Days after warning it may have to go out of business, toy retailer FAO Inc. announced it has the financing it needs to emerge from bankruptcy protection early next week and keep open its remaining FAO Schwarz, Right Start and Zany Brainy stores.
A federal bankruptcy court in Delaware yesterday approved a plan that appeases a group of investors critical to FAO's $77 million exit-financing program. Earlier this week, those investors had withdrawn from the deal because of "unexpected complications," FAO said.
In a statement late yesterday, the company said the investors are back on board and will purchase $30 million in convertible preferred stock. That should allow FAO to complete its reorganization plan and begin making payments to creditors, it added.
Even so, U.S. Bankruptcy Judge Lloyd King scheduled an auction of FAO's assets for Wednesday in case the retailer, based in King of Prussia, Pa., encounters more glitches.
"It's a fall-back plan in case something cataclysmic happens between now and next week," said Gregory W. Werkheiser, an attorney for unsecured creditors. The court's "unusual" decision "allows the lenders some assurances that this process will come to a close."
In January, FAO filed for bankruptcy protection, a victim of cut-throat competition and poor integration of its three chains, which cater to children of different ages.
Right Start Inc. purchased bankrupt retailer Zany Brainy in September 2001 and then bought 23 of FAO Schwarz's 40 U.S. stores that November. The company then renamed itself FAO Inc.
But it could not mesh the high-end toy company's operations with those of Right Start and Zany Brainy, which had their own performance problems.
Meanwhile, the company continued to cater to upscale shoppers even as rivals such as Wal-Mart, the nation's largest toy retailer, were offering the same or similar toys at rock-bottom prices.
To help finance the retailer after its emergence from bankruptcy, a group of banks led by Fleet Retail Finance Inc. committed $77 million and equity investors led by Hancock Partners and Kayne Anderson Capital Advisors L.P. agreed to purchase the $30 million in stock. The $77 million hinged on the equity investors coming through with their purchase.
Earlier this week, FAO declined to comment on why the equity investors pulled out.