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Exhibit 10.2    
  

FAO, INC.  

 
 

SECURITIES PURCHASE AGREEMENT    
  

Dated as of April 3, 2003  

39,000 Shares  

SERIES I CONVERTIBLE PREFERRED STOCK  

  

 
 

TABLE OF CONTENTS    
  

	 
	 	 
	 	Page

	Section 1.	 	ISSUANCE OF SECURITIES	 	1
	 	Section 1.1.	 	Authorization	 	1
	 	Section 1.2.	 	Purchase and Sale of Securities; the Closing	 	1
	 	Section 1.3.	 	Subsequent Sale of Securities 2	 	1
	 	Section 1.4.	 	Representations of the Purchasers	 	2
	

Section 2.	
 	

REPRESENTATIONS OF THE COMPANY	
 	

4
	 	Section 2.1.	 	Organization and Authority of the Company	 	4
	 	Section 2.2.	 	Business, Properties and Other Information Regarding the Company	 	5
	 	Section 2.3.	 	Capital Stock	 	5
	 	Section 2.4.	 	Litigation; Observance of Statutes, Regulations and Orders	 	6
	 	Section 2.5.	 	Title to Property	 	6
	 	Section 2.6.	 	Taxes	 	7
	 	Section 2.7.	 	Compliance with Laws and Other Instruments of the Company	 	7
	 	Section 2.8.	 	Governmental Authorizations	 	7
	 	Section 2.9.	 	Licenses and Permits	 	7
	 	Section 2.10.	 	Compliance with ERISA	 	7
	 	Section 2.11.	 	Investment Company Act	 	8
	 	Section 2.12.	 	Environmental Compliance	 	8
	 	Section 2.13.	 	Maintenance of Insurance	 	9
	 	Section 2.14.	 	Labor Relations	 	9
	 	Section 2.15.	 	Assumptions or Guaranties of Indebtedness of Other Persons	 	9
	 	Section 2.16.	 	Disclosure	 	9
	 	Section 2.17.	 	Valid Issuance of Preferred and Common Stock	 	9
	

Section 3.	
 	

CONDITIONS OF CLOSING	
 	

9
	 	Section 3.1.	 	Proceedings Satisfactory	 	9
	 	Section 3.2.	 	Agreement Regarding Departments	 	9
	 	Section 3.3.	 	Representations True; Officer's Certificate	 	9
	 	Section 3.4.	 	Purchase Permitted by Applicable Laws	 	10
	 	Section 3.5.	 	Securities	 	10
	 	Section 3.6.	 	Registration Rights Agreement 11	 	10
	 	Section 3.7.	 	Shareholders Agreement	 	10
	 	Section 3.8.	 	Third-Party Consents	 	10
	 	Section 3.9.	 	Confirmation of Plan of Reorganization	 	10
	 	Section 3.10.	 	Total Investments	 	10
	

Section 4.	
 	

DEFINITIONS	
 	

10
	 	Section 4.1.	 	Definitions	 	10
	 	Section 4.2.	 	Accounting Terms	 	14
	

Section 5.	
 	

REGISTRATION, TRANSFER AND EXCHANGE OF SECURITIES; LOST SECURITIES	
 	

14
	

Section 6.	
 	

TAXES	
 	

15

i

 

	

Section 7.	
 	

LETTER CREDIT COMMITMENT	
 	

15
	 	Section 7.1.	 	LC Commitment	 	15
	 	Section 7.2.	 	Commitment Provisions	 	15
	 	Section 7.3.	 	Payments to Purchasers for Commitment	 	15
	 	Section 7.4.	 	Purchaser Compensation for LC Draws	 	15
	 	Section 7.5.	 	Limitations of Liability	 	16
	 	Section 7.6.	 	Cash Collateral	 	16
	 	Section 7.7.	 	ISP 98	 	16
	 	Section 7.8.	 	Agreements of LC Issuer	 	16
	 	Section 7.9.	 	Subordination to Outstanding Equipment Notes	 	16
	

Section 8.	
 	

MISCELLANEOUS	
 	

19
	 	Section 8.1.	 	Indemnification	 	19
	 	Section 8.2.	 	Expenses	 	19
	 	Section 8.3.	 	Amendments, Waiver and Consents	 	19
	 	Section 8.4.	 	Reliance on and Survival of Representations	 	19
	 	Section 8.5.	 	Successors	 	20
	 	Section 8.6.	 	Notices	 	20
	 	Section 8 .7.	 	Counterparts	 	20
	 	Section 8.8.	 	Governing Law	 	20
	 	Section 8.9.	 	Waiver of Jury Trial	 	20
	 	Section 8.10.	 	[Intentionally Omitted]	 	21
	 	Section 8.11.	 	Entire Agreement	 	21
	 	Section 8.12.	 	Exculpation Among Purchasers; Due Diligence	 	21
	

Schedules	
 	

 
	

SCHEDULE I—Purchasers	
 	

S-1
	SCHEDULE 2.3—Capitalization	 	S-2
	

Exhibits	
 	

 
	

EXHIBIT A—Certificate of Designation	
 	

A-1
	EXHIBIT B—Form of Preferred Stock Certificate	 	B-1
	EXHIBIT C—Form of Registration Rights Agreement	 	C-1
	EXHIBIT D—Form of Shareholders Agreement	 	D-1

ii

  

 
 

FAO, INC.
  
    SECURITIES PURCHASE AGREEMENT    
  

Dated as of April 3, 2003  

To
each of the Purchasers

Listed on Schedule I hereto 

Ladies
and Gentlemen: 

        FAO, Inc.,
a Delaware corporation (the "Company"), hereby agrees with the Purchasers as follows: 

        Section 1.    ISSUANCE
OF SECURITIES. 

        Section 1.1.    Authorization. 

        By
the Initial Closing Date (as defined below), the Company will have duly authorized the issuance of 50,000 shares of its Series I Convertible Preferred Stock (the
"Series I Preferred Stock") plus such shares as are issued by the Company in lieu of the payment of dividends thereon in cash. The
Series I Preferred Stock shall have the rights, privileges and preferences set forth in a certificate of designation substantially in the form of Exhibit A. 

        As
used herein, the term "Series I Preferred Stock" shall include all stock certificates originally issued pursuant to this
Securities Purchase Agreement (the "Agreement") and all certificates delivered in substitution or exchange for any of such stock certificates or in lieu
of the payment of dividends in cash and, where applicable, shall include the singular number as well as the plural. The Series I Preferred Stock issued to the Purchasers pursuant to this
Agreement, and the certificates and other instruments from time to time evidencing the same, are herein sometimes collectively called the "Securities." 

        Section 1.2.    Purchase and Sale of Securities; the Closing.    The Company shall sell to the Purchasers and,
subject to the terms and conditions hereof, the Purchasers shall purchase from the Company the Series I Preferred Stock, at an aggregate purchase price equal to the aggregate liquidation
preference on the Series I Preferred Stock. 

        The
closing (the "Initial Closing") of such purchase of the Securities shall be held at 2:00 p.m., Eastern time, on the Effective
Date (the "Initial Closing Date"), at the principal executive office of the Company in King of Prussia, Pennsylvania, or at such other time or place as
the parties hereto may mutually agree. 

        On
the Initial Closing Date, the Company shall deliver to each Purchaser one or more certificates representing the Series I Preferred Stock set forth as being purchased by such
Purchaser on Schedule I, registered in such Purchaser's name or in the name of such Purchaser's nominee in any denominations, all as such Purchaser may specify by notice delivered to the
Company at least two days prior to the Initial Closing Date (or, in the absence of such notice, one certificate representing the Series I Preferred Stock, registered in such Purchaser's name),
duly executed and dated the Initial Closing Date, against each Purchaser's delivery to the Company of immediately available funds in the amount of the purchase price. 

        Section 1.3    Subsequent Sale of Securities.    If less than 39,000 shares of Series I Preferred Stock
are sold at the Initial Closing, then, subject to the terms and conditions of this Agreement, the Company may sell the unsold remainder up to an aggregate of 39,000 shares of Series I Preferred
Stock (as such, the "Remainder Shares") to such Persons as the Company may determine, on the same terms and conditions as those contained in this
Agreement (the date of any such sale, a "Subsequent Closing Date" and such closing a "Subsequent
Closing"). The purchasers of any Remainder Shares shall 

1

 

become, by their purchase thereof, parties to this Agreement and the Registration Rights Agreement and shall acknowledge their obligations under this Agreement and the Registration Rights Agreement
in a writing delivered to the Company. 

        On
any Subsequent Closing Date, the Company shall deliver to each purchaser on such Subsequent Closing Date (a "Subsequent Purchaser") one
or more certificates representing the Series I Preferred Stock purchased by such Subsequent Purchaser on such Subsequent Closing Date, registered in such
Subsequent Purchaser's name or in the name of such Subsequent Purchaser's nominee in any denominations, all as such Subsequent Purchaser may specify by notice delivered to the Company at least two
days prior to the Subsequent Closing Date (or, in the absence of such notice, one certificate representing the Series I Preferred Stock, registered in such Subsequent Purchaser's name), duly
executed and dated the Subsequent Closing Date, against each Subsequent Purchaser's delivery to the Company of immediately available funds in the amount of the purchase price. The certificate or
certificates provided to a Subsequent Purchaser shall accrue dividends from the date of issuance and shall have the same conversion rate as provided in the Series I Preferred Stock sold at the
Initial Closing. 

        The
Company agrees that if it sells any Remainder Shares on terms more favorable than those offered to the Purchasers in this Agreement (including but not limited to a more favorable
price, greater registration rights or additional Company representations and warranties), then the Company shall enter into an amendment hereto giving the Purchasers equivalent terms. The Purchasers
and the Company agree that the Agreement Regarding Licensed Departments and the exclusion of Saks Incorporated from the obligations of the Purchasers set forth in Section 7 hereof shall not be
deemed to be more favorable terms for purposes of this Securities Purchase Agreement. 

        Section 1.4.    Representations of the Purchasers.    Each Purchaser represents and warrants to the Company
that: 

	(a)
	Authorization. 

        Such
Purchaser has full power and authority to enter into this Agreement, and that this Agreement, when executed and delivered, will constitute a valid and legally binding obligation of
the Purchaser. 

	(b)
	Purchase Entirely for Own Account. 

        This
Agreement is made with such Purchaser in reliance upon the Purchaser's representation to the Company, which by its execution of this Agreement such Purchaser hereby confirms, that
the Securities to be purchased by such Purchaser will be acquired for investment for such Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that such Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, such Purchaser further
represents that such Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with
respect to any of the Securities. 

	(c)
	Reliance Upon Purchasers' Representations. 

        Such
Purchaser understands that the Securities are not registered under the Securities Act on grounds that the sale provided for in this Agreement and the issuance of securities
hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated on such Purchasers'
representations set forth herein. Such Purchaser realizes that the basis for the exemption may not be present if, notwithstanding such representations, such Purchaser has in mind merely acquiring the
Securities 

2

 

for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. Such Purchaser has no such intention. 

	(d)
	Investment Experience. 

        Such
Purchaser represents that it is experienced in evaluating and investing in private placement transactions and acknowledges that it is able to fend for itself, can bear the economic
risk of such Purchaser's investment, and has such knowledge and experience in financial and business matters that such Purchaser is capable of evaluating the merits and risks of the investment in the
Securities. Such Purchaser also represents that it has not been organized for the purpose of acquiring the Securities. 

	(e)
	Accredited Investor. 

        (1)  The
term "Accredited Investor" as used herein refers to: 

        (i)  A
person or entity who is a director or executive officer of the Company; 

        (ii)  Any
bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of
the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 as amended; any
insurance company as defined in Section 2(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 as amended or a business development company as
defined in Section 2(a)(48) of that act; any Small Business Investment Company licensed by the United States Small Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958 as amended; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for
the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 as
amended, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered
investment adviser, or if
the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are Accredited Investors; 

        (iii)  Any
private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940 as amended; 

        (iv)  Any
organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed
for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; 

        (v)  Any
natural person whose individual net worth, or joint net worth with that person's spouse, at the time of the purchase exceeds $1,000,000; 

        (vi)  Any
natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of
$300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; 

        (vii)  Any
trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a person
who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment; or 

        (viii)  Any
entity in which all of the equity owners are Accredited Investors. 

3

 

        As
used in this Section 1.4(e)(1), the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal
residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Section 1.4 (e)(1), "income" means
actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, the Purchaser should consider whether it should add any or all of the following items to the
Purchaser's gross income for income tax purposes in order to reflect more accurately the Purchaser's actual economic income: any amounts attributable to tax-exempt income received, losses
claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an IRA or Keogh retirement plan, and alimony payments. 

        (2)  Such
Purchaser further represents to the Company that, except as otherwise disclosed to the Company in writing prior to such Purchaser's execution hereof, it is an
Accredited Investor. 

	(f)
	Restricted Securities. 

        The
Purchaser understands that the Securities may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in
the absence of an effective registration statement covering the Securities or an available exemption from registration under the Securities Act, the Securities must be held indefinitely. The Purchaser
acknowledges that in connection with the purchase and sale of the Securities hereunder, the Purchaser and the Company will enter into a Registration Rights Agreement substantially in the form attached
hereto as Exhibit C. 

	(g)
	Legends. 

        To
the extent applicable, each certificate or other document evidencing any of the Securities shall be endorsed with the legends substantially in the form set forth below: 

        (1)  The
following legend: 

        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. 

        THE
SECURITIES, AND THE COMMON STOCK ISSUABLE UPON CONVERSION THEREOF, ARE SUBJECT TO THE PROVISIONS OF A SHAREHOLDERS AGREEMENT AMONG THE ISSUER AND THE ORIGINAL PURCHASERS OF THE
SECURITIES. 

        (2)  Any
legend imposed or required by applicable state securities laws. 

        Section 2.
REPRESENTATIONS OF THE COMPANY. The Company represents and warrants to each of the Purchasers as of the date hereof and as of the Closing Date that: 

        Section 2.1.    Organization and Authority of the Company. 

        (a)  The
Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to
own or hold under lease the property it purports to own or hold under lease and to transact the business it transacts and proposes to transact. The Company has all requisite power and authority to
execute and deliver this Agreement, the Securities, and any other documents or agreements contemplated hereby and thereby, to perform its obligations hereunder and thereunder and to consummate the 

4

 

transactions contemplated hereunder and thereunder. The Company is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the character of the properties owned
or held under lease by it or the nature of the business transacted by it requires such qualification except such jurisdictions, if any, in which the failure to be so qualified or in good standing will
not have a Material Adverse Effect on the Company. 

        (b)  The
execution, delivery and performance of this Agreement, the Securities, and any other documents or agreements to which the Company is a party contemplated hereby and
thereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized and approved by the Board of Directors and its Special Committee of Independent Directors.
Each of this Agreement, the Securities, and any other document or agreement to which the Company is a party contemplated hereby or thereby has been (or on the Closing Date will have been) duly
authorized, executed and delivered by, and each is (or, when duly executed and delivered on the Closing Date, will be) the valid and binding obligation of, the Company, enforceable in accordance with
its terms, except as may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws or by legal or equitable principles relating to or limiting creditors' rights
generally. 

        Section 2.2.    Business, Properties and Other Information Regarding the Company. 

        (a)  The
Company has delivered to each of the Purchasers copies of the (i) audited report of the Company's independent accountants for the fiscal year ended
February 2, 2002 containing balance sheets of the Company as of the last day of the fiscal year ended February 2, 2002, and the related statements of operations, shareholders' equity and
cash flows of the Company for the fiscal year ended February 2, 2002 and (ii) the unaudited balance sheets and the related statements of operations, shareholders' equity and cash flows
of the Company for the periods ended May 4, 2002, August 3, 2002 and November 2, 2002 (such financial statements being referred to collectively herein as the
"Financial Statements"). 

        The
Financial Statements fairly present the financial position of the Company as of the respective dates of such balance sheets and the results of the Company's operations for the
respective periods covered by such statements of operations, shareholders' equity and cash flows. The Financial Statements are true, accurate and complete in all material respects and have been
prepared in accordance with GAAP consistently applied throughout the periods involved. Since November 2, 2002, the Company has continued to experience operating losses and has filed for
reorganization under Chapter 11 of the federal Bankruptcy Code, as disclosed in the reports filed by the Company pursuant to the Exchange Act. 

        (b)  As
of their respective dates, neither the Financial Statements nor any certificate executed by the Company in connection with the transactions contemplated hereby and
thereby, contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made,
not misleading. 

        Section 2.3.    Capital Stock. 

        (a)  The
authorized capital stock of the Company on the Closing Date is expected to consist of approximately 500,000,000 shares of Common Stock (on a pre-split
basis) and 5,000,000 shares of preferred stock (on a pre-split basis) ("Preferred Stock") with the exact numbers to be provided by a
certificate of the Company on the Closing Date (the "Capital Stock Certification"). On the Closing Date, the Company expects that there will be
outstanding such shares of Common Stock, shares of Series I Preferred Stock convertible into shares of Common Stock and warrants for the purchase of shares of Common Stock, all in the amounts
with such conversion terms as are set forth in the Schedule 2.3 on a pre-split basis. All such shares of Common Stock and Preferred 

5

 

Stock outstanding on the Closing Date will have been duly and validly issued and be fully paid and nonassessable. 

        (b)  On
the Closing Date, the Company will not have outstanding any capital stock or other securities convertible into or exchangeable for any of its capital stock or any
rights to subscribe for or to purchase, or any options for the purchase of, or any agreements (contingent or otherwise) providing for the issuance of, or any calls, commitments or claims of any
character relating to, any of its capital stock or any securities convertible into or exchangeable for any of its capital stock, other than the capital stock noted in Sections 2.3(a) and 7. 

        (c)  The
Company does not have any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of its capital stock or obligation evidencing the
right of the holder thereof to purchase any of its capital stock, other than the Company's obligation to repurchase stock owned by an employee under the Company's Employee Stock Purchase Plan after
such employee elects to withdraw from such plan. There is not in effect any agreement by the Company pursuant to which any holders of securities of the Company have a right to cause the Company to
register such securities under the Securities Act, other than the registration rights set forth in the Registration Rights Agreement dated
as of the date hereof with respect to Common Stock issuable upon conversion of the Series I Preferred Stock and certain other shares of Common Stock formerly subject to registration rights
prior to the Bankruptcy Case Proceedings. 

        Section 2.4.    Litigation; Observance of Statutes, Regulations and Orders. 

        (a)  There
are no actions, suits or proceedings pending or, to the best knowledge of the Company, threatened against or affecting the Company or any of its properties in any
court or before any arbitrator of any kind or before or by any Governmental Body except the Bankruptcy Case Proceedings, litigation disclosed in the Company's Exchange Act Documents (as defined
herein) and actions, suits or proceedings arising in the ordinary course of business which individually or in the aggregate, if adversely determined, would not have a Material Adverse Effect on the
Company or materially adversely affect its ability to perform its obligations under this Agreement, the Securities, and any other document or agreement contemplated hereby or thereby. The Company may
have an indemnification obligation with respect to a class action suit brought against its chief executive officer and two of its directors filed February 19, 2003 in the Eastern District of
Pennsylvania but does not currently believe that such case will have a Material Adverse Effect on the Company. 

        (b)  The
Company is not in default under any order of any court, arbitrator or Governmental Body, or subject to or a party to any Order of any court or Governmental Body
arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters. The Company is not in violation
of any statute or other rule or regulation of any Governmental Body the violation of which would have a Material Adverse Effect on the Company or materially adversely affect its ability to perform its
obligations under this Agreement, the Securities, and any other document or agreement contemplated hereby or thereby. 

        Section 2.5.    Title to Property. 

        (a)  The
Company has good and marketable title to its real properties and good and merchantable title to each of its other properties as are reflected on the Financial
Statements, except for personal property sold or otherwise disposed of in the ordinary course of business and personal property and leases disposed of through the Bankruptcy Case Proceedings. All
properties of the Company are free and clear of all Liens, other than Permitted Liens. 

        (b)  The
Company enjoys full and undisturbed possession under all leases necessary in any material respect for the operation of its business (the
"Leases"). None of the Company's Leases 

6

 

contains any unusual or burdensome provisions which, individually or in the aggregate, are likely to materially impair the operation of the business of the Company. On the Closing Date, the Company's
Leases will be valid and subsisting and in full force and effect, and there will be no existing material
defaults by the Company or events that with notice or lapse of time or both would constitute material defaults by the Company under any of the Leases, except as may exist until cure payments are made
in accordance with the Plan of Reorganization (as defined below). 

        Section 2.6.    Taxes.    The Company has filed all tax returns which are required to have been filed in any
jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by the Company to the extent the same have become due and payable and
before they have become delinquent, except for any taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with
respect to which the Company has set aside on its books reserves (segregated to the extent required by GAAP) deemed by it to be adequate. The Company knows of no proposed material tax assessment
against the Company and in the opinion of the Company all tax liabilities are adequately provided for on the books of the Company. 

        Section 2.7.    Compliance with Laws and Other Instruments of the Company.    The consummation of the
transactions contemplated by this Agreement and the execution, delivery and performance of the terms and provisions of this Agreement, the Securities, or any other document or agreement contemplated
hereby or thereby will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any
material indenture, mortgage, deed of trust, bank loan or credit agreement, corporate charter, by-laws or other material agreement or instrument to which the Company is a party or by which
the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any Order of any court, arbitrator or
Governmental Body applicable to the Company, or (iii) violate any provision of any statute or other rule or regulation of any Governmental Body applicable to the Company. 

        Section 2.8.    Governmental Authorizations.    No consent, approval or authorization of, or registration,
filing or declaration with, any Governmental Body is required for the issuance of the Securities or the valid execution and delivery of the Securities or for the performance by the Company of this
Agreement, the Securities, and any other documents or agreements contemplated hereby and thereby other than filings of Securities Act Form D and similar filings. 

        Section 2.9.    Licenses and Permits.    The Company possesses all licenses, permits, franchises,
authorizations, patents, copyrights, trademarks and trade names, or rights thereto, required to conduct its business substantially as now conducted and as currently proposed to be conducted, without
known conflict with the rights of others. 

        Section 2.10.    Compliance with ERISA. 

        (a)  Neither
the Company nor any Related Person (as defined below) has breached the fiduciary rules of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or engaged in any transaction in connection with which the Company or any Related Person could be subjected to a suit
for damages, a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code of 1986, as amended (the
"Code"), in any such case which would be materially adverse to the Company. For purposes of this Section 2.10, a "Related
Person" shall mean any trade or business, whether or not incorporated, which, together with the Company, would be treated as a single employer under Section 414 of the
Code. 

        (b)  Neither
any employee pension benefit plan (as defined in Section 3(2) of ERISA) which is or has been established or maintained, or to which contributions are or
have been made, by the 

7

 

Company or any Related Person or with respect to which the Company or any Related Person is or has been obligated to contribute (a "Plan") nor any
trust created under any Plan has been terminated within the meaning of Title IV of ERISA since September 2, 1974 under circumstances that could result in liability which could be materially
adverse to the Company. Other than premiums due and owing in the normal course, no liability to the Pension Benefit Guaranty Corporation (the "PBGC")
has been incurred and remains unsatisfied or is expected by the Company to be incurred with respect to any Plan by the Company or any Related Person which is or would be materially adverse to the
Company. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any Plan which presents a risk of termination of any
such Plan by the PBGC under circumstances which in any case could result in liability which would be materially adverse to the Company. 

        (c)  Neither
the Company nor any Related Person has within the past six years contributed, or had any obligation to contribute, to a single employer plan that has at least
two contributing sponsors not under common control or has ceased operations at a facility under circumstances which could result in liability under Section 4068(f) of ERISA. 

        (d)  There
is no multiemployer plan (within the meaning of Section 4001(a)(3) of ERISA) to which the Company or any Related Person is or has ever been obligated to
contribute under Title IV of ERISA. 

        (e)  No
accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any Plan.
Full payment has been made within the time required under Section 412 of the Code of all amounts that the Company or any of its Related Persons is required under the terms of each Plan and
applicable law to have paid as contributions to such Plan as of the date hereof. Each Plan satisfies the minimum funding standard of Section 412 of the Code. 

        (f)  Neither
the Company nor any Related Person has engaged in any transaction that could result in the incurrence of any liabilities under Section 4069 or
Section 4212 of ERISA. 

        (g)  The
Company is not a party in interest with respect to any employee benefit pension plan, except for the Company's Employee Stock Ownership Plan and 401(k) Plan and
securities of the Company are not employer securities with respect to any employee benefit pension plan other than the above listed plans. For such purpose, the term "employee benefit pension plan"
shall have the meaning assigned to such term in Section 3 of ERISA and the term "employer security" shall have the meaning assigned to such term in Section 407(d)(1) of ERISA. The
execution and delivery of this Agreement, the Securities and any other agreements or instruments executed in connection herewith and therewith will not involve any transaction which is subject to the
prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code. 

        Section 2.11.    Investment Company Act.    The Company is not an investment company or a person directly or
indirectly controlled by or acting on behalf of an investment company within the meaning of the Investment Company Act of 1940, as amended. 

        Section 2.12.    Environmental Compliance.    The Company has obtained and is in compliance with all permits,
licenses, and other authorizations that are required under all Environmental Laws (as hereinafter defined), including laws relating to emissions, discharges, releases or threatened releases of
contaminants into the environment (including, without limitation, ambient air, surface water, ground water or land) or otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of contaminants, except to the extent that failure to have any such permit, license or other authorization does not have a Material Adverse Effect on the
Company. 

8

 

        Section 2.13.    Maintenance of Insurance.    The Company carries insurance covering its properties and
business adequate and customary for the type and scope of the properties and business. 

        Section 2.14.    Labor Relations.    To the best knowledge of the Company, no material unfair labor practice
complaint or sex, age, race or other discrimination claim has been brought during the last five years against the Company before the National Labor Relations Board, the Equal Employment Opportunity
Commission or any other Governmental Body. During that period, the Company has complied in all material respects with all applicable laws relating to the employment of labor, including, without
limitation, those relating to immigration, wages, hours and collective bargaining. 

        Section 2.15.    Assumptions or Guaranties of Indebtedness of Other Persons.    The Company has not assumed,
guaranteed, endorsed or otherwise become directly or contingently liable (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for
payment, to supply funds to or otherwise invest in the debtor or otherwise to assure the creditor against loss) on any Indebtedness of any other Person, other than its wholly-owned subsidiaries. 

        Section 2.16.    Disclosure.    The Company has provided or made available to Purchaser copies of its Annual
Report on Form 10-K for the fiscal year ended February 2, 2002 (including all amendments thereto), and its quarterly reports on Form 10-Q for the periods
ended May 4, 2002, August 3, 2002 and November 2, 2002, which include the Financial Statements (the "Exchange Act Documents"). Such
documents are true, accurate and complete as of their respective dates in all material respects. Neither this Agreement, the Financial Statements, the Exchange Act Documents nor any other agreement,
document, certificate or written statement furnished to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby contains any untrue statement of a
material fact. 

        Section 2.17.    Valid Issuance of Preferred and Common Stock.    The Series I Preferred Stock that is
being purchased by the Purchasers hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued,
fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. The Common
Stock issuable upon conversion of the Series I Preferred Stock being purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the
terms of the Series I Preferred Stock, as set forth in the Certificate of Designation, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on
transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. 

