The list of products popularized by Wham-O Inc. is in itself a history of American ingenuity and marketing savvy: the Hula Hoop, Frisbee, Super Ball, Slip ’N Slide, Silly String and Hacky Sack, each a relic of the postwar boom and the subject of backyard family frivolity.
But today, the toy institution is fighting to keep creditors at bay. They claim the Woodland Hills company’s owners – the fifth set since its co-founders sold it off more than 30 years ago – have racked up debts and avoided paying them by transferring assets to new entities.
The problems appear to stem from a combination of slow business and costly legal fights. Taiwanese competitor Agit Global Inc., a maker of snow sleds and stand-up paddleboards, settled a patent lawsuit against Wham-O for $1.6 million in 2011, and has sued again to force it to pay. Meanwhile, Goodwin Procter, a law firm that represented Wham-O in other intellectual property claims, has sued, claiming the company hasn’t paid $2.7 million in legal bills.
Company balance sheets filed in court show Wham-O had $36 million in liabilities in 2012, compared with only $31 million in assets.
“They were trying to get out of their obligations,” said Robert Johnson, an attorney for Agit.
John W. Kim, an attorney who is not involved but reviewed the cases for the Business Journal, said the filings painted a convincing picture of a company attempting to finagle its way out of paying creditors, and that bankruptcy is a possibility.
“It smells fairly bad,” he said. “One would conclude that the defendants have a very uphill battle here to fight.”
The legal fights have hit at a time when the company, which is privately held, has struggled to stay relevant in the competitive outdoor toy market. It had accumulated losses, or negative retained earnings, of $20 million as of late 2011, according to court documents.
“They’ve certainly had some challenges,” said Chris Byrne, content director of toy consumer website TTPM. “The brand cachet isn’t the same as it was. The challenge is to re-establish the brand’s (reputation for) fun innovative products. They’ve made some new products that didn’t work so well.”
Wham-O and its co-owners, Kyle Aguilar and Jeff Hsieh, denied the allegations in court. They did not respond to repeated calls and e-mails for comment.
Historic brand
Wham-O was co-founded by L.A. natives and best friends Arthur “Spud” Melin and Richard Knerr in 1948 out of Knerr’s South Pasadena garage. The impish duo, once arrested as teenagers for throwing rotten oranges at each other, would go on to mastermind some of the biggest toy crazes in the United States.
In 1957, they had their first hit when they bought the rights to a plastic flying disc, redesigned and renamed it the Frisbee, and paid distributors to sell it on college campuses. A year later, they were holding demonstrations at a Pasadena elementary school of a new product called the Hula Hoop, which they modeled after wooden Australian toy hoops. The Hula Hoop became an all-time smash that summer, selling 25 million units in four months and hitting 100 million in sales after two years.
By then, the company had moved its headquarters to San Gabriel (the same building would later house a factory for another American success story, Sriracha hot sauce). Other Wham-O hits included the Super Ball bouncy ball, made from a synthetic rubber sold to the company by a chemist who accidentally discovered it, and the Slip ’N Slide.
In describing his work, Knerr once said he was looking for the “wow” moment when “you’re … showing it off and everybody says, ‘What’s that? What’s that?’”
“They were sort of the original fad-creating company,” Byrne said.
In 1982, with the company slowing down, Knerr and Melin sold to San Francisco’s Kransco for $12 million. Mattel Inc. bought Kransco in 1994, setting off a chain of ownership changes. Mattel sold Wham-O in 1997 to a group of investors that included private equity firm Charterhouse Group, which moved the company to Emeryville. Hong Kong company Cornerstone, run by Hsieh, bought it in 2006 for less than $80 million.
In 2009, Hsieh reportedly sold a stake in the company to Aguilar, a then 29-year-old head of toymaker Manufacturing Marvel Inc. (By then, both co-founders had died – Melin in 2002 and Knerr in 2008.)
Aguilar took the reins as chief executive and attempted to reinvent the company. He developed Frisbees made of recycled material and marketed a heavier version of the Hula Hoop designed for exercise. He also moved the company from Emeryville to Woodland Hills and shifted manufacturing from China back to Marvel factories in the United States.
But the company ran into trouble when it was hit in late 2009 with claims of patent infringement by Agit, a maker of surfboards, paddleboards and snow sleds. Agit claimed Wham-O was using Agit technology for its snow sleds and body boards. Wham-O settled the case for $1.6 million two years later.
But instead of paying, Agit claims Aguilar and Hsieh hatched a scheme to transfer Wham-O’s assets away from the hands of creditors.
According to a complaint filed in federal court in Los Angeles in November, the first step was Hsieh’s foreclosure on a $14 million “investor note” owed to him by the company in June 2012. The foreclosure transferred all of the company’s assets, valued at roughly $31 million, to Hsieh.
He then allegedly transferred most of those assets to a newly formed company owned by Aguilar called Wham-O Marketing. Wham-O Marketing, incorporated in July 2011, one day after the settlement with Agit, is housed in the same Woodland Hills offices as Wham-O Inc. Hsieh also allegedly transferred Wham-O’s patents and trademarks, valued at roughly $9 million, to a new company run by Hsieh, Wham-O Holdings in Hong Kong.
Agit alleges that the transactions were not in good faith and served only to divert assets while allowing Hsieh and Aguilar to continue their business uninterrupted.
A lawsuit filed by Goodwin Procter last year made similar claims, and also referred to debts of $1.8 million owed to a warehouse landlord.
Kim said the tactics the creditors allege are often used, along with the threat of bankruptcy, as leverage by debtors.
“The hope many times is that the delay and costs of litigation will frustrate a creditor to a point where they throw up their hands, and (debtors) can leverage it for a more favorable settlement or even get them to dismiss the effort,” he said. “It’s anybody’s guess, but I wouldn’t be surprised if at some point the defendants explore bankruptcy as an option.”
Earlier this month, a federal judge gave Agit a boost by ordering that the new entities be added to Agit’s previous judgment against Wham-O Inc., giving Agit legal power to pursue Wham-O Marketing and Wham-O Holdings to satisfy its debts.
In the meantime, Wham-O Inc. continues to attempt reinvention. Some of its new products, such as a line of water balloon launchers, have not been successful, said Byrne, due to failures of engineering and marketing. In December, Wham-O announced a partnership with Montclair, N.J.’s Wish Factory to relaunch classic brands including the Hula Hoop, Super Ball and Hacky Sack as well as new lines of extreme sports and swim products.
“(The new products) didn’t function all that well. I know that’s one of the things that Wish Factory does really well, is the engineering part,” Byrne said. “They can help with that – but they face a lot of competition.”
