Cannon Bid as Major Studio Is Cliffhanger : Firm’s Future at Risk in High-Stakes Gamble

If they made an autobiographical film, they might call it “The Israelis Who Invaded Hollywood.” They would, of course, “protect the downside” by pre-selling the television and home video rights to what would qualify as the latest action thriller from the upstart Cannon Group.

“They” are the irrepressible Menahem Golan and Yoram Globus, Cannon’s chairman and president, respectively, and owners of about 40% of the company’s stock.

Long treated as outsiders by Hollywood’s power structure, the two cousins have bootstrapped what was a debt-ridden independent movie company when they took control of it in 1979 into a “mini-major” studio that is producing 35 movies for theatrical release this year.

While some--such as “Invaders from Mars” and “Texas Chainsaw Massacre II”--are in the old action-film genre that made Cannon successful, more and more are so-called mainline pictures.

Golan’s and Globus’ Cannon has become a darling of Wall Street and the entertainment press here and abroad. In full-page ads in trade papers, the company recently hailed itself as “the company of the future.”

Now, the company is attempting a high-stakes gamble. It has nearly doubled the number of films it makes--some with budgets and big stars matching those of the major studios, and has bought a British entertainment giant with hundreds of movie screens and its own studio.

Nonetheless, a growing number of observers believe that the long-term success of Cannon is still very much in doubt, given the huge new debt it has taken on to finance its gamble and its recent lack of film hits.

Star-struck Wall Street investors have provided plenty of money to finance the big plunge by Golan and Globus. Underwritten by the New York investment banker Drexel Burnham Lambert, Cannon raised a handsome $207 million from public investors just last spring.

In addition, domestic and foreign banks led by First National Bank of Boston have made available about $100 million in revolving lines of credit.

And Cannon has managed to report rising corporate profits recently even though its movies have for the most part been disappointments at the box office in the last year or so. Last week, the company reported a second-quarter profit of $5.7 million, up from $3.1 million the year before. For all of 1985, the company had earnings of $15.2 million, compared to $12.2 million in 1984.

Despite all the cash the company has raised, it disclosed last week that its working capital--the funds available for acquisitions and new film productions--had decreased to a negative $105.5 million as of June 28 from a positive $32.7 million a year earlier. The company hasn’t said what it intends to do about it, but observers say it might have to sell more stock or major assets.

Asked in a recent interview if the company had cash flow problems, Globus said, “We don’t have any problem.” But he said the company hasn’t made any decision on whether to seek to raise more money on Wall Street. “Right now, there is nothing on the agenda, I can tell you.” He said Cannon’s 1986 film production is completed. But to finance films planned for 1987, “we are going to our (bank credit) lines,” he said.

Informal SEC Inquiry

Meanwhile, Cannon disclosed last week that the Securities and Exchange Commission has begun an informal inquiry into the way in which the company accounts for its film costs and revenue. Those methods already had been a topic of discussion in Hollywood, and some experts have criticized Cannon’s accounting for possibly giving too optimistic a cast to the company’s financial picture.

“They keep reporting higher earnings on pictures that nobody goes to see,” observes Gordon Crawford, a senior vice president of Capital Guardian Research in Los Angeles. “They are fortunate to have a very forgiving Wall Street that keeps providing new capital to make films despite their spotty record.”

Meanwhile, since raising that $207 million in a debenture sale last spring and $100 million in earlier offerings, Golan and Globus have been on a corporate spending spree.

Cannon’s biggest expenditure by far was the $270-million acquisition last May of Screen Entertainment, formerly Thorn-EMI, a major British movie theater chain and movie studio with a large film library. Since then, the new division reported a sharply lower profit of $1.5 million for 1985, although Cannon has been selling theaters and licensing its new film library to cash in on its new acquisition.

The acquisition includes 106 theaters with 287 screens, making Cannon the biggest theater owner in England. “(We) stole the company--as much as we paid,” Globus boasts.

