Everything Ventured, Everything Lost

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Rachel Abramowitz is a Times staff writer. Times staff writer Corie Brown also contributed to this story

Last year’s Shooting Gallery Christmas party should have been a festive occasion. The spot was the white-hot New York disco Centro-Fly, a blinding Op Art fantasy in black and white, and the company, a brash band of testosterone-fueled New Yorkers, appeared to be riding a hit. Its latest film, Kenneth Lonergan’s “You Can Count on Me,” was an indie success story that would ultimately garner several Academy Award nominations and gross $9 million at the box office, not bad for a film that cost less than $2 million.

Moreover, the film production-distribution company was awash in public praise for its innovative film series, an operation in which it persuaded corporations to subsidize the release of challenging independent fare such as Iran’s award-winning “A Time of Drunken Horses” and the neat Mike Hodges thriller “Croupier.” Indeed, the New York Film Critics Circle bestowed a special award on the outfit, run by a pair of buddies from Horace Mann (a ritzy New York private school), Larry Meistrich and Steve Carlis, for their “ingenious distribution pattern as well as their choice of films.”

The pair had also garnered the Crain’s Small Business Award and Ernst & Young Entrepreneur of the Year Award for the launch of the 172,000-square-foot Gun for Hire production facility in New York, essentially a production hotel for film companies shooting in New York. In the past two years, the company had spawned an elaborate Internet and production services divisions, exploding from 35 employees to 275, with outposts in Vancouver, Canada, and Miami. Now the Canadian Internet company Itemus was offering to buy 80% of the Shooting Gallery with a stock trade worth $56 million.


Yet, if everything was going so great, why was Joe DiMartino, an investor, board member, and co-president of the interactive division, sitting at the bar bawling?

For those who ran Shooting Gallery, the night was a sad affair. For days, Meistrich, Carlis and other top executives, investors and members of the board of directors had been locked in meetings. During Itemus’ due diligence process, it was discovered that the company books were a shambles, according to at least one lawsuit as well as several former employees and investors. Far from being a prosperous and innovative company that successfully merged independent film with the Internet, as it appeared, Shooting Gallery had in fact hemorrhaged more than $40 million in 2000 alone, a later audit revealed. Days before the party, company President and Co-Chairman Carlis had been pushed out and soon after resigned under pressure.

Seven months later, Shooting Gallery is defunct, having lost more than $70 million, according to documents Itemus filed with the Securities and Exchange Commission. Itemus has also filed for bankruptcy protection. In a letter to shareholders, Itemus President Jim Tobin blamed the demise on poor market conditions and bad decisions, although he noted, “Itemus would have withstood all those challenges if we hadn’t encountered so many ‘bottomless’ problems related to our Shooting Gallery acquisition. I will advocate that Itemus [bankruptcy] trustee pursue legal actions to seek recourse against appropriate persons in the Shooting Gallery context.” Founded with $7,000 in 1991, Shooting Gallery epitomized the ethos of guerrilla filmmaking, in which hustle and chutzpah--and artistic freedom--made up for lack of financial resources. (In the beginning, they held keggers to pay the electricity bills.) Their triumphs also included the breakout Oscar-winning 1996 hit “Sling Blade.”

The company’s demise provides one more sorry example of Hollywood’s failure to capitalize on the Internet as well as more depressing news for indie film lovers, who are witnessing the slow meltdown of a once-thriving genre. Companies such as Miramax, which once specialized in challenging fare, now increasingly focus their efforts on genre spectacles such as “Scary Movie.” Almost every studio now boasts an art-house division, but those divisions seem to specialize in arty soporifics like “Quills” rather than expectation-busting filmmaking like “Pulp Fiction.” And although twice as many art-house films were released last year than were a decade ago, they collectively grossed only $220 million, about $40 million less than in 1990.

Now Shooting Gallery’s creditors are lining up around the block. Forty-five have already sued Shooting Gallery, ranging from its bank and law firm to former employees, former film associates, landlords and leasing companies to the mother of Shooting Gallery executive C.J. Follini, who lent the company $500,000.

