The ‘Talking’ at MCEG Is Now About What’s Next

With an impressive $127 million in box office grosses, the sleeper hit movie “Look Who’s Talking” has helped a little-known independent film company in more ways than one.

The film proved that Management Co. Entertainment Group, the movie’s producer, was capable of more than art-house fare. It resuscitated the career of John Travolta, a key MCEG client and the film’s star.

And it established the credibility of MCEG’s chief executive, a flamboyant young lawyer named Jonathan D. Krane, who arranged the production deal with the film’s owner-distributor, Tri-Star Pictures.

For MCEG, now comes the hard part.

Four months after the success that put it on the map, the Santa Monica concern is looking for follow-up hits, hustling to refinance a pile of debt and trying to quiet persistent industry talk that with rapid growth has come internal dissension and disarray.

“This is a critical time for them,” says Dennis McAlpine, analyst with the Oppenheimer & Co. investment bank in New York. “They’ve got a hit behind them, and a lot of questions ahead.”

In some ways, MCEG’s story illustrates the predicament now faced by most independent movie companies. After booming growth through much of the 1980s, Hollywood’s smaller film production and distribution companies have been forced to make a crash adjustment to a world where financing is hard to come by and the major studios have increased their financial muscle and reach.

Krane’s efforts to put together the company also illustrate the irresistible lure many feel for building a small film company, against lengthening odds.

Krane, 37, has expanded MCEG in seven years from a tiny talent management agency to a diversified concern with production, distribution and finance arms and with revenue that may approach $200 million this year. His most ambitious step was last July’s $83-million acquisition of a much larger foreign distribution company, Virgin Vision, from Richard Branson, the British entertainment and airline entrepreneur.

As he has built the company, Krane, who graduated from Hollywood High at 15 and studied law at Yale, has earned a reputation as inspired, hard working, abrasive and domineering.

“It wasn’t easy making all this stuff happen,” says Krane, who is married to actress Sally Kellerman. “I have to say ‘no’ to a lot of people. . . . I’m sure at times I come off like a jerk.”

Contributing to the appearance of disarray at MCEG has been the departure over the past several months of a series of top managers. Among them were Al Newman, marketing chief; Glen Shipley, chief financial officer; Michael Lauer, head of business affairs, and Beth Cannon, at one time head of the talent management operations. Last month, Charles Weber, who had been MCEG president for 10 months, abruptly gave up the post to become a consultant to the company.

Company officials describe the turnover as growing pains, brought on in part by its efforts to eliminate overlap after the acquisition of Virgin Vision. “We outgrew some people, and some people outgrew us,” says Krane.

Yet company officials also acknowledge that there is lingering bitterness among some who have left the company. “Some people have been spreading nasty things about Jonathan,” says William J. Rouhana Jr., MCEG’s vice chairman and co-founder. “Hollywood is a jealous place.”

MCEG faces a lawsuit from producer Simon Lewis, who contends that Krane fired him without cause as producer of “Look Who’s Talking” during the filming of the movie. Lewis says Krane later slandered him by telling a reporter for the trade paper Daily Variety that Lewis was never the film’s producer but only Krane’s production assistant. Krane says the suit has no merit.

Meanwhile, people close to the company say the investment firm of Kidder, Peabody & Co., which loaned $67 million to MCEG for the Virgin Vision acquisition and is also its investment banker, is keeping a watchful eye on the company. Kidder has been influential in a number of key moves recently, including the appointment and departure of key executives, these people say.

Krane, the company’s controlling shareholder, has been intimately involved in every aspect of the MCEG’s operations, from talent management and casting to film editing, although he has recently relinquished some role in production.

“Jonathan is the sun, and the rest of the company revolves around him,” says a former insider.

The son of a Los Angeles auto leasing executive, Krane founded MCEG in 1982 and worked as chief executive of Blake Edwards Entertainment from 1983 until 1987. He says he met Kellerman, who is 16 years his senior, at a group therapy session.

Krane is known for a taste for expensive Italian clothing, Rolls-Royce sedans and books on advanced physics. He and Kellerman live in a home perched above Laurel Canyon that has drawn wide attention for an addition designed by the architect Frank O. Gehry.

Krane’s blueprint for the company was designed to help it avoid the pitfalls that have undone so many independents. MCEG’s talent management, movie production, distribution and finance arms are supposed to support each other to increase their odds of success.

The company’s films, for example, sometimes provide work for MCEG-managed actors and directors. The distribution operations can help MCEG cover production costs through sales of the company’s movies to theaters and television and for home video use. With the Virgin Vision acquisition, MCEG is betting that it can exploit growing overseas demand for lower-budget U.S. film hits.

Krane is also trying to cultivate a reputation as the cheapest guy in Hollywood. He says MCEG plans to keep the production cost of its average film to about $3 million--compared to about $18 million for the majors--so the company doesn’t risk too much on any single project.

But will this master plan work only on paper, as some competitors contend?

What the company can do in cutting costs, Krane says, was demonstrated in “Look Who’s Talking,” a comedy about a baby who speaks with an adult voice (provided by actor Bruce Willis).

Krane struck a deal with Tri-Star Pictures based on his hunch that he could keep production costs to about half of the budgeted $14 million. He signed Travolta for about half his usual $4-million fee, shot the film in lower-cost Vancouver, Canada, and shortened the production schedule. Costs came in at about $8.6 million.

