REAL CLIFFHANGER : Will New World Be the Next Financial Horror in Hollywood? : New World Entertainment

New World Entertainment had a close shave last fall when it lost a $508-million bid for Kenner Parker Toys.

The acquisition would have added extraordinary debt for the brash Los Angeles company on the eve of the October stock market crash, creating a nightmare befitting some of New World’s B-movie titles: “Deadly Harvest,” “Uphill All the Way,” “Cut and Run” and “Beyond Therapy.”

By the time New World made its Kenner Parker bid, the company was already saddled with $304 million in debt and had more cash flowing out of its coffer than in. The company posted a $6.4-million loss in the third quarter and is expected to report a loss for the year.

Now--even without Kenner Parker--New World faces a pivotal year.

“I understand they have very serious financial problems at this time. Their survival is very much in question,” said Joel H. Reader, an L. F. Rothschild investment banker who once helped the company raise $300 million but resigned from New World’s board last month. “If you look at that third quarter, they were burning cash at the rate of $1 million a day.”

“They need to do well at the box office. If they don’t, they’re going to be in a very difficult situation,” said Roy W. Hong, a First Boston securities analyst who changed his pre-crash “buy” recommendation to a “hold.”

The harsh scrutiny comes less than two years after Wall Street embraced New World as one of the most enticing of a dozen or so independent movie companies. Analysts and investors were captivated by New World’s clever executives, who had business plans to match their sweeping ambition.

Harry Evans Sloan and Lawrence L. Kuppin are the young entertainment lawyers who (with producer Larry A. Thompson, who soon bowed out) acquired the New World name and certain distribution assets five years ago for a mere $2 million from the company’s founder, Roger Corman. At the time, New World was the sole remaining national distributor of low-budget exploitation films, and the new owners hoped to capitalize on that franchise.

None of their films have turned into blockbusters, however, and the cost of producing and promoting films has continued to rise. With the exception of “Soul Man,” a 1986 release, none of New World’s films under the new regime has topped $20 million at the box office.

In the home-video market, New World prospered at first on the release of older films, since it had acquired home-video rights (but not the actual film library) to about 100 movies owned by Corman, who had launched New World in 1970. In the past year, the home-video stores’ appetite for B titles has waned, hurting New World’s prospects in that otherwise robust market.

The company also took a costly plunge into television production that won’t pay off unless--and until--shows such as “Crime Story” and the upcoming “Wonder Years” are renewed by the networks for enough episodes (about 80 hours) to sell later as reruns to local stations. Until then, New World must bear the cost of deficits on the shows, since network fees seldom cover the full cost of producing pilots or hour-long dramas.

Markets Have Changed

Even the company’s acquisition of Marvel Entertainment has lost some of its bloom because of a severe decline in demand for new cartoon shows in weekday programming for local television stations.

“All of their markets changed on them. Low-budget movies are not working out, and the television market changed on them, including animation,” Reader said, not without sympathy, since his firm acted as New World’s investment banker until last year. Rothschild helped raise $300 million on Wall Street in an 11-month period, beginning with New World’s initial stock offering in 1985.

The money was earmarked for acquisitions, Reader said, but New World failed “to acquire a company that could help them service (the) debt.”

For the first nine months of 1987, New World paid net interest of $27.7 million. Later this year, the company will also owe $36 million in non-refundable advances to the owners of “Highway to Heaven,” a one-hour TV series, for previously negotiated rights to distribute reruns to television stations in the U.S. market. Discussions are under way concerning the payment, however, according to industry sources.

In interviews, New World executives said they are trying to staunch the cash outflow, but they insist that they’re not selling major assets or putting the company itself up for sale.

“We are experiencing some short-term problems, basically in cash flow. I think we got too big too fast. I think we’re doing some belt-tightening; we’re not ashamed to say we’re doing belt-tightening,” said Robert Rehme, the company’s chief executive for the past four years, who shares the co-chairman title with Sloan and Kuppin.

