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eToys to file for Chapter 11, shutter Web site

The toy e-tailer says it intends to file for bankruptcy protection and shut down its Web site by the end of next week.

After a long, downward spiral, eToys said Monday that it intends to file for bankruptcy protection and shut down its Web site by the end of next week.

In a statement issued after the stock markets closed Monday, eToys said it would file for Chapter 11 bankruptcy protection within five to 10 days. In addition, the company said that "it will close the eToys.com Web site on or about March 8, 2001, and that thereafter, the company will focus solely on the winding down of its business and the liquidation of its assets."

Los Angeles-based eToys previously announced that it intended to shut down by early April if it could not find additional funding. But in Monday's announcement, eToys said it concluded that "under any scenario, its outstanding liabilities substantially exceed the value of any proceeds or assets that may be received in a strategic transaction."

The company also had some dire news for shareholders: It has received notice from the Nasdaq Stock Market that its shares will be delisted "in the very near term."

"The company strongly encouraged anyone considering an investment in these securities to consider its determination that they are worthless," eToys said in the announcement.

Tapping into investor frenzy when it went public in May 1999, eToys raised $166 million during its IPO after pricing its shares at $20. In October 1999, the stock hit a high of $84.25. Monday, trading in eToys was halted before the announcement. The stock was down 3 cents, or almost 25 percent, to 9 cents on the Nasdaq.

The collapse of eToys marks the end of one of the best-known e-commerce companies. Backed by respected venture capital firms such as Idealab, Highland Capital Partners and Sequoia Capital Partners, eToys appeared headed to dominate the online toy sector.

During the holiday season of 1999, the 3-year-old company was the most popular Internet toy store, drawing more customers than the Web sites of Toys "R" Us and Amazon.com, according to traffic figures from Jupiter Media Metrix.

A one-time favorite of investors, analysts and the media, the company spent big on advertising, marketing and Web site technology. When the spending failed to produce profits, investors began pulling out in droves.

Investors' fear over the spending habits of most e-commerce start-ups led to the crash of technology stocks last April. Toy e-tailers were among the hardest hit. Disney-backed Toysmart.com closed its doors in May, followed by ToyTime.com. Many companies scaled back operations, including Toysrus.com, KBKids.com and Smarterkids.com

The knockout blow for eToys came last December, when the company warned that it would dramatically miss earnings estimates for its fiscal third quarter.

eToys spokesman Gary Gerdemann said at the time that the slowing U.S. economy and the "continual drumbeat of negativity surrounding Internet retailing" were the causes for the company's poor performance.

"In the end, we did the best we could, and the sales aren't there," Gerdemann said.

An eToys spokesman on Monday said that the company had nothing further to add to the announcement.