COMPANY TOWN : The Orwellian World of Independents : Failure Can Be Success If You Lead a Film Company Into Oblivion

It’s deja vu all over again.

With the demise of Carolco Pictures and the worsening financial struggles of others such as Samuel Goldwyn Co. and Savoy Pictures, it seems the most ambitious of the stand-alone independent movie companies in the mid-’90s have been unable to dodge the kinds of bullets that took down so many of their predecessors between 1988 and 1992.

Yet these companies that have lost millions for so many investors continue to extravagantly reward their top executives and founders, who invariably end up with up lucrative production deals elsewhere after their companies fail.

After four years of putting off its creditors, Carolco--the high-flying, overindulgent company that bet the bank on the big event action movies--filed for Chapter 11 bankruptcy Friday and sold its major assets to Twentieth Century Fox for $50 million.

Departing Carolco Chairman Mario Kassar’s ex-partner, Andy Vajna, is having his own difficulties with his Cinergi Pictures. Despite having a studio affiliation with Disney, Cinergi is now reeling from the back-to-back big-budget box-office bombs “Judge Dredd” and “The Scarlet Letter.”

Meanwhile, Goldwyn--also in desperate financial straits--is praying it will find a buyer for its assets before it too has to run for bankruptcy cover.

And three weeks ago, after having racked up cumulative losses of more than $80 million on 12 box-office flops, 3-year-old Savoy Pictures Entertainment announced it was retreating from the movie business and refocusing its resources on buying television stations and TV programming.

The announcement by Savoy founders Victor A. Kaufman and Lewis J. Korman signaled yet another major strategy shift for the company, whose original aim was to build a marketing and distribution company that would compete with the Hollywood majors but without taking on the risk of financing the development and production of movies.

But not long after Kaufman publicly declared that “our focus is to be in business with and assist filmmakers, not to pick pictures, “ Savoy went nose-first into movie making.

It seems few lessons have been learned from the days when companies such as De Laurentiis Entertainment Group, Weintraub Entertainment Group, Orion Pictures and Vestron were falling by the wayside.

“I’ve heard it a hundred times before,” says Wall Street analyst Harold Vogel of Cowen & Co. in New York. “They all say, ‘We’ve observed all the mistakes and this time we’ll do it differently.’ ”

But as Vogel and many of his Wall Street analysts view it, “These companies [past and present] are all victims of the rising costs of making and marketing films and of undermanagement and undercapitalization.”

Vogel says that across the board, these highly ambitious independents “underestimated the capital costs needed to get into the game and the amount of cash flow required to sustain a business, and overestimated the ability to manage [the assets].” With the cost of producing and marketing a movie rising by an average of 9% a year since 1980, the analyst says costs “are galloping beyond these companies’ ability to raise enough money and recycle the cash to stay afloat . . . they’re trying to swim across the river and found out the river moved.”

If independent companies can stay “below the radar screen and stick to making $1-million [to] $5-million films and don’t have the ambition to compete with the majors, they can probably survive,” Vogel suggests. “But otherwise, it’s virtually impossible--it’s a very tough game.”

Savoy, formed in 1992 by former Columbia Pictures and TriStar executives Kaufman and Korman, is the newest kid on the block and the latest loser in that game. The New York-based company began life with $100 million in seed money from such power players as Allen & Co., Time Warner’s HBO unit, GKH Investments, which includes Chicago’s Pritzker family, and Kaufman and Korman themselves. After going to the public well several times it was eventually capitalized at $700 million.

The stock, originally offered at $14.50 in 1993, closed at a new low of $5.25 in over-the-counter trading on Monday, down 50 cents.

“What you have is a very disappointed shareholder base and an embarrassed Allen & Co.,” one Savoy investor said.

Yet Hollywood power broker and former Columbia Pictures Chairman Herb Allen Jr.--who engineered such deals as Sony’s purchase of Columbia/TriStar and Matsushita’s purchase of MCA--and his high-profile Wall Street investment banking firm have collected millions in fees from Savoy over the past three years.

Despite Savoy’s inability to score even one major hit, Kaufman and Korman each received a salary boost from $250,000 in 1993 to $500,000 in 1994, and each received stock awards totaling $4.7 million last year, according to company documents filed with the Securities and Exchange Commission.

In 1994, when Carolco was running on fumes, Kassar got paid about $2.25 million in salary with a guaranteed annual raise of $250,000. Additionally, he had a contract giving him 1% of Carolco’s gross film rentals (about half a film’s box-office gross) before break-even and 3% after break-even. Also after break-even, Kassar was guaranteed 10% of all gross revenues from ancillaries such as merchandising, publishing and soundtracks. He also was allowed a $1-million advance per picture as a producer’s fee.

If that wasn’t enough, Carolco in 1994 spent about $30,000 for Kassar’s home gardener. According to his employment agreement, filed with the SEC, Kassar also had been getting $7,500 a month for “non-accountable business expenses.” In addition, Carolco used to rent Kassar and company one of the biggest yachts at the Cannes Film Festival.

One of the most curious aspects of these financial disasters is that the founders of these bankrupt public companies often emerge unscathed. Indeed, Hollywood rewards them. It’s as if these executives’ records in the industry and their companies’ going bust are somehow mutually exclusive events.

“If you lose $100 million, you’re more valuable than a really smart 25-year-old with good ideas,” suggests Vogel, noting that in Hollywood what counts is “power, names, back scratching and knowing how to market yourself.”

Just look at Jerry Weintraub, who was given a rich production deal by Warner Bros. after he blew $400 million of the public’s money on such box-office turkeys as “My Stepmother Is an Alien” and “Troop Beverly Hills.”

Kassar will also land on his feet after heading a company that went up in smoke.

Kassar, who resigned Friday when Carolco declared bankruptcy, is being heatedly pursued by three Hollywood companies--Fox, Universal and Cinergi--to strike what will undoubtedly be a very rich production deal.

He may be known as a great showman and a well-connected packager of movie stars and directors with sexy action scripts, but he was a major contributor to the out-of-control spending that left Carolco’s investors holding a near-empty popcorn bag.

It seems appropriate that last week saw a little-noticed announcement that the latest incarnation of independent Hemdale has filed for bankruptcy protection, just as its predecessor did three years ago.

If that wasn’t enough, Hemdale disclosed that it has invited back John Daly, who was at the helm when Hemdale originally fell from grace, as a special consultant. His mission: to get the firm back into the live-action film business.