Employment at New World and its subsidiaries has declined by 66 people to 678 since the beginning of 1987, according to figures supplied by the company.

Although no major assets are on the block, Sloan said, the company is discussing a possible sale of Lion’s Gate Studios, a post-production facility acquired for $4.4 million in May, 1986.

Seeks New Credit Line

“Our goal in 1988 is to have no negative cash flow,” Sloan said. Nevertheless, he insisted: “New World does not have a problem with cash.”

The company’s cash and marketable securities declined $107 million in the nine-month period ended Sept. 30, 1987, leaving about $114 million available. More recently, the company repaid debt of about $21 million when a credit agreement with Chemical Bank expired.

“We’ve got $100 million in cash available (and) $150 million in receivables,” Sloan said, counting the company’s access to funds from an Australian company formed last year.

New World is also negotiating with a new group of banks for a borrowing capacity of $25 million, Sloan said, but added, “We don’t even really need that. We’d just like to be in business with a bank.”

Outwardly, at least, the two former law partners have adopted a joking stance about rumors swirling about the company’s fate--including one trade publication’s report that bids were being opened for the company’s sale.

“When I read that, I said, ‘Gee, what are Bob and Harry up to? They haven’t told me that bids are being weighed,’ ” said Kuppin, who, in a serious tone, said New World is “absolutely not” for sale.

The top executives continue to travel extensively and are active in fund raising for political candidates in the presidential primaries. Kuppin and Sloan--both Republicans--are campaigning for Kansas Sen. Bob Dole, with Sloan serving as chairman of the Dole for President Committee in California. Meanwhile, Rehme and Jon Feltheimer, New World’s executive vice president in charge of television, have helped raise funds for Massachusetts Gov. Michael S. Dukakis, a candidate for the Democratic nomination.

Denies Playing the Market

Nevertheless, the speculation about the company’s health may be taking a toll. Reader, the former director, said the New World’s management has “become much more defensive.”

In interviews, Kuppin and Sloan do try to dispel the notion that New World used its borrowings of $300 million to play the stock market. In 1986, the company pocketed $13 million in investment income and interest--nearly enough to pay for its net interest expense of $15.8 million that year. Early in 1987, New World reported a gain of $17.8 million from its sale of Taft Broadcasting shares.

“People think that we have a bad reputation, that we play the stock market. It just simply isn’t true. We invested heavily in three stocks, which were Taft, Kenner Parker and Harper & Row,” Kuppin said. In each instance, the target companies had assets that appealed to New World--until “bidding got away from us,” as Sloan said.

Although fourth-quarter results have not been reported, New World’s portfolio losses due to the October crash won’t be a “big number,” Sloan said. (In its third-quarter report, New World noted portfolio losses of $6.3 million as of Nov. 13.)

A Different Era

Sloan and Kuppin control nearly 70% of the company, through agreements to vote all employees’ shares--including 10% held by Rehme. The three co-chairmen own nearly 50% of the outstanding shares, and they dominate the board, which has dwindled to four directors. The fourth director is also a company insider; “We’re looking for some outside directors now,” Kuppin said.

New World’s shrinking fortunes are painfully evident in daily stock tables. The price of a common share of New World stock has plummeted to the $2 to $3 range from $20.25 paid by investors who bought shares during a second offering in April, 1986.

Yet one professional investor who bought New World shares in its heyday said: “These guys are very smart and . . . sufficiently smooth to be the next generation of leaders in Hollywood. . . . If it works, (the stock) could be big. If it doesn’t, it’s wallpaper. The leverage in the company is mind blowing.”

“Before Oct. 19, it was a different era. It really was,” said Kuppin, 39. “Before Oct. 19, any investment banker in town was happy to go out and say, ‘What do you want to buy? You want to buy something for $100 million? $200 million? Or, in the case with Kenner Parker, $500 million? No problem.’ ”

“We were going to create a $1-billion company,” said Sloan, 37. The company had already acquired Marvel Entertainment, the publisher of Marvel Comics and TV animation producer; toy products appeared to be a logical addition.

