De Laurentiis : PRODUCER’S PICTURE DARKENS

Since he moved to the United States in 1972, Italian-born independent movie producer Dino De Laurentiis has managed to pull off a miracle that raises eyebrows even in miracle-prone Hollywood. He has produced one big-budget box-office bomb after another, yet has always managed to raise money to make more.

The list is a long and expensive one: “Orca” (1977), “Hurricane” (1979), “Flash Gordon” (1980), “Ragtime” (1981), “The Bounty” (1984), “Dune” (1984), “Red Sonja” (1985) and “Tai-pan” (1986), among others. All of those failed to return enough to their distributors to cover the cost of production.

In his native country, De Laurentiis--son of a Naples pasta maker--earned a reputation as the Cecil B. DeMille of Italy by producing high-budget costume dramas such as “The Bible,” “Ulysses” and “Barbarella,” as well as critically acclaimed films with Federico Fellini including “La Strada” and “Nights of Cabiria.”

To be sure, there have been occasional critical or commercial successes in the United States, too: “Serpico” (1974), “Death Wish” (1974), “Three Days of the Condor” (1975) and “King Kong” (1976). But the latter movie--with a reported $75 million in film rentals against production costs of $23 million--ranks as the only bona fide blockbuster in De Laurentiis’ 40-year, 500-movie career. A $55-million disaster (including prints and advertising) such as “Dune” more than cancels out the profits from the moderately successful “Conan the Barbarian” and its sequel, “Conan the Destroyer.”

The record stands as a testament to the 68-year-old producer’s reputation as an indefatigable and persuasive promoter, even if he has not been able consistently to produce movies that appeal to American audiences. The long-standing imbalance between hits and flops never seemed to impede his ability to do business in Hollywood--until recently, that is.

Beginning in 1985, De Laurentiis launched an ambitious plan to establish his Beverly Hills-based company, De Laurentiis Entertainment Group, as a major player in Hollywood. He bought a movie distribution company, Embassy Pictures, and a film library. Then he added a 32-acre movie studio in Wilmington, N.C. Next, he went public, raising a total of $240 million from various banks and stock offerings. Finally, he pronounced it all a boffo success.

“In a remarkably short time, DEG has become a major force in the motion picture industry, competitive with the other major studios,” he said in a letter to DEG shareholders printed in the company’s 1986 annual report. Unfortunately, like many De Laurentiis movie productions, DEG’s performance has not lived up to its publicity. In the 15 months since it went public, the company has lost a cumulative $16.5 million--losses brought on by a string of box office disappointments. DEG’s stock price has plummeted to $5 a share after trading as high as $17.75. It closed Friday at $5.125.

DEG has disclosed that, unless it improves its balance sheet by November, the company’s banks could take possession of its film library, which includes such classics as “The Graduate,” “The Lion in Winter” and “Carnal Knowledge.”

With the help of two investment banking firms--Paine Webber and Bear Stearns--DEG is scrambling to raise additional capital. This time, however, the money might be harder to find, since both Hollywood and Wall Street seem to have soured on DEG and its chairman.

“They are suffering from a tremendous cash crunch--you don’t hire two investment bankers because you’re in great shape,” one financial analyst said. “They need something to regain the confidence of the financial community, not even a big hit, just (movies) out there to start doing business again--nothing more than that.”

Others are less charitable. “De Laurentiis took the public’s money to make hit pictures and they all failed,” said one prominent Hollywood producer who declined to identified. “He’s proven that he doesn’t know how to make a hit movie.”

“You have to consider that DEG’s problems are occurring at a time when box office returns are booming,” said Howard Turetsky, an analyst for the New York investment firm of Brean Murray Foster. “This might turn out to be a record year. If (DEG) can’t make it now, when will they?”

Another analyst said: “Ever since he went public, the numbers have been awful--case closed.”

