Jakks wrestling with problems of executive pay, restatements.

TUCKED away in Jakks Pacific Inc.'s messy fourth-quarter earnings report last week was this nugget: top executives at the Malibu-based toy maker received $13.6 million in stock-related compensation last year, to go along with their already healthy salaries.

The report didn't say who received the awards, but in the past such payments have been limited to three officials--Chairman and Chief Executive Jack Friedman, Chief Operating Officer Stephen Berman and Chief Financial Officer Joel Bennett.

The pretax payments amount to about 22 percent of 2004 operating profits of $62 million, at a time the company is fighting a federal bribery, money-laundering and racketeering lawsuit that threatens to undo one of its most lucrative income streams.

Jakks also was forced by the Securities and Exchange Commission to restate both its 2002 and 2003 earnings. Its 2004 earnings were issued on a preliminary basis, after an SEC review found that the company failed to abide by generally accepted accounting principles.

In 2002, Jakks made lavish revenue projections prior a secondary offering that raised $60 million--including $9 million in sales by insiders. After the stock offering, the company revised those revenue projections downward, which soured many Wall Street analysts and investors.

In a similar manner, Jakks lowered expectations for the second half of 2003 after selling $98 million in convertible bonds.

Jakks' future now hinges on the outcome of a lawsuit filed in October by New York-based World Wrestling Entertainment, the producer of televised wrestling matches. The suit accuses Jakks, its three top executives, videogame partner THQ Inc., and two licensing agents of conspiring to obtain a WWE contract for videogames and toys in 1998. The joint venture brought in $7.9 million in profits last year.

Earlier this month, former WWE licensing official James Bell pleaded guilty to mail fraud, admitting he accepted kickbacks in return for handing out WWE licensing rights.

The U.S. Attorney's Office continues to investigate, and a half-dozen shareholder lawsuits have been filed against Jakks. Moreover, WWE is seeking treble, punitive and other damages, asking that profits earned by both Jakks and THQ be disgorged dating back to 1998, and that the joint venture be declared null and void.

Jakks has been advised by its lawyers not to comment on the litigation, said Genna Goldberg, a company spokeswoman.

So far, Jakks' seven-member board has not investigated the WWE matter. Four members of the board are outsiders--two are affiliated with private equity firms and two are professional investors. The three insiders are Friedman; Berman and Murray Skala, a partner at the company's law firm of Feder Kaszovitz Isaccson Weber Skala Bass & Rhine LLP.

Jakks has long been criticized for pay doled out to its executives. In 2003, Friedman and Berman each earned a salary of $965,000 plus a bonus of $1.3 million and $2.5 million in restricted stock.

By comparison, similarly valued Big 5 Sporting Goods Corp. paid its chairman and chief executive, Steven B. Miller, a salary of $395,000 in 2003, plus a bonus of $615,000 and $30,000 in restricted stock.

After receiving criticism from Wall Street analysts for its extravagant executive pay, Jakks hired a compensation expert in early 2003 and replaced its old cash bonus plan--which gave top executives a percentage of pretax income--with a new plan based on revenue growth and earnings per share.

Under the new plan, however, senior executives also were given restricted stock grants dependent on achieving a minimum pre-tax income.

The ties to revenues and pre-tax income have been criticized because they allow top executives to benefit from growth through acquisitions, which can mask stagnancy in the firm's previously existing operations.

Jakks shares hit a 52-week high of $25.55 on Oct. 19, but dropped to $12.96 the following day in light of the WWE's bribery and fraud lawsuit. Since then, shares have recovered somewhat.

After the fourth-quarter earnings report last week, investors bid Jakks shares up to $23 but then retreated after digesting the news of the stock options and SEC earnings restatements.

Jakks Pacific Inc.

Stock Prices

YEAR (Dec. 31)               2004 *   2003

Revenue (millions)           $574.3   $315.8
Total Expenses (millions)     517.7    296.9
Operating Income (millions)    56.6     18.9
Net Income (millions)          45.9     20.6
Earnings Per Share             $1.57    $0.83

* Preliminary results for full-year 2004: results for 2003 and
first three quarters of 2004 are being restated.

Quarterly Net Income (millions) *

SUMMARY

Business: Toy manufacturer
Headquarters: Malibu
CEO: Jack Friedman
Market Cap: $521.8 million Dividend Yield: None
Total Liabilities: $244.9 million P/E Ratio: 11.9
Long-Term Debt: $98 million

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].