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Exhibit 10.1

         March 25, 2003

FAO, Inc.
2520 Renaissance Boulevard
King of Prussia, PA 19406

Attention: Mr. Raymond Springer

Dear Mr. Springer:

        1. COMMITMENT

        We are pleased to advise you of the several commitments of Fleet Retail
Finance Inc. ("FRF") and Back Bay Capital Funding LLC ("Back Bay"), subject to
the terms and conditions hereof, respectively to provide a senior secured
revolving credit facility in the amount of $67,000,000 (the "Revolving Credit
Facility") and a senior secured term loan facility in the amount of $10,000,000
(the "Term Loan" and together with the Revolving Credit Facility, the
"Facilities") in favor of FAO, Inc. ("FAO") and its subsidiaries (collectively,
the "Borrower"), all as contemplated on the Summaries of Terms and Conditions
(the "Term Sheets") annexed to this letter as EXHIBIT A (with respect to the
Revolving Credit Facility) and EXHIBIT B (with respect to the Term Loan). The
commitment of FRF hereunder shall be limited to the Revolving Credit Facility
and the commitment of Back Bay hereunder shall be limited to the Term Loan.

        2. AGENT

        Fleet Retail Finance Inc. will act as Administrative Agent and
Collateral Agent (and is referred to herein in such capacities as the "Agent")
for itself and the other lenders (the "Revolving Credit Lenders") which fund the
Revolving Credit Facility and for Back Bay as lender for the Term Loan. The
Revolving Credit Lenders and Back Bay are referred to herein collectively as the
"Lenders".

        3. SYNDICATION

        FRF will act as the exclusive syndication manager for the Revolving
Credit Facility and, in such capacity, will perform the duties and exercise the
authority customarily associated with such role. No additional agents, arrangers
or syndication managers will be appointed with respect to the arrangement and
syndication of the Revolving Credit Facility. FRF will provide the full amount
of the Revolving Credit Facility but intends to syndicate the Revolving Credit
Facility among a group of financial institutions arranged by FRF. FRF, in its
sole discretion, but in consultation with the Borrower, will manage all aspects
of the syndication of the Revolving Credit Facility, including the selection of
lenders, the determination of when to approach potential lenders, the title and
roles given various lenders in the syndicate, and the final allocation of the
commitments among the lenders. FRF shall, in all events, have the final say
concerning all aspects of the syndication. FRF shall be released from a portion
of its commitment hereunder in an aggregate amount equal to the commitment of
those Lenders which commit and subscribe to the syndicate assembled by FRF.

        The Borrower will assist FRF in achieving a timely syndication, such
assistance to include, among other things, (a) direct contact during the
syndication between the Borrower's senior officers, representatives and
advisors, on the one hand, and prospective lenders, on the other hand, at such
times and places as FRF may reasonably request; (b) providing FRF and Back Bay
with all such financial and other information in the Borrower's possession with
respect to the Borrower and the transactions contemplated by this letter,
including but not limited to financial projections and forecasts relating to the
foregoing which FRF and Back Bay reasonably may request from time to time; and
(c) assistance in the preparation of a confidential information memorandum and
other marketing materials to be used in connection with the syndication. You
expressly permit FRF and Back Bay to distribute any and all documents and
information relating to the transactions contemplated hereby and received from
you or any other source to any potential Lender, participant or assignee, on a

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confidential basis reasonably satisfactory to the Borrower and to permit FRF and
Back Bay to publicize information in respect of the Facilities (including FRF's
and Back Bay's roles in the structuring and financing thereof) subject to your
prior reasonable approval of the form and content thereof.

        The Borrower acknowledges that the Agent, FRF and Back Bay, in
consultation with the Borrower, may change the pricing, structure and any other
terms of the Facilities if the Agent, FRF and Back Bay determine that such
changes are advisable in order to ensure a successful syndication or an optimal
credit structure for the Facilities.

        4. CONDITIONS

        The commitments of FRF, Back Bay and the Agent, as expressed in this
letter, are subject to those conditions set forth on the Term Sheets.

