provided, however, that the Successor Servicer, as Servicer hereunder, shall continue to be fully responsible for the performance of any duties so delegated. Section 6.11. Termination of Authority. All authority and power granted to the Servicer under this Agreement shall automatically cease and terminate upon termination of this Agreement and the Indenture and shall pass to and be vested in the Seller, and the Seller is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and other instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The Servicer agrees to cooperate with the Seller in effecting the termination of the responsibilities and rights of the Servicer to conduct servicing of the Purchased Receivables, including without limitation the transfer by the Servicer to the Seller, in the manner and at such times as the Seller shall request, of (1) the Servicer's electronic records relating to the Accounts and the Purchased Receivables therein in such electronic form as the Seller may request and (2) all other records, correspondence and documents relating to the Purchased Receivables. To the extent that compliance with this Section 6.11 shall require the Servicer to disclose to the Seller information of any kind which the Servicer deems to be confidential, the Seller shall be required to enter into such customary licensing and confidentiality agreements as the Servicer shall reasonably deem necessary to protect its interests. Section 6.12. Merger or Consolidation of, or Assumption of the Obligations of, the Servicer. The Servicer shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (i) the corporation formed by such consolidation or into which the Servicer is merged or the Person which acquires by conveyance or transfer the properties and assets of the Servicer substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia, or shall be a state or national banking association or other entity which is not subject to the bankruptcy laws of the United States of America and, if the Servicer is not the surviving entity, shall expressly assume, by an agreement supplemental hereto, executed and delivered to the Indenture Trustee in form satisfactory to the Indenture Trustee, the performance of every covenant and obligation of the Servicer hereunder (to the extent that any right, covenant or obligation of the Servicer, as applicable hereunder, is inapplicable to the successor entity, such successor entity shall be subject to such 30 32 covenant or obligation, or benefit from such right, as would apply, to the extent practicable, to such successor entity); (ii) the Servicer shall have delivered to the Indenture Trustee an Officer's Certificate that such consolidation, merger, conveyance or transfer and such supplemental agreement complies with this Section 6.12 and that all conditions precedent herein provided for relating to such transaction have been complied with and an opinion of counsel that such supplemental agreement is legal, valid and binding with respect to the Servicer; and (iii) the Servicer shall have delivered notice to the Rating Agency of such consolidation, merger, conveyance or transfer; provided, however, that the sale of Receivables by JNB to JCC shall not constitute the conveyance or transfer of properties and assets substantially as an entirety. ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE PURCHASED RECEIVABLES Section 7.01. Collection of Receivables; Rights of the Issuer and its Assignees. (a) The Issuer (and its assignees) may at any time (1) notify the Obligors of the Issuer's ownership of the Purchased Receivables and direct that payment of all amounts due or to become due under the Purchased Receivables be made directly to the Issuer or its designee and (2) give notice, or require that the Seller, at the Seller's expense, give notice of such ownership to each such Obligor and direct that all payments of such amounts be made directly to the Issuer or its designee; (b) Each of the Seller and the Servicer shall (1) upon the Issuer's (or its assignee's) request, and at the Seller's or the Servicer's expense, (A) assemble all the Seller's or the Servicer's documents, instruments and other records (including without limitation credit files and computer tapes or disks) that evidence or will evidence or record Purchased Receivables or the underlying Credit Card Agreements relating to the Purchased Receivables and that are otherwise necessary or desirable to effect Collections of such Purchased Receivables (collectively, the "Documents") and (B) deliver the Documents to the Issuer or its designee at a place designated by the Issuer; and (2) deliver to the Issuer, its designees or assignees all computer programs, material and data necessary to the immediate collection of the Purchased Receivables by the Issuer, or a party designated by the Issuer, with or without the participation of the Seller or the Servicer; and (c) The Seller hereby irrevocably authorizes the Issuer and its designee or assignees to take any and all steps in the Seller's name and on the Seller's behalf necessary or desirable, in the reasonable opinion of the Issuer and any such designee or assignee, to collect all amounts due under the Purchased Receivables, including, without limitation, opening mail received at the Post Office Boxes, endorsing the Seller's name on checks and other instruments 31 33 representing Collections, enforcing the Purchased Receivables and the underlying Credit Card Agreements and exercising all rights and remedies in respect thereof. ARTICLE VIII INDEMNIFICATION Section 8.01. Indemnification (a) In accordance with subsections (b) or (c) below, the Seller or the Servicer shall indemnify the Issuer, the Owner Trustee, the Noteholders of each Series and the Indenture Trustee and each of their respective directors, officers, employees and agents, from and against any loss, liability, expense, damage or injury suffered or sustained arising out of the acts or omissions of the Seller or the Servicer in performing its duties hereunder; provided, however, that the Seller or the Servicer shall not indemnify (i) the Issuer or the Noteholders of any Series for any liabilities, costs and expenses with respect to Federal, state or local income or franchise taxes required to be paid by the Issuer or the Noteholders of any Series or (ii) the Issuer, the Noteholders of any Series or the Indenture Trustee for liabilities imposed by reason of any gross negligence, willful misconduct or bad faith of the Indenture Trustee. (b) Without limiting or being limited by the foregoing, the Seller shall pay on demand to the Issuer or the Indenture Trustee, as the case may be, any and all amounts necessary to indemnify the Issuer or the Indenture Trustee, as the case may be, from and against any loss, liability, expense, damage or injury (any such amount or any amounts payable pursuant to subsection (a) hereof collectively referred to as "Seller Indemnified Amounts") and all Seller Indemnified Amounts relating to or resulting from: (i) the sale of any Receivable of the Seller that is not at the date of such sale an Eligible Receivable; (ii) reliance on any written representation or warranty made or deemed made by the Seller under or in connection with this Agreement that shall prove to have been false or misleading in any material respect when made or deemed made; (iii) the failure by the Seller to comply with any applicable law, rule or regulation with respect to any Purchased Receivable or the related Credit Card Agreement, or the nonconformity of any Purchased Receivable or the related Credit Card Agreement with any such applicable law, rule or regulation; (iv) the failure by the Seller to have filed, or any delay by the Seller in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to the Issuer's interest in any Purchased Receivables; (v) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Purchased Receivable (including without limitation a defense based on such Purchased Receivable or the related Credit Card Agreement not being a legal, valid and binding obligation of such Obligor 32 34 enforceable against it in accordance with its terms) or any other claim of the Obligor resulting from the sale of the merchandise or services related to any such Purchased Receivable or the furnishing or failure to furnish such merchandise or services; (vi) any failure of the Seller to perform its duties or obligations in all material respects under this Agreement, the Indenture and each Credit Card Agreement; (vii) any products liability claim arising out of or in connection with merchandise, insurance or services that are the subject of any charge pursuant to any Credit Card Agreement; (viii) except as provided in Section 6.04 of this Agreement with respect to Store Payments, the commingling of Collections of Purchased Receivables at any time with other funds other than funds of the Issuer; (ix) any investigation, litigation or proceeding in respect of this Agreement, any Purchased Receivable or any Credit Card Agreement; (x) the payment by the Issuer of any taxes owed by the Seller, including, without limitation, Federal, state or local income taxes, excise taxes or business taxes, or any tax liens of the Pension Benefit Guaranty Corporation, or any successor thereto, asserted under the Employee Retirement Income Security Act of 1974, as amended from time to time, to which the Purchased Receivables are made subject as a result of the Issuer being an Affiliate of the Seller; (xi) any claim arising under any patent, trademark or license or any interest therein (including without limitation any software license) owned by the Issuer or the Seller or used by the Issuer or the Seller in connection with the Purchased Receivables; or (xii) any amounts required to be paid by the Issuer pursuant to Section 11.04 of the Indenture. Notwithstanding the foregoing, the Seller shall not under any circumstances indemnify the Issuer (or its designees or assignees) for any Seller Indemnified Amounts that result from any default by any Obligor with respect to any Purchased Receivables, other than resulting from the circumstances described in clause (i), (iii) or (vi) above. (c) Without limiting or being limited by the foregoing, the Servicer shall pay on demand to the Issuer or the Indenture Trustee, as the case may be, any and all amounts necessary to indemnify the Issuer or the Indenture Trustee, as the case may be, from and against any loss, liability, expense, damage or injury (any such amount or any amounts payable pursuant to Subsection (a) hereof collectively referred to as "Servicer Indemnified Amounts") and all Servicer Indemnified Amounts relating to or resulting from: (i) reliance on any written representation or warranty made or deemed made by the Servicer under or in connection with this Agreement that shall prove to have been false or misleading in any material respect when made or deemed made; 33 35 (ii) any failure of the Servicer to perform its duties or obligations in all material respects under this Agreement, the Indenture and each Credit Card Agreement; (iii) except as provided in Section 6.04 of this Agreement with respect to Store Payments, the commingling of Collections of Purchased Receivables at any time with other funds other than funds of the Issuer; (iv) any investigation, litigation or proceeding in respect of this Agreement, any Purchased Receivable or any Credit Card Agreement; (v) the payment by the Issuer of any taxes owed by the Servicer, including, without limitation, Federal, state or local income taxes, excise taxes or business taxes, or any tax liens of the Pension Benefit Guaranty Corporation, or any successor thereto, asserted under the Employee Retirement Income Security Act of 1974, as amended from time to time, to which the Purchased Receivables are made subject as a result of the Issuer being an Affiliate of the Servicer; or (vi) any claim arising under any patent, trademark or license or any interest therein (including without limitation any software license) owned or used by the Servicer in connection with the Purchased Receivables. Notwithstanding the foregoing, the Servicer shall not under any circumstances indemnify the Issuer (or its designees or assignees) for any Servicer Indemnified Amounts that result from any default by any Obligor with respect to any Purchased Receivables, other than resulting from the circumstances described in clause (ii) above. (d) In the event of a Service Transfer, the Successor Servicer shall indemnify the Seller for any losses, claims, damages and liabilities of the Seller as described in this paragraph arising from the actions or omissions of such Successor Servicer. (e) Except as provided in Section 8.01(a), (b) and (c), none of the Seller, the Servicer or any of their directors, officers, employees or agents shall be under any other liability to the Indenture Trustee, the Issuer, the Noteholders of any Series or any other Person for any action taken, or for refraining from taking any action, in good faith pursuant to this Agreement. However, none of the Seller, the Servicer or any of their directors, officers, employees or agents shall be protected against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross negligence of any such Person in the performance of their duties or by reason of reckless disregard of their obligations and duties thereunder. (f) In addition, the Servicer is not under any obligation to appear in, prosecute or defend any legal action which is not incidental to its servicing responsibilities under this Agreement, nor is any Successor Servicer liable for any acts of any of its predecessor Servicers. The Servicer may, in its sole discretion, undertake any such legal action which it may deem necessary or desirable for the benefit of Noteholders of any Series with respect to this Agreement and the rights and duties of the parties thereto and the interest of the Noteholders of any Series thereunder. 34 36 ARTICLE IX INSOLVENCY EVENTS Section 9.01. Rights upon the Occurrence of an Insolvency Event. If the Seller shall consent or fail to object to the appointment of a bankruptcy Indenture Trustee or conservator, receiver or liquidator in any bankruptcy proceeding or other insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Seller of, or relating to all or substantially all of the Seller's property, or the commencement of an action seeking a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a bankruptcy Indenture Trustee or conservator, receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up, insolvency, bankruptcy, reorganization, conservatorship, receivership or liquidation of such entity's affairs, or notwithstanding an objection by the Seller any such action shall have remained undischarged or unstayed for a period of 60 days or upon entry of any order or decree providing for such relief; or the Seller shall admit in writing its inability to pay its debts generally as they become due, file, or consent or fail to object (or object without dismissal of any such filing within 60 days of such filing) to the filing of, a petition to take advantage of any applicable bankruptcy, insolvency or reorganization, receivership or conservatorship statute, make an assignment for the benefit of its creditors or voluntarily suspend payment of its obligations (any such act or occurrence being an "Insolvency Event"), the Seller shall, on the day any such Insolvency Event occurs (the "Appointment Date"), immediately cease to transfer Principal Receivables to the Issuer and shall promptly give notice to the Issuer and the Indenture Trustee thereof. Notwithstanding any cessation of the transfer to the Trust of additional Principal Receivables, Principal Receivables transferred to the Trust prior to the occurrence of such Insolvency Event, Collections in respect of such Principal Receivables and Finance Charge Receivables (whenever created) accrued in respect of such Principal Receivables shall continue to be a part of the Collateral and shall be allocated and distributed to Noteholders in accordance with the terms of each Indenture Supplement. ARTICLE X MISCELLANEOUS Section 10.01. Amendments, etc. No amendment or waiver of any provision of this Agreement, or consent to any departure therefrom by the Issuer, the Seller or the Servicer shall in any event be effective unless (a) the same shall be in writing and signed by the Issuer, the Seller and the Servicer and (b) if required pursuant to Section 13.03 of the Indenture, the Majority Noteholders have consented or agreed to consent thereto and the Rating Agency Condition shall have been satisfied. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. Section 10.02. Notices, etc. All notices and other communications provided under this Agreement shall be in writing (including telegraphic, telex, facsimile or cable communication) and shall be delivered in hand, mailed by United States certified or registered first class mail, sent by overnight courier, telegraphed, telexed, transmitted, telecopied or cabled: 35 37 (a) If to the Issuer, to it at: Zale Funding Trust c/o Wilmington Trust Company, as Owner Trustee Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Telephone (302) 651-1000 Telecopy (302) 651-8882 with separate copies to: General Counsel and Secretary and Treasurer, Finance Department Zale Corporation 901 West Walnut Hill Lane Irving, Texas 75038 Telephone (972) 580-4576 Telecopy (972) 580-5238 (b) If to the Seller, to it at: 901 West Walnut Hill Lane Irving, Texas 75038 Attention: General Counsel and Secretary and Treasurer, Finance Department Telephone (972) 580-4576 Telecopy (972) 580-5238 (c) If to JNB, to it at: 2035 West 4th Street Tempe, Arizona 85281 Attention: President Telephone (972) 580-4965 Telecopy (972) 580-4673 36 38 with separate copies to: General Counsel and Secretary and Treasurer, Finance Department Zale Corporation 901 West Walnut Hill Lane Irving, Texas 75038 Telephone (972) 580-4576 Telecopy (972) 580-5238 (d) If to Moody's, to it at: 99 Church Street New York, New York 10007 Attention: ABS Monitoring Department Telephone (212) 285-4082 Telecopy (212) 553-4600 (e) If to Standard & Poor's, to it at: 55 Water Street New York, New York 10041 Attention: Asset Backed Group Telephone (212) 438-2000 Telecopy (212) 412-0323 or, as to each such party, at such other address as shall be designated by such party in a written notice to all other parties. All notices and other communications given under this Agreement in accordance with the provisions of this Agreement shall be deemed to have been given (1) on the date of receipt if delivered by hand or overnight courier service or cabled or sent by telex, telecopy or other telegraphic communications equipment of the sender or (2) on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 10.02. Section 10.03. No Waiver; Cumulative Remedies. No failure on the part of any party to this Agreement to exercise, and no delay by any such party in exercising, any right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 10.04. Binding Effect. This Agreement shall become effective, as of the date first above written, when it shall have been executed by the Issuer, the Seller and the Servicer. From and after the date this Agreement shall have so become effective, this Agreement shall be binding upon and inure to the benefit of the Issuer, the Seller and the Servicer, and their 37 39 respective successors and assigns (including without limitation the Indenture Trustee), except that neither the Seller nor the Servicer shall have the right to assign its rights under this Agreement or any interest in this Agreement without the prior written consent of the Issuer. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the earlier of (1) the time at which all outstanding amounts with respect to the Notes have been paid in full in cash and (2) the time of final application of all remaining Collateral to the repayment of all outstanding amounts with respect to the Notes; provided that, the indemnification provisions of Article VIII of this Agreement shall be continuing and shall survive any termination of this Agreement. Section 10.05. