Tri-Star Looks for Hits on Road to Big Time

Early in the century, an immigrant’s son named Marcus Loew built one of the nation’s first movie theater chains. Eventually, he acquired some of the fledgling film studios that supplied the movies.

Nearly seven decades later, the story has come full circle. Tri-Star Pictures, an upstart film producer intent on securing its place among the major studios, six months ago purchased the venerable Loews Theaters. The 300-screen circuit operates some of Manhattan’s most prestigious movie houses, as well as theaters elsewhere in the Northeast, Ohio, Indiana, Florida and Texas.

With the acquisition, Tri-Star has boldly advanced its plan to build a fully integrated entertainment company, girding its movie business with theaters and television production. But skeptics regard Tri-Star as a Johnny-come-lately that paid too much for Loews and might lack the street smarts to succeed in the Byzantine theater business.

Tri-Star harbors none of those doubts. Launched just five years ago, the New York-based company already claims victory as the only successful new major studio to be formed in 40 years.

The company has garnered 5% or more of the film rentals from North American theaters since 1984, when its first movie was released. And, earlier this year, Tri-Star caught the last rung of a Business Week chart, scoring as the 1,000th-largest company in total value of its stock.

“We’re in the business forever,” declared Tri-Star Chairman and Chief Executive Victor A. Kaufman, who dreamed up the idea for Tri-Star when he was a top executive at Columbia Pictures, exploring ways to expand that studio’s business. Kaufman, working with Columbia Chairman Francis T. Vincent Jr., hit upon the idea of enlisting two more partners that would guarantee not just start-up money but distribution of Tri-Star’s product. Columbia benefited by collecting a 12.5% fee for distributing Tri-Star’s movies to theaters.

“Victor is brilliant. He knows the business of this industry certainly as well as--probably better than--anybody,” said Frank Price, a movie executive and former Columbia Pictures chairman who worked with Kaufman from 1978 to 1982. “I suppose the key thing would be, when are they going to get the hits?”

Tri-Star has yet to produce a “blockbuster”--a film that earns more than $50 million in box-office rentals. But in Kaufman’s view, the company “really arrived as a major . . . last year,” when it produced five movies that grossed more than $25 million apiece to capture “7% or 8% market share without having a blockbuster.”

Leonard Goldberg, president of 20th Century Fox Film Corp., said: “I think one has to consider them a major. They’re out there making their movies, dealing with major talent.”

But in some Hollywood quarters, the acceptance is grudging. “I don’t like them,” another studio executive said privately. “They make different deals than everybody else because they have deals covering the back end,” he complained, alluding to the peculiar circumstances of Tri-Star’s birth.

The company was formed in 1982 by CBS, Time Inc.’s Home Box Office and Columbia, which had become a Coca-Cola subsidiary earlier that year. Each partner contributed $16.5 million and instant credibility, by pledging to use Tri-Star movies in its relevant markets.

In effect, Tri-Star had guaranteed access to theaters, videocassettes, pay television, network and non-network television before the first camera rolled. Access to financing was so assured that Kaufman, by 1984, could say the company had $1 billion at its fingertips.

“Their birthright distinguishes them,” one entertainment industry lawyer said, because it started with a sophisticated financing plan rather than movies.

After Tri-Star shares began trading publicly in 1985, CBS sold its interest and Time reduced its stake by half. But Coca-Cola increased its holdings and remains the dominant shareholder with 30%.

It is Coca-Cola’s role that intrigues some onlookers, convinced that the soft-drink company has a master plan for Hollywood. Its wholly owned Columbia Pictures subsidiary, together with Tri-Star, accounted for 16% of North American film rentals last year, second only to Paramount Pictures, a Gulf & Western subsidiary with 22%.

In the past year, Coca-Cola has acquired 12% of the newly formed Weintraub Entertainment Group and agreed to spend up to $69 million producing movies with Nelson Entertainment Inc., another new venture. Coca-Cola has also become the industry’s largest television program supplier through a series of acquisitions.