        5. INDEMNIFICATION

        Whether or not the credit facilities contemplated hereby are
established, the Borrower agrees to indemnify and hold harmless FRF, Back Bay,
the Lenders, the Agent, any participants, and their respective directors,
officers, employees, affiliates, agents, attorneys, accountants, consultants and
each other entity, if any, who controls any of the foregoing, and to hold such
persons and entities (each, an "Indemnified Person") harmless from and against
all losses, claims, damages, liabilities and expenses, joint or several, to
which any such person or entity may become subject arising out of or in
connection with this letter, the Term Sheets, the Facilities, the use of
proceeds of the extensions of credit thereunder or any related transaction or
any claim, litigation, investigation or proceeding relating to any of the
foregoing, regardless of whether any of such Indemnified Persons is a party
thereto, and to reimburse each Indemnified Person upon demand for any reasonable
legal or other expenses incurred in connection with investigating or defending
any of the foregoing; provided, however, the foregoing indemnification shall not
be available, as to any Indemnified Person, on account of or in respect to any
claim as to which there is a final determination made in a judicial proceeding
(in which the Agent, FRF, Back Bay and such Indemnified Party have had an
opportunity to be heard), which determination includes a specific finding that
the person seeking indemnification pursuant hereto had acted in a grossly
negligent manner or in bad faith.

        If for any reason the foregoing indemnification is unavailable to any
Indemnified Person or insufficient to hold it harmless, then the Borrower shall
contribute to the amount paid or payable by such Indemnified Person as a result
of such loss, claim, damage or liability to the maximum amount legally
permissible. The Borrower also agrees that neither any Indemnified Person, nor
any of their respective affiliates, partners, directors, agents, employees or
controlling persons, shall have any liability to the Borrower, any person
asserting claims on behalf or in right of the Borrower or any other person in
connection with or as a result of either this arrangement or any matter referred
to herein or in the loan documentation except to the extent that there is a
final determination made in a judicial proceeding (in which the Agent, FRF, Back
Bay and such Indemnified Party have had an opportunity to be heard), which
determination includes a specific finding that the losses, claims, damages,
liabilities or expenses incurred by the Borrower resulted from the gross
negligence or bad faith of such Indemnified Person.

        No Indemnified Person shall be liable for any indirect, special,
punitive, or consequential damages in connection with or arising out of this
letter or the transactions contemplated hereby. This indemnification shall
survive any closing of the Facilities.

        6. REIMBURSEMENT

        The Borrower shall reimburse FRF, Back Bay and the Agent from time to
time on demand for reasonable out-of-pocket expenses (including, but not limited
to, reasonable expenses of due diligence investigation, reasonable syndication
expenses, reasonable travel expenses and reasonable fees,

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disbursements and charges of its counsel), in each instance incurred in
connection with the Facilities and the preparation of this letter, the Term
Sheets and the definitive documentation for the Facilities, whether or not the
transactions are closed.

        In accordance with the Term Sheets, FRF has received a due diligence
deposit of $125,000 and Back Bay has received a due diligence deposit of $85,000
(collectively, the "Work Fee"). If the Facilities are so established, then the
Work Fee shall be accounted for by FRF and Back Bay and any excess amounts shall
be returned to the Borrower; provided, however, the Borrower shall remain
obligated to reimburse the Agent, FRF and Back Bay for any legal fees and
expenses reasonably incurred in connection with the transactions contemplated by
this letter whether or not the Facilities are closed and whether or not the Work
Fee is sufficient for such purpose. If the Facilities are not so established
then the Work Fee may be retained by FRF and Back Bay as additional compensation
for FRF's and Back Bay's lost opportunity costs. The Work Fee shall be in
addition to the obligations of the Borrower to reimburse the Agent, FRF and Back
Bay for the expenses to be reimbursed by the Borrower as herein provided.

        7. CLOSING

        This letter shall terminate unless accepted by the Borrower on or before
5:00 p.m. (Boston time) on March 28, 2003 by signing below and returning this
letter, so signed to the Agent, together with that portion of the Commitment
Fees due to FRF and Back Bay upon the acceptance hereof, as more specifically
provided in the Term Sheets.

        If this letter is so accepted, then, subject to the terms and conditions
of this letter, FRF would be obligated to establish the Revolving Credit
Facility and Back Bay would be obligated to provide the Term Loan if all
conditions precedent thereto are satisfied (as reasonably determined by the FRF,
the Agent and Back Bay) on or before April 30, 2003. The closing, in such event,
would take place in Boston, Massachusetts at the offices of the Agent's counsel.

        The Borrower, with its acceptance of this letter, shall be deemed to
have authorized the Agent and its counsel to file financing statements in form
prepared by the Agent's counsel and in accordance with the Term Sheets with a
view towards the filing of such financing statements prior to the anticipated
closing date. If the Facilities are not so established, the Agent shall promptly
terminate all filed financing statements.

