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Exhibit 10.3    
  

 
 

ASSIGNMENT AND ASSUMPTION    
  

        This ASSIGNMENT AND ASSUMPTION (this "Assignment and Assumption") dated as of September 10, 2002 is made
between F.A.O., Inc., a California corporation (the "Assignor") and FAO, Inc., a Delaware corporation (the
"Assignee"). 

 
 

RECITALS    

        A.    The
Assignor is party to that certain Amended and Restated Loan and Security Agreement dated as of April 30, 2002, as amended by the First Amendment to Amended and
Restated Loan and Security Agreement dated as of May 31, 2002 and the Second Amendment to Amended and Restated Loan and Security Agreement dated as of August 15, 2002 (as so amended and
as further amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement") by and among, on the one hand, the Assignor,
FAO Schwarz, Inc., a Delaware corporation, and ZB Company, Inc., a Delaware corporation, and, on the other hand, the several financial institutions from time to time party thereto as
Lenders (the "Lenders"), and Wells Fargo Retail Finance, LLC, as agent for the Lenders (in such capacity, the
"Agent"). 

        B.    The
Assignor and the Assignee have entered into an Agreement and Plan of Merger dated as of August 23, 2002 (the "Merger
Agreement") the date hereof pursuant to which the Assignor shall be merged with and into the Assignee. 

        C.    The
Assignor wishes to assign to the Assignee all rights and obligations of the Assignor under the Loan Agreement and the other Loan Documents on the terms and subject to
the conditions set forth herein and the Assignee wishes to accept assignment of such rights and to assume such obligations from the Assignor on such terms and subject to such conditions. 

        NOW
THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 

        1.    Assignment and Assumption.    

	(a)
	With
effect on and after the date of the merger in accordance with the Merger Agreement (the "Effective Date"), and subject to the
terms and conditions of this Assignment and Assumption, (i) the Assignor hereby transfers, delegates and assigns to the Assignee, and (ii) the Assignee hereby accepts, assumes and
undertakes from the Assignor, all right, title and interest of the Assignor in, to and under the following property (the "Assigned Property"):
(A) the Loan Agreement and each of the other Loan Documents and (B) all related rights, benefits, obligations and duties of the Assignor under and in connection with the Loan Agreement
and the other Loan Documents.

	(b)
	With
effect on and after the Effective Date, the Assignee shall be a party to the Loan Agreement and the other Loan Documents to which the Assignor is a party and shall succeed to all
of the rights and be obligated to perform all of the obligations of the Assignor under the Loan Agreement and the other Loan Documents. By signing this Assignment and Assumption, as of the Effective
Date, the Assignee shall become liable as a primary obligor for all of the obligations of the Assignor under the Loan Agreement and the other Loan Documents, including, without limitation, all of the
Obligations under the Loan Agreement. 

        2.    Representations and Warranties.    

	(a)
	The
Assignor represents and warrants that (i) it is the legal and beneficial owner of the Assigned Property and that such property is free and clear of any lien or other
adverse claim; 

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(ii) it
is duly organized and existing and it has the full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Assumption and any other
documents required or permitted to be executed or delivered by it in connection with this Assignment and Assumption and to fulfill its obligations hereunder; (iii) no notices to, or consents,
authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Assumption, and no further
action by, or notice to, or filing with, any person is required of it for such execution, delivery or performance; and (iv) this Assignment and Assumption has been duly executed and delivered
by it and constitutes the legal, valid and binding obligation of the Assignor, enforceable against the Assignor in accordance with the terms hereof. 

	(b)
	The
Assignee represents and warrants that (i) it is duly organized and existing and it has full power and authority to take, and has taken, all action necessary to execute and
deliver this Assignment and Assumption and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Assumption, and to fulfill its obligations
hereunder and under the Loan Agreement and the other Loan Documents; (ii) no notices to, or consents, authorizations or approvals of, any person are required (other than any already given or
obtained) for its due execution, delivery and performance of this Assignment and Assumption; and no further action by, or notice to, or filing with any Person is required of it for such execution,
delivery or performance; (iii) this Assignment and Assumption has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignee, enforceable
against the Assignee in accordance with the terms hereof; and (iv) as of the Effective Date, the Loan Agreement and the other Loan Documents shall constitute the legal, valid and binding
obligations of the Assignee, enforceable against it in accordance with their respective terms. 

        3.    Further Assurances.    The Assignor and the Assignee each hereby agrees to execute and deliver such other
instruments, and take such other action, as either party or the Agent may reasonably request in connection with the transactions contemplated by this Assignment and Assumption, including the delivery
of any notices or other documents or instruments to any such party, which may be required in connection with the assignment and assumption contemplated hereby. 

        4.    Third Party Beneficiaries.    The Agent and the Lenders are third-party beneficiaries of the representations,
warranties and agreements of the Assignor and the Assignee hereunder and may enforce the same. 

        5.    Miscellaneous.    

	(a)
	Capitalized
terms used but not defined in this Assignment and Assumption shall have the meanings given to such terms in the Loan Agreement.