There are allegations, filed in a lawsuit by a former member of the board of directors and reiterated by former employees and investors, that Carlis had taken money private investors believed they were putting into films and funneled it into the Internet expansion, a charge Carlis denied both to The Times and in a response to the lawsuit filed with the court earlier this month. There are also significant differences in the independent audits released by Shooting Gallery to investors and the independent audits later performed at the behest of Itemus, and filed with the government. For instance, according to the 1999 Shooting Gallery audit by the Maryland firm Reznick, Fedder & Silverman, the company had a net loss of $2 million. The Itemus audit, by Deloitte & Touche, showed Shooting Gallery had a net loss of $23 million in 1999.


“Everybody’s mad at the auditors,” said Kathryn Wilde, president of the New York City Investment Fund, a private entity that lent Shooting Gallery $2.5 million to renovate its Gun for Hire production facilities. “There was no warning that the parent company was in the financial state that it was in.”

A representative for Reznick, Fedder & Silverman said that the company declines to comment. Shooting Gallery Co-Chairman Meistrich did not return phone calls, nor did Itemus’ Jim Tobin or several members of the Itemus board. In an interview for this story, Carlis, who feels he’s been made a scapegoat for collective decisions by the company, defended himself and his actions vigorously.

Interviews with 30 former employees, associates, and investors along with allegations made in lawsuits, internal company documents and later public filings by Itemus suggest that the demise of Shooting Gallery was not simply another dot-com or indie film casualty, the result of good intentions torpedoed by a terrible business climate. Indeed, they describe a sinkhole that managed to absorb millions and millions of dollars.

Unlike most indie producers, Shooting Gallery successfully tapped Wall Street and was awash with rich bankers and brokers wanting to put their excess dollars into celluloid dreams.

There were investors who plowed millions into limited liability companies, set up for each film, as well as two investment funds. A group of “angel” investors, among them Wall Street powerhouses Henry Kravis and Robert Lessin, purchased $11.9 million in preferred stock only a year before the company went belly-up.

“You cannot blame this financial disaster on the dot-com bust,” said investor Donald C. Carter, who said he lost $28 million on Shooting Gallery. “This company would have gone bust with or without the Internet. Their financial statements turned out to be a blueprint for disaster.”


Carter is hardly a neophyte investor, having once driven fear into the heart of Wall Street as the head of the Carter Organization, one of the leading proxy solicitation firms lobbying shareholders during the takeover battles of the 1980s. He’s hardly the only savvy financial type embroiled in the Shooting Gallery morass. The board includes Keith Abell, managing partner of Greenwich Street Capital Partners, and Peter J. DaPuzzo, co-president of institutional equity sales at the New York brokerage house Cantor, Fitzgerald & Co.

According to the lawsuit filed by DaPuzzo, the investors were “promised a priority 130% return on their investment,” meaning the investors would get “the first 130% of revenues over the cost of the film.” After that, all the profits were to be split equally between investors and talent. Carlis insists that the 130% figure was never a promise, merely a goal the company hoped to achieve.

Meistrich went so far as to brag to Variety that one of his prime fund-raising tactics was to hire the well-heeled progeny of New York’s elite. His staff included such people as Robbie Kravis, son of Henry Kravis; Joseph DiMartino, son of the chairman of the Dreyfus Family of Mutual Funds, and Peter T. DaPuzzo, son of board member Peter J. DaPuzzo. The younger DiMartino, in fact, not only invested money, but became the co-president of the interactive group.

“We baby-sit dysfunctional rich kids,” Meistrich told the trade paper. “If someone puts $250,000 in a film, we let their kid be a p.a. [production assistant].”Although Shooting Gallery executives walked and talked like mini-Masters of the Universe, the fare they promulgated was often just the kind of thoughtful, ungimmicky films that seem increasingly rare in today’s whammy-oriented marketplace. Unfortunately, their hits became increasingly rare, as they dreamed--very publicly--of being more successful than Miramax’s Harvey Weinstein.

Making movies “never seemed to be the first priority,” said indie expert John Pierson, author of “Spike, Mike, Slackers & Dykes: A Guided Tour Across a Decade of American Independent Cinema.” “Larry was all about building an empire.”

