FAO fails to complete loan deal to let it get out of bankruptcy

Liquidation possible for toy company

April 15, 2003|By BLOOMBERG NEWS

WILMINGTON, Del. - FAO Inc., owner of the FAO Schwarz, Zany Brainy and Right Start store chains, said yesterday that a $30 million investment has fallen through, threatening its exit from bankruptcy and raising the risk of liquidation.

The prospective buyers of preferred FAO shares backed out after "unexpected complications" with a $77 million loan package, the company said.

FAO's reorganization plan hinges on the deal and requires it to negotiate financing by Friday. FAO said its options might include replacement equity funding, a sale of all or some of its operations or liquidation.

"The challenge is simply to find investors to replace that. They still have a lot of viability in those three businesses," said Christopher Byrne, editor of the Toy Report newsletter and an independent toy consultant. "There are a lot of people within the children's entertainment industry who believe in it."

FAO filed for bankruptcy protection in January in the face of competition from Wal-Mart Stores Inc. and other discounters. As part of its reorganization effort, FAO closed some stores and fired workers. It also plans to sell toys at 245 Saks Inc. locations. U.S. Bankruptcy Judge Lloyd King approved the company's reorganization plan April 4.

The company, best known for its flagship FAO Schwartz store on New York's Fifth Avenue, has been financing operations with cash and other collateral assets. FAO will seek an extension beyond the scheduled Friday expiration to use those funds, said FAO spokeswoman Renee Hollinger.

"We are exploring all alternatives; it's a little too soon to tell what's going to happen," Hollinger said. "We are hopeful that liquidation will not be the solution."

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