Document:

Exhibit 4.2

 

THIS NOTE HAS
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED
OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. 
THIS NOTE MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS
THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER
FEDERAL OR STATE SECURITIES LAWS, OR UNLESS THE PROPOSED TRANSACTION IS
REGISTERED OR QUALIFIED AS REQUIRED.

 

THIS NOTE AND
THE INDEBTEDNESS EVIDENCED HEREBY ARE SUBORDINATE, IN THE MANNER AND TO THE
EXTENT SET FORTH IN THAT INTERCREDITOR AND SUBORDINATION AGREEMENT DATED AS OF
APRIL       , 2003 (AS AMENDED BY AND
THROUGH THE DATE HEREOF AND AS FURTHER AMENDED, RESTATED, SUPPLEMENTED OR
OTHERWISE MODIFIED FROM TIME TO TIME, THE 
“INTERCREDITOR AGREEMENT”) BY AND AMONG KAYNE ANDERSON CAPITAL  ADVISORS, L.P,. FORTUNE TWENTY-FIFTH, INC.,
FAO, INC., FAO SCHWARZ, INC., ZB COMPANY, INC. AND FLEET RETAIL FINANCE INC.,
AS AGENT FOR THE LENDERS (THE “SENIOR LENDERS”), TO ALL INDEBTEDNESS OWED BY
THE MAKER OF THIS NOTE TO THE SENIOR LENDERS, AND THE HOLDER OF THIS NOTE, BY
ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR
AND SUBORDINATION AGREEMENT.

 

 

FAO, INC.

FAO SCHWARZ, INC.

ZB COMPANY, INC.

 

EQUIPMENT NOTE

 

	
  $1,703,244

  	
   

  	
  King of Prussia, Pennsylvania

  
	
  Note No.
  LC-023B

  	
   

  	
  April 23, 2003

  

 

 

FOR VALUE
RECEIVED, the undersigned, FAO, Inc., a Delaware corporation (“Parent”), FAO
Schwarz, Inc. (“Schwarz”), a Delaware corporation and ZB Company, Inc., a
Delaware corporation (“ZB”, and, together with Parent and Schwarz, the “Co-Borrowers”),
jointly and severally promise to pay to RICHARD KAYNE, or registered assigns,
the unpaid principal sum of ONE MILLION SEVEN HUNDRED THREE THOUSAND TWO
HUNDRED FORTY-FOUR DOLLARS plus any accrued and unpaid interest thereon as
provided for herein upon demand made after the later of (a) January 11, 2004
and (b) the first business day following payment of all undisputed amounts due
or following payment after deferral of all undisputed amounts due but for

 

 

such deferral, in each case, by
the terms of the Co-Borrowers’ First Amended Joint Plan of Reorganization
confirmed in their joint administered case (No. 03-101119(LK) filed in United
States Bankruptcy Court in the District of Delaware (the “Plan”) to the holders
of Class 8 Allowed Claims (as defined therein) through and including December
22, 2003 (the date of such demand, the “Final Maturity Date”).  Payments are to be made to the address of
the registered holder of this Note as set forth on the records of the Co-Borrowers
(a “Holder”).  The Co-Borrowers jointly
and severally promise to pay interest on the principal amount of this Note at a
rate equal to the prime rate charged by Fleet National Bank plus 3% per annum
(the “Interest Rate”) through the payment of the full principal amount of this
Note.  To the extent that this Note or
any portion hereof is not paid when due, this Note or such portion shall bear
interest on the then outstanding principal amount thereof from the Maturity
Date until repayment at the Interest Rate plus 3% per annum increasing an
additional 3% per annum on and after each anniversary of the Maturity
Date.  Interest on this Note will accrue
from the most recent date to which interest has been paid or, if no interest
has been paid on this Note, from the date of this Note.  Each of the Co-Borrowers agrees (to the
extent it may lawfully do so) that it will not at any time insist upon, plead
or in any manner whatsoever claim or take the benefit or advantage of, any stay
or extension law or any usury law or other law that would prohibit or forgive
the Co-Borrowers from paying all or a portion of the principal of or interest
on this Note as contemplated in this Note, wherever enacted, now or at any time
later in force, or that may materially affect the covenants or the performance
of this Note in any manner inconsistent with its provisions.  Each of the Co-Borrowers expressly waives
all benefit or advantage of any such law, and will not hinder, delay or impede
the execution of any power granted to the Holder, but will suffer and permit
the execution of every such power as though no such law had been enacted.  If a court of competent jurisdiction
prescribes that the Co-Borrowers may not waive their rights to take the benefit
or advantage of any stay or extension law or any usury law or other law in
accordance with the prior sentence, 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 Co-Borrowers that is deemed illegal shall be deemed to have been a
prepayment of principal (without penalty or premium) on this Note.

 

This Note is
issued pursuant to the terms of the Plan. 
In lieu of the warrants that were provided together with the note
compromised in exchange for this Note, which warrants represented an interest
component. this Note includes a default interest rate.  Notwithstanding any other provision of this
Note, payments due under this Note may only be made if Co-Borrowers are current
with respect to payments due to holder of Allowed Class 8 Claims (as defined in
the Plan), and further provided that the Co-borrowers are generally paying
their post-Effective Date (as defined in the Plan) obligations as such
obligations become due, other than claims or obligations that are subject to a
bona fide dispute.

 

Interest will
be computed on the basis of a 360-day year consisting of twelve 30-day months
and compounded semi-annually.  Interest
shall be paid to the Holder at the close of business on the Maturity Date and
thereafter on the 15th day of each month so long as any portion of
the principal amount hereof is outstanding. 
The Co-Borrowers

 

2

 

shall pay principal of and
interest on this Note in such coin or currency of the United States of America
as at the time of payment shall be legal tender.   The Co-Borrowers may, however, pay principal of this Note by wire
transfer of federal funds, or interest on this Note by its check payable in
such legal tender.

 

If any of the
Co-Borrowers shall  (i) fail to pay
principal or interest when due, (ii) fail generally to pay their debts as they
mature, (iii) have any complaint, application, or petition filed by or against
it initiating any matter in which the Co-Borrowers are or may be granted any
relief from its debts pursuant to Title 11, U.S.C., as amended from time to
time, or any other insolvency statute or procedure (a “Bankruptcy Event”),
(iv) fail to comply with any other provision of this Note which failure shall
continue for five days after written notice thereof from the Holder, or (v)
suffer to exist any continuing Default or Event of Default as each is defined
pursuant to that certain Loan and Security Agreement dated as of April
    , 2003 (as amended, supplemented or otherwise modified
from time to time, the “Loan and Security Agreement”), among FAO, Inc.,
FAO Schwarz, Inc., ZB Company, Inc., The Right Start, Inc., Targoff-RS, LLC,
Fleet Retail Finance Inc., Back Bay Capital Funding LLC and the other lending
institutions party from time to time party thereto and Fleet Retail Finance
Inc. as agent for the lenders (each, an “Default Event”), the aggregate
outstanding amount of this Note, including any accrued and unpaid interest,
shall be immediately due and payable upon notice from the Holder with respect
to an Default Event under subclause (i) or (v) above, and without notice
otherwise, and in addition thereto, and not in substitution therefor, the Holder
shall be entitled to exercise any one or more of the rights and remedies
provided by law.  Failure to exercise
any right or remedy under this Note or available under applicable law shall not
constitute a waiver of such option or such other remedies or of the right to
exercise any of the same in the event of any subsequent Default Event. The
Co-Borrowers and all makers, sureties, guarantors, endorsers and other persons
assuming obligations pursuant to this Note hereby waive presentment, protest,
demand, notice of dishonor and all other notices and all defenses and pleas on
the grounds of any extension or extension of the time of payments or the due
dates hereof, in whole or in part, before or after maturity, with or without
notice.  No renewal or extension of this
Note, no release of any obligor and no delay in enforcement of this Note or in
exercising any right or power hereunder shall affect the liability of any
obligor hereunder.

