Discovery Zone May File for Chapter 11

Discovery Zone Inc., a major operator of children’s indoor entertainment centers, said Thursday that it may seek Chapter 11 bankruptcy protection.

The announcement sparked a heavy sell-off of the company’s stock. Its price slid as low as 68.75 cents a share before closing down $1.875 at $1.125 on Nasdaq. It was among the market’s most active issues, with 4.7 million shares changing hands.

Standard & Poor’s Corp. downgraded Discovery’s $127 million of zero-coupon subordinated debt to C from CCC and said it may lower the rating further on concerns about increased risk to bondholders.

Discovery said it is uncertain whether it can renegotiate its credit line with lenders because of its “disappointing operating performance” in January. The company said it now believes the credit line would need to be much greater than the amount previously expected.

As a result, Discovery is considering all alternatives to meet its cash needs, obtain additional working capital and restructure its debt.

The Fort Lauderdale-based company, which operates 330 children’s indoor entertainment and fitness facilities in 34 states, said it is continuing discussions with its lenders.

Since a change in operating management in April, Discovery has reduced corporate overhead and improved the quality of operations, the company said. But it is still unlikely to generate a cash flow from operations to “remain viable in the long term, unless it can reduce its debt burden, lower its interest expense and improve its operating cost structure,” it said.