The Coca-Cola strategy is usually likened to its broad assault on the soft-drink business. “ ‘Just make movies, and if we get enough of them, we’ll control the market,’ ” one critic said.

Coca-Cola and Time control four seats each on Tri-Star’s 10-member board, but Home Box Office Chairman Michael J. Fuchs said his company “does not play a very active role” and he doesn’t rule out a sale of Time’s 10% stake. “This is a Coca-Cola venture,” he said.

Kaufman said he hears infrequently from Coca-Cola executives in Atlanta, but he confers nearly every day with Vincent, his former boss at Columbia Pictures who is also president of Coca-Cola’s entertainment business sector. Kaufman said that if he has a thorny business problem, he turns first to Vincent, ahead of other Tri-Star executives.

Nevertheless, Tri-Star has been weaning itself from its initial dependence on Home Box Office, CBS and even Columbia Pictures.

Most of the partners’ original commitments have expired or been renegotiated. Tri-Star is setting up its own home video company, for example, and will soon regain control from Columbia of its movie sales to television.

Won’t Disclose Data

As Tri-Star assumes more risk, its potential for profit making grows--and its profile will more closely resemble the other studios.

Yet Tri-Star still behaves differently from most of the old studios.

It owns no sprawling studio lot, with picturesque bungalows or celebrity-studded commissaries; it prefers instead to rent office space in Manhattan and Century City’s high-rise buildings.

Tri-Star refuses to share information with other studios about film rentals (the distributor’s share of box-office gross)--thus forcing trade publication Variety to make its own estimates. Nor has Tri-Star joined the Motion Picture Assn. of America. Kaufman said that joining the movie distributors’ trade group has “not been a high priority.”

In contrast with some colorful Hollywood executives who skipped college, the typical Tri-Star executive graduated from a top Eastern school with either a law or business degree. None of the top Los Angeles-based executives make their home in the glittering film colonies of Beverly Hills or Malibu.

Kaufman, the 44-year-old founder and chairman, sets the low-key, intense style. He is the 1980s antithesis of Marcus Loew, who founded the theater company in 1904.

Born on New York’s East Side, Loew quit school at age 9. He failed twice in the fur business before succeeding in real estate and penny arcades. He acquired his first movie studio in 1920, and in 1924 formed Metro-Goldwyn-Mayer Picture Co. through a series of mergers. (MGM and Loews Corp. were separated in 1959 to end a government antitrust lawsuit.)

Loew was an avid card player and golfer, and spent the last month of his life in Saratoga, N.Y., during the race track season. When Loew fell ill, the movie mogul’s yacht was summoned to take him down the Hudson to Long Island, N.Y., where he died at his waterfront estate the next day. The year was 1927.

Kaufman, born 16 years later in the New York borough of Queens, is also an immigrant’s son. But Kaufman was graduated from Queens College and New York University School of Law and taught criminal law at UCLA for a year. He spent six years at a Wall Street law firm before joining Columbia Pictures in 1974.

The Tri-Star chairman lives on Long Island, less than a dozen miles from the old Loew estate, but he lives an “archetypical suburban” life with his wife and two children, according to a friend.

The Kaufman home has no screening room, because the Tri-Star chairman prefers to see movies with an audience, usually in the suburbs. Horseback riding, not the race track or gambling, is the family passion. Tri-Star’s logo is a horse because “my whole family is in love with horses,” Kaufman says.

Kaufman has kept his name out of “Who’s Who” and the “Motion Picture Almanac.” And he has yet to chair a gala benefit, unlike other studio chiefs who often lend their names to charitable or political fund-raisers.

“It’s just not me,” he said.

Weekends are spent with old friends who are “totally disassociated with the film business, but they give me advice all the time,” said the Tri-Star chairman, laughing. “Everyone thinks they know” whether a film is “going to be a hit or not.”

David Matalon, the Tri-Star president who also worked at Columbia, describes Kaufman as a “very loyal person. If you don’t step on his toes, he’s extremely, extremely loyal.”

