KB Toys receives extension from court to negotiate with creditors

By Ellen Chang

Houston, Feb. 24 - KB Toys, Inc. received a short extension to its exclusive periods to allow more time for negotiations with its official committee of unsecured creditors.

The company received an extension to March 3 from the original date of Feb. 28 under an agreement with the committee that was approved by the U.S. Bankruptcy Court for the District of Delaware.

The Pittsfield, Mass., toy retailer asked for its exclusive period to file a plan to be prolonged to May 15 from Feb. 15 and its exclusive period to solicit votes to be extended to July 15 from April 16.

A hearing was originally set for Feb. 28.

Arguing it deserved the extension, KB said in its request that it has made "substantial progress" in developing a revised business model and working with creditors to draw up a consensual plan of reorganization. It added, however, that the work is not yet complete.

However the creditors are asking 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.

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.

The committee wants authorization from the bankruptcy court to investigate and take legal action, 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.

KB Toys filed for bankruptcy on Jan. 14, 2004. Its Chapter 11 case number is 04-10120.

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