	(b)
	Any
amendment or waiver of any provision of this Assignment and Assumption shall be in writing and signed by the parties hereto. No failure or delay by either party hereto in
exercising any right, power or privilege hereunder shall operate as a waiver thereof and any waiver of any breach of the provisions of this Assignment and Assumption shall be without prejudice to any
rights with respect to any other or further breach thereof.

	(c)
	The
Assignor and the Assignee shall each pay its own costs and expenses incurred in connection with the negotiation, preparation, execution and performance of this Assignment and
Assumption.

	(d)
	This
Assignment and Assumption may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same
agreement. 

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	(e)
	THIS
ASSIGNMENT AND ASSUMPTION SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF SUCH STATE, EXCEPT
THAT NO DOCTRINE OF CHOICE OF LAW SHALL BE USED TO APPLY THE LAWS OF ANY OTHER STATE OR JURISDICTION. The Assignor and Assignee each agrees that, in addition to any other courts that may have
jurisdiction under applicable laws or rules, any action or proceeding to enforce or arising out of this Assignment and Assumption may be commenced in the state courts of the State of New York and the
United States District Court for the Southern District of New York, and the Assignor and Assignee each consents and submits in advance to such jurisdiction and agrees that venue will be proper in such
courts on any such matter. Each party to this Assignment and Assumption hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the
maintenance of such action or proceeding.

	(f)
	THE
ASSIGNOR AND THE ASSIGNEE EACH HEREBY WAIVES TRIAL BY JURY, RIGHTS OF SETOFF, AND THE RIGHT TO IMPOSE COUNTERCLAIMS IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION
WITH, OR ARISING OUT OF THIS ASSIGNMENT AND ASSUMPTION, THE LOAN AGREEMENT, ANY RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER ORAL OR WRITTEN)
DELIVERED PURSUANT HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE ASSIGNOR AND THE ASSIGNEE. THE ASSIGNOR AND THE ASSIGNEE EACH CONFIRMS THAT THE FOREGOING WAIVERS ARE
INFORMED AND FREELY MADE.

	(g)
	Except
for the substitution of the Assignee for the Assignor, the Loan Agreement and the other Loan Documents are unaffected by this Assignment and Assumption. The Loan Agreement and
all other Loan Documents are and shall continue to be in full force and effect, are hereby ratified and confirmed in all respects, and shall constitute the legal, valid, binding and enforceable
obligations of the Assignee and each of the other Borrowers to Agent and the Lenders. 

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        IN
WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment and Assumption to be executed and delivered by their duly authorized officers as of the date first above
written. 

	 	 	ASSIGNOR:

F.A.O., INC., a California corporation
	

 	
 	

By:	
 	

/s/  RAYMOND P. SPRINGER      
 Raymond P. Springer

Executive Vice President
	 	 	 	 	 
	 	 	 	 	 
	 	 	ASSIGNEE:

FAO, INC., a Delaware corporation
	

 	
 	

By:	
 	

/s/  RAYMOND P. SPRINGER      
 Raymond P. Springer

Executive Vice President

	

AGREED AND CONSENTED TO:

WELLS FARGO RETAIL FINANCE, LLC,

as Agent	
 	

 	
 	

 
	

By:	
 	

/s/  PATRICK J. NORTON      	
 	

 	
 	

 
	 	 	
 Patrick J. Norton

Vice President	 	 	 	 
	

FAO SCHWARZ, INC.	
 	

 	
 	

 
	

By:	
 	

/s/  RAYMOND P. SPRINGER      	
 	

 	
 	

 
	 	 	
 Raymond P. Springer

Executive Vice President	 	 	 	 
	

ZB COMPANY, INC.	
 	

 	
 	

 
	

By:	
 	

/s/  RAYMOND P. SPRINGER      	
 	

 	
 	

 
	 	 	
 Raymond P. Springer

Executive Vice President	 	 	 	 

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Exhibit 10.3

ASSIGNMENT AND ASSUMPTION

RECITALSQuickLinks
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Exhibit 10.4    
  

SECURED NOTE  

	$500,000	 	July 3, 2002

        FOR
VALUE RECEIVED, Jerry R. Welch (the "Maker"), hereby promises to pay on or before July 3, 2004, to the order of
F.A.O., Inc., a California corporation (the "Payee"), at 2520 Renaissance Road, King of Prussia, Pennsylvania, 19406, or such other place as the
Payee may designate in writing, in lawful money of the United States of America, the principal sum of FIVE HUNDRED THOUSAND Dollars ($500,000), or such lesser amount as may be outstanding as a result
of any prepaments hereof prior to such date. 

        Interest
shall be payable on the unpaid principal amount of this Secured Note (the "Note") outstanding from time to time and at a rate
equal to the rate of interest from time to time payable by the Payee to Wells Fargo Retail Finance, LLC ("Wells"), under the Loan and Security Agreement
dated as of April 30, 2002, by and among the Payee, FAO Schwarz, Inc., a Delaware corporation, and ZB Company, Inc., as amended from time to time (as so amended and as further
amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"). Interest shall begin to accrue on the date hereof in the
manner in which interest accrues under the Loan Agreement. Interest shall be due and payable upon maturity. 

