Lionel Financials - March '07 by Erol Gurcan Lionel's monthly operating report for March 2007, filed with the bankruptcy court on April 13, 2007, showed net earnings, or profit of $189,000. While the amount itself is small, it is a profit nonetheless, which is significant for this time of year. During the calendar year 2006, Lionel did not post a monthly profit during the first seven months of that year. Additionally, in March 2006, Lionel showed a loss of $349,000 and in March 2005, a loss of $534,000. For the first three months(first quarter) of 2007, even with the March profit factored in, Lionel has lost over $2.6 million. In January 2007, it lost over $1.7 million, and in February, lost almost $1.1 million. In contrast, during the first three months of 2006, Lionel's losses were lower, at $1,556,000. Thus, its losses to date this year are over $1,000,000 greater than for the same period last year. Although the losses so far this year are higher than last year, gross and net sales continue to increase. For the first three months of 2007, Lionel had gross sales of $12,261,000 and net sales of $11,458,000. In 2006, its gross and net sales for the same period were $10,190,000 and $9,780,000 respectively. The sales numbers for 2007 so far show significant increases from 2006 of over 2 million dollars. This is especially intriguing since this time of year does not account for most of the company's sales to hobby shops/mass merchandise retailers. In other words, since Lionel's business is mostly seasonal, this is the slow time of year since it comes right after Christmas. In 2006, Lionel's gross sales were $62 million. Gross and net sales for March 2007 were also about 2 million higher than in March 2006. Lionel's gross and sales for March 2007 were $6,958,000 and $6,466,000 respectively. Gross sales in March 2006 were $4,824,000 and net sales were $4,627,000. Ed. note: Lionel is a privately held company but their financials are entered into the public record on a monthly basis as part of Lionel's bankruptcy proceedings. -------------------------------------------------------- Lionel train maker's emergence from bankruptcy stalled NEW YORK -- Lionel LLC won approval Wednesday to pay lawyers and financial advisers who are working to bring the model train maker out of bankruptcy protection. Lionel -- maker of its iconic miniature trains, tracks and accouterments since 1900 -- also pushed back a status conference about when it must submit a plan to emerge from court protection. Its plan filing has been put on hold by a trade secrets lawsuit, brought by rival Mike's Train House Inc., which must first be settled in U.S. District Court in the Eastern District of Michigan. Chesterfield.-based Lionel asked U.S. Bankruptcy Judge Burton Lifland to approve $675,808.72 in fees. The company's bankruptcy attorneys, from the firm Schulte Roth & Zabel LLP, were paid $95,977.50 in fees and $2,145.46 in expenses for work done from Sept. 1 to Dec. 31 of last year. The company entered bankruptcy court protection on Nov. 15, 2004. Lionel has sold more than 50 million trains since it was founded, according to the company's Web site. ---------------------- Appeal's Court Denies MTH's Petition For Rehearing by Erol Gurcan On April 19, The Sixth Circuit Court of Appeals denied MTH's petition for a rehearing of its December 14, 2006 decision. That earlier decision vacated the jury's $40.8 million verdict in favor of MTH in the trade secrets case, and remanded it to the Eastern District of Michigan for another trial. While the above news is certainly important, it is not unexpected. I stated in a post in January that MTH's chances of prevailing on the petition were small. Additionally, MTH's Attorney Alec Ostrow stated at least twice at the bankruptpcy court conference on January 9, 2007 that is was unlikely MTH would prevail on the petition. The more important question now becomes, what is going to happen now that the appeals process is over. Where do we go from here? Click on the link below to read on First, the parties are still in the mediation process. Specifically according to the mediator Morris's report filed with the bankrupcy Court on April 17, MTH's and Lionel's lawyers met with her on February 21. On March 14, The attorneys, as well as MTH's Mike Wolf and Lionel's Jerry Calabrese met with the mediator for a full day. The mediation was continued by telephone on March 22, March 27 and April 5, 2007. The next in person mediation is scheduled for April 25. Both parties have also exchanged settlement proposals with regard to both the trade secrets and separate patent infringement lawsuits. The mediatior has advised Judge Lifland that in her opinion, both parties have acted in good faith and she has requested the court not take any action concerning any litigation until after the next scheduled mediation on April 25. The parties are scheduled to appear before Judge Lifland on May 22, so it is unlikely any litigation will occur before then anyway. The recent denial by the appeals court of MTH's petition for a rehearing, strengthens Lionel's bagaining position during the future mediation process since the appeals process is now over. If the mediation produces a settlement of both the trade secrets and separate $17.5 patent infringement lawsuit (involving sychronized smoke and sound), all the litigation between the parties would end. However, what will happen if the mediation process does not produce a settlement of both the trade secrets and patent infringment cases, or produces a settlement of only one of the two? Judge Lifland made it clear at both the January 9 and February 22 Court conferences (both of which I attended), that if both of MTH's separate lawsuits against Lionel are not resolved during the mediation process, he would conduct a Bankruptcy Code section 502c damages hearing. If Judge Lifland does indeed do this, he would essentially be moving the trial from the District Court in Michigan (the court where a jury awarded MTH over $40 million dollars in the trade secrets case and where the appeals court remanded it after it vacated the monetary award). In addition, Judge Lifland would be taking away MTH's right to a jury trial. My bankrutpcy lawyer friends have told me he has the power to do this to expedite Lionel's exit from bankruptcy. Of course, MTH wants a jury trial since one jury already awarded it $40.8 million dollars ($38.6 against Lionel individually) almost three years ago on June 7, 2004. In fact, MTH's attorney, Alec Ostrow, at both the January 9 and February 22 court conferences, objected when Judge Lifland stated that any potential damages would be decided by him, stating th judge was usurping the District Court's function by moving the trade serets case to his court. Lionel's attorneys have not objected when Judge Lifland previously stated he intended on conducting a damages estimation hearing. I believe they would be in favor of having the bankruptcy judge decide the issue of potential damages rather than a jury, which would most likely be more sympathetic to a plaintiff such as MTH. Moreover, Lionel's CEO Jerry Calabrese has told me in the past he wants to exit from bankruptcy as quickly as possible. A trial on the potential damages issue in the bankruptcy court would certainly occur more quickly than a jury trial in the Federal District Court in Dertoit, Michigan. Judge Lifland has previously stated he wants to expedite Lionel's exit from bankruptcy since they have been there for a long time. Lionel filed for bankruptcy on November 15, 2004, now a period of almost 2 and a half years. Moreover, a quicker trial and exit from bankruptcy would also benefit Lionel, if it needed to obtain any sort of future financing or capital. It would also remove any stigma associated with being in bankruptcy. Any other discussion of what could occur in the future with regard to the legal proceedings would be speculation, so I will not attempt to do so.