KB Toys files plan of reorganization, Prentice Capital to invest $20 million

By Caroline Salls

Pittsburgh, May 16 - KB Toys, Inc. filed a proposed plan of reorganization and disclosure statement with the U.S. Bankruptcy Court for Delaware that will give Prentice Capital Management, LP nearly all the equity of the reorganized company in exchange for a $20 million investment.

Under the plan, filed with the court Friday, KB Toys will issue 45,000 shares of new common stock, including 40,500 shares to the plan funder PKBT funding LLC, an affiliate of Prentice Capital Management, LP and 4,500 shares to a residual trust.

KB Toys will also issue 17,000 preferred shares to PKBT Funding.

The distributions will give PKBT Funding 90% of the common stock and 100% of the preferred stock of the reorganized KB Toys.

In return, the Prentice affiliate will invest $20 million in the reorganized company and provide a seasonal over-advance credit facility of up to $25 million.

The other shares in the residual trust will be held for allowed claimants, but no stock will be issued to the claimants.

The plan is endorsed by the official committee of unsecured creditors.

Holders of bank secured, other secured, unsecured, convenience and inter-company claims are considered impaired and allowed to vote on the plan.

Holders of bank secured claims will get 100% recovery in an amount to be determined by the bankruptcy court on plan confirmation; holders of other secured claims will recover the value of the collateral securing the claim.

Those with unsecured claims against one of the holding companies will get 2% plus litigation recoveries from the recapitalization claim via the residual trust.

Holders of class A and class B common stock will get no recovery.

The company's agreement with Prentice is subject to an auction process for the right to acquire either substantially all of the company's assets, including assuming all of the leases for KB Toys' retail stores, or the equity interests in the reorganized company.

The company also asked the court to authorize the auction and approve the termination fee and expense reimbursement provisions it has negotiated with Prentice.

KB Toys expects to emerge from Chapter 11 before the 2005 holiday season.

The company has a commitment for a $175 million exit facility from Bank of America, NA, consisting of an up to $150 million senior secured revolving credit facility and an up to $25 million senior secured term loan facility.

The maturity on the exit facility will be three years. The revolver's interest will be Libor plus 162.5 basis points to Libor plus 237.5 basis points and on the term loan the interest will be Libor plus 437.5 basis points.

Proceeds will be used to refinance existing debtor-in-possession facilities and to finance working capital needs and general corporate purposes of the reorganized company.

The seasonal over-advance facility will be subject to a $25 million cap. An up to $5 million advance will be available.

The interest rate will be 12%.

In the past year, KB said it has taken a number of steps intended to strengthen its business operations and enhance its financial performance including closing more than 600 stores, selling its internet business, closing a distribution center, streamlining management structure, reducing staffing levels at headquarters and introducing more efficient business practices throughout the organization.

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

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