Zany Brainy Deal Awaiting Approval

Pending approval by the U.S. Bankruptcy Court, the assets of children's specialty retail chain Zany Brainy will be purchased by Los Angeles-based investment company Waterton Management LLC for $115 million.

Zany Brainy, currently encompassing 187 stores coast to coast, carries toys and games; children's audio, video, and multimedia products; and books, primarily of an educational (and nonviolent) nature.

With shelf space always at a premium for children's audio—particularly at the mainstream record and mass-merchant level—Zany Brainy has been virtually the only high-profile retail chain in which an independent artist and/or producer of children's music has had a likelihood of being stocked. A typical Zany Brainy store carries approximately 300 children's audio titles—an extremely broad array, unrivaled in other retail outlets—which, along with 400 video titles, make up 5%-10% of store space.

bankruptcy hearing postponed

Zany Brainy, which first opened its doors 10 years ago in King of Prussia, Pa., had filed for Chapter 11 May 15 in U.S. Bankruptcy Court in Wilmington, Del. At that point, the chain listed assets of $201 million and liabilities of $131 million.

Under the terms of the proposed Waterton deal, Zany Brainy's creditors—who are owed approximately $60 million—would receive 25 cents on the dollar.

"That's pretty typical of what companies pay [in cases such as these]," says Rich Tauberman, a spokesman for Zany Brainy. "It has the support of the creditors' committee."

U.S. Bankruptcy Judge Sue L. Robinson had scheduled a hearing for Aug. 10, but a continuance was issued. This also postpones the deadline for any other parties that might wish to make a counter bid to Waterton's offer, according to Tauberman.

Should judicial approval be secured, Zany Brainy's assets would be transferred to a Waterton-owned company temporarily called Subco, he notes.

"Probably because of the technicalities of the transaction," Tauberman says, the company won't emerge from bankruptcy until Jan. 1, 2002.

lack of a red-hot toy

Zany Brainy, whose rising fortunes in the '90s culminated in its becoming a publicly traded company in 1999, bought competing specialty chain Noodle Kidoodle in 2000.

Its subsequent "liquidity crisis," according to a company press release, was due to the lack of a red-hot toy (à la Beanie Babies, Pokémon, etc.) at holiday time, as well as increased costs related to the Noodle Kidoodle merger.

Shortly before Zany Brainy filed for Chapter 11, a new CEO, Tom Vellios, was brought in "to lead Zany Brainy through the difficult challenges ahead," according to a press statement by C. Donald Dorsey, a member of Zany Brainy's board of directors.