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Warrant And Registration Rights Agreement, Dated As of May 10, 2010

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Sectors: Specialty Retail
Governing Law: Delaware, View Delaware State Laws
Effective Date: May 10, 2010
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WARRANT AND REGISTRATION RIGHTS AGREEMENT



by and among



ZALE CORPORATION,

THE INITIAL WARRANT HOLDER

and

Z INVESTMENT HOLDINGS, LLC



Dated as of May 10, 2010














TABLE OF CONTENTS



Page

ARTICLE I

Definitions

ARTICLE II

Original Issue of Warrants

SECTION 2.01. Form of Warrant Certificates 7
SECTION 2.02. Execution and Delivery of Warrant Certificates 7

ARTICLE III

Exercise Price; Exercise of Warrants and Expiration of Warrants

SECTION 3.01. Exercise Price 8
SECTION 3.02. Exercise of Warrants 8
SECTION 3.03. Expiration of Warrants 8
SECTION 3.04. Method of Exercise; Payment of Exercise Price 8
SECTION 3.05. Transferability of the Warrants 9
SECTION 3.06. Compliance with the Securities Act 10
SECTION 3.07. Exercise for Series A Preferred Stock 11

ARTICLE IV

Registration Rights and Procedures and Listing

SECTION 4.01. Demand Registration Rights 12
SECTION 4.02. Piggyback Registration Rights 15
SECTION 4.03. Expenses of Registration and Selling 16
SECTION 4.04. Obligations of the Company 16
SECTION 4.05. Suspension of Sales 19
SECTION 4.06. Furnishing Information 19
SECTION 4.07. Indemnification 20
SECTION 4.08. Contribution 21
SECTION 4.09. Representations, Warranties and Indemnities to Survive 22
SECTION 4.10. Lock-Up Agreements 22
SECTION 4.11. Rule 144 Reporting 22




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ARTICLE V

Adjustments

SECTION 5.01. Adjustments for Cash Dividends 23
SECTION 5.02. Adjustments Upon Certain Transactions 23
SECTION 5.03. Dividends and Distributions 23
SECTION 5.04. Issuer Tender Offers 25
SECTION 5.05. Consolidation, Merger or Sale 25
SECTION 5.06. Preemptive Rights 26
SECTION 5.07. Consent Upon Certain Issuances 26
SECTION 5.08. Affiliate Transactions 27
SECTION 5.09. Fractional Shares 27
SECTION 5.10. Notice of Adjustment 27

ARTICLE VI

Warrant Transfer Books

SECTION 6.01. Warrant Transfer Books 27

ARTICLE VII

Warrant Holders

SECTION 7.01. No Voting Rights 28
SECTION 7.02. Right of Action 28
SECTION 7.03. Agent 28

ARTICLE VIII

Representations and Warranties

SECTION 8.01. Representations and Warranties of the Company 29
SECTION 8.02. Representations and Warranties of the Holders 31

ARTICLE IX

Covenants

SECTION 9.01. Reservation of Common Stock for Issuance on Exercise of Warrants 31
SECTION 9.02. Notice of Dividends 32
SECTION 9.03. HSR Act Compliance 32
SECTION 9.04. Board Representation 32
SECTION 9.05. Stockholder Approval 34
SECTION 9.06. Certain Other Events 36




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SECTION 9.07. Transfers 36

ARTICLE X

Miscellaneous

SECTION 10.01. Tax Matters 36
SECTION 10.02. Surrender of Certificates 37
SECTION 10.03. Mutilated, Destroyed, Lost and Stolen Warrant Certificates 37
SECTION 10.04. Removal of Legends 38
SECTION 10.05. Notices 38
SECTION 10.06. Applicable Law 39
SECTION 10.07. Persons Benefiting 39
SECTION 10.08. Counterparts 39
SECTION 10.09. Amendments 39
SECTION 10.10. Headings 40
SECTION 10.11. Entire Agreement 40
SECTION 10.12. Limitation of Liability 40




SIGNATURES

EXHIBIT A - Form of A-Warrant Certificate A-1
EXHIBIT B - Form of B-Warrant Certificate B-1
EXHIBIT C - Certificate of Designation of the Series A Preferred Stock C-1




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WARRANT AND REGISTRATION RIGHTS AGREEMENT



AGREEMENT dated as of May 10, 2010 (the " Issuance Date "), by and among ZALE CORPORATION, a Delaware corporation (the " Company "), the Initial Warrant Holder (defined below) and Z Investment Holdings, LLC, a Delaware limited liability company, in its capacity as agent (the " Agent ").