        This letter does not constitute an unconditional commitment to lend.
Such a commitment will exist only following: execution and delivery of
definitive loan documents (each in form satisfactory to the Agent, FRF and Back
Bay); the recordation of such instruments and documents as the Agent, FRF and
Back Bay reasonably determine to be appropriate under the circumstances; and the
satisfaction of all conditions precedent referenced herein, in the Term Sheets,
or in any of the definitive loan documents.

        8. NONTRANSFERABILITY OF COMMITMENT

        The identity of the Borrower is of material importance to the Agent, FRF
and Back Bay. Consequently, this commitment may not be assigned or transferred
by the Borrower (it being understood that a change of control of the Borrower
shall not be considered an assignment or transfer). FRF and Back Bay may assign
its obligations (a) under this commitment to any present or future affiliate of
FRF, Back Bay or the Agent, (b) in connection with the syndication contemplated
hereby or (c) after the closing of the Facilities, in accordance with the loan
documentation.

        9. NON-DISCLOSURE OF COMMITMENT; EXCLUSIVE DEALINGS

        The Borrower shall maintain as confidential the terms and conditions of
this letter and the Term Sheets and the terms, conditions, provisions and
documentation of the Facilities. Without limiting the foregoing, this letter and
the Term Sheets may not be disclosed to any persons other than the

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employees and affiliates of the Borrower and its accountants, financial
advisors, existing lenders, creditors committee and counsel or as may be
required by law without the prior written consent of FRF, Back Bay and the
Agent. Further, none of the foregoing may discuss the pricing or other terms
contained herein with any person not entitled to receive a copy hereof. The
failure to comply with the foregoing provisions shall automatically terminate
any and all obligations of FRF, Back Bay and the Agent with respect to the
financing contemplated hereunder.

        By executing this letter where indicated below, the Borrower covenants
that, from and after the date of this letter and until the consummation of the
transactions contemplated herein or the expiry of FRF's and Back Bay's
obligations hereunder, the Borrower (and its officers, directors, employees,
agents and representatives) (a) shall not directly or indirectly solicit,
initiate, encourage, facilitate, or discuss any submission, proposal, or offer
from, or any effort or attempt by, any other person, entity, or group relating
to the financing of the Borrower or any of its affiliates, and (b) shall provide
the Agent with immediate written notice (with reasonable detail of the facts and
circumstances relating thereto) of any submission, proposal, or offer, of any
request for information, related directly or indirectly to any such financing of
the Borrower or any of its affiliates.

        10. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL

        This letter is a contract under the laws of the State of New York and
shall pursuant to New York General Obligations Law §5-1401, be construed in
accordance with and be governed by the laws of the State of New York.

        The Borrower agrees that any legal action, proceeding, case, or
controversy against the Borrower with respect to this letter or the Facilities
may be brought in the Courts of the State of New York or any federal court
sitting therein, as the Agent, FRF or Back Bay, as applicable, may elect in its
sole discretion. By acceptance of this letter, the Borrower for itself and in
respect of its property, accepts, submits, and consents generally and
unconditionally, to the jurisdiction of the aforesaid courts. The Borrower
Waives any objection based on forum non conveniens and any objection to venue of
any action or proceeding instituted under or with respect to this letter or the
Facilities and consents to the granting of such legal or equitable remedy as is
deemed appropriate by the relevant Court. The Borrower further agrees that any
action commenced by the Borrower asserting any claim or counterclaim arising
under or in connection with this letter or the Facilities shall be brought
solely in the Courts of the State of New York or any federal court sitting
therein, and that such Courts shall have exclusive jurisdiction with respect to
any action.

        The Borrower, the Agent, FRF and Back Bay make each of the following
waivers knowingly, voluntarily, and intentionally, and each understands that the
Agent, FRF and Back Bay, in providing this letter, and the Borrower, are each
relying on such waivers.

        THE BORROWER, THE AGENT, FRF AND BACK BAY EACH WAIVE THE FOLLOWING:

THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE
BORROWER, THE AGENT, FRF OR BACK BAY IS OR BECOMES A PARTY (WHETHER SUCH CASE OR
CONTROVERSY IS INITIATED BY OR AGAINST THE BORROWER, THE AGENT, FRF AND/OR BACK
BAY OR IN WHICH THE BORROWER, THE AGENT, FRF OR BACK BAY, IS JOINED AS A PARTY
LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF, ANY
RELATIONSHIP AMONGST OR BETWEEN THE BORROWER OR ANY OTHER PERSON AND THE AGENT,
FRF OR BACK BAY.

[Remainder of page Intentionally Blank]

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        If the foregoing is in accordance with your understanding of our
agreement, please sign this letter in the space indicated below and return it to
the Agent.

