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REAL CLIFFHANGER : Will New World Be the Next Financial Horror in Hollywood? : New World Entertainment

March 06, 1988|KATHRYN HARRIS | Times Staff Writer

New World Entertainment had a close shave last fall when it lost a $508-million bid for Kenner Parker Toys.

The acquisition would have added extraordinary debt for the brash Los Angeles company on the eve of the October stock market crash, creating a nightmare befitting some of New World's B-movie titles: "Deadly Harvest," "Uphill All the Way," "Cut and Run" and "Beyond Therapy."

By the time New World made its Kenner Parker bid, the company was already saddled with $304 million in debt and had more cash flowing out of its coffer than in. The company posted a $6.4-million loss in the third quarter and is expected to report a loss for the year.

Now--even without Kenner Parker--New World faces a pivotal year.

"I understand they have very serious financial problems at this time. Their survival is very much in question," said Joel H. Reader, an L. F. Rothschild investment banker who once helped the company raise $300 million but resigned from New World's board last month. "If you look at that third quarter, they were burning cash at the rate of $1 million a day."

"They need to do well at the box office. If they don't, they're going to be in a very difficult situation," said Roy W. Hong, a First Boston securities analyst who changed his pre-crash "buy" recommendation to a "hold."

The harsh scrutiny comes less than two years after Wall Street embraced New World as one of the most enticing of a dozen or so independent movie companies. Analysts and investors were captivated by New World's clever executives, who had business plans to match their sweeping ambition.

Harry Evans Sloan and Lawrence L. Kuppin are the young entertainment lawyers who (with producer Larry A. Thompson, who soon bowed out) acquired the New World name and certain distribution assets five years ago for a mere $2 million from the company's founder, Roger Corman. At the time, New World was the sole remaining national distributor of low-budget exploitation films, and the new owners hoped to capitalize on that franchise.

None of their films have turned into blockbusters, however, and the cost of producing and promoting films has continued to rise. With the exception of "Soul Man," a 1986 release, none of New World's films under the new regime has topped $20 million at the box office.

In the home-video market, New World prospered at first on the release of older films, since it had acquired home-video rights (but not the actual film library) to about 100 movies owned by Corman, who had launched New World in 1970. In the past year, the home-video stores' appetite for B titles has waned, hurting New World's prospects in that otherwise robust market.

The company also took a costly plunge into television production that won't pay off unless--and until--shows such as "Crime Story" and the upcoming "Wonder Years" are renewed by the networks for enough episodes (about 80 hours) to sell later as reruns to local stations. Until then, New World must bear the cost of deficits on the shows, since network fees seldom cover the full cost of producing pilots or hour-long dramas.

Markets Have Changed

Even the company's acquisition of Marvel Entertainment has lost some of its bloom because of a severe decline in demand for new cartoon shows in weekday programming for local television stations.

"All of their markets changed on them. Low-budget movies are not working out, and the television market changed on them, including animation," Reader said, not without sympathy, since his firm acted as New World's investment banker until last year. Rothschild helped raise $300 million on Wall Street in an 11-month period, beginning with New World's initial stock offering in 1985.

The money was earmarked for acquisitions, Reader said, but New World failed "to acquire a company that could help them service (the) debt."

For the first nine months of 1987, New World paid net interest of $27.7 million. Later this year, the company will also owe $36 million in non-refundable advances to the owners of "Highway to Heaven," a one-hour TV series, for previously negotiated rights to distribute reruns to television stations in the U.S. market. Discussions are under way concerning the payment, however, according to industry sources.

In interviews, New World executives said they are trying to staunch the cash outflow, but they insist that they're not selling major assets or putting the company itself up for sale.

"We are experiencing some short-term problems, basically in cash flow. I think we got too big too fast. I think we're doing some belt-tightening; we're not ashamed to say we're doing belt-tightening," said Robert Rehme, the company's chief executive for the past four years, who shares the co-chairman title with Sloan and Kuppin.

Employment at New World and its subsidiaries has declined by 66 people to 678 since the beginning of 1987, according to figures supplied by the company.

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