0001104659-03-008144.txt : 20030505 0001104659-03-008144.hdr.sgml : 20030505 20030505171552 ACCESSION NUMBER: 0001104659-03-008144 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20030505 GROUP MEMBERS: FORTUNE TWENTY-FIFTH, INC. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: FAO INC CENTRAL INDEX KEY: 0000878720 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 953971414 STATE OF INCORPORATION: CA FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-42042 FILM NUMBER: 03682653 BUSINESS ADDRESS: STREET 1: 2520 RENAISSANCE BOULEVARD STREET 2: . CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6102787800 MAIL ADDRESS: STREET 1: 2520 RENAISSANCE BOULEVARD STREET 2: . CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 FORMER COMPANY: FORMER CONFORMED NAME: RIGHT START INC /CA DATE OF NAME CHANGE: 19930328 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: KAYNE FRED CENTRAL INDEX KEY: 0000949806 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: FORTUNE FINANCIAL STREET 2: 1800 AVENUE OF THE STARS, SUITE 1112 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3105562721 MAIL ADDRESS: STREET 1: C/O FORTUNE FINANCIAL STREET 2: 1800 AVENUE OF THE STARS STE 310 CITY: LOS ANGELES STATE: CA ZIP: 90067 SC 13D/A 1 j9916_sc13da.htm SC 13D/A

SEC 1746
(11-02)

Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

	UNITED STATES	OMB APPROVAL
	SECURITIES AND EXCHANGE COMMISSION	OMB Number: 3235-0145
	Washington, D.C. 20549	Expires: December 31, 2005
	SCHEDULE 13D/A	Estimated average burden hours per response. . 11

Under the Securities Exchange Act of 1934
(Amendment No. 5)*

FAO, INC.

(Name of Issuer)

COMMON STOCK

(Title of Class of Securities)

30240S 60 0

(CUSIP Number)

Fred Kayne
c/o Fortune Financial
1800 Avenue of the Stars, Suite 310
Los Angeles, California 90067
(310) 551-0322

(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)

April 23, 2003

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. [ ]

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

^* The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP No. 30240S 60 0

	1.	Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only). FRED KAYNE

	2.	Check the Appropriate Box if a Member of a Group (See Instructions)
		(a)			[ ]
		(b)			[X]

	3.	SEC Use Only

	4.	Source of Funds (See Instructions) AF, PF

	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ]

	6.	Citizenship or Place of Organization UNITED STATES OF AMERICA

Number of Shares Beneficially Owned by Each Reporting Person With			7.	Sole Voting Power 2,775,482

			8.	Shared Voting Power 1,091,628

			9.	Sole Dispositive Power 2,775,482

			10.	Shared Dispositive Power 1,091,628

	11.	Aggregate Amount Beneficially Owned by Each Reporting Person 3,867,110

	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [X](1)

	13.	Percent of Class Represented by Amount in Row (11) 50.8%

	14.	Type of Reporting Person (See Instructions) IN

(1) Excludes certain shares of Common Stock and securities convertible into Common Stock held by or under the control of Richard Kayne, Kayne Anderson Capital Advisors, L.P. ("KACALP"), Woodacres LLC, Charles Norris, Les Biller and Hancock Park Capital II, L.P. ("Hancock") (See Item 6).

CUSIP No. 30240S 60 0

	1.	Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only). FORTUNE TWENTY-FIFTH, INC.

	2.	Check the Appropriate Box if a Member of a Group (See Instructions)
		(a)			[ ]
		(b)			[X]

	3.	SEC Use Only

	4.	Source of Funds (See Instructions) WC

	5.	Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) [ ]

	6.	Citizenship or Place of Organization NEVADA, UNITED STATES OF AMERICA

Number of Shares Beneficially Owned by Each Reporting Person With			7.	Sole Voting Power 0

			8.	Shared Voting Power 1,091,628

			9.	Sole Dispositive Power 0

			10.	Shared Dispositive Power 1,091,628

	11.	Aggregate Amount Beneficially Owned by Each Reporting Person 1,091,628

	12.	Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) [X](1)

	13.	Percent of Class Represented by Amount in Row (11) 14.3%

	14.	Type of Reporting Person (See Instructions) CO

(1) Excludes certain shares of Common Stock and securities convertible into Common Stock held by or under the control of Richard Kayne, KACALP, Woodacres LLC, Charles Norris, Les Biller and Hancock (See Item 6).