        Section 3.    CONDITIONS
OF CLOSING.    Except as otherwise noted, each Purchaser's obligation to purchase and pay for the Securities to be purchased by such
Purchaser on the Closing Date shall be subject to the satisfaction on or before the Closing Date of the conditions hereinafter set forth. 

        Section 3.1.    Proceedings Satisfactory.    All proceedings taken on or prior to the Closing Date in
connection with the issuance of the Securities and the consummation of the transactions contemplated hereby and all documents and papers relating thereto shall be reasonably satisfactory in form and
substance to the Purchasers, and they shall have received copies of such documents, papers, and certificates of officers of the Company, all in form and substance reasonably satisfactory to the
Purchasers, as they may reasonably request in connection therewith. 

        Section 3.2.    Agreement Regarding Licensed Departments.    Solely with respect to the obligation of Saks, the
Agreement Regarding Licensed Departments shall be effective and no substantive breach thereof shall have occurred. 

        Section 3.3.    Representations True; Officer's Certificate.    All representations and warranties of the
Company contained in Section 2 shall be true in all material respects, in each case on and as of the 

9

 

Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date; the Company shall have performed all agreements on its part required to be
performed under this Agreement on or prior to the Closing Date; the Company shall not have
consolidated with, merged into, or sold, leased or otherwise disposed of its properties as an entirety or substantially as an entirety to any Person; all conditions specified in Section 3 shall
have been satisfied to the reasonable satisfaction of the Purchasers; and the Purchasers shall have received a certificate signed by the President or the principal financial officer of the Company,
dated the Closing Date, certifying to the effect that all conditions specified in Section 3 shall have been satisfied. 

        Section 3.4.    Purchase Permitted by Applicable Laws.    The sale by the Company and the payment for the
Securities to be purchased by the Purchasers (i) shall not be prohibited by any applicable law or governmental regulation, release, interpretation or opinion, (ii) shall not subject any
Purchaser to any penalty under or pursuant to any applicable law or governmental regulation, and (iii) shall be permitted by the laws and regulations of the jurisdictions to which any Purchaser
is subject. 

        Section 3.5.    Securities.    The Securities shall have been duly issued by the Company in the form attached
as Exhibit B, with only such changes or additions as the Purchasers shall, in their reasonable judgment, require and all governmental charges payable in connection therewith shall have been
paid (or payment shall have been provided for) in full, and shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived without each Purchaser's
prior written consent. A Certificate of Designation in substantially the form of Exhibit A shall have been filed with the Secretary of State of the State of Delaware and shall be effective. 

        Section 3.6.    Registration Rights Agreement.    The Company shall have entered into the Registration Rights
Agreement substantially in the form set forth as Exhibit C hereto. 

        Section 3.7.    Shareholders Agreement.    The Company and each Purchaser shall have entered into the
Shareholders Agreement substantially in the form set forth as Exhibit D hereto. 

        Section 3.8.    Third-Party Consents.    The Company shall have received all third-party and Governmental Body
consents and waivers referred to in Section 2.8 above or otherwise necessary to permit consummation of the transactions contemplated hereunder. 

        Section 3.9.    Confirmation of Plan of Reorganization.    All of the conditions precedent to the Effective
Date, as such term is defined in the First Amended Joint Plan of Reorganization of FAO, Inc., and its Debtor Subsidiaries pursuant to the Bankruptcy Case Proceedings (the
"Plan of Reorganization"), shall have been satisfied in accordance with the terms of the Plan of Reorganization on or before May 15, 2003. The
Plan of Reorganization shall not have been amended nor shall any condition to the Effective Date have been waived in any respect that materially adversely affects any Purchaser without, in each case,
the written consent of such Purchaser. 

        Section 3.10.    Total Investments.    At least 27,000 shares of the Series I Preferred Stock shall have
been issued to the Purchasers, and the Company shall have received at least $27 million in payment therefor. 

        Section 4.    DEFINITIONS.

        Section 4.1.    Definitions.    Except as otherwise specified or as the context may otherwise require, the
following terms shall have the respective meanings set forth below whenever used in this Agreement: 

        "Affiliate" means a Person (i) that directly or indirectly controls, or is controlled by, or is under common control with, the
Company, (ii) that beneficially owns ten percent (10%) or more of the Voting Stock of the Company, or (iii) 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 the Company. The term "control" means the possession,
directly or indirectly, of the power 

10

 

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. 

        "Agreement" has the meaning ascribed thereto in Section 1.1. 

        "Agreement Regarding Licensed Departments" means the Agreement Regarding Licensed Departments of even date with this Agreement between
Saks and the Company. 

        "Bankruptcy Case Proceedings" means all proceedings and actions relating to the Chapter 11 Bankruptcy Case In re: FAO, Inc., a
Delaware corporation, et al., Debtors, filed on January 13, 2003 in the U.S. Bankruptcy Court for the District of Delaware (Case No. 03-10119 (LK)). 

        "Board of Directors" means either the Board of Directors of the Company or any duly authorized committee of that board. 

        "Business Day" means any day other than a Saturday, Sunday or a day on which banks in the State of California are required or permitted to
close. 

        "Capital Lease" means any lease of property that, in accordance with GAAP, should be capitalized on the lessee's balance sheet or for
which the amount of the asset and liability thereunder, if so capitalized, should be disclosed in a note to such balance sheet; and "Capital Lease
Obligation" means the amount of the liability with respect to a Capital Lease that should be so capitalized or disclosed. 

        "Closing" has the meaning ascribed thereto in Section 1.2. 

        "Closing Date" has the meaning ascribed thereto in Section 1.2. 

        "Code" has the meaning ascribed thereto in Section 2.10. 

        "Commission" means 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" has the meaning ascribed thereto in Section 1.1. 

        "Commitment" means the liability of a Purchaser (other than Saks) to provide an LC pursuant to Section 7, which shall be in the
same proportion that the number of shares of Series I Preferred Stock originally purchased by such Purchaser hereunder bears to (i) the total number of shares of Series I
Preferred Stock sold hereunder minus (ii) the number of such shares sold to Saks. 

        "Company" means FAO, Inc., a Delaware corporation. 

        "Conversion Price" means the conversion price of the Series I Preferred Stock, as defined in Section IV.A.(i) of its
Certificate of Designation. 

        "Effective Date" has the meaning ascribed thereto in Section 3.9. 

        "Environmental Law" or "Environmental Laws" mean any law or Order relating to the
regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or wastes into the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes. 

        "ERISA" has the meaning ascribed thereto in Section 2.10. 

        "Exchange Act" means the Securities 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. 

11

 

        "Exchange Act Documents" has the meaning ascribed thereto in Section 2.16. 

        "Financial Statements" has the meaning ascribed thereto in Section 2.2. 

        "GAAP" means generally accepted accounting principles as in effect at the time of application to the provisions hereof. 

        "Governmental Body" means any federal, state, municipal or other governmental department, commission, board, bureau, agency or
instrumentality, foreign or domestic, or any financial or other rating agency. 

        "Guarantee" means any guarantee or other contingent liability, direct or indirect, with respect to any Indebtedness of another person,
through an agreement or otherwise, including, without limitation, (i) any endorsement (otherwise than for collection or deposit in the ordinary course of business) or discount with recourse or
undertaking substantially equivalent to or having similar economic effect of a guarantee with respect to any such Indebtedness, and (ii) any agreement (A) to purchase, or to advance or
supply funds for the payment or purchase of, any such Indebtedness of another, (B) to purchase, sell or lease property, products, materials or supplies, or transportation or services, primarily
for the purpose of enabling such other person to pay such Indebtedness or to assure the owner thereof against loss regardless of the delivery or non-delivery of the property, products,
materials or supplies or transportation or services, or (C) to make any loan, advance, capital contribution or other investment in such other person to assure a minimum equity, working capital
or other balance sheet condition for any date, or to provide funds for the payment of any liability, dividend or stock liquidation payment, or otherwise to supply funds to or in any manner invest in
such other person. The amount of any Guarantee shall be equal to the outstanding principal amount of the Indebtedness guaranteed, unless some lesser limitation is specifically stated in such
Guarantee. 

        "Holder" means each of the Purchasers and any other Person that becomes a registered holder of any of the Series I Preferred Stock
as registered on the books of the Company. 

        "Indebtedness" means any obligation for borrowed money or for which interest is customarily paid, but in any event shall include without
limitation (i) any obligation owed for all or any part of the purchase price of property, services or other assets or for the cost of property or other assets constructed or of improvements
thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased or services rendered in the ordinary course of business, (ii) any obligations
secured by any Lien in respect of property even though the person owning the property has not assumed or become liable for the payment of such obligation, (iii) any Capital Lease Obligation,
(iv) any Guarantee with respect to Indebtedness (of the kind otherwise described in this definition) of another person, and (v) obligations in respect of letters of credit, surety bonds
and completion bonds. 

        "Initial Equity Capitalization" means the total number of shares of Common Stock outstanding as of the Closing Date and into which all
securities of the Company outstanding as of the Closing Date that are convertible into, are exchangeable for or have other rights exercisable for, shares of Common Stock, may be converted, exchanged
or otherwise exercised. 

        "Kayne Purchasers" means Fred Kayne, Richard Kayne, and their respective affiliates and successors. 

        "Leases" has the meaning ascribed thereto in Section 2.5. 

12

   
        "Lien" means, as to any person, any mortgage, lien, pledge, charge, security interest or other encumbrance in or on, or any interest or
title of any vendor, lessor, lender or other secured party to or of the person under any Indebtedness, conditional sale or other title retention agreement or Capital Lease with respect to, any
property or asset of the person, or the signing or filing of a financing statement which names the person as debtor, or the signing of any security agreement authorizing any other party as the secured
party thereunder to file any financing statement. 

        "Material Adverse Effect" means, with respect to any Person, a material adverse effect on the business, prospects, properties, condition
(financial or otherwise) or operations of such Person. 

        "Order" means any order, writ, injunction, decree, judgment, award, determination, direction or demand. 

        "Original Purchasers" means the original purchasers of Series I Preferred Stock under this Agreement, including the purchasers of
any Remainder Shares hereunder. 

        "PBGC" means the Pension Benefit Guaranty Corporation. 

        "Permitted Liens" means: 

        (a)  Liens
for taxes, assessments, or governmental charges or claims the payment of which is not yet past due or that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established; 

        (b)  statutory
Liens of landlords, carriers, warehousemen, mechanics, or materialmen, and other Liens imposed by law and incurred in the ordinary course of business, that are
for sums not yet delinquent for a period of more than thirty (30) days or are being contested in good faith, if reserves or other appropriate provisions, if any, as shall be required by GAAP,
shall have been made therefor; 

        (c)  Liens
incurred or deposits or pledges made in the ordinary course of business in connection with workers' compensation, unemployment insurance, and other types of social
security laws; 

        (d)  any
attachment or judgment Lien; provided that (i) the time for the appeal or petition for rehearing of such judgment lien shall not have expired; (ii) the
Company in good faith shall be prosecuting an appeal or proceeding for review with respect to which execution has been stayed pending such appeal or which is vacated or discharged within thirty
(30) days of the termination of such stay; or (iii) with respect to which payment in full above any applicable deductible is covered by insurance (so long as no reservation of rights has
been made by the insurer in connection with such coverage), and Liens incurred to secure any surety bonds, appeal bonds, supersedeas bonds, or other instruments serving a similar purpose in connection
with the appeal of any such judgment or any proceeding to which the Company is a party; 

        (e)  minor
survey exceptions, easements and licenses, reservations of, or rights of others for, rights-of-way, highway and railroad crossings, sewers,
electric lines, telegraph and telephone lines, and other similar purposes, or zoning or other restrictions or similar charges with respect to the use of real properties not incurred in connection with
Indebtedness of the Company or materially detracting from the value of such properties; and 

        (f)  any
Lien on the Company's assets or properties to secure payment to a lender to the Company. 

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

13

 

        "Plan of Reorganization" shall have the meaning ascribed thereto in Section 3.9. 

        "Purchasers" means the Purchasers listed on Schedule I hereto and their successors and assigns. 

        "Remainder Shares" has the meaning ascribed thereto in Section 1.3. 

        "Retained Securities" means the Common Stock not previously sold by any of the Original Purchasers that is issued or issuable upon
conversion of the Series I Preferred Stock. 

        "Saks" shall mean Saks Incorporated, a Tennessee corporation. 

        "Securities" has the meaning ascribed thereto in Section 1.1. 

        "Securities Act" means 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. 

        "Voting Stock" means 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. 

        Section 4.2.    Accounting Terms.    All accounting terms used herein which are not expressly defined in this
Agreement have the meanings respectively given to them in accordance with GAAP, all computations made pursuant to this Agreement shall be made in accordance with GAAP, and all balance sheets and other
financial statements shall be prepared in accordance with GAAP, except in the case of unaudited financial statements which are subject to year-end audit adjustments and the absence of
footnotes. 

        Section 5.    REGISTRATION,
TRANSFER AND EXCHANGE OF SECURITIES; LOST SECURITIES.    The Company shall keep at its principal executive office a register in
which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), it shall provide for the registration and transfer of the Securities. 

        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. 

        The
Holder of any of the Securities may, at such Holder's option, surrender the same for transfer or exchange at the principal executive office of the Company, accompanied in the case of
a transfer or assignment by a written instrument of transfer or assignment in form satisfactory to the Company duly executed by the registered Holder thereof or by such Holder's attorney duly
authorized in writing. In case any Holder shall so request the transfer, assignment or exchange of any Security, the Company at its expense shall execute and deliver in exchange therefor one or more
new Securities, as may be requested by such Holder, in the same denomination or denominations as the Securities or Securities so surrendered. 

        The
Company and any agent of the Company may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of dividends and
for all other purposes whatsoever. 

        Upon
receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of any Security, and (in case of loss, theft or destruction) of indemnity
reasonably satisfactory to it, upon surrender and cancellation of such Security or receipt of such indemnity, the Company shall make and deliver in lieu of such Security a new Security in the same
denomination. 

        Notwithstanding
the foregoing provisions of this Section, if any Security of which any Purchaser or any other institutional Holder is the owner is lost, stolen or destroyed, then the
affidavit of such Purchaser or such Holder's Treasurer or Assistant Treasurer (or other responsible official), setting forth 

14

 

the name of the owner of such Security and the circumstances with respect to such loss, theft or destruction, shall be accepted as satisfactory evidence thereof, and no indemnity shall be required as
a condition to the execution and delivery by the Company of a new Security in lieu of such Security (or as a condition to the payment thereof, if due and payable) other than a Purchaser's or such
Holder's written agreement to indemnify the Company. 

        Section 6.    TAXES.    The
Company shall pay all taxes (including interest and penalties), other than taxes imposed on the income of the Purchasers, which may
be payable in respect of the execution and delivery of this Agreement or of the execution and delivery of any of the Common Shares or of any amendment of, or waiver or consent under or with respect
to, this Agreement or any of the Common Shares and shall save each Purchaser harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax. 

        Section 7.    LETTER
OF CREDIT COMMITMENT 

        Section 7.1    LC Commitment.    Notwithstanding anything herein to the contrary, the obligations of the
Purchasers contained in this Section 7 shall not apply to Saks. The Company may request that the Purchasers cause the issuance of a letter of credit in favor of the Company's senior lenders
(the "LC") on the terms set forth in this Section 7. The Purchasers shall not be required to comply with more than one request by the Company for
an LC pursuant to this Section 7. 

        Section 7.2    Commitment Provisions.    The Purchasers shall cause the issuance of the LC so requested by the
Company provided that: 

        (a)  The
aggregate stated amount of the LC shall not exceed $5 million; 

        (b)  The
expiry of the LC shall not be later than November 30, 2003; 

        (c)  The
issuance date shall not be earlier than June 1, 2003; and 

        (d)  The
Company shall execute such documentation to apply for and support the issuance of the LC as may be required by the issuer of the LC, which may be one of the
Company's senior lenders (the "LC Issuer"). 

        Section 7.3    Payments to Purchasers for Commitment.    The Company shall pay to the Purchasers (other than
Saks), pro rata in proportion to each Purchaser's Commitment, the following compensation for the Purchasers' performance of its obligations under this Section 7: 

        (a)  On
the Closing Date, the Company shall pay to the Purchasers $100,000; and 

        (b)  If
the Company makes a request for an LC, then within 20 days after the LC has been issued, the Company shall issue to the Purchasers five-year
warrants exercisable at the Conversion Price to purchase an amount of Common Stock equal to three percent (3%) of the Initial Equity Capitalization or, if the stated amount of the LC is less than
$5 million, a pro-rata portion of such three percent (3%). 

In
addition, the Company shall pay on demand all customary issuance, processing, negotiation, amendment and administrative fees and other amounts charged by the Issuer on account of, or in respect to,
the LC. 

        Section 7.4    Purchaser Compensation for LC Draws.    If the LC is drawn upon by the beneficiary thereof, the
Company shall provide to the Purchasers (other than Saks), pro rata in proportion to each Purchaser's Commitment, the following compensation: 

        (a)  One-year
senior notes (the "LC Notes") of the Company in an aggregate principal amount equal to the stated
amount of the LC, secured by a perfected first priority lien (subject to Section 7.9) on the Company's equipment bearing interest at a rate of ten percent (10%) per 

15

 

annum and subject to an intercreditor agreement with the Company's senior lenders regarding limitations on foreclosure of collateral and other remedies, and 

        (b)  If
the LC Notes have not been repaid on or before November 30, 2003, five-year warrants exercisable at the Conversion Price to purchase an amount of
Common Stock equal to four percent (4%) of the Initial Equity Capitalization or, if the stated amount of the LC is less than $5 million, a pro-rata portion of such four percent
(4%). 

        Section 7.5    Limitations of Liability.    The Purchasers shall not be liable to the Company on account of: 

        (a)  The
delay or refusal of the LC Issuer to issue the LC; 

        (b)  The
action or inaction of the LC Issuer or a Purchaser on account of or in respect to, any LC; 

        (c)  The
performance by the beneficiary of the LC of that beneficiary's obligations to the Company; 

        (d)  The
form, sufficiency, correctness, genuineness, authority of any person signing, falsification or legal effect of, any documents called for under any LC if such
documents on their face appear to be in order; or 

        (e)  Any
inaccuracy, interruption, error or delay in transmission or delivery by post or electronic means, or for the inaccuracy of translation; 

except,
in each case, where there is a specific finding in a judicial proceeding (in which the Purchasers had an opportunity to be heard), that the subject action or omission to act was in bad faith,
grossly negligent or constituted willful misconduct, by or of the Purchasers. 

        Section 7.6    Cash Collateral.    The Purchasers shall, to the extent required by the LC Issuer, provide cash
collateral for the LC pro rata in proportion to each Purchaser's Commitment. 

        Section 7.7    ISP98.    Except to the extent otherwise expressly provided under this Section or agreed in
writing between the LC Issuer and the Company, the LC will be governed by the International Standby Practices ISP98 (adopted by the International Chamber of Commerce on April 6, 1998) and any
respective subsequent revisions thereof. 

        Section 7.8    Agreements of LC Issuer.    The Purchasers shall cause the LC Issuer to agree that: 

        (a)  any
action taken or omitted by the LC Issuer, its correspondents, or any advising, negotiating or paying bank with respect to the LC and the related drafts and
documents, shall be done in good faith and in compliance with law; and 

        (b)  the
Company shall not be required to indemnify the LC Issuer, its correspondents or any advising, negotiating or paying bank with respect to any LC for any claims,
damages, losses, liabilities, costs or expenses to the extent caused by (x) willful misconduct or gross negligence of the LC Issuer, its correspondents, or any advising, negotiating or paying
bank with respect to the LC in determining whether a request presented under the LC complied with the terms and conditions of the LC or (y) the LC Issuer's failure to pay under the LC after
presentation to it of a request strictly complying with the terms and conditions of such LC. 

        Section 7.9    Subordination to Outstanding Equipment Notes. 

        (a)  The
Purchasers, for themselves and their successors, each agree that the payment of the principal of or any other amounts due on the LC Notes is subordinated in right of
payment, to the extent and in the manner stated in this Section 7.9, to the prior payment in full of all Senior Debt. For purposes hereof, "Senior
Debt" means the principal of, interest on (including any interest 

16

 

accruing after the commencement of any bankruptcy proceeding or which would have accrued but for such proceeding whether or not allowed) and other amounts due on or with respect to $4 million
in aggregate principal amount of Equipment Notes issued to affiliates of Kayne Anderson Capital Advisors, L.P., Richard Kayne and Fred Kayne under the Bankruptcy Case Proceedings. 

        (b)  Anything
in the LC Note to the contrary notwithstanding, no payment or other distribution on account of principal of or redemption of, or other amounts due on the LC
Notes, and no redemption, purchase, or other acquisition of LC Notes, shall be made by or on behalf of the Company (i) unless full payment of amounts then due for principal and interest and of
all other amounts then due on all Senior Debt has been made or duly provided for in cash pursuant to the terms of the instrument, if any, governing such Senior Debt, (ii) if, at the time of
such payment, redemption, purchase or other acquisition, or immediately after giving effect thereto, there shall exist under any Senior Debt, or any agreement pursuant to which any Senior Debt is
issued, any default, which default shall not have been cured or waived and which default shall have resulted in the full amount of such Senior Debt being due and payable or (iii) if, at the
time of such payment, redemption, purchase or other acquisition, the Purchasers shall have received written notice from the holders of any Senior Debt or their representative or representatives (a
"Payment Blockage Notice") that there exists under such Senior Debt, or any agreement pursuant to which such Senior Debt is issued, any default, which
default shall not have been cured or waived, permitting the holders thereof to declare the full amount of such Senior Debt due and payable, but only for the period (the
"Payment Blockage Period") commencing on the date of receipt of the Payment Blockage Notice and ending (unless earlier terminated by notice
given to the Purchasers by the holders of such Senior Debt) on the earlier of (a) the date on which such event of default shall have been cured or waived or (b) 180 days from the
receipt of the Payment Blockage Notice unless payment or distribution with respect to the LC Notes is otherwise not then permitted. Upon termination of a Payment Blockage Period, payments on account
of principal of the LC Notes (other than amounts due and payable by reason of the acceleration of the maturity of the LC Notes) and redemptions, purchases or other acquisitions may be made by or on
behalf of the Company, if otherwise permitted hereunder. Notwithstanding anything herein to the contrary, (A) only one Payment Blockage Notice may be given during any period of 360 consecutive
days with respect to the same event of default and any other events of default on the same Senior Debt existing and known to the person giving such notice at the time of such notice and (B) no
new Payment Blockage Period may be commenced by the holder or holders of the same Senior Debt or their representative or representatives during any period of 360 consecutive days unless all events of
default which were the object of the immediately preceding Payment Blockage Notice, and any other event of default on the same Senior Debt existing and known to the Person giving such notice at the
time of such notice, have been cured or waived. 

        In
the event that, notwithstanding the provisions of this Section 7.9(b), payments are made by or on behalf of the Company in contravention of the provisions of this
Section 7.9(b), such payments shall be held by the Purchasers in trust for the benefit of, and shall be paid over to and delivered to, the holders of Senior Debt or their representative for
application to the payment of all Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt in full accordance with the terms of such Senior Debt, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Debt. 

        (c)  The
Company shall give prompt written notice to the Purchasers of any event of default under any Senior Debt or under any agreement pursuant to which any Senior Debt may
have been issued. 

        So
long as any Senior Debt remains unpaid, the Purchasers shall not accelerate, or cause to be accelerated, the LC Notes, or exercise any remedies with respect to any event of default 

17

 

occurring with respect to the LC Notes for a period of no less than 180 days after the Purchasers have delivered to the holders of the Senior Debt notice of the occurrence of any event of
default. If the event of default is cured or waived or shall have ceased to exist within such 180 day period (and payment of all amounts then due on the LC Notes without acceleration shall
constitute a cure of any Event of Default resulting from the failure to make such payment when due), then the Purchasers shall not be entitled to declare the LC Notes due prior to their stated
maturity because of such event of default. 

        (d)  Upon
(a) any acceleration of the principal amount due on the LC Note because of an event of default or (b) any distribution of assets of the Company upon
any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon
an assignment for the benefit of creditors or any other dissolution, winding up, liquidation or reorganization of the Company): 

        (i)  the
holders of the Senior Debt shall first be entitled to receive payment in full of the principal thereof, the interest thereon and any other amounts due thereon before
the Purchasers are entitled to receive payment on account of the principal of or any other amounts due on the LC Notes. 

        (ii)  any
payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as
reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent
provided in this Section with respect to the LC Note, to the payment in full without diminution or modification by such plan of all Senior Debt), to which the Purchaser would be entitled except for
the provisions of this Section, shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Senior Debt (or their
representative(s) or trustee(s) acting on their behalf), ratably according to the aggregate amounts remaining unpaid on account of the principal of or interest on and other amounts due on the Senior
Debt held or represented by each, to the extent necessary to make payment in full of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of
such Senior Debt; and 

        (iii)  in
the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or
securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment
of which is subordinate, at least to the extent provided in this Section with respect to the LC Notes, to the payment in full without diminution or modification by such plan of all Senior Debt) shall
be received by the Purchasers before all Senior Debt is paid in full in cash, such payment or distribution shall be held in trust for the benefit of, and be paid over to upon request by a holder of
the Senior Debt, the holders of the Senior Debt remaining unpaid (or their representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for application to the payment of such Senior
Debt until all such Senior Debt shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt. 

        Subject
to the payment in full of all Senior Debt, the Purchasers shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, property
or securities of the Company applicable to the Senior Debt until the principal of the LC Notes shall be paid in full. For purposes of such subrogation, no such payments or distributions to the holders
of Senior Debt of cash, property or securities that otherwise would have been payable or distributable to the Purchasers shall, as between the Company, its creditors other than the holders of Senior
Debt, and the Purchasers, be 

18

 

deemed to be a payment by the Company to or on account of the Senior Debt, it being understood that the provisions of this Section are and are intended solely for the purpose of defining the relative
rights of the Purchasers, on the one hand, and the holders of Senior Debt, on the other hand. 

        Nothing
contained in this Section is intended to or shall impair, as between the Company and its creditors, other than the holders of Senior Debt, the obligation of the Company, which is
absolute and unconditional, to pay to the Purchasers the principal of the LC Notes as and when the same shall become due and payable in accordance with the terms of the LC Notes, or is intended to or
shall affect the relative rights of the Purchasers and creditors of the Company, other than holders of Senior Debt, nor shall anything herein or therein prevent the Purchasers from exercising all
remedies otherwise permitted by applicable law upon default under the LC Notes, subject to the rights, if any, under this Section of the holders of Senior Debt in respect of cash, property and
securities of the Company received upon the exercise of any such remedy. Upon distribution of assets of the Company referred to in this Section, the Purchasers shall be entitled to rely upon a
certificate of the liquidating trustee or agent or other person making any distribution to the Purchasers for the purpose of ascertaining the persons entitled to participate in such distribution, the
holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to
this Section. 

        Section 8.    MISCELLANEOUS.

