Toy Store Giant Declares Bankruptcy

(AP)  FAO Inc., which owns the FAO Schwarz, Zany Brainy and Right Start toy-store chains, filed for Chapter 11 bankruptcy Monday.

The King of Prussia, Pa.-based company, known for its storied FAO Schwarz flagship on Fifth Avenue, said it has reached an agreement with lenders that will allow it to continue to operate without interruptions.

The company said it expects to meet with major creditors and file a reorganization plan soon, with the expectation of emerging from bankruptcy in the second quarter.

FAO listed assets of $257.4 million and liabilities of $238.4 million.

On Dec. 17, the company had warned that it likely would file for bankruptcy protection if its bank did not relax borrowing restrictions. A week later, the company announced plans to close 70 underperforming stores.

In the filing with the U.S. Bankruptcy Court in Delaware, FAO Inc. listed assets of $257.4 million and liabilities of $238.4 million.

Analysts have speculated that intense competition from such discounters as Wal-Mart, which carry many of the same toys but at lower prices, have hurt the specialty store retailer. In addition, Zany Brainy has put a large financial drain on the parent company.

FAO Inc. lost $23.6 million, or 66 cents a share, for the third quarter that ended Nov. 2.

Toy retailer Right Start changed its name to FAO Inc. and purchased the FAO Schwarz brand early last year for about $55 million. It bought Zany Brainy, which sells educational toys, in 2001 for $100 million.

FAO Schwarz, founded in 1862 by German immigrant Frederick August Otto Schwarz, was family owned for roughly its first 100 years and has had a series of owners since then. It has long had a reputation for exclusivity, carrying expensive and hard-to-get toys from all over the world.