As one example, banking sources say Kaufman refuses to do business with Bank of America because it supported financier Kirk Kerkorian in a takeover bid for Columbia Pictures seven years ago. Bank of America was one of Columbia’s lenders, and as a Columbia executive, Kaufman was deeply angered.

Stephen A. Kwitoski, Bank of America’s newly appointed head of entertainment lending, declines comment, as does Kaufman. But Kwitoski said Bank of America continues to seek Tri-Star’s business.

Kaufman defends his own actions in 1982 when Columbia was accused of double-crossing its would-be partners in a pay-television venture. Columbia had been negotiating with 20th Century Fox and American Broadcasting Cos. to invest in Showtime, the pay-TV service owned by Viacom International.

But Columbia was also negotiating with Showtime’s bitter rival, Home Box Office, and wound up forming Tri-Star. At a meeting critical to the Showtime deal, Columbia executives simply failed to show up or call.

“I felt it was better not to show up for a meeting than to mislead people, because I believe in the integrity of what I do,” Kaufman said. “Terry Elkes (Viacom’s president) has not forgiven me. And has not spoken to me since that day.”

Kaufman commands considerable loyalty in Tri-Star’s executive suites. Most of the top officials are former Columbia and Home Box Office executives, and there has been little turnover.

A new position was recently created for Lewis J. Korman, the lawyer-turned-financier who helped Tri-Star raise film financing through five limited partnerships that were sold to the public.

Korman, as Tri-Star’s senior executive vice president, is overseeing the new Loews subsidiary, and receives an annual base salary ($450,000) higher than the motion picture and television division presidents.

Reason for Action

But his salary isn’t resented because “everyone really thinks Lew is a major talent,” said Kaufman, who recently tapped Korman to join Matalon and himself on a new management policy committee.

Before he joined Tri-Star, Korman was president of PSO Delphi, a movie company formed by the 1984 merger of his financing company with Producer Sales Organization, a distributor of films abroad. Producer Sales Organization planned to produce its own films for the U.S. market and struck a deal with Tri-Star to distribute 25 to 40 movies over five years.

But financing proved scarce, and Korman pulled out. Producer Sales Organization has since been forced into bankruptcy proceedings.

Korman’s lack of experience in day-to-day theater management has been duly noted by competitors. One rival theater company executive asked how Korman will “play with the movie studios, landlords and advertising? Theft at the theater level? I think Korman’s ‘in’ is really as a friend.”

“He is a friend,” Kaufman responded. “He is incredibly talented, and he got the job because he is incredibly talented.” Indeed, the Tri-Star chairman says he entrusted Korman with negotiations to purchase Loews last fall. “The only thing I did on Loews was agree to the purchase price,” Kaufman said.

Korman himself said: “On a day-to-day basis, I still have a lot to learn. But fortunately I don’t have to learn that, because at Loews we have . . . people that have been in the business 30 to 40 years.”

Bernard Myerson, 69, has been running Loews Theaters since 1962. Two years ago, Myerson was part of an investor group that bought the theater chain from Loews Corp., the parent conglomerate, for $158 million. Myerson agreed to continue managing the company after its sale to Tri-Star for nearly $300 million.

Competitors were stunned by the price that Tri-Star paid and questioned whether Loews could show a profit after covering interest costs and depreciation.

Financing Wasn’t Problem

But box-office business in general has boomed, and at least one analyst predicts that Loews will show a profit in Tri-Star’s second quarter ending Aug. 31. “The Loews acquisition is working out better than expected,” said Mara M. Balsbaugh at Smith Barney, Harris Upham & Co., noting that Loews’ operating income apparently increased 32% in the first quarter.

Tri-Star has already announced plans to double the 300-screen theater chain in the next 18 months, largely through construction. To that end, last week it increased Loews’ borrowing capacity to $150 million from $100 million. Tri-Star also increased its corporate credit line to $250 million from $200 million.