        Section 8.1.    Indemnification.    The Company hereby agrees to indemnify, exonerate and hold each Purchaser
and each of their respective partners and Affiliates, and their shareholders, officers, directors, employees and agents, free and harmless from and against any and all actions, causes of action,
suits, litigation, losses, liabilities and damages, investigations or proceedings instituted by any Governmental Body or any other Person, and expenses in connection therewith, including without
limitation reasonable attorneys' fees and disbursements, incurred by the indemnitee or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be
financed in whole or in part directly or indirectly with proceeds from the sale by the Company of any Securities hereunder (including in connection with the LC), or (b) the execution, delivery,
performance or enforcement of this Agreement or any instrument contemplated hereby by any of the indemnitees, except in each such case to the extent any such indemnified liabilities arise on account
of such indemnitee's gross negligence, willful misconduct or bad faith. 

        Section 8.2.    Expenses.    The Company and Purchasers each agree to pay all their own costs and expenses in
connection with the preparation, execution and delivery of this Agreement, the Securities and other instruments and documents to be delivered hereunder. 

        Section 8.3.    Amendments, Waiver and Consents.    Subject to the provisions of Section 1.3, any term
of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the
written consent of the Company and, to the extent that such amendment would materially adversely affect the rights of any Purchaser under this Agreement in the aggregate, the written consent of such
Purchaser. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including
securities into which such securities have been converted), each future holder of all such securities, and the Company. 

        Section 8.4.    Reliance on and Survival of Representations.    All agreements, representations and warranties
of the Company contained in this Agreement and in any certificates or other instruments delivered pursuant to this Agreement shall (i) be deemed to be material and to have been relied upon by
the Purchasers, notwithstanding any investigation heretofore or hereafter made by any Purchaser or on such Purchaser's behalf, and (ii) survive the execution and delivery of this Agreement and
the Securities, and shall continue in effect so long as any Security is outstanding. 

19

 

        Section 8.5.    Successors.    This Agreement shall bind and inure to the benefit of and be enforceable by the
Company, each of the Purchasers, and the Purchasers' respective successors, and, in addition, shall inure to the benefit of and be enforceable by each Person who shall from time to time be a Holder of
any of the Securities. None of the Purchasers or the Company may assign its respective rights under this Agreement. 

        Section 8.6.    Notices.    All notices and other communications provided for in this Agreement shall be in
writing and delivered, telecopied or mailed, first class postage prepaid, addressed: 

        (a)  If
to the Company: 

FAO, Inc.

2520 Renaissance Boulevard

King of Prussia, PA 19406

Attention: Legal

Facsimile: (610) 278-7804 

        with
a copy to: 

Fulbright &
Jaworski L.L.P.

865 S. Figueroa, 29th Floor

Los Angeles, CA 90017

Attention: Victor Hsu, Esq.

Facsimile: (213) 680-4518 

        (b)  If
to the Holders, at the addresses set forth on the applicable signature page (in the case of any Purchaser) and as may be designated by notice to the Company. 

        Any
such notice or communication shall be deemed to have been duly given when delivered, telecopied or mailed as aforesaid. Each party may designate by notice in writing a new address to
which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand, request, or communication which shall be mailed, delivered or transmitted in the
manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt,
the affidavit of messenger or (with respect to a telecopy) the confirmation being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by the
addressee upon presentation. 

        Section 8.7.    Counterparts.    This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and the same instrument. 

        Section 8.8.    Governing Law.    This Agreement and the Securities and (unless otherwise provided) all
amendments, supplements, waivers and consents relating hereto or thereto shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws
principles thereof. 

        Section 8.9.    Waiver of Jury Trial.    EACH PURCHASER, EACH HOLDER, BY ITS ACCEPTANCE OF ANY OF THE
SECURITIES, AND THE COMPANY, EACH HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE SECURITIES, OR ANY OTHER
AGREEMENTS RELATING TO THE SECURITIES OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is
intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract
claims, tort 

20

 

claims, breach of duty claims and all other common law and statutory claims. The Purchasers and the Company each acknowledge that this waiver is a material inducement to enter into a business
relationship, that each has already relied on the waiver in entering into this Agreement, and that each shall continue to rely on the waiver in their related future dealings. The Purchasers and the
Company further represent and warrant that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal
counsel. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE SECURITIES, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE SECURITIES. In the event of litigation, this Agreement may
be filed as a written consent to a trial by the Court. 

        Section 8.10    [Intentionally omitted] 

        Section 8.11    Entire Agreement.    This Agreement, including the other writings referred to herein (including
without limitation the effective versions of the Exhibits to this Agreement) or delivered pursuant hereto, constitutes the entire agreement among the parties hereto with respect to the transactions
contemplated herein, and it supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein. 

        Section 8.12    Exculpation Among Purchasers; Due Diligence.    Each Purchaser acknowledges that such Purchaser
is not relying upon any Person other than the Company in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons,
officers, directors, partners, agents or employees of any Purchaser shall be liable for any action taken or omitted to be taken at any time by any of them in connection with the Series I
Preferred Stock (and the Common Stock issued upon conversion of the Series I Preferred Stock). Each Purchaser acknowledges that it is aware that the Company filed for protection under chapter
11 of the federal Bankruptcy Code on January 13, 2003 and will be emerging from bankruptcy simultaneously with the consummation of this Agreement. In addition, each Purchaser acknowledges that
it is relying only on the representations and warranties of the Company set forth in this Agreement and the Registration Rights Agreements and that it has had an opportunity to request and has
received any information it wanted to evaluate in performing its diligence and making its decision to purchase the Series I Preferred Stock. 

[Remainder
of page intentionally left blank] 

21

        Each Purchaser is requested to sign the form of acceptance in the space provided below whereupon this Agreement shall become a binding agreement between such Purchaser and the Company. 

	 	 	Very truly yours,
	

 	
 	

FAO, INC.
	

 	
 	

By:	
 	

/s/  RAYMOND SPRINGER      
 Raymond P. Springer

Executive Vice President

        The foregoing Agreement is hereby accepted as of the date first above written: 

	 	 	FRED KAYNE,

an Individual
	

 	
 	

By:	
 	

/s/  FRED KAYNE      

	

 	
 	

1800 Avenue of the Stars, Suite 310

Los Angeles, CA 90067

        The foregoing Agreement is hereby accepted as of the date first above written: 

	 	 	SAKS INCORPORATED,

a Tennessee corporation
	

 	
 	

By:	
 	

/s/  CHARLES J. HANSEN      
 Charles J. Hansen

Senior Vice President and Deputy General Counsel
	

 	
 	

Saks Incorporated

750 Lakeshore Parkway

Birmingham, AL 35211

        The foregoing Agreement is hereby accepted as of the date first above written: 

	 	 	KAYNE ANDERSON CAPITAL ADVISORS, LP,

a California limited partnership
	

 	
 	

By	
 	

Kayne Anderson Investment Management, Inc.

a Nevada corporation
	

 	
 	

 	
 	

By	
 	

/s/  DAVID SHLADOVSKY      
 David Shladovsky

General Counsel
	

 	
 	

 	
 	

Kayne Anderson Capital Advisors, LP

1800 Avenue of the Stars, 2nd Floor

Los Angeles, CA 90067

        The foregoing Agreement is hereby accepted as of the date first above written: 

	 	 	RICHARD KAYNE,

an Individual
	

 	
 	

By:	
 	

/s/  RICHARD KAYNE      

	

 	
 	

Kayne Anderson Capital Advisors, LP

1800 Avenue of the Stars, 2nd Floor

Los Angeles, CA 90067

        The foregoing Agreement is hereby accepted as of the date first above written: 

	 	 	HANCOCK PARK CAPITAL II LP,

a California limited partnership
	

 	
 	

By	
 	

Hancock Park Associates III
	

 	
 	

 	
 	

By	
 	

/s/  M.J. FOURTICQ      
 M.J. Fourticq

General Partner
	

 	
 	

 	
 	

Hancock Park Associates

10323 Santa Monica Blvd., Suite 101

Los Angeles, CA 90025

        The foregoing Agreement is hereby accepted as of the date first above written: 

	 	 	PCG Tagi, LLC (Series H)
	

 	
 	

By:	
 	

/s/  GREGG W. RITCHIE      
 Gregg W. Ritchie

Chief Financial Officer
	

 	
 	

c/o Pacific Capital Group

360 North Crescent Drive, North Building

Beverly Hills, CA 90210

  

 
 

SCHEDULE I    
  

	PURCHASERS
 
	 	AMOUNT OF

SHARES

PURCHASED
	 	PRICE

	Saks Incorporated	 	5,000	 	$	5,000,000
	Fred Kayne	 	5,000	 	$	5,000,000
	Kayne Anderson Capital Advisors, L.P.	 	7,000	 	$	7,000,000
	Richard Kayne	 	6,000	 	$	6,000,000
	Hancock Park Capital II, L.P.	 	5,000	 	$	5,000,000
	PCG Tagi, LLC (Series H)	 	2,000	 	$	2,000,000

S-1

 
 
 

Schedule 2.3    
  

 
  Capitalization    
  

        The equity capitalization of FAO is expected to be as follows on the Closing Date: 

	Security
 
	 	Common Equivalents

	Series I Convertible Preferred Stock*	 	296,116,962
	Common Stock**	 	39,496,548
	5 year Warrants exercisable at $.13 per share of Common Stock***	 	7,418,512
	 	 	

	 	Total:	 	343,513,440
	 	 	

	*
	Assumes
30,000 shares of Series I Preferred Stock are issued under the Agreement at a Conversion Price of $.13 per share. Includes $4 million in aggregate principal amount
of Equipment Notes received by Kayne Anderson affiliates and Fred Kayne in compromise of their claims in the Bankruptcy Case Proceedings that may be converted into Series I Preferred Stock.
Includes Preferred Stock shares issued to Kayne Anderson affiliates, Fred Kayne and KBB Retail Associates, Inc.

	**
	Includes
Common Stock to be received by unsecured creditors in compromise of their claims in the Bankruptcy Case Proceedings and existing Common Stock.

	***
	Includes
warrants to purchase Common Stock to be granted to Morgan Joseph and Kayne Anderson affiliates and Fred Kayne. 

       

        Until
the Closing Date, FAO will not issue additional equity not shown in this Schedule except pursuant the Agreement. 

S-2

  

 
 

EXHIBIT A    
  

 
  CERTIFICATE OF DESIGNATION OF PREFERENCES
  OF
  SERIES I CONVERTIBLE PREFERRED STOCK
  OF
  FAO, INC.
  (Pursuant to Section 151 of the

Delaware General Corporation Law)    

The
undersigned, Jerry R. Welch and Raymond P. Springer, hereby certify that (1) they are the President and Chief Executive Officer, and the Chief Financial Officer and Secretary, respectively,
of FAO, Inc., a Delaware corporation (the "Corporation"), and (2) under authority given by the Corporation's Certificate of Incorporation (the
"Certificate of Incorporation"), the Board of Directors of the Corporation has duly adopted the following recitals and resolutions: 

WHEREAS,
the Certificate of Incorporation provides for a class of shares known as "Preferred Stock," issuable from time to time in one or more series; 

WHEREAS,
the Board of Directors of the Corporation is authorized to determine the rights, preferences, privileges and restrictions granted to or imposed on any wholly unissued series of Preferred
Stock, to fix the number of shares constituting any such series and to determine the designation thereof, or any of them; 

WHEREAS,
the Certificate of Incorporation provides that the Corporation is authorized to issue [Five Million (5,000,000)] shares of Preferred Stock; 

WHEREAS,
the Corporation has no shares of Preferred Stock currently outstanding and the Board of Directors of the Corporation desires to determine the rights, preferences, privileges and restrictions
relating to a series of Preferred Stock and the number of shares constituting and the designation of such series; and 

WHEREAS,
the Board of Directors of the Corporation has determined that Fifty Thousand (50,000) shares of Preferred Stock shall be designated as Series I Convertible Preferred Stock; 

NOW,
THEREFORE, BE IT RESOLVED, that pursuant to Article Sixth of the Certificate of Incorporation, the Board of Directors hereby creates the Corporation's Series I Convertible Preferred Stock
and determines the designation of, number of shares constituting, and the rights, preferences, privileges and restrictions relating to the Series I Convertible Preferred Stock as follows: 

I.    Designation
and Amount.    The number of shares constituting the Series I Convertible Preferred Stock, par value $0.001 per share (the
"Series I Preferred Stock"), shall be Fifty Thousand (50,000) shares. 

	II.
	Dividends
and Distributions. 

A.    Dividends.    The
holders of Series I Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of
the Corporation, out of funds of the Corporation legally available therefor, on any shares of Series I Preferred Stock that have not been converted pursuant to
Section IV, dividends, at the rate of sixty dollars ($60.00) per share per annum, or 6% per annum (the "Dividend Rate") of the
liquidation preference of one thousand dollars ($1,000.00) per share, on the Series I Preferred Stock, which dividends shall be cumulative, shall accrue on a daily basis without interest from
the date of issuance of the Series I Preferred Stock (or, in the case of dividends on PIK Shares (as defined below), from the date on which such PIK Shares were payable in lieu of cash
dividends), and shall be payable semi-annually in arrears on December 1 

A-1

 

and June 1 of each year (each a "Series I Payment Date"), commencing December 1, 2003 (except that if any such date is not a Business Day, then such
dividend shall be payable on the next succeeding day that is a Business Day) to the holders of record as they appear on the stock transfer books of the Corporation on each November 15 and
May 15 (each a "Record Date"). The accumulation and accrual of dividends on the Series I Preferred Stock shall occur regardless of whether the Corporation
shall have funds legally available for the payment of dividends. The amount of dividends payable per share of Series I Preferred Stock for the initial dividend period and any period shorter
than a full semi-annual dividend period shall be computed on the basis of a 360-day year consisting of twelve 30-day months.
Prior to December 23, 2005 the Corporation may, in lieu of the payment of dividends in cash on the Series I Preferred Stock, pay dividends on all outstanding shares of Series I
Preferred Stock through the issuance of additional shares (or fractions thereof) of Series I Preferred Stock ("PIK Shares"), having an aggregate liquidation
preference equal to the amount of such dividends and a conversion price equal to the Closing Price (as defined herein) on the relevant Series I Dividend Payment Date. On each such
Series I Payment Date that the Corporation is to pay dividends in PIK Shares, the Corporation shall issue and deliver PIK Shares to the holders of Series I Preferred Stock entitled to
such dividend payments or make a record of such dividend on books kept by the Corporation for such purpose and, upon request, issue and deliver PIK Shares to evidence any such record entry to the
holder making such request. The issuance of such PIK Shares shall constitute "payment" of the related dividend for all purposes of this Certificate of Designation. 

In
no event, so long as any Series I Preferred Stock shall remain outstanding, shall (i) any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, any
Common Stock, or any other capital stock of the Corporation ranking junior as to the payment of dividends ("Junior Dividend Stock"), other than a dividend or distribution
payable only in shares of Common Stock or Junior Dividend Stock, unless and until all accrued and unpaid dividends on the Series I Preferred Stock, including the full dividend for the then
current period, shall have been paid or declared and set apart for payment, (ii) (A) except as set forth in clause (B) following, any dividend whatsoever be declared or paid upon,
nor shall any distribution be made upon, any other capital stock of the Corporation ranking on a parity as to the payment of dividends (the "Parity Dividend Stock"), for
any period unless and until cumulative dividends have been, or contemporaneously are, paid or declared and set apart for such payment of the Series I Preferred Stock and such Parity Dividend
Stock for all dividend periods terminating on or prior to the date of payment of such full cumulative dividends and (B) when dividends are not paid in full upon the Series I Preferred
Stock and the Parity Dividend Stock, all dividends paid or declared and set aside for payment upon shares of Series I Preferred Stock shall be paid or declared and set aside for payment pro
rata so that the amount of dividends paid or declared and set aside for payment per share on the Series I Preferred Stock and the Parity Dividend Stock shall in all cases bear to each other the
same ratio that accrued and unpaid dividends per share on the shares of Series I Preferred Stock and Parity Dividend Stock bear to one another, (iii) without the written consent of the
Majority Holders, any shares of Common Stock, Junior Dividend Stock or Parity Dividend Stock be purchased or redeemed by the Corporation, nor (iv) any moneys be paid to or made available for a
sinking fund for the purchase or redemption of any Common Stock, Junior Dividend Stock or Parity Dividend Stock. No cash dividend shall be declared or paid on any Common Stock unless at the same time
a like proportionate dividend shall be declared or paid on the Series I Preferred Stock, to be determined on an as-converted basis with each holder of Series I Preferred
Stock receiving such proportionate dividend based on the number of shares of Common Stock into which its shares of Series I Preferred Stock are convertible. 

B.    Liquidation
Preference.    In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the
holders of Series I Preferred Stock shall be entitled to receive with respect to each share, out of the assets of the Corporation, whether such 

A-2

 

assets are stated capital or surplus of any nature, an amount equal to the dividends accrued and unpaid thereon to the date of final distribution to such holders, whether or not declared, plus a sum
equal to One Thousand Dollars ($1,000.00) per share (the "Series I Preferred Liquidation Preference"), and no more, before any payment shall be made or any assets
distributed to holders of Common Stock or any other capital stock of the Corporation ranking junior as to the payment upon liquidation, dissolution or
winding up including, without limitation, all series of Preferred Stock hereafter issued by the Corporation (unless such later issued series has parity or is senior in priority, and has been permitted
under Section III) (collectively, "Junior Liquidation Stock"). The Series I Preferred Stock shall be senior as to liquidation to
the Common Stock and all Junior Liquidation Stock. In the event the assets of the Corporation available for distribution to shareholders upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, shall be insufficient to pay in full the amounts payable with respect to the Series I Preferred Stock and any other class or series of the
Corporation's capital stock which has or may hereafter have parity as to liquidation rights with the Series I Preferred Stock (the "Parity Liquidation Stock"), the
holders of the Series I Preferred Stock and the holders of the Parity Liquidation Stock, if any, shall share ratably in any distribution of assets of the Corporation in proportion to the full
respective preferential amounts to which they are entitled (but only to the extent of such preferential amounts). After payment in full of the liquidation preferences of the Series I Preferred
Stock, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a merger, consolidation, or other business combination of
the Corporation with or into another corporation or other entity nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property shall be considered a
liquidation, dissolution or winding up of the Corporation for purposes of this Section II.B. (unless in connection therewith the liquidation of the Corporation is
specifically approved by the shareholders of the Corporation). The holder of any shares of Series I Preferred Stock shall not be entitled to receive any payment owed for such shares under this
Section II.B. until such holder shall cause to be delivered to the Corporation (i) certificate(s) representing such shares of Series I Preferred Stock
and (ii) transfer instruments satisfactory to the Corporation and sufficient to transfer such shares to the Corporation free and clear of any adverse interest. 

III.    Voting
Rights.    The holders of the Series I Preferred Stock shall be entitled to vote with the holders of the Common Stock with
respect to each matter on which the holders of the Common Stock are entitled to vote, and such vote shall be determined on an as-converted basis with each share of Series I
Preferred Stock providing its holder with a number of votes equal to the number of shares of Common Stock into which such share of Series I Preferred Stock is convertible. 

        In
addition, consent of the Majority Holders (unless the consent of a greater percentage is required by applicable law or the Certificate of Incorporation as then in effect), voting
together as a single class, will be required for (a) each amendment of the Certificate of Incorporation as then in effect which adversely affects the relative rights, preferences,
qualifications, limitations or restrictions of the Series I Preferred Stock, (b) any action that, except as contemplated herein, creates any new class or series of shares having
preference over or being on a parity with the Series I Preferred Stock in respect of the payment of dividends, upon liquidation, dissolution or winding up of the Corporation, or (c) any
reclassification of the Series I Preferred Stock. Notwithstanding the foregoing, no amendment of this Certificate of Designation shall affect the conversion rights granted under
Section IV.A. with respect to any non-consenting holder of Series I Preferred Stock and no amendment shall take effect as to any such holder prior to a date that is 10
Business Days after receipt by such holder of notice from the Corporation of requisite consent to such amendment. Except for such consent rights and such voting rights as may be provided by applicable
law or herein, the Series I Preferred Stock shall have no voting rights as a separate series except the right to vote as a separate series within the class of preferred stock as to any matters
regarding the modification of the rights, privileges or terms of the Series I Preferred Stock. Any required vote of the Series I Preferred Stock as a separate series will be 

A-3

 

accomplished by the vote of a majority of the shares of such series. A class vote on the part of the Series I Preferred Stock specifically shall not be required (except as otherwise required
by law or resolution of the Corporation's Board of Directors) in connection with: (a) the authorization, issuance or increase in the authorized amount of any shares of any other class or series
of stock that ranks junior to the Series I Preferred Stock in respect of the payment of dividends, upon liquidation, dissolution or winding up of the Corporation or (b) the
authorization, issuance or increase in the amount of any notes, bonds, mortgages, debentures or other obligations of the Corporation not convertible into or exchangeable, directly or indirectly, for
stock ranking prior to the Series I Preferred Stock in respect of the payment of dividends, upon liquidation, dissolution or winding up of the Corporation. 

        In
addition, the holders of the shares of Series I Preferred Stock shall have such other voting rights as otherwise provided herein, including without limitation,
Section V. 

IV.    Conversion

A.    Voluntary
Conversion. 

(i)    Right
to Convert.    Any time, and from time to time, each share of Series I Preferred Stock shall, at the option of the holder thereof,
be convertible into that number of fully paid and non-assessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) obtained by
dividing the Series I Preferred Liquidation Preference by [            ] cents
($0.[    ])1, as adjusted from time to time as provided herein (the "Conversion Rate")
(provided that the Conversion Rate for PIK Shares shall be established pursuant to Section II.A.) and by surrender of such share of Series I Preferred Stock
so to be converted in the manner provided in Section IV.A.(ii). The Series I Preferred Liquidation Preference divided by the Conversion Rate, as adjusted
from time to time as provided herein, shall be referred to herein as the "Conversion Price." 

1  This blank is filled by a number equal to 13 cents multiplied by the reverse stock split ratio. For example, if the reverse
stock split ratio is 1:15 this blank would be filled with $1.95. 

(ii)    Mechanics
of Voluntary Conversion.    In order to exercise the voluntary conversion privilege set forth in
Section IV.A., the holder of one or more shares of Series I Preferred Stock to be converted shall surrender such shares to the Secretary of the Corporation
at the Corporation'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 the Corporation that such holder elects to convert all or a specified number of such shares 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 Common Stock to be issued, together with instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder
or his duly authorized attorney. As promptly as practicable after the surrender of such shares of
Series I Preferred Stock and the receipt of the Conversion Notice, instruments of transfer and funds to pay any transfer or similar tax, if any, as aforesaid, the Corporation shall issue and
deliver at such offices to such holder of Series I Convertible Preferred Stock, or to his nominee or nominees, a certificate or certificates representing the number of shares of Common Stock
and a check or cash with respect to any fractional interest in a share of Common Stock to which such holder shall be entitled as aforesaid in accordance with
Section IV.C. and, if less than the full number of shares of Series I Preferred Stock evidenced by such surrendered certificate or certificates are being
converted, a new certificate or certificates, of like tenor, for the number of shares of Series I Preferred Stock evidenced by such surrendered certificate less the number of such shares of
Series I Preferred Stock being converted. Any conversion made at the election of a holder of Series I Preferred Stock shall be deemed to have been made immediately prior to the close of
business on the date of such 

A-4

 

surrender of such shares to be converted, and the person or persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of
such Common Stock on such date. 

B.    Mandatory
Conversion. 

(i)    Trading
Price Level.    On or after April 15, 2008, if the Closing Price per share of the Common Stock is 200% of the Conversion Price or
greater for 20 consecutive trading days, and if all accrued but unpaid dividends on the Series I Preferred Stock shall have been paid in full, all outstanding shares of the Series I
Preferred Stock (whether issued and outstanding or merely recorded as PIK Shares) shall automatically convert into fully paid and nonassessable shares of Common Stock at the Conversion Rate. For
purposes of this Certificate of Designation, the term "Closing Price" on any day shall mean the last reported sales price on such day or, in case no such sale takes place
on such day, the average of the reported closing high and low quotations, in each case on the principal national securities market or quotation system on which the Common Stock is then traded or
quoted, or, if the Common Stock is then not so traded or quoted, the average of the high bid and low-asked quotations of the Common Stock in the over-the-counter
market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or, if no such quotations are available, the fair market
value of the Common Stock as determined by any New York Stock Exchange member firm selected from time to time by the Board of Directors for such purpose. 

(ii)    Cash
Payment of Remaining Dividends.    Prior to April 15, 2008, the Corporation may convert any or all of the outstanding shares of
Series I Preferred Stock into fully paid and nonassessable shares of Common Stock at the Conversion Rate, upon the payment to the holders of such Series I Preferred Stock of cash in an
amount equal to all accrued but unpaid dividends thereon to the date of conversion at the Dividend Rate plus the net present value (discounted at the Dividend Rate) of all dividends that would have
accrued with respect to such Series I Preferred Stock between the date of conversion and April 15, 2008 pursuant to Section II.A hereof, assuming in each case that such dividends
were payable in cash. 

(iii)    Mechanics
of Mandatory Conversion.    Notice of any mandatory conversion of the Series I Preferred Stock ("Mandatory
Conversion Notice") specifying the time of conversion, the Conversion Rate and
the Closing Price history of the Common Stock or the cash payment of remaining dividends payable as PIK Shares, as applicable, and the paragraph pursuant to which such conversion is required, shall be
mailed by certified or registered mail, return receipt requested, at the address for such holder shown on the Corporation's records. In the case of mandatory conversion made at the election of the
Corporation, such Mandatory Conversion Notice shall be mailed not more than one hundred twenty (120) nor less than thirty (30) days prior to the date on which such conversion is to be
made, with respect to the Series I Preferred Stock. Upon mailing any Mandatory Conversion Notice, the Corporation shall issue and deliver at its principal executive office to each holder of
Series I Preferred Stock who returns his Series I Preferred Stock certificate, or to his nominee or nominees, a certificate or certificates representing the number of shares of Common
Stock and a check or cash with respect to any fractional interest in a share of Common Stock to which such holder shall be entitled as aforesaid in accordance with
Section IV.C. Any conversion made at the election of the Corporation shall be deemed to have been made immediately prior to the close of business on the date of
mailing of the Mandatory Conversion Notice, and the person or persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of
such Common Stock on such date. On the date of such mailing, the certificates representing the Series I Preferred Stock shall be null and void and shall no longer represent an interest in the
Corporation and dividends shall cease to 

A-5

 

accrue thereon. Any Mandatory Conversion Notice that is mailed as provided in this subsection (iii) shall be conclusively presumed to have been duly given, whether or not the holder of the
Series I Preferred Stock receives such notice; and failure to give such notice or any defect in such notice shall not affect the validity of the proceedings for the mandatory conversion of
Series I Preferred Stock. 

C.    Fractional
Shares.    No fractional shares or scrip representing fractions of shares of Common Stock shall be issued upon conversion of the
Series I Preferred Stock. In lieu of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of any shares of Series I Preferred
Stock, the Corporation shall pay to the holder of such shares an amount in cash (computed to the nearest cent) equal to the closing price of the Common Stock (as reported on the national exchange or
quotation system on which the Common Stock is then traded or, if the Common Stock is not then traded on such an exchange or system, as determined in good faith by the Board of Directors of the
Corporation) on the Business Day next preceding the day of conversion, multiplied by the fractional interest that otherwise would have been deliverable upon conversion of such shares. 

