Are Those Marie Osmond Dolls Really Worth $12 Million?

The L.L. Knickerbocker Co. specializes in kitsch. Little wonder that few noticed the $7.8 million manufacturer of such home-shopping hits as Marie Osmond's porcelain doll collection and Annette Funicello's line of teddy bears. Then, faster than you can say "in-home painless hair removal," another Knickerbocker offering, the stock jumped from $4 to $46 in six weeks.

Observers can't pinpoint what caused the rapid rise. "It's shocking to me," says John D. Lane, a partner with Nutmeg Securities, an underwriter of Knickerbocker's January initial public offering. The Securities & Exchange Commission and the National Association of Securities Dealers are curious, too. Each called Chief Executive Louis L. Knickerbocker, 52, to ask about the stock. Says Knickerbocker: "All I can think of is that Rafi Khan introduced me to several institutional investors."

This isn't the first time the controversial stockbroker has jumped onto a spectacular stock rise. Khan is a La Canada (Calif.)-based Pakistani who is best known for his failed 1994 attempt to take over ICN Pharmaceuticals Inc., whose stock he once pushed before turning on management. He also is known for legal skirmishes with short-sellers and others, as well as directing institutional investors, such as St. Louis-based Kennedy Capital Management, to undervalued stocks. Another client is Norman L. Yu & Co., a Newport Beach (Calif.) money manager, who owns Knickerbocker shares. Trading has been furious. From July 25 to Aug. 16, average daily trading was 250,000 shares, nearly a third of all stock available.

Khan says his interest was sparked by Knickerbocker's foray in late June into direct marketing. Ads in Doll Reader magazine are expected to boost sales above the $12 million in projected 1995 revenues. Khan says he contacted clients and urged them to look at the company.

HIGH HOPES. But the dramatic runup may not be so easily explained. Traders and brokers say the rise is due largely to the stock's soaring short position. In June, shorts--who bet a stock will decline by selling borrowed shares in anticipation that they will repay the loaners with cheaper paper in the future--controlled 1,050 shares of Knickerbocker. By July 14, short positions were 31,440. As the stock rose, shorts had to pay up for stock to cover their bets. With only 800,000 shares available, the price climbed.

Khan insists the Knickerbocker story isn't overblown--though his own rhetoric about the company sometimes seems so. "Under the right circumstances, this could be a $1,000 stock," he gushes. Others are less sanguine. "If you buy this stock, you're buying hopes and dreams," says Gaines, Berland Inc. analyst Richard West. Sales are vulnerable to the fact that 98% come from one outlet: QVC Inc., TV's home-shopping giant. When QVC cut on-air exposure this spring and upped the price of Knickerbocker's ECT Ionizer air purifier, sales of the product fell 73% in 1995's second quarter.

Knickerbocker is a onetime restaurateur who with is wife, Tamara, launched private companies that sold a Farrah Fawcett line of jewelry and face creams promoted by Phyllis Diller on the Home Shopping Network in the mid- to late-1980s. The companies were merged to form Knickerbocker in a January, 1995, public offering, and Fawcett is on its board. One misstep: Knickerbocker no longer markets Creme de La Vie, the creation of Michael Elam, Diller's former plastic surgeon. In 1990, Elam's medical license was revoked for insurance fraud and malpractice, says the prospectus.

"I've seen this movie before," says John Merriman, a trader with Dabney/ Resnick Inc. "Eventually, this stock will trade at $4 or $5 again, if you have the stomach to hang on." Still, Merriman says he is not shorting the stock. Shorts have tangled with Khan in the past. In a suit with Future Communications Inc., a Texas cable company, they claimed he manipulated both the stock supply and price. Khan's then-employer settled the three suits; Khan himself took the cases to arbitration. This time, if the stock tanks, the biggest loser will be Knickerbocker himself: Some $60 million in paper profits from his 62% stake could disappear.

He seems unconcerned. "My goal is to take this company to $1 billion in sales," Knickerbocker says. But that's a lofty goal for a small player in a $5 billion industry. Almost as lofty as the stock.