COLECO MOVES OUT OF THE CABBAGE PATCH

OF course it makes sense that Arnold Greenberg's office is upstairs in what used to be a gymnasium in what used to be a junior high school. And that the stairway leading to the office starts where the foul line was. He is always tossing basketballs at hoops, hoping they drop. Arnold Greenberg's world, after all, is the world of play.

It is not easy being Arnold Greenberg, which is to say being the chief executive officer and sachem figure of Coleco Industries Inc. Coleco is a toymaker known for its nervy and brilliant hunches. Davey Crockett moccasins in the 1950's. Wading pools in the 1960's. Video games in the 1970's. The incredible Cabbage Patch Kids in the 1980's.

It gets into more mischief than even the most diabolical child, as it did when it started fooling with the ill-fated Adam home computer. But it bounces back. Coleco's new offering: giant ugly insects.

A year ago, investors were waiting for Coleco's wake. But last week, when Coleco reported its second quarter results, it demonstrated a renewed heartbeat. Sales climbed to $187.9 million, from $166.6 million in the 1984 period. Profits nearly quintupled, to $24.6 million from $5.1 million. Coleco's king-sized bank debt is virtually gone. It was $106 million at the end of December; it is now just $8 million.

This is a lot better than losing $79.9 million, which Coleco did in 1984. It has helped that the money-gulping Adam computer has been discontinued. And it has helped that the chubby-cheeked, chinless Cabbage Patch Kids (these, of course, are the ones that come with birth certificates and adoption papers and that customers stood in lines for hours to get) are selling at a slightly faster clip than last year, when they did $540 million worth of business.

What still hangs over Coleco, though, is the unanswerable question of how much longer the Cabbage Patch roll will go on. Coleco is reliant on its homely dolls for three-quarters of its sales. Toyland is a fickle place. What is Silly Putty today is often just silly tomorrow.

In fact, Toy & Hobby World, a trade magazine that surveys retailers to compute the 10 best-selling toys, reports that robots and various action figures are the toys that are sizzling these days. Cabbage Patch, which led the hit parade for a dazzling 16 months, was displaced in April by Transformers, a line of transformable toy robots manufactured by Hasbro Inc. In May, Cabbage Patch tumbled to third, behind Transformers and Mattel's Masters of the Universe action figures, but then the dolls climbed to second in the June survey.

''Cabbage Patch, after all, is just a toy,'' remarks Rick Anguilla, the editor of Toy & Hobby World. ''It's not a world event. It was so hysterically big, but it has to tail off.'' ARNOLD GREENBERG, at 52, is austere-looking. He has posed for innumerable pictures clutching toys, but one can hardly imagine him at play. He speaks quietly, fervently. He preaches toys as if they were a form of salvation.

When Arnold Greenberg thinks about Cabbage Patch, he thinks about Mattel's Barbie doll. There is nothing like Barbie in toy history. It has sold like crazy for 25 years. It still sits on Toy & Hobby's top 10 list.

Mr. Greenberg talking: ''Barbie represents the perfect golden Californian. No warts. No pimples. The kind of girl every kid perhaps would like to grow up to be. Cabbage kids are all different. They are not perfect. They represent you and me with all our warts. They are almost anti-hero. They require a lot of care and loving. So if Cabbage does represent the antithesis, then there's no reason it can't go on.''

Mr. Greenberg is uncomfortable nevertheless about so much of the company's money coming from one product. ''We expect the Cabbage will be a hardy perennial,'' he said. ''We don't know whether we will do more volume or less volume next year. It's very important to broaden the base of the Coleco business.''

He wants new toys and he wants to acquire some smaller toy companies. He would like Coleco to make other kinds of dolls. But he is not looking for a Hula-hoop or a Pet Rock, a single product that will catch on big.

''It's not the toy business today,'' Mr. Greenberg said. ''It's the entertainment business. We no longer invent single hot products. We invent an umbrella concept, a whole family of products. They are frequently licensed. They are frequently the subject of a motion picture or of a TV show or a book.''

