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Exhibit 10.5    
  

SECURITY AGREEMENT  

        This SECURITY AGREEMENT, dated as of August 15, 2002, is made by each of F.A.O., Inc. ("FAO"), a California corporation, FAO Schwarz, Inc.
("Schwarz"), a Delaware corporation and ZB Company, Inc., a Delaware corporation ("ZB", and, together with FAO and Schwarz, "Grantors"), in favor of Kayne Anderson Capital Advisors, L.P., as
agent ("KACA") and Fortune Twenty-Fifth, Inc. (together with KACA, the "Secured Parties"), holders of certain notes of even date herewith in the aggregate principal amount of up to $10,500,000
(the "Equipment Notes"), issued by Grantors to Secured Parties, with reference to the following facts: 

RECITALS  

        A.    The
Secured Parties agreed to provide a $10,500,000 letter of credit for the benefit of the Grantors expiring November 8, 2002 (the "Letter of Credit"). 

        B.    The
Grantors issued the Equipment Notes to the Secured Parties as security against draws made on the Letter of Credit. To the extent a draw is made on the Letter of
Credit, the Equipment Notes will thereafter represent a like aggregate principal amount of indebtedness of the Grantors. 

        C.    The
security interests created under this Security Agreement are senior to all other security interests in the Collateral described herein. 

AGREEMENT  

        NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which hereby is acknowledged, each of the Grantors hereby represents, warrants,
covenants, agrees, assigns and grants as follows: 

        1.    Definitions.    Terms defined in the Equipment Notes and not otherwise defined in this Agreement shall have the
meanings defined for those terms in the Equipment Notes. Terms defined in the New York Uniform Commercial Code and not otherwise defined in this Agreement or in the Equipment Notes shall have the
meanings defined for those terms in the New York Uniform Commercial Code. As used in this Agreement, the following terms shall have the meanings respectively set forth after each: 

        "Agreement" means this security agreement, and any extensions, modifications, renewals, restatements, supplements or amendments hereof. 

        "Collateral" means all of Grantors's now owned or hereafter acquired right, title and interest in and to each of the following: 

        (a)  the
Equipment; 

        (b)  books
and records related to the Equipment; 

        (c)  any
and all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any
and all accounts, books, chattel paper, general intangibles, goods (including without limitation equipment and inventory), investment property, instruments, letter of credit rights, real property,
money, or other tangible or intangible property (as such terms are defined from time to time in the Uniform Commercial Code as in effect in the State of New York), resulting from the sale, exchange,
collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. 

        "Equipment" means all of Grantors' now owned or hereafter acquired right, title, and interest with respect to "equipment", as such term is
defined from time to time in the Uniform Commercial Code as in effect in the State of New York, fixtures and vehicles (including motor vehicles) including all 

 

attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. 

        "Secured Obligations" means any and all present and future obligations of Grantors arising under or relating to the Equipment Notes or any
one or more of them, whether due or to become due, matured or unmatured, or liquidated or unliquidated, including interest that accrues after the commencement of any bankruptcy or insolvency
proceeding by or against Grantors. 

        2.    Further Assurances.    At any time and from time to time at the request of the Secured Parties, Grantors shall
execute and deliver to the Secured Parties all such financing statements and other instruments and documents in form and substance satisfactory to the Secured Parties as shall be necessary or
desirable to fully perfect, when filed and/or recorded, the Secured Parties' security interests granted pursuant to Section 3 of this Agreement.
At any time and from time to time, the Secured Parties shall be entitled to file and/or record any or all such financing statements, instruments and documents held by them, and any or all such further
financing statements, documents and instruments, and to take all such other actions, as the Secured Parties may deem appropriate to perfect and to maintain perfected the security interests granted in  Section 3
of this Agreement. Before and after the occurrence of any Event of Default, at the Secured Parties' request, Grantors shall execute all
such further financing statements, instruments and documents, and shall do all such further acts and things, as may be deemed necessary or desirable by the Secured Parties to create and perfect, and
to continue and preserve, an indefeasible security interest in the Collateral in favor of the Secured Parties, or the priority thereof, including causing any such financing statements to be filed
and/or recorded in the applicable jurisdiction. 

        3.    Security Agreement.    For valuable consideration, Grantors assign and pledge to the Secured Parties, and grants
to the Secured Parties a security interest in, all currently existing and hereafter acquired Collateral (except to the extent such a lien is prohibited by agreements of the Grantors existing on the
date hereof), as security for the timely payment of all of the Secured Obligations. This Agreement is a continuing and irrevocable agreement and all the rights, powers, privileges and remedies
hereunder shall apply to any and all Secured Obligations, including those Secured Obligations arising under successive transactions which shall either continue the Secured Obligations, increase or
decrease them, or from time to time create new Secured Obligations after all or any prior Secured Obligations have been satisfied, and notwithstanding the bankruptcy of Grantors. 

