Document:

Exhibit 10.56

 

FAO, INC. SECURITY AGREEMENT

 

This SECURITY
AGREEMENT, dated as of April 23, 2003, is made by FAO, Inc. (fka The Right
Start, Inc.), a Delaware corporation (“Grantor”), in favor of KBB Retail Assets
Corp. (fka F.A.O. Schwarz), a New York corporation (the “Subordinated Secured
Party”), the holder of that certain Subordinated Note (the “Subordinated Note”)
issued by Grantor pursuant to the Plan (as defined below) to Subordinated
Secured Party and guaranteed by Grantor, with reference to the following facts:

 

RECITALS

 

A.                                   Pursuant to the
Asset Purchase Agreement by and among Grantor, FAO Schwarz, Inc. (fka Toy
Soldier, Inc.), a Delaware corporation (the “Issuer”), Royal Vendex KBB N.V., a
Netherlands corporation, Quality Fulfillment Services, Inc., a Virginia
corporation (“QFS”) and the Subordinated Secured Party, dated November 19, 2001
(the “Asset Purchase Agreement”), the Subordinated Secured Party and QFS
agreed to accept, in partial payment of the Initial Purchase Price (as defined
in the Asset Purchase Agreement), certain subordinated notes issued by Issuer
and guaranteed by Grantor.

 

B.                                     On January 13,
2003 the Issuer and Grantor commenced their respective reorganization cases by
filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code.

 

C.                                     The
Subordinated Note is being issued to the Subordinated Secured Party pursuant to
the Issuer’s and the Grantor’s First Amended Joint Plan of Reorganization as
confirmed on April 4, 2003 by the United States Bankruptcy Court District of
Delaware in Case No. 03-10119(LK) (the “Plan”) in compromise of the earlier
issued subordinated notes.

 

D.                                    The Plan
requires that Grantor enter into a guaranty of the obligations of Issuer under
the Subordinated Note (the “Guaranty”), enter into this Security Agreement and
grant security interests to the Subordinated Secured Party  as herein provided.

 

E.                                      The security
interests created under this Security Agreement are junior and subordinated as
specified in Section 8 hereof.

 

AGREEMENT

 

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

 

1.                                       Definitions.  Terms defined in the Guaranty and not
otherwise defined in this Agreement shall have the meanings defined for those
terms in the Guaranty.  Terms defined in
the New York Uniform Commercial Code and not otherwise defined in this
Agreement or in the Guaranty  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.

 

1

 

“Collateral”
means all of Grantor’s now owned or hereafter acquired right, title and
interest in and to each of the following:

 

(a)                            accounts, contract rights, and all other
forms of obligations owing to Grantor arising out of the sale or lease of goods
or the rendition of services by Grantor, irrespective of whether earned by
performance, and any and all credit insurance, guaranties, or security
therefor;

 

(b)                           books and records including: ledgers; records
indicating, summarizing, or evidencing Grantor’s properties or assets or
liabilities; all information relating to Grantor’s business operations or
financial condition; and all other computer programs, disk or tape files,
printouts, runs, or other computer prepared information;

 

(c)                            deposit accounts (as that term is defined
from time to time in the Uniform Commercial Code as in effect in the State of
New York);

 

(d)                           all of Grantor’s general intangibles and
other personal property (including contract rights, rights arising under common
law, statutes, or regulations, choses or things in action, commercial tort
claims, goodwill, patents, trade names, trademarks, service marks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringement claims, computer
programs, information contained in computer disks or tapes, literature,
reports, catalogs, insurance premium rebates, tax refunds, and tax refund
claims);

 

(e)                            goods (as that term is defined from time to
time in the Uniform Commercial Code as in effect in the State of New York);

 

(f)                              investment property (as that term is defined
from time to time in the Uniform Commercial Code as in effect in the State of
New York);

 

(g)                           negotiable collateral, including all
Grantor’s right, title and interest with respect to any letters of credit,
letter of credit rights, instruments, drafts, documents and chattel paper (as
each term is defined from time to time in the Uniform Commercial Code as in
effect in the State of New York) and any and all supporting obligations in
respect thereof;

 

(h)                           all parcels of real property and the related
improvements thereto (whether as owner, lessee, or otherwise);

 

(i)                               money or other assets of Grantor that now or
hereafter come into the possession, custody, or control of Grantor;

 

(j)                               the 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 of the foregoing, or
other tangible or

 

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intangible property 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 and

 

(k)         all
of the issued and outstanding capital stock of ZB Company, Inc. and Issuer held
by Grantor.