The umbrella concept that Coleco is betting on this year is Sectaurs. On the remote planet of Symbion, a genetic experiment backfired, resulting in a world where insects grow to terrifying proportions. Even the inhabitants take on some of the traits of insects. People do not get along so well on Symbion; they ride around on the giant insects and fight each other with swords and crossbows. Some of the insects can shoot a stream of poison from their snout.

Dargon and Dragonflyer. General Spidrax and Spiderflyer. Pinsor and Battle Beetle. Skulk and Trancula. Such are some of the family of hideous creatures that make up Sectaurs. A number of them boast what's known as hands-in action. Children can wiggle their hand into the big insects and make them move so they frighten their parents to death.

''They're really scary,'' says Rick Anguilla, the editor. ''I just spooked the hell out of my secretary last week with one of those guys.''

Sectaurs are flirting with the bottom of the top 10 chart. But it's far too early to know how big they will become. Coleco is hoping for about $50 million worth of sales this year.

In the Coleco development lab are other products, to be unveiled in 1986. ''The company has a long history of wildly successful products that run into brick walls and then it looks like it's finished, but then it comes up with a new, wildly successful product,'' says Mark Manson, an analyst for the Donaldson, Lufkin & Jenrette Securities Corporation. ''If you trust in their history, they should come up with another big product. There's no guarantee, but that's been their story.''

MAURICE GREENBERG, a

Russian immigrant, founded the Connecticut Leather Company in Hartford in 1932 to sell leather supplies to shoemakers. His two young sons, Leonard and Arnold, were enlisted to do odd jobs.

Leonard designed a leather-cutting machine and turned out a spool of leather lacing. Then he branched into craft kits.

But Leonard wanted to try other things. Plastics looked good. So the company started making wading pools. By 1960, plastic pools were Coleco's principal product. Two years later, it sold the leather business. The company went public. The next year, it acquired Kestral Corporation, which made inflatable backyard pools. By the late 1960's, Coleco was the world's largest maker of above-ground swimming pools.

While all this was going on, Arnold Greenberg, six years younger than Leonard, graduated from Harvard Law School. He was representing Coleco as a partner in a Hartford law firm. Leonard, who was now running things, told him he needed help, and so he joined Coleco in 1966 as general counsel. Quickly, he immersed himself in everything else. (Until December 1982, the two brothers jointly acted as chief executive; Leonard now serves as chairman of the executive committee and spends most of his time with personal investments and charities.) In the mid-1960's, the brothers bought a doll carriage company and a maker of tabletop hockey games. Some other ventures backfired. In 1972, Coleco bought a snowmobile company; the next year it got rid of it after an unwinterlike winter murdered business. An attempt to develop dirt bikes fizzled. In 1973, the company lost $1.1 million.

Then, in 1975, Pong totally changed Coleco's world. Pong, of course, was the electronic table tennis game that was becoming as popular as beer in bars and arcades. The Greenbergs figured it had great potential as a home product. While working on a design, Leonard discovered that a company called Atari already had a home version. So, in 1976, Coleco introduced Telstar, a Pong clone, for $50, about half Atari's price. Coleco sold one million Telstars that year.

By 1977, Coleco had nine Telstar renditions ready for market. But then the skies opened, hailing events that conspired to keep sales down: production snags, a shortage of chips, an East coast dock strike that held up components. Moreover, video units that played only one game were being made obsolete by hand-held electronic games that did not have to be connected to a TV. Coleco sold a good many hand-held games - for instance, Electronic Quarterback -but it had to dump more than a million Telstars and suffered a $22.3 million loss in 1978.

Back Coleco came. Video game systems with changeable cartridges were the new wave. While it was developing its own game system, Coleco also shrewdly decided to make cartridges for Atari's VCS and Mattel's Intellivision. Meanwhile, it became the No. 1 maker of portable electronic games.

In August of 1982, another basketball dropped through the hoop. Colecovision, the company's home video game system, was introduced and promptly caught on. Heady with success, Coleco hatched Adam.