        4.    Events of Default.    There shall be an Event of Default hereunder upon the occurrence and during the
continuance of an Event of Default under the Equipment Notes. 

        5.    Rights Upon Event of Default.    Upon the occurrence and during the continuance of an Event of Default, the
Secured Parties shall have, in any jurisdiction where enforcement hereof is sought, in addition to all other rights and remedies that the Secured Parties may have under applicable law or in equity or
under this Agreement all rights and remedies of a secured party under the Uniform Commercial Code as enacted in any jurisdiction. 

        6.    Voting Rights; Dividends; Etc.    With respect to any Collateral consisting of securities, partnership
interests, joint venture interests, investments or the like in the possession of the Secured Parties (referred to collectively and individually in this Section 6  and in Section 7 as the "Investment Collateral"), so long as no Event of Default occurs and remains continuing: 

        6.1    Voting Rights.    Grantors shall be entitled to exercise any and all voting and other consensual rights
pertaining to the Investment Collateral, or any part thereof, for any purpose not inconsistent with the terms of this Agreement, the Equipment Notes or the Letter Agreement. 

        6.2    Dividend and Distribution Rights.    Grantors shall be entitled to receive and to retain and use any and all
dividends or distributions paid in respect of the Investment Collateral. 

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        7.    Rights During Event of Default.    With respect to any Investment Collateral in the possession of the Secured
Parties, so long as an Event of Default has occurred and is continuing: 

        7.1    Voting, Dividend and Distribution Rights.    At the option of the Secured Parties, all rights of Grantors to
exercise the voting and other consensual rights which they would otherwise be entitled to exercise pursuant to Section 6.1 above, and to receive
the dividends and distributions which they would otherwise be authorized to receive and retain pursuant to Section 6.2 above, shall cease, and
all such rights thereupon shall become vested in the Secured Parties which thereupon shall have the sole right to exercise such voting and other consensual rights and to receive and to hold as pledged
Collateral such dividends and distributions. 

        7.2    Dividends and Distributions Held in Trust.    All dividends and other distributions which are received by
Grantors contrary to the provisions of this Agreement shall be received in trust for the benefit of the Secured Parties, shall be segregated from other funds of Grantors and forthwith shall be paid
over to Secured Parties as pledged Collateral in the same form as so received (with any necessary endorsements). 

        8.    Costs and Expenses.    Grantors agree to pay to the Secured Parties all costs and expenses (including, without
limitation, reasonable attorneys' fees and disbursements) incurred by the Secured Parties in the enforcement or attempted enforcement of this Agreement, whether or not an action is filed in connection
therewith, and in connection with any waiver or amendment of any term or provision hereof. All advances, charges, costs and expenses, including reasonable attorneys' fees and disbursements, incurred
or paid by the Secured Parties in exercising any right, privilege, power or remedy conferred by this Agreement, or in the enforcement or attempted enforcement thereof, shall be secured hereby and
shall become a part of the Secured Obligations and shall be paid to the Secured Parties by Grantors, immediately upon demand, together with interest thereon from the date of demand at the rate of 8%
per annum. 

        9.    Continuing Effect.    This Agreement shall remain in full force and effect and continue to be effective should
any petition be filed by or against Grantors for liquidation or reorganization, should Grantors become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be
appointed for all or any significant part of Grantors' assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured
Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by the Secured Parties, whether as a "voidable preference,"
"fraudulent conveyance" or otherwise, all as though such payment or performance had not been made. In the event that any payment or any part thereof is rescinded, reduced, restored or returned, the
Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 

        10.    Release of Grantors.    This Agreement shall be terminated and all Secured Obligations of Grantors hereunder
shall be released when all Secured Obligations have been paid in full or upon such release of Grantors' Secured Obligations hereunder. Upon such termination Secured Parties shall return any pledged
Collateral to Grantors, or to the person or persons legally entitled thereto, and shall endorse, execute, deliver, record and file all instruments and documents, and do all other acts and things
reasonably required for the return of the Collateral to Grantors, or to the person or persons legally entitled thereto, and to evidence or document the release of the Secured Parties' interests
arising under this Agreement, all as reasonably requested by, and at the sole expense of, Grantors. 