 

“Secured
Obligations” means any and all present and future obligations of Grantor
arising under or relating to the Guaranty, 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 Grantor.

 

“Trade Debt”
means the principal of, interest on (including any interest accruing after the
commencement of any bankruptcy event or which would have accrued but for such
event whether or not allowed) and other amounts due on or with respect to
indebtedness of Grantor to its vendors, suppliers and trade creditors incurred
in the ordinary course of business.

 

2.                                       Further
Assurances.  At any time and from
time to time at the request of the Subordinated Secured Party, Grantor shall
execute and deliver to the Subordinated Secured Party all such financing
statements and other instruments and documents in form and substance
satisfactory to the Subordinated Secured Party as shall be necessary or
desirable to fully perfect, when filed and/or recorded, the Subordinated
Secured Party’s subordinated security interests granted pursuant to Section
3 of this Agreement.  At any time
and from time to time, the Subordinated Secured Party 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 Subordinated Secured
Party may deem appropriate to perfect and to maintain perfected the
subordinated security interests granted in Section 3 of this
Agreement.  Before and after the
occurrence of any Event of Default, at the Subordinated Secured Party’s
request, Grantor 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 Subordinated Secured Party to
create and perfect, and to continue and preserve, an indefeasible subordinated
security interest in the Collateral in favor of the Subordinated Secured Party,
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, Grantor assigns and pledges to the Subordinated Secured Party,
and grants to the Subordinated Secured Party a subordinated security interest
in, all currently existing and hereafter acquired Collateral, 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 Grantor.

 

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 Guaranty.

 

5.                                       Rights
Upon Event of Default.  Upon the
occurrence and during the continuance of an Event of Default, the Subordinated
Secured Party shall have, in any jurisdiction where enforcement hereof is
sought, in addition to all other rights and remedies that the Subordinated

 

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Secured Party 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
Subordinated Secured Party (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.  Grantor 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 Subordinated Note or the Asset Purchase
Agreement.

 

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

 

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

 

7.1                                 Voting,
Dividend and Distribution Rights. 
At the option of the Subordinated Secured Party, all rights of Grantor
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 Subordinated Secured Party
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 Grantor
contrary to the provisions of this Agreement shall be received in trust for the
benefit of the Subordinated Secured Party, shall be segregated from other funds
of Grantor and forthwith shall be paid over to the Subordinated Secured Party
as pledged Collateral in the same form as so received (with any necessary
endorsements).

 

8.                                       Subordination.  This Agreement and the rights and
obligations evidenced hereby are subordinate in the manner and to the extent
set forth in that certain Subordination and Intercreditor Agreement dated as of
April 23, 2003 (as amended, supplemented or otherwise modified from time to
time, the “Subordination Agreement”) among Royal Vendex KBB N.V., the
Subordinated Secured Party, Grantor, FAO Schwarz, Inc. and Fleet Retail
Finance, Inc. (the “Senior Lender”), to the indebtedness (including interest)
owed by Grantor pursuant to the Loan
and Security Agreement dated as of April 23, 2003 (as amended, supplemented or
otherwise modified from time to time, the “Fleet Loan Agreement”), among
FAO, Inc., FAO Schwarz, Inc., ZB Company, Inc., The Right Start, Inc.,
Targoff-RS, LLC, Fleet Retail Finance Inc., Back Bay Capital Funding LLC and
the other lending institutions party from time to time party thereto and Fleet
Retail Finance Inc. as agent for the lenders as contemplated by the
Subordination Agreement, and to any other secured indebtedness of Grantor
permitted to be incurred by the Fleet Loan Agreement, and each Subordinated
Secured Party, by acceptance hereof, agrees to be bound by the provisions of
the Subordination Agreement.  In the event
that any provisions of this 

 

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Security Agreement are deemed
to conflict with the Subordination Agreement, the provisions of the
Subordination Agreement shall govern.

 

9.                                       Costs
and Expenses.  Grantor agrees to pay
to the Subordinated Secured Party all costs and expenses (including, without
limitation, reasonable attorneys’ fees and disbursements) incurred by the
Subordinated Secured Party 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
Subordinated Secured Party 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 Subordinated Secured Party by Grantor,
immediately upon demand, together with interest thereon from the date of demand
at the rate of 6% per annum.

