eToys prepares to pay final debts

EBC I, as eToys is now called, has distributed a plan for dispersing its assets to creditors, the company said in a document recently filed with the Securities and Exchange Commission. Although the company has about $42 million in cash to distribute, its creditors have filed more than $440 million in claims; meaning that most creditors will get only pennies on the dollar and shareholders will likely see nothing at all.

"This is a milestone in the bankruptcy case," said Gregory Werkheiser, an attorney representing EBC I. "This was proposed by the debtors, but it was worked out in long consultation with the creditors' committee."

Creditors have until Sept. 18 to vote on the plan. The U.S. Bankruptcy Court for Delaware will hold a hearing on the plan Sept. 27. The court can choose to accept or reject the plan regardless of how creditors vote.

Once considered one of the leading e-commerce companies and a threat to brick-and-mortar toy sellers such as Toys "R" Us, eToys became one of the biggest flameouts of the dot-com implosion.

The company filed for Chapter 11 bankruptcy last year after a disastrous holiday season in 2000 that saw its sales fall about $100 million short of projections.

As it prepared for bankruptcy, the company laid off most of its staff and shuttered its Web site. Although companies typically file for Chapter 11 bankruptcy with the intention of continuing operations, eToys chose to wind down its business and liquidate its assets.

As part of the liquidation, the company sold off most of its inventory and intellectual property, including its name and Web site address, to toy store chain KB Toys. KB Toys later resurrected the eToys Web site and contracted with EBC I to market KBKids.com and the new eToys site to eToys' former customers.

U.S. bankruptcy law gives some creditors priority over others when it comes to collecting outstanding payments from bankrupt debtors. Priority goes to companies that continue to do business with debtors after the bankruptcy filing, governments to whom taxes are owed and secured creditors who hold some kind of collateral.

Those types of priority claims account for about $38 million of the total claims filed against EBC I, according to the regulatory document. Of that amount, EBC I expects that about $16.5 million will be approved by the court and the creditors after weeding out duplicative, old or mischaracterized claims. EBC I expects to pay the smaller amount in full to those creditors.

Werkheiser declined to give the names of eToys' creditors.

In contrast to the priority claims, unsecured creditors, including those holding the company's debt notes and bank loans, will not receive full payment under the disbursement plan. Creditors have filed about $404 million in unsecured claims against EBC I, of which the company expects the court to approve about $250 million.

For those unsecured creditors, EBC I proposes paying about $9.2 million, or 77 percent, of the $11.9 million in allowed senior unsecured claims; $7.9 million, or 5.2 percent, of the $152.5 million it owes to unsecured note holders; and $8.9 million, or 10.4 percent, of the $85.5 million in other unsecured claims.