    Very truly yours,
 
 
FLEET RETAIL FINANCE INC.,
individually and as Agent
 
 
By:
 
         

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    Title:
 
 
BACK BAY CAPITAL FUNDING, LLC
 
 
By:
 
         

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    Title:

The foregoing is agreed to:

FAO, INC.

By:                                                          

            Title:
            Dated:

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Exhibit A

FAO, Inc.—Emergence
Summary of Terms and Conditions
For Senior Revolving Credit Facility
March 25, 2003

Borrowers:   FAO, Inc. and its subsidiaries (collectively, the "Borrower" or the
"Company")
Agent:
 
Fleet Retail Finance Inc. ("FRF" or the "Agent")
Lenders:
 
Fleet Retail Finance Inc. and a group of financial institutions to be arranged
by the Agent, in its sole discretion
Credit Facilities:
 
The revolving credit facility (the "Revolver Facility") shall consist of a
revolving line of credit in the maximum principal amount of $67,000,000 with a
sub-limit of $15,000,000 for documentary and standby letters of credit. This
revolving line will be provided in combination with a fully funded tranche B
term facility in an amount of no less than $10,000,000 to be provided by Back
Bay Capital Funding LLC ("Back Bay"), as outlined in the Term Sheet of even date
herewith (the "Term Facility"). Each of which will be subject to acceptable
documentation, inclusive of an intercreditior agreement satisfactory to FRF. The
combined facilities will total $77,000,000.
Purpose:
 
Borrowing under the Revolver Facility will be used to fund working capital and
inventory purchases in accordance with the Company's budget and business plan
and to fund the Company's emergence upon confirmation of a reorganization plan
(the "Plan") by the Bankruptcy Court.
Maturity:
 
Three (3) years from the closing date, but at all times coterminous with the
Term Facility.
Security:
 
The Revolver Facility shall have a perfected first lien on all presently owned
and hereafter acquired assets of the Borrower subject to a second lien by Back
Bay and permitted liens as set forth in the final documentation (including first
liens on equipment, and with respect to equipment liens not existing as of the
closing, such liens shall be subject to intercreditor terms and conditions
acceptable to FRF, as Agent).
Commitment Fee:
 
As set forth on Schedule I.
Borrowing Options:
 
Borrowings under the Revolver Facility shall be at the Fleet Bank Base Rate
("Base Rate Loan") plus the Applicable Margin as indicated below or the
Eurodollar Rate plus the Applicable Margin as indicated below ("Eurodollar Rate
Loan"). Eurodollar Rates will be quoted for 1, 2, 3 and 6 months. Base Rate
Loans shall require one business day's advance notice. Eurodollar Rate Loans
shall require three business days' advance notice.
 
 
 
 
 
 
 
 
 
 
 
 
 

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Interest on Base Rate loans will be due and payable monthly in arrears. Interest
on Eurodollar Rate Loans will be payable at the end of each applicable interest
period or quarterly in arrears, whichever is earlier. All interest on Base Rate
Loans and Unused Fee and other fee calculations shall be based on a 365/366-day
year and actual days elapsed. All interest on Eurodollar Rate Loans shall be
based on a 360-day year and actual days elapsed.
Applicable Margin:
 
 
 
Level
 
Excess
Availability
 
Eurodollar
Margin
 
Base Rate
Margin
 
         

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I
 
TBD
 
2.00%
 
        0%
 
 
 
 
 
 
II
 
TBD
 
2.25%
 
    0.25%
 
 
 
 
 
 
III
 
TBD
 
2.50%
 
    0.50%
 
 
 
 
 
 
Level II (the starting point) will be in effect for the first year of the
commitment, unless excess availability falls into Level III. Thereafter, any
upward or downward pricing adjustments will be made quarterly based upon the
average excess availability for the prior quarter.
 
 
 
 
 
 
As used herein, "Excess Availability" shall be the amount by which the lesser of
(i) the Borrowing Base and (ii) the Maximum Commitment exceeds the loans and
letters of credit outstanding under the Facility.
 
 
Default Rate Pricing:
 
2% above the applicable margin.
L/C Issuing Bank:
 
Fleet National Bank
Letters of Credit:
 
Standby and Documentary Letters of Credit shall be priced at the Applicable
Margin for Eurodollar Rate Loans per annum, payable on the total face amount of
each outstanding letter of credit quarterly in advance.
Unused Fee:
 
Three eighths of one percent (0.375%) on the average unused portion of the
Revolver Facility.
Borrowing Base/
Advance Rates:
 
Advances under the Revolver Facility will be subject to a borrowing base (the
"Borrowing Base") to be calculated daily and determined by the following
formula:
 
 
Advances against the cost value of the Company's Eligible Inventory and Eligible
Letter of Credit Inventory shall not exceed 85.0% of the appraised liquidation
value of inventory.
 