The company’s first successful film was 1992’s “Laws of Gravity,” a gritty “Mean Streets”-like saga about a pair of Brooklyn thieves and their girlfriends. The film, directed by Nick Gomez, cost $35,000 and was shot in 12 days.


“The $35,000 probably came from Larry’s family,” Gomez said. “There was some shadowy person named Tom and we always thought it rhymed suspiciously with ‘Mom.’ It was a big mystery. We didn’t care. We were young and stupid and just wanted to make a movie.”

Shooting Gallery sold the film for more than $500,000 to entrepreneur Chris Blackwell, who released it through RKO Pictures. Almost immediately, the company began to swagger. “They were just guys full of guy energy,” said Pierson, who sold the movie on the company’s behalf. Pierson describes visiting the firm’s offices, then on lower Broadway in Civil War photographer Matthew Brady’s former studio (from which the company got its name). “It was a hotbed of ‘Let’s put on a show’ activity,” Pierson said. “It had a very macho kind of guy quality.”

In 1996, Shooting Gallery landed a big score, one of those outsize successes that make the whole indie business plan look good. The film was 1996’s “Sling Blade,” which went on to win an Academy Award for writer-director-star Billy Bob Thornton. The tale of a mentally handicapped man imprisoned for hacking up his mother was made for $1.85 million and sold to Miramax for $10 million. “Sling Blade” put Shooting Gallery on the map, particularly with Wall Street investors.

“We ended up getting $40,000 back,” said Tom Remien, an investment banker at Brean Murray & Co. who put $10,000 into “Sling Blade.” For Remien, the company’s presentation was impressive. “They said, to date, only one film they worked on lost money. Their approach was to really manage costs and do small movies for a reasonable amount of money. The worst-case scenario, you’d get your money back. They didn’t promise that, but that was their target.”

It’s notoriously hard to make money in independent films, and other film people who saw the pitch letters were more suspicious. “There was a letter they sent soliciting funds--this was after the time of ‘Sling Blade.’ It was Steve Carlis’ work. Among other things, it said they had recently secured a home video deal with Disney that was the most lucrative video deal in the history of the entertainment business,” recalls independent producer Peter Newman (“Smoke”), who read the letter. “The claims it was making about what they were able to do had people doubled over in laughter.”

Certainly, the company had difficulty repeating the extraordinary success of “Sling Blade.” Its follow-up was another Gomez feature, “Illtown” (1996). According to a former associate, Meistrich didn’t even bother to attend the buyer screenings at the Toronto Film Festival, preferring to retire to his hotel room and await phone calls from eager buyers. No one called.


Shooting Gallery wound up releasing the $900,000 film, which grossed only $54,780 at the box office. Its next film, “Niagara, Niagara” (1997), cost $1.2 million and garnered star Robin Tunney an award at the Venice Film Festival, but it grossed only $250,000 domestically at the box office.

Despite the films’ paltry box-office showing, Shooting Gallery still repaid investors such as Remien and Peter DaPuzzo their investments plus profits on these films.

“One thing the Shooting Gallery made sure to do was to keep their investors happy,” recalls Eamonn Bowles, who left his post as head of acquisition for Miramax to head up acquisition and distribution for Shooting Gallery. “They were very, very sensitive about that.”

Remien, nonetheless, declined to continue investing because Shooting Gallery began soliciting investors for “more money than I wanted to put in.” DaPuzzo, who became a board member, however, invested more than $1 million in the company’s various ventures.

Perhaps the biggest bugaboo facing the indie filmmaker is domestic distribution. Some independent films never see the light of day because they can’t find a buyer. When Shooting Gallery couldn’t sell a film to a major distributor, it released the product through a “rent-a-studio” deal with Artisan, in which Shooting Gallery paid for prints and advertising and Artisan received a 15% theatrical releasing fee.

That option, however, did not always bode well for the filmmakers. Richard Guay produced wife Nancy Savoca’s $3-million film “The 24-Hour Woman,” which was released in 1999. “The whole distribution thing was a disaster,” he said. “The movie was in 20 theaters and people didn’t know what it was. Nancy went to the local theater and found no poster, and they said they’d never been sent a trailer. She began calling around to other theaters, and they weren’t supplying trailers or posters to the theaters the movie was in.”


