FAO May Close 70 Stores to Deal With Cash Crunch

FAO Inc., owner of the FAO Schwarz and Zany Brainy chains, said Monday that it got more time from its lenders to negotiate new credit terms and may close more than a quarter of its stores to ease a cash crunch and avert possible bankruptcy.

The company and lenders, led by Wells Fargo Retail Finance, reached an agreement that delays any action through Jan. 10, FAO said.

The retailer may shut as many as 70 stores, including about 55 Zany Brainy locations, by the end of March.

The extension will allow FAO to work with its lenders and trade suppliers to improve liquidity, the company said. On Dec. 17, FAO said it might file for bankruptcy protection unless lenders eased recently tightened borrowing restrictions. Budget- minded shoppers have been paring spending on expensive toys at FAO, which has lost money in each of the last eight years.

About $1 million was available for borrowing as of Dec. 13, FAO said in a filing with the Securities and Exchange Commission this month. At that time, FAO said it would have been able to borrow $23.1 million without the bank’s restrictions.

The King of Prussia, Pa.-based company told analysts and investors last week that the restrictions needed to be eased to avoid disrupting payments to vendors and other creditors.

Right Start bought FAO Schwarz in January and bankrupt Zany Brainy in September 2001 and changed its name to FAO. FAO has combined some functions to lower costs. The company has installed 98 Right Start boutiques in Zany Brainy stores.

Some of the Zany Brainy stores to be closed were opened in 1999 and 2000 and weren’t “economically viable,” FAO said. FAO has 253 stores, including the flagship FAO Schwarz store on New York’s Fifth Avenue and 169 Zany Brainy locations.

FAO rose to as much as 75 cents a share in after-hours trading on Nasdaq. They fell 8 cents to 60 cents during the regular trading session.