FAO to File for Bankruptcy Protection Again

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FAO Inc. said yesterday that it will file for Chapter 11 bankruptcy protection this week for the second time this year.

The company said it hopes to sell its FAO Schwarz and Right Start chains but will liquidate the Zany Brainy business. FAO, King of Prussia, PA, already had warned last month that early holiday sales were worse than expected and that it would not have enough cash to get through the holiday season.

FAO emerged from bankruptcy protection in April, three months after filing for Chapter 11 when it failed to get necessary funding from lenders after poor holiday sales last year.

The company said that if efforts to sell FAO Schwarz and Right Start fail by Dec. 15, they also could be liquidated. Stores will stay open, though the company said it will reduce non-store staff "significantly in the coming days."

Common stockholders will receive no compensation, and the company asked Nasdaq to delist its stock, which closed Dec. 1 at 90 cents a share. Shares were down to 17 cents before its stock stopped trading yesterday. The company said it is negotiating with bank lenders to use cash collateral during bankruptcy to pay its employees.

FAO had a net loss of $18.8 million in its second quarter ended Aug. 2, compared with a loss of $18.2 million a year ago. It had an operating loss of $56.7 million for the first half of 2003.

Parent company FAO Inc. was formed after The Right Start bought FAO Schwarz from Dutch retail group Vendex KBB NV in 2001. Last month, Vendex sold its remaining 15 percent stake in FAO.


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