Shooting Gallery developed a profitable sideline in a business called Gun for Hire, which provided below-the-line services for films and commercials.

Meistrich continued to spin many grand plans. In 1996, he submitted a bid to New York City to build an $80-million back lot along the Hudson River. Then, in 1998, he announced plans to build the studio in New Jersey. Neither project materialized, although the company did lease a building in the West Village and launch the Gun for Hire Production Center, which provided much-needed production facilities for films being shot by such companies as Warner Bros., Viacom and Fox.

With an introduction from Remien, Shooting Gallery executives met with officials from the New York City Investment Fund, who lent them money for the renovation of the production center. Backed by blue-chip corporations and chaired by leveraged-buyout king Henry Kravis, the $50-million fund sought to improve New York City by creating jobs. “The facility was very much needed,” the fund’s Wilde said. “We were interested in making sure we didn’t lose film production activity for lack of having a production center.”

Kravis attended the launch of the production center and became one of the names Meistrich bandied about, going so far as to brag in print that he had the prominent financier on speed dial. (Kravis declined to comment for this story.) After the investment fund put in money, investors flocked to the company.

Still, by the late ‘90s, a decent little business in independent films seemed like a piddle compared with the astronomical sums of money being generated by the Internet. In 1999, Shooting Gallery decided to leverage its cachet in the independent film world into a position in the online world. Anticipating a broadband revolution that increasingly would bring live-action/real-time entertainment to the Internet, “SG seeks to leverage its unique infrastructure and content generation capabilities to become the leading provider of end-to-end broadband services,” declared an April 2000 private placement memorandum that was given to potential Shooting Gallery investors. Carlis supervised the Internet expansion.

“They did a 180 on their business plan,” Bowles said. “Their business philosophy was to be tight with the dollar. Then they saw people getting funding for half a billion dollars, and they tried to find that model. The idea was to build infrastructure, get their name out there and get huge investments. It was a strategy to raise the profile of the company so we could be a leader of the Internet economy.”


Within a year, Shooting Gallery boasted a nascent content channel, online production services and an interactive agency that did advertising and Web design. None of its ideas was particularly new, but executives hoped that the Shooting Gallery razzle-dazzle would extend into the new frontier. There was even talk of a clothing line, perhaps bolstered by the attention the company received when Monica Lewinsky attended one of its parties and was photographed wearing a Shooting Gallery hat.

For its online production portal, called Production 451, the company managed to raise $7.5 million from investors. According to internal documents and interviews, the portal earned absolutely no revenue in the last year of its existence. “They spent all this money outfitting a whole ad agency with all the machinery to do graphic work,” Bowles added. “But they had no clients except for internal Shooting Gallery people.”

The company also opened new Gun for Hire production facilities in Los Angeles, Miami and Vancouver, and went about updating the facilities with the latest equipment and technology. Despite the start-up status, the company shelled out a raft of six-figure salaries and further drove up costs by leasing everything from the editing equipment to the carpet under their feet.

According to the Itemus filings, salaries at Shooting Gallery nearly quintupled, from $2.5 million in 1999 to $12 million in 2000, while “general administrative costs” ballooned from $5 million to almost $21 million.

A number of former employees and investors say that Carlis handled all aspects of the company finances. “Larry [Meistrich] never had anything to do with the finances,” Carter, the investor, said. “All the finances and the raising of the money went through Steve. All the arrangements for making the movies went through Steve. Steve Carlis prided himself on being an absolutely anal person when it came to money.”

“Steve and Larry had a fairly difficult relationship,” said Ilario Pantano, a former vice president in the interactive division. “Steve was the brains of the operation, as opposed to Larry’s brawn.”


Carlis acknowledged that “in terms of investors, most of the people came to me. They felt more comfortable talking to me about the business side.” Yet Carlis said he never acted alone in making the prime financial decisions concerning the company. “All of these things were done by the officers and management of the company.”Carter had discovered Shooting Gallery when a neighbor in Long Island slipped a note in his mailbox asking if he wanted to invest in an independent film, “Illtown.” Carter was the kind of generous investor that indie producers dream of discovering. He quickly became the company’s prime investor. He even went so far as to pay for the company Christmas party and summertime bash, as well as lending money to Carlis and Meistrich personally so they could buy houses.