The purchase drew rave notices from some securities analysts, led by Lee Isgur of Paine Webber, but others have reserved judgment because of what they consider the high price.

Meantime, Cannon has been trumpeting grander and grander film projects, some with the higher price tags (and higher-priced talent) that Golan and Globus used to avoid.

Sylvester Stallone, for instance, got $12 million for starring in “Over the Top,” now being directed by Golan himself. And there are other expensive films slated for 1987, including “Superman IV” and the musical “Zorba.”

Although Cannon’s staple--action films such as those starring Charles Bronson and Chuck Norris--often have earned good money in the past on modest filming costs, Cannon’s recent action pictures with big production costs (including “Runaway Train” with Jon Voight and “Invasion USA” and “The Delta Force,” both with Norris) have had relatively modest success.

Apart from problems with its own films, Cannon also suffered on a major independently produced film it had contracted to distribute, the highly touted “Pirates” by Roman Polanski, which sank without a trace at the box office earlier this summer.

Meanwhile, Cannon’s stock lost 25% of its value in July after a long run-up. It had doubled in value to $45.50 a share over the past year. But the shares dipped to $33.25 by the end of July, rose to the mid-30s and then fell back to $30.125 last week after the SEC inquiry was disclosed.

Needs Some Hits Soon

Some analysts now believe that Cannon must soon produce some hits to retain its credibility on Wall Street. “(Cannon’s) argument is that they have no risk (due to pre-selling),” says one. “But they do. They have huge interest to pay. Movies have to make a profit, they can’t just break even.”

For his part, Globus isn’t worried about Cannon’s future. “We don’t need a hit,” he declares, adding with a smile that one would be “nice to have.”

“If we ever do have a hit, the earnings will jump 120%,” he says. “Sooner or later we will have a blockbuster. . . . It must come, by the odds. Even when you play roulette, it comes.”

And in the meantime? “For us, $20 million (in box-office receipts) is a very big success, compared to the (major studios), which think that is a joke.” However, very few of Cannon’s films in the last two years have approached $20 million in box-office receipts. The company’s share of the receipts generally runs 35% to 45%.

Globus recites the company’s sacred strategy: (1) Pre-sell “ancillary” rights to show films on television and home video throughout the world to cover shooting costs of its films, and (2) hold average costs to about $5 million. (What that $5 million doesn’t include is marketing costs, which often run another 50% or more. And the “average” includes a number of very small films of $1 million or $2 million that balance the much more expensive movies it is now making.)

Took Quick Writeoff

Cannon decided to write off its losses on “Pirates” quickly in the second quarter, Globus said, adding ruefully:

“We make mistakes. ‘Pirates’ was one of them. . . . We will lose $1 million or $2 million. . . . It hurts. It teaches us a very big lesson that we should not even take for distribution a picture which we don’t have all the rights.”

An intensely talkative man who at 42 has a salt-and-pepper mustache and beard, the Cannon president sandwiched the interview into the hectic activity that pervades his top-floor office at Cannon’s new $15-million headquarters in an office building at the intersection of San Vicente and Wilshire boulevards.

Earlier in the day, he presided at a special stockholders meeting at which anti-takeover measures were approved by what he called “big majorities.” Globus called the vote a compliment from major institutions that hold blocks of Cannon stock.

“(Wall Street) is very much with us, and, more than this, big institutions are supporting Cannon; and believe you me, we are meeting them more than once a year and more than three and four times a year.”

Golan, meanwhile, has been immersed in directing the Stallone movie and didn’t have time for an interview with The Times.

The subject of “Over the Top” is arm wrestling, which seems a natural for master negotiators Golan and Globus, who have attained a reputation for creative arm twisting.

The rotund 56-year-old Golan and his lean first cousin, Globus, go together like pastrami and rye. Their heavily accented English recalls to some observers such early day moguls as Sam Goldwyn. They don’t appear to mind the comparison. Annually, they are a center of attention at the Cannes Film Festival, where they often appear at press conferences in matching sweat suits emblazoned with the Cannon insignia.

