WILMINGTON, Del. - FAO Inc., owner of the FAO Schwarz and Zany Brainy toy store chains, has asked a bankruptcy judge for permission to shut its remaining stores including its flagship location on New York's Fifth Avenue unless the company can find financing, court papers say.
FAO said Monday that investors offering to buy $30 million in stock backed out after "unexpected complications" with a $77 million loan package. FAO's reorganization plan hinges on the transaction and requires it to complete financing by tomorrow.
FAO requests in court papers, "in the event the plan is not consummated, to cease operations at and close the stores."
The company, which also operates Right Start stores, filed for bankruptcy protection in January in the face of competition by Wal-Mart Stores Inc. and other discounters. As part of its reorganization effort, FAO closed some stores and fired workers. U.S. Bankruptcy Judge Lloyd King is scheduled to hear the request today.
The company is seeking permission to close 158 stores, court papers say. FAO operated 253 stores when it filed for Chapter 11 protection and won court permission to close 95 locations.
"The environment was never going to be really easy, but it turned out to be more difficult than they expected," said Sean McGowan, director of research at Gerard Klauer Mattison & Co. and a toy industry analyst. "The industry needs healthy retailers; it's never a good sign when you lose one."
FAO has been negotiating terms of a $67 million revolving credit line with a group of banks led by Fleet Retail Finance Inc. and a $10 million term loan provided by Back Bay Capital Funding LLC.
A group of investors led by Kayne Anderson Capital Advisors LP had agreed to purchase $30 million in convertible preferred stock. The investors backed out after "complications" with the loan package, FAO said in a statement.
FAO's bankruptcy filing was triggered when Wells Fargo Retail Finance LLC declined to relax debt restrictions.