WITNESSETH:



WHEREAS, the Company is issuing and delivering (i) warrant certificates in the form of Exhibit A hereto (the " A-Warrant Certificates ") evidencing A-Warrants to purchase 6,389,378 shares, subject to adjustment, of its Common Stock, and (ii) warrant certificates in the form of Exhibit B hereto (the " B-Warrant Certificates ", and together with the A-Warrant Certificates, the " Warrant Certificates ") evidencing B-Warrants to purchase, subject to the conditions set forth herein, 4,675,306 shares, subject to adjustment, of its Common Stock, in each case in connection with the execution and delivery of a senior secured term loan facility agreement dated May 10, 2010, among the Company, Z Investment Holdings, LLC, as administrative agent, and the lenders party thereto, pursuant to which such lenders will make a term loan to the Company in the amount of $150,000,000;



WHEREAS, subject to certain adjustments and limitations provided herein, the Warrants are exercisable for shares of Common Stock of the Company;



WHEREAS, to the extent of any adjustment to the A-Warrants that would require the approval of the Company92s stockholders in order to comply with the New York Stock Exchange Listed Company Manual, the A-Warrants will instead be exercisable for Series A Preferred Stock of the Company, on the terms set forth herein; and



WHEREAS, in order to comply with the New York Stock Exchange Listed Company Manual, the exercise of the B-Warrants for Common Stock shall be subject to the approval of the Company92s stockholders as specified herein and, in the absence of such approval, the B-Warrants will instead be exercisable for Series A Preferred Stock of the Company on the terms set forth herein.



NOW, THEREFORE, in consideration of the foregoing, the Company, the Agent and the Initial Warrant Holder each hereby agree as follows:








ARTICLE I



Definitions



As used in this Agreement, the following terms shall have the following meanings:



" Affiliate " means, with respect to any Person, a Person that directly or indirectly controls, is controlled by or is under direct or indirect common control with, such Person. For purposes of this definition, " control " when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms " controlling " and " controlled " have meanings correlative to the foregoing.



" Agent " has the meaning set forth in the preamble to this Agreement.



" A-Warrant " means the A-Warrants issued by the Company from time to time pursuant to this Agreement under an A-Warrant Certificate.



" A-Warrant Certificate " has the meaning set forth in the recitals to this Agreement.



" Board " means the board of directors of the Company.



" Business Day " means any day that is not a day on which banking institutions are authorized or required to be closed in the State of New York.



" B-Warrant " means the B-Warrants issued by the Company from time to time pursuant to this Agreement under a B-Warrant Certificate.



" B-Warrant Certificate " has the meaning set forth in the recitals to this Agreement.



" Cashless Exercise " has the meaning set forth in Section 3.04(b).



" Certificate of Incorporation " means the Company92s Restated Certificate of Incorporation, as amended from time to time.



" Common Stock " means the common stock, par value $0.01 per share, of the Company.



" Common Stock Equivalent " means any warrant, right or option to acquire any shares of Common Stock or any security convertible into or exchangeable for shares of Common Stock.



" Company " has the meaning set forth in the preamble to this Agreement, and its successors and assigns.



2






" Demand Registration " has the meaning set forth in Section 4.01(a).



" Demand Registration Statement " has the meaning set forth in Section 4.01(a).



" DOJ " has the meaning set forth in Section 9.03.



" Effective Issuance Price " means:



(i) with respect to Common Stock issued for cash, the per share amount of the net cash proceeds received by the Company for such Common Stock;



(ii) with respect to Common Stock issued for other consideration, the per share amount of the Fair Market Value of the net consideration received by the Company for such Common Stock;



(iii) with respect to any option, warrant or other right to acquire Common Stock, whether direct or indirect and whether or not conditional or contingent, the sum of the per share amount of (a) the Fair Market Value of the net aggregate consideration, if any, received by the Company for the issuance of such option, warrant or right divided by the number of shares of Common Stock into which such option, warrant or right is exercisable at time of issuance, plus (b) the per share amount of the net exercise price to the extent paid in cash and the per share Fair Market Value of the net exercise price if paid in other consideration; and



(iv) with respect to securities convertible into or exchangeable for Common Stock, (a) the net consideration per security paid for such securities to the extent the price for such securities is paid in cash or (b) the net Fair Market Value of the consideration per security paid for such securities to the extent the price for such securities is paid in other consideration, in each case, as of the date of their issuance, divided by the number of shares of Common Stock into which such securities are convertible or exchangeable.