D.    Adjustments
to Conversion Rate.    In the event that the Corporation sells Common Stock at a price below the fair market value of such Common
Stock or issues options to purchase Common Stock at a price below the fair market value of the Common Stock on the date the option is granted (as determined by the Corporation's Board of Directors or
any special committee of independent directors thereof), the Conversion Rate shall be adjusted to equal the product obtained by  multiplying the Conversion
Rate in effect immediately prior to such sale (or issuance) by the quotient obtained by
dividing (i) the fair market value of a share of Common Stock at the time of such sale (or issuance)  by (ii) the per share price at which such
Common Stock was sold (or in the case of an option, the lowest price at which such option may be
exercised). 

In
the event of any split, distribution, recapitalization or combination of the Common Stock, or other similar event, then the Conversion Rate shall be adjusted so that the holder of a share of
Series I
Preferred Stock will receive upon surrendering such share for conversion the aggregate percentage of the outstanding shares of Common Stock that such holder would have received if the share had been
submitted for conversion immediately prior to such split, distribution, recapitalization, combination, or other similar event. 

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

E.    No
Impairment.    The Corporation 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 Corporation but will at all times in good faith assist in
the carrying out of all the provisions of this Section IV and in the taking of all such action as may be necessary or appropriate in order to protect the conversion
rights of the holders of shares of Series I Preferred Stock against impairment. Without limiting the generality of the foregoing, the Corporation (i) will take all such action as may be
necessary or appropriate in order that the Corporation may validly and legally issue fully paid nonassessable shares of Common Stock on the conversion of the Series I Preferred 

A-6

 

Stock, and (ii) will not take any action which results in any adjustment of the Conversion Rate if the total number of shares of Common Stock issuable after the action upon the conversion of
all of the shares of Series I Preferred Stock will exceed the total number of shares of Common Stock then authorized by the Certificate of Incorporation and available for the purpose of issue
upon such conversion. 

F.    Certificate
as to Adjustments.    Whenever there shall be an adjustment to the Conversion Rate pursuant to Section IV
(D), the Corporation shall forthwith notify the holders of Series I Preferred Stock of such adjustment, setting forth in reasonable detail the event requiring the adjustment and
the method by which such adjustment was calculated. The Corporation shall, as promptly as practicable following its receipt of the written request of any holder of shares of Series I Preferred
Stock, furnish or cause to be furnished to such holder a like notice. 

G.    Notices
of Record Date.    In the event of any taking by the Corporation 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, the Corporation shall mail to each holder of
Series I Preferred Stock 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. 

V.    Events
of Default and Right to Elect Directors.    If the Corporation is in material breach of any of its obligations under this Certificate of
Designation, and the Corporation has not cured such breach within 30 days (ten days in the case of any payment default) of receipt of written notice thereof (an "Event of
Default"), then the holders of the Series I Preferred Stock shall have the right, voting together as a single class, to elect the smallest number of directors constituting a
majority of the authorized number of directors of the Corporation, and the holders of the Common Stock shall have the right to elect the remaining members of the Board of Directors. Such special
voting rights shall terminate when all Events of Default have been cured. At any time after the right to elect directors is vested in Series I Preferred Stock, and at any time after such
special voting rights terminate, the holders of 5% or more of the outstanding Series I Preferred Stock, as a single class, or the holders of 5% or more of the outstanding Common Stock, as the
case may be, shall have a right to call a special meeting of shareholders for the election of directors. Such right shall be exercisable by delivering a written request for a special meeting to the
Corporation at its principal executive office or to any senior officer of the Corporation. Within ten days after delivery of such written request, the Board of Directors shall call a special meeting
of shareholders for the election of directors, to be held on not less than 30 days after receipt of the written request for a special meeting. If the notice is not given within 20 days
after receipt of the request, the shareholders requesting the meeting may also call such meeting and for such purpose shall have access to the stock books and records of the Corporation. Upon the
election of directors by the holders of the Series I Preferred Stock at a special meeting or by written consent, the terms of office of all persons who were directors immediately prior thereto
shall terminate, and the directors elected by the Series I Preferred Stock shall constitute the directors of the Corporation until the next annual meeting or until a subsequent meeting of
holders of Common Stock held after termination of the special voting rights of the Series I Preferred Stock. Upon the election of directors by the holders of the Common Stock at a special
meeting held after termination of the special voting rights of the Series I Preferred Stock or by written consent made after such termination, the terms of office of all persons who were
directors immediately prior thereto shall terminate, and the directors elected by the holders of Common Stock at the special meeting by the holders of the Common Stock shall constitute the directors
of the Corporation until the next annual meeting. 

A-7

 

VI.    Miscellaneous.
This Certificate of Designation shall also be governed by the following: 

A.    Amendment
and Waiver.    This Certificate of Designation may be amended or otherwise altered in accordance with applicable law and
Section III. No amendment, modification or waiver of any provision hereof shall extend to or affect any obligation not expressly amended, modified or waived or
impair any right consequent thereon. No course of dealing, and no failure to exercise or delay in exercising any right, remedy, power or privilege hereunder, shall operate as a waiver, amendment or
modification of any provision of this Certificate of Designation. 

B.    Reacquired
Shares.    Any shares of Series I Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such shares shall, upon their cancellation, become authorized but unissued shares of Preferred Stock of the Corporation,
undesignated as to series. 

C.    Registration.    The
Corporation shall keep at its principal executive office (or such other place as the Corporation reasonably designates) a
register for the registration of Series I Preferred Stock. Upon the surrender of any certificate designated as Series I Preferred Stock at such place, the Corporation shall, at the
request of the registered holder of such certificate, execute and deliver a new certificate or certificates in exchange therefor representing in the aggregate (i) if prior to the conversion
thereof, the number of shares of Series I Preferred Stock represented by the surrendered certificate (and the Corporation forthwith shall cancel such surrendered certificate), and
(ii) if on or after the conversion thereof, the number of shares of Common Stock into which the shares of Series I Preferred Stock represented by such certificate have been converted, in
each case subject to the requirements of applicable securities laws and any other applicable restrictions. Each such new certificate shall be registered in such name as shall be requested by the
holder of the surrendered certificate. 

D.    Replacement.    Upon
receipt of evidence reasonably satisfactory to the Corporation (an affidavit and indemnity of the registered holder,
including a bond if so requested by the Corporation, shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Common
Stock, Series I Preferred Stock and, in the case of loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the registered holder is a
financial institution, its own agreement of indemnity shall be satisfactory), or, in the case of mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and
deliver in lieu of such certificate (i) if prior to the conversion thereof, a new certificate of like kind representing the number of shares of Series I Preferred Stock represented by
such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate and (ii) if on or after the conversion thereof, a new
certificate representing the number of shares of Common Stock represented by such lost, stolen or destroyed certificate and dated as of the applicable conversion date. 

E.    Definitions.    The
following terms shall have the following meanings, which meanings shall be equally applicable to the singular and plural
forms of such terms: 

"Affiliate"
of a Person means a Person that directly or indirectly controls, or is controlled by, or is under common control with such 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. 

"Business
Day" means any day which is not a Saturday or a Sunday or a public holiday or a day on which banks are required or permitted to close under the laws of the State
of California. 

"Common
Stock" means the Common Stock of the Corporation, par value $0.001 per share. 

A-8

 

"Conversion
Rate" shall have the meaning set forth in Section IV.A.(i). 

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

"Kayne
Holders" means Fred Kayne, Richard Kayne and their respective affiliates and successors. 

"Majority
Holders" means Holders that hold not less than (sixty-six and sixty-seven one hundredths percent (66.67%) of the outstanding shares of
Series I Preferred Stock. 

"Person"
shall include an individual, a corporation, a limited liability company, an association, a partnership, a limited liability partnership, a trust or estate, a
government or any agency or political subdivision thereof, or any other entity. 

"Preferred
Stock Issuance Date" means the date on which the Corporation first issues any shares of Series I Preferred Stock. 

F.    Preemptive
Rights.    The Series I Preferred Stock is not entitled to any preemptive or subscription rights in respect of any securities
of the Corporation. 

VII.    Notices.    All
notices provided hereunder shall be in writing and shall be delivered by courier, messenger, registered or certified mail,
return receipt requested, postage prepaid or by facsimile, receipt confirmed by sender and will be deemed to have been given when so mailed (or receipt confirmed in the case of a facsimile)
(i) to the Corporation, at its principal executive office and (ii) to the holder of Series I Preferred Stock, at such holder's address as it appears in the stock records of the
Corporation (unless otherwise indicated by any such holder in notice to the Corporation conforming with this Section VII). 

VIII.    Common
Stock Reserved.    The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock such
number of shares of Common Stock as shall from time to time be sufficient to effect conversion of the Series I Preferred Stock. 

        IN
WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Corporation by its duly authorized officers. 

	Date: April     , 2003	 
	 	
 Jerry R. Welch

President and Chief Executive Officer

	Date: April     , 2003	 
	 	
 Raymond P. Springer

Secretary and Chief Financial Officer

A-9

  

 
 
 
EXHIBIT B
  (face of security) 

	Number	 	Shares

 
 

FAO, INC., a Delaware Corporation
  
    Series I Convertible Preferred Stock    
  

Authorized:
50,000 shares of Series I Convertible Preferred Stock 

        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. 

        THE
SECURITIES, AND THE COMMON STOCK ISSUABLE UPON CONVERSION THEREOF, ARE SUBJECT TO THE PROVISIONS OF A SHAREHOLDERS AGREEMENT AMONG THE ISSUER AND THE ORIGINAL PURCHASERS OF THE
SECURITIES. 

       

        This Certifies that
                                         
                                          
              is the holder of                      shares of
the Capital Stock transferable only on the books of the Corporation by the holder hereof in person or by attorney for such holder upon surrender of this Certificate properly endorsed. 

        In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal
to be hereunto affixed 

        This
             day of
                                     A.D. 2003 

	
	 	

	Secretary	 	President

B-1

 
(reverse
of security) 

FOR
VALUE RECEIVED
                                         
        HEREBY SELL, ASSIGN AND

TRANSFER UNTO: 

                                         
                                          
                                          
                                         
      

 

(Insert
Social Security or other

identifying number of assignee) 

                                        
                                
SHARES REPRESENTED BY THE WITHIN

CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT

                                         
                                          
                                      ATTORNEY TO

TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED

CORPORATION, WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. 

DATED
                                         
                         , 20         

IN
PRESENCE OF
                                         
               
 

                                        
                                          
    

Notice:
The signature on this Assignment must correspond with the name as written upon the face of the Certificate in every particular without alteration or enlargement or any change whatever. 

 
 

Conversion Notice    
  

To
convert all of the shares represented by this Certificate check the box: o 

To
convert only a part of the shares represented by this Certificate state the number of shares to be converted:
                                         
                                          
   
 

The
undersigned hereby irrevocably elects to convert the number of shares indicated above of the Series I Convertible Preferred Stock represented by this Certificate into shares of the Common
Stock of
the Corporation (as such shares may be constituted on the conversion date) in accordance with the provisions of the Certificate of Incorporation of the Corporation, and amendments thereto, and directs
that the shares deliverable upon the conversion be registered in the names(s) of the undersigned and delivered together with a check as to payment for any fractional shares and a certificate
representing any shares of Series I Convertible Preferred Stock not converted to the undersigned unless a different name(s) has been indicated in the assignment form on this Certificate or in
an assignment on any other permitted form which accompanies this Conversion Notice. 

	Dated:
                                      ,
20        	 	                                        
        
	

Fill in for the Registration of Shares	
 	

                                         
       
	 	 	(Signatures)
	                                        
        

Name	 	Notice: The signature on this Conversion Notice must correspond with the name as written upon the face of the Certificate in every particular without alteration or enlargement or any change whatever.
	                                        
        

Address (including Zip)	 	 

B-2

  

 
 

EXHIBIT C    
  

 
 

REGISTRATION RIGHTS AGREEMENT    
  

        THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of April     , 2003 between FAO, Inc., a
Delaware corporation (the "Company"), and the undersigned and those who may purchase the Securities (as defined) in the future (each individually a
"Purchaser," and collectively the "Purchasers"). 

        WHEREAS,
the Company and certain of the Purchasers have entered into a Securities Purchase Agreement dated as of the date hereof (the "Purchase Agreement");
and 

        WHEREAS,
pursuant to the Purchase Agreement, the Company and such Purchasers desire to enter into this Agreement to provide such Purchasers with certain registration rights and to
address related matters; 

        NOW,
THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, the parties agree as follows: 

	1.
	Registration
Rights.

	1.1
	Demand
Registration Rights.

	(a)
	Subject
to the provisions of this Section 1.1, at any time after the date hereof, Purchasers holding (i) shares of the Company's Common
Stock, $.001 par value (the "Common Stock") issued or issuable upon the conversion of at least $5 million in aggregate liquidation preference of Series I
Convertible Preferred Stock (the "Series I Preferred Stock") issued by the Company to certain of the Purchasers pursuant to the Purchase Agreement (the number of
such shares being the "Registration Threshold Number"), or (ii) the Registration Threshold Number of shares of Common Stock which holders had the benefit of registration rights prior to the
Company's January 13, 2003 bankruptcy filing and which shares of Common Stock cannot be resold pursuant to Rule 144(k) promulgated under the Securities Exchange Act of 1934 (the
"Prior Registrable Common Stock," and collectively with the Series I Preferred Stock, the "Securities"), may request registration for
sale under the Securities Act of 1933, as amended (the "Act"), of all or part of the Securities. Within ten days after receipt of such demand notice, the Company shall
notify the other holders of Securities that a demand registration request has been made. Within 15 days after such notification is sent by the Company, any holder of Securities (a "Joining
Holder") may request participation in the registration demanded. After such fifteenth day, the Company shall, as expeditiously as practicable, notify the other holders of the Securities that such
registration has been requested and use its best efforts (i) to file with the Securities and Exchange Commission (the "SEC") under the Act, a registration statement
on the appropriate form (using Form S-3 or other "short form," if available) covering all the shares of Common Stock specified in the demand request and any request made by a
Joining Holder and (ii) to cause such registration statement to be declared effective. The Company shall use its best efforts to cause each offering pursuant to this
Section 1.1 to be managed, on a firm commitment basis, by a recognized regional or national underwriter. If the managing underwriter advises the Company or any
holder electing to participate in the demand registration offering, as the case may be, in writing that in their opinion the amount of common stock requested to be included in such registration
exceeds the amount which can be sold effectively in such offering, the common stock to be included shall be reduced pro rata among the electing holders based on the number of shares of common stock
each requested to have included. The Company shall not be required to comply with more than two (2) requests by Purchasers for demand registration pursuant to this
Section 1.1(a). The Company shall not be required to keep any such 

C-1

 

registration
statement effective in excess of 60 days after it is declared effective by the SEC or after completion of the distribution of the Common Stock so registered, whichever is earlier.
The Company shall not be required to effect a demand registration under the Act pursuant to Section 1.1(a) above if (i) the Company receives such request for
registration within 120 days preceding the anticipated effective date of a proposed underwritten public offering of securities of the Company approved by the Company's Board of Directors prior
to the Company's receipt of such request; (ii) within 180 days prior to any such request for registration, a registration of securities of the Company has been effected in which
Purchasers had the right to participate pursuant to Section 1.2 hereof; or (iii) the Board of Directors of the Company reasonably determines in good faith
that effecting such a demand registration at such time would have a material adverse effect upon a proposed sale of all (or substantially all) the assets of the Company, or a merger, reorganization,
recapitalization, or similar transaction materially affecting the capital structure or equity ownership of the Company; provided, however,
that the Company may only delay a demand registration pursuant to this Section 1.1(a)(iii) for a period not exceeding 90 days (or until such earlier time as
such transaction is consummated or no longer proposed). The Company shall promptly notify Purchasers in writing of any decision not to effect any such request for registration pursuant to this
Section 1.1(a), which notice shall set forth in reasonable detail the reason for such decision and shall include an undertaking by the Company promptly to notify
Purchasers as soon as a demand registration may be effected. 

	(b)
	Purchasers
may withdraw a request for demand registration at any time before a registration statement is declared effective, in which event the Company shall withdraw such
registration statement.
If the Company withdraws a registration statement under this Section 1.1(b) in respect of a registration for which the Company would otherwise be required to pay
expenses under Section 1.4 hereof, Purchasers shall be liable to the Company for all expenses of such registration specified in
Section 1.4 hereof in proportion to the number of shares each of the Purchasers shall have requested to be registered, and Purchasers shall not be deemed to have
requested a demand registration for purposes of Section 1.1(a) hereof. 

	1.2
	Piggyback
Registration Rights.

	(a)
	If
at any time or times after the date hereof, the Company proposes to make a registered public offering of any of its securities under the Act, whether to be sold by it or by one or
more third parties (including an offering pursuant to a demand registration under Section 1.1(a) hereof but excluding an offering registered on
Form S-8, Form S-4, or comparable forms), the Company shall, not less than 45 days prior to the proposed filing date of the registration form, give written
notice of the proposed registration to Purchasers, and at the written requests of Purchasers delivered to the Company within 20 days after the receipt of such notice, shall include in such
registration and offering, and in any underwriting of such offering, all shares of Common Stock that may have been designated in Purchasers' requests.

	(b)
	If
a registration in which Purchasers have the right to participate pursuant to this Section 1.2 is an underwritten offering for the account of the
Company or for the account of a security holder (other than Purchasers) pursuant to the exercise of a demand registration right, and the managing underwriters advise the Company or such security
holder, as the case may be, in writing that in their opinion the number of securities requested to be included in such registration, together with the securities being offered by the Company or such
security holder, as the case may be, exceeds the number which can be effectively sold in such offering, the Company shall include in such registration (i) first, the securities of the Company
or such security holder proposed to be sold, and (ii) second, to the extent possible, the Common Stock proposed to be sold by each of the Purchasers and any other selling shareholders, in 

C-2

 

proportion
to the number of shares of Common Stock with respect to which they have requested registration. 

	1.3
	Registration
Procedures. The Company shall have no obligation to file a registration statement pursuant to
Section 1.1 hereof, or to include shares of Common Stock owned by or issuable to any Purchaser in a registration statement pursuant to
Section 1.2 hereof, unless and until such Purchaser shall have furnished the Company with all information and statements about or pertaining to such Purchaser in
such reasonable detail and on such timely basis as is reasonably required by the Company in connection with the preparation of the registration statement. Whenever Purchasers have requested that any
shares of Common Stock be registered pursuant to Section 1.1 or 1.2 hereof, the Company shall, as expeditiously as reasonably possible:

	(a)
	prepare
and file with the SEC a registration statement with respect to such shares and use its best efforts to cause such registration statement to become effective as soon as
reasonably practicable thereafter (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish counsel for the Purchasers
with copies of all such documents proposed to be filed);

	(b)
	prepare
and file with the SEC such amendments and supplements to such registration statement and prospectus used in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than nine months (or two years, if the provisions of Rule 415 under the Act are available with respect thereto) or until the Purchasers have
completed the distribution described in such registration statement, whichever occurs first;

	(c)
	furnish
to the Purchasers such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement
(including each preliminary prospectus), and such other document as the Purchasers may reasonably request;

	(d)
	use
its best efforts to register or qualify such shares under such other securities or blue sky laws of such jurisdictions as the Purchasers request (and to maintain such
registrations and qualifications effective for a period of nine months or until the Purchasers have completed the distribution of such shares, whichever occurs first), and to do any and all other acts
and things which may be necessary or advisable to enable the Purchasers to consummate the disposition in such jurisdictions of such shares; provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction where it would not be required but for this Section 1.3(d), (ii) subject
itself to taxation in any such jurisdiction, or (iii) file any general consent to service of process in any such jurisdiction;

	(e)
	notify
the Purchasers, at any time during which a prospectus relating thereto is required to be delivered under the Act within the period that the Company is required to keep a
registration statement effective, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any
fact necessary to make the statements therein not misleading, and prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such shares, such
prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading;

	(f)
	use
its best efforts to cause all such shares to be listed on securities exchanges or interdealer quotation systems (including Nasdaq National Market), if any, on which similar
securities issued by the Company are then listed;

	(g)
	enter
into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as the Purchasers reasonably request (and subject to the 

C-3

 

Purchasers'
reasonable approval) in order to expedite or facilitate the disposition of such shares; and 

	(h)
	make
reasonably available for inspection by the Purchasers, by any underwriter participating in any distribution pursuant to such registration statement, and by any attorney,
accountant or other agent retained by the Purchasers or by any such underwriter, all relevant financial and other records, pertinent corporate documents, and properties (other than confidential
intellectual property) of the Company; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information
shall be kept confidential by the Purchasers or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality. 

	1.4
	Registration
Expenses. 

        The
Company will pay all Registration Expenses of all registrations under this Agreement, provided, however, that if a registration under Section 1.1
is withdrawn at the request of the Purchasers (other than as a result of information concerning the business or financial condition of the Company that is made known to the Purchasers after the date
on which such registration was requested) and if the requesting the Purchasers elect not to have such registration counted as a registration requested under
Section 1.1, the Purchasers shall pay the Registration Expenses of such registration. For purposes of this Section, the term "Registration
Expenses" means all expenses incurred by the Company in complying with this Section, including, without limitation, all registration and filing fees (other than National Association of
Securities Dealers, Inc. filing fees pursuant to an underwritten offering), exchange listing fees, printing expenses, fees, and expenses of counsel for the Company and the reasonable fees and
expenses of one firm or counsel selected by the Purchasers to represent them, state Blue Sky fees and expenses, and the expense of any special audits incident to or required by any such registration,
but excluding underwriting discounts and selling commissions. 

	1.5
	Indemnity.

	(a)
	In
the event that any shares of Common Stock owned by the Purchasers are sold by means of a registration statement pursuant to Section 1.1 or
1.2 hereof, the Company agrees to indemnify and hold harmless such Purchasers, each of their partners and their officers and directors, and each person, if any, who
controls such Purchasers within the meaning of the Act (each such Purchaser, its partners and their officers and directors, and any such other persons individually an "Indemnified
Person" and collectively "Indemnified Persons") from and against all demands, claims, actions or causes of action, assessments, losses, damages,
liabilities, costs, and expenses, including, without limitation, interest, penalties, and reasonable attorneys' fees and disbursements, asserted against, resulting to, imposed upon or incurred by such
Indemnified Person, directly or indirectly (in this Section 1.5 in the singular a "claim" and in the plural
"claims"), based upon, arising out of or resulting from any untrue statement of a material fact contained in the registration statement or any omission to state therein a
material
fact necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading, except insofar as such claim is based upon, arises out of or results
from information furnished to the Company in writing by such Purchaser for use in connection with the registration statement.

	(b)
	Each
Purchaser agrees to indemnify and hold harmless the Company, its officers and directors, and each person, if any, who controls the Company within the meaning of the Act (each of
the Company, its officers and directors, and any such other persons individually as an "Indemnified Person" and collectively "Indemnified
Persons") from and against all claims based upon, arising out of or resulting from any untrue statement of a material fact contained 

C-4

 

in
the registration statement or any omission to state therein a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made,
not misleading, to the extent that such claim is based upon, arises out of or results from information furnished to the Company in writing by such Purchaser for use in connection with the registration
statement. 

	(c)
	The
indemnification set forth herein shall be in addition to any liability the Company or a Purchaser may otherwise have to the Indemnified Persons. Promptly after actually receiving
definitive notice of any claim in respect of which an Indemnified Person may seek indemnification under this Section 1.5, such Indemnified Person shall submit
written notice thereof to either the Company or a Purchaser, as the case may be (an "Indemnifying Person"). The failure of the Indemnified Person so to notify the
Indemnifying Person of any such claim shall not relieve the Indemnifying Person from any liability it may have hereunder except to the extent that (a) such liability was caused or materially
increased by such failure, or (b) the ability of the Indemnifying Person to reduce such liability was materially adversely affected by such failure. In addition, the failure of the Indemnified
Person so to notify the Indemnifying Person of any such claim shall not relieve the Indemnifying Person from any liability it may have otherwise than hereunder. The Indemnifying Person shall have the
right to undertake, by counsel or representatives of its own choosing, the defense, compromise or settlement (without admitting liability of the Indemnified Person) of any such claim asserted, such
defense, compromise or settlement to be undertaken at the expense and risk of the Indemnifying Person, and the Indemnified Person shall have the right to engage separate counsel, at such Indemnified
Person's own expense, whom counsel for the Indemnifying Person shall keep informed and consult with in a reasonable manner. In the event the Indemnifying Person shall elect not to undertake such
defense by its own representatives, the Indemnifying Person shall give prompt written notice of such election to the Indemnified Person, and the Indemnified Person may undertake the defense,
compromise or settlement (without admitting liability of the Indemnified Person) thereof on behalf of and for the account and risk of the Indemnifying Person by counsel or other representatives
designated by the Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall be obligated hereunder with respect to amounts paid in settlement of any claim if such settlement is
effected without the consent of such Indemnifying Person, which consent shall not be unreasonably withheld.

	(d)
	If
for any reason the foregoing indemnity is unavailable to, or is insufficient to hold harmless, an Indemnified Person, then the Indemnifying Person shall contribute to the amount
paid or payable by the Indemnified Person as a result of such claims, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Person and the Indemnified Person as well
as any other relevant
equitable considerations. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. 

	1.6
	Subsequent
Registration Statements. The Company shall not cause or permit any new registration statements (except registration statements on
Form S-8, S-4, or comparable forms) to become effective during the 90 days after the effective date of a registration statement covering shares of Common Stock
owned by the Purchasers.

	2.
	Miscellaneous.

        2.1  Additional
Actions and Documents. Each of the parties hereto hereby agrees to use its good faith best efforts to take or cause to be taken
such further actions, to execute, deliver and file or cause to be executed, delivered and filed such further documents and instruments, and to obtain such 

C-5

 

consents, as may be necessary or as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement. 

        2.2  Assignment.
Any Purchaser may assign its rights under this Agreement to any assignee of the Securities (including any assignee of the Common
Stock issued upon conversion of the Series I Preferred Stock); provided that no such assignment shall be effective unless and until the Company shall have received written notice thereof from
such Purchaser. 

        2.3  Entire
Agreement; Amendment. This Agreement, including the other writings referred to herein or delivered pursuant hereto, constitutes the
entire agreement among the parties hereto with respect to the transactions contemplated herein, and it supersedes all prior oral or written agreements, commitments or understandings with respect to
the matters provided for herein. No amendment, modification or discharge of this Agreement shall be valid or binding unless set forth in writing and duly executed by the party against whom enforcement
of the amendment, modification, or discharge is sought. 

        2.4  Limitation
on Benefits. It is the explicit intention of the parties hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action to enforce any provision of this Agreement against any of the parties hereto, and the covenants, undertakings and
agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties hereto or their respective successors and assigns. 

        2.5  Binding
Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors
and assigns. 

        2.6  Governing
Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of the State of New York (without regard to conflicts of laws principles). 

