Lionel, LLC

Infobox_Company
company_name = Lionel, LLC
company_
company_type = Private
company_slogan = Standard of the World Since 1900
foundation = Chesterfield Township, Michigan (1995)
location = New York, NY
key_people = Jerry Calabrese, CEO
industry = Toys and hobbies
products = Lionel trains
revenue = $62 million in 2006
homepage = [http://www.lionel.com/ www.lionel.com]

Lionel, LLC is a designer and importer of toy trains and model railroads, based in Chesterfield Township, Michigan. Its roots lie in the 1969 purchase of the Lionel product line by cereal conglomerate General Mills.

Although Lionel, LLC now owns all of the trademarks and most of the product rights associated with Lionel Corporation, the original producer of Lionel trains founded in 1900, there is no direct connection between the two companies.

According to its reorganization papers filed as part of its bankruptcy plan on May 21, 2007, about 95 percent of the company's sales come from O gauge trains. The plan estimated that about $70 million worth of O gauge trains are sold each year, and that Lionel accounts for about 60% of that market, making it the largest manufacturer of O gauge trains.

The MPC (General Mills) era

The bankrupt Lionel Corporation sold the tooling for its then-current product line and licensed the Lionel name to General Mills in 1969, who then operated Lionel as a division of its subsidiary Model Products Corporation. General Mills did not buy the company, however. The Lionel Corporation became a holding company and invested in a number of ventures, including what would eventually become an East Coast chain of toy stores known as "Lionel Leisure World."

Due to General Mills' cost-cutting measures, production of Lionel-branded toy and model trains returned to profitability, but sometimes at the expense of quality. Detail was often sacrificed, and most of the remaining metal parts were replaced with molded plastic. A number of MPC's changes to the product line endure to the present day, the most noticeable being the use of needlepoint axles and trucks made of Delrin, two changes made to reduce friction and allow longer trains. Also starting in 1973, MPC experimented with a line of cars it called "Standard O," which were scaled to 1:48 (most postwar Lionel and MPC production was undersize for O scale). The experiment's failure is generally blamed on MPC's lack of a 1:48 locomotive and caboose to go with the cars; when it was repeated again in the 1980s with locomotives of appropriate size, it proved more successful.

An internal reorganization after 1973 caused Lionel to become part of General Mills' Fundimensions group. Although Lionel's tenure with MPC was relatively short, "MPC" is the most commonly used term for the 1970-1985 era.

In 1979, General Mills resurrected the American Flyer brand and product line, which Lionel Corporation had purchased from its bankrupt competitor (The A. C. Gilbert Company of New Haven, Connecticut) several months prior to its own bankruptcy in 1967. American Flyer products by Gilbert made after World War II are scaled roughly to a 1:64 proportion and are known as S gauge; their most distinctive feature, however, is that they operate on two-rail track as opposed to Lionel's three-rail trackage system.

With so many years of absence from the market, Gilbert American Flyer S gauge trains were no longer considered a direct competitor to Lionel's 1:48 proportion O gauge trains. To this day, Lionel markets American Flyer S gauge in limited quantities as collectibles.

The year 1982 brought General Mills' ill-fated move of train production from the United States to Mexico. Some Lionel fans were angry simply because the trains had been made in the United States for more than 80 years, while others criticized the quality of the Mexican-produced trains. Lionel production returned to the United States by 1984. During this time, corporate offices were retained at the company's Mount Clemens (later, Chesterfield), Michigan, location.

When General Mills spun off its Kenner-Parker division in 1985, Lionel became part of Kenner-Parker. Lionel was sold again in 1986, this time to toy-train collector / real estate developer Richard P. Kughn of Detroit, Michigan.

The Kughn era

Richard Kughn was a prolific toy train collector who said that his friends joked that the only thing his collection lacked was the company who made them. Kughn believed that if he moved production to Detroit, it would be possible to improve quality to a level characteristic of the original Lionel Corporation and still maintain profitability.

After his purchase, Kughn founded a company called Lionel Trains Inc. to continue the brand, and Lionel Trains Inc. opened a plant in Chesterfield, Michigan. In 1989 Lionel Trains introduced a locomotive featuring realistic electronically-produced sounds.

During this time frame, Lionel began producing new products based on designs from the Post-War era, when its popularity was at its peak. Additionally, some offerings began to depart from Lionel's toy-like design and place more emphasis on scale realism and detail, mirroring MPC's earlier "Standard O" experiments but to a larger degree.