" Excess Shares " has the meaning set forth in Section 3.07(a).



" Excess Tender Amount " has the meaning set forth in Section 5.04.



" Exchange Act " means the Securities Exchange Act of 1934, as amended.



" Excluded Securities " means (i) the Qualifying Employee or Director Stock; (ii) the Underlying Stock; (iii) any shares of Common Stock or Common Stock Equivalents issued for non-cash consideration in connection with any merger, consolidation, acquisition or similar business combination, provided that if any such transaction involves an Affiliate of the Company, such transaction is made on an arms92-length basis and supported by a fairness opinion from an Independent Financial Expert; and (iv) any shares of Common Stock or Common Stock Equivalents issued for non-cash consideration in connection with any joint venture, licensing, development or sponsorship activities in the ordinary course of business, provided that if any such



3






transaction involves an Affiliate of the Company, such transaction is made on an arms92-length basis and supported by a fairness opinion from an Independent Financial Expert.



" Ex-date " has the meaning set forth in Section 5.03(a).



" Exercise Date " has the meaning set forth in Section 3.02.



" Exercise Price " has the meaning set forth in Section 3.01.



" Expenses " means all expenses incurred by the Company and the Holders in effecting any registration pursuant to this Agreement, including all registration and filing fees, printing expenses, reasonable fees and disbursements of one counsel selected by the Agent to represent all holders of Registrable Securities included in such registration, Blue Sky fees and expenses, and expenses of the Company92s independent accountants in connection with any regular or special reviews or audits incident to or required by any such registration, and all underwriting discounts and selling commissions applicable to the sale of the applicable Registrable Securities.



" Expiration Date " means the seventh anniversary of the Issuance Date.



" Fair Market Value " means:



(i) in the case of shares of stock where, at least four months prior to the issuance thereof, other shares of the same class had already been listed on the New York Stock Exchange or Nasdaq, the average of the daily volume-weighted average prices of such stock for the five consecutive trading days immediately preceding the day as of which Fair Market Value is being determined;



(ii) in the case of securities not covered by clause (i) above or other property, the fair market value of such securities or such other property as determined by an Independent Financial Expert, using one or more valuation methods that the Independent Financial Expert in its best professional judgment determines to be most appropriate, assuming, in the case of securities, such securities are fully distributed and, in the case of securities or other property, such items are to be sold in an arm92s-length transaction and there was no compulsion on the part of any party to such sale to buy or sell, and taking into account all relevant factors; and



(iii) in the case of cash, the amount thereof.



" FTC " has the meaning set forth in Section 9.03.



" GGC Appointees " has the meaning set forth in Section 9.04.



" Holders " means the Initial Warrant Holder and any permitted assignee or transferee of the Initial Warrant Holder and, unless otherwise provided or indicated herein, the holders of the Registrable Securities.



4






" HSR Act " has the meaning set forth in Section 9.03.



" including " means "including, without limitation".



" Independent Financial Expert " means a nationally recognized investment banking firm mutually agreed by the Company and the Agent, which firm does not have a material financial interest in, or other material economic relationship with, either the Company or the Agent or their respective Affiliates. If the Company and the Agent are unable to agree on an Independent Financial Expert, each of them shall promptly choose a separate Independent Financial Expert who shall promptly choose a third Independent Financial Expert who shall serve as the Independent Financial Expert hereunder; provided that such third Independent Financial Expert does not have a material financial interest in, or other material economic relationship with, either the Company or the Agent or their respective Affiliates.



" Initial Warrant Holder " means Z Investment Holdings, LLC.



" Issuance Date " has the meaning set forth in the preamble to this Agreement.



" Maximum Number of Shares " has the meaning set forth in Section 4.01(c).



" Person " means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.



" Per Warrant Cap " has the meaning set forth in Section 3.07(a).



