Mattel Inc. hit a rough patch a couple weeks ago with a large scale recall of toys manufactured in China, but another lesser known public Los Angeles toy company is looking at the end of the road.
Educational toy maker Small World Toys, the sole subsidiary of Culver City-based Small World Kids Inc., voluntarily sought Chapter 11 bankruptcy protection this month due to lack of capital following a failed acquisition attempt the company was counting on to boost its sales.
“I wasn’t really expecting it,” said Debra Fine, who stepped down as chief executive of the company on Aug. 2 one day before the company filed its petition to reorganize in U.S. Bankruptcy Court in Los Angeles.
A buyer or financial partner is being sought and Small World is using $2.6 million of debtor-in-possession financing to continue operating the company until a deal is made. Among the company’s better known products are Dr. Seuss puzzles and stuffed animals.
The company, which is trading under $1 on the Pink Sheets, had been seeking out an acquirer for months since it failed to complete its own acquisition of a Milwaukee arts and crafts company.
Small World is now being run by Chuck Moffitt, a turnaround specialist who is acting as both interim chief executive and chief restructuring officer. Los Angeles-based investment banking firm Focal Point LLC is in charge of marketing the company for sale.
Moffitt said he expects the company will be able to complete a sale while under bankruptcy protection. “There is a mix of companies that are interested, both private equity investors and some that are already in the toy business,” he said.
Fine, a longtime toy industry executive who remains a company director, purchased the 45-year old Small World in May 2004 from founder and longtime owner Eddy Goldwasser.
Fine took the company public through a reverse merger with a publicly-traded online sporting goods company. In the first two years of her leadership, Fine grew Small World from $26 million to $34 million in revenues. She acquired electronic early learning toy company Neurosmith in September 2004 and a software and toy company called Imaginiix about a year later.
However, the company got into trouble after it signed an agreement to acquire Milwaukee-based arts and crafts company the Bead Shop in October 2005 for $15 million in cash and $5 million in restricted shares of common stock. Fine was counting on the purchase to help boost sales, but the deal fell through when financing didn’t shape up in time.
“This was a very big personal investment for me,” said Fine, who declined to disclose how much money she lost when the deal was scuttled. “That acquisition was supposed to give us additional working capital and make us larger as a public company.”
Lance Jon Kimmel, founding principal of Los Angeles-based SEC Law Firm, an advisor to small companies on securities law, said that business for microcap public companies like Small World Toys is very precarious.
“They need to raise money, comply with the regulations of the SEC, and run a business. It’s like three jobs for the CEO. Even for people that are very dedicated, there’s only so much a person or team can accomplish,” he said.