        2.7  Notices.
All notices, demands, requests, or other communications which may be or are required to be given, served, or sent by any party to
any other party pursuant to this Agreement shall be in writing and shall be mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by hand
delivery, including delivery by courier, telegram, telex, or facsimile transmission, addressed as follows: 

	(a)
	If
to the Company: 

FAO, Inc.

2520 Renaissance Boulevard

King of Prussia, PA 19406

Attention: President

Facsimile: (610) 278-7804 

with
a copy (which shall not constitute notice) to: 

Fulbright &
Jaworski L.L.P.

865 S. Figueroa, 29th Floor

Los Angeles, CA 90017

Attention: Victor Hsu, Esq.

Facsimile: (213) 680-4518 

	(b)
	If
to a Purchaser, to the address set forth in the Securities Purchase Agreement for such Purchaser. 

        Each
party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand,
request, or communication which shall be mailed, delivered or transmitted in the manner described above shall be 

C-6

 

deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the affidavit of messenger or
(with respect to a telex) the answer back being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 

        2.8  Headings.
Section headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of
this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. 

        2.9  Execution
in Counterparts. To facilitate execution, this Agreement may be executed in as many counterparts as may be required; and it shall
not be necessary that the signatures of each party appear on each counterpart; but it shall be sufficient that the signature of each party appear on one or more of the counterparts. All counterparts
shall collectively constitute a single agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than a number of counterparts containing the respective
signatures of all of the parties hereto. 

        IN
WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date first above written. 

	 	 	FAO, INC.
	

 	
 	
By:	

 
	 	 	 	
 Jerry R. Welch
 President and Chief Executive Officer

C-7

  

 
 

EXHIBIT D    
  

 
 

FORM OF SHAREHOLDERS AGREEMENT
  TAG-ALONG RIGHTS AND DRAG-ALONG RIGHTS    
  

        This SHAREHOLDERS AGREEMENT, dated as of April     , 2003 (this "Agreement"), among the holders
(the "Holders") who have purchased the Series I Convertible Preferred Stock (the "Convertible Preferred
Stock") of FAO, Inc. (the "Company") and the Company. 

RECITALS:  

        The Holders and the Company have entered into a Securities Purchase Agreement, dated as of April    , 2003 (the "Purchase
Agreement"), pursuant to which, among other things, the Holders agreed to purchase the Preferred Stock. 

        The
Convertible Preferred Stock is convertible into shares (such shares as issued or issuable on conversion of the Convertible Preferred Stock, until registration of such shares, the
"Conversion Shares") of common stock, with a par value of $0.001 per share, of the Company (the "Common
Stock"). 

        As
a condition to the Closing under the Purchase Agreement, the parties hereto have agreed to enter into this Agreement. 

        In
consideration of the foregoing and the mutual agreements and covenants hereinafter set forth, the parties hereto hereby agree as follows: 

        1.    Tag-Along Rights.    If any Holder proposes to sell or transfer
("Tag-Along Transfer") a number of Conversion Shares equal to or greater than the number of Conversion Shares that would be received upon
conversion of 2,000 shares of Convertible Preferred Stock (which amount shall be adjusted to account for any dividends on, subdivisions of, or combinations of, Common Stock) held by such Holder to a
Person who is not an Affiliate of such Holder ("Third Party"), in a single transaction or a series of related transactions, then, at least fifteen
(15) days prior to any such Tag-Along Transfer, such Holder shall provide to all other Holders a notice (a "Tag-Along
Notice") delivered to such Holders at their address set forth in the Purchase Agreement, explaining the terms and conditions of such Tag-Along Transfer (including
the consideration to be paid) and identifying the name and address of the Third Party. If such notice is sent, then, upon the written request ("Tag-Along
Request") of any such Holder (a "Requesting Holder") made within ten (10) days after the day the Tag-Along
Notice is received by such Holder, the Holder proposing to make the Tag-Along Transfer shall cause the Third Party to purchase from each Requesting Holder a number of Conversion Shares
equal to the product of (A) the quotient of (1) the total number of Conversion Shares to be Tag-Along Transferred divided by
(2) the total number of Conversion Shares held by the Holder proposing the Tag-Along Transfer and all Requesting Holders, multiplied  by (B) the total number of Conversion Shares the Requesting
Holder has requested to have transferred. Such purchase shall be made on the same date and at the same price
and on terms and conditions at least as favorable to Requesting Holders as the terms and conditions contained in the Tag-Along Notice delivered in connection with such proposed
transaction. To the extent a Holder does not receive a Tag-Along Request with respect to Conversion Shares for which such Holder has provided a Tag-Along Notice within the time
period noted above, the Holder providing the Tag-Along Notice may sell the shares proposed to be Tag-Along Transferred as set forth in the Tag-Along Transfer
Notice. 

        Each
Requesting Holder shall effect its participation in a Tag-Along Transfer by promptly delivering to the Holder who proposed the Tag-Along Transfer (the
"Proposing Holder"), for transfer to the Third-Party one or more certificates, properly endorsed for transfer, which 

D-1

 

represent the Conversion Shares the Requesting Holder has requested be transferred. Upon consummation of the Tag-Along Transfer, the Proposing Holder shall remit or arrange for direct
transfer to the Requesting Holder that portion of the sale proceeds to which the Requesting Holder is entitled by reason of its participation in the Tag-Along Transfer. 

        Notwithstanding
the foregoing, Requesting Holders shall have no rights under this Section 1 with respect to any Tag-Along Transfer by a Holder to the extent such
Tag-Along Transfer is (i) in the form of a distribution to withdrawing partners from such Holder or otherwise among Affiliates of such Holder; (ii) in connection with a call
written against the stock held by any Holder or a put right written with respect to stock held by a Holder, the rights under this Section 1 shall not arise until exercise of such put or call;
(iii) any bona fide gift, or (iv) a transfer to the Proposing Holder's ancestors, descendants or spouse, or to trusts for the benefit of such persons or the Proposing Holder. 

        Any
transferee of a Tag-Along Transfer shall take Conversion Shares free of the rights and obligations of this Section. Any transferee under a transfer not subject to this
Section shall take pursuant to the immediately foregoing paragraph shall take Conversion Shares subject to the rights and obligations of this Section. 

        2.    Drag-Along Rights.    In the event that the Company receives a bona fide purchase offer from a
non-affiliate of the Company (an "Offeror") seeking to purchase the Company's outstanding equity, and (i) the Company's Board of
Directors and (ii) Holders of not less than 50% of the Conversion Shares, consent to such purchase, all Holders of Conversion Shares shall sell their Conversion Shares (as Preferred Stock if
such Preferred Stock has not yet been converted) to such offeror at the price so approved. At least twenty (20) but not more than ninety (90) days prior to any transfer to an Offeror (a
"Drag-Along Transfer"), the Company shall provide to the Holders a notice (a "Drag-Along
Notice") delivered to the Holders at their address set forth in the Purchase Agreement, explaining the terms and conditions of such Drag-Along Transfer (including
the consideration to be paid), identifying the name and address of the Offeror and indicating the date that is fifteen (15) days after the mailing of the Drag-Along Notice (the
"Response Date"). If such Drag-Along Notice is sent, then, on or before the Response Date, each Holder that consents to the
Drag-Along Transfer shall provide written notice of such consent (the "Consent Notice") to the Company. Any Consent Notice may be revoked
prior to the Response Date by sending an additional writing explicitly revoking such Consent Notice. If the Company receives unrevoked Consent Notices from the requisite Holders on or before the
Response Date or any extension thereof (not to exceed thirty days), the Company shall promptly send a second notice to all Holders informing the Holders that the requisite Holders delivered Consent
Notices. If requisite Holders deliver Consent Notices on or prior to the Response Date, the purchase shall be deemed to have been made on the closing of the Drag-Along Transfer without
further action by the Company or any Holder. 

        3.    Further Assurances.    The Holders shall cooperate fully with the Company to enable the parties to fulfill their
obligations and responsibilities under, and obtain the benefits of, this Agreement. The Holders shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to
be done all things necessary, proper or advisable under applicable laws, and execute and deliver such documents and other papers as may be required or appropriate to carry out the provisions of this
Agreement and to consummate, perform and make effective the transactions (including any Drag-Along Transfer) contemplated hereby. 

        4.    Term.    This Agreement shall be effective as of the Effective Time and shall terminate on the date the Holders
no longer hold any Conversion Shares (the "Term"). 

        5.    Amendments.    This Agreement may not be amended except in a writing signed by, or on behalf of, all parties
hereto. 

D-2

 

        6.    Notices.    All notices, consents, instructions and other communications required or permitted under this
Agreement (collectively, "Notice") shall be effective only if given in writing and shall be considered to have been duly given when (i) delivered
by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or
(iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return
receipt requested, postage prepaid. Notice shall be sent in each case to the appropriate addresses or telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party
may from time to time designate as to itself by notice similarly given to the other parties in accordance herewith, which shall not be deemed given until received by the addressee). Notice shall be
given: 

to
the Holders at their address set forth in the Purchase Agreement. 

and
to the Company at: 

FAO, Inc.

2520 Renaissance Boulevard

King of Prussia, PA

Attention: Legal

Tel: (610) 278-7800

Fax: (610) 278-7804

Email: kroyer@faoinc.com 

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

Fulbright &
Jaworski L.L.P.

865 South Figueroa Street, 29th Floor

Los Angeles, CA 90017

Attention: Victor Hsu, Esq.

Tel: (213) 892-9200

Fax: (213) 680-4518

Email: vhsu@fulbright.com 

        7.    Governing Law.    This Agreement will be governed by and construed under the laws of the State of New York
without regard to conflicts-of-laws principles that would require the application of any other law. 

        8.    Specific Performance.    The Holders agree that if any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached, irreparable damage
would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that, in the event of a breach or threatened breach of this Agreement, the Holders shall be entitled
to specific performance, injunctive or other equitable relief, in addition to any other remedy available at law or in equity, without posting bond or other undertaking. 

        9.    Non-Compliant Tag-Along Transfers.    The Holders agree that Tag-Along
Transfers attempted to be made in violation of this Agreement shall be void. The Company agrees that it shall not (i) register Tag-Along Transfers of Conversion Shares on its books
nor issue new stock certificates in connection with any such Tag-Along Transfer or (ii) remove or cause the removal of any legend with respect to legended Conversion Shares proposed
to be Tag-Along Transferred, in each case, until it shall first have received a copy of a Tag-Along Notice with respect to the securities proposed to be Tag-Along
Transferred and then only in accordance with such Tag-Along Notice and any related Tag-Along Request received after the Tag-Along Notice and prior to such action by
the Company. 

D-3

 

        10.    Severability.    Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall,
as to such jurisdiction, be adjusted rather than voided, if possible, in order to achieve the intent of the parties to this Agreement to the extent possible, without invalidating or adjusting the
remaining provisions hereof, and any such prohibition, unenforceability or adjustment in any jurisdiction shall not invalidate, render unenforceable or adjust such provision in any other jurisdiction. 

        11.    Successors and Assigns; Assignment.    All covenants and agreements in this Agreement contained by or on behalf
of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties. 

        12.    Descriptive Headings.    The descriptive headings of the several sections and paragraphs of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement. 

        13.    Counterparts.    This Agreement may be executed in one or more counterparts, each of which will be deemed to be
an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. The exchange of copies of this Agreement and of signature pages by
facsimile transmission shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the
parties transmitted by facsimile shall be deemed to be their original signatures for all purposes. 

        IN
WITNESS WHEREOF, the parties have caused this Agreement to be executed, by their respective duly authorized officers, as of the date first above written. 

	 
	 	 

	

 	

 	

[Purchasers]

By
 Its:

FAO, INC.

By
 Its:

D-4

QuickLinks

Exhibit 10.2

SECURITIES PURCHASE AGREEMENT

TABLE OF CONTENTS

FAO, INC. SECURITIES PURCHASE AGREEMENT

SCHEDULE I

Schedule 2.3

Capitalization

EXHIBIT A

CERTIFICATE OF DESIGNATION OF PREFERENCES OF SERIES I CONVERTIBLE PREFERRED STOCK OF FAO, INC. (Pursuant to Section 151 of the Delaware General Corporation Law)

EXHIBIT B

FAO, INC., a Delaware Corporation Series I Convertible Preferred Stock

Conversion Notice

EXHIBIT C

REGISTRATION RIGHTS AGREEMENT

EXHIBIT D

FORM OF SHAREHOLDERS AGREEMENT TAG-ALONG RIGHTS AND DRAG-ALONG RIGHTSExhibit 4.2

SILICON GRAPHICS, INC.

11.75% Senior Notes Due 2009

 

INDENTURE

Dated as of                , 2003

 

U.S. BANK NATIONAL
ASSOCIATION

TRUSTEE

 

 

 

TABLE OF
CONTENTS

 

	
   

  	
   

  	
  PAGE

  
	
  Article 1

  
	
  DEFINITIONS AND INCORPORATION BY REFERENCE

  
	
   

  	
   

  	
   

  
	
  Section 1.01.  Definitions

  	
   

  	
    1

  
	
  Section 1.02.  Other Definitions

  	
   

  	
    6

  
	
  Section
  1.03.  Incorporation by Reference of TIA

  	
   

  	
    6

  
	
  Section
  1.04.  Rules Of Construction

  	
   

  	
    6

  
	
   

  	
   

  	
   

  
	
  Article 2

  
	
  THE SECURITIES

  
	
   

  	
   

  	
   

  
	
  Section 2.01.  Form and Dating

  	
   

  	
    7

  
	
  Section
  2.02.  Execution And Authentication

  	
   

  	
    7

  
	
  Section
  2.03.  Registrar, Paying Agent and
  Conversion Agent

  	
   

  	
    8

  
	
  Section
  2.04.  Paying Agent to Hold Money and
  Securities in Trust

  	
   

  	
    8

  
	
  Section 2.05.  Securityholder Lists

  	
   

  	
    9

  
	
  Section
  2.06.  Exchange and Registration of Transfer
  of Securities; Depositary

  	
   

  	
    9

  
	
  Section
  2.07.  Replacement Securities

  	
   

  	
  11

  
	
  Section
  2.08.  Outstanding Securities; Determinations
  of Holders’ Action

  	
   

  	
  12

  
	
  Section 2.09.  Temporary Securities

  	
   

  	
  12

  
	
  Section 2.10.  Cancellation

  	
   

  	
  13

  
	
  Section
  2.11.  Persons Deemed Owners

  	
   

  	
  13

  
	
  Section
  2.12.  Payment of Interest; Interest Rights
  Preserved

  	
   

  	
  13

  
	
  Section
  2.13.  Computation of Interest

  	
   

  	
  15

  
	
  Section
  2.14.  Preservation of Information;
  Communications to Holders.

  	
   

  	
  15

  
	
   

  	
   

  	
   

  
	
  Article 3

  
	
  REDEMPTION

  
	
   

  	
   

  	
   

  
	
  Section
  3.01.  Right to Redeem; Notices to Trustee

  	
   

  	
  15

  
	
  Section
  3.02.  Selection of Securities to be
  Redeemed

  	
   

  	
  16

  
	
  Section 3.03.  Notice of Redemption

  	
   

  	
  16

  
	
  Section
  3.04.  Effect of Notice of Redemption

  	
   

  	
  16

  
	
  Section
  3.05.  Deposit of Redemption Price

  	
   

  	
  17

  
	
  Section
  3.06.  Securities Redeemed in Part

  	
   

  	
  17

  
	
  Section
  3.07.  Redemption at Option of the Holder
  upon a Fundamental Change

  	
   

  	
  17

  

 

 

 

	
   

  	
   

  	
   

  
	
  Article 4

  
	
  COVENANTS

  
	
   

  	
   

  	
   

  
	
  Section
  4.01.  Payment of Securities

  	
   

  	
  20

  
	
  Section 4.02.  SEC Reports

  	
   

  	
  21

  
	
  Section 4.03.  Compliance Certificate

  	
   

  	
  21

  
	
  Section
  4.04.  Further Instruments and Acts

  	
   

  	
  21

  
	
  Section
  4.05.  Maintenance of Office or Agency

  	
   

  	
  21

  
	
  Section
  4.06.  Restriction on Additional
  Indebtedness

  	
   

  	
  21

  
	
  Section 4.07.  Restricted Payments

  	
   

  	
  22

  
	
   

  	
   

  	
   

  
	
  Article 5

  
	
  SUCCESSOR CORPORATION

  
	
   

  	
   

  	
   

  
	
  Section
  5.01.  When Company May Merge or Transfer
  Assets

  	
   

  	
  23

  
	
   

  	
   

  	
   

  
	
  Article 6

  
	
  DEFAULTS AND REMEDIES

  
	
   

  	
   

  	
   

  
	
  Section 6.01.  Events of Default

  	
   

  	
  24

  
	
  Section 6.02.  Acceleration

  	
   

  	
  25

  
	
  Section 6.03.  Other Remedies

  	
   

  	
  25

  
	
  Section
  6.04.  Waiver of Past Defaults

  	
   

  	
  26

  
	
  Section 6.05.  Control by Majority

  	
   

  	
  26

  
	
  Section 6.06.  Limitation on Suits

  	
   

  	
  26

  
	
  Section
  6.07.  Rights of Holders to Receive Payment

  	
   

  	
  27

  
	
  Section
  6.08.  Collection Suit by Trustee

  	
   

  	
  27

  
	
  Section
  6.09.  Trustee May File Proofs of Claim

  	
   

  	
  27

  
	
  Section 6.10.  Priorities

  	
   

  	
  28

  
	
  Section
  6.11.  Undertaking for Costs

  	
   

  	
  28

  
	
  Section
  6.12.  Waiver of Stay, Extension or Usury
  Laws

  	
   

  	
  29

  
	
   

  	
   

  	
   

  
	
  Article 7

  
	
  TRUSTEE

  
	
   

  	
   

  	
   

  
	
  Section 7.01.  Duties of Trustee

  	
   

  	
  29

  
	
  Section 7.02.  Rights of Trustee

  	
   

  	
  30

  
	
  Section
  7.03.  Individual Rights of Trustee

  	
   

  	
  30

  
	
  Section 7.04.  Trustee’s Disclaimer

  	
   

  	
  30

  
	
  Section 7.05.  Notice of Defaults

  	
   

  	
  31

  
	
  Section
  7.06.  Disqualification; Conflicting
  Interests

  	
   

  	
  31

  
	
  Section
  7.07.  Compensation and Indemnity

  	
   

  	
  31

  
	
  Section
  7.08.  Replacement of Trustee

  	
   

  	
  32

  
	
  Section
  7.09.  Successor Trustee by Merger

  	
   

  	
  32

  
	
  Section
  7.10.  Eligibility; Disqualification

  	
   

  	
  33

  
	
  Section
  7.11.  Preferential Collection of Claims
  Against Company

  	
   

  	
  33

  

 

 

ii

 

 

	
  Section 7.12.  Reports by Trustee

  	
   

  	
  33

  
	
   

  	
   

  	
   

  
	
  Article 8

  
	
  DISCHARGE OF INDENTURE

  
	
   

  	
   

  	
   

  
	
  Section
  8.01.  Discharge of Liability on Securities

  	
   

  	
  33

  
	
  Section
  8.02.  Repayment to the Company

  	
   

  	
  34

  
	
   

  	
   

  	
   

  
	
  Article 9

  
	
  AMENDMENTS

  
	
   

  	
   

  	
   

  
	
  Section
  9.01.  Without Consent of Holders

  	
   

  	
  34

  
	
  Section
  9.02.  With Consent of Holders

  	
   

  	
  34

  
	
  Section 9.03.  Compliance with TIA

  	
   

  	
  35

  
	
  Section
  9.04.  Revocation and Effect of Consents,
  Waivers and Actions

  	
   

  	
  35

  
	
  Section
  9.05.  Notation on or Exchange of Securities

  	
   

  	
  36

  
	
  Section
  9.06.  Trustee to Sign Supplemental
  Indentures

  	
   

  	
  36

  
	
  Section
  9.07.  Effect of Supplemental Indentures

  	
   

  	
  36

  
	
   

  	
   

  	
   

  
	
  Article 10

  
	
  MISCELLANEOUS

  
	
   

  	
   

  	
   

  
	
  Section 10.01.  Conflict with TIA

  	
   

  	
  36

  
	
  Section 10.02.  Notices

  	
   

  	
  36

  
	
  Section
  10.03.  Communication by Holders with Other
  Holders

  	
   

  	
  37

  
	
  Section
  10.04.  Certificate and Opinion as to
  Conditions Precedent

  	
   

  	
  37

  
	
  Section
  10.05.  Statements Required in Certificate or
  Opinion

  	
   

  	
  38

  
	
  Section
  10.06.  Separability Clause

  	
   

  	
  38

  
	
  Section
  10.07.  Rules By Trustee, Paying Agent,
  Conversion Agent and Registrar

  	
   

  	
  38

  
	
  Section 10.08.  Legal Holidays

  	
   

  	
  38

  
	
  Section 10.09.  Governing Law

  	
   

  	
  38

  
	
  Section
  10.10.  No Recourse Against Others

  	
   

  	
  39

  
	
  Section 10.11.  Successors

  	
   

  	
  39

  
	
  Section 10.12.  Multiple Originals

  	
   

  	
      39(1)

  
	
   

  	
   

  	
   

  
	
  Exhibit A — Form of Security

  	
   

  	
  A-1

  

 

(1) This Table of Contents shall not, for any
purpose, be deemed to be part of the Indenture.

 

iii

 

 

INDENTURE, dated as of          , 2003, between SILICON GRAPHICS, INC., a Delaware
corporation (the “Company”), and U.S. BANK NATIONAL
ASSOCIATION, a national banking association organized and existing under the
laws of the United States of America (the “Trustee”).

Each party agrees as follows for the benefit of the
other party and for the equal and ratable benefit of the Holders of the
Company’s 11.75% Senior Notes Due 2009 (the “Securities”):

ARTICLE
1

DEFINITIONS AND INCORPORATION BY REFERENCE

Section 1.01.  Definitions.

“Affiliate” of any specified Person means
any other Person directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person.  For the purposes of this definition,
“control,” when used with respect to any specified Person means the power to
direct or cause the direction of 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.

“Average Life” means, with respect to any
indebtedness, the quotient obtained by dividing the sum of the products of (1)
the number of years from the date of determination to the dates of each
successive scheduled principal payment on such indebtedness, and (2) the amount
of such principal payment, by the sum of all such principal payments.

“Board of Directors” means either the board
of directors of the Company or any duly authorized committee of such board.

“Business Day” means each day of the year on
which banking institutions are not required or authorized to close in The City
of New York or at the principal corporate trust office of the Trustee.

“Capital Stock” means (1) in the case of a
corporation, corporate stock, (2) in the case of an association or business
entity, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock, (3) in the case of a
partnership, partnership interests (whether general or limited), and (4) any
other interest or participation that confers on a person the right to receive a
share of the profits and losses of, or distribution of assets of, the issuing
person.

 

“Common Stock” means any stock of any class
of the Company which has no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company and which is not subject to redemption by the
Company.

“Company” means the party named as the
“Company” in the first paragraph of this Indenture until a successor replaces
it pursuant to the applicable provisions of this Indenture and, thereafter,
shall mean such successor.  The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.

“Company Request” or “Company Order” means a
written request or order signed in the name of the Company by its Chairman of
the Board, a Vice Chairman, its President, a Senior Vice President or a Vice
President, and by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary, and delivered to the Trustee.

“Custodian” means U.S. Bank National
Association, as custodian with respect to any Global Security, or any
successor.

“Default” means any event which is, or after
notice or passage of time or both would be, an Event of Default.

“Defaulted Interest” has the meaning
specified in Section 2.12.

“Depositary” means, with respect to the
Securities issuable or issued in whole or in part in global form, the person
specified in Section 2.06 as the Depositary with respect to the Securities,
until a successor Depositary shall have been appointed and become such pursuant
to the applicable provisions of this Indenture, and thereafter, “Depositary”
shall mean or include such successor.

“Disqualified Stock” means Capital Stock
that, by its terms (or the terms of any security into which it is convertible
or for which it is exchangeable), or upon the happening of any event, matures
or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder, in whole or in part,
on or prior to the date that is the Stated Maturity of the Securities and the
New Convertible Notes.

“Event of Default” means any event or
condition specified as such in Section 6.01.

“Exchange Act” means the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the SEC promulgated
thereunder.

“Fundamental Change” means the occurrence of
any transaction or event in connection with which all or substantially all the
Common Stock shall be 

 

2

 

exchanged for, converted
into, acquired for or constitute solely the right to receive (whether by means
of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise) consideration
which is not all or substantially all common stock listed (or, upon
consummation of such transaction or event, will be listed) on a United States
national securities exchange or approved for quotation in the Nasdaq National
Market or any similar system of automated dissemination of quotations of
securities prices.

“Global Security” means a Security that is
registered in the Security Register in the name of the Depository or a nominee
thereof.

“Holder” or “Securityholder” means a
Person in whose name a Security is registered on the Registrar’s books.

“Indenture” means this Indenture, as amended
or supplemented from time to time in accordance with the terms hereof.

“Interest Payment Date” means the Stated
Maturity of an installment of interest on the Securities.

“Maturity” when used with respect to any
Security, means the date on which the principal of such Security becomes due
and payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption, redemption upon a Fundamental
Change or otherwise.

“New Convertible Indenture” means that
certain Indenture dated as of          
, 2003 among the Company and the Trustee, relating to the New
Convertible Notes.

“New Convertible Notes” means the Company’s
6.50% Senior Convertible Notes Due 2009.

“Officer” means the Chairman of the Board,
any Vice Chairman, the President, any Senior Vice President, any Vice
President, the Treasurer or the Secretary or any Assistant Treasurer or
Assistant Secretary of the Company.

“Officers’ Certificate” means a written
certificate containing the information specified in Sections 10.04 and 10.05,
signed in the name of the Company by its Chairman of the Board, a Vice
Chairman, its President, a Senior Vice President or a Vice President, and by
its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary,
and delivered to the Trustee.

“Old Notes” means the Company’s 51⁄4% Senior
Convertible Notes Due 2004.

 

3

 

“Old Notes Indenture” means that certain
Indenture dated as of September 1, 1997 among the Company and the U.S. Bank
National Association, as successor trustee to State Street Bank and Trust
Company of California, N.A., relating to the Old Notes.

“Opinion of Counsel” means a written opinion
signed by legal counsel who may be an employee of or counsel to the Company and
who shall be satisfactory to the Trustee. 
Each such opinion shall comply with Section 314 of the Trust Indenture
Act and include the information specified in Sections 10.04 and 10.05.

“Options” means any warrants, options or
other rights to acquire Capital Stock of the Company (but excluding (i) any
options or other rights issued under a plan maintained by the Company for the
benefit of employees, directors and consultants, and (ii) any debt security
that is convertible into or exchangeable for Capital Stock of the Company).

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

“Predecessor Security” of any particular
Security means every previous Security evidencing all or a portion of the same
debt as that evidenced by such particular Security.  For the purposes of this definition, any Security authenticated
and delivered under Section 2.06 in exchange for or in lieu of a mutilated,
destroyed, lost or stolen Security shall be deemed to evidence the same debt as
the mutilated, destroyed, lost or stolen Security.