" Piggyback Registration " has the meaning set forth in Section 4.02(a).



" Premium Per Pro Forma Share " has the meaning set forth in Section 5.04.



" Prospectus " means the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus.



" Qualifying Employee or Director Stock " means (i) rights and options issued in the ordinary course of business under any Company-sponsored employee benefit plan or agreement, any Company-sponsored director compensation plan or agreement and any Common Stock issued after the date hereof upon exercise of such rights and options and (ii) restricted stock and restricted stock units issued after the date hereof in the ordinary course of business under any Company-sponsored employee benefit plan or agreement, any Company-sponsored director compensation plan or agreement and Common Stock issued after the date hereof in settlement of any such restricted stock units.



5






" Recapitalization Event " has the meaning set forth in Section 5.03(a).



" Register, registered, and registration " shall refer to a registration effected by preparing and (a) filing a Registration Statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration of or automatic effectiveness of such Registration Statement or (b) filing a Prospectus and/or prospectus supplement in respect of an appropriate effective Registration Statement on Form S-3.



" Registrable Securities " means Common Stock, Series A Preferred Stock or other securities issuable under the Warrants on the Issuance Date and at any time during the term of this Agreement. Registrable Securities shall continue to be Registrable Securities (whether they continue to be held by the Initial Warrant Holder or they are sold to other Persons) until (i) they are sold pursuant to an effective Registration Statement under the Securities Act; (ii) they may be sold by their holder pursuant to Rule 144 without limitation thereunder on volume or manner of sale; or (iii) they shall have otherwise been transferred and new securities not subject to transfer restrictions under any federal securities laws and not bearing any legend restricting further transfer shall have been delivered by the Company, all applicable holding periods shall have expired, and no other applicable and legally binding restriction on transfer by the Holder thereof shall exist under the Securities Act.



" Registration Rights " means the rights of Holders set forth in Article IV to have shares of Registrable Securities registered under the Securities Act for sale under one or more effective Registration Statements.



" Registration Statement " means any registration statement filed by the Company under the Securities Act pursuant to the Registration Rights, including the Prospectus, any amendments and supplements to such registration statement, including post-effective amendments, and all exhibits and all material incorporated by reference in such registration statement.



" Reorganization Event " has the meaning set forth in Section 5.05.



" Required Stockholder Approval " means, collectively, (i) in respect of the A-Warrants, any approval by the Company92s stockholders required in connection with an adjustment of the A-Warrants to comply with Section 312.03 of the New York Stock Exchange Listed Company Manual, and (ii) in respect of the B-Warrants, the approval by the Company92s stockholders required in connection with the exercise of the B-Warrants for Common Stock to comply with Section 312.03 of the New York Stock Exchange Listed Company Manual.



" Rule 144, Rule 144A and Rule 415 " mean, in each case, such rule promulgated under the Securities Act (or any successor provision), as such rules may be amended from time to time.



" Sale " has the meaning set forth in Section 3.06(a).



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" Scheduled Black-Out Period " means the periods (i) from and including the day that is 10 days prior to the last day of a fiscal quarter of the Company to and including the day that is two days after the day on which the Company publicly releases its earnings for such fiscal quarter and (ii) from and including Thanksgiving Day to and including the day that is two days after the day on which the Company publicly releases its holiday sales report in January.



" SEC " means the Securities and Exchange Commission.



" Securities Act " means the Securities Act of 1933, as amended.



" Series A Preferred Stock " has the meaning set forth in Section 3.07(a).



" Total Cap " has the meaning set forth in Section 3.07(a).



" Underlying Stock " means the shares of Common Stock or Series A Preferred Stock issuable or issued upon the exercise of the Warrants.



" Vote Date " means the date of the first meeting of the stockholders of the Company at which a vote of such stockholders in respect of the Required Stockholder Approval shall have been taken, which meeting shall be called by the Board in accordance with Section 9.05 and shall in any event take place no later than the first annual meeting of the Company92s stockholders to be held after the Issuance Date.



" Voting Securities " means the Common Stock and any other securities of the Company of any kind or class having power generally to vote in the election of directors.



" Warrant Certificates " has the meaning set forth in the recitals to this Agreement.



" Warrants " means, collectively, the A-Warrants and the B-Warrants.