Item 1.	Security and Issuer
The equity securities to which this statement on Schedule 13D relates are the Common Stock, par value $0.001 (the "Common Stock") of FAO, Inc., a Delaware corporation (the "Issuer"), with its principal executive offices located at 2520 Renaissance Boulevard, King of Prussia, PA, 19406.

Item 2.	Identity and Background
(a)	The Reporting Persons include Fred Kayne and Fortune Twenty-Fifth, Inc., the sole shareholder of which is Fred Kayne.
(b)	Fred Kayne's business address is c/o Fortune Financial, 1800 Avenue of the Stars, Suite 310, Los Angeles, California 90067. Fortune Twenty-Fifth's business address is P.O. Box 381, Glenbrook, NV 89413 with a copy to Mr. Fred Kayne c/o Fortune Financial, 1800 Avenue of the Stars, Suite 310, Los Angeles, California 90067
(c)	Fred Kayne is President, Chairman and sole shareholder of Fortune Twenty-Fifth. Fortune Twenty-Fifth's principal business is investments. Mr. Kayne is also President of Fortune Fashions Industries and Chairman of Big Dog Holdings, Inc. Fortune Fashions Industries' principal business is sportswear manufacturer and its address is 4700 S. Boyle Ave., Vernon, California 90058-3021. Big Dog Holdings, Inc. principal business is the development and retailing of sportswear and related accessories and its address is 121 Gray Avenue, Suite 300, Santa Barbara, California 93101.
(d)	Neither of the Reporting Persons has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) during the last five years.
(e)	Neither of the Reporting Persons has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction which resulted in a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or findings any violation with respect to such laws during the last five years.
(f)	Fred Kayne is a citizen of the United States of America.
Because of the voting agreement (the "Stockholders Agreement") described in Item 6, the Reporting Persons together with Richard Kayne, KACALP, Woodacres LLC, Charles Norris, Les Biller and Hancock may be deemed to constitute a "group" as such term is used in Section 13(d)(3) of the rules and regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Except for the Stockholders Agreement and the other agreements mentioned in Item 6, the Reporting Persons have no affiliation or agreement or other arrangement relating to the Issuer or securities of the Issuer with any of Richard Kayne, KACALP, Woodacres LLC, Charles Norris, Les Biller or Hancock. Neither the making or contents of this filing constitutes an admission by Fred Kayne that a group exists, and the existence of any such group is expressly disclaimed. The Reporting Persons also expressly disclaim any beneficial ownership in any Common Stock beneficially owned by Hancock, Woodacres LLC, Charles Norris, Les Biller, Richard Kayne or KACALP, which separately file statements on Schedule 13D with respect to their respective beneficial ownership of the Issuer's securities.

Item 3.	Source and Amount of Funds or Other Consideration
Fred Kayne purchased 4,000 shares of the Issuer's Class I Convertible Preferred Stock convertible into 2,666,667 shares of Common Stock in a private transaction on April 23, 2003 in connection with the Issuer's emergence from bankruptcy, at a purchase price of $4,000,000. Fortune Twenty-Fifth received debt securities convertible into 952,381 shares of Common Stock in compromise of certain debt claims held against the Issuer in connection with the Issuer's bankruptcy. Fred Kayne has agreed not to convert such debt securities prior to January 12, 2004. Fortune Twenty-Fifth also received shares of the Issuer's Class J Convertible Preferred Stock convertible into 64,482 shares of Common Stock in compromise of certain debt claims held against the Issuer in connection with the Issuer's bankruptcy. In addition, Fortune Twenty-Fifth received warrants exercisable at $1.95 per share to purchase an additional 35,862 shares of Common Stock and had warrants to purchase 10,060 shares of Common Stock repriced to an exercise price of $1.95, in each case, in compromise of claims through the bankruptcy of the Issuer. All of the Reporting Persons' outstanding options and warrants (other than those repriced as noted above) with respect to the Issuer were cancelled as part of the bankruptcy. The remainder of the Reporting Persons' beneficial ownership of the Issuer's Common Stock is attributable to Common Stock held prior to the bankruptcy that survived the bankruptcy. Immediately upon its emergence from bankruptcy, the Issuer conducted a 1:15 reverse stock split with respect to the Common Stock. The share amounts described herein refer to the number of shares after giving effect to the reverse stock split.