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS; AND OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. Section 10.06. Costs, Expenses and Taxes. In addition to the rights of indemnification granted to the Issuer under Article VIII of this Agreement, the Seller agrees to pay on demand (1) all reasonable costs and expenses of the Issuer in connection with the preparation, execution and delivery of this Agreement and the documents to be delivered hereunder, including without limitation the reasonable fees and out-of-pocket expenses of counsel for the Issuer with respect thereto and with respect to advising the Issuer as to its rights and remedies under this Agreement, (2) all reasonable costs and expenses of the Issuer (including without limitation the reasonable fees and out-of-pocket expenses of counsel for the Issuer) in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement and the documents to be delivered hereunder, (3) any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other documents to be delivered hereunder (and the Seller agrees to hold the Issuer harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes and fees) and (4) all fees, expenses and disbursements of the Indenture Trustee (including the reasonable fees and expenses of its counsel). Section 10.07. Headings. All section and subsection headings and the Table of Contents used in this Agreement are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. Section 10.08. License. To the extent so provided in any Indenture Supplement, upon the occurrence and during the continuance of certain Early Amortization Events specified in such Indenture Supplement, each of the Seller and the Servicer shall be deemed to have granted to the Issuer a non-exclusive and, except to the extent provided below, non-transferable, license to use the various tradenames (the "Licensed Names") listed in Schedule I to this Agreement, which license to use (1) may be transferred by the Issuer to the Indenture Trustee and by the Indenture Trustee pursuant to the Indenture to the extent necessary to collect the Purchased Receivables in a commercially reasonable manner, (2) is limited to (a) such uses of the Licensed Names as are reasonably necessary to the collection by the Issuer or the Indenture 38 40 Trustee in a commercially reasonable manner of the Purchased Receivables and (b) actions taken in accordance with the terms of this Agreement and the Indenture and (3) shall expire on the expiration of a reasonable time for the collection of all Purchased Receivables. Notwithstanding anything to the contrary in this Agreement or in any other agreement between the parties, no other use or display of the Licensed Names shall be made by the Indenture Trustee except as granted in this Section 10.08. Section 10.09. Merger or Consolidation. Any Person into which the Seller or the Servicer may be merged or consolidated or any Person resulting from any merger or consolidation to which the Seller or the Servicer is a party, or any Person succeeding to the business of the Seller or the Servicer, upon execution of a supplement to this Agreement (notice of which shall promptly be provided to each Rating Agency) and delivery of an opinion of counsel with respect to the compliance of the transaction with the applicable provisions of this Agreement, will be the successor to the Seller or the Servicer, as the case may be, under this Agreement. Section 10.10. Acknowledgment of Assignment. Each of the Seller and the Servicer hereby acknowledges and consents to the security interest granted by the Issuer in the Purchased Receivables and the rights of the Issuer under this Agreement pursuant to the Indenture, and each of the Seller and the Servicer hereby acknowledges that the Indenture Trustee shall enforce the rights of the Issuer. Section 10.11. WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY TO THIS AGREEMENT (1) 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 SUCH LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (2) 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 10.11. Section 10.12. 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 or enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby, and the parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid, legal and enforceable provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 10.13. No Petition in Bankruptcy. Each of the Seller and the Servicer, severally and not jointly, covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Notes of each Series it shall not (notwithstanding that the Seller or the Servicer may at such time be holder of record or beneficial owner of any 39 41 Notes) institute against, or join any other Person in instituting against, the Issuer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. Section 10.14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. Section 10.15. Third Party Beneficiaries. Each of the Secured Parties and the Owner Trustee, including in its individual capacity, shall be a third-party beneficiary of this Agreement. In addition, the Seller hereby agrees to be liable for any and all liability imposed upon the Trust other than liabilities to any Person holding an interest in the Trust which is characterized as equity for federal income tax purposes and any liability which, pursuant to its terms, is recourse only to the assets of the Trust. Section 10.16. Jurisdiction; Consent to Service of Process. Each party to this Agreement hereby irrevocably and unconditionally (1) submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment arising out of or relating to this Agreement; (2) agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, Federal court; (3) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law; (4) consents that any such action or proceeding may be brought in such courts and waives any objection it may now or hereafter have to the laying of venue of any such action or proceeding in any such court and any objection it may now or hereafter have that such action or proceeding was brought in an inconvenient court, and agrees not to plead or claim the same; (5) consents to service of process in the manner provided for notices in Section 10.02 of this Agreement (provided that, nothing in this Agreement shall affect the right of any such party to serve process in any other manner permitted by law); and (6) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any such action or proceeding any special, exemplary, punitive or consequential damages. Section 10.17. Confirmation of Intent. It is the express intent of the parties to this Agreement that the sale, assignment, transfer and conveyance, from the Seller to the Issuer pursuant to Section 2.01 of this Agreement, of all of the Seller's right, title and interest in, to and under the property set forth in such Section 2.01, in each case and at all times shall be treated under applicable law as a sale by the Seller to the Issuer of such property. If, at any time, it is determined that all or any portion of such property continues to be property of the Seller then the Seller shall hereby grant and shall be deemed to have granted to the Issuer a security interest in all of such property and this Agreement shall constitute a security agreement under applicable law. Section 10.18. Limitation of Liability. It is expressly understood and agreed by the parties hereto that (a) this Agreement is executed and delivered by Wilmington Trust 40 42 Company, not individually or personally but solely as the Owner Trustee of the Issuer under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, undertakings and agreements herein made on the part of the Issuer is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose of binding only the Issuer, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant, either expressed or implied, contained herein, all such liability, if any, being expressly waived by the Seller or the Servicer and by any Person claiming by, through or under the Seller or the Servicer and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Agreement or the other Transaction Documents. Section 10.19. Duties of Owner Trustee. The Servicer shall monitor the performance of the Issuer and the Owner Trustee and shall advise the Owner Trustee in writing when action is necessary to comply with the Issuer's or the Owner Trustee's duties under the Indenture and the Trust Agreement. The Servicer shall prepare or shall cause to be prepared, all documents, reports, filings, instruments, certificates and opinions as shall be required to be prepared, filed or delivered by the Issuer or the Owner Trustee pursuant to the Indenture, the Trust Agreement or this Agreement. 41 43 IN WITNESS WHEREOF, each of the parties to this Agreement has caused this Agreement to be duly executed and delivered in New York City, New York by its proper and duly authorized officers as of the date first above written. ZALE FUNDING TRUST By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee under the Amended and Restated Trust Agreement dated as of July 15, 1999 By:/s/ JAMES P. LAWLER ---------------------------------------- Name: Title: ZALE DELAWARE, INC. By:/s/ STEPHEN C. MASSANELLI ---------------------------------------- Name: Title: JEWELERS NATIONAL BANK By:/s/ SUE E. GOVE ---------------------------------------- Name: Title: Agreed to and accepted: THE BANK OF NEW YORK, not in its individual capacity but solely as Indenture Trustee By:/s/ ERWIN SORIANO --------------------------------- Name: Title: [Signature page - Purchase and Servicing Agreement] 42 44 SCHEDULE I TRADENAMES OF THE SELLER A Bailey Banks & Biddle Jeweler Advisory & Replacement Services Aaron Rose Argenzio Brothers Bailey Banks & Biddle Bohm-Allen Boswell's of Vandevers Brodnax Corrigan's Cowell & Hubbard Daniel's Daniel's Jewelers Diamond Park Diamond Park Fine Jewelers Dobbins D.P. Paul Feder's Fine Jewelers Guild Gertzberg's Gordon's Gordon's Jewelers Gordon's Joyeros Granat Bros. Hershberg's Hertzberg's Hess & Culbertson Jaccard's Jacobs J. Herbert Hall Jobe-Rose Koerber & Barber Lawton's Levitts Linz L. Litwin & Design Mindlin Morgan's Rider's Rosenfields Rosenzweig's Rost Slavick's Stelfox Stifft's Stowell's Sweeney's Wagners Wiss & Lambert Wolf's Wright-Kay Zale Zales Zales Jewelers Zales the Online Diamond Store Zales the Diamond Store Outlet Zell Brothers 43 45 SCHEDULE III P.O. Boxes Zale Delaware, Inc. (Zales, Bailey & Outlet) P.O. Box 78102 Phoenix, AZ 85062-8102 (Gordon's) P.O. Box 78101 Phoenix, AZ 85062-8101 Collection Deposit Accounts Bank One, AZ 6010011963144 Collection Deposit Banks Bank One, AZ Phoenix, AZ Collection Account 708102 Interest Sub-Account 708103 Excess Funding Account 708104 Optional Redemption Account 708105 Concentration Accounts First Union Philadelphia, PA 2100012953658 Bank Boston Boston, MA 551-49011 44 46 TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS................................................................................1 Section 1.01. Definitions........................................................................1 ARTICLE II PURCHASE OF RECEIVABLES; CONSIDERATION AND PAYMENT.........................................1 Section 2.01. Purchase of Receivables............................................................1 Section 2.02. Termination........................................................................2 Section 2.03. Purchase Price.....................................................................2 Section 2.04. Payments...........................................................................2 Section 2.05. Adjustments for Ineligible Receivables.............................................3 Section 2.06. Returns............................................................................3 Section 2.07. Finance Charges....................................................................4 Section 2.08. [Reserved].........................................................................4 Section 2.09. Recovery of Sales Tax..............................................................4 Section 2.10. Addition of Sellers................................................................4 Section 2.11. Addition of Participation Interests................................................5 Section 2.12. Removal of Accounts and Participation Interests; Termination of Automatic Addition of Accounts...............................................................5 Section 2.13. Discount Option....................................................................8 Section 2.14. Premium Option.....................................................................8 Section 2.15. Account Allocations................................................................8 Section 2.16. Assumption of JNB's Obligations as Owner of the Accounts...........................9 ARTICLE III CONDITIONS TO PURCHASES OF RECEIVABLES....................................................10 Section 3.01. [Reserved]........................................................................10 Section 3.02. Conditions Precedent to the Issuer's Purchases of Receivables.....................10 Section 3.03. [Reserved]........................................................................11 Section 3.04. Conditions Precedent to the Seller's Obligations on Purchase Dates................11 ARTICLE IV REPRESENTATIONS AND WARRANTIES............................................................11 Section 4.01. Certain Representations and Warranties of the Parties.............................11 Section 4.02. Additional Representations and Warranties of the Seller and the Servicer..........12 Section 4.03. Additional Representations and Warranties of the Seller...........................13
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PAGE Section 4.04. Representations and Warranties of the Issuer......................................15 ARTICLE V COVENANTS.................................................................................16 Section 5.01. Affirmative Covenants of the Seller and Servicer..................................16 Section 5.02. Negative Covenants of the Seller and Servicer.....................................21 ARTICLE VI ADMINISTRATION AND SERVICING OF PURCHASED RECEIVABLES.....................................22 Section 6.01. Appointment of and Acceptance by the Servicer of Servicing Obligations............22 Section 6.02. Servicing Compensation............................................................22 Section 6.03. Reports and Statements............................................................23 Section 6.04. Collection Procedures.............................................................24 Section 6.05. Allocations and Applications of Collections.......................................25 Section 6.06. Maintenance of Property; Insurance................................................25 Section 6.07. Access to Certain Documentation Regarding the Purchased Receivables...............26 Section 6.08. Certain Responsibilities of the Servicer and the Seller...........................26 Section 6.09. Limitation on Liability of the Seller and Others..................................26 Section 6.10. Successor Servicer................................................................27 Section 6.11. Termination of Authority..........................................................30 Section 6.12. Merger or Consolidation of, or Assumption of the Obligations of, the Servicer..........................................................................30 ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE PURCHASED RECEIVABLES.................31 Section 7.01. Collection of Receivables; Rights of the Issuer and its Assignees.................31 ARTICLE VIII INDEMNIFICATION...........................................................................32 Section 8.01. Indemnification...................................................................32 ARTICLE IX INSOLVENCY EVENTS.........................................................................35 Section 9.01. Rights upon the Occurrence of an Insolvency Event.................................35 ARTICLE X MISCELLANEOUS.............................................................................35 Section 10.01. Amendments, etc...................................................................35 Section 10.02. Notices, etc......................................................................35 Section 10.03. No Waiver; Cumulative Remedies....................................................37
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PAGE Section 10.04. Binding Effect....................................................................37 Section 10.05. GOVERNING LAW.....................................................................38 Section 10.06. Costs, Expenses and Taxes.........................................................38 Section 10.07. Headings..........................................................................38 Section 10.08. License...........................................................................38 Section 10.09. Merger or Consolidation...........................................................39 Section 10.10. Acknowledgment of Assignment......................................................39 Section 10.11. WAIVER OF JURY TRIAL..............................................................39 Section 10.12. Severability......................................................................39 Section 10.13. No Petition in Bankruptcy.........................................................39 Section 10.14. Counterparts......................................................................40 Section 10.15. Third Party Beneficiaries.........................................................40 Section 10.16. Jurisdiction; Consent to Service of Process.......................................40 Section 10.17. Confirmation of Intent............................................................40 Section 10.18. Limitation of Liability...........................................................40 Section 10.19. Duties of Owner Trustee...........................................................41