“Redemption Date” shall mean a date
specified for redemption of the Securities (other than redemption upon a
Fundamental Change at the option of the Securityholder) in accordance with the
terms of the Securities and Section 3.01 of this Indenture.

“Redemption Price” shall have the meaning
set forth in paragraph 5 of the Securities.

“Regular Record Date” for the interest
payable on any Interest Payment Date means the December 15 or June 15 (whether
or not a Business Day), as the case may be, next preceding such Interest
Payment Date.

“SEC” means the Securities and Exchange
Commission.

“Secured Credit Facility” means that certain
Amended and Restated Loan and Security Agreement between the Company and
Foothill Capital Corporation and the Bank of America, N.A. dated September 24,
2002, as 

 

4

 

amended by that certain
Amendment Number One to Amended and Restated Loan Agreement, dated as of April
11, 2003, among the Company and Foothill Capital Corporation, as the same may
be amended from time to time.

“Security” or “Securities” means any of the
Company’s 11.75% Senior Notes Due 2009, as amended or supplemented from time to
time, issued under this Indenture.

“Securities Act” means the Securities Act of
1933, as amended, and the rules and regulations of the SEC promulgated
thereunder.

“Securityholder” or “Holder” means a person in
whose name a Security is registered on the Registrar’s books.

“Security Register” has the meaning
specified in Section 2.05.

“SGI Japan Secured Debt” means that Loan
Agreement between the Company, Silicon Graphics World Trade B.V. and SGI Japan,
Ltd. as of November 9, 2001, as the same may be amended from time to time.

“Special Record Date” for the payment of any
Defaulted Interest means a date fixed by the Trustee pursuant to Section 2.12.

“Stated Maturity” when used with respect to
any Security or any installment of interest thereon, means the date specified
in such Security as the fixed date on which the principal of such Security or
such installment of interest is due and payable, and when used with respect to
any other indebtedness or any installment of interest thereon, the date
specified as the fixed date on which the principal of such debt or such
installment of interest is due and payable as set forth in the documentation
governing that debt, not including any contingent obligation to repay, redeem
or repurchase prior to the regularly scheduled date for payment.

“Subsidiary” means a corporation of which a
majority of the capital stock (which for purposes of this definition means any
and all shares, interests, rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated)
stock issued by such corporation) having voting power under ordinary
circumstances to elect a majority of the board of directors of such corporation
is owned directly or indirectly by (i) the Company, (ii) the Company and one or
more Subsidiaries or (iii) one or more Subsidiaries.

“TIA” means the Trust Indenture Act of 1939
as in effect on the date of this Indenture, except as provided in Section 9.03.

“Trust Officer” means any officer of the
Trustee assigned by the Trustee to administer its corporate trust matters.

 

5

 

“Trustee” means the party named as the
“Trustee” in the first paragraph of this Indenture until a successor replaces
it pursuant to the applicable provisions of this Indenture and, thereafter,
shall mean such successor.  The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.

Section 1.02.  Other Definitions.

	
   

  	
  Term

  	
   

  	
  Defined in

  Section

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Bankruptcy Law

  	
   

  	
  6.01

  	
   

  
	
   

  	
  Company Notice

  	
   

  	
  3.07

  	
   

  
	
   

  	
  Event of Default

  	
   

  	
  6.01

  	
   

  
	
   

  	
  Fundamental Change Repurchase Date

  	
   

  	
  3.07

  	
   

  
	
   

  	
  Fundamental Change Redemption Price

  	
   

  	
  3.07

  	
   

  
	
   

  	
  Incur

  	
   

  	
  4.06

  	
   

  
	
   

  	
  Legal Holiday

  	
   

  	
  10.08

  	
   

  
	
   

  	
  Notice of Default

  	
   

  	
  6.01

  	
   

  
	
   

  	
  Paying Agent

  	
   

  	
  2.03

  	
   

  
	
   

  	
  Registrar

  	
   

  	
  2.03

  	
   

  

 

Section 1.03.  Incorporation by Reference of TIA. 
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture.  The following TIA terms used in this
Indenture have the following meanings:

“Commission” means the SEC.

“Indenture Securities” means the Securities.

“Indenture Security Holder” means a
Securityholder.

“Indenture to be Qualified” means this
Indenture.

“Indenture Trustee” or “Institutional Trustee” means
the Trustee.

“Obligor” on the indenture securities means
the Company.

All other TIA terms used in this Indenture that are defined
by the TIA, defined by TIA reference to another statute or defined by SEC rule
have the meanings assigned to them by such definitions.

Section 1.04.  Rules of Construction. 
Unless the context otherwise requires:

 

6

 

(a)       a term has the meaning
assigned to it;

(b)      an accounting term not
otherwise defined has the meaning assigned to it in accordance with generally
accepted accounting principles as in effect from time to time;

(c)       “or” is not exclusive;

(d)      “including” means
including, without limitation; and

(e)       words in the singular
include the plural, and words in the plural include the singular.

ARTICLE
2

THE SECURITIES

Section 2.01.  Form and Dating. 
The Securities and the Trustee’s certificate of authentication shall be
substantially in the form of Exhibit A, which is a part of this Indenture.  The Securities may have notations, legends
or endorsements required by law, stock exchange rule or usage (provided that
any such notation, legend or endorsement required by usage is in a form
acceptable to the Company).  The Company
shall provide any such notations, legends or endorsements to the Trustee in
writing.  Each Security shall be dated
the date of its authentication.

Section 2.02.  Execution And Authentication. 
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, one of its Vice Chairman, its President, one of its
Senior Vice Presidents or one of its Vice Presidents, under its corporate seal
reproduced thereon and attested by its Secretary or one of its Assistant
Secretaries.  The signature of any of
these officers on the Securities may be manual or facsimile.

Securities bearing the manual or facsimile
signatures of individuals who were at any time the proper Officers of the
Company shall bind the Company, notwithstanding that such individuals or any of
them have ceased to hold such offices prior to the authentication and delivery
of such Securities or did not hold such offices at the date of authentication
of such Securities.

No Security shall be entitled to any benefit under
this Indenture or be valid or obligatory for any purpose unless there appears
on such Security a certificate of authentication substantially in the form
provided for herein duly executed by the Trustee by manual signature of an
authorized officer, and such certificate upon any Security shall be conclusive
evidence, and the only evidence, that such Security has been duly authenticated
and delivered hereunder.

 

7

 

The Trustee shall authenticate and deliver
Securities for original issue in an aggregate principal amount of up to
$230,000,000 upon a Company Order without any further action by the
Company.  The aggregate principal amount
of Securities and New Convertible Notes outstanding at any time may not exceed
the amount set forth in the foregoing sentence, except as provided in Section
2.07.

Section 2.03.  Registrar, Paying Agent and Conversion
Agent.  The Company shall maintain
an office or agency where Securities may be presented for registration of
transfer or for exchange (“Registrar”), and an office or agency where
Securities may be presented for purchase or payment (“Paying Agent”).  The Registrar shall keep a register (the “Security
Register”) of the Securities and of their transfer and
exchange.  The Company may have one or
more co-registrars, one or more additional paying agents and one or more
additional conversion agents.  The term
Paying Agent includes any additional paying agent.

The Company shall enter into an appropriate agency
agreement with any Registrar, Paying Agent or co-registrar (if not the
Trustee).  The agreement shall implement
the provisions of this Indenture that relate to such agent. The Company shall
notify the Trustee of the name and address of any such agent.  If the Company fails to maintain a Registrar
or Paying Agent, the Trustee shall act as such and shall be entitled to
appropriate compensation therefor pursuant to Section 7.07. The Company or any
Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar
or co-registrar.

The Company initially appoints the Trustee as
Registrar and Paying Agent in connection with the Securities.

Section 2.04.  Paying Agent to Hold Money and Securities in
Trust.  Except as otherwise provided
herein, prior to or on each due date of payments in respect of any Security,
the Company shall deposit with the Paying Agent a sum of money or securities
sufficient to make such payments when so becoming due.  The Company shall require each Paying Agent
(other than the Trustee) to agree in writing that the Paying Agent shall hold
in trust for the benefit of Securityholders or the Trustee all money and
securities held by the Paying Agent for the making of payments in respect of
the Securities and shall notify the Trustee of any default by the Company in
making any such payment.  At any time
during the continuance of any such default, the Paying Agent shall, upon the
written request of the Trustee, forthwith pay to the Trustee all money and
securities so held in trust.  If the
Company, a Subsidiary or an Affiliate of either of them acts as Paying Agent,
it shall segregate the money and securities held by it as Paying Agent and hold
it as a separate trust fund.  The
Company at any time may require a Paying Agent to pay all money and securities
held by it to the Trustee and to account for any funds and securities disbursed
by it.  Upon doing so, the Paying Agent
shall have no further liability for the money or securities.

 

8

 

Section 2.05.  Securityholder Lists. 
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders.  If the Trustee is not
the Registrar, the Company shall cause to be furnished to the Trustee at least
semiannually on December 15 and June 15 a listing of Holders dated within 15
days of the date on which the list is furnished and at such other times as the
Trustee may request in writing a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Securityholders.

Section 2.06.  Exchange and Registration of Transfer of
Securities; Depositary.  Upon surrender
for registration of transfer of any Security at any office or agency of the
Company designated as Registrar or co-registrar pursuant to Section 2.03 and
satisfaction of the requirements for such transfer set forth in this Section
2.06, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of any authorized denominations and of a like aggregate
principal amount.

Securities may be exchanged for a like aggregate
principal amount of Securities of other authorized denominations.  Securities to be exchanged shall be
surrendered at any office or agency to be maintained by the Company designated
as Registrar or co-registrar pursuant to Section 2.03 and the Company shall
execute and register and the Trustee shall authenticate and deliver in exchange
therefor the Security or Securities which the Securityholder making the
exchange shall be entitled to receive, bearing registration numbers not
contemporaneously outstanding.

All Securities presented for registration of
transfer or for exchange, purchase, redemption or payment shall (if so required
by the Company, the Trustee, the Registrar or any co-registrar) be duly
endorsed by, or be accompanied by a written instrument or instruments of transfer
in form satisfactory to the Company and the Trustee, duly executed by the
Holder or his attorney duly authorized in writing.

No service charge shall be charged to the
Securityholder for any exchange or registration of transfer of Securities, but
the Company may require payment of a sum sufficient to cover any tax,
assessments or other governmental charges that may be imposed in connection
therewith.

None of the Company, the Trustee, the Registrar or
any co-registrar shall be required to exchange or register a transfer of (a)
any Securities for a period of 15 days next preceding any selection of
Securities to be redeemed or (b) any Securities or portions thereof selected or
called for redemption or (c) any Securities or portion thereof surrendered for
redemption (and not withdrawn) pursuant to Section 3.07.

 

9

 

All Securities issued upon any transfer or exchange
of Securities shall be valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture as the Securities
surrendered upon such exchange or transfer.

The provisions of Clauses (a), (b), (c), (d) and (e)
below shall apply only to Global Securities:

(a)       Each Global Security
authenticated under this Indenture shall be registered in the name of the
Depositary designated for such Global Security or a nominee thereof and
delivered to such Depositary or a nominee thereof or Custodian therefor, and
each such Global Security shall constitute a single Security for all purposes
of this Indenture.

(b)      Notwithstanding any other
provision in this Indenture, no Global Security may be exchanged in whole or in
part for Securities registered, and no transfer of a Global Security in whole
or in party may be registered, in the name of any Person other than the
Depositary for such Global Security or a nominee thereof unless (A) such
Depositary (i) has notified the Company that it is unwilling or unable to
continue as Depositary for such Global Security or (ii) has ceased to be a
clearing agency registered under the Exchange Act, or (B) there shall have
occurred and be continuing an Event of Default with respect to such Global
Security.

(c)       Subject to 2.06(b)
above, any exchange of a Global Security for other Securities may be made in
whole or in part, and all Securities issued in exchange for a Global Security
or any portion thereof shall be registered in such names as the Depositary for
such Global Security shall direct.

(d)      Every Security
authenticated and delivered upon registration of transfer of, or in exchange
for or in lieu of, a Global Security or any portion thereof whether pursuant to
this Article Two or otherwise, shall be authenticated and delivered in the form
of, and shall be, a Global Security, unless such Security is registered in the
name of a Person other than the Depositary for such Global Security or a
nominee thereof.

(e)       The Depositary or its
nominee, as registered own of a Global Security, shall be the Holder of such
Global Security for all purposes under the Indenture and the Securities, and
owners of beneficial interests in a Global Security shall hold such interests
pursuant to the applicable procedures. 
Accordingly, any such owner’s beneficial interest in a Global Security
will be shown only on, and the transfer of such 

 

10

 

interest shall be effected only through, records maintained by the Depositary
or its nominee or its agent members and such owners of beneficial interests in
a Global Security will not be considered the owners or holders thereof.

The Depositary shall be a clearing agency registered
under the Exchange Act.  The Company
initially appoints The Depository Trust Company to act as Depositary with
respect to the Securities in global form. 
Initially, the Global Security shall be issued to the Depositary,
registered in the name of Cede & Co., as the nominee of the Depositary, and
deposited with the Trustee as custodian for Cede & Co.

If at any time the Depositary for the Global
Security notifies the Company that it is unwilling or unable to continue as
Depositary for such Global Security, the Company may appoint a successor
Depositary with respect to such Security. 
If a successor Depositary for the Global Security is not appointed by
the Company within 90 days after the Company receives such notice, the Company
will execute, and the Trustee, upon receipt of a Company Order for
authentication and delivery of Securities, will authenticate and deliver,
Securities in definitive form, in an aggregate principal amount equal to the
principal amount of the Global Security, in exchange for such Security in the
global form.

Section 2.07.  Replacement Securities. 
If (i) any mutilated Security is surrendered to the Trustee, or (ii)
the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the
Company and the Trustee such security or indemnity as may be required by them
to save each of them harmless, then, in the absence of notice to the Company or
the Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute and upon its written request the Trustee shall
authenticate and deliver, in exchange for any such mutilated Security or in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor
and principal amount, bearing a number not contemporaneously outstanding.

In case any such mutilated, destroyed, lost or
stolen Security has become or is about to become due and payable, or is about
to be redeemed by the Company pursuant to Article 3 hereof, the Company in its
discretion may, instead of issuing a new Security, pay or redeem such Security,
as the case may be.

Upon the issuance of any new Securities under this
Section, the Company may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Trustee) connected
therewith.

Every new Security issued pursuant to this Section
in lieu of any mutilated, destroyed, lost or stolen Security shall constitute
an original additional 

 

11

 

contractual obligation of
the Company, whether or not the destroyed, lost or stolen Security shall be at
any time enforceable by anyone, and shall be entitled to all benefits of this
Indenture equally and proportionately with any and all other Securities duly
issued hereunder.

The provisions of this Section are exclusive and
shall preclude (to the extent lawful) all other rights and remedies with
respect to the replacement or payment of mutilated, destroyed, lost or stolen
Securities.

Section 2.08.  Outstanding Securities; Determinations of
Holders’ Action.  Securities outstanding
at any time are all the Securities authenticated by the Trustee except for
those canceled by it, those delivered to it for cancellation and those
described in this Section 2.08 as not outstanding.  A Security does not cease to be outstanding because the Company
or an Affiliate thereof holds the Security; provided, however, that in
determining whether the Holders of the requisite principal amount of Securities
have given or concurred in any request, demand, authorization, direction,
notice, consent or waiver hereunder, Securities owned by the Company or any
other obligor upon the Securities or any Affiliate of the Company or such other
obligor shall be disregarded and deemed not to be outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trustee knows to be so owned shall be so disregarded.  Subject to the foregoing, only Securities
outstanding at the time of such determination shall be considered in any such
determination (including, without limitation, determinations pursuant to
Articles 6 and 9).

If a Security is replaced pursuant to Section 2.07,
it ceases to be outstanding unless the Trustee receives proof satisfactory to
it that the replaced Security is held by a bona fide purchaser.

If the Paying Agent holds, in accordance with this
Indenture, on a Redemption Date, on a Fundamental Change Repurchase Date or on
Stated Maturity, money or securities, if permitted hereunder, sufficient to pay
Securities payable on that date, then on and after that date such Securities
shall cease to be outstanding and interest on such Securities shall cease to
accrue; provided, that if such Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made.

Section 2.09.  Temporary Securities. 
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, 

 

12

 

substitutions
and other variations as the officers executing such Securities may determine,
as conclusively evidenced by their execution of such Securities.

If temporary Securities are issued, the Company will
cause definitive Securities to be prepared without unreasonable delay.  After the preparation of definitive
Securities, the temporary Securities shall be exchangeable for definitive
Securities upon surrender of the temporary Securities at the office or agency
of the Company designated for such purpose pursuant to Section 2.03, without
charge to the Holder.  Upon surrender
for cancellation of any one or more temporary Securities the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
like principal amount of definitive Securities of authorized
denominations.  Until so exchanged the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.

Section 2.10.  Cancellation. 
All Securities surrendered for payment, redemption or registration of
transfer or exchange shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee and shall be promptly canceled by it.  The Company may at any time deliver to the
Trustee for cancellation any Securities previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and all
Securities so delivered shall be promptly canceled by the Trustee.  The Company may not issue new Securities to
replace Securities it has paid or delivered to the Trustee for cancellation.  No Securities shall be authenticated in lieu
of or in exchange for any Securities canceled as provided in this Section,
except as expressly permitted by this Indenture.  All canceled Securities held by the Trustee shall be destroyed by
the Trustee and evidence of their destruction delivered to the Company unless the
Company directs by Company Order that the Trustee deliver canceled Securities
to the Company.

Section 2.11.  Persons Deemed Owners. 
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal amount, premium, if
any, interest, Redemption Price and Fundamental Change Redemption Price in respect
thereof, for all purposes whatsoever, whether or not such Security be overdue,
and none of the Company, the Trustee or any agent of the Company or the Trustee
shall be affected by notice to the contrary.

Section 2.12.  Payment of Interest; Interest Rights
Preserved.  Interest on any Security
which is payable, and is punctually paid or duly provided for, on any Interest
Payment Date shall be paid to the person in whose name that Security (or one or
more Predecessor Securities) is registered at the close of business on the
Regular Record Date for such interest.

 

13

 

Any interest on any Security which is payable, but
is not punctually paid or dully provided for, on any Interest Payment Date
(herein called “Defaulted Interest”) shall forthwith cease to be payable to
the Holder on the relevant Regular Record Date by virtue of having been such
Holder, and such Defaulted Interest may be paid by the Company, at its election
in each case, as provided in (a) or (b) below:

(a)       The Company may elect to
make payment of any Defaulted Interest to the Persons in whose names the
Securities (or their respective Predecessor Securities) are registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company shall
notify the Trustee in writing of the amount of Defaulted Interest proposed to
be paid on each Security and the date of the proposed payment, and at the same
time the Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest or
shall make arrangements satisfactory to the Trustee for such deposit on or
prior to the date of the proposed payment, such money when deposited to be held
in trust for the benefit of the Persons entitled to such Defaulted Interest as
in this Clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of the
proposed payment.  The Trustee shall
promptly notify the Company of such Special Record Date and, in the name and at
the expense of the Company, shall cause notice of proposed payment of such
Defaulted Interest and the Special Record Date therefor to be mailed,
first-class postage prepaid, to each Holder at his address as it appears in the
Security Register, not less than 10 days prior to such Special Record
Date.  Notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor having been so
mailed, such Defaulted Interest shall be paid to the Persons in whose names the
Securities (or their respective Predecessor Securities) are registered at the
close of business on such Special Record Date and shall no longer be payable
pursuant to the following 2.12(b).

(b)      The Company may make
payment of any Defaulted Interest in any other lawful manner not inconsistent
with the requirements of any securities exchange or market on which the
Securities may be listed, and upon such notice as may be required by such
exchange or market, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this Clause, such manner of payment shall be
deemed practicable by the Trustee.

 

14

 

Subject to the foregoing provisions of this Section,
each Security delivered under this Indenture upon registration of transfer of
or in exchange for or in lieu of any other Security shall carry the rights to
interest accrued and unpaid, and to accrue, which were carried by such other
Security.

Section 2.13.  Computation of Interest. 
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.

Section 2.14.  Preservation of Information; Communications
to Holders.

(a)   The Trustee shall preserve, in as current a
form as is reasonably practicable, the names and addresses of Holders contained
in the most recent list furnished to the Trustee as provided in Section 2.05
and the names and addresses of Holders received by the Trustee in its capacity
as Security Registrar.  The Trustee may
destroy any list furnished to it as provided in Section 2.05 upon receipt of a
new list so furnished.

(b)   The rights of Holders to communicate with
other Holders with respect to their rights under this Indenture or under the
Securities, and the corresponding right and duties of the Trustee, shall be as
provided in the TIA.

(c)   Every Holder of Securities, by receiving and
holding the same, agrees with the Company and the Trustee that neither the
Company nor the Trustee nor any agent of either of them shall be held accountable
by reason of the disclosure of information as to names and addresses of the
Holders made pursuant to the TIA.

ARTICLE
3

REDEMPTION

Section 3.01.  Right to Redeem; Notices to Trustee. 
The Company, at its option, may redeem the Securities in accordance
with the provisions of paragraph 5 of the Securities.  If the Company elects to redeem Securities pursuant to paragraph
5 of the Securities, it shall notify the Trustee in writing of the Redemption
Date, the principal amount of Securities to be redeemed, the Redemption Price,
and the amount of accrued interest to, but excluding, the Redemption Date.

The Company shall give the notice to the Trustee
provided for in this Section 3.01 (i) in the case of any redemption of fewer
than all of the Securities, at least 45 days before the Redemption Date and
(ii) in the case of a redemption of all of the Securities, no later than the
Company is required to give notice to the Holders pursuant to Section 3.03, in
each case unless a shorter notice shall be satisfactory to the Trustee.

 

15

 

Section 3.02.  Selection of Securities to be Redeemed. 
If less than all the Securities are to be redeemed, the Trustee shall
select the Securities to be redeemed pro rata or by lot or by a method the
Trustee considers fair and appropriate (as long as such method is not
prohibited by the rules of any stock exchange or automated quotation system on
which the Securities are then listed). 
The Trustee shall make the selection at least 10 days, but not more than
60 days, before the Redemption Date from outstanding Securities not previously
called for redemption.  The Trustee may
select for redemption portions of the principal amount of Securities that have
denominations larger than $1,000. 
Securities and portions of Securities selected by the Trustee shall be
in principal amounts of $1,000 or a multiple of $1,000.  Provisions of this Indenture that apply to Securities
called for redemption also apply to portions of Securities called for redemption.  The Trustee shall notify the Company
promptly of the Securities or portions of Securities to be redeemed.

Section 3.03.  Notice of Redemption. 
At least 30 days but not more than 60 days before a Redemption Date,
the Company shall mail a notice of redemption by first-class mail, postage
prepaid, to each Holder of Securities to be redeemed.

The notice shall identify the Securities to be
redeemed and shall state:

(a)       the Redemption Date;

(b)      the Redemption Price,
together with the amount of accrued interest to, but excluding, the Redemption
Date;

(c)       the name and address of
the Paying Agent;

(d)      that Securities called
for redemption must be surrendered to the Paying Agent to collect the
Redemption Price and accrued interest to, but excluding, the Redemption Date;

(e)       if fewer than all the
outstanding Securities are to be redeemed, the certificate number and principal
amounts of the particular Securities to be redeemed; and

(f)       that interest on
Securities called for redemption will cease to accrue on and after the
Redemption Date.

At the Company’s request, the Trustee shall give the
notice of redemption in the Company’s name and at the Company’s expense.

Section 3.04.  Effect of Notice of Redemption. 
Once notice of redemption is given, Securities called for redemption
become due and payable on the 

 

16

 

Redemption
Date and at the Redemption Price, together with accrued interest to, but
excluding, the Redemption Date, stated in the notice.

Upon the later of the Redemption Date or the date
such Securities are surrendered to the Paying Agent, such Securities shall be
paid at the Redemption Price, together with accrued interest to, but excluding,
the Redemption Date, stated in the notice.

Section 3.05.  Deposit of Redemption Price. 
Prior to or on the Redemption Date, the Company shall deposit with the
Paying Agent (or if the Company or a Subsidiary or an Affiliate of either of
them is the Paying Agent, shall segregate and hold in trust) money sufficient
to pay the Redemption Price and accrued interest to, but excluding, the
Redemption Date of all Securities to be redeemed on that date other than
Securities or portions of Securities called for redemption which prior thereto
have been delivered by the Company to the Trustee for cancellation; provided
that if such payment is made on the Redemption Date it must be received by the
Trustee or Paying Agent, as the case may be, by 10:00 a.m.  New York City time, on such Redemption
Date.  If such money is then held by the
Company in trust and is not required for such purpose it shall be discharged
from such trust.

Section 3.06.  Securities Redeemed in Part. 
Upon surrender of a Security that is redeemed in part, the Company
shall execute and the Trustee shall authenticate and deliver to the Holder a
new Security in an authorized denomination equal in principal amount to the
unredeemed portion of the Security surrendered.

Section 3.07.  Redemption at Option of the Holder upon a
Fundamental Change.  (a)  If a Fundamental Change shall occur at any
time prior to July 1, 2009, each Holder of Securities shall have the right, at
such Holder’s option, to require the Company to redeem such Holder’s Securities
on the date (the “Fundamental Change Repurchase Date”) (or if
such date is not a Business Day, the next succeeding Business Day) that is 45
days after the date of the Company’s notice of such Fundamental Change.  The Securities will be redeemable in part in
multiples of $1,000 of principal amount. 
Such repayment shall be made at 100% of the principal amount (the “Fundamental
Change Redemption Price”) thereof. In each case, the Company shall
also pay to such Holders accrued interest to, but excluding, the Fundamental
Change Repurchase Date on the redeemed Securities; provided that if such
Fundamental Change Repurchase Date is an Interest Payment Date, then the
interest payable on such date shall be paid to the Holder of the Security on
the next preceding the Regular Record Date.

(b)   On or before the tenth day after the occurrence
of a Fundamental Change, the Company, or, at its written request (which must be
received by the 

 

17

 

Trustee at least five
Business Days prior to the date the Trustee is requested to give notice as
described below), the Trustee in the name of and at the expense of the Company,
shall mail or cause to be mailed to all Holders of record on the date of the
Fundamental Change a notice (the “Company Notice”) of the occurrence of such
Fundamental Change and of the redemption right at the option of the Holders
arising as a result thereof.  Such
notice shall be mailed in the manner and with the effect set forth in Section
3.03.  The Company shall also deliver a
copy of the Company Notice to the Trustee at such time as it is mailed to the
Holders.

Each Company Notice shall specify the circumstances
constituting the Fundamental Change, the Fundamental Change Repurchase Date,
the Fundamental Change Redemption Price at which the Company shall be obligated
to redeem the Securities, the amount of interest accrued on each Security to,
but excluding, the Fundamental Change Repurchase Date, the latest time by which
the Holder must exercise the redemption right (the “Fundamental Change Expiration Time”),
that the Holder shall have the right to withdraw any Notes prior to the
Fundamental Change Expiration Time, a description of the procedure which a
Holder must follow to exercise such redemption right and to withdraw any
surrendered Notes and the place or places where the Holder is to surrender such
Holder’s Securities.