 

1.  Security.

 

This
instrument and the rights and obligations evidenced hereby are secured pursuant
to that certain Security Agreement of even date herewith granting a first
priority security interest in the 
“Collateral” as that term is defined in such Security Agreement.

 

2.  Mandatory Prepayment.

 

2.1  Prepayment Triggered by Securities
Offering.  In the event that Parent shall receive net
cash proceeds from the closing of a sale of its equity securities or debt
securities, other than in connection with a merger, consolidation or
acquisition of assets (the “Securities Offering Proceeds”), Parent shall, to the
extent permitted under the Loan and Security Agreement, prepay, an aggregate
principal amount of this Note and a like

 

3

 

note issued to Fortune Twenty-Fifth, Inc. (together, the “Notes”)
which, after addition of any accrued and unpaid interest thereon to the date of
prepayment, is equal to the amount of the Securities Offering Proceeds.  Such prepayment shall be made not more than
30 calendar days after receipt of such net proceeds pro rata among the Notes.

 

2.2  Notice
to Holder.  If any event occurs that
requires Parent to prepay all or a portion of this Note, Parent shall send
notice of such event to the Holder not less than 10 calendar days prior to the
date such prepayment is required at such Holder’s address of record by first
class mail, postage prepaid.  Such
notice will identify the event, the aggregate principal amount of this Note to
be prepaid, the prepayment date, the paragraph of this Note under which the
prepayment is to be made and that, provided the prepayment amount is paid, the
aggregate principal amount of this Note to be prepaid shall cease to accrue
interest from and after the prepayment date.

 

2.3  Prepayment on Change of Control.  No more than 30 calendar days following a
Change of Control, Parent or the successor entity to the majority of Parent’s
assets shall prepay the entire principal amount outstanding under this
Note.  As used herein, (x) the term “Change
of Control” means the occurrence of any of the following: (i) the adoption
of a plan relating to the liquidation or dissolution of Parent, (ii) any person
or group (as such term is used in Section 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act (or any successor rules)) other than the Holder and any group of which the
Holder is a part, directly or indirectly, of more than 50% of the total voting
stock of Parent or another Co-Borrower, or (iii) the first day on which a
majority of the members of the board of Directors of Parent are not Continuing
Directors and (y) the term “Continuing Director” means, as of any date
of determination, any member of the board of directors of Parent who (i) was a
member of such board of directors on the date of this Note or (ii) was
nominated for election or elected to such board of directors with the
affirmative vote of a majority of the Continuing Directors who were members of
such board at the time of such nomination or election.

 

2.4  Effect of Notice.  Once
notice of prepayment is mailed, that portion of the principal amount of this
Note to be prepaid shall become due and payable on the prepayment date and,
provided the prepayment amount is paid, the aggregate principal amount of this
Note to be prepaid shall cease to accrue interest from and after the prepayment
date.

 

2.5  Application
of Prepayment.  Any prepayment of
this Note shall be applied first to pay any accrued and unpaid interest on this
Note to the date of prepayment and thereafter to the remaining principal
balance of this Note.

 

3.  Transfer; Registration; Replacement.

 

Upon surrender
of this Note for registration of transfer or assignment, duly endorsed, or
accompanied by a written instrument of transfer or assignment duly executed, by
the registered Holder hereof or such Holder’s attorney duly authorized in
writing, a new Note for a like principal amount shall be issued to, and, at the
option of the

 

4

 

Holder, registered in the name
of, the transferee or assignee.  The
Co-Borrowers may deem and treat the person in whose name this Note is
registered as the Holder and owner hereof for the purpose of receiving payments
and for all other purposes whatsoever, and the Co-Borrowers shall not be
affected by any notice to the contrary.

 

4.  Conversion.

 

4.1  Conversion Right.  Any time, and from time to time, this
Note shall, at the option of the Holder, be convertible in whole or in part
into that number of fully paid and non-assessable shares of Class J Convertible
Preferred Stock of Parent, with a liquidation preference of $1,000 per share
(the “Preferred Stock”) obtained by dividing the principal amount of
this Note to be converted by ONE THOUSAND DOLLARS ($1,000), as adjusted from
time to time as provided herein (the “Conversion Rate”) and by surrender of
this Note in the manner provided in Section 4.2.

 

4.2  Mechanics of Conversion.  In order to exercise the voluntary conversion
privilege set forth in Section 4.1, the Holder shall surrender this Note
to the Secretary of Parent at Parent’s principal executive office, accompanied
by the funds, if any, required to pay transfer or similar taxes and shall give
written notice (the “Conversion Notice”) to Parent that the Holder
elects to convert all or a specified portion of the principal amount of this
Note and stating in such Conversion Notice, his name or the name or names of
his nominees in which he wishes the certificate or certificates for Preferred
Stock to be issued, together with instruments of transfer, in form satisfactory
to Parent, duly executed by the Holder or his duly authorized attorney.  As promptly as practicable after the surrender
of this Note and the receipt of the Conversion Notice, instruments of transfer
and funds to pay any transfer or similar tax, if any, as aforesaid, Parent
shall issue and deliver at such offices to the Holder, or to his nominee or
nominees, a certificate or certificates representing the number of shares of
Preferred Stock and a check or cash with respect to any fractional interest in
a share of Preferred Stock to which the Holder shall be entitled as aforesaid
in accordance with Section 4.3, and, if less than the total aggregate
outstanding principal amount of this Notes is being converted, a new Note or
Notes evidencing the unconverted principal amount of this Note and otherwise
with substantially the same terms and conditions.  Any conversion made at the election of a Holder shall be deemed
to have been made immediately prior to the close of business on the date of
such surrender of this Note to be converted, and the person or persons entitled
to receive the Preferred Stock issuable upon conversion shall be treated for
all purposes as the record holder or holders of such Preferred Stock on such
date.