Item 4.	Purpose of Transaction
	The Reporting Persons currently intend to hold all of the acquired securities for investment purposes and for the purpose of enhancing their control of the Issuer.

Item 5.	Interest in Securities of the Issuer
(a)	Fred Kayne beneficially owns 3,867,110 shares of the Issuer's Common Stock, or approximately 50.8% of the Issuer's outstanding Common Stock. Of those shares, Fortune Twenty-Fifth beneficially owns 1,091,628 shares of the Issuer's outstanding Common Stock, or approximately 14.3% of the Issuer's outstanding Common Stock. Assuming all of the Company's outstanding Class I Convertible Preferred Stock (which votes with the Common Stock) was converted to Common Stock (and assuming other convertible securities were not converted), these percentages would drop to 16.8% and 4.7%, respectively.
(b)	Subject to the Stockholders Agreement, Fred Kayne has the sole power to vote and dispose, or direct the disposition, of 3,867,110 shares of the Issuer's Common Stock. Of those shares, Fortune Twenty-Fifth has the sole power, subject to the Stockholders Agreement, to vote and dispose, or direct the disposition, of 1,091,628 shares of the Issuer's Common Stock. Fred Kayne is President, Chairman and sole shareholder of Fortune Twenty-Fifth.
(c)	The following transactions in the Issuer's Common Stock beneficially owned by Fred Kayne and Fortune Twenty-Fifth were effected in the last 60 days:
	Date Acquired	Type of Security	Amount of Common or Equivalents Acquired	Price Per Common Share	Where/how Transaction Effected
	4/23/03	Class I Preferred	2,666,667	$1.50	From Issuer (1)
	4/23/03	Convertible Debt	952,381	$1.95	From Issuer (2)
	4/23/03	Class J Preferred	64,482	$1.95	From Issuer (3)
	4/23/03	Warrants	35,862	$1.95	From Issuer (4)
	4/23/03	Repriced Warrants	10,060	$1.95	From Issuer (4)

(1)	Issuable upon conversion of Class I Convertible Preferred. The Reporting Persons expressly disclaim any beneficial ownership in any of the Class I Convertible Preferred (or the Common Stock into which such preferred stock is convertible) owned by Richard Kayne, KACALP, Woodacres LLC, Charles Norris, Les Biller or Hancock.
(2)	Issuable upon conversion of Convertible Notes. The Reporting Persons expressly disclaim any beneficial ownership in any of the Convertible Notes (or the Common Stock into which such notes are convertible) owned by Richard Kayne or KACALP.
(3)	Issuable upon conversion of Class J Convertible Preferred. The Reporting Persons expressly disclaim any beneficial ownership in any of the Class J Convertible Preferred (or the Common Stock into which such preferred stock is convertible) owned by Richard Kayne, KACALP, Woodacres LLC, Charles Norris, Les Biller or Hancock.
(4)	Issuable upon exercise of Warrants. The Reporting Persons expressly disclaim any beneficial ownership in any of the Warrants (or the Common Stock for which such warrants are exercisable) owned by Richard Kayne or KACALP.
(d)	Not applicable.
(e)	Not applicable.
By reason of the Stockholders Agreement and operation of Section 13(d) of the Exchange Act as described in Item 2, Fred Kayne may be deemed to beneficially own an additional (i) 3,333,333 shares beneficially owned by Hancock, (ii) 10,137,815 shares beneficially owned or controlled by Richard Kayne and KACALP, (iii) 2,066,667 shares beneficially owned by Woodacres LLC, (iv) 666,667 shares beneficially owned by Charles Norris and (v) 1,333,333 shares beneficially owned by Les Biller. The information with respect to the beneficial ownership by Hancock, Richard Kayne and KACALP is based on information supplied by, or on behalf of, Hancock, Richard Kayne and KACALP and Fred Kayne makes no representation or guarantee as to the completeness or accuracy of this information.
Fred Kayne expressly disclaims any beneficial ownership in any Common Stock held or controlled by Hancock, Richard Kayne or KACALP notwithstanding the stockholders agreement among Fred Kayne, Hancock, Woodacres LLC, Charles Norris, Les Biller, Richard Kayne and KACALP with respect to voting rights as described in Item 6.