To some outsiders, Tri-Star appeared hard-pressed last winter to raise the $300 million necessary for the Loews purchase. These critics scoffed at Tri-Star’s simultaneous plan to acquire the nation’s largest theater chain from United Artists Communications for another $400 million.

Early this year, the United Artists deal was scrapped, but Kaufman said it was by mutual agreement and not for lack of financing.

“We could have done it. We had all the financing in place,” he said. As part of the purchase price, Tri-Star would have issued new shares worth $125 million to Tele-Communications, the nation’s largest cable-TV operator, which owns a controlling interest in the UA theater chain. Tele-Communications’ stake in Tri-Star then would have equaled Coca-Cola’s.

The proposal had Coca-Cola’s full support, Kaufman said. “Obviously, an acquisition of $400 million was something that I discussed at every stage with Fay (Vincent),” he said.

Although the Columbia chairman is just five years older than Kaufman, he has played the senior role in their relationship since he took Columbia’s helm in 1978 and ignored some directors’ advice to fire Kaufman because he was part of the old management team.

Kaufman turned out to be “the best executive that I know of in this business; he’s the smartest, certainly. I think he has the most vision,” Vincent said. “He’s very entrepreneurial. He’s a builder of businesses.”

Both men insist that Vincent, a former Securities and Exchange Commission lawyer, is careful to consider the best interests of all Tri-Star shareholders. “We’re trying to build the value for the shareholders, and we’re the biggest shareholder,” Vincent said.

Coca-Cola has the right to purchase Time’s remaining stake in Tri-Star if Time decides to sell. But Coca-Cola is unlikely to acquire more than 50% of Tri-Star, and doesn’t want to consolidate film or television production at Tri-Star and Columbia, according to Vincent.

Tri-Star entered television production just last year, after CBS sold its holdings in the company. Before that time, Tri-Star couldn’t produce TV shows because CBS is barred from distributing TV programs to non-network television stations under Federal Communications Commission rules.

None of Tri-Star’s three initial network series were renewed for the fall season, but two new prime-time series have been sold for next season. “Buck James,” an hourlong show, will air on ABC, while “My Two Dads,” a half-hour comedy, is scheduled to air on NBC in a coveted slot following “Family Ties.”

In addition, a half-hour show called “Werewolf” is scheduled to begin July 11 on the new Fox Broadcasting network of independent stations.

The investment in television and theaters has reduced Tri-Star’s earnings. In the two-month period ended Feb. 28, Tri-Star reported a loss of $5.4 million, stemming largely from a canceled TV series.

The losses were tucked into the unusual two-month reporting period when Tri-Star changed its fiscal year. Analysts were unperturbed. “I would have done it the same way,” said Smith Barney’s Balsbaugh, who is recommending purchase of the stock.

In the first quarter, Tri-Star reported net income of $1.2 million on revenue of $146.9 million, compared to net income of $906,000 on revenue of $37 million the year before.

At least three other brokerage firms have recently recommended the stock as a long-term prospect.

But Alan Kassan, a senior vice president at Shearson Lehman Bros., said he stopped recommending Tri-Star about six months ago because he believes that “the major studios . . . for the first time in a long time have strong leaders at the top,” which will “make it more difficult for Tri-Star and other independents to attain a high share of domestic film rentals.”

Kassan, for one, still contends that Tri-Star ranks as a “mini-major,” because it owns no library of older films, which are valuable for sequel rights and merchandising, as well as broadcast and home video rights.

But Tri-Star’s Kaufman said: “The real worth of libraries is based on it being replenished by new films each year.” Tri-Star, which will produce nearly a dozen of its own films this year, “is quickly getting to the point” where it will be building its library as rapidly as other majors, he said.

By Kaufman’s definition, a major must “put out between 15 and 20 movies a year, and to be able to withstand bad times when your films are not performing.”

With the exception of “Blind Date,” which stars popular TV actor Bruce Willis, Tri-Star has had a lackluster year at the box-office, with disappointments such as “Gardens of Stone” and “Amazing Grace and Chuck.”

