Lenders Warn FAO It's in Default of Loan Agreements

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The news has rapidly gone from bad to worse at FAO Inc.


The King of Prussia, PA, multichannel marketer of children's products said yesterday that its lenders delivered a notice of default under its loan agreement late Nov. 7.


The notice stated that they no longer would be obligated to provide further loans or extend letters of credit, that outstanding loans would bear interest at the default rate under the loan agreement until defaults were cured or waived. Also, additional extensions of credit would be subject to a 5 percent funding fee. The company said it was in discussion with its lenders to resolve the issues that led to the issuance of the notice, but could give no assurance of success.


Yesterday's announcement followed the news issued Nov. 7 that the company's retail, catalog and Internet sales "had been disappointing and significantly below expectations." FAO added that it had not realized the improvement in sales it anticipated from its initial holiday marketing efforts.


Assuming continuing slow sales, the company said that it probably would lack adequate liquidity to operate normally in November and that liquidity in December would depend on whether the sales trend improved.


The company on Nov. 7 also requested an "overadvance" from its lenders, which it said could lead to them issuing a notice of default.


FAO previously announced it engaged an investment banker to help raise capital. It expanded the assignment to include a review of strategic alternatives, including a sale of the company, but made no assurances that any alternatives would be available or, if available, would be acceptable.


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