 

4.3  Fractional Shares.  No fractional shares or scrip representing
fractions of shares of Preferred Stock shall be issued upon conversion of this
Note.  In lieu of any fractional
interest in a share of Preferred Stock that would otherwise be deliverable upon
the conversion of the full remaining amount of this Note, the Co-Borrowers
shall pay to the Holder an amount in cash equal to the unconverted portion of
this Note.

 

5

 

4.4  Adjustments.

 

If Parent
shall be party to any merger, consolidation, share exchange, separation,
reorganization or liquidation of Parent, or other similar event (collectively,
an “Event”), as a result of which Preferred Stock of Parent shall be
changed into the same or a different percentage of the same or another type of
Preferred Stock or securities of Parent or another entity, then the Conversion
Rate shall be adjusted so that the Holder submitting this Note for conversion
after such Event shall receive the aggregate percentage and type of Preferred
Stock or securities of Parent or another entity that the Holder would have
received if this Note had been submitted for conversion immediately prior to
such Event.

 

4.5  No Impairment.  The Co-Borrowers will not through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Co-Borrowers but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such
action as may be necessary or appropriate in order to protect the conversion
rights of the Holder against impairment. 
Without limiting the generality of the foregoing, Parent (i) will
take all such action as may be necessary or appropriate in order that Parent
may validly and legally issue fully paid nonassessable shares of Preferred
Stock on the conversion of this Note, and (ii) will not take any action that
results in any adjustment of the Conversion Rate if the total number of shares
of Preferred Stock issuable after the action upon the conversion of the total
aggregate outstanding principal amount of this Note will exceed the total
number of shares of Preferred Stock then authorized by the Certificate of
Incorporation and available for the purpose of issuance upon such conversion.

 

4.6  Notices of Record Date.  In the event of any taking by Parent of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend which is the same as cash dividends paid in previous quarters) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, Parent shall mail to the Holder at least ten days prior to the
date specified therein, a notice specifying the date on which any such record
is to be taken for the purpose of such dividend or distribution.

 

5.  Miscellaneous

 

5.1           Organization and Authority.  Each of the Co-Borrowers is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all necessary power to enter into and
perform this Note.

 

5.2           Authorization.  The execution and delivery of this Note, and
the performance of the terms hereof, has been duly authorized by all necessary
corporate action on the part of the Co-Borrowers, will not conflict with or
result in a breach of the articles of incorporation or bylaws of the
Co-Borrowers.  This Note constitutes a
valid and binding obligation of the Co-Borrowers, enforceable against the
Co-Borrowers in

 

6

 

accordance with its terms
except as limited by bankruptcy and insolvency laws and other laws affecting
the rights of creditors generally.

 

5.3           Notices.  All notices to be given under this Note
shall be in writing and shall be given either personally or by reputable
private delivery service or by regular first-class mail, or certified mail
return receipt requested, and by fax and telephone, addressed to the parties at
the addresses shown below, or at any other address designated in writing by one
party to the other party.  All notices
shall be deemed to have been given upon delivery in the case of notices
personally delivered, or at the expiration of one business day following
delivery to the private delivery service, or two business days following the
deposit thereof in the United States mail, with postage prepaid or on the first
business day of receipt in the case of notices sent by fax.

 

If to Holder:           At its address set forth on the
records of the Co-Borrowers which, until changed as set forth herein shall be:

 

	
   

  	
  Richard
  Kayne

  
	
   

  	
  Kayne
  Anderson Capital Advisors, L.P.

  
	
   

  	
  1800 Avenue
  of the Stars, Second Floor

  
	
   

  	
  Los Angeles,
  California 90067

  
	
   

  	
  Attention:
  David Shladovsky, Esq.

  
	
   

  	
  Fax:
  310-284-6444

  
	
   

  	
   

  
	
  If to Co-Borrowers to:

  
	
   

  	
   

  
	
   

  	
  c/o FAO,
  Inc.

  
	
   

  	
  2520
  Renaissance Blvd.

  
	
   

  	
  King of
  Prussia, PA 19406

  
	
   

  	
  Attention:
  Legal

  
	
   

  	
  Tel: (610)
  278-7800

  
	
   

  	
  Fax: (610)
  278-7804

  
	
   

  	
   

  
	
   

  	
  with
  required copy to (which, in and of itself, shall not constitute notice):

  
	
   

  	
   

  
	
   

  	
  Fulbright
  & Jaworski

  
	
   

  	
  865 South
  Figueroa Street, 25th Floor

  
	
   

  	
  Los Angeles,
  CA 90017

  
	
   

  	
  Attention:
  Victor Hsu, Esq.

  
	
   

  	
  Tel:  (213) 892-9200

  
	
   

  	
  Fax: (213)
  680-4518

  

 

5.4           Amendment; Successors and Assigns.
This Note may not be modified or amended, nor may any rights hereunder be
waived, except in a writing signed by the party against whom enforcement of the
modification, amendment or waiver is sought and

 

7

 

the Senior Lender.  This Note shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.  The Co-Borrowers’ obligations
under this Note may be assigned or transferred by the Co-Borrowers without the
prior written consent of the registered Holder hereof or thereof.

 

5.5           Governing Law.  This Note shall be governed by, and shall be
construed and enforced in accordance with the internal laws of the State of New
York, without regard to conflicts of laws principles.

 

[Remainder of Page Intentionally Left Blank]

 

8

 

IN WITNESS
WHEREOF, the undersigned has caused this Equipment Note to be duly executed on
its behalf as of the date first hereinabove set forth.

 

	
   

  	
  FAO, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ R. P.
  Springer

  	
   

  
	
   

  	
   

  	
  Raymond P.
  Springer

  
	
   

  	
   

  	
  Executive
  Vice President and Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  FAO SCHWARZ,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ R. P.
  Springer

  	
   

  
	
   

  	
   

  	
  Raymond P.
  Springer

  
	
   

  	
   

  	
  Executive
  Vice President and Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  ZB COMPANY,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ R. P.
  Springer

  	
   

  
	
   

  	
   

  	
  Raymond P.
  Springer

  
	
   

  	
   

  	
  Executive
  Vice President and Chief Financial Officer

  

 

9Exhibit 4.3

 

	
  No. of Stock
  Units:  45,919

  	
   

  	
  Warrant No. LC2-4B

  

 

WARRANT

 

to
Purchase Common Stock of

 

FAO,
Inc.

 

THIS IS TO CERTIFY THAT FORTUNE TWENTY-FIFTH, INC. or registered
assigns, is entitled, to purchase from FAO, Inc., a Delaware corporation (the “Company”),
at any time and from time to time after April 23, 2003 (the “Initial
Exercisability Date”), but not later than 5:00 p.m., Pacific Standard time,
on October 8, 2007 (the “Expiration Date”), 45,919 Stock Units, in whole
or in part, at a purchase price per Stock Unit of $1.95 all on the terms and
conditions hereinbelow.

 

This Warrant has been issued under the Company’s First Amended Joint
Plan of Reorganization in its Bankruptcy Case in the United States Bankruptcy
Court of the District of Delaware (Case No. 03-10119(LK)) and represents a
repricing of the Company’s warrant No. LC2-3A which warrant this Warrant
supercedes in all respects.