        Maker
hereby grants to Payee, a continuing security interest in all of Maker's right, title, and interest in and to all currently existing and hereafter acquired or arising
(i) options to purchase stock of the Payee (other than incentive stock options), (ii) proceeds paid to Maker from any life insurance purchased by Payee and ("Life Insurance")
(iii) any proceeds of any of the foregoing (collectively, the "Collateral"), in order to secure prompt repayment of any and all of the
obligations in accordance with the terms and conditions of this Note. The Payee's liens in and to the Collateral shall attach to all such Collateral without further act on the part of Payee or Maker.
Anything contained in this Note or any other document (including, without limitation, any stock option agreement or life insurance contracts) to the
contrary notwithstanding, Maker shall have no authority, express or implied, to dispose of any item or portion of such Collateral. In addition, Maker shall not sell any common stock of the Payee
received upon exercise any option that is a part of the Collateral without repaying outstanding principal of and accrued and unpaid interest on this Note to the extent possible from such proceeds (net
of the costs of sale). Notwithstanding the foregoing, Maker shall be permitted to sell such common stock to the extent that Maker causes the proceeds to be used to repay this Note and the limitations
in this Note on the use of proceeds of any such sale shall not be deemed a limitation on the actual sale. Maker agrees, upon request by Payee, to take any and all reasonably requested action
(including delivery of any stock option agreements made for the benefit of Maker and assignment of any insurance proceeds) in order to fully perfect and protect the security interest granted to Payee
under this Note. If Payee forecloses on the Collateral, Payee shall use reasonable efforts to recognize reasonable value from the disposition of the Collateral within a reasonable amount of time and
any excess amounts received over the amount due under this Note shall be delivered to Maker or his estate promptly after receipt. 

        If
Maker (a) resigns from his employment with Payee, (b) dies, (c) is convicted of a felony involving moral turpitude or, (d) is guilty of willful gross
neglect or continued willful gross misconduct as determined by a court of competent jurisdiction (which results, in either the case of (c) or (d), in material economic harm to the Payee, unless
such act or failure to act under (c) or (d), was believed by the Maker, in good faith, to be in the best interests of the Payee), then all unpaid principal and interest under this Note shall
become due and payable on or before the 90th day after such event. Maker's estate shall use the proceeds of any Life Insurance that are paid to such estate to repay the outstanding
principal and any accrued and unpaid interest on this Note prior to any other use. 

        Failure
of the Payee hereof to assert any right contained herein will not be deemed to be a waiver thereof. 

        In
the event any one or more of the provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable, in whole or in part or in any respect, or in the event
that any one or more of the provisions of this Note operate to invalidate this Note, then, and in either of those events, such provision or provisions only shall be deemed null and void and shall not
affect any other provision of this Note and the remaining provisions of this Note shall remain operative and in full force and effect and shall in no way be affected, prejudiced or disturbed thereby. 

        The
Maker hereby forever waives presentment, presentment for payment, demand, protest, notice of protest, notice of dishonor of this Note and all other demands and notices in connection
with the delivery, acceptance, performance and enforcement of this Note. The Maker further agrees to indemnify and hold harmless the Payee from any and all damages, losses, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses) which the Payee may incur by reason of the Maker's failure promptly to pay when due the indebtedness evidenced by this Note. 

        If
a court of competent jurisdiction determines that the Maker has the benefit of any stay or extension law or any usury law or other law, then the obligation to pay interest on this
Note shall be reduced to the maximum legal limit under applicable law governing the interest payable in connection with this Note, and any amount of interest paid by the Maker that is deemed illegal
shall be deemed to have been a prepayment of principal (without penalty or premium) on this Note. 

        This
Note may be prepaid in whole or in part at any time and from time to time without premium. Any prepayment of this Note will be applied first to accrued and unpaid interest and then
to principal. This Note shall be paid without deduction by reason of any set-off, defense or counterclaim of the Maker. 

        This
Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without giving any effect to principles of conflicts of laws. This
Note shall be binding upon the successors and assigns of the Maker and on the Maker's estate and shall inure to the benefit of the successors and assigns of Payee. This Note may only be amended,
modified or terminated by an agreement in writing signed by the party to be charged. 

	 	 	 	 	/s/  JERRY R. WELCH      
 Jerry R. Welch

        Pay to the order of Wells Fargo Retail Finance, LLC, without recourse. 

	 	 	F.A.O., INC.
	

 	
 	

By:	
 	

/s/  RAYMOND P. SPRINGER      
 Raymond P. Springer

Title: Executive Vice President

Spousal Acknowledgement  

        I, Gail Welch, hereby acknowledge that the certain Secured Note dated July 3, 2002 in the aggregate principal amount of $500,000 by Jerry R. Welch for the
benefit of F.A.O., Inc. is secured by certain collateral that might otherwise be part of any estate of Jerry R. Welch and further hereby waive, and agree not to assert on behalf of such estate,
any claim to, or other benefit of, such collateral or the proceeds of such collateral. 

	 	 	 	 	/s/  GAIL WELCH      
 Gail Welch

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Exhibit 10.4

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