KB Toys back in bankruptcy amid 'sudden and sharp' decline in sales

By Caroline Salls

Pittsburgh, Dec. 11 - KB Toys, Inc. returned to Chapter 11 bankruptcy Thursday, citing a "sudden and sharp decline" in sales, according to a filing with the U.S. Bankruptcy Court for the District of Delaware.

Thursday's filing marks the company's second bankruptcy filing in less than five years. As previously reported, KB Toys emerged from the first bankruptcy, filed Jan. 14, 2004, in August 2005.

As part of the 2004 bankruptcy, Prentice Capital Management, Inc. acquired majority ownership of the company. Prentice Capital holds 100% of KB Toys' senior, non-voting preferred stock and 90% of its common stock.

According to an affidavit filed by KB Toys vice president and controller Raymond I. Borst, the company made this most recent bankruptcy filing in an effort to preserve and maximize the value of its assets through going-out-of-business sales in its retail stores and the possible sale of its wholesale distribution business.

Borst said a series of market forces have triggered a rapid decline in retail sales during the company's critical selling season.

In light of the erosion in sales and other factors, Borst said KB Toys reviewed its liquidity needs and investigated a number of potential alternatives to address its projected liquidity shortfall, but none of those potential alternatives proved to be viable.

The company requested court approval Thursday to conduct going-out-of-business or store-closing sales at all of its retail locations. The sales will be conducted by a joint venture comprised of Gordon Brothers Retail Partners, LLC and Great American Group, LLC.

KB Toys said it expects the store-closing sales to be completed by Feb. 9, but the sales can be extended to no later than Feb. 28.

The company will reimburse the liquidation agent for up to $200,000 of its start-up supervisor costs, $240,000 of its advertising expenses, and it will pay third-party signage providers up to $700,000.

In addition, KB will pay a consultant's fee of up to 2.25% of gross proceeds, with the total fee to be based on gross recovery.

The company will also pay store-closing bonuses, not to exceed 10% of store-level employee payroll, to employees who agree to continue to work for KB until the sales are completed.

In connection with the bankruptcy filing, KB Toys has requested access to cash collateral to meet payroll and other operating expenses.

According to court documents, the company had $241 million in assets and $362 million in debt at Nov. 29.

KB Toys' largest unsecured creditors include Li & Fung Toy Island Manufact, Hong Kong, with a $27.2 million trade and foreign consolidation claim and Mattel Toys, El Segundo, Calif., with a $1.29 million trade claim.

KB Toys is a Pittsfield, Mass., mall-based toy retailer. Its Chapter 11 case number is 08-13269.

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