 

THE SECURITIES REPRESENTED BY
THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS THE PROPOSED TRANSACTION DOES NOT REQUIRE
REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS, OR UNLESS
THE PROPOSED TRANSACTION IS REGISTERED OR QUALIFIED AS REQUIRED.

 

1

 

Section
1.  Certain Definitions.  As used in this Warrant, unless the context
otherwise requires:

 

“Affiliate”
of any Person means a Person (1) that directly or indirectly controls, or is
controlled by, or is under common control with, such other Person,
(2) that beneficially owns ten percent (10%) or more of the Voting Stock
of such other Person, or (3) ten percent (10%) or more of the Voting Stock
(or in the case of a Person which is not a corporation, ten percent (10%) or
more of the equity interest) of which is owned by such other Person.  The term “control” means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.

 

“Appraised
Value” shall mean the fair market value of all outstanding shares of Common
Stock (on a fully diluted basis including any fractional shares and assuming
the exercise in full of all then-outstanding options, warrants or other rights
to purchase shares of Common Stock that are then currently exercisable at
exercise prices less than the Current Market Price), as determined by the Board
of Directors or, if the holders of Warrants object to such appraisal, by a
written appraisal prepared by an appraiser acceptable to the Company and the
holders of Warrants.  “Fair market
value” is defined for this purpose as the price in a single transaction
determined on a going-concern basis that would be agreed upon by the most
likely hypothetical buyer for a 100% controlling interest in the equity capital
of the Company (on a fully diluted basis including any fractional shares and
assuming the exercise in full of all then-outstanding options, warrants or
other rights to purchase shares of Common Stock that are then currently
exercisable at exercise prices less than the Current Market Price), with
consideration given to the effect of all noncompete covenants signed by the
seller and employment agreements signed by key management personnel of the
Company (and of its subsidiaries), each extending for a period of time
considered sufficient by all parties to effect the transfer of goodwill from
the seller to the buyer and disregarding any discounts for nonmarketability of
Common Stock of the Company.  In the
event that the Company and said holders cannot, in good faith, agree upon an
appraiser, then the Company, on the one hand, and said holders, on the other
hand, shall each select an appraiser, the two appraisers so selected shall
select a third appraiser who shall be directed to prepare such a written
appraisal (the “Appraisal”) and the term Appraised Value shall mean the
appraised value set forth in the Appraisal prepared in accordance with this
definition. The fees and expenses of any appraisers shall be paid by the
Company, except in the case in which the valuation of any appraiser who renders
an Appraisal is within ten percent (10%) of the value originally determined by
the Board of Directors, in which case the holders shall pay the fees and
expenses of any appraisers.  In the
event that the Company bears the cost of the appraisal process, such cost shall
be deemed an account payable of the Company and shall be considered in the
determination of the Appraised Value.

 

“Board of
Directors” shall mean either the board of directors of the Company or any
duly authorized committee of that board.

 

“Business
Day” shall mean any day other than a Saturday, Sunday or a day on which
banks in the State of New York are required or permitted to close.

 

2

 

“Commission”
shall mean the Securities and Exchange Commission and any other similar or successor
agency of the federal government administering the Securities Act and the
Exchange Act.

 

“Common
Stock” shall mean the Company’s authorized Common Stock, $0.001 par value
per share, irrespective of class unless otherwise specified, as constituted on the
date of original issuance of this Warrant, and any stock into which such Common
Stock may thereafter be changed, and shall also include stock of the Company of
any other class, which is not preferred as to dividends or assets over any
other class of stock of the Company issued to the holders of shares of stock
upon any reclassification thereof.

 

“Current
Market Price” per share of Common Stock for the purposes of any provision
of this Warrant at the date herein specified, shall be deemed to be the price
determined pursuant to the first applicable of the following methods:

 

(i)            If
the Common Stock is traded on a national securities exchange or is traded in
the over-the-counter market, the Current Market Price per share of Common Stock
shall be deemed to be the average of the daily market prices for 20 consecutive
Trading Days commencing 20 Trading Days before such date.  The market price for each such Trading Day
shall be (a) if the Common Stock is traded on a national securities exchange or
in the over-the-counter market, its last sale price on the preceding Trading
Day on such national securities exchange or over-the-counter market or, if
there was no sale on that day, the last sale price on the next preceding
Trading Day on which there was a sale, all as made available over the
Consolidated Last Sale Reporting System of the CTA Plan (the “CLSRS”)
or, if the Common Stock is not then eligible for reporting over the CLSRS, its
last reported sale price on the preceding Trading Day on such national
securities exchange or, if there was no sale on that day, on the next preceding
Trading Day on which there was a sale reported on such exchange or (b) if the
principal market for the Common Stock is the over-the-counter market, but the
Common Stock is not then eligible for reporting over the CLSRS, but the Common
Stock is quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”), the last
sale price reported on Nasdaq on the preceding Trading Day or, if the Common
Stock is an issue for which last sale prices are not reported on Nasdaq, the
closing bid quotation on such day, but, in each of the next preceding two
cases, if the relevant Nasdaq price or quotation did not exist on such day,
then the price or quotation on the next preceding Trading Day in which there
was such a price or quotation.

 

(ii)           If
the Current Market Price per share of Common Stock cannot be ascertained by any
of the methods set forth in paragraph (i) immediately above, the Current Market
Price per share of Common Stock shall be deemed to be the price equal to the
quotient determined by dividing the Appraised Value by the number of
outstanding shares of Common Stock (on a fully diluted basis including any
fractional shares and assuming the exercise in full of all then-outstanding
options, warrants or other rights to

 

3

 

purchase shares of Common Stock that are then currently exercisable at
exercise prices equal to or less than the Current Market Price).

 

“Current Warrant Price” per share of Common Stock, for the
purpose of any provision of this Warrant at the date herein specified, shall
mean the amount equal to the quotient resulting from dividing the Exercise
Price in effect on such date by the number of shares (including any fractional
share) of Common Stock comprising a Stock Unit on such date.

 

“Exchange Act” shall mean the Securities and Exchange Act of
1934, as amended, and any similar or successor federal statute, and the rules
and regulations of the Commission thereunder, all as the same shall be in effect
at any applicable time.

 

“Exercise Price” shall mean the purchase price per Stock Unit as
set forth on the first page of this Warrant on the Issuance Date and thereafter
shall mean such dollar amount as shall result from the adjustments specified in
Section 4.

 

“Holder” means, initially, FORTUNE TWENTY-FIFTH, INC., and
thereafter any Person that is or Persons that are the registered holder(s) of
the Warrant or Warrant Stock as registered on the books of the Company.

 

“Issuance Date” shall mean the date of issuance of this Warrant.

 

“Nonpreferred Stock” shall mean the Common Stock and shall also
include stock of the Company of any other class which is not preferred as to
dividends or assets over any other class of stock of the Company and which is
not subject to redemption.

