Emak Worldwide Inc. became known as the thriving marketing agency behind all those promotional toys given away by Burger King, but it’s quickly becoming known as a place where a pitched battle over its control is being waged.
The ousted chief executive last month won a bitter proxy fight and got the right to seat four directors on the L.A. company’s seven-member board. But the company is refusing to seat the dissident’s directors; a change in bylaws reduced the number of board members to three, effectively nullifying the proxy vote.
That’s not Emak’s only problem. The company lost its Burger King account, which represented half its revenues.
In turn, that is shaping much of the fight. The former chief executive, who also is Emak’s co-founder, wants to keep making promotional toys. The current chief executive, who is allied with the other co-founder, wants to chart a new course.
The smoldering conflict erupted in late September when a dissident shareholder group called Take Back Emak, led by co-founder and former Chief Executive Don Kurz, filed a lawsuit against board members and company officers alleging fraud and breach of duty. A few days later, Emak announced that Burger King – the agency’s largest customer by far – would no longer be a client.
“In a remarkable display of hubris, self-interest and gross incompetence, defendants drove one of the best marketing services agencies in the world to the brink of financial ruin,” the suit states. “Through their extraordinary ineptitude, defendants took Emak from being a public company listed on the Nasdaq stock exchange, with a share price of more than $10 and an enterprise value of $100 million, to becoming a nearly worthless penny stock.”
But Stephen Robeck, the other Emak co-founder, and current Chief Executive James Holbrook maintain the company must evolve as the marketing business changes, and that Kurz – who was ousted as CEO four years ago – just wants his old job back.
Headquartered on San Vicente near Wilshire Boulevard, Emak grew from its founding in 1987 into a conglomerate of four marketing agencies: Upshot, the main promotional product agency, based in Chicago; Neighbor, an L.A. agency that markets health-related clients; Equity Marketing, another L.A. agency that specializes in entertainment; and London-based Logistix, which caters to consumer goods clients.
The company rose to prominence in the ad world by supplying fast-food restaurants with promotional toys, usually based on Hollywood movies or cartoon characters. The agency secures the rights to the characters, supervises the manufacturing of the giveaway items and then manages the advertising campaigns.
In a Jan. 4 letter to stockholders, Holbrook attributed the company’s poor performance to changes in fast-food advertising, with chains now emphasizing low prices, not toys, to get customers. As a result, he said Emak should change by moving into the services business, essentially becoming a group of midsized ad agencies.
Emak’s four agencies offer clients “a better alternative to the big ad agency holding companies and a more reliable marketing partner than small mom-and-pop agencies,” the letter stated.
The ad service sector offers higher profit margins and more growth potential for the future, Holbrook told the Business Journal.
“We were in a business that was good for a long time, but the world changed, so we changed with it,” he said.
But Kurz said that Holbrook’s transformation plan as outlined in the Jan. 4 statement was just another excuse to cover up for mismanagement. Getting out of the promotional product business “is a bad move and will eliminate the company’s uniqueness,” he warned. His position is that promotional product expertise is what differentiates Emak from the competition.
“Accessing intellectual properties from Hollywood, designing and manufacturing toys in quantity that are safe for kids on very tight deadlines and budgets – those are skills that are hard to replicate,” he said.
Rather than compete with other ad agencies, Kurz thinks Emak should update the promotional toy genre by distributing them online and in stores.
On the other hand, Holbrook pointed to the recent acquisition of new clients – including Corona, Safeway and Jamba Juice – as evidence that his plan is working.
“I have made annual promises to stockholders about the profits we would make, and I have delivered on every one of them,” Holbrook declared in his letter.
He also said that Kurz’s “legal assaults” are hindering the turnaround, as illustrated in two sets of financial projections: If Kurz continues his legal battle, Holbrook predicted annual pretax earnings of $6 million by 2014. Without the legal problems, the pretax earnings would jump to $15 million.
“The first scenario is less attractive than the second because it is based on the assumption that we will continue to move sideways, distracted by expensive and fruitless litigation and held back with a complex capital structure,” Holbrook said.
Proxy fight
Emak deregistered its stock in 2008 and last filed quarterly reports in August of that year. Holbrook said the decision saves $1 million per year in Sarbanes-Oxley compliance costs, but the company voluntarily discloses financial information on its Web site as though it were still on an exchange. The shares currently trade over the counter.
At its peak in 2004, Emak had annual revenue of $236 million and a stock price of about $10.50. Based on its last four quarterly reports, the company had revenue of $132 million from third quarter 2008 to third quarter 2009, down 44 percent from the 2004 peak. However, lots of advertising and PR firms are suffering mightily in this recession.
In addition to its lawsuit, Take Back Emak launched a proxy battle to win three seats on the company’s seven-person board. Because Kurz already had a seat on the board, the three new directors would seem to give the group control of Emak.
Kurz was invited to join the board in June 2009, according to a letter to shareholders in response to Take Back Emak’s lawsuit, in the hopes that he would end “what appears to be a personal vendetta.”
Between October and early December, two independent proxy services, which advise institutional investors on how to vote in such matters, endorsed Take Back Emak’s slate of candidates – a strong statement because such services usually prefer stability over dissident stockholder takeovers.
As the election loomed, Robeck – the chairman and co-founder – resigned his seat along with another director Dec. 14. The next day, the dissidents won the proxy battle.
However, Emak has refused to seat the three dissidents, claiming that a change in bylaws reduced the board to three from seven, making the proxy battle meaningless. Kurz has filed another lawsuit to force the company’s hand.
Kurz was removed as Emak chief executive in 2005; Holbrook was hired later that year to replace him. When he left the company, Kurz signed an agreement that no one would discuss the circumstances of his departure, a legal limitation he believes Robeck and Holbrook have breached during the proxy fight.
“Kurz is not the right person to lead Emak, which is why he was ousted as CEO nearly five years ago after years of a failed acquisition strategy capped off by huge losses in 2004 and 2005,” a letter from Emak to shareholders stated Dec. 7. “We believe the recently mailed consent solicitation is part of a self-interested campaign by Kurz to regain control of the company in order to get his old job back,” stated a previous letter Oct. 29.
As a result of those statements, Kurz said he is considering a third suit. For now, Kurz plans to pursue all his legal actions until Take Back Emak controls the boardroom – and beyond.
“I don’t doubt it’s distracting, but that’s just an excuse for poor performance,” he said. “Unless there’s a rational settlement, we have every intention to pursue the lawsuit. Myself and other shareholders have been significantly harmed and the court system is designed to address wrongdoing.”
For his part, Holbrook plans to press forward with his transformation of the company.
“The services business is where the growth potential is, so that’s the obvious plan,” he told the Business Journal.