ARTICLE II



Original Issue of Warrants



SECTION 2.01. Form of Warrant Certificates. The Warrant Certificates shall be in registered form only and substantially in the forms attached hereto as Exhibits A and B, shall be dated the date on which signed by the Company and may have such legends and endorsements typed, stamped, printed, lithographed or engraved thereon as provided in Section 3.05 or as may be required to comply with any applicable law or with any applicable rule or regulation pursuant thereto or with any applicable rule or regulation of any securities exchange on which the Warrants may be listed.



SECTION 2.02. Execution and Delivery of Warrant Certificates. (a) Simultaneously with the execution of this Agreement, (i) A-Warrant Certificates evidencing an aggregate of 6,389,378 A-Warrants entitling the holders thereof to



7








collectively purchase an aggregate of 6,389,378 shares of Common Stock, subject to adjustment and subject to Section 3.07(a), shall be executed by the Company and delivered to the Initial Warrant Holder, and (ii) B-Warrant Certificates evidencing an aggregate of 4,675,306 B-Warrants entitling the holders thereof to collectively purchase an aggregate of 4,675,306 shares of Common Stock, subject to adjustment and subject to Section 3.07(b), shall be executed by the Company and delivered to the Initial Warrant Holder.



(b) From time to time, the Company shall sign and deliver Warrant Certificates in required denominations to Persons entitled thereto in connection with any exchange permitted under this Agreement. The Warrant Certificates shall be executed on behalf of the Company by its President, Chief Executive Officer, Chief Financial Officer, Secretary or Executive Vice President, either manually or by facsimile signature printed thereon. In case any officer of the Company whose signature shall have been placed upon any of the Warrant Certificates shall cease to be such officer of the Company before issue and delivery thereof, such Warrant Certificates may, nevertheless, be issued and delivered with the same force and effect as though such person had not ceased to be such officer of the Company.



ARTICLE III



Exercise Price; Exercise of Warrants and Expiration of Warrants



SECTION 3.01. Exercise Price. Each Warrant Certificate shall entitle the Holder thereof, subject to the provisions of this Agreement, to purchase, except as provided in Section 3.04 and Section 3.07 hereof, one share of Common Stock for each Warrant represented thereby, at an exercise price of $2.00 per share of Common Stock or, as applicable, Series A Preferred Stock (the " Exercise Price "), subject to all adjustments made on or prior to the date of exercise thereof as herein provided.



SECTION 3.02. Exercise of Warrants. (a) The A-Warrants shall be exercisable in whole or in part from time to time on any Business Day beginning on the Issuance Date and ending on the Expiration Date and (b) the B-Warrants shall be exercisable in whole or in part from time to time on any Business Day beginning on the day immediately following the earlier to occur of (i) the Vote Date and (ii) the date of the first annual meeting of the Company92s stockholders to be held after the Issuance Date, and ending on the Expiration Date, in each case in the manner provided for herein (any such date on which the applicable Warrant shall be exercisable, an " Exercise Date ").



SECTION 3.03. Expiration of Warrants. Any unexercised Warrants shall expire and the rights of the Holders of such Warrants to purchase Underlying Stock shall terminate at the close of business on the Expiration Date.



SECTION 3.04. Method of Exercise; Payment of Exercise Price. (a) In order to exercise a Warrant, the Holder thereof must (i) surrender the Warrant Certificate evidencing such Warrant to the Company, with the form on the reverse of or attached to the Warrant Certificate duly executed, and (ii) pay in full the Exercise Price then in effect



8








for the shares of Underlying Stock as to which a Warrant Certificate is submitted for exercise in the manner provided in paragraph (b) of this Section 3.04.



(b) Simultaneously with the exercise of each Warrant, payment in full of the Exercise Price shall be delivered to the Company. Such payment shall be made (at the option of the Holder) (i) in cash, by bank wire transfer in immediately available funds, or (ii) if at the time of such exercise, the Fair Market Value of the shares of Common Stock (or, with respect to Warrants exercisable for shares of Series A Preferred Stock, the Fair Market Value of the shares of Common Stock into which such shares of Series A Preferred Stock would otherwise be convertible) exceeds the Exercise Price, by surrendering a number of Warrants (or fractional portions thereof) having a value equal to the Exercise Price (a " Cashless Exercise "), determined as provided in this Section 3.04(b). The value of each Warrant so surrender
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