So New World fought hard for Kenner Parker Toys, increasing its initial offer by 15% before finally bowing out to a higher bidder. New World pocketed the last of its Kenner Parker profits just 72 hours before the stock market crashed on Oct. 19.

If its bid for Kenner Parker had prevailed, New World intended to raise half the purchase price from banks, and the remainder from the public sale of high-yield, high-risk bonds.

“The bank financing dried up for hostile acquisitions, and the ‘junk bond’ rates went up, so as it turned out, we’re better off,” Sloan said.

Even before the market crash, New World shareholders had taken a beating. The price had declined to $6.75 per share on the eve of the stock market crash. By Dec. 1, the price had dropped to its 52-week low of $2. (New World shares closed Friday at $2.25 on the American Stock Exchange.)

The stocks of other independent or “mini-major” studios have been battered as well, but New World executives take pains to distinguish their company from other independents such as Cannon Group and DeLaurentiis Entertainment Group, with their well-publicized woes.

Cannon and DEG “pre-sold” many of their movie rights to foreign markets and home-video companies, unlike New World, which concentrated on building distribution networks in home video and television, as well as to theaters. The New World approach was more costly, but the company can retain more of the profits in each market as a result.

There is also a demonstrable difference in New World’s access to cash. According to the most recent quarterly reports filed at the Securities and Exchange Commission, New World’s $114-million in cash and marketable securities towered over a $3-million sum available to DEG (Nov. 30) and Cannon Group’s $11 million (Oct. 3).

Banks May Balk

Yet one securities analyst maintains that New World has just “one year left in cash. The Street’s not going to raise them any more money; I don’t think the banks want to give them any money. They’ve got to come up with some ‘pot of gold’ at the end of the rainbow,” he said, to attract a new investor’s cash infusion.

A hit television show might do the trick, said the analyst, who did not want to be identified. He held out some hope for “Wonder Years,” a new half-hour show scheduled to premiere in mid-March on ABC in a coveted time-slot just before “Moonlighting,” a network favorite.

But New World is still embroiled in a lawsuit with Michael Mann, executive producer of “Crime Story,” an hourlong TV series in its second season. Mann has sued the company for $577,500, alleging that New World has fallen behind in paying certain royalties and advances.

New World, for its part, is trying to adopt a tougher stance on the show’s deficits, which have sometimes ranged from $350,000 to $400,000 per episode. Some of the losses have been offset recently by a higher network fee and foreign sales, but New World executives said “Crime Story” must operate on a break-even basis next season if the show is renewed.

Losses on the series were widely predicted two years ago after MCA, the owner of Universal Television, passed up the chance to finance the show. MCA, after all, had previous experience with Mann’s stunning but costly work on “Miami Vice.” But New World makes no apology for its “Crime Story” investment. “There was a reason,” Kuppin said. “We wanted to be in the business.”

To further demonstrate its commitment to network television, New World has produced numerous mini-series or movies of the week, swallowing additional losses on shows that exceed the networks’ fees. But the strategy appeared to succeed when New World became the third biggest supplier of prime-time series to the networks at the beginning of the season last fall, trailing only Lorimar Telepictures and MCA.

Although two of five New World shows have already been cancelled, networks have placed orders for two new series, Sloan said. In addition, 11 pilots have been ordered. New World is seeking investors for some of those pilots, but no deals have been reached, according to Sloan.

Success in television would be particularly sweet for Kuppin and Sloan, who specialized in representing prime-time talent during their law practice days. The two men became famous in Hollywood for keeping actor-clients such as Gary Coleman (“Diff’rent Strokes”), John Schneider and Tom Wopat (“Dukes of Hazzard”) off the sets of their respective television shows. The stars’ absence typically forced studios to negotiate more favorable contracts.

Even after their acquisition of New World, Kuppin and Sloan continued a law practice that collected $576,000 in fees from New World during a four-year period ending in 1986. The firm has now “retired,” Sloan said, with a trace of a reminiscent smile.

“We were controversial and aggressive entertainment lawyers.”