As it warned might happen, FAO Inc., parent company of multimedia children's retailer Zany Brainy, has filed for Chapter 11.

FAO, which also owns FAO Schwarz and The Right Start, said that it has agreed with lenders to use some $20 million in cash collateral that will allow it to continue in business. It plans to meet "immediately" with its major creditors and file a plan of reorganization with the bankruptcy court. It also aims to hire an investment banker to "assist it in raising equity capital within its current public company structure."

The company had complained in December that its bankers, primarily Wells Fargo, would not renegotiate part of its lending agreements so that it would have enough cash to continue in business.

During the past year, sales at the company's stores had slumped dramatically in part because of the poor economy and because of strong competition from discounters. Late last year, the company confirmed that several major suppliers had stopped shipping products. At the end of December, FAO announced it would close 55 of its 169 Zany Brainy stores by March.

In the filing, FAO said it had consolidated assets of $257.4 million and $238.4 million in debts. Toymaker Mattel is the largest creditor, with $1.14 in claims, while Lego is owed $1.13 million.

Maria Weiskott, editor-in-chief of Playthings, a toy industry trade magazine, told Reuters that until now, the toy industry has been considered recession-proof. "We have threats of war, a West Coast dockworkers' strike and consumers wondering how long they would keep their jobs," she said. "I think consumers were spending less on upscale toy retail products."

Founded in 1991 by David Schlessinger, who also founded Encore Books, Zany Brainy was for a time an unusual and successful retailing idea. The chain expanded rapidly in the late 1990s, but after management changes and the purchase of one-time rival Noodle Kidoodle in 2000, it went bankrupt in 2001. FAO, then called the The Right Start, bought Zany Brainy after its bankruptcy. (The Right Start adopted the FAO name after buying FAO Schwarz.) Many of the Zany Brainy stores to be closed were opened in 1999 or 2000. Both Zany Brainy and Noodle Kidoodle have had significant book sections in their multimedia offerings.