K-Line Announcement from Jerry Calabrese
04/25/2006

Dear Friends,

I must confess that I so enjoyed the speculation and armchair lawyering about the future of  K-Line that I almost hate bringing it to an end.  But, as one of my former mothers-in-law used to say, “Appoint a day and it will come.”  After a lot of legal wrangling, the K-Line transaction has finally been concluded.   As of last week, right before York, Lionel took control of all K-Line assets, including its inventory, intellectual property, tooling, and trademarks. 

Lionel’s deal is with Sanda Kan, K-Line’s principal manufacturer and creditor, who, in turn, worked out its own deal with K-Line’s bankers before we could move forward.  Under the terms of our arrangement, Lionel will control and run the K-Line brand, in all respects, and will have the exclusive right to buy it outright sometime in the near future.

Our first step was to take possession of the existing K-Line inventory and move it from its former headquarters in North Carolina.  As of today, that’s just about done.  Our next challenge is to sort through K-Line’s books and records to make sure that everyone who pre-paid for products receives them.  This will take some time, as most of what’s owed to individuals and clubs is not in existing inventory and will have to be manufactured. 

As I’ve said before, Lionel is committed to making good on unfulfilled orders.  I anticipate that it will take us at least 60 days to sort out what is owed to whom.  During that time, I cannot stress strongly enough how much we will need your patience and cooperation.  As hard as it may be to control the urge to call us throughout this transition, I would really appreciate it if you will give us a couple of months to figure things out. 

One bit of good news is that we’ve already managed to get most of the trains that had been stuck in K-Line’s repair department during its bankruptcy fixed and shipped back to their owners.  

Once the smoke clears, we plan to re-launch K-Line later this year, in our second catalog.  Because getting the deal done took so long, there will be only a limited line of new products in 2006.  But we plan to make them very special.  Next year, in 2007, we plan to make K-Line a larger part of the Lionel product line, positioning it with our own LionMaster offerings, in our ongoing effort to offer you even more quality mid-priced choices.

Finally, I’d just like to say thanks to all of the people who worked so long and hard to get this deal done.   

Best Regards,

Jerry Calabrese

Jury awards MTH $40.7 million; says Lionel wrongly benefited from stolen "trade secrets"

A federal court jury has awarded MTH Electric Trains, Columbia, Md., more than $40 million in damages after it found Lionel and manufacturing partner Korea Brass unfairly profited from stolen MTH blueprints used in the production of high-end Lionel steam locomotives.

The decision came on June 7 after an 18-day trial in Detroit. Jurors found Chesterfield, Mich.-based Lionel liable of misappropriation of MTH's trade secrets. The exact amount of the award was $40,775,745. The decision came four years and two months after MTH first filed its claim against Lionel and Korea Brass Co. Ltd.

"Despite the wishes of some model railroading enthusiasts that pursuing a lawsuit against Lionel wasn't in the best interest of the hobby, I felt our firm had no choice but to seek justice against those who wronged us," MTH president Mike Wolf said in a press release sent to Kalmbach Publishing Co.'s Classic Toy Trains magazine.

MTH sued Lionel in April 2000, charging that Lionel knew - or should have known - that blueprints used to build the Lionel locomotives had been stolen. MTH said the Korea Brass-built models were created in too brief a time for a company that had no previous experience producing die-cast metal articulated O-gauge locomotives.

The digital blueprints were stolen in 1998 or 1999 from Samhongsa, MTH's former South Korean manufacturing partner, and, according to the lawsuit, were discovered in the hands of a design firm that did sub-contract work for Korea Brass. Four South Koreans were arrested by South Korean authorities and were subsequently convicted, according to the lawsuit.

The jury was asked to determine whether the stolen drawings fit the definition of trade secrets and whether Lionel wrongly profited from the drawings. MTH sought $33 million in damages.

The drawings showed mechanical and electrical subassemblies for O-gauge articulated locomotives and tools and dies to produce those subassemblies, Wolf had told Classic Toy Trains. The drawings were not for complete locomotives. The locomotives involved included MTH's Premier line C&O Allegheny, Union Pacific Big Boy, and Norfolk & Western A-class 2-6-6-4

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