KB Toys files for Chapter 11, obtains $350 million DIP facility

By Jeff Pines

Washington, Jan. 14 - Fierce competition from large discounters and Toys "R" Us has forced retailer KB Toys, Inc. into Chapter 11, the company said. It hopes to emerge from bankruptcy before the 2004 holiday season.

In addition, KB Toys has secured a $350 million debtor-in-possession financing facility through Fleet Retail Group (see related report on this page).

The company, based in Pittsfield, Mass., said it will continue to pay vendors, suppliers and other business partners under normal terms. KB sells toys through about 1,230 stores, online and through a wholesale division.

"We have been assured by many of our vendors, landlords, and other interested parties that they see an important and continuing role for KB Toys in the retail toy market, and will work with us to achieve approval of the Company's reorganization plan," stated Michael L. Glazer, chief executive officer of KB Toys, Inc. in a press release.

As of Jan. 3, KB had total assets of $507 million and total liabilities of $461 million, according to filings with the U.S. Bankruptcy Court for the District of Delaware.

Liabilities include $77 million to pre-petition senior secured creditors, which includes about $29 million of letters of credit. This total includes $52 million owed by its subsidiary Mall of America Kay-Bee Toy, Inc. under a credit agreement with Fleet Retail Finance as administrative agent and a $25 million term loan KB has with Back Bay Capital Funding, LLC as administrative agent. KB also owes $116 million for merchandise and has other accounts payable of $159 million.

The company estimates it has more than 1,000 creditors. Toy manufacturers Hasbro and Lego Systems have the two largest unsecured claims, $15.33 million and $9.91 million respectively. Other creditors include: THQ Inc.; Workflow Solutions LLC/SFI; Jack of All Games Inc.; and Electronic Arts.

KB Toys has no public debt securities.

After realizing it would run short of funds it could borrow if it continued paying its creditors, KB Toys met with its largest trade creditors in December, and the creditors formed an informal committee, which retained Traub, Bonacquist & Fox as its counsel and Ernst & Young as its financial advisor. They agreed not to purse any legal action until Jan. 9.

Meanwhile, the company worked with Bear Stearns to find a buyer, but after detailed talks with five potential buyers did not get an acceptable offering. So the company said it conducted a bottom up review of its business and developed a plan it thinks will carry it into profitability.

Initiatives will include closing 400-500 stores, mostly mall-based, but will also include outlets and strip-mall-based stores. It will also close one of its three distribution center.

"As a result of these store closures and other cost reductions, the debtors believe that they will achieve positive operating results for fiscal year 2004," KB Toys said.

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