Hard Times for ‘Sting’ Producer : Phillips Wants to Take His Ailing Production Company Private

When a comedy called “Don’t Tell Mom the Babysitter’s Dead” died at the box office last summer, so did the prospects for a small production company headed by Michael Phillips.

Phillips--who has not had a hit since he produced “The Sting” and “Close Encounters of the Third Kind” in the 1970s--had counted on the film to shore up the shaky finances of Mercury Entertainment, founded in the red-hot financial climate of the mid-1980s.

But by fall, Mercury’s stock was mired below 3 cents a share, having tumbled from a high of about $3.

Now--on the verge of financial collapse--Phillips has proposed taking the company private, offering to pay 7 cents per share to investors who bought into the company at as much as $1 per share.

Phillips said he expects to be confronted by some angry investors at a stockholders meeting Monday. But in an interview this week, he maintained that he has no other choice.

“I feel very badly for the stockholders,” said Phillips, who controls enough of the company’s stock to guarantee approval of the tender offer. “I have suffered a great deal myself financially. . . . But I honestly believe that this is the best thing to do.”

Phillips is the ex-husband of “You’ll Never Eat Lunch in This Town Again” author Julia Phillips.

For the press-shy Phillips, who for years has been trying to regain the standing he enjoyed in the 1970s, Mercury’s failure represents another career setback.

For investors who put their money into Mercury and other small Hollywood production companies that went public in the 1980s, it’s a story line that’s become all too familiar. In the end, undercapitalization and poor box-office results often proved the firms’ undoing.

Shares in DeLaurentiis Entertainment Group, for instance, sold for $12 before it went belly-up. And Carolco Pictures Inc., which opened at $9, was down to $2 a share before foreign investors were forced to bail out that financially troubled company.

“These companies had to make films that made money, and they had to keep their overhead to some reasonable level,” said Jeffrey Logsdon, an entertainment analyst with Seidler Amdec Securities in Los Angeles. “What happened is that a lot of those guys didn’t do that.”

When Mercury Entertainment went public in 1984, investors were offered an opportunity to tap into the success that won Phillips an Academy Award for “The Sting.” Mercury told investors that it hoped to produce three to five films a year in the $10-million range. ABC Motion Pictures was to pay all operating and development costs; the company’s production financing was to be picked up by the major studios.

More than $3 million poured into Mercury’s coffers in an oversubscribed offering for 30% of the company. But Mercury struggled almost from the start.

Its first production, “The Flamingo Kid” in 1984, was a mild disappointment at the box office, not returning anything to the company beyond a producer’s fee. ABC Motion Pictures subsequently went out of business, robbing Phillips of his development deal. In the aftermath, Phillips struck a short-term alliance with actor/producer Michael Douglas. But the three films that came out of the partnership all proved to be losers.

“Don’t Tell Mom the Babysitter’s Dead,” a juvenile comedy starring “Married With Children” co-star Christina Applegate, opened in June and earned a disappointing $25 million domestically. The other two films have not found distributors.

Meanwhile, Mercury has been bleeding cash.

Annual revenue dropped from $600,971 in fiscal 1986 to $127,211 last year. Losses ranged from $413,021 in 1986 to $147,824 in the nine months ended last Aug. 31.

While it is unclear how much of his own money Phillips put into the firm, he generally was well compensated. In an effort to shave costs, Phillips took a 20% salary cut--to $270,000 a year--in August, 1989, securities documents show. Later that year, Beverly Hills-based Mercury entered into an office-sharing agreement that saved it another $11,000 a month.

Then, in 1990, Phillips agreed to forgo his salary altogether and terminated all but two of his employees.

But Phillips said he realized that austerity measures weren’t enough to justify Mercury’s existence as a public company.

Critics of the buy-back plan privately have accused Phillips of using the company’s existing cash to rid himself of his investors, while he gets to keep Mercury’s remaining assets. Supporters said Phillips is doing stockholders a favor, under the circumstances.

“Michael Phillips was always incredibly prudent,” said one former associate. “While his stock didn’t increase in value over the long run, he also didn’t pile on any debt and he didn’t burn any banks or bondholders.”

Phillips will continue to operate the company as Michael Phillips Productions once the sale is completed.

“I always felt I was halfway across the stream, standing on a rock, without enough money to really proceed,” he said. “Had I known we were only going to raise $3 million, that would have been the beginning and the end.”

Falling Mercury

Mercury Entertainment went public in 1984 during the boom time for public investment in Hollywood. The company hoped to produce several films a year, but most of its projects stalled. By 1989, mercury’s stock was permanently mired at less than $1 a share before going off the boards on Sept. 12 of that year. Since then it’s been traded over-the-counter. Trading has been sporadic. The average price in recent weeks has been 2.5 cents a share. Phillips has offered to buy back the stock at 7 cents a share.