Lionel LLC seeks bankruptcy protection

[Otto Vondrak]

Following court decision, Lionel seeks bankruptcy protection
by Otto M. Vondrak

Detroit-based Lionel LLC filed for bankruptcy protection this week following a court decision against the company that demands a $40 million dollar settlement. Newly appointed Lionel CEO Jerry Calabrese says that the debt is "too much for what is essentially a small business to bear." The bankruptcy protection will allow Lionel some room in order to pursue a reversal of the decision and temporarily keep creditors at bay.

The court decision essentially says that Lionel stole plans and drawings from competitor MTH Electric Trains ("Mike's Train House") of Columbia, Md. The suit alleges that the plans were acquired by South Korean contractor Korea Brass, who took them from MTH's South Korean contractor Samhongsa. The court demanded that Lionel pay MTH $40.8 million in damages as a result of the decision.

This is not Lionel's first bankruptcy. In 1991, the company sought protection from creditors. Shortly thereafter, singer Neil Young took a stake in the floundering toy train maker. Currently Young holds a 20-percent stake in the company.

Lionel's Calabrese will be hosting an on-line chat at Lionel's web site (http://www.lionel.com) on Thursday, November 18, 6:30 PM EST, to discuss the current state of the company and answer questions regarding the Chapter 11 filing. No other official comment is posted on Lionel's web site. There is no mention of the court ruling or any other official comment on MTH's web site (http://www.mth-railking.com/).

Apparently this bankruptcy is only one issue affecting the company right now. Hoping to cash in on the publicity connected with the new Warner Bros. animated movie The Polar Express, Lionel is releasing a set based on the trains illustrated in the movie. While pre-sale response has been terriffic, there are now doubts as to whether Lionel can meet production demands and have sets delivered in time for the holidays. What's more, many orders are being turned away because it is feared demand cannot be met. Lionel is missing out on a huge opportunity to capitalize on nostalgia and reintroduce a generation of young people to the hobby of model trains.

It is yet to be seen what will happen to the venerable 104-year-old toy train company. Lionel has announced that they will be pursuing an appeal of the court's decision, and said that their Chapter 11 filing will not affect their ability to manufacture or ship products as they have in the past.

WHAT IS CHAPTER 11 BANKRUPTCY?
Chapter 11 is typically used for business bankruptcies and restructuring. It is not commonly used by individual consumers since it is far more complex and expensive to pursue. It allows businesses to reorganize themselves, giving them an opportunity to restructure debt and get out from under certain burdensome leases and contracts. Typically a business is allowed to continue to operate while it is in Chapter 11, although it does so under the supervision of the Bankruptcy Court and its appointees.

©2004 RAILROAD.NET

[Otto Vondrak]

Lionel CEO Calabrese stresses Lionel will stay on the right track
by Otto M. Vondrak

In a live webchat hosted by Lionel LLC on Thursday, November 18, CEO Jerry Calabrese only had one response to many hobbyists' questions about the future of the company: "Absolutely nothing will change." Lionel recently declared Chapter 11 bankruptcy in response to a court decision resulting from a complaint from MTH Electric Trains that the venerable toy train maker stole proprietary plans for an upcoming release. In an effort to appeal the $40 million dollar decision, Lionel declared Chapter 11 bankruptcy.

Many customers posted worried questions about Lionel's continued ability to meet production dates, ship new products, and continue to offer sales and service as it had in the past. Calabrese carefully explained that while Lionel is involved in these legal proceedings, "absolutely nothing will change" in regards to manufacturing or shipping of new products. Some were worried that Lionel filed for bankruptcy protection for reasons other than the lawsuit appeal. "We are having a good year," Calabrese explained, "shipping most of our stuff on time, and selling more product than in years past." He lamented the fact that fighting the court's decision will be a distraction while they work to bring new trains to market. He remarked that the appeals process in regards to the MTH case could stretch as far as three or four years. While some business reports are pessimistic that Lionel can whether a storm like this for the long-term, Calabrese is convinced that the company's refinancing plan will ensure continued, uninterrupted operation.

His attitude was optimistic when asked about the shortage of Polar Express themed train sets. "The Polar Express is a runaway hit," Calabrese said, "and we have made more sets than we originally decided to make." The sets have been shipped from China, and will be in stores by mid-December. Also, new Thomas the Tank Engine sets are also shipping. When asked about producing any more HO scale trains, Calabrese said, "No, and I'm to blame for that," and further indicated that Lionel would be focusing on its core O-scale business in the near future.

When asked if the company was for sale, or if he would consider selling the company, Calabrese casually remarked, "No, I really like it here and plan to stay!" He went on to say that there are no plans to sell the company and that, "the owners and I have dug in for the long haul." On the question of how much competition is a good thing, his candid response was "MTH and K-Line have made Lionel a better company by forcing it to adapt to change." He also reaffirmed the company's belief that no one can compete with the years of tradition and quality associated with the Lionel brand name.

The mess with MTH Electric Trains is not the only battle they are currently involved in. Lionel is actively reviewing other cases of patent infringement in a late-hour attempt at damage control. There is also the matter of Union Pacific Railroad's new licensing procedure, in which they demand that model makers pay a fee in exchange for usage of their logo and corporate colors- reversing a situation that has existed for more than 80 years. "UP is a complicated question," Calabrese said, "and the short answer is that we will not make a deal that works in the short term, but endangers the future of our ability to make product we have been making for a century."

As the interactive chat drew to a close, Calabrese stated he has "no animus towards MTH," and continued, "As long as Mike [Wolf, owner of MTH] can force the issue between [MTH] and Lionel into a courtroom, instead of the marketplace and the court of public opinion, he has a chance." Admittedly a newcomer to the company and the toy train hobby, Calabrese wanted to let everyone know that Lionel is far from the end of the line. "With your continued help and input we can once again make Lionel the company we all love and want it to be."

The entire transcript of the Jerry Calabrese-Lionel interactive chat can be found here:
http://www.lionel.com/digichat/transcript.htm

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