(According to internal Shooting Gallery financial statements, Carlis also borrowed more than $100,000 from the company to purchase a vacation property in upstate New York--money that was ultimately deducted from him as part of his exit agreement.)

Rather than investing in one particular film, Carter initially invested in the film fund and later purchased $10 million of company stock, heartened by the Reznick, Fedder & Silverman independent audits sent out by the company that showed a steadily expanding empire with assets growing from $16 million in 1997 to $36 million in 1998 and $48 million in 1999. (The later Deloitte & Touche audits say the company’s assets in 1999 were $27 million.)

Carlis also routinely sent letters to investors reassuring them about their assets. According to a lawsuit filed in New York, Carlis wrote to Peter DaPuzzo in July 1999 that the company had sold the foreign distribution rights to “Once in the Life” (starring writer-director Laurence Fishburne) for more than any of its prior films. A few months later, he sent e-mails stating that profits of at least 30% on “The Bumblebee Flies Anyway” (with Elijah Wood and Janeane Garofalo) and “The 24-Hour Woman” would be coming in 2000.

Steve Haft, who produced “The Bumblebee Flies Anyway,” and Guay, producer of “The 24-Hour Woman,” say they have never received accountings from Shooting Gallery about how their films performed, although both assume the films lost money. “Once in the Life” lost the company money, a former high-level employee said.

As the company branched out into the Internet, it ramped down it’s film production division. Four films were released in 2000, but only one was made for release in 2001.


And yet the money appeared to keep rolling in. More than $15 million was raised in two stock offerings. In 1999, the company also arranged for new loans with the French Natexis Banques Populaires specifically for making and distributing films. The expandable line of credit at one point ballooned to $20 million. Shooting Gallery collateralized the loan with the film library and the movies. Any revenue from the movies went directly to the bank.

“When the board of directors signed off on the credit facility with Natexis, the bank got a lien on everything we did,” Carlis said. The bank also garnered huge fees for its services. The audit conducted by Itemus showed that the bank was owed $12 million by the time Shooting Gallery closed its doors. Natexis Banques Populaires has filed suit against the company. Repeated calls to officials at Natexis by The Times went unreturned.

The company did have its much-vaunted film series, which was launched in 2000 with 12 films. The bank lent the company $200,000 for every film that appeared in the series.

With a practiced eye, Bowles picked out memorable art-house fare that had been overlooked by the studios, paid each filmmaker $25,000 total for theatrical and video rights, and promised them nationwide releases. The company persuaded Loews Cineplex to contribute the theaters (generally its least desirable spots, such as the Fairfax in L.A., which usually shows older films at bargain prices), and companies such as Heineken, Yahoo and Polo Jeans initially contributed a total of $1 million to pay for the first two weeks of advertising. If the film hit, Shooting Gallery picked up the rest of the promotional costs for a longer run.

The company immediately had a success with “Croupier,” which went on to gross more than $6 million at the box office, but Shooting Gallery’s share went directly to the bank.

“With all the Internet activity, we got marginalized,” Bowles adds. “We had very little money to spend on the films, to chase after their success.” By the third installment of the series, corporate sponsorship had fallen off dramatically. Bowles had only $12,000 to spend on advertising, even though the critically lauded Iranian film “When I Was a Woman” had fared better than “Croupier” in its first two-week run and even though the bank had lent the firm at least $1.2 million expressly for the series.


According to the lawsuit filed by DaPuzzo, “by the late 1990s, Shooting Gallery had greatly overextended itself into areas other than film production, with the costs of its expansion far exceeding its revenues.” It added that Carlis was “diverting revenues generated by and other monies allocated to the films to meet unrelated obligations of the company,” as well as “using for general operating purposes loans that were secured by film-related assets and that were earmarked to finance distributions to outside investors.”

Carlis denied all these allegations and added that “the bank loans were used for the production, development, and distribution of films. As long as we were taking care of our third parties, the rest was used for general corporate purposes.”