 

10.                                 Continuing
Effect.  This Agreement shall remain
in full force and effect and continue to be effective should any petition be
filed by or against Grantor for liquidation or reorganization, should Grantor
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 Grantor’s
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 Subordinated Secured Party,
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.

 

11.                                 Release
of Grantor.  This Agreement shall be
terminated and all Secured Obligations of Grantor hereunder shall be released
when all Secured Obligations have been paid in full, upon termination of the
Guaranty, or upon such release of Grantor’s Secured Obligations hereunder.  Upon such termination Subordinated Secured Party
shall return any pledged Collateral to Grantor, 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 Grantor, or to the person or
persons legally entitled thereto, and to evidence or document the release of
the Subordinated Secured Party’s interests arising under this Agreement, all as
reasonably requested by, and at the sole expense of, Grantor.

 

12.                                 Agreement
to be Pari Passu with Trade Debt. 
Upon any dissolution, winding up, liquidation, reorganization (under
bankruptcy law) or insolvency of the Grantor (whether (a) in bankruptcy,
insolvency or receivership proceedings or upon an assignment for the benefit of
creditors, (b) upon the assets of the Grantor becoming less than its
liabilities, (c) in the event that the Grantor is unable to pay its debts when
they become due or (d) any other dissolution, winding up or liquidation of the
Grantor) (a “Triggering Event”), the Subordinated Secured Party agrees that
from and after the date the Subordinated Secured Party is notified that a
Triggering Event has occurred, the holders of the Trade Debt shall be pari
passu in right of payment and shall be entitled to share the proceeds of the
Collateral pro rata based on the aggregate principal amount of the Trade Debt
then outstanding, the interest thereon and any other amounts due thereon and
the aggregate amount of Secured Obligations then outstanding.

 

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13.                                 GOVERNING LAW.  THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
AND GOVERNED BY THE INTERAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.

 

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

 

	
   

  	
  “Grantor”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FAO, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Jerry R. Welch

  	
   

  
	
   

  	
  Title:

  	
     President and Chief
  Executive Officer

  	
   

  
					

 

6

 

	
  ACCEPTED AND AGREED

  AS OF THE DATE FIRST

  ABOVE WRITTEN:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  “Subordinated Secured Party”

  	
   

  
	
   

  	
   

  
	
  KBB RETAIL ASSETS CORP.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
  /s/ Marcel Smits

  	
   

  	
   

  
	
  Title:

  	
  Chairman

  	
   

  	
   

  
					

 

7Exhibit 10.57

 

FAO SCHWARZ, INC. SECURITY AGREEMENT

 

This SECURITY
AGREEMENT, dated as of April 23, 2003, is made by FAO Schwarz, Inc. (fka Toy
Soldier, Inc.), a Delaware corporation (“Grantor”), in favor of KBB Retail
Assets Corp. (fka F.A.O. Schwarz), a New York corporation (the “Subordinated
Secured Party”), the holder of that certain Subordinated Note (the
“Subordinated Note”) issued by Grantor pursuant to the Plan (as defined below)
to Subordinated Secured Party, with reference to the following facts:

 

RECITALS

 

A.                                   Pursuant to the
Asset Purchase Agreement by and among Grantor, FAO, Inc. (fka Right Start,
Inc.), a Delaware corporation (the “Parent”), Royal Vendex KBB N.V., a
Netherlands corporation, Quality Fulfillment Services, Inc., a Virginia
corporation (“QFS”) and the Subordinated Secured Party, dated November 19, 2001
(the “Asset Purchase Agreement”), the Subordinated Secured Party and QFS
agreed to accept, in partial payment of the Initial Purchase Price (as defined
in the Asset Purchase Agreement), certain subordinated notes.

 

B.                                     On January 13,
2003 the Parent and Grantor commenced their respective reorganization cases by
filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code.

 

C.                                     The
Subordinated Note is being issued to the Subordinated Secured Party pursuant to
the Parent’s and the Grantor’s First Amended Joint Plan of Reorganization as
confirmed on April 4, 2003 by the United States Bankruptcy Court District of
Delaware in Case No. 03-10119(LK) (the “Plan”) in compromise of the earlier
issued subordinated notes issued by Grantor.

 

D.                                    The Plan
requires that Grantor enter into this Security Agreement and grant security
interests to the Subordinated Secured Party  as herein provided.

 

E.                                      The security
interests created under this Security Agreement are junior and subordinated as
specified in Section 8 hereof.