        11.    GOVERNING LAW.    THIS AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

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        IN
WITNESS WHEREOF, Each of the Grantors has executed this Agreement by its duly authorized officer as of the date first written above. 

	 	 	"Grantors"
	

 	
 	
F.A.O., INC.,

a California corporation
	

 	
 	

By:	
 	

/s/  JERRY R. WELCH      
 Jerry R. Welch

President and Chief Executive Officer
	

 	
 	
FAO SCHWARZ, INC.,

a Delaware corporation
	

 	
 	

By:	
 	

/s/  JERRY R. WELCH      
 Jerry R. Welch

President and Chief Executive Officer
	

 	
 	
ZB COMPANY, INC.,

a Delaware corporation
	

 	
 	

By:	
 	

/s/  JERRY R. WELCH      
 Jerry R. Welch

President and Chief Executive Officer

ACCEPTED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN: 

	"Secured Parties"
	
KAYNE ANDERSON CAPITAL ADVISORS, L.P.
	

BY	
 	

/S/  DAVID SHLADOVSKY      

	Title:	 	General Counsel

	
FORTUNE TWENTY-FIFTH, INC.
	

By	
 	

/s/  FRED KAYNE      

	Title:	 	President

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Exhibit 10.6    
  

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

F.A.O., INC.

FAO SCHWARZ, INC.

ZB COMPANY, INC.  

 EQUIPMENT NOTE  

	$9,000,000

Note No. LC-021	 	King of Prussia, Pennsylvania

August 15, 2002

        FOR
VALUE RECEIVED, the undersigned, F.A.O., Inc., a California corporation ("Parent"), FAO Schwarz, Inc. ("Schwarz"), a Delaware corporation and ZB Company, Inc., a
Delaware corporation ("ZB", and, together with Parent and Schwarz, the "Co-Borrowers"), jointly and severally promise to pay to KAYNE
ANDERSON CAPITAL ADVISORS, L.P., as agent for the parties listed on Exhibit A, or registered assigns, the unpaid principal sum of NINE MILLION DOLLARS, or, if less, a sum equal to 85.7143%
multiplied by the aggregate sum of all amounts drawn under that certain Letter of Credit
dated as of August 15, 2002, in favor of Wells Fargo Retail Finance, LLC by order of Kayne Anderson Capital Advisors, L.P., as agent and Fortune Twenty-Fifth, Inc. (the "Letter of
Credit") plus any accrued and unpaid interest thereon as provided for herein on that date (the "Maturity Date") that is one year after the date that an amount has first been drawn on the Letter of
Credit ("Draw Date"). Payments are to be made to the address of the registered holder of this Note as set forth on the records of the Co-Borrowers in lawful money of the United States of
America. The Co-Borrowers jointly and severally promise to pay interest on the principal amount of this Note at a rate equal to the prime rate charged by Wells Fargo Bank, N.A. plus 3% per
annum from the Draw Date through the date of payment of the full principal amount of the Note. Interest on the Note will accrue from the most recent date to which interest has been paid or, if no
interest has been paid on the Note, from the Draw Date. Each of the Co-Borrowers agrees (to the extent it may lawfully do so) that it will not at any time insist upon, plead or in any
manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Co-Borrowers from paying all or a
portion of the principal of or interest on this Note as contemplated in this Note, wherever enacted, now or at any time later in force, or that may materially affect the covenants or the performance
of this Note in any manner inconsistent with its provisions. Each of the Co-Borrowers expressly waives all benefit or advantage of any such law, and will not hinder, delay or impede the
execution of any power granted to the Holder (as defined below), but will suffer and permit the execution of every such power as though no such law had been enacted. If a court of competent
jurisdiction prescribes that the Co-Borrowers may not waive their rights to take the benefit or advantage of any stay or extension law or any usury law or other law in accordance with the
prior sentence, then the obligation to pay interest on the Note shall be reduced to the maximum legal limit under applicable law governing the interest payable in connection with the Note, and any
amount of interest paid by the Co-Borrowers that is deemed illegal shall be deemed to have been a prepayment of principal (without penalty or premium) on the Note. 

