FAO Schwarz Parent Files for Chapter 11

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.