Understanding the Lionel - K-Line “Deal” - PART 1
In Part One of this multi part series of posts I will lay
out the necessary background you need to know to get a complete understanding
of the Lionel/K-Line “deal” announced by Lionel’s CEO, Jerry Calabrese last
week. Over the past week, speculation
and opinions surrounding the announcement has dominated the O Gauge Railroading
forum and to a lesser extent, been the subject of some discussion in the other
forums. Readers of Mr. Calabrese’s statement
were lead to believe (by reading between the lines) that Lionel was actually
taking over K-Line. That isn’t the
whole story.
To get a better understanding of the deal, I obtained a copy
of the docket report detailing the motion filed by Lionel in the U.S.
Bankruptcy Court for the Southern District of New York. Since Lionel is in bankruptcy, any of its
financial dealings need to be reported to and approved by the bankruptcy
court and become part of the public record. On February 16th,
2006, lawyers representing Lionel filed a motion with the court to allow it to
enter into the agreement Mr. Calabrese alluded to in his statement last
week. Upon reading the report, I
quickly realized there were several aspects of the proposed “takeover” which
need to be presented to paint a complete picture of the Lionel/K-Line deal. Please note that throughout the court
documentation K-Line is referenced as MDK, Inc. For the purposes of clarity, I will refer to MDK, Inc as K-Line.
For you to gain a better understanding of the proposal
on the table, it is important to be
familiar with the events that lead Lionel and K-Line into
bankruptcy and eventually to where they stand today.
Two lawsuits involving the leading players in the O Gauge
hobby have been filed over the past 6 years that have had a profound impact on
the industry. One would never guess a
cottage industry could have such controversy!
In 2000, MTH sued Lionel alleging that Korea Brass, a former
supplier to Lionel based in Korea, stole confidential information from one of
MTH’s Korean supplier’s, Samhongsa, and used the information to design and
build Lionel trains. In June of 2004, a
jury sided with MTH and ordered Lionel to pay MTH over $38 million. Not being able to post $38 million in reserve
while it appealed the verdict, Lionel was forced to declare bankruptcy in
November of 2004 to protect its assets from creditors.
In July of 2005, Lionel sued K-Line alleging the theft of
Lionel trade secrets concerning its Train Master Command Control (TMCC) and
Railsounds technology. Lionel and
K-Line ultimately reached a settlement and as a result, K-Line filed for
bankruptcy in August of 2005. Generally, the settlement allowed Lionel a general unsecured claim of $2
million dollars against K-Line and a permanent injunction prohibiting K-Line
from manufacturing and selling products containing the TMCC and Railsounds
technology. As you will eventually see,
the latter will play an important role in events to come.
Now that the background is out of the way, you need to
understand a few details concerning the K-Line bankruptcy and the principal
players involved. In Part Two of the series, I’ll
discuss the K-Line bankruptcy and the “monkey wrench” that I think foiled one
principal player’s attempt to acquire K-Line.
Related posts:
- Court Approves Lionel’s Bankruptcy Plan and Settlement with MTH by Erol Gurcan
- Neil Young And Lionel To Buy Out Partner Of Creative Trains
- Lionel Execs Get Pay Raise
- Bankruptcy Court Grants Lionel 7th Extension: MTH Motion to Extend TRO Granted by Erol Gurcan
- Current Status Of MTH, Lionel Lawsuits Settlement By Erol Gurcan
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