Item 6.	Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer
Fred Kayne is Chairman of the Board of Directors of the Issuer and is also the brother of Richard Kayne, a principal of KACALP. KACALP and its affiliates beneficially own, directly or indirectly, a substantial portion of the Issuer's Common Stock.
On April 23, 2003, in connection with the Issuer’s emergence from bankruptcy the Reporting Persons consummated the transactions contemplated by the Securities Purchase Agreement among the Issuer, the Reporting Persons and the other parties listed on the signature pages thereto, as amended (the “Purchase Agreement”). The Purchase Agreement includes, among other provisions, (i) pursuant to Section 5 of the Purchase Agreement, an agreement that the securities purchased thereby 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; and (ii) pursuant to Section 7 of the Purchase Agreement, an agreement that the Issuer may cause certain purchasers of the Convertible Preferred Stock (“Conversion Shares”), to cause the issuance of a letter of credit in favor of the Issuer’s lenders on the terms set forth therein.
In connection with the Purchase Agreement, the Reporting Persons entered into a Registration Rights Agreement, dated as of April 23, 2003, with the Issuer and the other parties thereto, pursuant to which purchasers of the Issuer’s Convertible Preferred Stock (“Holders”) were granted rights to have Conversion Shares owned by such Holders registered for sale under the Securities Act of 1933, as amended, under the terms and conditions described therein.
In connection with the Purchase Agreement, the Reporting Persons also entered into the Shareholders Agreement, dated as of April 23, 2003, with the Issuer and the other parties thereto, pursuant to which purchasers of the Issuer's Convertible Preferred Stock ("Holders") were granted rights to have Conversion Shares owned by such Holders registered for sale under the Securities Act of 1933, as amended, under the turns and conditions described therein.
The Reporting Persons agreed in the Stockholders Agreement among the Reporting Persons, KACALP, Richard Kayne, Woodacres LLC, Charles Norris, and Hancock in connection with Hancock's purchase of the Issuer's securities that they will vote all securities of the Issuer that are entitled to vote thereon in favor the election of one director designated by Hancock until Hancock holds less than 3,000 shares of Class I Convertible Preferred Stock of the Issuer (or the equivalent in such securities and Common Stock).

Item 7.	Material to Be Filed as Exhibits
99.1	Stockholders Agreement, dated April 22, 2003, among Kayne Anderson Capital Advisors, L.P., Fred Kayne, Richard Kayne, Woodacres LLC, Charles Norris, Fortune Twenty-Fifth, Inc. and Hancock Park Capital II, L.P.
99.2	Securities Purchase Agreement, dated as of April 3, 2003, by and among the Issuer, Saks Incorporated, Richard Kayne, Fred Kayne, Kayne Anderson Capital Advisors, L.P., Hancock Park Capital II, L.P., and PCG Tagi, LLC (Series H).*
99.3	First Amendment to Securities Purchase Agreement, dated as of April 21, 2003, by and among the Issuer, PCG Tagi, LLC (Series H), Fred Kayne, Kayne Anderson Capital Advisors, L.P., Woodacres LLC, Charles Norris, and Les Biller, as trustee.
99.4	Shareholders Agreement, dated as of April 23, 2003, by and among the Issuer, Saks Incorporated, Richard Kayne, Fred Kayne, Kayne Anderson Capital Advisors, L.P., Hancock Park Capital II, L.P., Woodacres LLC, Charles Norris, and Les Biller, as trustee.
99.5	Registration Rights Agreement, dated as of April 23, 2003, by and among the Issuer, Saks Incorporated, Richard Kayne, Fred Kayne, Kayne Anderson Capital Advisors, L.P., Hancock Park Capital II, L.P., Woodacres LLC, Charles Norris, and Les Biller, as trustee.
* Previously filed as Exhibit 10.2 to Form 8-K filed on April 21, 2003 (File No. 000-19536), which exhibit is incorporated herein by this reference.