Amy Heckerling, the film’s director, gives MCEG a lot of credit for the picture’s success. Tri-Star, the film’s owner and distributor, had been moving without haste to shoot the picture and planned a limited regional release that didn’t promise great profit.

Five years after director Heckerling had written the script, three potential leading actresses had read it and “I was getting very depressed,” Heckerling says. “It was a ‘go’ movie that wasn’t going anywhere.”

“Look Who’s Talking” was Hollywood’s top box office money maker for five weeks last fall, and now there are plans for a sequel, a TV sitcom and perhaps a cartoon series.

Still, MCEG’s take may be rather modest. Of the $127 million gross, MCEG may net $10 million to $12 million, industry officials estimate.

Any earnings MCEG does receive will come in handy, for the company isn’t expected to report a profit until at least next year as it digests the Virgin Vision acquisition.

Kidder’s loan for the acquisition was supposed to be repaid by last Dec. 15. Instead, the deadline was extended to March 30, and Kidder put up an additional $5 million in fresh loans.

At a time of jitters in the credit markets, the delay stirred speculation that MCEG may have had trouble lining up lenders. Richard Intrader, the Kidder banker in charge of the deal, acknowledges that “the lending environment had changed between August and December.”

But Vice Chairman Rouhana insists that the company has had no trouble and will soon complete the refinancing with bank loans, commercial paper and funds from possible deals he won’t discuss. “We’re in the middle of doing a number of things,” he says.

Rouhana boasts that within six months the company will cut its $131-million debt burden to 50% of capital from its current heavy 85%.

Christopher Dixon, a Kidder securities analyst and MCEG’s biggest fan on Wall Street, claims that the Virgin Vision acquisition will make MCEG the third-largest overseas distributor of English language films, hedging the risk of MCEG’s movie-production ventures. “This company is superbly positioned,” he raves.

The stock market seems less enthusiastic. MCEG’s stock, trading at $4.125 a share during the peak of the success of “Look Who’s Talking,” has since slumped, closing Tuesday at a bid price of $2.0625 a share, off 6.25 cents, in over-the-counter trading. MCEG lost $11 million on revenue of $31 million for the six months ended last Sept. 30.

In March, MCEG expects to release two films: “Chains of Gold,” an action story about a social worker fighting New York drug lords, which stars Travolta, and “Boris and Natasha,” a film based on the two Russian spies in the old Rocky and Bullwinkle cartoons that stars Kellerman and Dave Thomas.

Krane says the company may soon break with past practice by working out a so-called “rent-a-major” deal with a major studio or an independent movie company for domestic theatrical distribution of its films. Such deals reduce the risks for producers but also can limit their money-making potential, since distributors typically claim 15% to 30% of box office rentals.

Meanwhile, MCEG is a company in flux. The concern has scaled back its talent management division, laying off 25 employees just before Christmas as part of what Krane says is a new strategy of relying on fewer but higher-producing talent managers. “Managers whose client base didn’t excel left the company,” he says.

Observers are watching to see how smoothly MCEG will refinance the debt. Further down the road, a key question is whether MCEG will be able to produce or acquire, and then market, the two dozen pictures a year that Virgin Vision will need to remain a player in distribution.

What the company really could use right now, outsiders say, is another hit. Company officials insist that’s not necessary. “This company isn’t dependent on any single film,” Rouhana says.

MCEG AT A GLANCE

A diversified entertainment concern, Santa Monica-based Management Co. Entertainment Group manages talent and produces, distributes and finances movies. The company lost $2.5 million on revenue of $34 million for the fiscal year ended March 31, 1989; for the six months ended Sept. 30, it lost $10.9 million on revenue of $31.1 million. In August, MCEG acquired Virgin Vision, a British-based distributor with revenues of $148 million for the fiscal year ended July 31, 1989.

Projected 1990 Revenue

Activity (in millions) % of total Foreign video $80.5 41% Film finance $39.0 20 Domestic film revenue $27.1 14 Domestic video $27.3 14 Foreign film $17.8 9 Talent management $3.1 2 TOTAL $194.8 100%

Source: Kidder, Peabody & Co.

Feature Films

* Look Who’s Talking (production only; owned and distributed by Tri-Star), 1989. Starring John Travolta, Kirstie Alley, Olympia Dukakis,George Segal, with Bruce Willis as Baby’s Voice. Written and directed by Amy Heckerling.

* The Chocolate War, 1988. Starring Ilan Mitchell-Smith, John Glover and Jenny Wright; written and directed by Keith Gordon.

* Getting It Right, 1989. Starring Lynn Redgrave, Sir John Gielgud and Helena Bonham Carter; co-produced and directed by Randal Kleiser.

Films to Be Released

* Chains of Gold, March, 1990. Starring John Travolta and Marilu Henner, written by John Petz, Linda Favila and Anson Downes; directed by Rod Holcomb.

* Boris and Natasha. Starring Sally Kellerman and Dave Thomas; directed by Charles Martin Smith, with special appearances by John Travolta and John Candy.

* Convicts. Starring Robert Duvall, Lukas Haas and James Earl Jones; written by Horton Foote; directed by Peter Masterson.

* Cold Heaven. Starring Theresa Russell, Mark Harmon and Talia Shire; directed by Nicholas Roeg.