-iii- 49 Exhibits Exhibit A [Reserved] Exhibit B [Reserved] Exhibit C Form of Assignment Exhibit D Form of Reassignment Schedules Schedule I Tradenames of the Seller Schedule II Reserved Schedule III Account Schedule Annexes Annex I Glossary of Terms Annex II Conditions to Closing -iv- EX-10.1 6 CLASS A NOTE PURCHASE AGREEMENT 1 EXHIBIT 10.1 EXECUTION COPY ------------------------------------------------------------------------- CLASS A NOTE PURCHASE AGREEMENT Dated as of July 15, 1999 among ZALE FUNDING TRUST, Issuer, ZALE DELAWARE, INC., Seller, JEWELERS NATIONAL BANK, Servicer, THE CLASS A PURCHASERS PARTIES HERETO, CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH, Administrative Agent and Agent, and THE OTHER AGENTS PARTIES HERETO ------------------------------ Relating to Zale Funding Trust Class A Floating Rate Asset Backed Variable Funding Notes Series 1999-A ------------------------------ ------------------------------------------------------------------------- 2 TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS........................................................2 1.1 Definitions................................................2 1.2 Other Definitional Provisions.............................11 ARTICLE 2 AMOUNT AND TERMS OF COMMITMENTS....................................11 2.1 Purchases.................................................11 2.2 Reductions and Extensions of Commitments..................14 2.3 Interest, Fees, Expenses, Payments, Etc...................16 2.4 Requirements of Law.......................................20 2.5 Taxes.....................................................21 2.6 Indemnification...........................................23 ARTICLE 3 CONDITIONS PRECEDENT...............................................25 3.1 Condition to Initial Purchase.............................25 3.2 Condition to Additional Purchases.........................29 ARTICLE 4 REPRESENTATIONS AND WARRANTIES.....................................30 4.1 Representations and Warranties of Z Del...................30 4.2 Representations and Warranties of JNB.....................32 4.3 Representations and Warranties of the Issuer..............34 4.4 Representations and Warranties of the Class A Purchasers..36 ARTICLE 5 COVENANTS..........................................................36 5.1 Covenants of Z Del........................................37 ARTICLE 6 MUTUAL COVENANTS REGARDING CONFIDENTIALITY.........................40 6.1 Covenants of the Zale Parties.............................40 6.2 Covenants of Class A Purchasers...........................40 ARTICLE 7 THE AGENTS........................................................41 7.1 Appointment...............................................41 7.2 Delegation of Duties......................................41 7.3 Exculpatory Provisions....................................42 7.4 Reliance by Agents........................................42 7.5 Notices...................................................43 7.6 Non-Reliance on Agents and Other Class A Purchasers.......43 7.7 Indemnification...........................................44 7.8 Agents in their Individual Capacity.......................44 7.9 Successor Agents..........................................44 (i) 3 ARTICLE 8 SECURITIES LAWS; TRANSFERS........................................45 8.1 Transfers of Class A Notes............................45 8.2 Tax Characterization..................................50 ARTICLE 9 MISCELLANEOUS.....................................................50 9.1 Amendments and Waivers................................50 9.2 Notices...............................................51 9.3 No Waiver; Cumulative Remedies........................53 9.4 Successors and Assigns................................53 9.5 Successors to Servicer................................53 9.6 Counterparts..........................................54 9.7 Severability..........................................54 9.8 Integration...........................................54 9.9 Governing Law.........................................54 9.10 Jurisdiction; Consent to Service of Process...........54 9.11 Termination...........................................55 9.12 Limited Recourse; No Proceedings......................55 9.13 Survival of Representations and Warranties............56 9.14 Waiver of Jury Trial..................................56 (ii) 4 LIST OF EXHIBITS EXHIBIT A Form of Investment Letter EXHIBIT B Form of Transfer Supplement EXHIBIT C Form of Joinder Supplement (iii) 5 CLASS A NOTE PURCHASE AGREEMENT, dated as of July 15, 1999, by and among ZALE FUNDING TRUST, a Delaware business trust (together with its successors and assigns, the "Issuer"), ZALE DELAWARE, INC., a Delaware corporation ("Z Del"), individually and as Seller (as defined in the Indenture referred to below), JEWELERS NATIONAL BANK, a national banking association ("JNB"), as Servicer (as defined in the Indenture referred to below), the CLASS A PURCHASERS (as hereinafter defined) from time to time parties hereto, the AGENTS for the Purchaser Groups from time to time parties hereto (each such party, together with their respective successors in such capacity, an "Agent"), and CREDIT SUISSE FIRST BOSTON, a Swiss banking corporation acting through its New York Branch ("CSFB"), as administrative agent for the Class A Purchasers (together with its successors in such capacity, the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the Issuer, the Seller and the Servicer are parties to a certain Purchase and Servicing Agreement, dated as of July 15, 1999 (as the same may from time to time be amended or otherwise modified, the "Purchase and Servicing Agreement"), pursuant to which, among other things, the Seller has sold, assigned, transferred and conveyed, and has agreed to sell, assign, transfer and convey, certain Receivables (as defined therein) to the Issuer, and the Servicer has agreed to service such Receivables; WHEREAS, the Issuer and The Bank of New York, as trustee (together with its successors in such capacity, the "Indenture Trustee") are parties to a certain Indenture, dated as of July 15, 1999 (as the same may from time to time be amended or otherwise modified, the "Base Indenture"), providing a receivables financing facility in connection with the Purchase and Servicing Agreement and the other Transaction Documents (as defined in the Indenture); WHEREAS, the Issuer proposes to issue its Class A Floating Rate Asset Backed Variable Funding Notes, Series 1999-A (the "Class A Notes") pursuant to the Indenture and a supplement thereto, dated as of July 15, 1999 (as the same may from time to time be amended or, otherwise modified, the "Supplement" and the Base Indenture, as supplemented by the Supplement, the "Indenture"); WHEREAS, the Issuer also proposes to issue its Class B Asset Backed Notes, Series 1999-A (the "Class B Notes") pursuant to the Indenture, which Class B Notes are subordinate to the Class A Notes and initially will be retained by the Issuer; WHEREAS, the Class A Purchasers are willing to purchase the Class A Notes on the Closing Date and from time to time thereafter to purchase Class A Note Principal Balance Increases (as defined in the Supplement) on the terms and conditions provided for herein; NOW THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and adequacy of which are hereby expressly acknowledged, the parties hereto agree as follows: 6 ARTICLE 1 DEFINITIONS 1.1 Definitions. All capitalized terms used herein as defined terms and not defined herein shall have the meanings given to them in the Indenture. Each capitalized term defined herein shall relate only to the Series 1999-A and to no other Series issued pursuant to the Indenture. "Adjusted Commitment" shall mean on any date of determination, with respect to a Liquidity Purchaser for a CP Conduit, such Liquidity Purchaser's Commitment minus the aggregate outstanding principal amount of its Support Advances to such CP Conduit. "Adjusted Eurodollar Rate" shall mean, for any Interest Accrual Period or portion thereof, a rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equivalent to the rate determined pursuant to the following formula: Adjusted Eurodollar Rate = LIBOR Rate ----------------------------- 1-LIBOR Reserve Percentage on the first day of such Interest Accrual Period. "Administrative Agent" has the meaning specified in the preamble to this Agreement. "Affected Party" shall mean, with respect to any CP Conduit, any Support Party of such CP Conduit. "Agreement" shall mean this Class A Note Purchase Agreement, as amended, supplemented or otherwise modified from time to time. "Alternative Rate" shall mean, for any Interest Accrual Period, an interest rate per annum equal to the lesser of (i) 0.50% per annum above the Adjusted Eurodollar Rate for such Interest Accrual Period, and (ii) the daily average Prime Rate in effect during such Interest Accrual Period. "Assignee" and "Assignment" have the respective meanings specified in subsection 8.1(e) of this Agreement. "Agent" has the meaning specified in the preamble to this Agreement. "Class A Agent" has the meaning specified in Section 7.1 of this Agreement. "Class A Interest Rate" has the meaning specified in subsection 2.3(a) of this Agreement. -2- 7 "Class A Mandatory Partial Amortization Amount" shall mean, (a) with respect to a Partial Commitment Expiration Date other than the Step-Down Date, (i) the aggregate Percentage Interest held by Class A Purchasers having Commitments which expire on such date, times (ii) the Class A Invested Amount on such date and (b) with respect to the Step-Down Date, the excess, if any, of (i) the aggregate Percentage Interests of Class A Purchasers in the Initial Purchaser Group times the Class A Invested Amount, over (ii) the aggregate Commitments of Class A Purchasers in the Initial Purchaser Group(after giving effect to reductions thereof on the Step-Down Date pursuant to subsection 2.2(b)). "Class A Monthly Interest" shall mean, for any Interest Accrual Period, the sum of (i) interest on the Class A Principal Balance for such Interest Accrual Period computed pursuant to subsections 2.3(a) or 2.3(b), as applicable, of this Agreement, plus or minus (as the case may be) (ii) any Estimated Interest Adjustment for the immediately preceding Interest Accrual Period. "Class A Notes" has the meaning specified in the recitals to this Agreement. "Class A Owners" shall mean the Class A Purchasers that are owners of record of the Class A Notes or, with respect to any Class A Note held by an Agent hereunder as nominee on behalf of Class A Purchasers in a Purchaser Group, the Class A Purchasers that are owners of the Class A Noteholders' Interest represented by such Class A Note as reflected on the books of such Agent in accordance with this Agreement. "Class A Principal Balance" shall mean, on any date of determination, an amount equal to (i) the Class A Initial Invested Amount, plus (ii) the aggregate amount of Class A Note Principal Balance Increases made on or prior to such date, minus (iii) the aggregate amount of principal payments made to the Class A Owners prior to such date. "Class A Program Commitment Fee" shall mean, with respect to a Purchaser Group, the ongoing program fees payable to Class A Purchasers in such Purchaser Group in respect of the unutilized portion of the aggregate Commitments of such Class A Purchasers, in the amounts and on the dates set forth in the Supplemental Fee Letter for such Purchaser Group. "Class A Program Utilization Fee Rate" shall mean, with respect to a Purchaser Group, the applicable rate or rates identified as the "Class A Program Utilization Fee Rate" in the Supplemental Fee Letter for such Purchaser Group. "Class A Purchase Limit" shall mean, for any day, the lesser of (i) $350,000,000 and (ii) the Total Commitment on such day. "Class A Purchasers" shall mean, collectively, the CP Conduits, the Liquidity Purchasers and the Committed Purchasers. "Class B Notes" has the meaning specified in the recitals to this Agreement. -3- 8 "Closing Date" shall mean July 15, 1999. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Commercial Paper Notes" shall mean, with respect to a CP Conduit, the short-term promissory notes issued by such CP Conduit which are allocated by such CP Conduit as its funding for its purchasing or maintaining its Percentage Interest of the Class A Principal Balance hereunder. "Commercial Paper Rate" shall mean, with respect to a CP Conduit, the rate identified as its "Commercial Paper Rate" in the Supplemental Fee Letter to which such CP Conduit or its agent is a party. "Commitment" shall mean, for any Committed Purchaser or Liquidity Purchaser, the maximum amount of such Class A Purchaser's commitment to purchase a portion of the Class A Noteholders' Interest, as set forth in the Joinder Supplement or the Transfer Supplement by which such Committed Purchaser became a party to this Agreement or assumed the Commitment (or a portion thereof) of another Class A Purchaser, as such amount may be adjusted from time to time pursuant to Section 2.2 of this Agreement or pursuant to Transfer Supplement(s) executed by such Class A Purchaser and its Assignee(s) and delivered pursuant to Section 8.1 of this Agreement. In the event that a Class A Purchaser is both a Committed Purchaser and a Liquidity Purchaser, or is a Liquidity Purchaser which maintains a portion of its Commitment hereunder in relation to more than one CP Conduit, such Class A Purchaser shall be deemed to hold separate Commitments hereunder in each such capacity. "Commitment Expiration Date" shall mean July 13, 2000, as such date may be extended from time to time in accordance with subsection 2.2(d) hereof. "Committed Purchaser" shall mean any Class A Purchaser which is designated as a Committed Purchaser in the Joinder Supplement or the Transfer Supplement pursuant to which it became a party to this Agreement, and any Assignee of such Class A Purchaser to the extent of the portion of such Commitment assumed by such Assignee pursuant to its respective Transfer Supplement. "Covered Portion" shall mean the portion of the Class A Principal Balance equal to the Class A Invested Amount. "CP Conduit" shall mean any Class A Purchaser which is designated as a CP Conduit in the Joinder Supplement or the Transfer Supplement pursuant to which it became a party to this Agreement. "CSFB" has the meaning specified in the preamble to this Agreement. -4- 9 "Dissenting Purchaser" has the meaning specified in subsection 2.2(d) of this Agreement. "Downgraded Purchaser" has the meaning specified in subsection 8.1(j) of this Agreement. "Election Period" has the meaning specified in subsection 2.2(d) of this Agreement. "Estimated Interest Adjustment" has the meaning specified in subsection 2.3(k) of this Agreement. "Excluded Taxes" has the meaning specified in subsection 2.5(a) of this Agreement. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Increase Notice" shall mean a notice delivered by the Issuer to the Administrative Agent and each Agent pursuant to Section 7.04 of the Supplement requesting a Class A Note Principal Balance Increase. "Indemnitee" has the meaning specified in subsection 2.6(a) of this Agreement. "Indenture Trustee" has the meaning specified in the recitals to this Agreement. "Initial Purchaser Group" shall mean the Purchaser Group which includes the initial CP Conduit which is a party to this Agreement. "Investing Office" shall mean initially, the office of any Class A Purchaser (if any) designated as such, in the Joinder Supplement or the Transfer Supplement by which it became a party to this Agreement, and thereafter, such other office of such Class A Purchaser or such Assignee as may be designated in writing to the applicable Agent, the Administrative Agent, the Issuer, the Servicer and the Indenture Trustee by such Class A Purchaser or Assignee. "Investment Letter" has the meaning specified in subsection 8.1(a) of this Agreement. "JCC" shall mean Jewelers Credit Corporation, a Delaware corporation which is a subsidiary of Z Del. "JNB" has the meaning specified in the preamble to this Agreement. "LIBOR Rate" shall mean, with respect to any Interest Accrual Period or portion thereof, the rate per annum shown on page 3750 of the Dow Jones & Company Telerate screen or -5- 10 any successor page as the composite offered rate for London interbank deposits for a period equal to such Interest Accrual Period (or portion) thereof, as shown under the heading "USD" as of 11:00 a.m., London time, two London Business Days prior to the first day of such Interest Accrual Period; provided that in the event no such rate is shown, the LIBOR Rate shall be the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of one percent) based on the rates at which Dollar deposits for a period equal to such Interest Accrual Period (or portion thereof) are displayed on page "LIBOR" of the Reuters Monitor Money Rates Service or such other page as may replace the LIBOR page on that service for the purpose of displaying London interbank offered rates of major banks as of 11:00 a.m., London time, two London Business Days prior to the first day of such Interest Accrual Period (it being understood that if at least two such rates appear on such page, the rate will be the arithmetic mean of such displayed rates); provided further that in the event fewer than two such rates are displayed, or if no such rate is relevant, the LIBOR Rate shall be the rate per annum equal to the average of the rates at which deposits in Dollars are offered by the Reference Banks at approximately 11:00 a.m., London time, two London Business Days prior to the first day of such Interest Accrual Period to prime banks in the London interbank market for a period equal to such Interest Accrual Period (or portion thereof), it being understood that if at least two such quotations are provided, the rate shall be the arithmetic mean of such provided rates; provided further that if fewer than two such rates are provided, the rate shall be the arithmetic mean of the rates quoted by major banks in New York City, selected by the Administrative Agent, at approximately 11:00 a.m., New York City time, on the first day of such Interest Accrual Period to leading European banks for Dollar deposits for a period equal to such Interest Accrual Period (or portion thereof); provided further that if the LIBOR Rate is not established for any such Interest Accrual Period as otherwise provided above, the LIBOR Rate for such Interest Accrual Period shall equal the LIBOR Rate for the immediately preceding Interest Accrual Period. "LIBOR Reserve Percentage" shall mean, with respect to any Interest Accrual Period or portion thereof, a percentage (expressed as a decimal) equal to the weighted average of the percentages in effect during such Interest Accrual Period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor thereto) for determining the maximum reserve requirements applicable to "Eurocurrency liabilities" pursuant to Regulation D or any other applicable regulation of the Federal Reserve Board (or any successor thereto) which prescribes reserve requirements applicable to "Eurocurrency liabilities" as currently defined in Regulation D. "Liquidity Percentage" shall mean, for a Liquidity Purchaser for a CP Conduit, such Liquidity Purchaser's Adjusted Commitment with respect to such CP Conduit as a percentage of the aggregate Adjusted Commitments of all Liquidity Purchasers for such CP Conduit. "Liquidity Purchaser" shall mean, with respect to a CP Conduit, each Class A Purchaser identified as a Liquidity Purchaser for such CP Conduit in the Joinder Supplement or the Transfer Supplement pursuant to which such CP Conduit became a party hereto, and any Assignee of such Class A Purchaser to the extent such Assignee has assumed, pursuant to a Transfer Supplement, the Commitment of such Class A Purchaser. In the event that a Liquidity Purchaser acquires a portion of the Class A Principal Balance from its related CP Conduit by Assignment, such -6- 11 Liquidity Purchaser shall thereupon become a Committed Purchaser holding a Commitment as such in an amount equal to the Class A Principal Balance so acquired and cease to be a Liquidity Purchaser in respect of such Commitment. "Maximum Purchase Amount" shall mean, for any CP Conduit, the aggregate Commitments of its Liquidity Purchasers. "Nonextending Class A Purchaser" shall mean, after its respective Commitment Expiration Date, each Committed Purchaser or Liquidity Purchaser which has declined to extend such Commitment Expiration Date in accordance with subsection 2.2(d) hereof, to the extent not replaced pursuant to subsection 2.2(e). "Note Rate Determination Date" shall mean, for any Interest Accrual Period, the third Business Day prior to the Payment Date which follows the end of such Interest Accrual Period. "Partial Commitment Expiration Date" shall mean the date of the occurrence of a Partial Expiration Event. "Partial Expiration Event" has the meaning specified in subsection 2.2(d) of this Agreement and shall include the occurrence of the Step-Down Date. "Participant" has the meaning specified in subsection 8.1(d) of this Agreement. "Participation" has the meaning specified in subsection 8.1(d) of the Agreement. "Percentage Interest" shall mean, for a Class A Purchaser on any day, the percentage equivalent of (a) the sum of (i) the portion of the Class A Initial Invested Amount (if any) purchased by such Class A Purchaser, plus (ii) the aggregate portion of Class A Note Principal Balance Increases (if any) purchased by such Class A Purchaser prior to such day pursuant to Section 7.04 of the Supplement, plus (iii) any portion of the Class A Principal Balance acquired by such Class A Purchaser as an Assignee from another Class A Purchaser pursuant to a Transfer Supplement executed and delivered pursuant to Section 8.1 of this Agreement, minus (iv) the aggregate amount of principal payments made to such Class A Purchaser prior to such day, minus (v) any portion of the Class A Principal Balance assigned by such Class A Purchaser to an Assignee pursuant to a Transfer Supplement executed and delivered pursuant to Section 8.1 of this Agreement, divided by (b) the aggregate Class A Principal Balance on such day. "Person" shall mean an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Prime Rate" shall mean, for any day, the higher of (i) the base commercial lending rate per annum announced from time to time by CSFB in New York in effect on such day, or (ii) the -7- 12 interest rate per annum quoted by CSFB at approximately 11:00 a.m., New York City time, on such