Getting back on track

M.T.H. Electric Trains of Columbia aims to pick up momentum after winning a $41 million judgment against the venerable Lionel company.

December 24, 2004|By William Patalon III | William Patalon III,SUN STAFF

For model train fans, Christmas is the time to dust off the layout, gather the family around and permit the odoriferous mix of pine needles, lubricating oil and ozone to summon pleasant memories of childhood.

But, for model train maker M.T.H. Electric Trains of Columbia, this season is bittersweet.

It won a $41 million judgment this year against the venerable granddaddy of electric trains, Lionel LLC, which it sued for stealing its train designs. But it will likely be years, if ever, before the local firm sees any money.

Lionel intends to appeal the verdict and has filed for bankruptcy protection. M.T.H. contends that Lionel continues to benefit from the technical know-how it acquired through the disputed designs.

"The bad times are hopefully behind us," said M.T.H. owner Mike Wolf, who started his business in 1980 as Mike's Train House, in the basement of his parents' home.

Because Lionel could remain under bankruptcy protection for two to four years, according to its own estimates, Wolf, 44, said he is "going to let the lawyers handle the appeal and focus instead on making really great trains."

Lionel officials were not available for comment. However, in a Nov. 18 Internet posting, Chief Executive Officer Gerard Calabrese defended his company and reported sales up about 5 percent this year over last. "This is actually a good year for us," Calabrese said.

Legal maneuvers aside, M.T.H., Lionel and a handful of other players will have to work harder to revitalize a segment of the toy industry that in its day was as exciting as the computer-gaming business is today.

Wolf remembers, as a young boy, waiting for his father to get home from work to set up their big-scale train layout. Because model train sets were expensive - in the 1950s, a starter set could cost a working man the equivalent of two weeks' pay - operating the trains became a family event, with the children having to wait for dad to get home to supervise.

Today, many of the most ardent hobbyists are men in their 40s or 50s who fondly remember those times and want to replicate them for their children. They also tend to have setups of their own and are willing to travel to model train shows or into "cyberspace" to find rare locomotives, or rolling stock.

They also have the cash to make it happen. Wolf said that a study of his customer base found that the big spenders lay out an average of $4,200 a year on their avocation. For collectors seeking older trains, perhaps to complete a set passed down from fathers or grandfathers, there's plenty of ground to cover.

The industry dates to the early 1900s, when Joshua Lionel Cowen, then in his early 20s, created a battery-powered train locomotive as an advertisement in a store window. Customers wanted the train, not the products in the window, and Lionel Trains was created. Lionel became the world's largest toy manufacturer. Its fortunes peaked in the early 1950s. But the company's slide accelerated in the 1960s as families moved to the suburbs, the fascination with trains waned and the "generation gap" split children and adults. Lionel filed for bankruptcy in 1967 and limped along with a variety of owners.

M.T.H.'s Wolf spent several years doing subcontracted design and production work for Lionel before the two firms parted ways.

His company had grown to about $60 million in annual revenue, he said, when he found Lionel was selling trains based on designs he claims were stolen from Samhongsa, a South Korean manufacturer that was doing work for M.T.H. He sued in 2000 and this year won a $40.8 million verdict against Lionel and its supplier, Korea Brass Co. Lionel filed for bankruptcy protection in November, a financial reorganization that could take years to resolve.

Run off the rails

Wolf contended that his company was virtually derailed as a business by Lionel's acts, which cost it market share. He alleges that sales by his privately held firm have plunged to $40 million, forcing it to cut workers - to 57 from 127 at its peak.

M.T.H. posted its first-ever loss in 2002, scratched out a profit in 2003 and will lose money again this year, Wolf said.

Calabrese, Lionel's CEO, disputed M.T.H.'s claims during last month's Web chat, alleging that M.T.H. just did a better job than Lionel in presenting its case. While repeatedly contending that he didn't wish "to retry the case here or anywhere," Calabrese did what he could to cast doubt on the verdict.

"I honestly believe we got a bad deal, partly because of our own uninspired defense," Calabrese said, according to a transcript of the chat posted on Lionel's company Web site. "As a guy who just came to the company and the hobby, I sense a lot of anger and animus on both sides. I personally have none and actually respect Mike [Wolf] as a smart guy who has played his hand beautifully."

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