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 \o7 are\f7 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.
