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FAO Inc. Files for Bankruptcy Protection

January 14, 2003

NEW YORK (AP) _ The owners of FAO Schwarz, unable to turn the cachet of the world’s best-known toy mecca into profits in an era of discount outlets, filed for Chapter 11 bankruptcy protection on Monday.

FAO Inc. said the filing will allow it to keep open without interruptions its FAO Schwarz stores _ including the storied flagship shop on New York’s Fifth Avenue _ as well as its Zany Brainy and The Right Start chains.

In conjunction with the filing, made in the U.S. Bankruptcy Court in Wilmington, Del., the company has reached an agreement with its banks that, with court approval, will allow it to fund its ongoing operating needs while it begins restructuring.

FAO, based in King of Prussia, Pa., said it expects to meet with major creditors and file a formal reorganization plan soon, with the expectation of emerging from bankruptcy in the second quarter.

As part of its plan, the company will hire an investment banker to assist it in raising equity capital. FAO said employees and customers should not see any difference in operations at its ongoing stores.

``The company has been in contact with many of its suppliers, and they have indicated that they will continue to support FAO Inc. during the reorganization period,″ said Jerry R. Welch, president and chief executive of FAO Inc.

Tourists worldwide flock to FAO Schwarz’s flagship store, particularly during the holiday season, where a toy soldier greets them at the door. The store’s image as a playland has been reinforced by movies such as ``Big,″ which featured Tom Hanks and Robert Loggia playing ``Chopsticks″ on a giant piano keyboard.

But on Dec. 17, the company warned that it likely would file for bankruptcy protection if its bank Wells Fargo Retail Finance LLC did not relax borrowing restrictions.

The company said Monday it plans to close up to 80 stores by March, up from its plan announced last month to close 70 stores. Alan Marcus, a company spokesman, said the bulk of the closings will be within Zany Brainy. He said the company hasn’t made final decisions about the closing because it is trying to negotiate rent reductions with its landlords.

FAO Inc. currently operates 253 retail stores nationwide. It lost $23.6 million, or 66 cents a share for the third quarter ended Nov. 2.

In its bankruptcy filing, FAO Inc. listed assets of $257.4 million and liabilities of $238.4 million.

The top two largest unsecured creditors are Mattel Inc., which is owed $1.14 million, and Lego Systems Inc., which is owed about $1.13 million.

Jules Andres, a Mattel spokeswoman, declined to comment. Michael McNally, a Lego Systems Inc. spokesman, could not immediately be reached.

Analysts have said that intense competition from such discounters as Wal-Mart Stores Inc., which carries many of the same toys but at lower prices, have hurt the specialty toy retailer. In addition, the struggling Zany Brainy chain has been a financial drain on the parent company.

``This is a good opportunity for the company to restructure and reorganize in light of the changing toy industry,″ said Chris Byrne, a New York-based independent toy consultant. He added that the company needs to ``redefine″ itself because it can’t compete on price. ``Where they have to compete is with exclusive products and being a destination for parents.″

FAO Schwarz was founded in 1862 by German immigrant Frederick August Otto Schwarz. The store has 23 stores nationwide.

The Right Start Inc., a retailer of developmental, educational and care products for infants and children, purchased the FAO Schwarz brand early last year for about $55 million and changed its name to FAO Inc.

It bought Zany Brainy, which specializes in developmental products for children, in 2001 for $100 million. Zany Brainy was in bankruptcy when The Right Start acquired its assets.

Shares of FAO Inc., which were halted for a time on Monday, closed 13 cents higher at 51 cents each on the Nasdaq Stock Market.

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