day, to dealers in the New York Federal funds market for the overnight offering of Dollars by CSFB plus one-half of one percent (0.50%). (The Prime Rate is not intended to represent the lowest rate charged by CSFB for extensions of credit.) "Purchase and Servicing Agreement" has the meaning specified in the recitals to this Agreement. "Purchase Date" shall mean the Closing Date and each Increase Date. "Purchase Termination Date" shall mean, for a Class A Purchaser, the first to occur of (i) in the case of a Committed Purchaser or Liquidity Purchaser, the Commitment Expiration Date for such Class A Purchaser or, in the case of a CP Conduit, the latest Commitment Expiration Date for any of its Liquidity Purchasers, or (ii) the Early Amortization Commencement Date. "Purchaser Group" shall mean each group of Class A Purchasers consisting of (i) a CP Conduit, (ii) the Liquidity Purchasers with respect to such CP Conduit, and (iii) any Committed Purchasers which are assignees of such CP Conduit or any such Liquidity Providers. "Purchaser Percentage" shall mean, with respect to a Committed Purchaser or CP Conduit, its Commitment or Maximum Purchase Amount, as the case may be, as a percentage of the Total Commitment. "Reference Banks" shall mean CSFB, and Bank One Texas, N.A. "Regulatory Change" shall mean, as to each Class A Purchaser, any change occurring after the date of the execution and delivery of this Agreement or, if later, the date of the execution and delivery of the Transfer Supplement by which it became party to this Agreement; in the case of a Participant, any change occurring after the date on which its Participation became effective, or in the case of an Affected Party, any change occurring after the date it became such an Affected Party, in any (or the adoption after such date of any new): (1) United States Federal or state law or foreign law applicable to such Class A Purchaser, Affected Party or Participant; or (2) regulation, interpretation, directive, guideline or request (whether or not having the force of law) applicable to such Class A Purchaser, Affected Party or Participant of any court or other judicial authority or any Governmental Authority charged with the interpretation or administration of any law referred to in clause (i) or of any fiscal, monetary or other Governmental Authority or central bank having jurisdiction over such Class A Purchaser, Affected Party or Participant. -8- 13 "Related Documents" shall mean, collectively, this Agreement (including all effective Supplemental Fee Letters and Transfer Supplements), the Base Indenture, the Supplement, the Purchase and Servicing Agreement, the Trust Agreement, the Series 1999-A Notes and the Transaction Documents. "Replacement Purchaser" has the meaning specified in subsection 8.1(l). "Required Class A Owners" shall mean, at any time, Class A Owners having more than two-thirds of the aggregate Percentage Interests of all Class A Owners. "Required Class A Purchasers" shall mean, at any time, Committed Purchasers and Liquidity Purchasers having Commitments aggregating more than two-thirds of the Total Commitment. "Requirement of Law" shall mean, as to any Person, any law, treaty, rule or regulation, or determination of an arbitrator or Governmental Authority, in each case applicable to or binding upon such Person or to which such Person is subject, whether federal, state or local (including usury laws, the Federal Truth in Lending Act and Regulation Z and Regulation B of the Board of Governors of the Federal Reserve System). "Risk Portion" shall mean the portion of the Class A Principal Balance equal to the excess thereof over Class A Invested Amount. "Risk Rate" shall mean, for any day, a rate per annum equal to the sum of (i) the Prime Rate in effect for such day, plus (ii) 2.00%. "Step-Down Date" shall mean the first to occur of (i) October 15, 1999, or (ii) the date on which the Issuer shall have issued any additional Series of Notes pursuant to the Base Indenture. "Supplement" has the meaning specified in the recitals to this Agreement. "Supplemental Fee Letter" shall mean, with respect to each Purchaser Group, the letter agreement, designated therein as a Supplemental Fee Letter with respect to such Purchaser Group and then in effect, between the Issuer and the Agent for such Purchaser Group, as such letter agreement may be amended or otherwise modified from time to time. "Support Advances" shall mean, with respect to a Liquidity Purchaser and its related CP Conduit, any participation held by such Liquidity Purchaser in such CP Conduit's Percentage Interest in the Class A Principal Balance which was purchased from such CP Conduit pursuant to a Support Facility and any loans or other advances made by such Liquidity Purchaser to such CP Conduit pursuant to a Support Facility to fund such CP Conduit's making or maintaining its purchases hereunder (but excluding any such loans or advances made to fund such CP Conduit's obligations to -9- 14 pay interest, fees or other similar amounts relating to the funding of its making or maintaining its purchases hereunder). "Support Facility" shall mean any liquidity or credit support agreement with a CP Conduit which relates to this Agreement (including any agreement to purchase an assignment of or participation in Class A Notes). "Support Party" shall mean any other bank, insurance company or other financial institution extending or having a commitment to extend funds to or for the account of a CP Conduit (including by agreement to purchase an assignment of or participation in Class A Notes) under a Support Facility. Each Liquidity Purchaser for a CP Conduit which is a CP Conduit shall be deemed to be a Support Party for such CP Conduit. "Taxes" has the meaning specified in subsection 2.5(a) of this Agreement. "Termination Event" shall mean the occurrence of an Early Amortization Event, a Series 1999-A Early Amortization Event or a Servicer Default, or the occurrence of an event or condition which would be an Early Amortization Event, a Series 1999-A Early Amortization Event or a Servicer Default but for a waiver of or failure to declare or determine such event by the Noteholders or the Trustee; provided, however, that the occurrence of an event or circumstance which constitutes or would constitute an Early Termination Event solely under clause (iv) of Section 10.01 of the Indenture with respect to a Series other than Series 1999-A shall not constitute a Termination Event. "Total Commitment" shall mean, on any date of determination, the aggregate Commitments of the Committed Purchasers and the Liquidity Purchasers. "Transfer" has the meaning specified in subsection 8.1(c) of this Agreement. "Transferee" has the meaning specified in subsection 8.1(c) of this Agreement. "Transfer Supplement" has the meaning specified in subsection 8.1(e) of this Agreement. "Trust" has the meaning specified in the recitals to this Agreement. "written" or "in writing" (and other variations thereof) shall mean any form of written communication or a communication by means of telex, telecopier device, telegraph or cable. "Z Del" has the meaning specified in the preamble to this Agreement. "Zale" shall mean Zale Corporation, a Delaware corporation. -10- 15 "Zale Party" shall have the meaning specified in Section 5.1 of this Agreement. 1.2 Other Definitional Provisions. (2) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto. (3) The words "hereof", "herein", and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and Section, subsection and Exhibit references are to this Agreement, unless otherwise specified. The words "including" and "include" shall be deemed to be followed by the words "without limitation". ARTICLE 2 AMOUNT AND TERMS OF COMMITMENTS 2.1 Purchases. (a) On and subject to the terms and conditions of this Agreement, (i) each CP Conduit may purchase Class A Notes on the Closing Date representing a Class A Principal Balance equal to its Purchaser Percentage of the Class A Initial Invested Amount and (ii) each Liquidity Purchaser for each Purchaser Group, severally, agrees to purchase, to the extent not purchased by the CP Conduit in its Purchaser Group, its Liquidity Percentage of the Class A Initial Invested Amount, in either case for a purchase price equal to the portion of the Class A Initial Invested Amount so purchased. (b) On and subject to the terms and conditions of this Agreement and prior to its Purchase Termination Date, (i) each CP Conduit may purchase its Purchaser Percentage of any Class A Note Principal Balance Increase offered for purchase pursuant to Section 7.04 of the Supplement, and (ii) each Committed Purchaser (if any), severally, agrees to purchase its Purchaser Percentage of the Class A Note Principal Balance Increase so offered for purchase, in each case for a purchase price equal to the Class A Note Principal Balance Increase so purchased. (c) The purchase of the Class A Initial Invested Amount hereunder shall be made on prior notice from the Issuer to the Administrative Agent and each Agent received not later than 4:00 p.m., New York City time, on the Business Day preceding the Closing Date. Each purchase of any Class A Note Principal Balance Increase hereunder on the applicable Increase Date shall be in accordance with the provisions of Section 7.04 of the Supplement. Each Increase Notice shall be irrevocable. Each Agent shall promptly forward a copy of each Increase Notice received by it to each Class A Purchaser in its Purchaser Group. (d) Each CP Conduit shall notify the Agent for its Purchaser Group by 10:00 a.m., New York City time, on the applicable Purchase Date whether it has elected to make the purchase -11- 16 offered to it pursuant to subsection 2.1(a) or 2.1(b), as applicable, of this Agreement. In the event that a CP Conduit shall not have timely provided such notice, such CP Conduit shall be deemed to have elected not to make such purchase. Such Agent shall notify each Liquidity Purchaser for such CP Conduit on or prior to 11:00 a.m., New York City time, on the applicable Purchase Date if such CP Conduit has not elected to purchase its entire Purchaser Percentage of the Class A Initial Invested Amount or the Class A Note Principal Balance Increase, as the case may be, which notice shall specify (i) the identity of such CP Conduit, (ii) the portion of the Class A Initial Invested Amount or the Class A Note Principal Balance Increase, as the case may be, which such CP Conduit has not elected to purchase as provided above, and (iii) the respective Liquidity Percentages of such Liquidity Purchasers on such Purchase Date (as determined by such Agent in good faith; for purposes of such determination, such Agent shall be entitled to rely conclusively on the most recent information provided by such CP Conduit or its agent or by the agent for its Support Parties). Subject to receiving such notice and to the satisfaction of the applicable conditions set forth in Article 3 hereof, each of such CP Conduit's Liquidity Purchasers shall make a purchase of Class A Notes on the applicable Purchase Date in an amount equal to its Liquidity Percentage of the portion of the Class A Initial Invested Amount or the Class A Note Principal Balance Increase, as the case may be, which such CP Conduit has not elected to purchase, for a purchase price equal to the Class A Initial Invested Amount or the Class A Note Principal Balance Increase, as the case may be, so purchased. (e) Each Class A Purchaser's purchase price payable pursuant to subsection 2.1(a), 2.1(b) or 2.1(d) of this Agreement shall be made available to the Agent for its Purchaser Group, subject to the fulfillment of the applicable conditions set forth in Article 3 hereof, at or prior to 2:00 p.m., New York City time, on the applicable Purchase Date, by deposit of immediately available funds to an account of such Agent specified in subsection 9.2(b) of this Agreement. Such Agent shall promptly notify the Issuer in the event that any Class A Purchaser either fails to make such funds available to such Agent before such time or notifies such Agent that it will not make such funds available to such Agent before such time. Subject to (i) such Agent's receipt of such funds and (ii) the fulfillment of the applicable conditions set forth in Article 3 hereof, as determined by such Agent, such Agent will not later than 4:00 p.m., New York City time, on such Purchase Date make such funds available, in the same type of funds received, by wire transfer thereof to the account of Issuer in the United States specified in the applicable Increase Notice or, in the case of the purchase on the Closing Date, specified in writing by the Issuer to such Agent not later than the Business Day prior to the Closing Date. (f) In the event that notwithstanding the fulfillment of the applicable conditions set forth in Article 3 hereof with respect to a purchase, a CP Conduit elected to make a purchase on a Purchase Date but failed to make its purchase price available to the Agent for its Purchaser Group when required by subsection 2.1(e) of this Agreement, such CP Conduit shall be deemed to have rescinded its election to make such purchase, and neither the Issuer, the Seller nor any other party shall have any claim against such CP Conduit by reason for its failure to timely make such purchase. In any such case, such Agent shall give notice of such failure not later than 2:30 p.m., New York City time, on the Purchase Date to each Liquidity Purchaser for such CP Conduit and to the Issuer, which notice shall specify (i) the identity of such CP Conduit, (ii) the amount of the purchase which -12- 17 it had elected but failed to make and (iii) the respective Liquidity Percentages of such Liquidity Purchasers on such Purchase Date (as determined by such Agent in good faith; for purposes of such determination, such Agent shall be entitled to rely conclusively on the most recent information provided by such CP Conduit or its agent or by the agent for its Support Parties). Subject to receiving such notice, each of such CP Conduit's Liquidity Purchasers shall purchase a portion of the Class A Principal Balance in an amount equal to its Liquidity Percentage of the amount described in clause (ii) above at or before 4:00 p.m., New York City time, on such Purchase Date and otherwise in accordance with subsection 2.1(d) of this Agreement. Subject to such Agent's receipt of such funds, such Agent will not later than 5:00 p.m., New York City time, on such Purchase Date make such funds available, in the same type of funds received, by wire transfer thereof to the account of the Issuer described in subsection 2.1(e) of this Agreement, which payment shall be deemed to be timely for purposes of subsection 7.04(c) of the Supplement. (g) The Agent for each Purchaser Group shall notify the Issuer, the Servicer, the Indenture Trustee and each Class A Purchaser in its Purchaser Group on the Closing Date (in the case of the purchase of the Class A Initial Invested Amount) or not later than the Business Day following the applicable Increase Date (in the case of any purchases of Class A Note Principal Balance Increases) of the identity of each Class A Purchaser in such Purchaser Group which purchased any portion of the Class A Initial Invested Amount or any Class A Note Principal Balance Increase on such Purchase Date, whether such Class A Purchaser was a CP Conduit, a Committed Purchaser or a Liquidity Purchaser and the portion of the Class A Initial Invested Amount or Class A Note Principal Balance Increase purchased by such Class A Purchaser. (h) In no event shall a Committed Purchaser be required on any date to purchase a Class A Note Principal Balance Increase which would result in its Percentage Interest of the Class A Principal Balance, determined after giving effect to such purchase, exceeding its Commitment, and in no event shall a Liquidity Purchaser be required on any date to purchase a Class A Note Principal Balance Increase which would result in its Percentage Interest of the Class A Principal Balance, determined after giving effect to such purchase, exceeding its Adjusted Commitment. In no event may any Class A Note Principal Balance Increase be offered for purchase hereunder or under Section 7.04 of the Supplement, nor shall any Class A Purchaser be obligated to purchase any Class A Note Principal Balance Increase, to the extent that, after giving effect to such Class A Note Principal Balance Increase, the Class A Principal Balance would exceed the lesser of the Total Commitment or the Class A Purchase Limit. (i) The Class A Purchasers in each Purchaser Group hereby direct that the Class A Notes be registered in the name of the Agent for such Purchaser Group, as nominee on behalf of the Class A Purchasers in such Purchaser Group from time to time hereunder. -13- 18 2.2 Reductions and Extensions of Commitments. (a) At any time the Issuer may, upon at least five Business Days' prior written notice to the Agent, reduce the Total Commitment. Each partial reduction shall be in an aggregate amount of $5,000,000 or integral multiples of $1,000,000 in excess thereof (or such other amount requested by the Issuer to which the Agent consents). Reductions of the aggregate Commitments pursuant to this subsection 2.2(a) of this Agreement shall be allocated (i) to the Commitment of each Committed Purchaser and the Maximum Purchase Amount of each CP Conduit, pro rata based on the Purchaser Percentage represented by such Commitment or Maximum Purchase Amount, and (ii) to the aggregate Commitments of Liquidity Purchasers for each CP Conduit pro rata based on their respective Liquidity Percentages. (b) On the Step-Down Date, the aggregate Commitments of all Liquidity Purchasers and Committed Purchasers in the Initial Purchaser Group shall automatically be reduced to the extent they exceed $150,000,000. Any such reduction will be allocated (i) to the Commitment of each Committed Purchaser (if any) in such Purchaser Group and to the Maximum Purchase Amount of the CP Conduit in such Purchaser Group, pro rata based on the Purchaser Percentage represented by such Commitment or Maximum Purchase Amount, and (ii) to the aggregate Commitments of Liquidity Purchasers in the Initial Purchaser Group pro rata based on their respective Liquidity Percentages. (c) On the Purchase Termination Date for a Committed Purchaser or Liquidity Purchaser, the Commitment of such Class A Purchaser shall be automatically reduced to zero. (d) So long as no Termination Event has occurred and is continuing, no more than 120 and no less than 90 days prior to the applicable Commitment Expiration Date, the Seller may request, through the Administrative Agent, that each Committed Purchaser and Liquidity Purchaser extend its Commitment Expiration Date for a 364-day period as herein provided, which decision will be made by each Committed Purchaser and Liquidity Purchaser in its sole discretion. Upon receipt of any such request, the Administrative Agent shall promptly notify each Agent thereof, which shall notify each Committed Purchaser and Liquidity Purchaser in its Purchaser Group thereof. At least 30 but not more than 60 days prior to the applicable Commitment Expiration Date (the "Election Period"), each Committed Purchaser and Liquidity Purchaser shall notify the Agent for its Purchaser Group of its willingness or refusal to so extend its Commitment Expiration Date, and such Agent shall notify the Seller and the Administrative Agent of such willingness or refusal by the Committed Purchasers and Liquidity Purchasers not later than the Business Day following the last day of the Election Period. No Liquidity Purchaser may consent to an extension of its Commitment Expiration Date without the consent of each CP Conduit, if any, for which it acts as a Liquidity Purchaser. Any Committed Purchaser or Liquidity Purchaser which notifies the applicable Agent of its refusal to extend or which does not expressly notify such Agent that it is willing to extend its Commitment Expiration Date during the applicable Election Period shall be deemed to be (x) a Nonextending Class A Purchaser after the Commitment Expiration Date then in effect (such occurrence, unless such Nonextending Class A Purchaser is replaced pursuant to subsection 2.2(e) of this Agreement, a -14- 19 "Partial Expiration Event") and (y) a "Dissenting Purchaser" from the date of its refusal notice or the end of the applicable Election Period. If (i) one or more Committed Purchasers or Liquidity Purchasers have agreed to extend the Commitment Expiration Date, and (ii) at the end of the applicable Election Period, no Termination Event shall have occurred, the Commitment Expiration Date then in effect for each such Committed Purchaser and Liquidity Purchaser shall be extended to the date which is 364 days following the first day of the Election Period or, if such day is not a Business Day, the next preceding Business Day; provided that if not all Committed Purchasers and Liquidity Purchasers have agreed to such extension, the Seller may elect, by notice to the Administrative Agent, the Issuer and each Agent delivered not later than five Business Days prior to the end of the Election Period, not to have such extension become effective. (e) Within two Business Days following the end of an Election Period, the Agent for each Purchaser Group shall notify each other Class A Purchaser in such Purchaser Group, the Administrative Agent, the Issuer, the Seller and the Servicer of the identity of any Dissenting Purchaser and the amount of its Commitment. Such Agent, the Seller and, if the Dissenting Purchaser is a Liquidity Purchaser, the affected CP Conduit may (but shall not be required to) request one or more other Class A Purchasers in such Purchaser Group, with the consent of the Agent (which shall not be unreasonably withheld) and, if the Dissenting Purchaser is a Liquidity Purchaser, the affected CP Conduit in its sole discretion, or seek another financial institution reasonably acceptable to such Agent and, if the Dissenting Purchaser is a Liquidity Purchaser acceptable to the affected CP Conduit in its sole discretion, to acquire all or a portion of the Commitment of the Dissenting Purchaser and all amounts payable to it hereunder and under the Indenture in accordance with Section 8.1 of this Agreement. Each Dissenting Purchaser hereby agrees to assign all or a portion of its Commitment and the amounts payable to it hereunder and under the Indenture to a replacement investor identified by the Agent for its Purchaser Group in accordance with the preceding sentence, subject to ratable payment of such Dissenting Purchaser's Percentage Interest of the Class A Principal Balance, together with all accrued and unpaid interest thereon, and a ratable portion of all fees and other amounts due to it hereunder. (f) The Class A Purchasers in the Initial Purchaser Group and the Agent therefor shall become parties to this Agreement by entering into Joinder Supplements with the Issuer and the Administrative Agent, substantially in the form of Exhibit C. The Total Commitment may be increased by the Issuer, at the direction of the Seller, from time to time, to an amount not exceeding $350,000,000, minus (unless the Administrative Agent otherwise consents) the aggregate amount of the reductions of the Total Commitment pursuant to subsection 2.2(a), by (i) with respect to a Purchaser Group, the increase of the Commitment of one or more Liquidity Purchasers in such Purchaser Group or the addition of one or more Liquidity Purchasers in such Purchaser Group, with the consent of the CP Conduit and each affected Liquidity Purchaser in such Purchaser Group, or (ii) by the addition of one or more Purchaser Groups with the consent of the Administrative Agent (which consent shall not be unreasonably withheld), each consisting of a CP Conduit and one or more Liquidity Purchasers; provided, however, that no such increase shall become effective unless (A) such increasing or new Liquidity Purchaser and, if applicable, such CP Conduit shall have entered into an appropriate amendment or supplement to this Agreement (or its Assignment) reflecting such -15- 20 increased or new Commitment or, in the case of a CP Conduit, its Maximum Purchase Amount, (B) after giving effect to such increase and to any concurrent increase in the Class B Invested Amount pursuant to the Supplement, the Class B Invested Amount shall equal at least the Class B Enhancement Percentage times the sum of the Total Commitment plus the Class B Invested Amount, and (C) such conditions, if any, as the Administrative Agent shall have reasonably required in connection with such increase or addition shall have been satisfied. 2.3 Interest, Fees, Expenses, Payments, Etc. (a) Except as otherwise provided in subsection 2.3(b) of this Agreement, each CP Conduit's Percentage Interest of the Covered Portion of the Class A Principal Balance shall bear interest for each Interest Accrual Period at a rate per annum equal to the sum of such CP Conduit's Commercial Paper Rate plus the applicable Class A Program Utilization Fee Rate. Each CP Conduit's commercial paper tranches will be selected by such CP Conduit or its administrator, after consultation with the Seller, to the extent reasonably practicable. Each Committed Purchaser's Percentage Interest and each Liquidity Purchaser's Percentage Interest of the Covered Portion of the Class A Principal Balance shall bear interest for each Interest Accrual Period at a rate per annum equal to the sum of the Alternative Rate plus the applicable Class A Program Utilization Fee Rate. Each Class A Purchaser's Percentage Interest of the Risk Portion of the Class A Principal Balance shall bear interest for each Interest Accrual Period at a rate per annum equal to the sum of the Risk Rate from time to time in effect plus the applicable Class A Program Utilization Fee Rate. The "Class A Interest Rate" for each Interest Accrual Period shall equal the dollar weighted average (based on the respective applicable portions of the Class A Principal Balance) of the interest rates for such Interest Accrual Period determined as provided in this subsection 2.3(a) and in subsection 2.3(b) of this Agreement. (b) If and to the extent that, and only for so long as, a CP Conduit at any time determines for any reason whatsoever that it is unable to raise or is precluded or prohibited from raising, or that it is not advisable to raise, funds through the issuance of Commercial Paper Notes in the commercial paper market of the United States to finance its purchase or maintenance of its Percentage Interest of the Covered Portion of the Class A Principal Balance or any portion thereof (which determination may be based on any allocation method employed in good faith by such CP Conduit), including by reason of market conditions or by reason of insufficient availability under any of its Support Facilities or the downgrading of any of its Support Parties, upon notice from such CP Conduit to the Agent for its Purchaser Group and the Issuer, such portion of such CP Conduit's Percentage Interest of the Class A Principal Balance shall bear interest at a rate per annum equal to the sum of the Alternative Rate plus the applicable Class A Program Utilization Fee Rate, rather than as otherwise determined pursuant to subsection 2.3(a) of this Agreement. (c) The Class A Notes and interest thereon shall be paid as provided in the Indenture, and each Agent shall allocate to the Class A Owners in its Purchaser Group each payment in respect of the Class A Notes received by such Agent in its capacity as Class A Noteholder as provided herein. Except as otherwise provided in the Indenture, payments in reduction of the portion -16- 21 of the Class A Principal Balance evidenced by a Class A Note shall be allocated and applied to Class A Owners of such Class A Note pro rata based on their respective Percentage Interests of the Class A Principal Balance, or in any such case in such other proportions as each affected Class A Purchaser may agree upon in writing from time to time with such Agent and the Issuer; provided that from and after the occurrence of a Partial Expiration Event until the earlier to occur of (i) the Purchase Termination Date for all Class A Purchasers and (ii) the date on which (A) the aggregate amount of payments in reduction of the Class A Principal Balance made after the related Partial Commitment Expiration Date equals (B) the related Class A Mandatory Partial Amortization Amount, payments on a Class A Note in reduction of the portion of the Class A Principal Balance evidenced by such Class A Note shall be allocated and applied to Nonextending Class A Owners of such Class A Note pro rata based on their respective Percentage Interests of the Class A Principal Balance; provided that in the case of the Step-Down Date, the related Class A Mandatory Partial Amortization Amount shall be allocated and applied to Class A Purchasers in the Initial Purchaser Group pro rata based, for each such Class A Purchaser, on the amount by which its Percentage Interest of the Class A Invested Amount exceeds its Commitment or Maximum Purchase Amount (as applicable), after giving effect to the reduction thereof on the Step-Down Date pursuant to subsection 2.2(b) hereof. Payments of interest in respect of the portion of the Class A Principal Balance evidenced by a Class A Note shall be allocated and applied to Class A Owners of such Class A Note pro rata based upon the respective amounts of interest owed to them, determined as provided above in this Section 2.3. (d) The Seller agrees to pay to each Agent for the account of Class A Purchasers in its Purchaser Group the Class A Program Commitment Fee and other amounts set forth in the Supplemental Fee Letter for such Purchaser Group at the times specified therein. Each Class A Purchaser in a Purchaser Group shall be entitled to receive the share of the Class A Program Commitment Fee as may be agreed upon from time to time between such Class A Purchaser and the Agent for such Purchaser Group. (e) The Seller agrees to pay on demand (i) to the Administrative Agent and the initial Class A Purchasers all reasonable costs and expenses in connection with the preparation, execution, delivery and initial syndication of this Agreement and each related Support Facility, and the other documents to be delivered hereunder or in connection herewith, (ii) to the Administrative Agent and each Agent and Class A Purchaser all reasonable costs and expenses in connection with the administration (including any requested amendments, waivers or consents of any of the Related Documents) of this Agreement and the Related Documents and Support Facilities, including in each case the reasonable fees and out-of-pocket expenses of counsel with respect thereto, and (iii) to the Administrative Agent and each Agent and Class A Purchaser, on demand, all reasonable costs and expenses (including reasonable fees and expenses of counsel), if any, in connection with the enforcement of any of the Related Documents, and the other documents delivered thereunder or in connection therewith. (f) The Seller agrees to pay on demand any and all stamp, transfer and other taxes (other than Taxes covered by Section 2.5 hereof) and governmental fees payable in connection with -17- 22 the execution, delivery, filing and recording of any of the Related Documents and each related Support Facility or the other documents and agreements to be delivered hereunder and thereunder or otherwise in connection with the issuance of Series 1999-A Notes, and agrees to save each Class A Purchaser and Agent and the Administrative Agent harmless from and against any liabilities with respect to or resulting from any delay in paying or any omission to pay such taxes and fees. (g) Any fees or other amounts payable hereunder (without regard to any limitations set forth herein on the sources from which such amount may be paid) which are not paid on the due date thereof (including interest payable pursuant to this clause (g)) and Carryover Class A Interest shall accrue interest (after as well as before judgment) at the Risk Rate from time to time in effect from and including the due date thereof to but excluding the date such amount is actually paid. (h) Unless otherwise specified in an applicable Supplemental Fee Letter, interest calculated by reference to the Commercial Paper Rate or the Adjusted Eurodollar Rate shall be calculated on the basis of a 360-day year for the actual days elapsed. Interest calculated by reference to the Prime Rate shall be calculated on the basis of a 365- or 366-day year, as applicable, for the actual days elapsed. Periodic fees or other periodic amounts payable hereunder shall be calculated, unless otherwise specified in the Supplemental Fee Letter, on the basis of a 360-day year and for the actual days elapsed. (i) All payments to be made hereunder or under the Indenture, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 2:00 p.m., New York City time, on the due date thereof to the Administrative Agent or the applicable Agent, as the case maybe, at its account specified in subsection 9.2(b) hereof, in United States dollars and in immediately available funds. Payments received by such Agent after 2:00 p.m., New York City time, shall be deemed to have been made on the next Business Day. Notwithstanding anything herein to the contrary, if any payment due hereunder becomes due and payable on a day other than a Business Day, the payment date thereof shall be extended to the next succeeding Business Day and interest shall accrue thereon at the applicable rate during such extension. To the extent that (i) the Issuer, the Indenture Trustee, the Seller or the Servicer makes a payment to the Administrative Agent or an Agent or Class A Purchaser or (ii) the Administrative Agent or an Agent or Class A Purchaser receives or is deemed to have received any payment or proceeds for application to an obligation, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy or insolvency law, state or Federal law, common law, or for equitable cause, then, to the extent such payment or proceeds are set aside, the obligation or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received or deemed received by the Administrative Agent or such Agent or Class A Purchaser, as the case may be. (j) At or before 4:00 p.m., New York City time, on each Note Rate Determination Date, each CP Conduit shall notify the Agent for its Purchaser Group of (i) its Commercial Paper Rate, if applicable, in effect for the related Interest Accrual Period, and (ii) if -18- 23 applicable, the date on which the Alternative Rate became applicable to its Percentage Interest of the Class A Principal Balance or a portion thereof pursuant to subsection 2.3(b) of this Agreement. Such notification may be based on such CP Conduit's good faith estimate of the Commercial Paper Rate if the actual rate is not then known to such CP Conduit, and in such case, such CP Conduit shall notify such Agent at or before 4:00 p.m., New York City time, on the following Note Rate Determination Date of the amount of any variation between interest payable to such CP Conduit for the applicable Interest Accrual Period based on such estimate and interest which should have been payable to such CP Conduit for such Interest Accrual Period based on its final determination of the applicable Commercial Paper Rate. The amount of any shortfall in interest based on such variation shall be included in the portion of Class A Monthly Interest payable to such CP Conduit for the following Interest Accrual Period, and the amount of any overpayment of interest to such CP Conduit based on such variation shall be credited, dollar for dollar, against the portion of Class A Monthly Interest otherwise payable to such CP Conduit for the following Interest Accrual Period. Each determination by a CP Conduit of its applicable Commercial Paper Rate pursuant to this Agreement shall be conclusive and binding on the Class A Purchasers, each Agent, the Issuer, the Seller, the Servicer and the Indenture Trustee in the absence of manifest error. (k) On each Note Rate Determination Date, (i) the Agent for each Purchaser Group shall notify the Servicer, with respect to such Purchaser Group, of the applicable Commercial Paper Rates and the Class A Program Utilization Fee Rate for the related Interest Accrual Period, and, if applicable, the dates on which the Alternative Rate was applicable to the Percentage Interest of the Class A Principal Balance owed to any member of its Purchaser Group, and (ii) the Administrative Agent shall notify the Servicer of the Alternative Rate and the Risk Rate, if applicable, for the related Interest Accrual Period. For such purposes, the Agents may rely conclusively on notices from CP Conduits as to the interest rate or rates from time to time applicable to their respective Percentage Interest of the Class A Principal Balance. Such notification from an Agent may be based on such CP Conduit's estimate of the Commercial Paper Rate as provided to such Agent pursuant to subsection 2.3(j) hereof, if the actual rate and amount is not then known to such Agent. In any such case, such Agent shall notify the Servicer and the Indenture Trustee on or before the following Note Rate Determination Date of the amount of any variation between the estimated amount of interest payable on Class A Notes accrued at the Commercial Paper Rate and the actual amount thereof for the preceding Interest Accrual Period. The amount of any shortfall in interest based on such variation shall be a positive "Estimated Interest Adjustment" for such Interest Accrual Period, and the amount of any overpayment of interest based on such variation shall be a negative "Estimated Interest Adjustment" for such Interest Accrual Period. Any positive Estimated Interest Adjustment for an Interest Accrual Period shall be deemed not due on the Payment Date for such Interest Accrual Period, but shall be due on the next following Payment Date. An Estimated Interest Adjustment shall not bear interest, unless not paid when due as provided in the preceding sentence. Each determination of the Commercial Paper Rate, the Alternative Rate, the Risk Rate and the Class A Program Utilization Fee Rate by the Administrative Agent or an Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Class A Purchasers, the Issuer, the Servicer and the Indenture Trustee in the absence of manifest error. -19- 24 2.4 Requirements of Law. (a) In the event that any Class A Purchaser shall have reasonably determined that any Regulatory Change shall: (i) subject such Class A Purchaser to any tax of any kind whatsoever with respect to this Agreement, its Commitment or its beneficial interest in the Class A Notes, or change the basis of taxation of payments in respect thereof(except for Taxes covered by Section 2.5 hereof and taxes included in the definition of Excluded Taxes in subsection 2.5(a) hereof); or (ii) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, such Class A Purchaser; and the result of any of the foregoing is to increase the cost to such Class A Purchaser, by an amount which such Class A Purchaser deems to be material, of maintaining its Commitment or its interest in the Class A Notes or to reduce any amount receivable in respect thereof, then, in any such case, after submission by such Class A Purchaser to the Agent for its Purchaser Group of a written request therefor and the submission by such Agent to the Issuer and the Servicer of such written request therefor, the Issuer shall pay to such Agent for the account of such Class A Purchaser any additional amounts necessary to compensate such Class A Purchaser for such increased cost or reduced amount receivable, to the extent not already reflected in the applicable interest rate, together with interest on any such unpaid amount from the Payment Date following receipt by the Issuer of such request for compensation under this subsection 2.4(a) of this Agreement, if such request is received by the Issuer at least five Business Days prior to the Determination Date related to such Payment Date, and otherwise from the following Payment Date, until payment in full thereof (after as well as before judgment) at the Prime Rate in effect from time to time. (b) In the event that any Class A Purchaser shall have determined that any Regulatory Change regarding capital adequacy has the effect of reducing the rate of return on such Class A Purchaser's capital or on the capital of any Person controlling such Class A Purchaser as a consequence of its obligations hereunder or its maintenance of its Commitment