Alchemy II in Need of Some Modern Magic : Worlds of Wonder Bankruptcy Hurts Firm

Alchemy II’s name comes from the legendary medieval sorcerers who supposedly could create gold from lead.

For a while, the private Chatsworth company performed modern-day alchemy by turning a talking teddy bear into riches. Now, Alchemy II may need a touch of wizardry to get out of its financial problems.

Alchemy’s gold was Teddy Ruxpin, the story-telling teddy bear that its president, Ken Forsse, thought up 25 years ago. After trying unsuccessfully for years to interest numerous toy makers and entertainment companies, Forsse in early 1985 convinced Silicon Valley upstart Worlds of Wonder to manufacture the toy under a royalty agreement, producing what was then one of the big hits of the toy world.

But last month, Worlds of Wonder sought protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. Its problems include competing against a glut of talking toys on the market and sloppiness in its deliveries to retailers.

Under Chapter 11, Worlds of Wonder can stay in business while working out a plan to repay its debts, which it listed as $312 million. But some analysts have doubts about the company’s chances of success, since Teddy Ruxpin’s retail price has been slashed to $30 and other Worlds of Wonder products have declined in popularity, notably its Lazer Tag game.

Meanwhile, Alchemy executives are clearly nervous. Teddy Ruxpin was Alchemy’s biggest source of income, but Alchemy has become merely a creditor of an ailing company. “Our situation is that we are in a bit of a hurt financially. We have to look at the realization that Teddy Ruxpin has been hurt by the discounting,” said Alchemy partner Larry Larsen last week.

$20 Million in Royalties

The 15-minute interview was cut short when another Alchemy executive walked into his office to say the company didn’t want to discuss Worlds of Wonder anymore.

Priced initially at an elite $70 a bear, Worlds of Wonder sold $93 million worth of Teddy Ruxpins in the first year, and the toy inspired the cartoon “The Adventures of Teddy Ruxpin,” which still airs in syndication.

Teddy Ruxpin sales produced nearly $20 million worth in royalties for Alchemy from Worlds of Wonder in a two-year period ended last March, according to a Worlds of Wonder prospectus last June. Larsen said in an interview that Alchemy allowed Worlds of Wonder to stretch out royalty payments last year when its financial problems became evident.

The prospectus also says Alchemy has pledged substantially all of its assets, including royalties due the company, to Worlds of Wonder as collateral for loans and advances Alchemy received.

Included in the money Alchemy received from Worlds of Wonder, the document shows, was $2 million borrowed to buy out dissident Alchemy stockholder Neal Simmons, who filed two lawsuits against the company and settled them in December, 1986. Court papers show Simmons agreed to accept $2.05 million from Alchemy II to dismiss a lawsuit alleging that his firing was improper, and $250,000 for his 20% stake in Alchemy II.

Alchemy executives wouldn’t discuss their company in detail or its prospects. Larsen said the company is working with other toy makers on potential toys but wouldn’t say what.

Court and other public documents indicate that Alchemy has been plagued by cash problems, bitter internal feuds, lawsuits and a frequently stormy relationship with Worlds of Wonder over the accounting of royalties.

Court documents include a 1986 letter written by Alchemy’s attorney, Martin A. Flannes, to Worlds of Wonder complaining of the toy maker’s “continued failure to provide adequate accounting to Alchemy with respect to royalties.”

In addition, Flannes complains in the letter of numerous misstatements and omissions made by Worlds of Wonder in a stock prospectus, including claiming exclusive rights to some products when it actually shared them with Alchemy.

Despite the disputes, the association between Alchemy II and Worlds of Wonder was so closely tied that in spring 1986 Worlds of Wonder nearly bought Alchemy, according to court documents.

Worlds of Wonder officials did not return calls seeking comment.

But in a federal lawsuit filed in Los Angeles, Simmons portrays Alchemy executives as inexperienced to the point of allowing themselves to be pressured by Worlds of Wonder and its chairman, Donald D. Kingsborough, into accepting a less favorable deal than was originally negotiated.

Simmons alleged that the company was originally supposed to get 10% of Worlds of Wonder’s common stock and arranged a complex royalty agreement, part of which included a so-called technology royalty of 5% of the manufacturing costs of products made and sold by Worlds of Wonder.

Accusations Denied

Simmons alleges that Worlds of Wonder pressured Alchemy II into giving up the stock rights, lowering the royalty rate to 3% and allowing Kingsborough to pledge Alchemy’s assets to lenders so he could get financing.

Alchemy denied Simmons accusations before settling. The company accused Simmons of participating in the same negotiations he criticized and also of filing the suits to pressure the company into buying him out.

The company further said the stock it was to have received was part of a swap of stock with Worlds of Wonder that was called off and that the royalty rate was lowered because Worlds of Wonder bought some of the rights to the products. Alchemy added that it had to pledge its assets as security so Worlds of Wonder could continue to advance it money to develop products.

Forsse declined to be interviewed for this story.