The same day that it announced liduidity concerns, King of Prussia, PA-based FAO receive a notice of default from its lenders.
The notice, which FAO received Nov. 7, stated that the lenders would no longer consider themselves obligated to make further loans or extend letters of credit to cataloger/retailer. It also said that outstanding loans would bear interest at the default rate under the loan agreement until defaults were cured or waived, and that additional extensions of credit would be subject to a 5% funding fee. FAO said that it was in discussion with its lenders to resolve the issues that gave rise to the notice but that it could give no assurances it would be successful.
Earlier that day, FAO had admitted that retail, catalog, and Internet sales following its initial holiday marketing efforts have been “disappointing and significantly below expectations.” Should this trend continue, FAO believes it would not have adequate liquidity to operate its business “normally” through the rest of November and December.
The parent company of toys cataloger/retailer FAO Schwarz, children’s merchandise cataloger/retailer The Right Stuff, and toys retailer Zany Brainy is asking certain vendors to reduce shipments. It’s also asking most vendors to extend payment dates to the first of the year. FAO, which gave no assurances that its vendors would relax terms as requested, also requested an overadvance from its lenders, which could lead to its lenders issuing a notice of default.