Adam was to be the first low-cost ($600) complete home computer and word processing system. But its development costs were enormous. By the end of 1983, Coleco was overwhelmed by debt. There were delays and more delays. When Adam hit the stores in November, it was plagued by complaints about defects. Coleco solved the quality-control problems, but sales failed to rebound.

At the beginning of January, Coleco said that it was abandoning the tainted Adam. It wrote off $118 million. Coleco is now debating whether to withdraw from electronics altogether. Colecovision still sells, but it is a shadow of its former self. Mr. Greenberg expects electronics, once the heart of Coleco, to be less than 10 percent of sales this year. SEVEN-thirty in the morning is his arrival time. Not until 7:30 at night does he head home. Arnold Greenberg stops by on Saturdays, too. It does not bother his wife. She is the chairman of the board of education in West Hartford and as busy as he is.

Every week, he drops in on toy stores, opens his ears and eyes, tries to pick up useful gossip. He sees how his toys look next to the competition.

''You have to talk to buyers and customers and find out what's hot and what isn't,'' he said. ''And you have to understand the culture of our society. Looking at the success of 'Rambo' and seeing the application to military toys. Looking at the cult of Madonna. Even understanding this Coke thing and seeing if it has any lessons. The experience you need to pick toys is far more than quantitative. It's understanding your gut.''

Still, Coleco is trying to nourish more professional management, too. As Mark Manson says: ''The company has displayed remarkable ingenuity and not much discipline. That has to be a reflection of senior management. Greenberg has good ideas, but he doesn't always know when an idea has run its course.''

Effective June 12, J. Brian Clarke, who had been executive vice president, was named president and chief operating officer, the first non-Greenberg to hold that title.

''The Adam experience,'' Mr. Greenberg said, ''confirmed my belief in the need for even tighter day-to-day operating controls, and in the value of separating the chief executive responsibility from the chief operating responsibility. Coleco, as a result of being a family business and an entrepreneurial business, has a can-do spirit about it. We were told we couldn't compete in video, we couldn't compete with Mattel. We were propelled forward here by people prepared to climb mountains and move mountains. The Adam experience convinced us that some challenges are greater than others.''

''There are fewer surprises now,'' Mr. Clarke said. ''You don't have finance saying, what are the marketing guys doing to me? We have more reports, more voices in our meetings.''

Mr. Greenberg and Mr. Clarke are determined to keep milking Cabbage Patch, bringing out new sizes, shapes, costumes. New this year are Cabbage Patch twins, Cabbage Patch world travelers, Cabbage Patch ponies, Cabbage Patch with a first tooth, Cabbage Patch with glasses. The funny-looking dolls continue to benefit from wacky publicity. Recently, an orthodontist in Arlington, Tex., began gluing metal onto the mouths of Cabbage Dolls when he put braces on the teeth of the dolls' young owners. The Cabbage braces drew national publicity.

Coleco also remains the biggest maker of wading pools. It is the leading manufacturer of children's ride-on vehicles, like Power Cycle plastic tricycles. It makes Dr. Seuss characters, pinball machines, pool tables, sleds. But sales of all these things amounted to only about $130 million last year, a quarter of what Cabbage Patch did.

So Mr. Greenberg goes on listening to his gut, trying to understand a perplexing culture. The company is a source of great family pride. ''When things are not going well at Coleco, it's like being up with a sick child,'' Mr. Greenberg said. '' There aren't enough hours to get it well.'' AT A GLANCE Coleco Industries rrAll dollar amounts in thousands, except per share data Three months ended June 29#1985#1984 Revenues$187,918$166,606 Net income#24,580#5,138 Earnings per share$1.49$0.32 Year ended Dec. 31#1984#1983 Revenues$774,860 $596,498 Net income(79,818)(7,443) Earnings per share- - Total assets, June 29, 1985 $353,106 Current assets

* 293,827 Current liabilities

* 128,637 Long-term debt

*

* 24,671 Book value per share, June 29, 1985 $3.94 Stock price, July 19, 1985 N.Y.S.E. consolidated close 17 5/8 Stock price, 52-week range 19 1/8-9 5/8 Employees, July 19, 1985 4,500 Headquarters West Hartford, Conn. (loss)