Troy Wolverton

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FAO Schwarz Parent Files for Chapter 11

Troy Wolverton

FAO (FAOO Quote), the parent company of toy retailer FAO Schwarz, has filed for reorganization in a Chapter 11 bankruptcy proceeding.

The King of Prussia, Pa.-based company, which also operates the Zany Brainy and The Right Start chains, plans to continue operating its stores through the bankruptcy process, FAO said in a statement on Monday. FAO hopes to emerge from bankruptcy by the second quarter, the company said.

"Having already made significant strides in our restructuring efforts, we are now able to turn our focus toward ensuring our long-term financial health," said Jerry R. Welch, FAO's CEO, in the statement.

Saying that it faced a "liquidity crisis," FAO warned last month that it might need to file for bankruptcy if Wells Fargo, its bank, didn't relax its credit restrictions. The companies later negotiated a standstill agreement under which Wells Fargo and FAO's other bank lenders agreed not to take any action to pursue their claims against FAO; that agreement expired on Friday.

FAO also announced last month that it would close up to 70 stores, 55 of them being Zany Brainy outlets. Then known as The Right Start, FAO acquired the Zany Brainy stores in September 2001 as part of an asset sale related to Zany Brainy's own bankruptcy proceedings. FAO took on its current name and form after buying FAO Schwarz in January from the Netherlands-based Royal Vendex KBB.

Restrictive borrowing conditions put in place by FAO's lenders forced the company to file for bankruptcy, company spokeswoman Renee Hollinger said. FAO's bank lenders are holding about $20 million as a cash collateral against the company's outstanding loans. As part of an agreement reached with the lenders, FAO will be able to tap into that cash collateral and its operating revenue to fund its operating activities going forward, assuming the bankruptcy court approves the plan, Hollinger said.

"This gives us an opportunity to complete our store closings and restructuring under a structured, court-controlled, supervised environment," she said.

Despite acquiring its high-profile brands, FAO has struggled to get its financial footing. In its third fiscal quarter, which ended Nov. 2, the company lost $23.7 million, or 66 cents per share, on $88 million in revenue.

FAO lost $9.9 million, or $4.07 per share, on $57 million in revenue last year. FAO's outstanding shares ballooned from 7.2 million to 35.8 million over the last year as it issued stock for acquisitions and to fund its working capital.