or its interest in the Class A Notes to a level below that which such Class A Purchaser or such Person could have achieved but for such Regulatory Change (taking into consideration such Class A Purchaser's or such Person's policies with respect to capital adequacy) by an amount deemed by such Class A Purchaser or such Person to be material, then, from time to time, after submission by such Class A Purchaser to the Agent for its Purchaser Group of a written request therefor and submission by such Agent to the Issuer and the Servicer of such written request therefor, the Issuer shall pay to such Agent for the account of such Class A Purchaser such additional amount or amounts as will compensate such Class A Purchaser or such Person, as applicable, for such reduction, together with interest on any such unpaid amount from the Payment Date following receipt by the Issuer of such request for compensation under this subsection 2.4(b), if such request is received by the Issuer at least five -20- 25 Business Days prior to the Determination Date related to such Payment Date, and otherwise from the following Payment Date, until payment in full thereof (after as well as before judgment) at the Prime Rate in effect from time to time. Nothing in this subsection 2.4(b) shall be deemed to require the Issuer to pay any amount to a Class A Purchaser to the extent such Class A Purchaser has been compensated therefor under another provision of this Agreement or to the extent such amount is already reflected in the applicable interest rate. (c) Each Class A Purchaser agrees that it shall use its reasonable efforts to reduce or eliminate any claim for compensation pursuant to subsections 2.4(a) and 2.4(b) of this Agreement, including but not limited to designating a different Investing Office for its Class A Notes (or any interest therein) if such designation will avoid the need for, or reduce the amount of, any increased amounts referred to in subsection 2.4(a) or 2.4(b) hereof and will not, in the opinion of such Class A Purchaser, be unlawful or otherwise disadvantageous to such Class A Purchaser or inconsistent with its policies or result in any unreimbursed cost or expense to such Class A Purchaser or in an increase in the aggregate amount payable under subsections 2.4(a) and 2.4(b) hereof. (d) Each Class A Purchaser claiming increased amounts described in subsection 2.4(a) or 2.4(b) of this Agreement will furnish to the Agent for its Purchaser Group (together with its request for compensation) a certificate prepared in good faith setting forth the basis and the calculation of the amount (in reasonable detail) of each request by such Class A Purchaser for any such increased amounts referred to in subsection 2.4(a) or 2.4(b) hereof. Any such certificate shall be conclusive absent manifest error, and such Agent shall deliver a copy thereof to the Issuer and the Servicer. Failure on the part of any Class A Purchaser to demand compensation for any amount pursuant to subsection 2.4(a) or 2.4(b) hereof with respect to any period shall not constitute a waiver of such Class A Purchaser's right to demand compensation with respect to such period ; provided, however, that notwithstanding the foregoing provisions of this Section 2.4, a Class A Purchaser shall not be compensated for any such amount relating to any period ending, and of which such Class A Purchaser has had knowledge, more than six months prior to the date that such Class A Purchaser notifies the Issuer in writing thereof or for any amounts resulting from a change by any Class A Purchaser of its Investing Office (other than changes required by law). 2.5 Taxes. (a) All payments made to the Class A Purchasers, the Agents or the Administrative Agent under this Agreement and the Indenture (including all amounts payable with respect to the Class A Notes) shall, to the extent allowed by law, be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority (collectively, "Taxes"), excluding (i) income taxes (including branch profit taxes, minimum taxes and taxes computed under alternative methods, at least one of which is based on or measured by net income), franchise taxes (imposed in lieu of income taxes), or any other taxes based on or measured by the net income of such Class A Purchaser or Agent or the Administrative Agent (as the case may be) or the gross receipts -21- 26 or income of such Class A Purchaser or Agent or the Administrative Agent (as the case may be); (ii) any Taxes that would not have been imposed but for the failure of such Class A Purchaser or Agent or the Administrative Agent, as applicable, to provide and keep current (to the extent legally able) any certification or other documentation required to qualify for an exemption from, or reduced rate of, any such Taxes or required by this Agreement to be furnished by such Class A Purchaser or Agent or the Administrative Agent, as applicable; and (iii) any Taxes imposed as a result of a change by any Class A Purchaser of the Investing Office (other than changes mandated by this Agreement, including subsection 2.4(c) hereof, or required by law) (all such excluded taxes being hereinafter called "Excluded Taxes"). If any Taxes, other than Excluded Taxes, are required to be withheld from any amounts payable to a Class A Purchaser or Agent or the Administrative Agent hereunder or under the Indenture, then after submission by any Class A Purchaser to the Agent for its Purchaser Group (in the case of an amount payable to a Class A Purchaser) and by any Agent or the Administrative Agent to the Issuer and the Servicer of a written request therefor, the amounts so payable to such Class A Purchaser or Agent or the Administrative Agent, as applicable, shall be increased, and the Issuer shall pay to the applicable Agent for the account of such Class A Purchaser or for its own account or to the Administrative Agent, as applicable, the amount of such increase to the extent necessary to yield to such Class A Purchaser or Agent or the Administrative Agent, as applicable (after payment of all such Taxes) interest or any such other amounts payable hereunder or thereunder at the rates or in the amounts specified in this Agreement and the Indenture; provided, however, that the amounts so payable to such Class A Purchaser or Agent or the Administrative Agent shall not be increased pursuant to this subsection 2.5(a) if such requirement to withhold results from the failure of such Person to comply with subsection 2.5(c) hereof. Whenever any Taxes are payable on or with respect to amounts distributed to a Class A Purchaser or Agent or the Administrative Agent, as promptly as possible thereafter the Servicer shall send to the Agent, on behalf of such Class A Purchaser, or to such Agent or the Administrative Agent, as applicable, a certified copy of an original official receipt showing payment thereof. If the Issuer fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, on behalf of itself or such Class A Purchaser, or to such Agent or the Administrative Agent, as applicable, the required receipts or other required documentary evidence, the Issuer shall pay to such Agent on behalf of such Class A Purchaser or to such Agent or the Administrative Agent for its own account, as applicable, any incremental taxes, interest or penalties that may become payable by such Class A Purchaser or Agent or the Administrative Agent, as applicable, as a result of any such failure. (b) A Class A Purchaser claiming increased amounts under subsection 2.5(a) hereof for Taxes paid or payable by such Class A Purchaser will furnish to the applicable Agent a certificate prepared in good faith setting forth the basis and amount of each request by such Class A Purchaser for such Taxes, and such Agent shall deliver a copy thereof to the Issuer and the Servicer. An Agent or the Administrative Agent claiming increased amounts under subsection 2.5(a) hereof for its own account for Taxes paid or payable by such Agent or the Administrative Agent , as applicable, will furnish to the Issuer and the Servicer a certificate prepared in good faith setting forth the basis and amount of each request by the Agent or the Administrative Agent for such Taxes. Any such certificate of a Class A Purchaser or Agent or the Administrative Agent shall be conclusive absent manifest error. Failure on the part of any Class A Purchaser or Agent or the Administrative -22- 27 Agent to demand additional amounts pursuant to subsection 2.5(a) of this Agreement with respect to any period shall not constitute a waiver of the right of such Class A Purchaser or Agent or the Administrative Agent, as the case may be, to demand compensation with respect to such period. All such amounts shall be due and payable to such Agent on behalf of such Class A Purchaser or to such Agent or the Administrative Agent for its own account, as the case may be, on the Payment Date following receipt by the Issuer of such certificate, if such certificate is received by the Issuer at least five Business Days prior to the Determination Date related to such Payment Date and otherwise shall be due and payable on the following Payment Date (or, if earlier, on the Series 1999-A Termination Date). (c) Each Class A Purchaser and each Participant holding an interest in Class A Notes agrees that prior to the date on which the first interest or fee payment hereunder is due thereto, it will deliver to the Issuer, the Servicer, the Indenture Trustee, the applicable Agent and the Administrative Agent (i) if such Class A Purchaser or Participant is not incorporated under the laws of the United States or any State thereof, two duly completed copies of the U.S. Internal Revenue Service Form 4224 or successor applicable forms required to evidence that the Class A Purchaser's or Participant's income from this Agreement or the Class A Notes is "effectively connected" with the conduct of a trade or business in the United States, and (ii) a duly completed U.S. Internal Revenue Service Form W-9 or successor applicable or required forms. Each Class A Purchaser or Participant holding an interest in Class A Notes also agrees to deliver to the Issuer, the Servicer, the Indenture Trustee, the applicable Agent and the Administrative Agent two further copies of such Form 4224 and Form W-9, or such successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it hereunder, and such extensions or renewals thereof as may reasonably be requested by the Servicer, an Agent or the Administrative Agent, unless in any such case, solely as a result of a change in treaty, law or regulation occurring prior to the date on which any such delivery would otherwise be required, the Class A Purchaser is no longer eligible to deliver the then-applicable form set forth above and so advises the Servicer and the applicable Agent and the Administrative Agent. Each Class A Purchaser certifies, represents and warrants as of the Closing Date, each Assignee and each Participant (in either case other than a Support Party) shall certify, represent and warrant as a condition of acquiring its Assignment or Participation as of the effective date of the Transfer Supplement to which it is a party or of such Participation, as the case may be, and each Support Party shall certify, represent and warrant as of the effective date of its becoming a Support Party, that (x) in the case of Form 4224 (if applicable), its income from this Agreement or the Class A Notes is effectively connected with a United States trade or business and (y) it is entitled to an exemption from United States backup withholding tax. Further, each Class A Purchaser and each Participant acquiring an interest in a Class A Note covenants that for so long as it shall own Class A Notes or such Participation, such Class A Notes or Participation shall be held in such manner that the income therefrom shall be effectively connected with the conduct of a United States trade or business. 2.6 Indemnification. -23- 28 (a) The Seller agrees to indemnify and hold harmless the Administrative Agent and each Agent and Class A Purchaser and any director, officer, employee or agent thereof (each such Person being an "Indemnitee") from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable fees and expenses of counsel) whatsoever (including claims under federal or state securities laws, but excluding claims for repayment of principal of or interest on, or other amounts due in respect of, the Class A Notes or amounts payable by the Issuer under Section 2.4 or 2.5 hereto, which the Indemnitee may incur (or which may be claimed against the Indemnitee) by reason of or in connection with (i) the execution and delivery or assignment of, or payment under, this Agreement or any Related Document or the Class A Notes, (ii) the offer and sale by or on behalf of the Issuer, the Seller or any of their affiliates of the Series 1999-A Notes or (iii) the other transactions contemplated hereby, including the matters and circumstances described in any of clauses (i) through (xii) of subsection 8.01(b) of the Purchase and Servicing Agreement, except (A) to the extent that any such claim, damage, loss, liability, cost or expense shall be caused by the willful misconduct or gross negligence of the Indemnitee in performing its obligations under this Agreement, (B) to the extent that any such claim, damage, loss, liability, cost or expense relates to Taxes, and (C) to the extent limited by the last paragraph of subsection 8.01(b) of the Purchase and Servicing Agreement. Subject to the limitations set forth above, but without limiting the generality of the foregoing, the Seller agrees to indemnify and hold harmless the Administrative Agent and each Agent from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including at any time following the payment of the obligations under this Agreement, including the Class A Principal Balance) be imposed on, incurred by or asserted against the Administrative Agent and such Agent in any way relating to or arising out of this Agreement, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted by the Administrative Agent or any Agent under or in connection with any of the foregoing; provided that the Seller shall not be liable under this sentence for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of the Administrative Agent or any Agent resulting from its own gross negligence or willful misconduct. Promptly after receipt by the Administrative Agent or an Agent or Class A Purchaser of notice of the commencement of any action, the Administrative Agent or such Agent or Class A Purchaser, as the case may be, will, if a claim in respect thereof is to be made under this subsection 2.6(a), notify the Seller in writing of the commencement thereof; provided, however, the omission to so notify the Seller will not relieve the Seller from any liability which it may have to the Administrative Agent or such Agent or Class A Purchaser under this subsection 2.6(a) except to the extent the Seller was actually prejudiced by the failure to give such notices promptly. (b) JNB and any Successor Servicer, by accepting its appointment pursuant to the Purchase and Servicing Agreement, (i) shall agree to be bound by the terms, covenants and conditions contained herein applicable to the Servicer and to be subject to the duties and obligations of the Servicer hereunder, (ii) as of the date of its acceptance, shall be deemed to have made with respect to itself the representations and warranties made by the Servicer in subsections 4.1(a) through 4.1(e) hereof (in the case of subsection 4.1(a) with appropriate factual changes) and (iii) shall agree on a recourse basis to indemnify and hold harmless any Indemnitee from and against any and all claims, -24- 29 damages, losses, liabilities, costs or expenses (including the fees and expenses of counsel) whatsoever which such Indemnitee may incur (or which may be claimed against such Indemnitee) (i) by reason of the negligence or willful misconduct of such Servicer in exercising its powers and carrying out its obligations under this Agreement, the Purchase and Servicing Agreement or any Related Document or (ii) by reason of or in connection with any of the matters and circumstances described in any of clauses (i) through (vi) of subsection 8.01(c) of the Purchase and Servicing Agreement, subject in the case of this clause (ii) to the limitations set forth in the last paragraph of subsection 8.01(c) of the Purchase and Servicing Agreement. (c) In the event that for any reason, (i) the basis for calculation of interest on any CP Conduit's Percentage Interest of the Class A Principal Balance shall change from the Commercial Paper Rate to the Alternative Rate, (ii) any CP Conduit receives any repayment of its share of the Class A Principal Balance, and the date of such change or of such repayment is not the maturity date for all Commercial Paper Notes allocated by such CP Conduit to funding its purchase or maintenance of the affected portion of its Percentage Interest of the Class A Principal Balance, or (iii) any Class A Purchaser receives any repayment of its share of the Class A Principal Balance on a date other than a Payment Date or upon fewer than two Business Days' prior (or, with respect to amounts listed at the Alternative Rate based on the Adjusted Eurodollar Rate, two Business Days') written notice, then in any such case the Issuer agrees to indemnify each affected Class A Purchaser against, and to promptly pay on demand directly to such Class A Purchaser the amount equal to any loss or reasonable out-of-pocket expense suffered by such Class A Purchaser as a result of such change or such repayment, including, in the case of a CP Conduit, any loss, cost or expense suffered by such CP Conduit by reason of its issuance of Commercial Paper Notes or its incurrence of other obligations reasonably allocated by such CP Conduit to its funding or the maintenance of its funding of its share of the Class A Principal Balance, or, in the case of any Class A Purchaser, redeploying funds prepaid or repaid, in amounts which correspond to its share of the Class A Principal Balance. A statement setting forth in reasonable detail the calculations of any additional amounts payable pursuant to this Section submitted by a Class A Purchaser or Agent or by the Administrative Agent, as the case may be, to the Issuer and the Servicer and shall be conclusive absent manifest error. ARTICLE 3 CONDITIONS PRECEDENT 3.1 Condition to Initial Purchase. The following shall be conditions precedent to the initial purchase by the Class A Purchasers of the Class A Notes: (a) the representations and warranties of the Issuer, Z Del and JNB set forth or referred to in Sections 4.1, 4.2 and 4.3, respectively, hereof shall be true and correct in all material respects on the Closing Date as though made on and as of the Closing Date, and no event which of itself or with the giving of notice or lapse of time, or both, would constitute a Termination Event shall have occurred and be continuing on the Closing Date; -25- 30 (b) the Receivables Purchase Agreement, dated as of July 15, 1999, between JNB and JCC shall have been duly executed and delivered by all parties thereto and shall be in form and substance satisfactory to the Class A Purchasers; (c) the Receivables Purchase Agreement, dated as of July 15, 1999, between JCC and Z Del shall have been duly executed and delivered by all parties thereto and shall be in form and substance satisfactory to the Class A Purchasers; (d) the Purchase and Servicing Agreement shall have been duly executed and delivered by all parties thereto and shall be in form and substance satisfactory to the Class A Purchasers; (e) the Base Indenture and Supplement shall have been duly executed and delivered by all parties thereto and shall be in form and substance satisfactory to the Class A Purchasers; (f) the Supplemental Fee Letter for each Purchaser Group shall have been executed and delivered by the Issuer to the Agent for such Group; (g) the Class A Notes and the Class B Notes shall have been duly issued in accordance with the Indenture, and the Class B Initial Invested Amount shall equal at least the Class B Enhancement Percentage times the Initial Invested Amount; (h) there shall be no Originator other than JNB; (i) Zale shall have executed and delivered to the Administrative