 
 
 
 
 
 
 
 
 
 
 
 

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Plus
 
 
85.0% of Eligible Credit Card Receivables
 
 
Minus
 
 
applicable reserves.
 
 
Eligible Inventory shall consist of stock ledger inventory at cost less any
capitalized costs (exclusive of usual and customary freight), and shall exclude
the following: Inventory that cannot be sold, including non-merchandise
categories (labels, bags, packaging, etc.), inventory in foreign locations
(except for inventory supported by eligible letters of credit whose initial term
does not exceed 60 days) and samples. Additionally, eligible inventory will
specifically exclude (i) damaged goods, return to vendor merchandise, packaways,
consignment inventory and such other similar categories to be determined based
on due diligence, and (ii) third party locations not under the Borrower's
control unless appropriate waivers are obtained.
 
 
Eligible Credit Card Receivables shall consist of amounts payable from
nationally recognized credit card processors, payable within 3-to-5 business
days, on a non-recourse basis.
 
 
The actual reserves and final advance rates will be determined based upon the
results of due diligence, which will include a third party appraisal of the net
liquidation (GOB) value of inventory, and a commercial finance examination,
which will be shared by and coordinated with FRF.
Prepayment Fee:
 
If the Company terminates the Revolver Facility and repays the loan prior to
maturity with funds borrowed from sources other than FRF, Fleet Boston, NA or
any of its affiliates, the company will pay an early termination fee equal to
2.0% of the maximum commitment if terminated in the first year of the facility
and 1% if terminated in the second or third year of the facility. Except, there
shall be no prepayment fee if the Company refinances the Revolver Facility
within 90 days of maturity of the Revolver Facility.
Financial Covenants:
 
Financial Covenants to include but not be limited to:
 
 
•
 
Minimum excess borrowing availability at all times must exceed the greater of
$4.0 million or 7.5% of the Borrowing Base.
 
 
•
 
Maximum annual capital expenditures to be determined in the course of due
diligence.
 
 
•
 
Minimum ratio of Accounts Payable to Inventory to be determined.
 
 
 
 
 
 
 
 
 
 
 
 
 

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•
 
Minimum EBITDA to be determined.
Cash Concentration Account:
 
Fleet National Bank shall remain throughout the term of the Revolver Facility
the concentration bank for all of the Borrowers' cash management. The Borrowers'
disbursement account may be at Fleet National Bank or another bank acceptable to
FRF subject to a control agreement satisfactory to FRF. All credit card
collections will be transferred directly to FRF and subject to direction letters
with the credit card issuers. All collections and proceeds from asset sales
(other than credit card collections) will be transferred to concentration
accounts with institutions which have entered into control agreements
satisfactory to FRF and such amounts will on a regular basis be transferred to
the Fleet concentration bank. Proceeds will be applied on a daily basis to
reduce borrowings under the Revolver Facility on the business day immediately
following receipt.
Conditions Precedent:
 
Closing shall be conditioned upon satisfaction of the following conditions
precedent and other conditions customary to transactions of this type, or
reasonably required by the Agent.
 
 
1.    FRF shall have received a copy of the Plan and the final terms of any Plan
to be consummated and the order of the Bankruptcy Court approving such Plan (the
"Confirmation Order") shall be reasonably satisfactory to FRF. All material
conditions precedent to confirmation, as defined in the Plan, shall have been
met (or the waiver thereof shall have been consented to by FRF). The
confirmation order shall not have been reversed, modified, amended, or stayed
and, unless otherwise agreed by FRF, all appeal periods relating to the
confirmation order shall have expired, and no appeals from the confirmation
order shall be outstanding. Except as consented to by FRF, the Bankruptcy
Court's retention of jurisdiction under the confirmation order shall not govern
the enforcement of the loan and security documents for the Revolver or any
rights or remedies relating thereto. The capital structure of the Borrower after
giving effect to the Plan shall be reasonably satisfactory to FRF in all
respects and shall include evidence of a successful equity private placement
generating not less than $25,000,000 of new cash equity (net of costs) and
available to fund the Plan and for ongoing operations. Further, the terms of
indebtedness (if any) and capital stock issued under the Plan shall be
reasonably satisfactory to FRF in all respects.
 