 

“Person” shall include a natural person, limited partnership, a
corporation, an association, a partnership, a limited liability company, a
trust or estate, a government, foreign or domestic, and any agency or political
subdivision thereof, or any other entity.

 

“Restricted Certificate” shall mean a certificate for Common
Stock or a Warrant bearing the restrictive legend set forth in the preamble.

 

“Restricted Securities” shall mean Restricted Stock and the
Restricted Warrant.

 

“Restricted Stock” shall mean Common Stock evidenced by a
Restricted Certificate.

 

“Restricted Warrant” shall mean a Warrant evidenced by a
Restricted Certificate.

 

“Securities” shall mean the Warrant issued to the Holder, and
the certificates and other instruments from time to time evidencing the same.

 

4

 

“Securities Act” shall mean the Securities Act of 1933, as
amended, and any similar or successor federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
any applicable time.

 

“Stock Unit” shall constitute one share of Common Stock, as such
Common Stock was constituted on the date hereof and thereafter shall constitute
such number of shares (including any fractional shares) of Common Stock as
shall result from the adjustments specified in Section 4.

 

“Trading Day” shall mean a day on which the national securities
exchanges were open for trading.  

 

“Voting Stock” shall mean any equity security entitling the holder
of such security to vote at meetings of shareholders except an equity security
which entitles the holder of such security to vote only upon the occurrence of
some contingency, unless that contingency shall have occurred and be
continuing.

 

“Warrant” shall mean this Warrant to purchase an aggregate of
45,919 Stock Units accruing as set forth herein initially issued to FORTUNE
TWENTY-FIFTH, INC., and all Warrants issued upon transfer, division or
combination of, or in substitution therefor.

 

“Warrant Stock” shall mean the shares of Common Stock
purchasable by the holder of any Warrants upon the exercise thereof.

 

Section 2.  Exercise of
Warrant.  The holder of this Warrant
may, at any time on and after the Initial Exercisability Date, but not later
than the Expiration Date, exercise this Warrant in whole or in part at any time
and from time to time for the number of Stock Units which such holder is then
entitled to purchase hereunder.  The
Holder may exercise this Warrant, in whole or in part, by any of the following
methods (or a combination thereof or as otherwise determined by the Company’s
Board of Directors):

 

(a)                                                  the Holder may deliver to the
Company at its office maintained pursuant to Section 13 for such purpose (i) a
written notice of such Holder’s election to exercise this Warrant, which notice
shall specify the number of Stock Units to be purchased, (ii) this Warrant and
(iii) a sum equal to the aggregate Exercise Price therefor in immediately
available funds; or

 

(b)                                                 to the extent permitted by applicable
law, the Holder may also exercise this Warrant, in whole or in part, in a
“cashless” or “net issue” exercise by delivering to the Company at its office
maintained pursuant to Section 13 for such purpose (i) a written notice of such
Holder’s election to exercise this Warrant, which notice shall specify the
number of Stock Units to be delivered to such Holder and the number of Stock
Units with respect to which this Warrant is being surrendered in

 

5

 

payment of the aggregate Exercise Price for the Stock Units to be
delivered to the Holder, and (ii) this Warrant.  For purposes of this subparagraph (b), each Stock Unit as to
which this Warrant is surrendered will be attributed a value equal to the
product of (x) the Current Market Price per share of Common Stock minus the
Current Warrant Price per share of Common Stock, multiplied by (y) the number
of shares of Common Stock then comprising a Stock Unit; or

 

(c)                                                  the Holder may also exercise
this Warrant, in whole or in part, by delivering to the Company at its office
maintained pursuant to Section 13 for such purpose written notice accompanying
the surrender of this Warrant at the time of such exercise, instructing the
Company to apply to the Exercise Price all or any part of the unpaid principal
amount of any one or more Notes at the time held by the Holder, in which case
the Company will accept the principal amount specified in such notice in
satisfaction of a like amount of such payment. 
Upon any partial application of a Note, the Company at its expense shall
forthwith issue and deliver to or upon the order of the Holder a new Note or
Notes in principal amount of such surrendered Note which has not been applied
against such payment, such new Note or Notes to be dated and to bear interest
from the date to which interest has been paid on such surrendered Note.  Within two Business Days after receipt of
any such notice, in the manner provided in the Notes, all unpaid interest on
the principal amount so specified in such notice, accrued to the date of the
exercise of such Warrant.

 

Any notice required under this Section 2 may be in the form of a
subscription set out at the end of this Warrant.  Upon delivery thereof, the Company shall as promptly as
practicable, and in any event, subject to compliance with Section 9, within 10
Business Days thereof, cause to be issued in the name of and delivered to such
Holder or, subject to Section 9, as Holder may direct, a certificate or
certificates representing the aggregate number of duly authorized, validly
issued, fully-paid and nonassessable shares of Common Stock issuable upon such
exercise and, in case such exercise is in part only, a new Warrant or Warrants
of like tenor, as further described below.

 

The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in said notice and shall be
registered in the name of such Holder or, subject to Section 9, such other name
or names as shall be designated in said notice.  Such certificate or certificates shall be deemed to have been
issued and such Holder or any other Person so designated to be named therein
shall be deemed to have become a holder of record of such shares, with, to the
extent permitted by law, the right to vote such shares or to consent or to
receive notice as a stockholder, as of the time said notice is delivered to the
Company as aforesaid.  If this Warrant
shall have been exercised only in part, the Company shall, at the time of
delivery of said certificate or certificates, deliver to such Holder a new
Warrant dated the date

 

6

 

it is issued, evidencing the
rights of such Holder to purchase the remaining Stock Units called for by this
Warrant, which new Warrant shall in all other respects be identical with this
Warrant.

 

The Company shall pay all expenses, taxes (other than federal, state,
local or foreign income taxes) and other charges payable in connection with the
preparation, issue and delivery of stock certificates and new Warrants under
this Section 2.

 

All shares of Common Stock issuable upon the exercise of this Warrant
shall be duly authorized, validly issued, fully paid and nonassessable, and
free from all liens and other encumbrances thereon.  The Company will from time to time take all such action as may be
necessary to assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.

 

The Company shall not issue certificates for fractional shares of
Common Stock upon any exercise of this Warrant whenever, in order to implement
the provisions of this Warrant, the issuance of such fractional shares is
required.  Instead, the Company shall
pay cash in lieu of such fractional shares upon such exercise.

