Small World's High Hopes
Out of bankruptcy, the specialty toymaker sets out to prove the world still awaits
By Brent Felgner -- Playthings, 12/19/2007 4:00:00 AM
CULVER CITY, Calif.—In the post-bankruptcy resurrection following the sale of its remaining assets to an investors group last October, Small World Toys has been moving to repair the damage the company suffered in relationships with once-faithful vendors and retailers, re-motivate its sales force, and begin rebuilding the corporate infrastructure that peeled away as SWT foundered.
By now the new owners have traveled to Asia at least twice to meet with the company’s factories and have held revival meetings with sales reps, sending them back into the marketplace with order books in hand to stand up and preach the gospel of corporate renewal. Among many other factors, success will require an admittedly skeptical retail congregation to rediscover its belief in Small World’s ability to deliver — consistently and on time.
While part of their effort is directed at salvaging a modest part of this holiday selling season, the lion’s share of attention is being paid to getting ready for Small World Toys’ born-again celebration — Toy Fair — less than two months away. By that time the company wants to be on its way to offering a much broader portfolio of products to attract wider retailer interest, and enhance its latest marketing and sales stories.
When times are the most challenging, return to your core constituency, the axiom advises. So, the focus is once again on Small World’s base — the specialty retail market. It’s a return-to-basics strategy, said company executives.
“I have a 30-day horizon right now and we’ll adjust that every 30 days as we work to rebuild the company,” offered CEO John Nelson, a founding principal in Rivenrock Capital, the Los Angeles-based private equity firm that bought the toy company out of bankruptcy for $12.5 million in cash, the assumption of $2.7 million in letters of credit and additional liabilities — and then took it private.
Nelson said he would increase product SKUs by 30 percent in 2008, and hopes to double that in 2009. The added expense associated with broadening the line to that extent — more than doubling over two years — will be incremental and more than offset by increased sales, Nelson insisted.
No less significant, Nelson and his management group want to avoid repeating recent history. Small World’s troubles pre-bankruptcy, they said, stemmed principally from being undercapitalized and overleveraged. Adding to that grief, the company carried the financial burdens — about $1 million a year in compliance expenses— of being a small public company, COO John Matise said.
The company’s balance sheet is “very clean” currently; additional financing with an equity position has given an affiliate (Kallina Corp.) of its largest secured creditor a minority position in the company. Former CEO Debra Fine has no role in the new company, Nelson said.
After Fine resigned and control of Small World Toys was wrested away through the bankruptcy and defaults of the loan covenants, she retained leadership over parent-company Small World Kids. But Kids’ only asset was the toy business, according to Fine and SEC and court documents. (Moreover, Small World Kids filed for Chapter 7 bankruptcy liquidation last month in U.S. Bankruptcy Court for the Central District of California at Los Angeles. The company listed liabilities, all secured debt, of $7,340,224.75.)
“There’s been damage to the brand, but we’re going to work very hard” to win back customers, Nelson added. “It’s a tough environment, there’s no question about that. We’re not naïve.”
‘Free and clear’ — at a cost
Who’s Who in the new Small World
“When an investment company goes out and looks for a company, it looks for a company that has, let’s say, good bones; and this company has great bones,” offered John Nelson, the investor and new CEO of Small World Toys. “And the opportunity for people that have experience in the specialty market to come back and run a company, and for those people to also be investors is unique. We have a very strong management team that’s experienced in the business.”
Nelson and David Adams, who is the new CFO of Small World, are co-founders of Rivenrock Capital, which bought the toy company out of bankruptcy. Nelson is no stranger to Small World. He sat on the company’s board for 10 years going back to the time it was owned by founder Eddy Goldwasser, now a consultant to the new Small World.
Nelson, an engineer by training, an investor by choice, spent 10 years building missiles for Ford Aerospace. He also owned and was president of a wood manufacturing company and was COO at a consumer products company he declined to identify. Though he and Adams founded Rivenrock two years ago, they’ve been doing deals since the late ’90s, according to the company’s website. One of their highest profile investments to date was Shopatron, an ecommerce business.
But after serving on the board of Goldwasser’s Small World, Nelson became president and COO in 2000. He successfully sold the company in 2004 to Debra Fine and her family, who then took the company public in a bid to raise further capital. Immediately prior to filing for bankruptcy, however, the company reported that despite being public, it was still closely held; at the time, fewer than 70 shareholders owned the stock, according to disclosures in SEC documents.