Neither De Laurentiis nor any of the company’s top executives agreed to be interviewed for this article. A DEG spokesman cited ongoing discussions with potential investors as the reason for the company’s reticence to talk about the situation.

Among the entertainment companies widely believed to be interested in acquiring at least a share of DEG are independent film maker Guber-Peters Co., 20th Century Fox, Paramount Pictures and Home Box Office. None has commented publicly, but intense negotiations are known to be going on.

According to a source close to the negotiations, HBO, a unit of Time Inc., recently made an offer of about $30 million for a 25% stake in the company, which is being considered.

At least one other offer has been rejected because it asked for too large a share of the company in return for the financing--”in the area of 50%, which Dino didn’t want, because he doesn’t want to give up control of the company,” according to the source, a Hollywood financial executive who asked not to be identified. “The problem is, to get a major capital infusion like they need, they have to give up a substantial interest in terms of common shares.”

De Laurentiis now owns or controls about 70% of DEG’s stock.

Departure Painful

The producer himself is “deeply sorrowed by failure of the company to make money,” a source close to De Laurentiis said. “He’s the first one in the office every day, no matter how sick, tired or busy he is.” His daughter, Raffaella, resigned this month as president of production at DEG, but intends to stay on as an independent producer. Raffaella’s departure “deeply pained” De Laurentiis, a source said.

Ironically, most of the film executives and investment analysts interviewed for this article did not fault the structure of the company or the executives that De Laurentiis has hired to run it. Rather, they blamed De Laurentiis’ choice of films to be produced, along with the traditional vagaries of the movie business.

“When they set up the company, the structure and deals they had in place were well thought-out and well-conceived, it was all set up on a financially sound basis,” one analyst said. “Although Dino has a history of making big-budget extravaganzas, and for a period of time there was some carry-over of his old modus operandi, when they went public they said they were going to make smaller-budget films, and they have done that.”

Indeed, of the 14 movies DEG has released since going public in May, 1986, 11 have been budgeted at $10 million or less, well below the industry’s current average of $14 million to $16 million.

Not Only Firm in Trouble

Trouble is, several of DEG’s big-budget films--the $25-million “Tai-pan” and the $21-million “King Kong Lives”--were duds at the box office, earning film rentals in the area of $1 million apiece. Although they have yet to turn a profit, the smaller-budget “Blue Velvet” and “Crimes of the Heart” were critically acclaimed and earned a number of Academy Award nominations.

The most recent and notorious failure was “Million-Dollar Mystery,” released last June. The film featured a gimmick in which audiences were offered a chance to win $1 million if they correctly guessed where the madcap film’s hidden loot was stashed. (The contest runs through Dec. 31) The movie cost $10 million to produce but brought in less than $1 million at the box office. DEG has already written off its entire investment in “Million-Dollar Mystery.”

Some observers point out that DEG is not alone in its financial woes. A number of other small movie companies that went public in the last few years also have seen their stock prices drop dramatically for many of the same reasons.

Lisbeth Barron, an analyst for the Balis, Zorn & Gerard investment firm in New York, said DEG, “in addition to Cannon Group and several others, fell into kind of a snowballing situation. When they decided to handle their own distribution (of films), they took on a lot of overhead expenses and they had to make a lot of pictures to bring in as much money as possible. They believed they were safe because they were doing a lot of pre-selling (of TV, videocassette and foreign distribution rights), which covered their production expenses. Except that it’s prints and advertising cost where the most money is lost,” she said.

Figures provided by DEG in its prospectus show that, in some cases, the cost of prints and advertising has come close to or exceeded the cost of making the movie. And even the claimed $43 million in pre-sales for “Dune” failed to protect the company from substantial losses, primarily due to the surprisingly high cost of prints and advertising--$15.6 million.