Lionel also began selling reproductions of its designs that dated from the period before World War II, mostly in Standard Gauge. These products were made by MTH Electric Trains under contract. This arrangement ended in the early 1990s after a disagreement between Kughn and MTH owner Mike Wolf.

The year 1993 brought Kughn's Lionel an opportunity. The original Lionel Corporation had recovered after the sale of its trains and survived as an entirely separate entity, operating a successful chain of retail toy stores for 24 years and becoming for a time the second-largest toy retailer in the country. However, it went bankrupt in the early 1990s under increased competition and liquidated in 1993, allowing the train manufacturer to purchase the Lionel trademark after years of operating as a licensee.

The Wellspring era

Lionel changed hands again in 1995, when Kughn sold controlling interest in the company to an investment group that included rock star Neil Young and the holding company Wellspring Associates, which was headed by former Paramount Communications chairman Martin Davis (he had left the board of Viacom, which bought Paramount the previous year). The new company became known as Lionel LLC. The company continued marketing reproductions of its vintage equipment, and the trend towards producing new equipment that was ever-more-detailed (with a correspondingly higher price) continued.

Additionally, Young, who has a 20% stake in the company [http://news.ft.com/cms/s/ade1fc40-d069-11d9-abb8-00000e2511c8.html] , helped finance the development of Trainmaster Command Control, a technology similar to Digital Command Control which permits, among other things, the operation of Lionel trains by remote control. In order to proliferate this standard, Lionel has licensed it to several of its competitors, including K-Line. This technology was the brainchild of Neil Young. It was originally licensed to Lionel under the Liontech name. Another element of Young's vision was the creation of "Railsounds II" a sound system that would faithfully reproduce the sound of a particular locomotive, with electronics and loudspeaker built into each model.

Lionel, LLC continued to manufacture and market trains and accessories in O scale under the Lionel brand and S gauge under the American Flyer brand. While most of the American Flyer product comprises re-issues using old Gilbert tooling from the 1950s, the O scale equipment is a combination of new designs and reissues. Lionel also ventured into HO scale at times during its history, with limited success.

In 2001, Lionel closed its last manufacturing plant in the United States, outsourcing production to Korea and China. While this move proved unpopular with some longtime fans, the backlash was minor in comparison to the failed move of production to Mexico in the 1980s. The company also licensed the Lionel name to numerous third parties, who have marketed various Lionel-branded products since 1995.

The 2004 Christmas movie Polar Express, based on the children's book of the same name, provided Lionel with its first hit in years. Lionel produced a train set based on the movie, and stronger-than-anticipated demand caused highly publicized shortages. Various news stories told of a reporter's quest to locate a set, and some dealers marked the prices up above the suggested retail price of $229. Sets turned up on eBay with buy-it-now prices of $449 as Lionel ordered an additional production run but said it would not be able to deliver the additional sets until March of the following year. Although many criticized Lionel for not producing more sets, Lionel's management called the set a great success.

In 2006, the Lionel electric train was inducted into the National Toy Hall of Fame, along with the Easy Bake Oven. It was the first time an electric toy had ever been inducted. That same year, Lionel made a bigger push to sell its train sets outside of hobby shops, selling them in stores such as FAO Schwarz, Macy's, and Target. By November 2006, the company had turned a $760,000 profit on sales of $55 million.

This era was marked by legal troubles. In April 2000, competitor and former partner MTH Electric Trains filed a trade secret misappropriation lawsuit against Lionel, LLC, saying that one of Lionel's subcontractors had acquired plans for an MTH locomotive design and used them to design locomotives for Lionel. Additionally, on May 27, 2004, Union Pacific Railroad sued Athearn and Lionel for trademark infringement because both companies put the names and logos of UP, as well as the names and logos of various fallen flag railroads UP had acquired over the years, on their model railroad products without a license. While Athearn quickly settled and acquired a license, Lionel initially resisted, arguing that it and its predecessor companies had been using the logos for more than 50 years and had been encouraged or even paid to do so. On September 13, 2006, Lionel and UP settled the suit for $640,000 plus a royalty on future sales.

The misappropriation lawsuit by MTH eventually went to trial, and on June 7, 2004, a jury in Detroit, Michigan found Lionel liable and awarded MTH $40,775,745. On November 1, 2004, a federal judge upheld the jury's decision. Lionel announced it would appeal, and two weeks later filed for bankruptcy, citing the judgment as the main reason. On December 14, 2006, the judgment was overturned on appeal, citing legal mistakes in the jury trial, and a new trial ordered.