Signature

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

May 2, 2003
Date
	/s/ Fred Kayne
	Signature
	Fred Kayne
	Name/Title

	FORTUNE TWENTY-FIFTH, INC.
	/s/ Fred Kayne
	Signature

	Fred Kayne/President
	Name/Title

EX-99.1 3 j9916_ex99d1.htm EX-99.1

Exhibit 99.1

April 22, 2003

Hancock Park Capital II, L.P.

10323 Santa Monica Blvd., Suite 101

Los Angeles, CA 90025

Ladies and Gentlemen:

Re: Agreement Regarding Certain Matters

Ladies and Gentlemen:

In consideration of the purchase by Hancock Park Capital II, L.P. (“Hancock”) of 5,000 shares of FAO, Inc. Class I Convertible Preferred Stock (the “Shares”), and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, this letter constitutes the following agreement:

1. Kayne Anderson Capital Advisors LP, Woodacre LLC, Fortune Twenty-Fifth, Inc., Fred Kayne, Richard Kayne, Charles Norris, and Les Biller hereby agree that, so long as Hancock and its affiliates own not less than 3,000 Shares or the shares of FAO, Inc. (“FAO”) Common Stock into which such Shares have been converted, each of them shall cause all shares of Class I Convertible Preferred Stock, Class J Convertible Preferred Stock, and Common Stock owned by them to be voted so as to elect the designee of Hancock to FAO’s Board of Directors.

2. Fred Kayne and Richard Kayne hereby agree that with respect to all FAO, Inc., FAO Schwarz, Inc., and ZB Company, Inc. Equipment Notes dated on or about April 22, 2003 (the “Notes”) beneficially owned by either of them (including, but not limited to, those held by Fortune Twenty-Fifth, Inc.), they will not exercise the conversion right contained in such Notes at any time prior to January 12, 2004.

3. Each party to this agreement severally represents that (i) such party has full capacity to execute, deliver and perform this letter agreement; (ii) this letter agreement has been duly authorized and approved, if applicable; and (iii) this letter agreement is the valid and binding obligation of such party and enforceable against such party in accordance with its terms.

Sincerely,

	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


	FRED KAYNE,
	an Individual


	By	/s/ Fred Kayne


	RICHARD KAYNE,
	an Individual


	By	/s/ Richard Kayne


	WOODACRES LLC


	By	/s/ David Shladovsky
	Its:	General Counsel of Manager


	CHARLES NORRIS,
	an Individual


	By	/s/ Charles Norris

		FORTUNE TWENTY-FIFTH, INC.


		By	/s/ Fred Kayne
		Its:	President


Accepted and Agreed:

HANCOCK PARK CAPITAL II, L.P.,
a Delaware limited partnership

By:	Hancock Park Associates III, LLC, a Delaware limited liability company


By:	/s/ Brian McDermott
General Partner

EX-99.3 4 j9916_ex99d3.htm EX-99.3

Exhibit 99.3

FIRST AMENDMENT

SECURITIES PURCHASE AGREEMENT

THIS FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT (this “First Amendment”) is entered into and effective as of April 21, 2003 by and among, on the one hand, FAO, Inc., a Delaware corporation (“Company”), and certain purchasers (the “Purchasers”) under that certain Securities Purchase Agreement dated as of April 3, 2003 (the “Purchase Agreement”).

RECITALS

Company and Purchasers have entered into the Purchase Agreement pursuant to which Purchasers have agreed to purchase and Company has agreed to sell its Series I Convertible Preferred Stock (the “Preferred Stock”). Certain Purchasers have requested and Company has agreed to make certain amendments to the Purchase Agreement. Certain new persons (the “New Purchasers”) wish to purchase the Preferred Stock that certain existing Purchasers have a right to purchase.

Section 8.3 of the Purchase Agreement permits amendment with the written consent of the Company and any Purchaser who would be materially adversely affected by the amendment.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties signatory hereto agree as follows.

