For Some, There’s No Success Like Failure

Here’s a proposal for the Securities and Exchange Commission to adopt.

The next time someone tries to sell the public on buying stock in some small entertainment company, especially one whose sole business is trying to pick hit movies to make or distribute, require the following to be printed in big, red letters across the front page of the prospectus:

“Warning: This investment carries a high degree of risk. Past experience shows investors dumb enough to invest in these companies more often than not end up getting shafted.”

The latest case in point is Cinergi Pictures Entertainment, which earlier this month finally mapped out a plan to liquidate. Turkeys like “The Shadow Conspiracy,” “Judge Dredd,” “The Scarlet Letter” and “Color of Night” can do that to a company.

Even the excessive publicity surrounding some of the films it produced couldn’t save this one. If press clippings per share mattered, Cinergi would have been in great shape, what with the hype surrounding “Evita” and “Nixon.”

So Cinergi is turning over virtually all of its library to Walt Disney Co. because the company is in the hole to the studio by $38.4 million with no prospect of digging out. Consider it a little like Hollywood’s equivalent of giving the keys to your house to your mortgage holder and walking away from it all. In this case, the Bank of Mickey gets the keys to the library and kisses off the $38.4 million.

Will Cinergi shareholders ever get anything? There are vague references in public documents filed by the company. A spokesman says there is some cash, although the exact amount at the end of last year hasn’t been disclosed. Chairman Andy Vajna may even buy back rights to the company name.

But a stock trading at less than what a cup of Starbucks costs--a little more than 84 cents a share on Monday--says a lot about investor faith in what they’ll get.

What’s more, there’s plenty of “Hey, Don’t Say We Didn’t Warn You” clauses that litter Cinergi’s public documents, such as the one that tells stockholders there is no assurance “that a cash payment of any type will be made to Cinergi’s stockholders and no assurances can be given as to the amount of any cash payment, if made.” In other words, don’t get your hopes up.

With Cinergi, it didn’t take an investment Nostradamus to see this wreck coming. Still, someone obviously thought it was worth something at one point. After all, the stock was offered to the public at $14.50 a share in 1992.

The biggest red flag with Cinergi, as with any Hollywood company, is how well executives take care of themselves.

In other words, is the guy who heads the company personally leasing it the office space, and are executives negotiating nice paydays for themselves even as the company is heading into the tank?

When Cinergi went public, its prospectus showed it was paying Vajna $38,500 a month to lease its offices from him. Not only that, but it agreed to pay him $5 million in fees for “air charter services.” He also had a clause in his contract that he was guaranteed one of the biggest yachts at the Cannes Film Festival, which was later deleted when it was deemed embarrassing.

All of that was when the company was making money.

In January, when Cinergi’s finances were sliding downhill fast, Warren Braverman, the company’s chief operating officer, negotiated a new deal. Not only did he get a raise, but he was awarded a $600,000 “signing bonus,” $300,000 of which is being used to effectively cancel out two loans he had from Cinergi, according to SEC documents.

Was it appropriate for an ailing company to dole out that kind of contract? Braverman didn’t return calls, but a Cinergi spokesman said Braverman’s “very, very much involved on day to day activities.”

To paraphrase Eva Peron in Cinergi’s “Evita,” don’t cry for the executives here.

In fairness to Braverman, he’s not the only one in Hollywood who has cut a better deal while the ship is sinking. When Savoy Pictures was heading down the tubes, top executives Vicor Kaufman and Lew Korman each doubled their salaries, to $500,0000 annually, and got stock awards totaling $4.7 million.

In fairness to Vajna, he’s not the only head of a public film company to get a few good perks. His onetime producing partner, Mario Kassar, reportedly got Carolco Pictures to pay $30,000 a month for his home gardener. For a lot of reasons, including profligate spending, that company failed as well, with shareholders getting zip.

What’s remarkable in the case of Cinergi is that the company was effectively sold to the public in the first place on the strength of one movie. The company’s original prospectus came on the heels of “Tombstone.” It was a profitable movie, but no “Jurassic Park,” and for a blip in time made Cinergi’s numbers actually look decent.

As a result of that film, Cinergi posted a $2.9-million profit in 1994, a switch from the $27 million it lost in the previous four years, in part because of start-up costs. It didn’t last long. In 1995, the company lost $16 million and has projected another loss when its 1996 results are made public.

Fortunately, the lessons of Cinergi, Carolco Pictures, Savoy Pictures, Weintraub Entertainment and a host of other entertainment debacles may not be lost on people. Investor interest was cool earlier this year when Time Warner was shopping around the historically more successful New Line Cinema, so Time Warner will keep it and fund it through Chase Manhattan Bank. No big surprise there, given New Line’s lousy year in 1996.

Firms like to go public in part because it allows executives to sell some of their holdings and get rich. There’s no shortage of people in Hollywood with a burning desire to do that. The latest stock market swoon will no doubt temper those efforts.

Still, there will inevitably come a time when investors are once again being pitched on the idea of buying a few shares in a company for the right to be in business with Bruce, Demi and Sly, just as they were with Cinergi.

When that time comes, don’t just check the numbers. Look at who the company is leasing office space from, and where it’s chartering its jets from. And make sure to check on who is picking up the tab for the gardener.