KB Toys Hopes to Exit Chapter 11 Before Holidays

KB Toys Inc. (search) said Monday it expects to emerge from bankruptcy protection before the holiday shopping season without having to close additional stores or to cut more jobs under an agreement that would put the chain under control of a New York City investment firm.

There is no guarantee the new ownership would not eventually decide to eliminate some of the remaining 648 stores or 7,500 employees, said Kenneth Grady, KB Toys' executive vice president. The numbers are about half the total stores and jobs that the 80-year-old chain had when it entered Chapter 11 protection (search) in January 2004, citing aggressive price wars with rivals. KB Toys' corporate headquarters are expected to remain in Pittsfield, Grady said.

An affiliate of Prentice Capital Management (search) would invest $20 million in the reorganized company, and extend credit of up to $25 million in exchange for 90 percent of the new entity's private equity common stock and 100 percent of its preferred stock, a type of stock that grants holders preference over common stock holders in case assets must be liquidated. The company's remaining common stock would be held in trust for the benefit of its unsecured creditors.

"We look forward to the prospect of working with Prentice Capital as we continue to improve the company's performance and further solidify KB's presence as the largest mall-based toy retailer," chief executive Michael Glazer said.

The new ownership arrangement would not go ahead if KB Toys receives a better offer for its remaining assets in a proposed bankruptcy auction.

Privately held KB Toys said the reorganization plan it has submitted to the bankruptcy court in Delaware has been endorsed by a committee of the chain's creditors. The group is headed by toy manufacturers, including Pawtucket, R.I.-based Hasbro Inc. (HAS) and Lego Systems Inc., and landlords for KB's stores. During the bankruptcy, KB sold its retail Internet operation to eToys Direct Inc. and also closed a distribution center.

The creditors' consent does not settle pending claims that KB Toys creditors recently filed accusing the company's top executives and majority shareholder of improperly paying themselves $121 million through a stock redemption program before KB entered bankruptcy, Grady said.

KB executives and directors also face a separate lawsuit filed by Big Lots Inc., KB Toys' former owner, over a $45 million debt.