1. Definitions Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to such terms in the Purchase Agreement.

2. Amendments to the Purchase Agreement.

(a) Section 4.1 of the Purchase Agreement is hereby amended by adding to the end of the definition of “Initial Equity Capitalization” the following: “, as set forth in Schedule 2.3 attached hereto.”

(b) Section 7.2 of the Purchase Agreement is hereby amended and restated in its entirety as follows:

“Section 7.2 Commitment Provisions. The Purchasers, pro rata in proportion to each Purchaser’s Commitment, 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;

(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).”

(c) Section 7.4(b) of the Purchase Agreement is hereby amended by adding to the end of such subsection the following: “; provided that the issuance of such warrants will not result in the cancellation of the LC Notes.”

(d) Schedule I of the Purchase Agreement is hereby amended and restated in its entirety as follows:

“SCHEDULE I

PURCHASERS	AMOUNT OF SHARES PURCHASED	PRICE

Saks Incorporated	5,000	$	5,000,000
Fred Kayne	4,000	$	4,000,000
Kayne Anderson Capital Advisors, L.P.	5,000	$	5,000,000
Richard Kayne	4,900	$	4,900,000
Hancock Park Capital II, L.P.	5,000	$	5,000,000
Woodacres LLC	3,100	$	3,100,000
Les Biller, as trustee	2,000	$	2,000,000
Charles Norris	1,000	$	1,000,000	”

(e) Schedule 2.3 of the Purchase Agreement is hereby amended and restated in its entirety as follows:

“Schedule 2.3

Capitalization

The equity capitalization of FAO will be as follows on the Closing Date (without giving effect to the 1:15 reverse stock split):

Security		Common Equivalents
Series I Convertible Preferred Stock*		305,000,000
Series J Convertible Preferred Stock**		65,704,954
Warrants***		1,650,000
Common Stock****		39,835,968
Total:		412,190,924

* Assumes 30,000 shares of Series I Convertible Preferred Stock are issued under the Agreement at a conversion rate of $.10 per share. Also includes 500 shares of Series I Convertible Preferred Stock issued to KBB Retail Assets Corp. in compromise of its claims in the Bankruptcy Case Proceedings.

** Series J Convertible Preferred Stock ranks pari passu with the Series I and is issued in compromise of claims by Kayne Anderson affiliates and Fred Kayne in connection with the Bankruptcy Case Proceedings. Assumes that Kayne Anderson affiliates and Fred Kayne convert the $4 million in aggregate principal amount of convertible Equipment Notes they receive in compromise of their claims in the Bankruptcy Case Proceedings.

*** Includes Common Stock issuable upon exercise of warrants held by Kayne Anderson Affiliates and Fred Kayne.

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

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

3. Choice of Law. The validity of this First Amendment, its construction, interpretation and enforcement, and the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the laws of the State of New York.

4. Counterparts; Telefacsimile Execution. This First Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this First Amendment by telefacsimile shall be as effective as delivery of a manually executed counterpart of this First Amendment. Any party delivering an executed counterpart of this First Amendment by telefacsimile also shall deliver a manually executed counterpart of this First Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this First Amendment.

5. Effect on Purchase Agreement. The Purchase Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. The execution, delivery, and performance of this First Amendment shall not operate as a waiver of or, except as expressly set forth herein, as an amendment of, any right, power, or remedy of the Agent under the Purchase Agreement, as in effect prior to the date hereof.

6. Effect of Signatures of New Purchasers. Upon execution of this Amendment, the New Purchasers will become entitled to all the rights granted to Purchasers under the Purchase Agreement and become obligated under the Purchase Agreement as fully as if they had signed the Purchase Agreement originally, Kayne Anderson Capital Advisors, L.P., as Agent, Richard Kayne and Fred Kayne will have their purchase rights reduced as indicated and PCG Tagi, LLC (Series H) shall no longer have any rights or obligations under the Purchase Agreement or any related agreement.

7. Miscellaneous.

(a) Upon and after the effectiveness of this First Amendment, each reference in the Purchase Agreement to “this Agreement”, “hereunder”, “herein”, “hereof” or words of like import referring to the Purchase Agreement, and each reference in the related documents to “the Purchase Agreement”, “thereunder”, “therein”, “thereof” or words of like import referring to the Purchase Agreement, shall mean and be a reference to the Purchase Agreement as modified and amended hereby.