In September 2004, the troubled company dismissed its CEO, Bill Bracy, and replaced him with Jerry Calabrese, a former Marvel Comics and NASCAR executive. Along with Bracy, another 17 high-level employees were also dismissed.

In July 2005, Lionel sued competitor K-Line for theft of trade secrets. The two companies settled out of court but the settlement quickly fell apart, leading to K-Line declaring bankruptcy and selling its assets to Sanda Kan, a Chinese subcontractor who did manufacturing for both K-Line and Lionel. In January 2006, Sanda Kan licensed the K-Line name and intellectual property to Lionel.

On March 28, 2008, a bankruptcy judge approved Lionel's reorganization plan, including a settlement with MTH. Although the specifics were to remain sealed, the Associated Press reported that Lionel settled with MTH for $12 million. [http://www.forbes.com/feeds/ap/2008/03/28/ap4827815.html]

Bankruptcy

On November 15, 2004, Lionel, LLC filed for Chapter 11 bankruptcy protection, citing the $40 million-plus judgment in the MTH lawsuit as the primary factor. In the filing, it listed $55 million in debt and $42 million in assets. The largest secured creditor was PNC Financial Services Corp., owed $31 million. The MTH judgment was not included in the $55 million figure. On July 26, 2006, Lionel's bankruptcy judge ordered that Lionel submit a plan for emerging from bankruptcy within 75 days of the appeals court's verdict on the MTH lawsuit. On December 14th, 2006, a federal appeals court determined that the company is entitled to a new trial, and that their reorganised plan should be filed by March 1, 2007.

Consequently, since March 27, 2008, Judge Burton R. Lifland, of the U.S. Bankruptcy Court in New York, approved Lionel LLC's Chapter 11 reorganization plan, clearing the way for the company to exit bankruptcy. According to Lionel Chief Executive Gerald Calabrese, the plan calls for the company to pay all its creditors in full with interest, whilst the company itself will also obtain up to $40 million in loans to fund its exit from Chapter 11, pay off its creditors and fund its working capital needs in the future.

In regard to MTH lawsuit, recent filings revealed Lionel agreed to pay MTH $12 million in cash to settle the lawsuit and a separate spat involving patented smoke-puffing technology. Calabrese and MTH lawyer Alec Ostrow declined to comment on the settlement.

Lionel's Chapter 11 plan also calls for private-equity firm Guggenheim Corporate Funding to contribute $37.1 million to the reorganised Lionel company, which consequently now owns 48.6 percent of the new Lionel. Similarly, the plan also calls for the estate of the late Martin Davis (former chairman of Paramount Communications Inc.) to provide $21.9 million to Lionel, and the Davis estate will now have a 28.6 percent share in the reorganised company. Guggenheim's and the Davis estate's funding totalled $59 million for the reorganisation plan; they are also loaning Lionel an additional $10 million in second-lien debt. As a result, Calabrese expects the company to be out of bankruptcy "within a week" http://www.forbes.com/feeds/ap/2008/03/28/ap4827815.html] .

Following the reorganisation plan, Neil Young is no longer a minority shareholder in the Lionel company; however, Calabrese insists that the company wants Young to remain involved, claiming that Neil will have an "ongoing role in the company", but that this role is "up to [Neil] " . The pair had organised a meeting on March 28, 2008, although any formal findings from this meeting are yet to be announced. As of May 1, Lionel is fully out of bankruptcy.

Collector value

The collector value of "modern era" Lionel trains has been limited compared to the trains produced by Lionel Corporation prior to 1969. Although, it is currently getting better, there has been only limited collector interest in trains produced by this succession of entities, from MPC through to Lionel Trains Inc. and Lionel, LLC, especially if the items are in less than mint condition and do not include the original box. In addition, Lionel's reissues have somewhat decreased the collector value of even vintage Lionel and American Flyer equipment.

The MPC era is often derided, especially by fans of recent-production Lionel products that have better scale fidelity than the majority of MPC production and by fans of Lionel Corporation's postwar era. These critics often call MPC an acronym for "Mostly Plastic Crap," due to the flimsy and low quality plastic used at that time. MPC has a small following due to the quality of the graphics, variety of roadnames produced, and play value. Others are attracted to MPC because of its low cost and the ease of finding MPC-produced train sets and accessories, often barely used, in its original packaging.

External links

* http://www.lionel.com
* http://www.lioneltransformer.com

References