FAO files Chapter 11

On Jan. 13, the parent of venerable toy and kids clothing cataloger/retailer FAO Schwarz, (Nasdaq: FAOO) FAO Inc., filed for Chapter 11 Bankruptcy Protection in the District of Delaware in Wilmington.

In the filing, FAO, which in addition to FAO Schwarz includes cataloger/retailers The Right Start and Zany Brainy, listed $257.4 million of assets and $238.4 million in debts.

The parent firm was founded in Westlake Village, CA, in 1985, as The Right Start, an infants products cataloger (and later a retailer as well). Now based in King of Prussia, PA-based, the company bought educational toys retailer Zany Brainy out of bankruptcy in 2001, and the upscale toys marketer FAO Schwarz last year, subsequently changing its corporate name to FAO Inc.

The company posted net sales of $89.3 million for the third quarter ended Nov. 2, which was 52% greater than last year due to the FAO Schwarz acquisition and a full quarter’s worth of sales from Zany Brainy. But the company’s third-quarter net loss ballooned to $23.7 million from $9.9 million last year.

Earlier last month, FAO said it would be forced into bankruptcy if its lenders didn’t help it fend off a liquidity crisis during the peak of the holiday shopping season. On Dec. 17, FAO announced plans to close up to 70 stores by the end of March; at least 55 of them would be Zany Brainy stores. About 30 of the Zany Brainy stores were opened in 1999 and 2000 amid a rampant store expansion that crippled the company. On Dec. 23, the FAO’s lenders reached a standstill agreement with the company to stave off taking any steps until after the holidays. But the deal expired on Jan. 10, and FAO filed Chapter 11 three days later.

FAO may be down, but it’s not our, say company officials. “We are encouraged by the support demonstrated by our various creditor constituencies going into this process and expect to emerge a stronger, well-capitalized company by the second quarter of this year,” said CEO Jerry Welch in a statement.

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