 

Section 3.  Transfer,
Division and Combination.  Subject
to Section 9, this Warrant and all rights hereunder are transferable, in whole
or in part, on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at the office of the Company maintained for such
purpose pursuant to Section 13, together with (a) a written assignment in the
form set out at the end of this Warrant duly executed by the Holder hereof or
its agent or attorney and (b) payment of funds sufficient to pay any stock
transfer taxes payable upon the making of such transfer.  Upon such surrender, execution and payment,
the Company shall, subject to Section 9, execute and deliver a new Warrant or
Warrants in the name of the assignee or assignees and in the denominations
specified in such instrument of assignment, and this Warrant shall promptly be
canceled.  If and when this Warrant is
assigned in blank (in case the restrictions on transferability in Section 9
shall have been terminated), the Company may (but shall not be obliged to)
treat the bearer hereof as the absolute owner of this Warrant for all purposes
and the Company shall not be affected by any notice to the contrary.  This Warrant, if properly assigned in
compliance with this Section 3 and Section 9, may be exercised by an assignee
for the purchase of shares of Common Stock without having a new Warrant issued.

 

This Warrant may, subject to Section 9, be divided upon presentation at
the aforesaid office of the Company, together with a written notice specifying
the names and denominations in which new Warrants are to be issued, signed by
the holder hereof or its agent or attorney. 
Subject to compliance with the preceding paragraph and with Section 9,
as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant to be divided or combined in accordance with such notice.

 

The Company shall pay all expenses, taxes (other than federal, state,
local or foreign income taxes) and other charges incurred by the Company in the
performance of its

 

7

 

obligations in connection with
the preparation, issue and delivery of Warrants under this Section 3.

 

The Company agrees to maintain at its aforesaid office books for the
registration and transfer of the Warrants.

 

Section 4.  Adjustment of
Stock Unit or Exercise Price.  The
number of shares of Common Stock comprising a Stock Unit, and the Exercise
Price per Stock Unit, shall be subject to adjustment from time to time as set
forth in this Section 4 and in Section 5. 
The Company will not take any action with respect to its Nonpreferred
Stock of any class requiring an adjustment pursuant to any of the following
Subsections 4.1 or 4.3 without at the same time taking like action with respect
to its Nonpreferred Stock of each other class.

 

4.1.  Stock Dividends,
Subdivisions and Combinations.  In
case at any time or from time to time the Company shall:

 

(a) take a record of the holders of its Nonpreferred Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Nonpreferred Stock, or

 

(b) subdivide its outstanding shares of Nonpreferred Stock into a
larger number of shares of Nonpreferred Stock, or 

 

(c) combine its outstanding shares of Nonpreferred Stock into a smaller
number of shares of Nonpreferred Stock,

 

then the number of shares of
Common Stock comprising a Stock Unit immediately after the happening of any
such event shall be adjusted so as to consist of the number of shares of Common
Stock which a record holder of the number of shares of Common Stock comprising
a Stock Unit immediately prior to the happening of such event would own or be
entitled to receive after the happening of such event.

 

4.2.  Other Provisions
Applicable to Adjustments.  The
following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Stock Unit hereinbefore provided
for in this Section 4:

 

(a)  When Adjustments to Be
Made.  The adjustments required by
Section 4.1 shall be made whenever and as often as any specified event
requiring an adjustment shall occur. 
For the purpose of any adjustment, any specified event shall be deemed
to have occurred at the close of business on the date of its occurrence.

 

(b)  Fractional Interests.  In computing adjustments under this Section
4, fractional interests in Nonpreferred Stock shall be taken into account to
the nearest one-thousandth of a share.

 

8

 

(c)  When Adjustment Not
Required.  If the Company shall take
a record of the holders of its Nonpreferred Stock for the purpose of entitling
them to receive a dividend or distribution and shall, thereafter and before the
distribution thereof to shareholders, abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment shall be required by
reason of the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.

 

4.3.  Merger, Consolidation
Etc.  In case the Company shall (a)
merge into or consolidate with another Person and shall not be the continuing
or surviving Person of such merger or consolidation, (b) shall permit any other
Person to merge into or consolidate with the Company and the Company shall be
the continuing or surviving Person, but, in connection with such merger or
consolidation, the Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other any other property,
(c) shall sell, transfer or otherwise dispose of all or substantially all of
its property, assets or business to another Person or (d) effect a capital
reorganization or reclassification of the Common Stock (other than a capital
reorganization or reclassification for which an adjustment is provided by
Section 4.1) and pursuant to the terms of such merger, consolidation,
disposition, capital reorganization or reclassification, shares of common stock
of a successor or acquiring Person are to be received by or distributed to the
holders of Nonpreferred Stock of the Company, then each holder of a Warrant
shall have the right thereafter to receive, upon exercise of such Warrant,
Stock Units each comprising the number of shares of common stock of such
successor or acquiring Person receivable upon or as a result of such merger,
consolidation, disposition, capital reorganization or reclassification by a
holder of the number of shares of Nonpreferred Stock comprising a Stock Unit
immediately prior to such event.  If,
pursuant to the terms of such merger, consolidation, disposition, capital
reorganization or reclassification, any cash, shares of stock, other securities
or property or warrants or other subscription or purchase rights or property of
any nature whatsoever are to be received by or distributed to the holders of
Nonpreferred Stock of the Company, there shall be either, at the Holder’s option,
(i) a reduction of the Exercise Price equal to the amount applicable to the
number of shares of Common Stock then comprising a Stock Unit of any such cash
and of the fair value of any and all such shares of stock or of other
securities or property to be received by or distributed to the holders of
Nonpreferred Stock of the Company, or (ii) such Holder shall have the right to
receive, upon exercise of its Warrant, such cash, shares of stock or other
securities or property of any nature as a holder of the number of shares of
Nonpreferred Stock underlying a Stock Unit would have been entitled to receive
upon the occurrence of such event.  Such
fair value shall be determined in good faith by the Board of Directors of the
Company, provided that if such determination is objected to by the holders of
Warrants, such determination shall be made by an independent appraiser selected
by the Company and said holders.  In the
event that the Company and said holders cannot, in good faith, agree upon an
appraiser, then the Company, on the one hand, and said holders, on the other
hand, shall each select an appraiser, the two appraisers so selected shall
select a third appraiser who shall be directed to prepare such a written
appraisal which shall be conclusive and binding on the parties.  The fees and expenses of any appraisers
shall be paid by the Company, except in the case where the valuation of any
appraiser who renders an Appraisal is within ten percent (10%) of the value
originally determined by the Board of Directors, in which case the holders
shall pay the fees and expenses of any appraisers.  In case of any such merger, consolidation, disposition,

 

9

 

capital reorganization or
reclassification, the successor or acquiring Person shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
of the obligations and liabilities hereunder, subject to such modification as
shall be necessary to provide for adjustments of Stock Units which shall be as
nearly equivalent as practicable to the adjustments provided for in this
Section 4.  For the purposes of this
Section 4 “common stock of the successor or acquiring Person” shall
include stock of such corporation of any class, that is not preferred as to
dividends or assets over any other class of stock of such corporation and that
is not subject to redemption, and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event, and any warrants or other
rights to subscribe for or purchase any such stock.  The foregoing provisions of this Subsection 4.3 shall similarly
apply to successive mergers, consolidations, dispositions, capital
reorganizations or reclassifications..