Agent, for the benefit of each Indemnitee, an agreement, in form and substance satisfactory to the Class A Purchasers, the Administrative Agent and each Agent, providing for indemnification of each Indemnitee on terms and conditions substantially as set forth in subsection 2.6(a) hereof; (j) the Seller shall have paid all fees payable on the Closing Date to the Administrative Agent (for its own account or for the account of the initial Class A Purchasers) described in the initial Supplemental Fee Letter and all reasonable and appropriately invoiced costs and expenses of the Administrative Agent and the initial Agent and Class A-1 Purchasers payable by the Seller, to the extent provided herein, in connection with the transactions contemplated hereby; and (k) the Administrative Agent on behalf of the Class A Purchasers shall have received on the Closing Date the following items, each of which shall be in form and substance satisfactory to the Agent: (i) an Officer's Certificate of Z Del confirming the satisfaction of the conditions set forth in clauses (a) through (g), inclusive, above; -26- 31 (ii) an Officer's Certificate of JNB confirming the satisfaction of the conditions set forth in clauses (a) (as to representations and warranties of JNB only), and (b) through (g), inclusive, above; (iii) a certificate, in form and substance satisfactory to the Class A Purchasers, of JCC confirming the satisfaction of the conditions set forth in clauses (b) and (c) above and to the effect that the Administrative Agent and each Agent and Class A Purchaser may rely on the representations and warranties of JCC made in the Receivables Purchase Agreement described in clause (c) above; (iv) a copy of the Trust Agreement, in form and substance satisfactory to the Class A Purchasers, certified as a true and complete copy thereof by an authorized officer of Z Del; (v) a copy of (A) the certificate of incorporation and by-laws of, and an incumbency certificate with respect to its officers executing any of the Related Documents on the Closing Date on behalf of Z Del, certified by its authorized officer, and (B) resolutions of the Board of Directors (or an authorized committee thereof) of Z Del with respect to the Related Documents to which it is party, certified by its authorized officer; (vi) a copy of (A) the certificate of incorporation and by-laws of, and an incumbency certificate with respect to its officers executing any of the Related Documents on the Closing Date on behalf of JCC, certified by its authorized officer, and (B) resolutions of the Board of Directors (or an authorized committee thereof) of JCC with respect to the Related Documents to which it is party, certified by its authorized officer; (vii) a copy of (A) the articles of association and by-laws of, and an incumbency certificate with respect to its officers executing any of the Related Documents on the Closing Date on behalf of JNB, certified by its authorized officer, and (B) resolutions of the Board of Directors (or an authorized committee thereof) of JNB with respect to the Related Documents to which it is party, certified by its authorized officer; (viii) a copy of (A) the certificate of incorporation and by-laws of, and an incumbency certificate with respect to its officers executing any of the Related Documents on the Closing Date on behalf of Zale, certified by its authorized officer, and (B) resolutions of the Board of Directors (or an authorized committee thereof) of Zale with respect to the Related Documents to which it is party, certified by its authorized officer; (ix) "long form" certificates issued on a recent date by the Secretary of State of Delaware evidencing the legal existence and good standing of Z Del, JCC and Zale as corporations under the laws of the State of Delaware; -27- 32 (x) certificates issued on a recent date by the appropriate officer in (A) in the case of Z Del, Arizona, California, Florida, Louisiana, Pennsylvania, Texas and Virginia, and (B) in the case of JCC, Texas, evidencing the qualification of such Zale Parties to transact business as a foreign corporation therein and the good standing of such Zale Parties therein; (xi) a certificate issued on a recent date from the Comptroller of the Currency of the United States evidencing the existence and good standing of JNB; (xii) the favorable written opinions of counsel for Z Del, JNB, JCC and Zale addressed to the Administrative Agent and each Agent and Class A Purchaser, or accompanied by a letter providing that the Administrative Agent and each Agent and Class A Purchaser may rely on such opinions as if they were addressed to them, and dated the Closing Date, covering general corporate matters, the due execution and delivery of, and the enforceability of, each of the Related Documents to which Z Del, JNB, JCC or Zale (individually or in any other capacity) is party, sale/security interest matters, banking regulation, tax matters and such other matters as the Administrative Agent may request; (xiii) evidence of the due execution and delivery by the Owner Trustee, on behalf of the Trust, and the Indenture Trustee of the Related Documents to which it is party; (xiv) an executed copy of each Receivables Purchase Agreement described in clause (b) or (c) above, the Purchase and Servicing Agreement, the Base Indenture and the Supplement; (xv) a signed copy of a letter of Arthur Andersen LLP, in form and substance satisfactory to the Administrative Agent; (xvi) a certificate of the Owner Trustee as to the establishment of certain accounts as provided in the Trust Agreement; (xvii) the duly executed Class A Note(s) registered in the name of each Agent as nominee on behalf of the Class A Owners in its Purchaser Group; (xviii) evidence satisfactory to the Administrative Agent that financing statements duly executed by JNB, JCC, Z Del and the Issuer or other, similar instruments or documents, as may be necessary or, in the opinion of the Administrative Agent or any Agent or Class A Purchaser, desirable under the Uniform Commercial Code of all appropriate jurisdictions or any comparable law to perfect the transfers (including grants of security interests) under the Related Documents have been delivered and, if appropriate, have been duly filed or recorded and that all filing fees, taxes or other amounts required to be paid in connection therewith have been paid; (xix) certified copies of requests for information or copies (or a similar search report certified by a party acceptable to the Administrative Agent), dated a date reasonably -28- 33 near to the Closing Date, listing all effective financing statements which name JNB, JCC, Z Del or the Issuer (under its present name and any previous name) as debtor and which are filed in the jurisdictions in which the statements referred to in clause (xviii) above were or are to be filed, together with copies of such financing statements (none of which, other than financing statements naming the party under the Related Documents to which transfers (including grants of security interests) thereunder purport to have been made) shall cover any of the property purported to be conveyed thereunder; (xx) evidence satisfactory to each Class A Purchaser that the Class A Notes are rated at least "Aa2" and "AA" by Moody's and S&P, respectively; (xxi) evidence satisfactory to each initial CP Conduit that its purchase of Class A Notes and Class A Note Principal Balance Increases hereunder will not result in a reduction or withdrawal of the rating of its Commercial Paper Notes by Moody's, S&P or any other nationally recognized rating agency; (xxii) evidence satisfactory to each Class A Purchaser that, giving effect to the issuance of the Class A Notes and the purchase hereunder of the Class A Initial Invested Amount, all of the Issuer's Series 1994-1 Notes shall have been redeemed in full; and (xxiii) such additional documents, instruments, certificates or letters as the Administrative Agent or any Agent or Class A Purchaser may reasonably request. 3.2 Condition to Additional Purchases. The following shall be conditions precedent to each purchase hereunder by any Class A Purchasers of the Class A Notes on the Closing Date and of each Class A Note Principal Balance Increase thereafter: (a) Except in the case of the initial purchase on the Closing Date, each Agent shall have received a properly completed Increase Notice not later than 5:00 p.m. on the fourth Business Day prior to such Increase Date; (b) (i) No Termination Event, and no event that, after the giving of notice or the lapse of time, would constitute a Termination Event, shall have occurred and be continuing, (ii) as of such Purchase Date and after giving effect to the distributions to be made on such date pursuant to the Supplement, no unreimbursed Investor Charge-Offs shall remain outstanding, and (iii) except in the case of the purchase on the Closing Date, the amount of funds then available for distribution to the Administrative Agent, the Agents or the Class A Purchasers pursuant to the Supplement shall equal or exceed the aggregate sum of all interest, fees, expenses and all other amounts due and payable to the Administrative Agent, the Agents and the Class A Purchasers hereunder (including any amounts owed to the Administrative Agent, the Agents or the Class A Purchasers under subsections 2.3, 2.4, 2.5 or 2.6 of this Agreement, but excluding the Class A Principal Balance); -29- 34 (c) On the Purchase Date and after giving effect to the purchases on such date of the Initial Invested Amount or of the Class A Note Principal Balance Increase, if any, to be purchased on such date, as applicable, all representations and warranties of Z Del or JNB (individually or in any other capacity) or the Issuer contained herein or otherwise made in writing pursuant to any of the provisions hereof shall be true and correct in all material respects with the same force and effect as though such representations and warranties had been made on and as of such date (unless such representations and warranties specifically relate to an earlier date); (d) After giving effect to the purchases on such date of the Initial Invested Amount or of the Class A Note Principal Balance Increase to be purchased on such date, (i) the Class A Invested Amount shall not exceed the Class A Purchase Limit, and (ii) the Class A Note Principal Balance Increase on such date plus the amount of any related increase in the Class B Invested Amount shall not exceed an amount equal to the excess of the aggregate amount of Principal Receivables in the Trust over the Required Minimum Principal Balance; (e) After giving effect to the purchases on such date of the Initial Invested Amount or of the Class A Note Principal Balance Increase to be purchased on such date and any related increase in the Class B Invested Amount, the Class B Invested Amount shall at least equal the Class B Enhancement Percentage times the aggregate Invested Amount; (f) The Initial Investor Interest (in the case of the Closing Date) or the amount of the Class A Note Principal Balance Increase (in the case of an Increase Date) to be purchased on such Purchase Date shall equal a minimum amount of $5,000,000 and be shall be in an integral multiple of $1,000,000; (g) Such Purchase Date shall not occur during a Partial Amortization Period; (h) Each CP Conduit's Support Facilities shall be in full force and effect; and (i) In the case of each Increase Date, the Seller shall have delivered to the Administrative Agent and each Agent an Officer's Certificate dated such Increase Date certifying (i) that the conditions described in clauses (a) through (g) above have been satisfied and (ii) that based on the facts known to the officer signing such Officer's Certificate at such time, in the reasonable belief of the Seller, the purchases of the additional Invested Amount to be purchased on such Increase Date will not cause an Early Amortization Event or Series 1999-A Early Amortization Event or an event that, after the giving of notice or the lapse of time, would constitute an Early Amortization Event or Series 1999-A Early Amortization Event to occur. ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of Z Del. Z Del represents and warrants to the Class A Purchasers, the Agents and the Administrative Agent that the representations and warranties of Z Del (individually or as Seller) set forth in the Purchase and Servicing Agreement, the -30- 35 Indenture and the other Related Documents are true and correct as of the date hereof. Z Del further represents and warrants to, and agrees with, each Class A Purchaser and Agent and the Administrative Agent that, as of the date hereof: (a) Z Del is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority under such laws to own its properties and conduct its business as such properties are presently owned and such business is presently conducted and to execute, deliver and perform its obligations under this Agreement and the Related Documents to which it is a party. (b) Z Del has the power and authority to execute, deliver and perform this Agreement and the Related Documents to which it is a party and all the transactions contemplated hereby and thereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement and such Related Documents. When executed and delivered, each of this Agreement and each Related Document to which Z Del is a party will constitute the legal, valid and binding agreement of Z Del, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium and other laws of general applicability relating to or affecting creditors' rights generally and the rights of creditors from time to time in effect. The enforceability of Z Del's obligations under such agreements is also subject to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law, and indemnification sought in respect of securities laws violations may be limited by public policy. (c) No consent, license, approval or authorization of, or registration with, any governmental authority, bureau or agency is required to be obtained in connection with the execution, delivery or performance of each of this Agreement or any Related Documents that has not been duly obtained and which is not and will not be in full force and effect on the Closing Date, except such that may be required by the blue sky laws of any state and except those which the failure to obtain individually or in the aggregate, would not have a material adverse effect on the Issuer or Z Del or the transactions contemplated by, or the ability of the Issuer or Z Del to perform its respective obligations under, this Agreement or the Related Documents. (d) The execution, delivery and performance of each of this Agreement and the Related Documents do not violate any provision of any existing law or regulation applicable to Z Del, any order or decree of any court to which Z Del is subject, its charter or by-laws or any mortgage, indenture, contract or other agreement to which Z Del is a party or by which it or any significant portion of Z Del's properties is bound (other than violations of such laws, regulations, orders, decrees, mortgages, indentures, contracts and other agreements which do not affect the legality, validity or enforceability of any of such agreements or the Receivables and which, individually or in the aggregate, would not have a material adverse effect on the Issuer or Z Del or the transactions contemplated by, or the ability of the Issuer or Z Del to perform its respective obligations under, this Agreement or the Related Documents). -31- 36 (e) There is no litigation or administrative proceeding before any court, tribunal or governmental body presently pending or, to the knowledge of Z Del, threatened against Z Del with respect to this Agreement and the Related Documents, the transactions contemplated hereby or thereby or the issuance of the Series 1999-A Notes, and there is no such litigation or proceeding against Z Del or any significant portion of Z Del properties, in each case which would have a material adverse effect on the Issuer or Z Del or the transactions contemplated by, or the ability of the Issuer or Z Del to perform its respective obligations under, this Agreement or the Related Documents. (f) Z Del has delivered to the Administrative Agent complete and correct copies of (i) the audited balance sheet of Z Del as at July 31, 1998, and the related audited statements of income, shareholders' equity and cash flows for the fiscal year then ended, accompanied by the report thereon of Arthur Andersen LLP, and (ii) the unaudited balance sheet of Z Del as at April 30, 1999, and the related unaudited statements of income, shareholders' equity and cash flows for the fiscal quarter then ended. Such financial statements fairly present in all material respects the financial condition of Z Del as at such date and the results of the operations of Z Del for the period ended on such dates, all in accordance with United States generally accepted accounting principles, consistently applied, and since July 31, 1998 there has been no material adverse change in any such condition or operations. (g) Except as may have been consented to in writing by the Administrative Agent or as provided in Section 6.1, such Agent or Class A Purchaser, the identity of the Administrative Agent or any Agent or Class A Purchaser as purchaser of the Class A Noteholders' Interest under this Agreement or as an agent therefor has not been disclosed to any Person (other than any director, officer, employee, representative or counsel of a party hereto and each Rating Agency). (h) The Indenture is not required to be qualified under the Trust Indenture Act of 1939, and the Issuer is not required to be registered under the Investment Company Act. (i) The aggregate amount of the Receivables in the Accounts as of July 12, 1999 was $587,515,901.79, consisting of $573,697,044.56 of Principal Receivables and $13,818,857.23 of Finance Charge Receivables. (j) On the Closing Date and after giving effect to the purchase of the Class A Noteholders' Interest and the issuance of the Series 1999-A Notes, no Early Amortization Event, Series 1999-A Early Amortization Event or Servicer Default has occurred and is continuing, and no event, act or omission has occurred and is continuing which, with the lapse of time, the giving of notice or both, would constitute such an Early Amortization Event, Series 1999-A Early Amortization Event or Servicer Default. 