It’s unclear what criteria the firm used for paying back investors. According to his lawsuit, DaPuzzo received a small portion of his investment back on such films as “Once in the Life” and “The 24 Hour Woman,” which appear to have lost money, but none of his money back on “You Can Count on Me,” which was an indie hit.

According to the Itemus-released audit, film investors were owed $9.4 million at the end of 1999 and $5.5 million by the end March of 2001.

In the spring of 2000, the company’s officers were looking to sell the company. Board member and investor Keith Abell, a venture capitalist, recommended they enlist Tower Hill Securities, Inc. to serve as their investment banker. The head of Tower Hill, Evan Marks, also happened to be a Shooting Gallery investor.

Ziad K. Abdelnour, a former managing director of Tower Hill Securities who was asked by Marks to supervise the sale, said he introduced Carlis, Meistrich and their two lieutenants, Joe Tedeschi and Joe DiMartino, to 30 venture capital outfits. The idea was to separate the Internet side of the business from the film division because institutional investors rarely put money into film production.


When the company raised the last round of financing in June 1999, Shooting Gallery had been valued at $48 million, Abdelnour says. Yet some investors balked at paying even that much; one, for instance, suggesting that the firm was worth only $20 million. Nonetheless, Abdelnour managed to garner at least one significant institutional buyer.

On their own, however, the executives at Shooting Gallery had met with an executive from Itemus, a Canadian mining company that had recently transformed itself into an Internet incubator. Itemus was willing to value the company at $70 million.

Abdelnour advised them, however, to take the offer from the established player. “Their burn rate was in excess of a million a month. When a major institution offers you the same valuation as the last round, you should take the money and shut up,” he said. “They had no leverage. They thought they found a sucker in Itemus. Itemus was a public shell company. They had cash and no significant assets, and they thought Shooting Gallery was a good acquisition.”

“Itemus had a stellar management team,” countered Rob Ireland, a public relations representative for Compaq Canada, which had invested $10 million in Itemus in the middle of the Shooting Gallery purchase. “Tobin was a visionary. They were an incubator for 20 to 25 companies we wanted to be close to. The strategy was to tie in aspects of the Shooting Gallery with the other companies. Shooting Gallery had the ability to produce high-quality video for the Internet. That was the big draw.”

Almost immediately, the merger ran into problems. Almost every division of Shooting Gallery was bleeding money, and the Internet market was tanking.

After Carlis was forced out in December, about 100 people were laid off as the company tried to stem the flow of cash. “Given the opportunity, [Steve] could have kept the ship afloat,” insists Pantano, the former Shooting Gallery executive. “His departure was part of the undoing of the company. Unfortunately, Steve’s become a scapegoat.”


According to the Itemus documents filed with the SEC as well as interviews with former employees and associates, Itemus forwarded the company $14.9 million to keep going, as it tried to complete the merger. Shooting Gallery also solicited bridge loans in excess of $12 million from private investors, the last million deposited in the bank just days after Carlis was forced out. Meistrich was able to raise another $4 million from investors, including $2 million from Robbie Kravis and $1.1 million from Carter, to purchase an option to buy the film business from Itemus.

Despite the problems discovered with Shooting Gallery, Itemus nonetheless completed its purchase of the company, but at drastically reduced terms--$17.6 million in stock and a $3-million note for 100% of the company. It almost immediately cut off the supply of money to the company, and by the end of June, a weeping Meistrich told the 60 employees who remained that it was over. On July 31, Itemus, whose shares had plunged from a $1.22 high to about 5 cents, declared bankruptcy.

“There are decent brains here,” said Alan Farber, the bankruptcy trustee in charge of Itemus. “These were capable guys caught up in the storm of the Internet mania with gobs of money being thrown around. Shooting Gallery is messy from any point of view. Now that the business has collapsed, there’s uncertainty, doubt and accusations. We are told there are many claimants to the Shooting Gallery assets. They are all tiptoeing around the minefield.”

“Quite frankly, it’s an embarrassment to admit you invested in the Shooting Gallery,” said director Nick Gomez, whose film launched the company. “You’re going to give these guys money?” *