 

4.4  No Impairment.  The Company will not, by amendment of its
certificate of incorporation or through a consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights
of the Holder of this Warrant against impairment.  Without limiting the generality of the foregoing, the Company
will not permit the par value of any shares of stock receivable upon the
exercise of this Warrant to exceed the amount payable therefor upon such
exercise, (b) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of stock on the exercise of the Warrants from time to time
outstanding, and (c) will not take any action that results in any adjustment of
the Exercise Price if the total number of shares of Common Stock (or other
securities) issuable after the action upon exercise of all of the Warrants
would exceed the total number of shares of Common Stock (or other securities)
then authorized by the Company’s certificate of incorporation and available for
the purpose of issue upon such exercise.

 

Section 5.  Notice to Warrant
Holders.

 

5.1.  Notice of Adjustment of
Stock Unit or Exercise Price. 
Whenever the number of shares of Common Stock comprising a Stock Unit,
or the price at which a Stock Unit may be purchased upon exercise of the
Warrants, shall be adjusted pursuant to Section 4, the Company shall forthwith
obtain a certificate signed by independent accountants, of recognized national
standing, selected by the Company and reasonably acceptable to the Holder(s) of
the Warrants, setting forth, in reasonable detail, the event requiring the
adjustment and the method by which such adjustment was calculated (including a
statement of the fair value, as determined by the Board of Directors of the
Company or by appraisal (if applicable), of any evidences of indebtedness,
shares of stock, other securities or property or warrants or other subscription
or purchase rights or property of any nature whatsoever referred to in Section
4.3) and specifying the number of shares of Common Stock comprising a Stock
Unit and (if such adjustment was

 

10

 

made pursuant to Section 4.3)
describing the number and kind of any other shares of stock comprising a Stock
Unit, and any change in the purchase price or prices thereof, after giving
effect to such adjustment or change. 
The Company shall promptly, and in any case within three days after the
making of such adjustment, cause a signed copy of such certificate to be
delivered to each holder of a Warrant in accordance with Section 14.  The Company shall keep at its office or
agency, maintained for the purpose pursuant to Section 13, copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by any holder of a Warrant or any prospective
purchaser of a Warrant designated by a holder thereof.

 

5.2.  Notice of Certain
Corporate Action.  In case the
Company shall propose (a) to pay any dividend to the holders of any class of
securities or to make any other distribution to the holders of any class of
securities (other than a regular, periodic cash dividend in an amount not
exceeding the amount of the immediately preceding cash dividend for the immediately
preceding period) or to grant any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right or (b) to effect any consolidation, merger or
sale, capital reorganization, reclassification or recapitalization of the
capital stock organic change, transfer or other disposition of all or
substantially all of its property, assets or business, voluntary or involuntary
dissolution, liquidation or winding-up of the Company, then in each such case,
the Company shall deliver to each holder of a Warrant, in accordance with
Section 14, a notice of such proposed action, which shall specify the date on
which a record is to be taken for the purposes of, and expected date of
consummation of, such dividend, distribution or rights, consolidation, merger,
sale, capital reorganization, reclassification or recapitalization of the
capital stock, organic change, transfer or voluntary or involuntary
dissolution, liquidation or winding-up of the Company or transfer is to take
place and the date of any participation therein by the holders of Nonpreferred
Stock, if any such date is to be fixed, and shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action on the Nonpreferred Stock and the number and kind of any other
shares of stock which will comprise a Stock Unit, and the purchase price or
prices thereof, after giving effect to any adjustment which will be required as
a result of such action.  Such notice
shall be so delivered as promptly as reasonably possible and, in any event, at
least 10 days prior to the date therein specified.

 

Section 6.  Reservation and
Authorization of Common Stock.  The
Company shall at all times reserve and keep available for solely issue upon the
exercise of Warrants such number of its authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full of all
outstanding Warrants.  All shares of
Common Stock which shall be so issuable, when issued upon exercise of any
Warrant or upon such exercise, as the case may be, shall be duly and validly
authorized and issued, fully-paid and nonassessable.

 

Section 7.  Taking of Record;
Stock and Warrant Transfer Books. 
In the case of all dividends or other distributions by the Company to
the holders of its Nonpreferred Stock with respect to which any provision of
Section 4 refers to the taking of a record of such holders, the Company will in
each such case take such record as of the close of business on a Business
Day.  The Company will not at any time,
except upon dissolution, liquidation or winding up or as

 

11

 

otherwise may be required by
law, close its stock transfer books or Warrant transfer books so as to result
in preventing or delaying the exercise or transfer of any Warrant.

 

Section 8.  Taxes.  The Company will pay all taxes (other than
federal, state, local or foreign income taxes) which may be payable in
connection with the execution and delivery of this Warrant or the issuance and
sale of the Restricted Securities hereunder or in connection with any
modification of the Restricted Securities and will save the Holder harmless
without limitation as to time against any and all liabilities with respect to
or resulting from any delay in paying, or omission to pay, such taxes.  The obligations of the Company under this
Section 8 shall survive any redemption, repurchase or acquisition of Restricted
Securities by the Company.

 

Section 9.  Restrictions
on Transferability.  The Restricted
Securities shall not be transferable except upon the conditions specified in
this Section 9.

 

9.1           Transfer to an
Affiliate.  The Holder shall have
the right to transfer any Restricted Securities to any Affiliate of the Holder,
in each case without complying with the restrictions imposed by this
Section 9 other than the requirement as to the legending of the
certificates for such Restricted Securities specified in Section 9.3.  No opinion of counsel shall be required for
a transfer of Restricted Securities to an Affiliate of the Holder.

 

9.2           Transfer to a
Non-Affiliate.  The Holder and his
or her or her subsequent transferees shall have the right to transfer any
Restricted Securities to a non-Affiliate of the Holder as follows:

 

(a)           Prior to any
transfer or attempted transfer of any Restricted Securities to a non-Affiliate
of the Holder, the holder of such Restricted Certificate shall give written
notice to the Company of such Holder’s intention to effect such transfer.  Each such notice shall describe the manner
and circumstances of the proposed transfer in reasonable detail.

 

(b)           Upon receipt of such
notice, the Company may request an opinion of counsel of the transferring
Holder to the effect that such proposed transfer may be effected without
registration under the Securities Act. 
Upon receipt of such opinion, or if the Company does not request such an
opinion, within five (5) Business Days after receiving notice of the proposed
transfer, the Company shall, as promptly as practicable, so notify the Holder
of such Restricted Certificate and the Holder shall thereupon be entitled to
transfer such Restricted Securities in accordance with the terms of the notice
delivered by the Holder to the Company. 
Each certificate evidencing the Restricted Securities thus to be
transferred (and each certificate evidencing any untransferred balance of the
Restricted Securities evidenced by such Restricted Certificate) shall bear the
restrictive legend set forth in Section 9.3, unless in the opinion of the
Company or the opinion of such counsel, if requested, pursuant to
Rule 144(k) of the Securities Act or otherwise, such legend is not
required in order to ensure compliance with the Securities Act.  The fees and expenses of counsel for any
such opinion shall be paid by the Company.