Won Several Nominations

Before Golan came to the United States in 1978, his Israeli films received four Academy Award nominations as best foreign film. (He never won.) He also negotiates deals and helps decide matters in the business domain while Globus usually acts as chief operating officer.

They operate so closely that they are often thought of almost as a single entity. They remain Israeli citizens, and their families still live in that country. Although they were successful producers in Israel, they arrived in Hollywood with little money and bought control of Cannon on a shoestring by using their commissions from marketing films to pay for the stock.

Although they often point to their (by Hollywood standards) low salaries, Cannon’s 1985 annual report to the SEC shows that the company paid $835,722 total cash compensation to each of them.

But it’s not the entrepreneurs’ flamboyance or compensation that has troubled several securities analysts recently. The chief worry of Cannon’s critics is its style of accounting for film costs and revenue. In amortizing its films, critics say, Cannon makes optimistic estimates of how much revenue a movie will produce. In fact, such accounting procedures can make the difference between a profit or a loss for a movie company, these analysts say.

Firm Selling Short

The Menlo Park, Calif.-based investment firm Stockbridge Partners has been a major short seller of Cannon stock since last year. (Short selling is a method by which an investor borrows shares of a stock and sells them in anticipation of a price drop, at which time he can buy back the shares, return them and make a profit.)

Stockbridge’s Kurt Feshbach explains the firm’s position: “Our analysis indicated that (Cannon) couldn’t have made money on movies after interest and overhead.”

But, he said, by writing off less on a film in earlier stages, Cannon may have been able to make itself look more profitable. And, he adds, a company’s rapid growth could mask the effect of poor box-office results.

Others note, however, that the movie industry as a whole is often slow to recognize the financial consequences of its flops. Studios frequently take big writedowns (and report the consequent losses) only after a management change. Or alternatively, they may wait until a box-office hit comes along so they can write off the “junk” on their balance sheet without reporting red ink on the bottom line.

Responds Globus: “This management is already seven years (in office), thank God. You didn’t see us in one quarter writing off major things. So how many years we could have, what do you call it, manipulated?”

He said Cannon amortizes the cost of films over three years, while the movie industry tends to amortize over five years.

“Even if we have a mistake, it’s cleaned in three years,” Globus said. “I want to see the industry if they adjusted to our method.”

Allow Great Latitude

Some Wall Street analysts note that accounting rules set up for all film makers allow great latitude for personal judgment in forecasting film revenue. Globus says Cannon’s strategy of covering production costs by selling ancillary rights before shooting begins protects the company from serious miscalculations. Major studios normally do not sell ancillary rights until filming is complete.

But critics contend that while pre-selling probably does cover the bare cost of film making, Cannon often doesn’t receive enough in box-office receipts to cover its substantial costs for prints and marketing--often $3 million or more per film. And where, they ask, will the company get the money to cover its administrative overhead, including interest costs on its vastly increased debt of about $400 million?

Also, questions are raised about whether those who now pre-buy ancillary rights to Cannon films may grow disenchanted because of the recent mediocre box-office results.

Not so, Globus insists. “If they have good moneymaking pictures and they have them in quantity, it’s like a big hit--and better.”

Despite the critics, there is still considerable enthusiasm for Cannon along Wall Street. One of the biggest fans is respected analyst Lee Isgur:

“The real story of Cannon is basically how much of a jewel is Screen Entertainment (the British acquisition) and how fast they can turn it around. . . . No one else had the audacity to buy it.”

Adds Harold Vogel of Merrill Lynch: “If they can manage them (their assets) properly over the next few years, they will do quite well.”

The Legend Grows

Among their Hollywood peers, the legend of Golan and Globus grows. Tales abound of sharp dealing, slow payments and premature ballyhooing of its deals in full-page ads in trade papers. Cannon has been the subject of scorn and lawsuits; its business methods are legendary.

Even though they have attempted to beef up management in the last year, Golan and Globus are Cannon, according to many who have dealt with and worked with them. That means that opinions of the company within the movie industry nearly always amount to opinions of its two top executives.