 
2.    Funding of the Term Facility.
 
 
3.    Minimum day one opening excess availability under the Revolver Facility
(after giving effect to the funding of the Term Facility and the Minimum Excess
Availability Covenant) shall be equal to or greater than $14,000,000. All post
petition accounts payable and taxes shall be paid current; excluding good faith
disputes and "liabilities subject to compromise".
 
 
 
 
 
 
 
 
 
 
 
 
 

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4.    All necessary consents and approvals to the Revolver Facility shall have
been obtained.
 
 
5.    Satisfactory completion of due diligence, including without limitation, a
commercial finance examination and collateral examinations.
 
 
6.    Usual and customary financial reporting requirements, including monthly
stock ledger by department, certain asset based reporting requirements and
monthly business plan for 12 consecutive months from date of projected closing.
 
 
7.    Preparation, execution and delivery of definitive documentation (the
"Definitive Documentation") satisfactory to the Agent (including a certified
Borrowing Base certificate and reasonably appropriate security documentation).
 
 
8.    Satisfactory inter-creditor or agency agreement provisions between the
Lender and (a) the agent for the Senior Credit Facility, (b) Saks and (c) any
other debt of the Borrower as part of the plan.
 
 
9.    Liens on all of the Borrower's collateral shall have been filed and
otherwise perfected to the satisfaction of the Agent.
 
 
10.    Legal opinions of counsel to the Company reasonably satisfactory in form
and substance to FRF, including, without limitation, with respect to the
enforceability and perfection of FRF's security interests.
 
 
11.    No material misstatements in the materials furnished to FRF for its
review prior to closing, or in representations or warranties made in the final
documentation. FRF must be satisfied that any financial statements and
projections delivered to it fairly present the business and financial condition
of the Company and its subsidiaries, and that there has been no material adverse
change in the assets, business, financial condition, income or prospects of the
Company since the date of the most recent financial information delivered to
FRF.
 
 
12.    The absence of any litigation or other proceeding the result of which
might have a material adverse effect on the Company (excluding the current
Chapter 11 proceeding).
 
 
13.    Absence of any material adverse change in the condition (financial or
otherwise), operations, assets, income and/or prospects of the Company.
 
 
14.    The proposed financing is subject to the condition that no material
changes in governmental regulations or policies affecting the Company or FRF
occur prior to Closing.
 
 
15.    The absence of any default of any material contract or agreement of the
Company.
 
 
 
 
 
 
 
 
 
 
 
 
 

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16.    The Bankruptcy Court shall have entered an order allowing the Company to
emerge from bankruptcy protection.
 
 
17.    There shall not have occurred any disruption or material adverse change
in the financial or capital markets in general that would, in the opinion of the
Agent, have a material adverse effect on the market for loan syndications or in
the markets for equity securities in particular, or adversely affecting the
syndication.
Documentation:
 
The Revolver will be subject to the negotiation, execution of an acceptable
credit agreement and related security agreements, guarantees, and any other
documents as shall be requested by FRF. Such credit agreement will contain
representations, and warranties, conditions precedent, covenants, events of
default and other provisions appropriate for transactions of this size, type and
purpose and shall be acceptable to FRF and its counsel in every respect.
Expenses and Indemnification:
 
The Company will pay FRF's reasonable legal and other out-of-pocket expenses
incurred in connection with the negotiation, preparation and execution of the
documentation, regardless of whether the Revolver Facility should close.
Documentation shall contain enforcement expense and indemnification provisions
for the benefit of FRF customary for a transaction of this size, type and
purpose.
Governing Law:
 
State of New York.

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Schedule I

Commitment Fee:   0.80% of the total commitment. 30% of the Commitment Fee
($160,800) shall be due and payable on the Borrowers acceptance of the
commitment letter (the "Commitment Acceptance Fee") with the remainder due at
Closing; provided, however, the Borrowers can instruct FRF to apply up to
$75,000 of the Work Fee previously paid by the Borrowers to FRF as partial
payment of the Commitment Acceptance Fee with the remainder due in cash. The
Commitment Fee shall be non-refundable upon pay.