4.2 Representations and Warranties of JNB. JNB represents and warrants to the Class A Purchasers, the Agents and the Administrative Agent that the representations and warranties of JNB (individually or as Servicer or an Originator) set forth in the Purchase and Servicing Agreement and the other Related Documents are true and correct as of the date hereof. JNB further -32- 37 represents and warrants to, and agrees with, each Class A Purchaser and Agent and the Administrative Agent that, as of the date hereof: (a) JNB is a national banking association validly existing and in good standing under the laws of the United States, with full power and authority under such laws to own its properties and conduct its business as such properties are presently owned and such business is presently conducted and to execute, deliver and perform its obligations under this Agreement and the Related Documents to which it is a party. JNB is subject to the supervision of the Office of the Comptroller of the Currency. (b) JNB has the power and authority to execute, deliver and perform this Agreement and the Related Documents to which it is a party and all the transactions contemplated hereby and thereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement and such Related Documents. When executed and delivered, each of this Agreement and each such Related Document will constitute the legal, valid and binding agreement of JNB, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium and other laws of general applicability relating to or affecting creditors' rights generally and the rights of creditors of national banking associations from time to time in effect. The enforceability of JNB's obligations under such agreements is also subject to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law, and indemnification sought in respect of securities laws violations may be limited by public policy. (c) No consent, license, approval or authorization of, or registration with, any governmental authority, bureau or agency is required to be obtained in connection with the execution, delivery or performance of each of this Agreement or any Related Documents that has not been duly obtained and which is not and will not be in full force and effect on the Closing Date, except such that may be required by the blue sky laws of any state and except those which the failure to obtain individually or in the aggregate, would not have a material adverse effect on JNB or the transactions contemplated by, or JNB's ability to perform its obligations under, this Agreement or the Related Documents. (d) The execution, delivery and performance of each of this Agreement and the Related Documents do not violate any provision of any existing law or regulation applicable to JNB, any order or decree of any court to which JNB is subject, its charter or by-laws or any mortgage, indenture, contract or other agreement to which JNB is a party or by which it or any significant portion of JNB's properties is bound (other than violations of such laws, regulations, orders, decrees, mortgages, indentures, contracts and other agreements which do not affect the legality, validity or enforceability of any of such agreements or the Receivables and which, individually or in the aggregate, would not have a material adverse effect on JNB or the transactions contemplated by, or JNB's ability to perform its obligations under, this Agreement or the Related Documents). -33- 38 (e) There is no litigation or administrative proceeding before any court, tribunal or governmental body presently pending or, to the knowledge of JNB, threatened against JNB with respect to this Agreement and the Related Documents, the transactions contemplated hereby or thereby or the issuance of the Series 1999-A Notes, and there is no such litigation or proceeding against JNB or any significant portion of JNB properties, in each case which would have a material adverse effect on JNB or the transactions contemplated by, or the ability of JNB to perform its respective obligations under, this Agreement or the Related Documents. (f) JNB has delivered to the Agent complete and correct copies of the publicly available portions of (i) JNB's Consolidated Reports of Condition and Income for the year ended December 31, 1998 and (ii) JNB's Consolidated Reports of Condition and Income for the quarter ended March 31, 1999, and since December 31, 1998 there has been no material adverse change in its condition or operations as reflected in such Consolidated Reports of Condition and Income for the year then ended. (g) Except as may have been consented to in writing by the Administrative Agent or as provided in Section 6.1, such Agent or Class A Purchaser, the identity of the Administrative Agent or any Agent or Class A Purchaser as purchaser of the Class A Noteholders' Interest under this Agreement or as an agent therefor has not been disclosed by or on behalf of JNB to any Person (other than any director, officer, employee, representative or counsel of a party hereto and each Rating Agency). (h) The aggregate amount of the Receivables in the Accounts as of July 12, 1999 was $587,515,901.79, consisting of $573.697.044.56 of Principal Receivables and $13,818,857.23 of Finance Charge Receivables. (i) On the Closing Date and after giving effect to the purchase of the Class A Noteholders' Interest and the issuance of the Series 1999-A Notes, no Servicer Default has occurred and is continuing, and no event, act or omission has occurred and is continuing which, with the lapse of time, the giving of notice or both, would constitute such a Servicer Default. 4.3 Representations and Warranties of the Issuer. The Issuer represents and warrants to the Class A Purchasers, the Agents and the Administrative Agent that the representations and warranties of the Issuer set forth in the Purchase and Servicing Agreement, the Indenture and the other Related Documents are true and correct as of the date hereof. The Issuer further represents and warrants to, and agrees with, each Class A Purchaser and Agent and the Administrative Agent that, as of the date hereof: (a) The Issuer is a business trust duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority under such laws to own its properties and conduct its business as such properties are presently owned and such business is presently conducted and to execute, deliver and perform its obligations under this Agreement and the Related Documents to which it is a party. -34- 39 (b) The Issuer has the power and authority to execute, deliver and perform this Agreement and the Related Documents to which it is a party and all the transactions contemplated hereby and thereby and has taken all necessary trust action to authorize the execution, delivery and performance of this Agreement and such Related Documents. When executed and delivered, each of this Agreement and each Related Document to which the Issuer is a party will constitute the legal, valid and binding agreement of the Issuer, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium and other laws of general applicability relating to or affecting creditors' rights generally and the rights of creditors from time to time in effect. The enforceability of the Issuer's obligations under such agreements is also subject to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law, and indemnification sought in respect of securities laws violations may be limited by public policy. (c) No consent, license, approval or authorization of, or registration with, any governmental authority, bureau or agency is required to be obtained in connection with the execution, delivery or performance of each of this Agreement or any Related Documents that has not been duly obtained and which is not and will not be in full force and effect on the Closing Date, except such that may be required by the blue sky laws of any state and except those which the failure to obtain individually or in the aggregate, would not have a material adverse effect on the Issuer or Z Del or the transactions contemplated by, or Issuer's ability to perform its obligations under, this Agreement or the Related Documents. (d) The execution, delivery and performance of each of this Agreement and the Related Documents do not violate any provision of any existing law or regulation applicable to the Issuer, any order or decree of any court to which the Issuer is subject, its governing instrument or any mortgage, indenture, contract or other agreement to which the Issuer is a party or by which it or any significant portion of the Issuer's properties is bound (other than violations of such laws, regulations, orders, decrees, mortgages, indentures, contracts and other agreements which do not affect the legality, validity or enforceability of any of such agreements or the Receivables and which, individually or in the aggregate, would not have a material adverse effect on the Issuer or the transactions contemplated by, or the Issuer's ability to perform its respective obligations under, this Agreement or the Related Documents.) (e) There is no litigation or administrative proceeding before any court, tribunal or governmental body presently pending or, to the knowledge of the Issuer, threatened against the Issuer with respect to this Agreement and the Related Documents, the transactions contemplated hereby or thereby or the issuance of the Series 1999-A Notes, and there is no such litigation or proceeding against the Issuer or any significant portion of the Issuer properties, in each case which would have a material adverse effect on the Issuer or the transactions contemplated by, or the ability of the Issuer to perform its obligations under, this Agreement or the Related Documents. -35- 40 (f) Except as may have been consented to in writing by the Administrative Agent or as provided in Section 6.1, such Agent or Class A Purchaser, the identity of the Administrative Agent or any Agent or Class A Purchaser as purchaser of the Class A Noteholders' Interest under this Agreement or as an agent therefor has not been disclosed by or on behalf of the Issuer to any Person (other than any director, officer, employee, representative or counsel of a party hereto and each Rating Agency). (g) The Indenture is not required to be qualified under the Trust Indenture Act of 1939, and the Issuer is not required to be registered under the Investment Company Act. (h) The aggregate amount of the Receivables in the Accounts as of July 12, 1999 was $587,515,901.79, consisting of $573,697,044.56 of Principal Receivables and $13,818,857.23 of Finance Charge Receivables. (i) On the Closing Date and after giving effect to the purchase of the Class A Noteholders' Interest and the issuance of the Series 1999-A Notes, no Early Amortization Event, Series 1999-A Early Amortization Event or Servicer Default has occurred and is continuing, and no event, act or omission has occurred and is continuing which, with the lapse of time, the giving of notice or both, would constitute such an Early Amortization Event, Series 1999-A Early Amortization Event or Servicer Default. 4.4 Representations and Warranties of the Class A Purchasers. Each of the Class A Purchasers severally (each with respect to itself only) represents and warrants to, and agrees with, the Issuer that: (a) Such Class A Purchaser is duly authorized to enter into and perform this Agreement and its respective Investment Letter and has duly executed and delivered this Agreement and such Investment Letter; (b) This Agreement constitutes the valid and binding obligation of such Class A Purchaser, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, receivership and other laws relating to, or affecting generally, the enforcement of creditors' rights and remedies as the same may be applied in the event of the bankruptcy, insolvency, reorganization, receivership or liquidation or a similar event of such Class A Purchaser or a moratorium applicable to such Class A Purchaser and to general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity); and (c) No registration with, consent or approval of or other action by any federal, state, or other governmental authority or regulatory body having jurisdiction over such Class A Purchaser is required in connection with the execution, delivery or performance by such Class A Purchaser of this Agreement. ARTICLE 5 COVENANTS -36- 41 5.1 Covenants of Z Del. Z Del, JNB and the Servicer, on behalf of the Issuer (each, individually or in its capacity as Seller, Servicer or an Originator, as applicable, a "Zale Party"), severally covenants and agrees, in each case as to itself individually or in such respective capacities, through the Purchase Termination Date for all Class A Purchasers and thereafter so long as any amount of the Class A Principal Balance shall remain outstanding or any monetary obligation arising hereunder shall remain unpaid, unless the Required Class A Owners and the Required Class A Purchasers shall otherwise consent in writing, that: (a) Each Zale Party shall perform in all material respects each of the respective agreements, warranties and indemnities applicable to it and comply in all material respects with each of the respective terms and provisions applicable to it under the other Related Documents to which it is party, which agreements, warranties and indemnities are hereby incorporated by reference into this Agreement as if set forth herein in full; and each Zale Party shall take all reasonable actions to enforce the obligations of each of the other parties to each Receivables Purchase Agreement (as defined in the Trust Agreement) to which it is a party which are contained therein; (b) The Seller and the Servicer (in its capacity as such and on behalf of the Issuer), shall furnish to the Administrative Agent and each Agent a copy of each material written opinion, certificate, report, statement, notice or other communication (other than investment instructions) relating to the Investor Notes which is furnished by or on behalf of such Zale Party to Noteholders, to any Rating Agency or to the Indenture Trustee and furnish to the Administrative Agent and each Agent after receipt thereof, a copy of each material written notice, demand or other communication relating to the Investor Notes, this Agreement, the Indenture or the Purchase and Servicing Agreement received by the Issuer, the Seller or the Servicer from the Indenture Trustee, any Rating Agency or 10% or more of the Investor Noteholders (to the extent such notice, demand or communication relates to the Accounts, the Receivables, any Servicer Default, any Early Amortization Event or any Series 1999-A Early Amortization Event); and (ii) such other information, documents records or reports respecting the Accounts, the Receivables, the Issuer, the Seller, any Originator or the Servicer as the Administrative Agent or any such Agent may from time to time reasonably request; (c) (i) The Seller shall furnish to the Administrative Agent and each Agent copies of each of the financial statements, reports and certificates required by Section 5.01(a) of the Purchase and Servicing Agreement, on or before the date such financial statements, reports or certificates are due under the Purchase and Servicing Agreement, (ii) JNB or the Servicer, as applicable, shall furnish to the Administrative Agent and each Agent copies of each of the financial statements, reports and certificates required by Section 5.01(i), 6.03(b), 6.03(c) or 6.03(d) of the Purchase and Servicing Agreement or, if requested by the Administrative Agent or any Agent, Section 6.03(a) of the Purchase and Servicing Agreement, on or before the date such financial statements, reports or certificates are due under such Related Documents, and (iii) the Servicer, on behalf of the Issuer, shall furnish to the Administrative Agent and each Agent copies of each of the -37- 42 financial statements, reports and certificates required by Section 8.01(d) of the Base Indenture, on or before the date such financial statements, reports or certificates are due under the Base Indenture; (d) The Servicer shall promptly furnish to the Administrative and each Agent a copy, addressed to the Administrative and each Agent, of each opinion of counsel delivered to the Indenture Trustee pursuant to clause (iii) of Section 2.05 of the Purchase and Servicing Agreement; (e) JNB shall furnish to the Administrative and each Agent promptly when publicly available, the publicly available portions of its annual and quarterly Consolidated Reports of Condition and Income; (f) Each Zale Party shall furnish to the Administrative and each Agent promptly after known to such Zale Party, information with respect to any action, suit or proceeding involving such Zale Party or any of its Affiliates by or before any court or any Governmental Authority which, if adversely determined, would be reasonably likely to result in a material and adverse effect on any Zale Party or Zale or the transactions contemplated by, or any Zale Party's ability to perform its obligations under, this Agreement or the Related Documents; (g) Each Zale Party shall furnish to the Administrative Agent and each Agent promptly upon request therefor any information or documents which under the terms of the Indenture or the Purchase and Servicing Agreement it is required to deliver upon request of the Indenture Trustee or any Noteholder or group of Noteholders; (h) The Servicer shall furnish to the Administrative and each Agent a certificate concurrently with its delivery of its annual certificate pursuant to Section 6.03(d) of the Purchase and Servicing Agreement stating that no Termination Event or event or condition which with the passage of time or the giving of notice, or both, would constitute a Termination Event has occurred or, if such a Termination Event, event or condition has occurred, identifying the same in reasonable detail; (i) The Seller and the Servicer shall at any time from time to time during regular business hours, on reasonable notice to the Seller or the Servicer, as the case may be, and subject to the confidentiality requirements set forth in Section 6.2, permit the Administrative Agent or any Agent, or its respective agents or representatives to exercise the inspection and other rights granted to the Issuer or the Indenture Trustee pursuant to Section 5.01(d) of the Purchase and Servicing Agreement; (j) The Issuer shall at any time from time to time during regular business hours, on reasonable notice to the Issuer, and subject to the confidentiality requirements set forth in Section 6.2, permit the Administrative Agent or any Agent, or its respective agents or representatives to exercise the inspection and other rights granted to the Indenture Trustee pursuant to Section 8.01(i) of the Base Indenture; -38- 43 (k) Except for New Issuances in accordance with Section 2.22 of the Indenture and modifications to Supplements with respect to Series other than Series 1999-A and except for terminations, amendments, waiver and modifications of Related Document, no Zale Party shall take any action which, under the terms of the Related Documents, requires the consent or approval of the Indenture Trustee, the Majority Noteholders or other group of Noteholders or the satisfaction of the Rating Agency Condition (or any similar condition), unless such action has been consented to or approved, as the case may be, by the Required Class A Owners and the Required Class A Purchasers; (l) Neither the Seller nor the Issuer shall reduce or withdraw any Discount Percentage (i) if the Early Amortization Commencement Date has occurred or (ii) unless it shall have delivered to the Administrative Agent and each Agent an Officer's Certificate of the Servicer stating that the Servicer reasonably believes that such reduction or withdrawal will not (i) result in the occurrence of an Early Amortization Event or Series 1999-A Early Amortization Event or (ii) cause the Portfolio Yield to be less than the Base Rate. Neither the Seller nor the Issuer shall designate, increase or withdraw the Discount Percentage without the prior written consent of the Required Class A Owners and the Required Class A Purchasers if, as a result thereof, the Discount Percentage would be less than 6% or greater than 8%. (m) Neither the Seller nor the Issuer shall designate, change or withdraw a Premium Percentage without the prior written consent of all Class A Purchasers.; (n) Any determination to be made by a Zale Party pursuant to any Related Document that a matter does not adversely or materially adversely affect (within the meaning of such Related Document) the interests of Noteholders shall not be made unless such matter does not adversely or materially adversely affect the interests of the Class A Purchasers or Class A Owners; (o) The Servicer shall not exercise its optional right to purchase the Receivables pursuant to subsection 6.10(c) of the Purchase and Servicing Agreement and the Issuer shall not exercise its optional right to repay all Class A Notes pursuant to Section 7.01 of the Supplement, unless the Class A Purchasers, the Administrative Agent and each Agent have been paid, or will be paid upon such purchase or in connection with such optional repayment, the Class A Principal Balance, all interest thereon and all other amounts owing hereunder in full; (p) Each Zale Party shall use reasonable efforts to cooperate with each Agent in its effort to syndicate the Commitments of its Purchaser Group; (q) The Servicer shall furnish to the Administrative Agent and each Agent, promptly after the occurrence of any Termination Event, a certificate of an appropriate officer of the Servicer setting forth the circumstances of such Termination Event and any action taken or proposed to be taken by the Servicer or any other Zale Party with respect thereto; -39- 44 (r) Each Zale Party shall make all payments, deposits or transfers and give all instructions to transfer required to be made or given by it pursuant to this Agreement or Related Documents as provided herein or therein; and (s) No Zale Party shall terminate (except in accordance with the terms thereof), amend, waive or otherwise modify any Related Document unless (i) in the case of amendments and modificatio