 

9.3           Restrictive
Legend.  Unless and until the
Restricted Securities have been registered under the Securities Act, this
Warrant, each Warrant issued to any transferee of the Holder, each certificate
for any Warrant Stock issued upon exercise of any Warrant and each

 

12

 

certificate for any Warrant
Stock issued to any transferee of any such certificate, shall be stamped or
otherwise imprinted with a legend in substantially the following form:

 

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR
QUALIFIED UNDER ANY STATE SECURITIES LAWS. 
THE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION
UNDER FEDERAL OR STATE SECURITIES LAWS, OR UNLESS THE PROPOSED TRANSACTION IS
REGISTERED OR QUALIFIED AS REQUIRED.”

 

Whenever such restriction shall
cease and terminate as to any Restricted Securities, the Holder shall be
entitled to receive from the Company, without expense (other than applicable
transfer taxes, if any), new securities of like tenor not bearing the legend
required by this Subsection 9.3 upon delivery of satisfactory evidence to the
Company of such cessation and termination (including an opinion of counsel
reasonably satisfactory to the Company).

 

Section 10.  Limitation of
Liability.  No provision hereof, in
the absence of affirmative action by the Holder to purchase shares of Common
Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the purchase price
of the Warrant Stock or as a stockholder of the Company, whether such liability
is asserted by the Company or by creditors of the Company.

 

Section 11.  Loss or
Destruction of Warrant Certificates. 
Upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of any Warrant and, in the case of any
such loss, theft or destruction, upon receipt of indemnity or security in an
amount reasonably satisfactory to the Company (the original Holder’s or any
other institutional Holder’s indemnity being satisfactory indemnity in the
event of loss, theft or destruction of any Warrant owned by such institutional
Holder), or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, the Company will at its own expense execute and deliver,
in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of
like tenor and representing the right to purchase the same aggregate number of
shares of Common Stock.

 

Section 12.  Amendments.  The terms of this Warrant may be amended,
and the observance of any term therein may be waived, but only with the
unanimous written consent of the holders of Warrants subject to such amendment.

 

Section 13.  Office of the
Company.  So long as any Warrant
remains outstanding, the Company shall maintain an office where the Warrants
may be presented for exercise, transfer, division or combination as in this
Warrant provided.  Such office shall be
at 2520 Renaissance Boulevard, King of Prussia, Pennsylvania, 19406 FAX: (610)
278-7804, unless and

 

13

 

until the Company shall
designate and maintain some other office for such purposes and deliver written
notice thereof to the holders of all outstanding Warrants.

 

Section 14.  Notices
Generally.

 

14.1.  All communications
(including all required or permitted notices) pursuant to the provisions hereof
shall be in writing and shall be sent, to any registered Holder of any Warrants
or Warrant Stock, to the address of such Holder as it appears in the stock or warrant
ledger of the Company or at such other address as such Holder may have
furnished in writing to the Company.

 

14.2.  Any notice shall be
deemed to have been duly delivered when delivered by hand, if personally
delivered, and if sent by mail to a party whose address is in the same country
as the sender, two Business Days after being deposited in the mail, postage
prepaid, and if sent by recognized international courier, freight prepaid, with
a copy sent by telecopier, to a party whose address is not in the same country
as the sender, three Business Days after the later of (a) being telecopied and
(b) delivery to such courier.

 

Section 15.  Registration
Rights.  The Company agrees, upon
request of the holders of Warrants, to register the Common Stock issuable upon
exercise of this Warrant on substantially the same terms it agreed to provide
registration rights to Athanor Holdings, LLC in connection with its investment
in the Company’s Series E Contingent Convertible Preferred Stock; provided that
this Section shall not require registration on any form if the Commission would
not permit registration of such Common Stock on that form.

 

Section 16. Governing Law. 
This Warrant shall be governed by and construed in accordance with the
laws of the State of New York (without regard to conflicts of law provisions
thereof).

 

Section 17. Remedies. 
The Company stipulates that the remedies at law of the Holder in the
event of any default or threatened default by the Company in the performance of
or compliance with any of the terms of this Warrant are not and will not be
adequate and that, to the fullest extent permitted by law, such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.

 

[Remainder of Page Intentionally Left Blank]

 

14

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its President or a Vice President and attested by its Secretary or
an Assistant Secretary

 

Dated as of:    April 23, 2003

 

	
   

  	
   

  	
  FAO, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ R. P. Springer

  	
   

  
	
   

  	
   

  	
  By:  Raymond P. Springer

  	
   

  
	
   

  	
   

  	
  Its: 
  Executive Vice President and Chief

  Financial Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  /s/ Kendrick F. Royer

  	
   

  	
   

  	
   

  
	
  Name:  Kendrick F. Royer

  	
   

  	
   

  	
   

  
	
  Title:  Secretary

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  AGREED AND CONSENTED TO:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  FORTUNE
  TWENTY-FIFTH, INC.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By: 

  	
  /s/ Fred Kayne

  	
   

  	
   

  	
   

  
	
   

  	
  Name: Fred Kayne

  	
   

  	
   

  	
   

  
	
   

  	
  Title: President

  	
   

  	
   

  	
   

  

 

15

 

SUBSCRIPTION
FORM

(to be executed only upon exercise of
Warrant)

 

 

The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases Stock Units of FAO, Inc., a Delaware corporation,
purchasable with this Warrant, and herewith makes payment therefor (by check in
the amount of $        ), or hereby
tenders
                         
Stock Units as payment therefor, all at the price and on the terms and
conditions specified in this Warrant and requests that certificates for the
shares of Common Stock hereby purchased (and any securities or other property
issuable upon such exercise) be issued in the name of and delivered to
                                       
whose address is                                                                                                                             
and, if such Stock Units shall not include all of the Stock Units issuable as
provided in this Warrant that a new Warrant of like tenor and date for the
balance of the Stock Units issuable thereunder be delivered to the undersigned.

 

 

	
  Dated:

  	
   

  	
  ,

  	
   

  	
   

  

 

	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (Signature of Registered Owner)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (Street Address)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (City)

  	
  (State)

  	
  (Zip Code)

  	
   

  
							

 

 

ASSIGNMENT
FORM

 

FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
Stock Units set forth below:

 

	
  Number of Stock Units

  	
   

  	
  Name and Address of Assignee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

and does hereby irrevocably constitute and appoint
                                                  
Attorney to make sure transfer occurs on the books of FAO, Inc., a Delaware
corporation, maintained for the purpose, with full power of substitution in the
premises.

 

Dated:

 

	
   

  	
   

  
	
  Signature

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Witness

  	
   

  

 

NOTICE:                                                The
signature to the assignment must correspond with the name as written upon the
face of the Warrant in every particular instance, without alteration or
enlargement or any change whatsoever.

 

The signature to this assignment must be guaranteed by a bank or trust
company having an office or correspondent in New York, New York or by a firm
having membership on the New York Stock Exchange.

 

2

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