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[BackBay Capital LOGO]

Exhibit B

FAO, Inc.—Emergence
Summary of Terms and Conditions
For Term Loan Credit Facility
March 25, 2003

Borrowers:   FAO, Inc. and its subsidiaries (collectively, the "Borrower" or the
"Company").
Lender:
 
Back Bay Capital Funding LLC ("Back Bay").
Credit Facility:
 
$10,000,000 term loan to be fully funded at closing (the "Credit Facility"), and
structured on a first in/last out basis as part of a $67,000,000 senior credit
facility to be agented by Fleet Retail Finance Inc. ("FRF"), (the "Senior Credit
Facility"). Total facility size will be $77,000,000.
Purpose:
 
For working capital and general corporate purposes, all in accordance with the
Borrower's bankruptcy court approved confirmation of emergence plan of
reorganization (the "Plan").
Maturity:
 
Three (3) years from the closing date, but at all times coterminous with the
Senior Credit Facility.
Security:
 
The Credit Facility will be secured by a 2nd security position on all of the
Borrowers' assets, capital stock of the Borrower and each of its subsidiaries;
subject only to a 1st security position in favor of the Senior Credit Facility
and liens permitted under the Senior Credit Facility (including first liens on
equipment, and with respect to equipment liens not existing as of the closing,
such liens shall be subject to intercreditor terms and conditions acceptable to
FRF, as Agent).
Borrowing Base:
 
At no time shall outstanding amounts under the Senior Credit Facility plus
outstanding amounts under the Credit Facility exceed 95% of the current
appraised liquidation (GOB) value of Eligible Inventory from November 1st
through August 14th, and 102.5% of the current appraised liquidation (GOB) value
of Eligible Inventory from August 15th through October 31st; plus, 85% of
eligible credit card receivables; minus, applicable reserves.
 
 
 
 
 
 
 
 
 
 
 
 
 

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Eligible Inventory shall consist of stock ledger inventory at cost less any
capitalized costs (exclusive of usual and customary freight), and shall exclude
the following: Inventory that cannot be sold, including non-merchandise
categories (labels, bags, packaging, etc.), inventory in foreign locations
(except for inventory supported by eligible letters of credit whose initial term
does not exceed 60 days) and samples. Additionally, eligible inventory will
specifically exclude (i) damaged goods, return to vendor merchandise, packaways,
consignment inventory and such other similar categories to be determined based
on due diligence, and (ii) third party locations not under the Borrower's
control unless appropriate waivers are obtained.
 
 
Eligible Credit Card Receivables shall consist of amounts payable from
nationally recognized credit card processors, payable within 3-to-5 business
days, on a non-recourse basis.
 
 
The actual reserves and final advance rates will be determined based upon the
results of due diligence, which will include a third party appraisal of the net
liquidation (GOB) value of inventory, and a commercial finance examination,
which will be shared by and coordinated with FRF.
Commitment Fee:
 
As set forth on Schedule I.
Current Pay Interest:
 
From the closing through the first anniversary date of closing, 13.00% per
annum, payable monthly in arrears. Thereafter, interest shall accrue at a rate
equivalent to Fleet Bank's prime lending rate plus 8.75% per annum adjusted
quarterly, payable monthly in arrears.
PIK (Payment in Kind) Interest:
 
2.50% per annum accruing, to be capitalized and added to both the principal
balance of the Credit Facility and the maximum commitment amount, on the first
day of each calendar month, and payable upon maturity.
Monitoring Fee:
 
As set forth on Schedule I.
Early Termination Fee:
 
The greater of (i) yield revenue due within the 1st fifteen (15) months
following the closing (Commitment Fee, Current Pay Interest, PIK Interest) less
actual payments of Commitment Fee, Current Pay Interest, PIK Interest (Partial
pre-payments will be applied to the preceding formula on a pro-rata basis); or
(ii) 1.00% of the amount pre-paid. If the Credit Facility is repaid as a result
of a refinancing effort that takes place after the close of the 33rd month
following the initial loan closing, the Early Termination Fee shall be waived.
Amortization:
 
None
Financial Covenants:
 
•
 
Minimum excess availability at all times, equal to the greater of (i) $4,000,000
or (ii) 7.50% of the Borrowing Base;
 
 
 
 
 
 
 
 
 
 
 
 
 

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•
 
Maximum annual capital expenditures (threshold amounts t/b/d);
 
 
•
 
Minimum ratio of Accounts Payable to Inventory (threshold ratio amount to be
determined);
 
 
•
 
Minimum EBITDA (threshold amounts to be determined).
Conditions Precedent:
 
Closing shall be conditioned upon satisfaction of the following conditions
precedent and other conditions customary to transactions of this type, or
reasonably required by the Lender.
 
 
1.
 