(b) The Purchase Agreement and all related documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Company.

[The rest of this page is intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Securities Purchase Agreement to be executed as of the date first above written.

		FAO, INC.


		By		/s/ Raymond P. Springer
		Raymond P. Springer Executive Vice President


EXITING PURCHASER:		NEW PURCHASERS:

PCG TAGI, LLC (SERIES H)		WOODACRES LLC

By	/s/ Kurt M. Tomita	By			/s/ David Shladovsky
	Kurt M. Tomita				David Shladovsky
Title:	Vice President, Finance and Secretary	Title:			General Counsel of General Partner


			/s/ Charles Norris
		CHARLES NORRIS

		NEW PURCHASER:


		/s/ Les Biller
		LES BILLER, as Trustee Amended and Restated Les and Sheri Biller Revocable Trust U/A Dated June 5, 2002


		REMAINING PURCHASERS:

		KAYNE ANDERSON CAPITAL ADVISORS,
		L.P., as Agent


		By	/s/ David Shladovsky
			David Shladovsky
		Title:	General Counsel


		/s/ Fred Kayne
		FRED KAYNE

EX-99.4 5 j9916_ex99d4.htm EX-99.4

Exhibit 99.4

SHAREHOLDERS AGREEMENT

TAG-ALONG RIGHTS AND DRAG-ALONG RIGHTS

This SHAREHOLDERS AGREEMENT, dated as of April 23, 2003 (this “Agreement”), among the holders (the “Holders”) who have purchased the Class I Convertible Preferred Stock (the “Convertible Preferred Stock”) of FAO, Inc. (the “Company”) and the Company.

R E C I T A L S:

The Holders and the Company have entered into a Securities Purchase Agreement, dated as of April 3, 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 subject to such Tag-Along Transfer divided by (2) the total number of Conversion Shares held by the Holder proposing such 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 subject to such Tag-Along Transfer 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 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 as a result 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 so transferred free of the rights and obligations of this Section. Any transferee under a transfer not subject to this Section shall take Conversion Shares so transferred 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 by the Company 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 later of the Response Date or any such extension, the purchase of all Conversion Shares shall be deemed to have been made on the closing of the Drag-Along Transfer (the “Closing Date”) without further action by the Company or any Holder. Any share certificates for Conversion Shares held by any Holder shall be deemed cancelled on the Closing Date and each Holder shall promptly forward such certificate, duly endorsed for transfer, to the Company upon the written request of the Company. Upon consummation of the Drag-Along Transfer, the Company shall remit or arrange for direct transfer to each Holder that portion of the sale proceeds to which such Holder is entitled as a result of the Drag-Along Transfer.

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.

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 subject to a Tag-Along Transfer, in each case, until it shall first have received a copy of a Tag-Along Notice with respect to the securities proposed to be subject to a Tag-Along Transfer 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.

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, 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., a Delaware corporation


By	/s/ Jerry R. Welch
Name:		Jerry R. Welch
Title:		President and Chief Executive Officer

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.

SAKS INCORPORATED, a Tennessee corporation


By	/s/ George W. Carlis
Name:		George W. Carlis
Title:		Vice President

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.

	FRED KAYNE, an Individual


	By	/s/ Fred Kayne
		Fred Kayne

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.

KAYNE ANDERSON CAPITAL ADVISORS, L.P.
a California limited partnership


By Kayne Anderson Investment Management, Inc. a Nevada corporation


By	/s/ Richard Kayne
Name:		Richard Kayne
Title:		Chief Executive Officer

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.

	RICHARD KAYNE, an Individual


	By	/s/ Richard Kayne
		Richard Kayne

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.

HANCOCK PARK CAPITAL II, L.P. a Delaware limited partnership


By Hancock Park Associates III, LLC a Delaware limited partnership its General Partner


By	/s/ Brian McDermott
Name:		Brian McDermott
Title:		Partner

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.

WOODACRES LLC


By	/s/ David Shladovsky
Name:		David Shladovsky
Title:		General Counsel of Manager

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.

	CHARLES NORRIS, an Individual


	By	/s/ Charles Norris
		Charles Norris

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.

