Troubled Times in Toyland

FAO Inc. (King of Prussia, Pa.), which owns the FAO Schwarz, Zany Brainy and Right Start toy store chains, has sought Chapter 11 bankruptcy protection as less pricey rivals continue to lure away customers.

Along with Monday's filing in the U.S. Bankruptcy Court in Wilmington, Del., the company said it has agreed on a plan with its banks to fund its ongoing operations while it begins restructuring. That agreement requires court approval.

As part of its restructuring, the company plans to close up to 80 stores by March. A company spokesman says the bulk of the closings will be within the Zany Brainy chain, which currently operates about 170 outlets.

The company said it expects to meet with major creditors and file a formal reorganization plan soon. It expects to leave bankruptcy in the second quarter.

Last month the company warned that it likely would file for bankruptcy protection without relaxed borrowing restrictions by its lender, Wells Fargo Retail Finance LLC. FAO Schwarz made that announcement a day after reporting a net loss of $23.7 million and an operating loss of $20.5 million for its third quarter of 2002.

FAO Schwarz was founded in 1862 by German immigrant Frederick August Otto Schwarz. The chain has 23 stores nationwide, including its Fifth Avenue flagship store in New York.

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.