COO John Matise, too, is a former Small World executive. By his description, he was originally a turnaround executive who spent time with Accenture and Deloitte Consulting, then worked in venture capital and private equity deals with Encore Venture Partners, Wedbush Capital Partners and most recently, Stone Canyon Venture Partners.
Now also partner at Rivenrock, Matise returned to run Small World as COO, as Nelson was departing two years ago. Matise left his post a few months prior to the bankruptcy, only to return with the same title and as a new owner. In his first term, Matise said he took an active role in finding new financing and restructuring the company’s debt and trying to clean up its balance sheet.
Finally, 26-year Small World veteran Howard Bennett is the new president of the company.
In the meantime, Chuck Moffitt, the interim CEO of Small World during the bankruptcy, has won a court-approved raise in his compensation. A turnaround specialist who occasionally pitches in during bankruptcies, Moffitt was being paid $10,000 a week during the pre-auction period for what were likely for some very long weeks. But acknowledging that the wind-down period has begun post-sale and that he will probably no longer be putting in consistently long hours, Moffitt sought to change his compensation to $350 per hour — $14,000 for a 40 hour week. Indeed, he’d need to put in less than 29 hours to come out with the same $10,000 compensation he was awarded during the height of the bankruptcy. —BF
The privately held successor company — the result of a bankruptcy court-sanctioned Section 363 sale —emerged from Chapter 11 debt-free. And though management declined to specify a dollar amount, Matise pegged the company’s working capital “into seven figures.”
In a telephone interview, Nelson explained, “When I was looking at this, the most important thing was that we structure the deal to have working capital to be able to run and grow the company. That was a very difficult assignment: John [Matise] had a lot to do with it, and we were able to structure a deal. That was critical. If we didn’t have the working capital or were undercapitalized, we wouldn’t be sitting here today.”
Even if working capital is just a few million dollars, as Matise stated, it should buy the company some time — a few months, at least — to get re-established, ramp up sales and shipments, and begin building up its cash flow to become self-sustaining once again. No less critical, it will also buy time to win back some of the battered trust from a vendor base stuck with millions in unsecured trade debt that is likely never to be recovered.
Cash raised through the sale went largely to pay down the secured debt — most of that owed to an affiliate of Laurus Capital, which listed senior secured debt and interest of $11.8 million. In its last full fiscal year in operation, SWT reported total sales of $28.3 million.
“There is no doubt that a lot of those vendors that have been with us for 20-plus years, will have lost a lot of money,” Nelson said. “But they have confidence that we can get this company back on its feet. Maybe not 100 percent, but we have the support of our strategic vendors.”
Lost in (retail) shelf space
No less concerning will be the company’s ability to regain shelf space in a retail environment often likened to quicksand. When a product loses its slotting, the space is filled almost immediately by something else; getting the space back after any length of time is difficult by all accounts, especially when global suppliers are fighting tooth-and-nail for that inside real estate.
“We’re very well aware that the marketplace is much more competitive today than it was five years ago or 10 years ago,” Nelson acknowledged. “But I think that competitive market and the challenges ahead of us are really going to keep us on the balls of our feet.”
Licensed products will continue to play an important but not dominant part, according to Matise. Small World lost the Dr. Suess license as it emerged from bankruptcy, according to court documents, but retains relationships with such names as Eric Carle, Ryan’s Room, Neurosmith and IQ Baby.
Matise said SWT will pursue licenses when they are synergistic with its product line and when the deals make sense, although he didn’t go into detail. But he insisted Small World will not “chase” licenses not core to its business. He said the emphasis will be on finding and developing “innovative” products, again directed at the specialty niche. But senior executives realize they have a hard sell ahead.
But what benchmarks have been established and in what timeline, to begin showing positive and substantial results? Nelson wears two hats when discussing that.
“The first is Rivenrock Capital and our investors. When are they going to require us to show a profit? We have a very long view,” he stated. “We are not here to turn [sell] this company; the investors know they are going to be here for the long haul and they are happy to be in this business. So there’s no pressure on us to show immediate results. They’re going to be pleasantly surprised when we do meet out operational goals and we do begin to show positive cash flow. It’s hard to say, probably in the third or fourth quarter of 2008.”
The other is from the point of view of the company’s customers. “I am absolutely sensitive to the fact that this company has lost credibility with the specialty market. And the specialty market is critical to our success. We’re going to focus on doing the very best we can to regain their confidence.”
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