	LES BILLER, as Trustee Amended and Restated Les and Sheri Biller Revocable Trust U/A Dated June 5, 2002


	By	/s/ Les Biller
		Les Biller

EX-99.5 6 j9916_ex99d5.htm EX-99.5

Exhibit 99.5

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (the “Agreement”) is made as of April 23, 2003 between FAO, Inc., a Delaware corporation (the “Company”), and each of the undersigned and those who may purchase the S ecurities (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 April 3, 2003, as amended by a First Amendment to Securities Purchase Agreement dated as of April 21, 2003 (as so amended, the “Purchase Agreement”); and

WHEREAS, pursuant to the Purchase Agreement, the Company and such Purchaser s 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 Class I Convertible Preferred Stock (the “Class 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 Common Stock issued or issuable upon the conversion of Class 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. In addition, subject to the provisions of this Section 1.1, at any time after the date hereof if the Company is then eligible to use Form S-3 for such purpose, a Purchaser or Purchasers holding at least 40% of the Registration Threshold Number of shares of Common Stock may request registration for sale under the Act of all or part of the Securities (a “ ;Special S-3 Demand”); provided that the Company shall not be required to make any registration under this sentence if Form S-3 is, or becomes, unavailable for such purpose. Within ten days after receipt of a demand notice or a Special S-3 Demand pursuant to this Section 1.1(a), the Company shall notify the other holders of Securities that a registration demand 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(a) (other than one arising from a Special S-3 Demand) 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 (A) more than two requests for demand registration pursuant t o this Section 1.1(a) (other than a Special S-3 Demand) or (B) in any 12-month period more than one Special S-3 Demand. The Company shall not be required to keep any such 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 this Section 1.1(a) 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 (i ii) 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.< /font>

(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 de mand registration for purposes of Section 1.1(a) hereof unless Purchasers fail to pay such expenses.

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 Sectio n 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 registr ation 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 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 and, in the case of a registration statement pursuant to Section 1.2 hereof, shall have entered into any underwriting agreement in connection with such registration. 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) 0; 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 pros pectus), 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 prospec tus 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 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 un derwriter 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 7;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.

< font size="2" face="Times New Roman" style="font-size:10.0pt;">

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 in the registration statement or any omission to state therein a materia l 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 t o 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) &# 160; 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 registrat ion 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 execu ted, delivered and filed such further documents and instruments, and to obtain such 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 Class 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 b y 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: Legal

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 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 count erparts. 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., a Delaware corporation


By	/s/ Jerry R. Welch
Name:		Jerry R. Welch
Title:		President and Chief Executive Officer

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.

SAKS INCORPORATED, a Tennessee corporation


By	/s/ George Carlis
Name:		George Carlis
Title:		Vice President

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.

WOODACRES LLC


By	/s/ David Shladovsky
Name:		David Shladovsky
Title:		General Counsel of Manager

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.

	RICHARD KAYNE, an Individual


	By	/s/ Richard Kayne
		Richard Kayne

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.

	LES BILLER, as Trustee Amended and Restated Les and Sheri Biller Revocable Trust U/A Dated June 5, 2002


	By	/s/ Les Biller
		Les Biller

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.

HANCOCK PARK CAPITAL II, L.P. a Delaware limited partnership


By Hancock Park Associates III, LLC a Delaware limited partnership its General Partner


By	/s/ Brian McDermott
Name:		Brian McDermott
Title:		Partner

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.

	CHARLES NORRIS, an Individual


	By	/s/ Charles Norris
		Charles Norris

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.

KAYNE ANDERSON CAPITAL ADVISORS, L.P.
a California limited partnership


By Kayne Anderson Investment Management, Inc. a Nevada corporation


By	/s/ David Shladovsky
Name:		David Shladovsky
Title:		General Counsel

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.

HANCOCK PARK CAPITAL II, L.P. a California limited partnership


By Hancock Park Associates III
a Delaware limited partnership
its General Partner

By	/s/ Brian McDermott
Name:		Brian McDermott
Title:		Partner

Under the Securities Exchange Act of 1934 (Amendment No. 5)*

Signature

Common Equivalents

Under the Securities Exchange Act of 1934
(Amendment No. 5)*