High-ranking officers at two major Hollywood studios, who declined to be identified, dismiss Cannon as a serious competitor. One called it a potential “house of cards” because of its high debt, increased film budgets and lack of hits. The other observed that Cannon doesn’t have a single film project that he covets, adding that this is unusual in the highly competitive film market.

Globus blames jealousy for the adverse comments about Cannon in the industry, but he makes a slight concession:

“We are not perfect people. But we are doing everything in good faith and integrity.”

The dozens of suits filed against the company in recent years are not at all unusual in a litigious industry, Globus maintains.

Dustin Hoffman Irked

Actor Dustin Hoffman’s reaction is an extreme instance of Hollywood anger over a bit of Cannon chutzpah.

After Cannon placed double-page ads in Daily Variety and the Hollywood Reporter last March trumpeting its signing of Hoffman to star in a film named “La Brava” without his prior approval, the actor canceled the deal on grounds that Cannon had breached their contract.

Weeks later, Globus was quoted in Variety as maintaining that the contract was binding and that the company was “doing the picture with Hoffman--period.”

The actor’s attorney, Bert Fields, says Cannon “still calls” Hoffman from time to time seeking to open negotiations. Fields added that Hoffman turned his back on “the largest deal I have ever heard of” for an entertainer.

He declined to be specific but said one published report of a $6.5-million salary plus 22% of the film’s profit was “relatively modest” compared to the actual terms.

Fields also filed suit last May against Golan and Globus on behalf of Gladden Entertainment, headed by producer David Begelman.

Although the parties settled the case earlier this month for undisclosed terms, some language of the suit summarizes a view of Cannon that has cropped up repeatedly in the movie industry.

The complaint alleged that Golan, Globus and Cannon “have become known for bad-faith business practices and the failure or refusal to perform their contractual obligations.”

Claimed ‘Coercive Scheme’

The suit in Los Angeles County Superior Court is an outgrowth of Cannon’s deal to acquire Screen Entertainment, which had contracted to co-finance Gladden movies. The suit accused Golan and Globus of a “coercive scheme” to alter the deal’s terms.

Attorneys for Golan and Globus did not file an answer before the suit was settled.

Asked about the suit, Globus said, “Our track record shows we kept deals even when we didn’t like them.”

Producers, directors and actors (sometimes their agents) have been quoted publicly over the years about alleged grievances against Cannon, including legendary penny-pinching by Golan and Globus on ordinary business expenses.

An agent recently told of a producer’s frustration as he tried in vain to get Cannon to provide the lavish expense allowance offered by the big studios for lunch meals during the making of a film. The producer had sought a low six-figure sum to feed the crew, but Golan and Globus--who often eat sandwiches in their offices at lunchtime--wouldn’t go along.

Recently, according to columnist Army Archerd in Daily Variety, Cannon shipped a crate of fabricated skulls from Texas, where they were used in “Texas Chainsaw Massacre II” filming, to the filming site for its “Journey to the Center of the Earth.” And a Las Vegas Sun columnist took Cannon to task several weeks ago for making “more enemies than even Rambo could handle” while shooting “Over the Top.”

According to this account, the movie folks recruited hundreds of volunteers to act as unpaid extras at an arm-wrestling sequence by promising to donate $5 to their favorite charity. The charity sign-up booths were at the rear, while other booths where extras were required to sign up for free lunch and breakfast were at the opposite end of the set.

Eschew Lavish Ways

Globus and Golan eschew the lavish ways of traditional Hollywood, and they obviously expect anyone who makes films for them or works for them to do the same.

Recounting his and Golan’s coming to America to make pictures, Globus said:

“Our philosophy was, America conquered the world by the movies. . . . We had the idea to produce pictures with normal, logical, average cost and have these stars--we’d make the shareholders rich, and we’d make ourselves rich.”

They would pre-license the rights to their pictures around the world, he said, “cover the downside, dream on the upside and run it as a business.”