Zany Brainy Faces Cloudy Future

Another retailer in the book marketplace is in financial trouble. Zany Brainy said in a filing with the Securities & Exchange Commission that its bank has notified the company that it is in default on its $115-million credit agreement. Zany is negotiating to get the bank to agree not to exercise the rights and remedies available to it for an set period of time, and to gain greater borrowing availability. The multimedia retailer is also exploring the possibility of a junior loan to supplement the credit facility and is considering a complete restructuring of its existing loan. In addition, Zany has hired William Blair & Company to help the company review its options, which could include the merger or sale of the retailer or a recapitalization.

Because Zany is in default, the bank has the right to end the credit facility at any time, although the bank has so far let the retailer continue to borrow money. The default also means that unless new financing is found, the company only has enough working capital to allow it to continue operating for a short period. In addition to negotiating with the banks, Zany is looking to gain a little breathing room by meeting with its largest creditors to restructure its unsecured debt.

Zany Brainy has been struggling financially since its merger with former rival Noodle Kidoodle. Zany management acknowledged that it had underestimated the resources necessary to merge the companies. For the first nine months of 2000, the company had an operating loss of $32 million, compared to $12.2 million in the previous period. Sales were up 4.6%, to $211 million.