No failure of the Company to give the foregoing
notices and no defect therein shall limit the Holders’ redemption rights or
affect the validity of the proceedings for the repurchase of the Securities
pursuant to this Section 3.07.

(c)   For a Security to be so redeemed at the
option of the Holder, the Paying Agent must receive such Security with the form
entitled “Option to Elect Redemption Upon a Fundamental Change” on the reverse
thereof duly completed (a “Fundamental Change Redemption Notice”),
together with such Security duly endorsed for transfer, on or before the 30th
day after the date of such Company Notice (or if such 30th day is not a
Business Day, the immediately preceding Business Day).  All questions as to the validity,
eligibility (including time of receipt) and acceptance of any Security for
redemption shall be determined by the Company, whose determination shall be
final and binding.

(d)   Upon receipt by the Company of the
Fundamental Change Redemption Notice specified in Section 3.07(c), the Holder
of the Security in respect of which such Fundamental Change Redemption Notice
was given shall (unless such Fundamental Change Redemption Notice is withdrawn
as specified in the following two paragraphs) thereafter be entitled to receive
solely the Fundamental Change Redemption Price, together with accrued interest
to, but excluding, the Fundamental Change Repurchase Date, with respect to such
Security.  Such Fundamental Change
Redemption Price together with accrued interest to, but excluding, the
Fundamental Change Repurchase Date, shall be 

 

18

 

paid to such Holder promptly
following the Fundamental Change Repurchase Date.

A Fundamental Change Redemption Notice may be
withdrawn by the Holder by means of a written notice of withdrawal delivered to
the office of the Paying Agent at any time prior to the close of business on
the Fundamental Change Repurchase Date to which it relates specifying:

(i)    the certificate number of
the Security in respect of which such notice of withdrawal is being submitted,

(ii)   the principal amount of the
Security with respect to which such notice of withdrawal is being submitted,
and

(iii)  the principal amount, if
any, of such Security which remains subject to the original Fundamental Change
Redemption Notice and which has been or will be delivered for purchase by the
Company.

There shall be no redemption pursuant to Section
3.07 if there has occurred prior to, on or after, as the case may be, the
giving, by the Holders of such Securities, of the required Fundamental Change
Redemption Notice and is continuing an Event of Default (other than a default
in the payment of the Fundamental Change Redemption Price, together with
accrued interest to, but excluding, the Fundamental Change Repurchase Date,
with respect to such Securities).

(e)   On or before the Fundamental Change
Repurchase Date the Company shall deposit with the Trustee or with the Paying
Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is
acting as the Paying Agent, shall segregate and hold in trust as provided in
Section 2.04) an amount of money and/or securities, if permitted hereunder,
sufficient to pay the aggregate Fundamental Change Redemption Price, together
with accrued interest to, but excluding, the Fundamental Change Repurchase
Date, of all the Securities or portions thereof which are to be redeemed as of
such Fundamental Change Repurchase Date; provided that if such payment is made
on the Fundamental Change Repurchase Date it must be received by the Trustee or
Paying Agent, as the case may be, by 10:00 a.m.  New York City time, on such Fundamental Change Repurchase Date.

(f)    Any Security that is to be redeemed upon a
Fundamental Change only in part shall be surrendered at the office of the
Paying Agent (with, if the Company or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Trustee duly executed by, the Holder thereof or such Holder’s attorney duly
authorized in writing) and the Company shall execute and, upon the Company’s
written direction to the Trustee, 

 

19

 

the Trustee shall
authenticate and deliver to the Holder of such Security, without service
charge, a new Security or Securities, of any authorized denomination as
requested by such Holder in aggregate principal amount equal to, and in
exchange for, the portion of the principal amount of the Security so
surrendered which is not redeemed.

(g)   In connection with any offer to redeem
Securities under Section 3.07 hereof the Company shall comply with all Federal
and state securities laws so as to permit the rights and obligations under
Section 3.07 to be exercised in the time and in the manner specified in Section
3.07.

(h)   The Trustee and the Paying Agent shall return
to the Company any cash that remains unclaimed as provided in paragraph 9 of
the Securities, together with interest or dividends, if any (subject to the
provisions of Section 7.01(f)), thereon, held by them for the payment of a
Fundamental Change Redemption Price, together with accrued interest to, but
excluding, the Fundamental Change Repurchase Date; provided, however that to
the extent that the aggregate amount of cash deposited by the Company pursuant
to Section 3.07 exceeds the aggregate Fundamental Change Redemption Price,
together with accrued interest to, but excluding, the Fundamental Change
Repurchase Date, of the Securities or portions thereof which the Company is
obligated to purchase as of the Fundamental Change Repurchase Date then
promptly after the Business Day following the Fundamental Change Repurchase
Date the Trustee and the Paying Agent shall return any such excess to the
Company together with interest or dividends, if any, thereon.

ARTICLE
4

COVENANTS

Section 4.01.  Payment of Securities. 
The Company shall promptly make all payments in respect of the
Securities on the dates and in the manner provided in the Securities or
pursuant to this Indenture.  The
principal amount, premium, if any, accrued interest, Redemption Price and
Fundamental Change Redemption Price shall be considered paid on the applicable
date due if on such date the Trustee or the Paying Agent holds on or before
10:00 a.m.  New York City time on such
date, in accordance with this Indenture, money or securities, if permitted
hereunder, sufficient to pay all such amount then due.

The Company shall pay interest at the rate set forth
in paragraph 1 of the Securities and it shall pay interest on overdue interest
at the same rate compounded semiannually (to the extent that the payment of
such interest shall be legally enforceable), which interest on overdue interest
shall accrue from the date such amounts became overdue.

 

20

 

Section 4.02.  SEC Reports. 
The Company shall file with the Trustee, within 15 days after it files
such annual and quarterly reports, information, documents and other reports
with the SEC, copies of its annual report and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the SEC
may by rules and regulations prescribe) which the Company is required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act.

Section 4.03.  Compliance Certificate. 
The Company shall deliver to the Trustee within 120 days after the end
of each fiscal year of the Company (beginning with the fiscal year ending in
June 2004) an Officers’ Certificate stating whether or not the signers know of
any Default that occurred during such period. 
If they do, such Officers’ Certificate shall describe the Default and
its status.

Section 4.04.  Further Instruments and Acts. 
Upon request of the Trustee, the Company will execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purposes of this Indenture.

Section 4.05.  Maintenance of Office or Agency. 
The Company will maintain in the Borough of Manhattan, The City of New
York, an office or agency where Securities may be presented or surrendered for
payment, where Securities may be surrendered for registration of transfer,
exchange, or redemption and where notices and demands to or upon the Company in
respect of the Securities and this Indenture may be served.  The office of U.S. Bank Trust National
Association, an Affiliate of the Trustee, at 100 Wall Street, Suite 1600, New
York, NY 10005, shall be such office or agency for all of the aforesaid
purposes unless the Company shall maintain some other office or agency for such
purposes and shall give prompt written notice to the Trustee of the location,
and any change in the location, of such other office or agency.  If at any time the Company shall fail to maintain
any such required office or agency or shall fail to furnish the Trustee with
the address thereof, such presentations, surrenders, notices and demands may be
made or served at the address of the Trustee set forth in Section 10.02.

The Company may also from time to time designate one
or more other offices or agencies where the Securities may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designations; provided, however, that no such designation or rescission shall
in any manner relieve the Company of its obligation to maintain an office or
agency in the Borough of Manhattan, The City of New York, for such purposes.

Section 4.06.  Restriction on Additional Indebtedness. 
The Company shall not, nor shall it permit any Subsidiary to, directly
or indirectly (including by means of a merger or an acquisition involving a
company with outstanding indebtedness), create, incur, 

 

21

 

assume,
guaranty or otherwise become directly or indirectly liable for (“Incur”)
any additional indebtedness for borrowed money (other than additional
indebtedness that is (i) in an aggregate principal amount no greater than
$35,000,000, (ii) is subordinate in right of payment to all amounts payable
under the Securities and New Convertible Notes, (iii) does not have a final
Stated Maturity prior to the Stated Maturity of the Securities and the New
Convertible Notes, and (iv) has an Average Life at least equal to the remaining
Average Life of the Securities and the New Convertible Notes) or issue any
Disqualified Stock, except that the Company may, and may permit any Subsidiary
to Incur additional indebtedness

(a)   pursuant to any interest rate swap agreement,
interest rate cap agreement or other agreement designed to protect against
fluctuations in interest rates, any foreign exchange forward contract, currency
swap agreement or other agreement designed to protect against fluctuations in
foreign exchange rates, or any commodity or raw material futures contract or
any other agreement designed to protect against fluctuations in raw material
prices, entered into in the ordinary course of business for the purpose of
limiting risks associated with our business and not for speculation;

(b)   with respect to letters of credit and
bankers’ acceptances issued in the ordinary course of business and not
supporting indebtedness for borrowed money, including letters of credit
supporting performance, surety or appeal bonds, indemnification obligations,
lease or other contractual deposits, or other similar obligations;

(c)   the proceeds of which, less fees and
expenses, are used to repay, redeem or repurchase, at the option of the
Company, Securities, New Convertible Notes, or Old Notes, provided that if any
Securities or New Convertible Notes will remain outstanding, the Stated
Maturity of the indebtedness incurred must be at least 120 days after the
Stated Maturity of the Securities and New Convertible Notes;

(d)   indebtedness incurred to refinance, renew or
replace the SGI Japan Secured Debt, or any extensions or amendments of the SGI
Japan Secured Debt, in each case that do not increase the principal amount
thereof; or

(e)   other indebtedness to banks or other
institutional lenders in the form of revolving credit loans or term loans or
the issuance of letters of credit or bankers’ acceptances or the like,
including the Secured Credit Facility as it may be extended, refinanced,
renewed or replaced, provided that the aggregate principal amount of such other
indebtedness at any time outstanding does not exceed $100 million.

Section 4.07.  Restricted Payments. 
The Company shall not

(a)   declare or pay any dividend or make any
distribution on its Capital Stock, other than dividends or distributions paid
in its or its Subsidiaries’ Capital Stock other than Disqualified Stock;

 

22

 

(b)   purchase, redeem or otherwise acquire or
retire for value any of its Capital Stock or Options, other than (1) the
repurchase of unvested restricted stock in connection with voluntary or
involuntary terminations of employment with an aggregate purchase price less
than $100,000 per fiscal year, or (2) repurchases, redemptions, acquisitions or
retirements paid for with its Capital Stock other than Disqualified Stock or
Options to buy Capital Stock other than Disqualified Stock; 

(c)   pay any funds to or for the account of, make
any investment in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect, any transaction with,
any Affiliate except on an arms-length basis on terms at least as favorable to
the Company as could have been obtained from a third party that was not an
Affiliate (except that the Company may enter into compensatory arrangements
with and pay such salary, bonus or other compensation to employees, officers
and directors as have been approved by a committee of the Company's Board of
Directors comprised of independent directors); or

(d)   repay, redeem, repurchase, defease or otherwise
acquire or retire for value, any indebtedness subordinated in right of payment
to the Securities or the New Convertible Notes except a payment of interest or
principal when due.

ARTICLE
5

SUCCESSOR CORPORATION

Section 5.01.  When Company May Merge or Transfer Assets. 
Company shall not consolidate with or merge with or into any other
Person (other than in a merger or consolidation in which the Company is the
surviving Person) or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless:

(a)       the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by conveyance, transfer or lease the
properties and assets of the Company substantially as an entirety (i) shall be
a corporation, partnership or trust organized and validly existing under the
laws of the United States or any State thereof or the District of Columbia and
(ii) shall expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all of the
obligations of the Company under the Securities and this Indenture;

(b)      immediately after giving
effect to such transaction, no Default shall have occurred and be continuing; and

(c)       the Company shall have
delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, conveyance, transfer or lease
and, if a supplemental indenture is required in connection with such transaction,
such supplemental indenture, comply with this Article and that all conditions
precedent herein provided for relating to such transaction have been satisfied.

The successor Person formed by such consolidation or
into which the Company is merged or the successor Person to which such
conveyance, transfer or lease is made shall succeed to, and be substituted for,
and may exercise every 

 

23

 

right and power of, the
Company under this Indenture with the same effect as if such successor had been
named as the Company herein; and thereafter, except in the case of a lease of
its properties and assets substantially as an entirety, the Company shall be
discharged from all obligations and covenants under this Indenture and the
Securities.

ARTICLE
6

DEFAULTS AND REMEDIES

Section 6.01.  Events of Default. 
“Event
of Default” occurs if:

(a)   the Company defaults in the payment of the
principal amount of, premium, if any, Redemption Price or Fundamental Change
Redemption Price on any Security when the same becomes due and payable at its
Stated Maturity, upon redemption, upon declaration or otherwise;

(b)   the Company defaults in the payment of any
installment of interest upon any of the Securities as and when the same shall
become due and payable, and continuance of such default for 30 days;

(c)   the Company fails to comply with any of its
agreements in the Securities or this Indenture (other than those referred to in
clause (1) or (2) above) and such failure continues for 60 days after receipt
by the Company of a Notice of Default;

(d)   a decree or order by a court having
jurisdiction in the premises shall have been entered adjudging the Company a
bankrupt or insolvent, or approving as properly filed a petition seeking reorganization
of the Company under any Bankruptcy Law, and such decree or order shall have
continued undischarged and unstayed for a period of 60 consecutive days; or a
decree or order of a court having jurisdiction in the premises of the
appointment of a receiver or liquidator or trustee or assignee in bankruptcy or
insolvency of the Company or of its property, or for the winding-up or
liquidation of its affairs, shall have been entered, and such decree or order
shall have remained in force undischarged and unstayed of a period of 60
consecutive days; or

(e)   the Company shall institute proceedings to be
adjudicated a voluntary bankrupt, or shall consent to the filing of a
bankruptcy proceeding against it, or shall file a petition or answer or consent
seeking reorganization under any Bankruptcy Law, or shall consent to the filing
of any such petition, or shall consent to the appointment of a receiver or
liquidator or trustee or assignee in bankruptcy or insolvency of it or of its
property or shall make an assignment for the benefit of creditors, or shall
admit in writing its inability to pay its debts generally as they become due.

 

24

 

(f)    an event of default under the Secured Credit
Facility, the Old Notes Indenture or the New Convertible Indenture shall have
occurred which results in the principal amount and accrued interest on that
debt becoming immediately due and payable.

“Bankruptcy Law” means Title 11, United
States Code, or any similar Federal or state law for the relief of debtors.

A Default under clause (c) above is not an Event of
Default until the Trustee notifies the Company, or the Holders of at least 25%
in aggregate principal amount of the Securities at the time outstanding notify
the Company and the Trustee, of the Default and the Company does not cure such
Default (and such Default is not waived) within the time specified in clause
(3) above after actual receipt of such notice (a “Notice of Default”).  Any such notice must specify the Default,
demand that it be remedied and state that such notice is a Notice of Default.

Section 6.02.  Acceleration. 
If an Event of Default (other than an Event of Default specified in
Section 6.01(d) or (e)) occurs and is continuing, the Trustee by notice to the
Company, or the Holders of at least 25% in aggregate principal amount of the
Securities at the time outstanding by notice to the Company and the Trustee,
may declare the principal amount and premium, if any, on all the Securities and
the interest accrued thereon to be immediately due and payable.  Upon such a declaration, such principal
amount, premium, if any, and interest accrued thereon shall be due and payable
immediately.  If an Event of Default
specified in Section 6.01(d) or (e) occurs and is continuing, the principal
amount and premium, if any, on all the Securities and the interest accrued
thereon shall become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any Securityholders.  The Holders of a majority in aggregate
principal amount of the Securities at the time outstanding, by notice to the
Trustee (and without notice to any other Securityholder) may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of the principal amount, premium, if any, and interest
accrued thereon that has become due solely as a result of acceleration and if
all amounts due to the Trustee under Section 7.07 have been paid.  No such rescission shall affect any
subsequent Default or impair any right consequent thereto.

Section 6.03.  Other Remedies. 
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of the principal amount and
premium, if any, on the Securities and interest accrued thereon or to enforce
the performance of any provision of the Securities or this Indenture.

 

25

 

The Trustee may maintain a proceeding even if the
Trustee does not possess any of the Securities or does not produce any of the
Securities in the proceeding.  A delay
or omission by the Trustee or any Securityholder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of, or acquiescence in, the Event of Default.  No remedy is exclusive of any other
remedy.  All available remedies are
cumulative.

Section 6.04.  Waiver of Past Defaults. 
The Holders of a majority in aggregate principal amount of the
Securities at the time outstanding, by notice to the Trustee (and without
notice to any other Securityholder), may waive an existing Default and its
consequences except (1) an Event of Default described in Section 6.01(a)  or 6.01(b), or (2) a Default in respect of a
provision that under Section 9.02 cannot be amended without the consent of each
Securityholder affected.  When a Default
is waived, it is deemed cured, but no such waiver shall extend to any
subsequent or other Default or impair any consequent right.

Section 6.05.  Control by Majority. 
The Holders of a majority in aggregate principal amount of the
Securities at the time outstanding may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee.  However, the Trustee may refuse to follow
any direction that conflicts with law or this Indenture or that the Trustee
determines in good faith is unduly prejudicial to the rights of other
Securityholders or would involve the Trustee in personal liability unless the
Trustee is offered indemnity satisfactory to it.

Section 6.06.  Limitation on Suits. 
A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities unless:

(a)       the Holder gives to the
Trustee written notice stating that an Event of Default is continuing;

(b)      the Holders of at least
25% in aggregate principal amount of the Securities at the time outstanding
make a written request to the Trustee to pursue the remedy;

(c)       such Holder or Holders
offer to the Trustee reasonable security or indemnity against any loss,
liability or expense satisfactory to the Trustee;

(d)      the Trustee does not
comply with the request within 60 days after receipt of the notice, the request
and the offer of security or indemnity; and

 

26

 

(e)       the Holders of a
majority in aggregate principal amount of the Securities at the time outstanding
do not give the Trustee a direction inconsistent with the request during such
60-day period.

A Securityholder may not use this Indenture to
prejudice the rights of any other Securityholder or to obtain a preference or
priority over any other Securityholder.

Section 6.07.  Rights of Holders to Receive Payment. 
Notwithstanding any other provision of this Indenture, the right of any
Holder to receive payment of the principal amount, premium, if any, accrued
interest, Redemption Price or Fundamental Change Redemption Price in respect of
the Securities held by such Holder, on or after the respective due dates
expressed in the Securities or any Redemption Date or Fundamental Change
Repurchase Date, as the case may be, or to bring suit for the enforcement of
any such payment on or after such respective dates, shall not be impaired or
affected adversely without the consent of each such Holder.

Section 6.08.  Collection Suit by Trustee. 
If an Event of Default described in Section 6.01(a) or 6.01(b) occurs
and is continuing, the Trustee may recover judgment in its own name and as
trustee of an express trust against the Company for the whole amount owing with
respect to the Securities and the amounts provided for in Section 7.07.

Section 6.09.  Trustee May File Proofs of Claim. 
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal amount, premium,
if any, accrued interest, Redemption Price or Fundamental Change Redemption
Price in respect of the Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the
Trustee shall have made any demand on the Company for the payment of any such
amount) shall be entitled and empowered, by intervention in such proceeding or
otherwise,

(a)   to file and prove a claim for the whole
amount of the principal amount, premium, if any, accrued interest, Redemption
Price or Fundamental Change Redemption Price and to file such other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and of the
Holders allowed in such judicial proceeding, and

 

27

 

(b)   to collect and receive any moneys or other
property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or similar official in any such judicial proceeding is
hereby authorized by each Holder to make such payments to the Trustee and, in
the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.07.

Nothing herein contained
shall be deemed to authorize the Trustee to authorize or consent to or accept
or adopt on behalf of any Holder any plan of reorganization, arrangement,
adjustment or composition affecting the Securities or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the claims of any
Holder in any such proceeding.

Section 6.10.  Priorities. 
If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money in the following order:

First:  to the Trustee for amounts due under Section 7.07;

Second:  to Securityholders for amounts due and unpaid on the Securities
for the principal amount, premium, if any, accrued interest, Redemption Price
or Fundamental Change Redemption Price, as the case may be, ratably, without
preference or priority of any kind, according to such amounts due and payable
on the Securities; and

Third:  the balance, if any, to the Company.

The Trustee may fix a record date and payment date
for any payment to Securityholders pursuant to this Section 6.10.  At least 15 days before such record date,
the Company shall mail to each Securityholder and the Trustee a notice that
states the record date, the payment date and amount to be paid.

Section 6.11.  Undertaking for Costs. 
In any suit for the enforcement of any right or remedy, under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant (other than the Trustee) in the suit of an undertaking to pay the
costs of the suit, and the court in its discretion may assess reasonable costs,
including reasonable attorneys’ fees, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made
by the party litigant.  This Section 6.11
does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section
6.07 or a suit by Holders of more than 10% in aggregate principal amount of the
Securities at the time outstanding.

 

28

 

Section 6.12.  Waiver of Stay, Extension or Usury Laws. 
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law or any
usury or other law wherever enacted, now or at any time hereafter in force,
which would prohibit or forgive the Company from paying all or any portion of
the principal amount, premium, if any, accrued interest, Redemption Price or
Fundamental Change Redemption Price in respect of Securities as contemplated
herein, or which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such laws and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.

ARTICLE
7

TRUSTEE

Section 7.01.  Duties of Trustee. 
(a)  If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in its
exercise as a prudent man would exercise or use under the circumstances in the
conduct of his own affairs.

(b)   Except during the continuance of an Event of
Default:

(i)    the Trustee need perform
only those duties that are specifically set forth in this Indenture and no
others; and

(ii)   in the absence of bad faith
on its part, the Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to the
requirements of this Indenture.

(c)   The Trustee may not be relieved from
liability for its own negligent action, its own negligent failure to act or its
own willful misconduct, except that:

(i)    this paragraph (c) does not
limit the effect of paragraph (b) of this Section 7.01;

 

29

 

(ii)   the Trustee shall not be
liable for any error of judgment made in good faith by a Trust Officer unless
it is proved that the Trustee was negligent in ascertaining the pertinent
facts; and

(iii)  the Trustee shall not be
liable with respect to any action it takes or omits to take in good faith in
accordance with a direction received by it pursuant to Section 6.05.

(d)   Every provision of this Indenture that in any
way relates to the Trustee is subject to paragraphs (a), (b), (c) and (e) of
this Section 7.01.

(e)   The Trustee may refuse to perform any duty or
exercise any right or power or extend or risk its own funds or otherwise incur
any financial liability unless it receives indemnity satisfactory to it against
any loss, liability or expense.

(f)    Money held by the Trustee in trust hereunder
need not be segregated from other funds except to the extent required by law.

Section 7.02.  Rights of Trustee. 
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper person.  The Trustee need not investigate any fact or
matter stated in the document.

(b)   Before the Trustee acts or refrains from
acting, it may require a Company Order, an Officers’ Certificate or an Opinion
of Counsel.  The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such Company Order, Officers’ Certificate or Opinion of Counsel.

(c)   The Trustee may act through agents and shall
not be responsible for the misconduct or negligence of any agent appointed with
due care.

(d)   Subject to the provisions of Section 7.01(c),
the Trustee shall not be liable for any action it takes or omits to take in
good faith which it believes to be authorized or within its rights or powers.

Section 7.03.  Individual Rights of Trustee. 
The Trustee in its individual or any other capacity may become the owner
or pledgee of Securities and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee.  Any Paying Agent, Registrar or co-registrar
may do the same with the like rights. 
However, the Trustee must comply with Section 7.10.

Section 7.04.  Trustee’s Disclaimer. 
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company’s
use of the proceeds from the Securities, it shall not be responsible for any
statement in the Prospectus for the Securities or in the 

 

30

 

Indenture
of the Securities (other than its certificate of authentication), the acts of
an prior Trustee hereunder, or the determination as to which beneficial owners
are entitled to receive any notices hereunder.

Section 7.05.  Notice of Defaults. 
If a Default occurs and is continuing and if it is known to the
Trustee, the Trustee shall give to each Securityholder notice of the Default
within 90 days after it occurs.  Except
in the case of a Default described in Section 6.01(a) or 6.01(b), the Trustee
may withhold the notice if and so long as a committee of its Trust Officers in
good faith determines that withholding the notice is in the interests of
Securityholders.  The Trustee shall not
give notice of a Default pursuant to Section 6.01(c) until at least sixty (60)
days have passed since its occurrence.

Section 7.06.  Disqualification; Conflicting Interests. 
If the Trustee has or shall acquire any conflicting interest within the
meaning of the TIA, it shall either eliminate such conflicting interest or
resign, to the extent and in the manner provided by, and subject to the
provisions of the TIA and this Indenture.

Section 7.07.  Compensation and Indemnity. 
The Company agrees:

(a)       to pay to the Trustee
from time to time reasonable compensation for all services rendered by it
hereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust);

(b)      to reimburse the Trustee
upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expense, advances and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and

(c)       to indemnify the Trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of this trust, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties hereunder.

To secure the Company’s payment obligations in this
Section 7.07, the Trustee shall have a lien prior to the Securities on all
money or property held or collected by the Trustee, except that held in trust
to pay the principal amount, premium, if any, accrued interest, Redemption
Price or Fundamental Change Redemption Price, as the case may be, on particular
Securities.

 

31

 

The Company’s payment obligations pursuant to this
Section 7.07 shall survive the discharge of this Indenture.  When the Trustee incurs expenses after the
occurrence of a Default specified in Section 6.01(d)or (e), the expenses are
intended to constitute expenses of administration under any Bankruptcy Law.

Section 7.08.  Replacement of Trustee. 
The Trustee may resign by so notifying the Company; provided, however,
no such resignation shall be effective until a successor Trustee has accepted
its appointment pursuant to this Section 7.08. 
The Holders of a majority in aggregate principal amount of the
Securities at the time outstanding may remove the Trustee by so notifying the
Trustee and may appoint a successor Trustee. 
The Company shall remove the Trustee if:

(a)       the Trustee fails to
comply with, or ceases to be eligible under, Section 7.10;

(b)      the Trustee is adjudged
bankrupt or insolvent;

(c)       a receiver or public
officer takes charge of the Trustee or its property; or

(d)      the Trustee otherwise
becomes incapable of acting.

If the Trustee resigns or is removed or if a vacancy
exists in the office of Trustee for any reason, the Company shall promptly
appoint, by resolution of its Board of Directors, a successor Trustee.

A successor Trustee shall deliver a written
acceptance of its appointment to the retiring Trustee and to the Company.  Thereupon the resignation or removal of the
retiring Trustee shall become effective, and the successor Trustee shall have
all the rights, powers and duties of the Trustee under this Indenture.  The successor Trustee shall mail a notice of
its succession to Securityholders.  The
retiring Trustee shall promptly transfer all property held by it as Trustee to
the successor Trustee, subject to the lien provided for in Section 7.07.

If a successor Trustee does not take office within
30 days after the retiring Trustee resigns or is removed, the retiring Trustee,
the Company or the Holders of a majority in aggregate principal amount of the
Securities at the time outstanding may petition any court of competent
jurisdiction for the appointment of a successor Trustee.

If the Trustee fails to comply with Section 7.10,
any Securityholder may petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.