The final terms of any Plan to be consummated and the order of the Bankruptcy
Court approving such Plan (the "Confirmation Order") shall be reasonably
satisfactory to the Lender. All material conditions precedent to confirmation,
as defined in the Plan, shall have been met (or the waiver thereof shall have
been consented to by the Lender). The confirmation order shall not have been
reversed, modified, amended, or stayed and, unless otherwise agreed by the
Lender, all appeal periods relating to the confirmation order shall have
expired, and no appeals from the confirmation order shall be outstanding. Except
as consented to by the Lender, the Bankruptcy Court's retention of jurisdiction
under the confirmation order shall not govern the enforcement of the loan and
security documents for the Facility or any rights or remedies relating thereto.
The capital structure of the Borrower after giving effect to the Plan shall be
reasonably satisfactory to the Lender in all respects and shall include evidence
of a successful equity private placement generating not less than $25,000,000 of
new cash equity (net of costs) and available to fund the Plan and for ongoing
operations. Further, the terms of indebtedness (if any) and capital stock issued
under the Plan shall be reasonably satisfactory to the Lender in all respects.
 
 
2.
 
Minimum excess availability under the Senior Credit Facility at closing, after
giving effect to the funding of the Credit Facility and the Minimum Excess
Availability Covenant, shall be equal to or greater than $14,000,000. All post
petition accounts payable and taxes shall be paid current; excluding good faith
disputes.
 
 
3.
 
Liens on all of the Borrower's collateral shall have been filed and otherwise
perfected to the satisfaction of the Lender.
 
 
4.
 
Satisfactory completion of due diligence, including, without limitation,
completion of a commercial finance examination.
 
 
 
 
 
 
 
 
 
 
 
 
 

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5.
 
All necessary consents and approvals to the financing shall all have been
obtained.
 
 
6.
 
Receipt by the Lender of financial projections and the Plan, which shall be
satisfactory to the Lender in both form and substance.
 
 
7.
 
Completion of legal due diligence investigation by the Lender's counsel, with
results satisfactory to the Lender and its counsel.
 
 
8.
 
Preparation, execution and delivery of definitive documentation satisfactory to
the Lender. Documentation shall contain representations, covenants, events of
default, expense reimbursement, and indemnification provisions for the benefit
of the Lender customary for transactions of this size, type, and purpose.
 
 
9.
 
Satisfactory (a) inter-creditor or agency agreement provisions with any other
debt of the Borrower as part of the plan and (b) collateral agency agreements
with Saks.
 
 
10.
 
The Lender shall have received (i) reasonable and customary opinions of counsel
to the Borrower as to the transactions contemplated hereby which opinions are
satisfactory to the Lender and (ii) such corporate resolutions, certificates and
other documents as the Lender shall reasonably request. With respect to the form
and scope of the opinion of Borrower's counsel, the Lender shall rely upon the
requirements as determined by counsel to FRF, as Agent to the lenders under the
Senior Credit Facility.
 
 
11.
 
No material misstatements in the materials furnished to the Lender for its
review prior to closing, or in representations or warranties made in the final
documentation. The Lender must be satisfied that any financial statements and
projections delivered to it fairly present the business and financial condition
of the Borrower; and that there has been no material adverse change in the
assets, business, financial condition, income or prospects of the Borrower since
the date of the most recent financial information delivered to the Lender.
 
 
12.
 
The absence of any litigation or other proceeding the result of which might have
a material adverse effect on the Borrower (excluding the current Chapter 11
proceedings).
 
 
13.
 
The absence of any default of any material contract or agreement of the Borrower
or any of its subsidiaries.
 
 
 
 
 
 
 
 
 
 
 
 
 

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14.
 
The proposed financing is subject to the condition that no material changes in
governmental regulations or policies affecting the Borrower or Lender involved
in this transaction occur prior to the closing date.
Expenses:
 
Legal, appraisal, commercial finance examination (field audit), and any other
out of pocket expenses of the Lender will be paid by the Borrower.
Governing Law:
 
State of New York.

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Schedule I

Commitment Fee:   3.00% of the total commitment. $75,000 of the Commitment Fee
shall be due and payable on the Borrowers acceptance of the commitment letter
(the "Commitment Acceptance Fee") with the remainder due at Closing; provided,
however, the Borrowers can instruct Back Bay to apply up to $50,000 of the Work
Fee previously paid by the Borrowers to Back Bay as partial payment of the
Commitment Acceptance Fee with the remainder due in cash. The Commitment Fee
shall be non-refundable upon pay.
Monitoring Fee:
 
$25,000 payable at closing and on the 1st and 2nd anniversary dates of the
closing.

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QuickLinks

Exhibit 10.1

Exhibit A

FAO, Inc.—Emergence Summary of Terms and Conditions For Senior Revolving Credit
Facility March 25, 2003
Schedule I

Exhibit B

FAO, Inc.—Emergence Summary of Terms and Conditions For Term Loan Credit
Facility March 25, 2003
Schedule I