Profits and stocks prices are up for JAKKS Pacific Inc. But the company has been sued by World Wrestling Entertainment and a class action lawsuit could be coming.
By Hans Laetz/Special to The Malibu Times
Malibu-based JAKKS Pacific Inc. is riding a new wave of profits and Wall Street acclaim as it nails down key licensing agreements for new toys, develops new video game technology that is being plugged into television sets across the country and acquires smaller toy companies. Exuberance over the largest publicly held company with headquarters in Malibu may need to be tempered, however, as a couple of clouds hang over the company.
Profits are soaring for the firm, which sells shares through the NASDAQ electronic stock trading exchange. 2004 sales crossed the half-billion dollar mark-up 82 percent from the year before-making JAKKS Pacific the third largest U.S. toy company, although it is just one-fifth the size of number two Hasbro and trails industry giant Mattel even further.
But all is not well in toyland. Some stock analysts are grumbling that executives are overpaid and wield too much power over the board of directors when compared to the interests of the stockholders. And the company will have to restate its profits for the last two years due to an accounting change that CEO Jack Friedman called a minor technicality during a Feb. 22 conference call with stock analysts.
A bigger cloud is a lawsuit filed by World Wrestling Entertainment, the TV wrestling giant. WWE charges JAKKS with getting an exclusive license for WWE toys by bribing a WWE executive. That executive is awaiting sentencing on a federal bribery conviction.The WWE wants not only damages, but the ability to get out of its exclusive contract with JAKKS.
On top of that, a nationally known shareholder advocate lawyer is circling the water with a potential class action suit seeking a piece of JAKKS Pacific. The suit was filed by the firm headed by William Lerach, who has been profiled on “60 Minutes” and elsewhere for his shareholder lawsuits. Many business people consider Lerach a shakedown artist, while others herald him for winning suits against insider trading and other corporate abuse of shareholders money.
David A. Rosenfield, a Lerach associate attorney in New York City, said some past JAKKS financial statements ignored the WWE problems and misled investors.
“Those statements were misleading and not full of candor,” he said. “The allegations levied here are pretty serious; bribery and racketeering. A lot of companies do these things, but that doesn’t make it right.”
Company officials cite federal regulations that prevent them from addressing these charges outside of the tightly controlled shareholder conferences. Gena Goldberg, vice president for public affairs, apologized that such topics would have to be off limits during a recent interview.
But she allowed that the controversies were relatively minor when compared to the big picture of innovation, marketing and return of shareholder investment that JAKKS continues to deliver.
And industry analysts are indeed generally glowing about JAKKS potential after it navigates through the current lawsuits and controversy.
Founded in 1995 by Malibu residents Jack Friedman and Steven Berman, JAKKS Pacific occupies most of The Enclave, the curved-top bank of office suites terraced up a hill along Pacific Coast Highway across from the pier. Friedman was a 30-year toy industry veteran when he and Berman set up shop.
The company’s early growth was marked by a dozen acquisitions of companies that manufacture toys and import them from the Far East. Toys as varied as Fun Noodle swimming pool toys and designer kites wound up in the JAKKS family as the company tried to diversify from the types of toys and games sold mostly at Christmastime.
The company has just announced the next step for TV Games: wireless TV Games, fueled by a seeming endless stream of licenses to popular entertainment items quietly sewed up by the firm over the past few years.
Toy industry analyst Jeffrey S. Thomison, a vice president and researcher at the Louisville, Kentucky brokerage house of Hilliard Lyons, rates the firm’s stock “neutral,” and is advising his clients against buying JAKKS stock on NASDAQ for the time being.
Thomison said he rates the company management as smart and forward-thinking, and does not think the 170 Malibu jobs could be in any short-term jeopardy due to a company takeover or other potential development. But he does cite the WWE lawsuits as a cloud on the horizon.
“Some may naturally wonder, ‘could Mattel or Hasbro acquire JAKKS?'” Thomison said. “Of course anything is possible, but in my opinion, it isn’t too likely, at least in the near term.
“Things are going well for JAKKS and the excitement that the company feels regarding its latest hit product, TV Games, may mean that being acquired is among the last thing on the minds of management,” he said.
Executive salaries disclosed on past federal accounting reports indicate that the top four JAKKS executives earned a combined $13 million last year, noted Rich Smith, a contributing writer to The Motley Fool Web site in Arlington, Va. That total is more than the pay granted to executives at the next-largest toy company, Hasbro.
But Hasbro is five times the size of JAKKS, notes Smith.
“The salaries paid to JAKKS management erase a sufficiently large proportion of profits that, were I a shareholder, I’d be a bit upset at that money not trickling down to me.”