The company has postponed the release of some films to make certain it could weather the anticipated directors’ strike, according to Matalon, the Tri-Star president who oversees distribution.

Tri-Star projects are selected by a three-man committee: Matalon, Kaufman and movie production President Jeffrey Sagansky. Only once have all three agreed on a script, according to Matalon. But each man praises the committee debate, which often takes place by means of coast-to-coast conference calls, since Sagansky works in Los Angeles.

Sagansky, a former NBC programming executive responsible for developing such hits as “Cheers,” “The A-Team” and “Miami Vice,” is a Massachusetts native who majored in economics at Harvard University before attending its business school.

His biggest achievement in film, Sagansky said, has been to “manage the creative process” in a way that “makes sense financially.” Kaufman said the company has kept film production costs to $13 million per film, below the industry average of nearly $18 million.

Sagansky takes a measure of pride in films such as last year’s “Peggy Sue Got Married,” and “About Last Night,” which he calls a “sort of urban smart” movie or “comedy drama” designed to appeal to a slightly upscale audience. Sagansky said the company hopes to make two or three such films each year.

But Tri-Star has also stepped up its search for projects with wider commercial appeal, according to Kaufman. “My own view is that we made films that were a little too sophisticated,” the Tri-Star chairman said. “I think the films that we have coming out this year and next year are more geared to breakaway potential,” meaning a potential blockbuster.

With its own distribution system in place, Tri-Star insists that it has no trouble placing its films in top-notch theaters.

“It is not our intention at all to use the Loews Theaters to play Tri-Star films,” Kaufman said. “I think it’s a business that has the potential of significantly high returns.”

The product of Tri-Star’s largest shareholder, however, will definitely be sold at Loews concession stands. “Loews,” said Kaufman, “has always served Coke.”

TRI-STAR PICTURES AT A GLANCE Formed in 1982 as a joint venture of CBS, Coca-Cola’s Columbia Pictures Industries and Time Inc.’s Home Box Office, the company is a film producer and distributor. Tri-Star went public in 1985 and has expanded into television production and acquired the Loews theater chain. Columbia Pictures now owns 30% of the company’s stock, HBO holds 10% and CBS has sold its stake. Formed in 1982 as a joint venture of CBS, Coca-Cola’s Columbia Pictures Industries and Time Inc.’s Home Box Office, the company is a film producer and distributor. Tri-Star went public in 1985 and has expanded into television production and acquired the Loews theater chain. Columbia Pictures now owns 30% of the company’s stock, HBO holds 10% and CBS has sold its stake.

2 mos. ended Year ended Dec. 31 Feb. 28, 1987* 1986 1985 1984 (in millions) Revenue $29 $254 $259 $85 Net income (loss) ($5.4) $13.8 $1.6 ($14.7)

Assets: $693 million Employees: 250 Shares outstanding: 31 million 52-week price range: $8.50-$13.25 Thursday close: (OTC) $10.125,unchanged * In 1987, the company changed its fiscal year to end on the last day of February. TRI STAR’S TOP 10 Listed below are the top 10 movies distributed by Tri-Star, ranked by its rental receipts. All are Tri-Star productions except “Rambo,” produced by Carolco Pictures, and “Short Circuit,” co-produced by Tri-Star and PSO Delphi.

1. RAMBO: FIRST BLOOD PART II $80 million 2. THE NATURAL $25 million 3. BLIND DATE $18 million* 4. SHORT CIRCUIT $17 million 5. PEGGY SUE GOT MARRIED $16.5 million 6. ABOUT LAST NIGHT $16 million 7. PLACES IN THE HEART $16 million 8. NOTHING IN COMMON $13.5 million 9. THE MUPPETS TAKE MANHATTAN $13 million 10. BERRY GORDY’S THE LAST DRAGON $11.5 million

*(estimate, currently in release) Source: Variety, except for “Blind Date,” still in release