Section 7.09.  Successor Trustee by Merger. 
If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all its corporate 

 

32

 

trustee
business or assets (including the administration of the trust created by this
Indenture) to, another corporation, the resulting, surviving or transferee
corporation without any further act shall be the successor Trustee.

Section 7.10.  Eligibility; Disqualification. 
The Trustee (or if a Trustee is a member of a bank holding company, its
bank holding company) shall have a combined capital and surplus of at least
$50,000,000 as set forth in its most recent published annual report of
conditions.  If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section,
it shall resign immediately in the manner and with the effect hereinafter
specified in this Article.

Section 7.11.  Preferential Collection of Claims Against
Company.  If and when the Trustee
shall be or become a creditor of the Company (or any other obligor upon the
Securities), the Trustee shall be subject to the provisions of the TIA
regarding the collection of claims against the Company (or any such other
obligor).

Section 7.12.  Reports by Trustee.

(a)   The Trustee shall transmit to Holders such
reports concerning the Trustee and its actions under this Indenture as may be
required pursuant to the TIA at the times and in the manner provided pursuant
thereto.

(b)   A copy of each such report shall, at the time
of such transmission to Holders, be filed by the Trustee with each stock
exchange or market upon which the Securities are listed, with the Commission
and with the Company.  The Company will
notify the Trustee when the Securities are listed on any stock exchange or
market.

ARTICLE
8

DISCHARGE OF INDENTURE

Section 8.01.  Discharge of Liability on Securities. 
When (i) the Company delivers to the Trustee all outstanding Securities
(other than Securities replaced pursuant to Section 2.07) for cancellation or
(ii) all outstanding Securities have become due and payable and the Company
deposits with the Trustee cash and/or securities, as permitted by the terms
hereof, sufficient to pay at Stated Maturity the principal amount of all
outstanding Securities (other than Securities replaced pursuant to Section
2.07), and if in either case the Company pays all other sums payable hereunder
by the Company, then this Indenture shall, subject to Section 7.07, cease to be
of further effect.  The Trustee shall
join in the execution of a document prepared by the Company acknowledging
satisfaction and discharge of this Indenture on demand of the Company
accompanied by an Officers’ Certificate and Opinion of Counsel and at the cost
and expense of the Company.

 

33

 

Section 8.02.  Repayment to the Company. 
The Trustee and the Paying Agent shall return to the Company upon
written request any money or securities held by them for the payment of any amount
with respect to the Securities that remains unclaimed for two years, provided,
however, that the Trustee or such Paying Agent, before being required to make
any such return, shall at the expense of the Company cause to be published once
in a newspaper of general circulation in The City of New York or mail to each
such Holder notice that such money or securities remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such publication or mailing, any unclaimed money or securities then
remaining will be returned to the Company. 
After return to the Company, Holders entitled to the money or securities
must look to the Company for payment as general creditors unless an applicable
abandoned property law designates another person.

ARTICLE
9

AMENDMENTS

Section 9.01.  Without Consent of Holders. 
The Company and the Trustee may amend this Indenture or the Securities
without the consent of any Securityholder:

(a)       to cure any ambiguity,
defect or inconsistency;

(b)      to comply with Article 5;

(c)       to provide for
uncertificated Securities in addition to certificated Securities so long as
such uncertificated Securities are in registered form for purposes of the
Internal Revenue Code of 1986, as amended;

(d)      to make any change that
does not adversely affect the right of any Securityholder; or

(e)       to make any change to
comply with the TIA, or any amendment thereto, or to comply with any
requirement of the SEC in connection with the qualification, if any, of the
Indenture under the TIA.

Section 9.02.  With Consent of Holders. 
With the written consent of the Holders of at least a majority in
aggregate principal amount of the Securities at the time outstanding, the
Company and the Trustee may amend this Indenture or the Securities.  However, without the consent of each
Securityholder affected, an amendment or supplement to this Indenture or the
Securities may not:

 

34

 

(a)       make any change to the
manner or rate of accrual in connection with interest, reduce the rate of
interest referred to in paragraph 1 of the Securities or extend the time for
payment of interest on any Security;

(b)      reduce the Redemption
Price or extend the Stated Maturity;

(c)       reduce the Redemption
Price or Fundamental Change Redemption Price of any Security;

(d)      make any Security payable
in money or securities other than that stated in the Security;

(e)       make any change in
Section 6.04, Section 6.07 or this Section 9.02, except to increase any such
percentage; or

(f)       make any change that
adversely affects the right to require the Company to redeem the Securities
upon a Fundamental Change in accordance with the terms thereof and this
Indenture;

and no such amendment or
supplement to this Indenture may reduce the aforesaid percentage of Securities
whose Holders must consent to any such amendment or supplemental indenture,
without the consent of the Holders of all the Securities then outstanding.

It shall not be necessary for the consent of the
Holders under this Section 9.02 to approve the particular form of any proposed
amendment or supplemental indenture, but it shall be sufficient if such consent
approves the substance thereof.

After an amendment under this Section 9.02 becomes
effective, the Company shall mail to each Holder a notice briefly describing
the amendment.

Section 9.03.  Compliance with TIA. 
Every supplemental indenture executed pursuant to this Article shall
comply with the TIA as then in effect.

Section 9.04.  Revocation and Effect of Consents, Waivers
and Actions.  Until an amendment,
supplemental indenture, waiver or other action becomes effective, a consent to
it or any other action by a Holder of a Security hereunder is a continuing
consent by the Holder and every subsequent Holder of that Security or portion
of the Security that evidences the same obligation as the consenting Holder’s
Security, even if notation of the consent, waiver or action is not made on the
Security.  However, any such Holder or
subsequent Holder may revoke the consent, waiver or action as to such Holder’s
Security or portion of the Security if the Trustee receives the notice or
revocation before the date the amendment, supplemental indenture, waiver or
action becomes effective.  After an 

 

35

 

amendment,
supplemental indenture, waiver or action becomes effective, it shall bind every
Securityholder.

Section 9.05.  Notation on or Exchange of Securities. 
Securities authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Trustee,
bear a notation in form approved by the Trustee as to any matter provided for
in such supplemental indenture.  If the
Company shall so determine, new Securities so modified as to conform, in the
opinion of the Trustee and the Board of Directors, to any such supplemental
indenture may be prepared and executed by the Company and authenticated and
delivered by the Trustee in exchange for outstanding Securities,

Section 9.06.  Trustee to Sign Supplemental Indentures. 
The Trustee shall sign any supplemental indenture authorized pursuant
to this Article 9 if the amendment does not adversely affect the rights,
duties, liabilities or immunities of the Trustee.  If it does, the Trustee may, but need not, sign such supplemental
indenture.  In signing such supplemental
indenture the Trustee shall be entitled to receive, and (subject to the
provisions of Section 7.01) shall be fully protected in relying upon, an
Officers’ Certificate and an Opinion of Counsel stating that such supplemental
indenture is authorized or permitted by this Indenture.

Section 9.07.  Effect of Supplemental Indentures. 
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.

ARTICLE
10

MISCELLANEOUS

Section 10.01.  Conflict with TIA. 
If any provision hereof limits, qualifies or conflicts with a provision
of the TIA that is required under the TIA to be a part of and govern this
Indenture, the latter provision shall control. 
If any provision of this Indenture modifies or excludes any provision of
the TIA that may be so modified or excluded, the latter provision shall be
deemed to apply to this Indenture as so modified or excluded, as the case may
be.

Section 10.02.  Notices. 
Any request, demand, authorization, notice, waiver, consent or
communication shall be in writing and delivered in person or mailed by first
class mail, postage prepaid, addressed as follows or transmitted by facsimile
transmission (confirmed by overnight courier) to the following facsimile
numbers:

 

36

 

if to the Company:

Silicon Graphics, Inc.

1600 Amphitheatre Parkway

Mountain View, California 94043

Attn:  General Counsel

Telephone Number:  (415) 960-1980

Facsimile Number:  (415) 969-6289

if to the Trustee:

U.S. Bank National Association

550 South Hope Street, 5th Floor

Los Angeles, California 90071

Attention:  Corporate Trust Services
(Silicon Graphics, Inc.)

Telephone Number:  (213) 533-8418

Telefax Number:  (213) 533-8729

The Company or the Trustee by notice to the other
may designate additional or different addresses for subsequent notices or
communications.

Any notice or communication given to a
Securityholder shall be mailed to the Securityholder, by first class mail, postage
prepaid, at the Securityholder’s address as it appears on the registration
books of the Registrar and shall be sufficiently given if so mailed within the
time prescribed.

Failure to mail a notice or communication to a
Securityholder or any defect in it shall not affect its sufficiency with
respect to other Securityholders.  If a
notice or communication is mailed in the manner provided above, it is duly
given, whether or not received by the addressee.

If the Company mails a notice or communication to the
Securityholders, it shall mail a copy to the Trustee and each Registrar, Paying
Agent, Conversion Agent or co-registrar.

Section 10.03.  Communication by Holders with Other Holders. 
Securityholders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities.  The Company, the Trustee,
the Registrar, the Paying Agent, the Conversion Agent and anyone else shall
have the protection of TIA Section 312(c).

Section 10.04.  Certificate and Opinion as to Conditions
Precedent.  Upon any request or
application by the Company to the Trustee to take any action under this
Indenture, the Company shall furnish to the Trustee:

 

37

 

(a)       an Officers’ Certificate
stating that, in the opinion of the signers, all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with; and

(b)      an Opinion of Counsel
stating that, in the opinion of such counsel, all such conditions precedent
have been complied with.

Section 10.05.  Statements Required in Certificate or
Opinion.  Each Officers’ Certificate
or Opinion of Counsel with respect to compliance with a covenant or condition
provided for in this Indenture shall include:

(a)       a statement that each
person making such Officers’ Certificate or Opinion of Counsel has read such
covenant or condition,

(b)      a brief statement as to
the nature and scope of the examination or investigation upon which the
statements or opinions contained in such Officers’ Certificate or Opinion of
Counsel are based;

(c)       a statement that, in the
opinion of each such person, he has made such examination or investigation as
is necessary to enable such person to express an informed opinion as to whether
or not such covenant or condition has been complied with; and

(d)      a statement that, in the
opinion of such person, such covenant or condition has been complied with.

Section 10.06.  Separability Clause. 
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

Section 10.07.  Rules By Trustee, Paying Agent, Conversion Agent
and Registrar.  The Trustee may make
reasonable rules for action by or a meeting of Securityholders.  The Registrar, Conversion Agent and the
Paying Agent may make reasonable rules for their functions.

Section 10.08.  Legal Holidays. 
A “Legal Holiday” is any day other than a Business Day.  If any specified date (including a date for
giving notice) is a Legal Holiday, the action shall be taken on the next
succeeding day that is not a Legal Holiday, and, to the extent applicable, no
interest, if any, shall accrue for the intervening period.

Section 10.09.  Governing Law. 
THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE
SECURITIES.

 

38

 

Section 10.10.  No Recourse Against Others. 
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. 
By accepting a Security, each Securityholder shall waive and release all
such liability.  The waiver and release
shall be part of the consideration for the issue of the Securities.

Section 10.11.  Successors. 
All agreements of the Company in this Indenture and the Securities
shall bind its successor.  All
agreements of the Trustee in this Indenture shall bind its successor.

Section 10.12.  Multiple Originals. 
The parties may sign any number of copies of this Indenture.  Each signed copy shall be an original, but
all of them together represent the same agreement.  One signed copy is enough to prove this Indenture.

 

39

 

IN WITNESS WHEREOF, the undersigned, being duly
authorized, have executed this Indenture on behalf of the respective parties
hereto as of the date first written above.

	
   

  	
  SILICON GRAPHICS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:  Jeffrey Zellmer

  
	
   

  	
   

  	
  Title:  Chief Financial Officer

  

 

 

	
  Attest:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  

 

[SEAL]

 

 

	
   

  	
  U.S. BANK NATIONAL
  ASSOCIATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:  Paula M. Oswald

  
	
   

  	
   

  	
  Title:  Vice President

  

 

 

40

 

 

EXHIBIT A

[FORM OF FACE OF SECURITY]

[FORM OF LEGEND FOR GLOBAL
SECURITY:

UNLESS THIS CERTIFICATE IS
PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A
NEW YORK CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.]

SILICON GRAPHICS, INC.

11.75% SENIOR NOTE DUE 2009

	
  No.

  	
  $

  	
   

  
	
   

  	
  CUSIP

  	
   

  

 

Silicon Graphics, Inc., a Delaware corporation,
promises to pay to or registered assigns, the principal amount of_____________
Dollars ($) on July 1, 2009 and to pay interest thereon from  [the date after expiration of the exchange
offer], 2003 or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, semi-annually on January 1 and July 1
in each year, commencing January 1, 2004, at the rate of 11.75% per annum
until the principal hereof is paid or made available for payment.  The interest so payable, and punctually paid
or duly provided for, on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest, which shall be the December 15 or June  15 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date. Any such interest not
so punctually paid or duly provided for will forthwith cease to be payable to
the Holder on such Regular Record Date and may either be paid to the Person in
whose name this Security (or one or more Predecessor Securities) is registered
at the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to
Holders of Securities not less than 10 days prior to such 

 

A-1

 

Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange or other market on which the Securities
may be listed, and upon such notice as may be required by such exchange or
market, all as more fully provided in said Indenture.  Payment of the principal of (and premium, if any) and interest on
this Security will be made at the Corporate Trust Office or the office or
agency of the Company maintained for that purposes in the Borough of Manhattan,
The City of New York, New York in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of, or by wire transfer to
the account of, the Person entitled thereto as such address shall appear in the
Security Register.

Additional provisions of this Security are set forth
on the other side of this Security.

 

 

A-2

 

IN WITNESS WHEREOF, Silicon Graphics, Inc.  has caused this instrument to be duly
executed under its corporate seal.

 

	
   

  	
  SILICON GRAPHICS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

[SEAL]

 

 

	
  Attest:

  	
   

  	
   

  

 

 

Dated:

 

	
  TRUSTEE’S CERTIFICATE OF
  AUTHENTICATION

  	
   

  
	
   

  	
   

  	
   

  
	
  This is one of the
  Securities referred to in the within mentioned Indenture.

  	
   

  
	
   

  	
   

  	
   

  
	
  U.S. BANK NATIONAL
  ASSOCIATION, as Trustee,

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized Signatory

  	
   

  
	
   

  	
   

  	
   

  

 

 

A-3

 

[FORM OF REVERSE SIDE OF
SECURITY]

SILICON GRAPHICS, INC.

11.75% SENIOR NOTE DUE 2009

1.             Interest

This Security shall bear interest at 11.75% per
annum in the manner set forth in the Indenture and the face of this
Security.  In the event that principal
hereof or any portion of such principal is not paid when due (whether upon
acceleration pursuant to Section 6.02 of the Indenture, upon the date set for
payment of the Redemption Price pursuant to paragraph 5 hereof, upon the date
set for payment of a Fundamental Change Redemption Price pursuant to paragraph
6 hereof or upon the Stated Maturity of this Security), then in each such case
the overdue amount shall bear interest at the rate of 11.75% per annum,
compounded semiannually (to the extent that the payment of such interest shall
be legally enforceable), which interest shall accrue from the date such overdue
amount was due to the date payment of such amount, including interest thereon,
has been made or duly provided for.  All
such interest shall be payable on demand.

2.             Method of Payment

Subject to the terms and conditions of the
Indenture, the Company will make payments in respect of the Securities to the
persons who are registered Holders of Securities at the close of business on
the Redemption Date, Fundamental Change Repurchase Date or Stated Maturity, as
the case may be.  Holders must surrender
Securities to a Paying Agent to collect such payments in respect of the
Securities.  The Company will pay cash
amounts in money of the United States that at the time of payment is legal
tender for payment of public and private debts.  However, the Company may make such cash payments by check mailed
to the address of, or by wire transfer to the account of, the person entitled
to such payment.

3.             Paying Agent and
Registrar

Initially, U.S. Bank National Association, a
national banking association (the “Trustee”), will act as Paying Agent and Registrar.  The Company may appoint and change any
Paying Agent, Registrar or co-registrar without notice, other than notice to
the Trustee.  The Company or any of its
Subsidiaries or any of their Affiliates may act as Paying Agent, Conversion
Agent, Registrar or co-registrar.

 

A-4

 

4.             Indenture

The Company issued the Securities under an Indenture
dated as of           , 2003 (the “Indenture”),
between the Company and the Trustee. 
Capitalized terms used herein and not defined herein have the meanings
ascribed thereto in the Indenture.  The
Securities are subject to all such terms, and Securityholders are referred to
the Indenture for a statement of those terms.

The Securities are general unsecured obligations of
the Company limited to $230,000,000 aggregate principal amount (subject to
Section 2.02 and 2.07 of the Indenture).

5.             Redemption at the
Option of the Company

Prior to July 1, 2003, the Securities will not be
redeemable at the option of the Company. 
Beginning on July 1, 2003, the Company may redeem the Securities for
cash as a whole at any time, or from time to time in part, upon not less than
10 days’ nor more than 60 days’ notice at the following prices (the “Redemption
Price”) (expressed as percentages of the principal amount), together
with accrued and unpaid interest to, but excluding, the Redemption Date.

If redeemed prior to July 1, 2004, the Redemption
Price shall be 105% of the principal amount, plus accrued and unpaid interest
thereon.  Beginning on July 1, 2004, the
Redemption Price shall be 104% of the principal amount plus accrued and unpaid
interest thereon.  Beginning on July 1,
2005, the Redemption Price shall be 103% of the principal amount plus accrued
and unpaid interest thereon.  Beginning
on July 1, 2006, the Redemption Price shall be 102% of the principal amount
plus accrued and unpaid interest thereon. Beginning on July 1, 2007, the
Redemption Price shall be 101% of the principal amount plus accrued and unpaid
interest thereon.  Beginning on July 1,
2008, the Redemption Price shall be 100% of the principal amount plus accrued
and unpaid interest thereon.

If any Redemption Date is an Interest Payment Date,
then the interest payable on such date shall be paid to the Holder of the Security
on the next preceding Regular Record Date. 
No Securities may be redeemed by the Company if an Event of Default with
respect to the payment of interest on the Securities has occurred and is
continuing.

No sinking fund is provided for the Securities.

Notice of redemption at the option of the Company
will be mailed at least 30 days but not more than 60 days before the Redemption
Date to each Holder of Securities to be redeemed at the Holder’s registered
address.  If money sufficient to pay the
Redemption Price, together with accrued interest to, but excluding, the
Redemption Date, of all Securities (or portions thereof) to be redeemed on the 

 

A-5

 

Redemption Date is deposited
with the Paying Agent prior to or on the Redemption Date, on and after such
date interest ceases to accrue on such Securities or portions thereof.  Securities in denominations larger than
$1,000 of principal amount may be redeemed in part but only in multiples of
$1,000 of principal amount.

6.             Redemption at the
Option of the Holder Upon a Fundamental Change

(a)           At the option of the Holder and
subject to the terms and conditions of the Indenture, the Company shall become
obligated to redeem the Securities held by such Holder on the date (the “Fundamental
Change Repurchase Date”) (or if such date is not a Business Day, the
next succeeding Business Day) that is 45 days after the date of the Company’s
notice of such Fundamental Change (as defined in the Indenture) occurring on or
prior to July 1, 2009 at 100% of the principal amount.  In each case, the Company shall also pay
accrued but unpaid interest, if any, on such Securities to, but excluding, the
Fundamental Change Repurchase Date; provided that if such Fundamental Change
Repurchase Date is an Interest Payment Date, then the interest payable on such
date shall be paid to the Holder of the Security on the next preceding Regular
Record Date.  Securities in
denominations larger than $1,000 of principal amount may be redeemed in part in
connection with a Fundamental Change, but only in multiples of $1,000 of
principal amount.

(b)           Holders have the right to withdraw
any Fundamental Change Redemption Notice by delivering to the Paying Agent a
written notice of withdrawal in accordance with the provisions of the
Indenture.

(c)           If cash sufficient to pay the
Fundamental Change Redemption Price, together with accrued interest to, but
excluding, the Fundamental Change Repurchase Date, of all Securities or
portions thereof to be purchased as of the Fundamental Change Repurchase Date
is deposited with the Paying Agent on or prior to the Fundamental Change
Repurchase Date, interest ceases to accrue on such Securities (or portions
thereof) on and after the Fundamental Change Repurchase Date, and the Holder thereof
shall have no other rights as such (other than the right to receive the
Fundamental Change Redemption Price, together with accrued interest to, but
excluding, the Fundamental Change Repurchase Date, upon surrender of such
Security).

7.             Denominations;
Transfer; Exchange

The Securities are in registered form, without
coupons, in denominations of $1,000 of principal amount and multiples of
$1,000.  A Holder may transfer or
exchange Securities in accordance with the Indenture.  The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes
and fees required by law or permitted by the 

 

A-6

 

Indenture.  The Registrar need not transfer or exchange
any Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the Security not to be redeemed) or any
Securities in respect of which a Fundamental Change Redemption Notice has been
given and not withdrawn (except, in the case of a Security to be purchased in
part, the portion of the Security not to be purchased) or any Securities for a
period of 15 days before a selection of Securities to be redeemed.

8.             Persons Deemed
Owners

The registered Holder of this Security may be
treated as the owner of this Security for all purposes.

9.             Unclaimed Money or
Securities

The Trustee and the Paying Agent shall return to the
Company upon written request any money or securities held by them for the
payment of any amount with respect to the Securities that remains unclaimed for
two years, provided, however, that the Trustee or such Paying Agent, before
being required to make any such return, shall at the expense of the Company
cause to be published once in a newspaper of general circulation in The City of
New York or mail to each such Holder notice that such money or securities
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication or mailing, any unclaimed
money or securities then remaining will be returned to the Company.  After return to the Company, Holders
entitled to the money or securities must look to the Company for payment as
general creditors unless an applicable abandoned property law designates
another person.

10.          Amendment; Waiver

Subject to certain exceptions set forth in the
Indenture, (i) the Indenture or the Securities may be amended with the written
consent of the Holders of at least a majority in aggregate principal amount of
the Securities at the time outstanding and (ii) certain defaults or
noncompliance with certain provisions may be waived with the written consent of
the Holders of a majority in aggregate principal amount of the Securities at
the time outstanding.  Subject to
certain exceptions set forth in the Indenture, without the consent of any
Securityholder, the Company and the Trustee may amend the Indenture or the
Securities to cure any ambiguity, defect or inconsistency, or to comply with
Article 5 of the Indenture, to provide for uncertificated Securities in
addition to or in place of certificated Securities or to make any change that
does not adversely affect the rights of any Securityholder or to comply with
any requirement of the SEC in connection with the qualification of the
Indenture under the TIA.

 

A-7

 

11.          Defaults and Remedies

Under the Indenture, Events of Default include (i)
default in payment of the principal amount, Redemption Price or Fundamental
Change Redemption Price, as the case may be, in respect of the Securities when
the same becomes due and payable; (ii) default for 30 days in the payment of
any installment of interest on the Securities; (iii) failure by the Company to
comply with other agreements in the Indenture or the Securities, subject to
notice and lapse of time; (iv) an event of default under the Secured Credit
Facility, the Old Notes Indenture or the New Convertible Indenture shall have
occurred that results in the principal amount of and accrued interest on that
debt becoming immediately due and payable, and (v) certain events of bankruptcy
or insolvency.  If an Event of Default
occurs and is continuing, the Trustee, or the Holders of at least 25% in
aggregate principal amount of the Securities at the time outstanding, may
declare all the Securities to be due and payable immediately.  Certain events of bankruptcy or insolvency
are Events of Default which will result in the Securities being declared due
and payable immediately upon the occurrence of such Events of Default.

Securityholders may not enforce the Indenture or the
Securities except as provided in the Indenture.  The Trustee may refuse to enforce the Indenture or the Securities
unless it receives reasonable indemnity or security.  Subject to certain limitations, Holders of a majority in aggregate
principal amount of the Securities at the time outstanding may direct the
Trustee in its exercise of any trust or power. 
The Trustee may withhold from Securityholders notice of any continuing
Default (except a Default in payment of amounts specified in  (i) or (ii) above) if it determines that
withholding notice is in their interests.

12.          Trustee Dealings with
the Company

The Trustee under the Indenture, in its individual
or any other capacity, may become the owner or pledgee of Securities and may
otherwise deal with and collect obligations owed to it by the Company or its
Affiliates and may otherwise deal with the Company or its Affiliates with the
same rights it would have if it were not Trustee.

13.          No Recourse Against
Others

A director, officer, employee or stockholder, as
such, of the Company shall not have any liability for any obligations of the
Company under the Securities or the Indenture or for any claim based on, in
respect of or by reason of such obligations or their creation.  By accepting a Security, each Securityholder
waives and releases all such liability. 
The waiver and release are part of the consideration for the issue of
the Securities.

 

A-8

 

14.          Authentication

This Security shall not be valid until an authorized
officer of the Trustee manually signs the Trustee’s Certificate of
Authentication on the other side of this Security.

15.          Abbreviations

Customary abbreviations may be used in the name of a
Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT
(=tenants by the entireties), JT TEN (=joint tenants with right of survivorship
and not as tenants in common), CUST (=custodian), and U/G/M/A (Uniform Gift to
Minors Act).

16.          Governing Law

THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE
INDENTURE AND THIS SECURITY.

The Company will furnish to any Securityholder upon
written request and without charge a copy of the Indenture which has in it the
text of this Security in larger type. 
Requests may be made to:

Silicon Graphics, Inc.

1600 Amphitheatre Parkway

Mountain View, California
94043

Attn:  General Counsel

 

 

A-9

 

 

[FORM OF OPTION TO ELECT
REDEMPTION

UPON A FUNDAMENTAL CHANGE]

To:          Silicon Graphics, Inc.

The
undersigned registered holder of this Security hereby acknowledges receipt of a
notice from Silicon Graphics, Inc.  (the
“Company”) as to the occurrence of a Fundamental Change with respect to the Company
and requests and instructs the Company to redeem this Security, or the portion
hereof (which is $1,000 principal amount or a multiple thereof) below
designated, in accordance with the terms of the Indenture referred to in this
Security.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Signature(s)

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  principal
  amount to be redeemed

  
	
   

  	
   

  	
   

  	
  (if
  less than all):

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  $__________

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Social
  Security or other

  
	
   

  	
   

  	
   

  	
  Taxpayer
  Identification Number

  

 

 

A-10

 

 

[FORM OF ASSIGNMENT]

For value received _________________________
hereby sell(s), assign(s) and transfer(s) unto 

	
   

  
	
  (Please
  insert social security or other taxpayer identification number of assignee.)

  

 

the within Security and hereby irrevocably
constitutes and appoints _______________________ attorney to transfer the said
Security on the books of the Company, with full power of substitution in the
premises.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Signature(s)

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Signature(s)
  must be guaranteed by a

  
	
   

  	
   

  	
   

  	
  commercial
  bank or trust company or a

  
	
   

  	
   

  	
   

  	
  member
  firm of a major stock exchange.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Signature
  Guarantee

  

 

 

NOTICE: 
The above signatures of the holder(s) hereof must correspond with the
name as written upon the face of the Security in every particular without
alteration or enlargement or any change whatever.

 

 

A-11

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