 

 

AGREEMENT

 

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

 

1.                                       Definitions.  Terms defined in the Subordinated Note and
not otherwise defined in this Agreement shall have the meanings defined for
those terms in the Subordinated Note. 
Terms defined in the New York Uniform Commercial Code and not otherwise
defined in this Agreement or in the Subordinated Note  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.

 

1

 

“Collateral”
means all of Grantor’s now owned or hereafter acquired right, title and
interest in and to each of the following:

 

(a)                            accounts, contract rights, and all other
forms of obligations owing to Grantor arising out of the sale or lease of goods
or the rendition of services by Grantor, irrespective of whether earned by
performance, and any and all credit insurance, guaranties, or security
therefor;

 

(b)                           books and records including: ledgers; records
indicating, summarizing, or evidencing Grantor’s properties or assets or
liabilities; all information relating to Grantor’s business operations or
financial condition; and all other computer programs, disk or tape files,
printouts, runs, or other computer prepared information;

 

(c)                            deposit accounts (as that term is defined
from time to time in the Uniform Commercial Code as in effect in the State of
New York);

 

(d)                           all of Grantor’s general intangibles and
other personal property (including contract rights, rights arising under common
law, statutes, or regulations, choses or things in action, commercial tort
claims, goodwill, patents, trade names, trademarks, service marks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringement claims, computer
programs, information contained in computer disks or tapes, literature,
reports, catalogs, insurance premium rebates, tax refunds, and tax refund
claims);

 

(e)                            goods (as that term is defined from time to
time in the Uniform Commercial Code as in effect in the State of New York);

 

(f)                              investment property (as that term is defined
from time to time in the Uniform Commercial Code as in effect in the State of
New York);

 

(g)                           negotiable collateral, including all
Grantor’s right, title and interest with respect to any letters of credit,
letter of credit rights, instruments, drafts, documents and chattel paper (as
each term is defined from time to time in the Uniform Commercial Code as in
effect in the State of New York) and any and all supporting obligations in
respect thereof;

 

(h)                           all parcels of real property and the related
improvements thereto (whether as owner, lessee, or otherwise);

 

(i)                               money or other assets of Grantor that now or
hereafter come into the possession, custody, or control of Grantor; and

 

(j)                               the 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 of the foregoing, or
other tangible or

 

2

 

intangible property 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.

 

“Secured
Obligations” means any and all present and future obligations of Grantor
arising under or relating to the Subordinated Note 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 Grantor.

 

“Trade Debt”
means the principal of, interest on (including any interest accruing after the
commencement of any bankruptcy event or which would have accrued but for such
event whether or not allowed) and other amounts due on or with respect to
indebtedness of Grantor to its vendors, suppliers and trade creditors incurred
in the ordinary course of business.

 

2.                                       Further
Assurances.  At any time and from
time to time at the request of the Subordinated Secured Party, Grantor shall
execute and deliver to the Subordinated Secured Party all such financing
statements and other instruments and documents in form and substance
satisfactory to the Subordinated Secured Party as shall be necessary or
desirable to fully perfect, when filed and/or recorded, the Subordinated
Secured Party’s subordinated security interests granted pursuant to Section
3 of this Agreement.  At any time
and from time to time, the Subordinated Secured Party 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 Subordinated Secured
Party may deem appropriate to perfect and to maintain perfected the
subordinated security interests granted in Section 3 of this
Agreement.  Before and after the
occurrence of any Event of Default, at the Subordinated Secured Party’s
request, Grantor 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 Subordinated Secured Party to
create and perfect, and to continue and preserve, an indefeasible subordinated
security interest in the Collateral in favor of the Subordinated Secured Party,
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, Grantor assigns and pledges to the Subordinated Secured Party,
and grants to the Subordinated Secured Party a subordinated security interest
in, all currently existing and hereafter acquired Collateral, 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 Grantor.

 

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 Subordinated Note.

 

5.                                       Rights
Upon Event of Default.  Upon the
occurrence and during the continuance of an Event of Default, the Subordinated
Secured Party shall have, in any jurisdiction where enforcement hereof is
sought, in addition to all other rights and remedies that the Subordinated
Secured Party 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.

 

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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
Subordinated Secured Party (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.  Grantor 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 Subordinated Note or the Asset Purchase
Agreement.

 

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

 

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

 

7.1                                 Voting,
Dividend and Distribution Rights. 
At the option of the Subordinated Secured Party, all rights of Grantor
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 Subordinated Secured Party
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 Grantor contrary
to the provisions of this Agreement shall be received in trust for the benefit
of the Subordinated Secured Party, shall be segregated from other funds of
Grantor and forthwith shall be paid over to the Subordinated Secured Party as
pledged Collateral in the same form as so received (with any necessary
endorsements).