        Interest
on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Draw Date. Interest will be computed on the basis
of a 360-day year consisting of twelve 30-day months and compounded semi-annually. Interest shall be paid to the holder of record of this Note on the
Co-Borrowers' records (the "Holder") at the close of business on the Maturity Date. The Co-Borrowers shall pay principal of and interest on this Note in such coin or 

 

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

        If
any of the Co-Borrowers shall (i) fail to pay principal or interest when due, (ii) fail generally to pay its debts as they mature, (iii) have any
complaint, application, or petition filed by or against it initiating any matter in which the Co-Borrowers are or may be granted any relief from its debts pursuant to Title 11, U.S.C., as
amended from time to time, or any other insolvency statute or procedure (a "Bankruptcy Event"), or (iv) fail to comply with any other provision
of this Note which failure shall continue for five days after written notice thereof from the Holder (each, an "Event of Default"), the aggregate
outstanding amount of this Note, including any accrued and unpaid interest, shall be immediately due and payable, and in addition thereto, and not in substitution therefor, the Holder shall be
entitled to exercise any one or more of the rights and remedies provided by law. Failure to exercise any right or remedy under this Note or available under applicable law shall not constitute a waiver
of such option or such other remedies or of the right to exercise any of the same in the event of any subsequent Event of Default. The Co-Borrowers and all makers, sureties, guarantors,
endorsers and other persons assuming obligations pursuant to this Note hereby waive presentment, protest, demand, notice of dishonor and all other notices and all defenses and pleas on the grounds of
any extension or extension of the time of payments or the due dates hereof, in whole or in part, before or after maturity, with or without notice. No renewal or extension of this Note, no release of
any obligor and no delay in enforcement of this Note or in exercising any right or power hereunder shall affect the liability of any obligor hereunder. 

        1.    Security.    

        This
instrument and the rights and obligations evidenced hereby are secured pursuant to that certain Security Agreement of even date herewith granting a first priority security interest
in the Co-Borrowers' "equipment", as such term is defined from time to time in the Uniform Commercial Code as in effect in the State of New York, fixtures and vehicles (including motor
vehicles) including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. 

        2.    Transfer; Registration; Replacement.    Upon surrender of this Note for registration of transfer or assignment,
duly endorsed, or accompanied by a written instrument of transfer or assignment duly executed, by the registered Holder hereof or such Holder's attorney duly authorized in writing, a new Note for a
like principal amount shall be issued to, and, at the option of the Holder, registered in the name of, the transferee or assignee. The Co-Borrowers may deem and treat the person in whose
name this Note is registered as the Holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Co-Borrowers shall not be affected by any
notice to the contrary. 

        3.    Miscellaneous    

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

        3.2    Authorization.    The execution and delivery of this Note, and the performance of the terms hereof, has been
duly authorized by all necessary corporate action on the part of the Co-Borrowers, will not conflict with or result in a breach of the articles of incorporation or bylaws of the
Co-Borrowers. This Note constitutes a valid and binding obligation of the Co-Borrowers, enforceable against the Co-Borrowers in accordance with its terms except as
limited by bankruptcy and insolvency laws and other laws affecting the rights of creditors generally. 

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

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

 	

 	
 	

Kayne Anderson Capital Advisors, L.P.

1800 Avenue of the Stars, Second Floor

Los Angeles, California 90067

Fax: 310-284-6444
	

 	

If to Co-Borrowers to:	
 	

 
	

 	

 	
 	

c/o F.A.O., Inc.

2520 Renaissance Blvd.

King of Prussia, PA 19406

Attention: Legal

Tel: (610) 278-7800

Fax: (610) 278-7804
	

 	

 	
 	

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

 	

 	
 	

Fulbright & Jaworski

865 South Figueroa Street, 25th Floor

Los Angeles, CA 90017

Attention: Victor Hsu, Esq.

Tel: (213) 892-9200

Fax: (213) 680-4518

        3.4    Amendment; Successors and Assigns.    This Note may not be modified or amended, nor may any rights hereunder be
waived, except in a writing signed by the party against whom enforcement of the modification, amendment or waiver is sought and the Senior Lender. This Note shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns. The Co-Borrowers' obligations under this Note may be assigned or transferred by the Co-Borrowers
without the prior written consent of the registered Holder hereof or thereof. 

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

[Remainder
of Page Intentionally Left Blank] 

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

	 	 	F.A.O., INC.
	

 	
 	

By:	
 	

/s/  JERRY R. WELCH      
 Jerry R. Welch

Chief Executive Officer
	

 	
 	
FAO SCHWARZ, INC.
	

 	
 	

By:	
 	

/s/  JERRY R. WELCH      
 Jerry R. Welch

Chief Executive Officer
	

 	
 	
ZB COMPANY, INC.
	

 	
 	

By:	
 	

/s/  JERRY R. WELCH      
 Jerry R. Welch

Chief Executive Officer

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Exhibit A  

	Party Name
	 	Percentage Held

	

	

	

	

	

	

	

	

	

	

	

	

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Exhibit 10.6

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