It was De Laurentiis, as an independent producer, who pioneered the concept of pre-selling the so-called ancillary markets as a way of raising production funding. Formerly, he would also pre-sell the U.S. distribution rights to a major distributor such as Paramount Pictures or Universal Pictures for a flat fee against a percentage of the profits. “Since Dino was getting his $1-million producer’s fee up front, he didn’t really care if the picture made money,” said one Hollywood financial executive.

However, as his string of box office disappointments grew in recent years, the major studios became less willing to invest in a De Laurentiis production.

Investors Bear Brunt

“About two years ago, a fallacious concept arose in the investment community that, with all the ancillary markets, you couldn’t lose money in the movie business,” analyst Turetsky said. “As a result, the whole movie-making group was painted by Wall Street with the same positive brush, and many initial public offerings came forward.

“But that was an untruth put forward to investors, a bunch of baloney,” he said. “Today, we have many smaller movie companies hurting on the earnings side because of their inability to have many, or any, theatrical hits. The industry has not changed that much, the main game is still theatrical box office. Ancillary markets may help protect you, but they are not a panacea.”

Another analyst said as the number of small, publicly held film distribution companies grew, “they created more movies and bid up the price of talent.”

In addition, he said, distribution costs have ballooned over the last few years as distributors felt compelled to open films in more and more theaters all at once. According to the Motion Picture Assn. of America, distribution costs are up to about $7 million a film now, whereas a few years ago they were half that. Meanwhile, the growth of ancillary markets has been slowed.

All of that has been bad news for DEG. But hope springs eternal in the movie business, where one monster hit like “Star Wars” or “E.T.” can wipe out years of box office disaster. DEG currently has a half-dozen films completed and awaiting release.

“Everyone’s down on Dino right now,” one movie executive said, “but if the films he has in the pipeline turn out to be great, they’ll all love him again.”

COMING UP De Laurentiis films scheduled for release in next six months

Title Budget in millions Weeds $12 Rampage 7.5 Date with an Angel 8.0 Collision Course 13.0 Pumpkinhead 3.5 Adult Education 7.0 Illegally Yours 13.0 Bill & Ted’s Excellent Adventure 6.5 Traxx 6.5

Source: De Laurentiis Entertainment

Group

DINO IN HOLLYWOOD Major films released in the United States by Dino De Laurentiis

Millions of dollars Year/Title Cost Rentals** 1974 Serpico $3.3 $23.4 Death Wish 3.7 20.3 1975 Three Days of the Condor 7.8 32.7 1976 Buffalo Bill & the Indians 7.1 7.2 King Kong 23.0 74.9 1977 Orca 17.5 9.4*** 1978 The Brinks Job 16.4 14.5 1979 Hurricane 22.0 4.54*** 1980 Flash Gordon 27.0 15.4*** 1981 Ragtime 28.3 21.2 1982 Conan the Barbarian 19.4 43.3 Fighting Back 9.0 6.4 1983 Dead Zone 7.09 16.3 1984 Firestarter 12.0 18.9 Bounty 20.0 18.3 Conan the Destroyer 16.0 30.1 Dune 42.0 37.9 1985 Cat’s Eye NA 3.5*** Red Sonja 16.0 2.9*** Year of the Dragon 21.5 30.4 Marie 12.0 14.2 Silver Bullet NA 5.4*** 1986 Raw Deal 12.0 7.3*** My Little Pony 5.5 2.8*** Maximum Overdrive 9.0 3.5*** Transformers 5.0 2.6*** Manhunter 14.0 4.0*** Blue Velvet 7.0 3.5*** Radioactive Dreams 3.0 under 1.0*** Trick or Treat 3.5 3.04*** Tai-Pan 25.0 2.0*** King Kong Lives 18.0 2.2*** Crimes of the Heart 9.0 7.0 1987 Bedroom Window 8.3 Evil Dead 4.0 From the Hip 7.5 Body Slam NA Million-Dollar Mystery 9.5

*Excluding Prints and advertising. **Receipts of distributors worldwide, except those marked***which are for North America only. Sources: Company and industry estimates, Variety.