 

8.                                       Subordination.  This Agreement and the rights and
obligations evidenced hereby are subordinate in the manner and to the extent
set forth in that certain Subordination and Intercreditor Agreement dated as of
April 23, 2003 (as amended, supplemented or otherwise modified from time to
time, the “Subordination Agreement”) among Royal Vendex KBB N.V., the
Subordinated Secured Party, Grantor, FAO, Inc. and Fleet Retail Finance, Inc.
(the “Senior Lender”), to the indebtedness (including interest) owed by Grantor
pursuant to the Loan and Security
Agreement dated as of April 23, 2003 (as amended, supplemented or otherwise
modified from time to time, the “Fleet Loan Agreement”), among FAO,
Inc., FAO Schwarz, Inc., ZB Company, Inc., The Right Start, Inc., Targoff-RS,
LLC, Fleet Retail Finance Inc., Back Bay Capital Funding LLC and the other
lending institutions party from time to time party thereto and Fleet Retail
Finance Inc. as agent for the lenders as contemplated by the
Subordination Agreement, and to any other secured indebtedness of Grantor
permitted to be incurred by the Fleet Loan Agreement, and the Subordinated
Secured Party, by acceptance hereof, agrees to be bound by the provisions of
the Subordination Agreement.  In the
event that

 

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any provisions of this Security
Agreement are deemed to conflict with the Subordination Agreement, the
provisions of the Subordination Agreement shall govern.

 

9.                                       Costs
and Expenses.  Grantor agrees to pay
to the Subordinated Secured Party all costs and expenses (including, without
limitation, reasonable attorneys’ fees and disbursements) incurred by the
Subordinated Secured Party 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
Subordinated Secured Party 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 Subordinated Secured Party by Grantor,
immediately upon demand, together with interest thereon from the date of demand
at the rate of 6% per annum.

 

10.                                 Continuing
Effect.  This Agreement shall remain
in full force and effect and continue to be effective should any petition be
filed by or against Grantor for liquidation or reorganization, should Grantor
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 Grantor’s
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 Subordinated Secured Party,
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.

 

11.                                 Release
of Grantor.  This Agreement shall be
terminated and all Secured Obligations of Grantor hereunder shall be released
when all Secured Obligations have been paid in full or upon such release of
Grantor’s Secured Obligations hereunder. 
Upon such termination Subordinated Secured Party shall return any
pledged Collateral to Grantor, 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 Grantor, or to the person or persons legally
entitled thereto, and to evidence or document the release of the Subordinated
Secured Party’ interests arising under this Agreement, all as reasonably
requested by, and at the sole expense of, Grantor.

 

12.                                 Agreement
to be Pari Passu with Trade Debt. 
Upon any dissolution, winding up, liquidation, reorganization (under
bankruptcy law) or insolvency of the Grantor (whether (a) in bankruptcy,
insolvency or receivership proceedings or upon an assignment for the benefit of
creditors, (b) upon the assets of the Grantor becoming less than its
liabilities, (c) in the event that the Grantor is unable to pay its debts when
they become due or (d) any other dissolution, winding up or liquidation of the Grantor)
(a “Triggering Event”), the Subordinated Secured Party agrees that from and
after the date the Subordinated Secured Party is notified that a Triggering
Event has occurred, the holders of the Trade Debt shall be pari passu in right
of payment and shall be entitled to share the proceeds of the Collateral pro
rata based on the aggregate principal amount of the Trade Debt then
outstanding, the interest thereon and any other amounts due thereon and the
aggregate amount of Secured Obligations then outstanding.

 

5

 

13.                                 GOVERNING LAW.  THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
AND GOVERNED BY THE INTERAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.

 

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

 

	
   

  	
  “Grantor”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FAO SCHWARZ, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Jerry R. Welch

  	
   

  
	
   

  	
  Title:

  	
       President and Chief Executive
  Officer

  	
   

  

 

6

 

	
  ACCEPTED AND AGREED

  AS OF THE DATE FIRST

  ABOVE WRITTEN:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  “Subordinated Secured Party”

  	
   

  
	
   

  	
   

  
	
  KBB RETAIL ASSETS CORP.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
  /s/ Marcel Smits

  	
   

  	
   

  
	
  Title:

  	
  Chairman

  	
   

  	
   

  
					

 

7

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