KB Toys unsecured creditors want to investigate, take legal action over payout to shareholders

New York, Feb. 11 - KB Toys, Inc.'s official committee of unsecured creditors asked for court permission to investigate and potentially take legal action over a $121 million payout to shareholders in April 2002.

The committee claims that the transaction used up nearly all the company's cash on hand even as those involved knew the economy generally was heading deeper into recession and the toy industry and specifically KB Toys were in a downward trend.

"It appears the transaction was effectuated during the zone of insolvency or when the debtors were insolvent, or, alternatively, the transaction rendered the debtors insolvent," the creditors said in a filing with the U.S. Bankruptcy Court for the District of Delaware Friday.

The payout had a "devastating" effect on KB Toys' business, with EBITDA for 2002 plunging to negative $21 million from $89 million the year before.

In addition, the company faced a liquidity shortfall and had to obtain $72 million of secured financing within a year, the committee said. Payments to unsecured creditors had to be stretched to generate liquidity.

"As of the date of the debtors' bankruptcy filing, while the potential defendants held on to their $121 million, unsecured creditors were left 'holding the bag' with claims exceeding $200 million," the committee said.

The committee wants authorization from the bankruptcy court to investigate and take legal action against, including fraudulent conveyance actions, against the current chief executive officer, the current chief financial officer and Bain Capital, Inc. and related investment funds.

Bain acquired KB Toys in December 2000 with a $17.5 million equity investment.

The payout under attack by the creditors took place in April 2002 as a stock redemption.

According to the creditors, Bain and related funds received $83 million while management received $34.4 million. The CEO, CFO and two other officers received $28.5 million in share repurchase proceeds and cash bonuses.

KB Toys had to use $55 million of its cash on hand and borrow $65.6 million in senior secured financing to make the payments.

A hearing is set for Feb. 21.

KB Toys, a Pittsfield, Mass., toy retailer, filed for Chapter 11 on Jan. 14, 2004. Its Chapter 11 case number is 04-10120.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.