filmroman/30″/mike1st/mark2nd DAN TURNER Staff Reporter Film Roman Inc., the North Hollywood-based animation company that churns out “The Simpsons,” has a dubious distinction: It launched the most disastrous initial public offering in L.A. County last year. While most other 1996 local IPOs have appreciated in value since their initial offering, Film Roman stock has gone from its initial $10 a share to between $2.50 and $3 in recent trading. Analysts say investors were lured into buying a very risky stock at a price that didn’t accurately reflect the company’s true value. The offering price was pegged to the value of future assets that may never materialize. “Animation is a hot area right now, but what makes it hot is companies like Disney that constantly churn out ‘Lion King’ characters. This is Film Roman, not Disney. There’s a big difference,” said Lloyd Greif, president of downtown L.A. investment bank Greif & Co. Besides “The Simpsons,” the longest-running animated show on television, Film Roman produces “Garfield & Friends,” “The Mask,” “Bobby’s World,” “The Critic” and the recently launched “King of the Hill.” Founded in 1984 by animator Phil Roman, Film Roman was a rare success story for most of its history, one of the few independent producers able to carve out a substantial niche in an industry dominated by firms owned by such giant entertainment companies as Walt Disney Co. and Time Warner Inc. But even before Film Roman launched its IPO last fall, there were signs of trouble. After steadily gaining in profits between 1991 and 1994, the company lost $1.7 million in 1995, according to documents filed with the Securities and Exchange Commission. It lost another $850,453 in the nine-month period ended Sept. 30, 1996. The losses were caused by the same factor that prompted company officials to go public in the first place a desire to change the way Film Roman does business. Since its founding, the company was a “fee-for-services” TV producer, meaning it was essentially an independent contractor for the various broadcast and cable networks that aired its shows. In fee-for-service deals, producers sell shows usually for about 110 to 115 percent of production cost, according to Film Roman Executive Vice President Bill Schultz. As part of those deals, Film Roman sold the rights to the shows and characters to the networks giving up potentially lucrative merchandising rights. In recent years, however, networks have begun to offer less money for fee-for-service deals. Although there are many more outlets for animated TV shows today than there were only a decade ago, the audience is fragmenting and decreasing. Fewer kids are watching cartoons, lured away by interactive CD-ROM games and the Internet. Meanwhile, the launch of such outlets as the Cartoon Network and Nickelodeon on cable has fragmented the audience, lowering market share and thus advertising revenues for the broadcast networks. Film Roman officials decided that, in order to expand, they had to own the rights to their own creations, Schultz said. Studios such as Disney have made a fortune by exploiting proprietary characters in consumer products, video games, theme park attractions, books and other media. Film Roman wants to do the same. But that process is expensive. Networks pay a licensing fee that only represents about 60 percent of production costs for shows they don’t own, Schultz said, and Film Roman began losing money in 1995 when it started working on proprietary shows. The $33 million in proceeds from the IPO are being used to pay down debt and finance production of proprietary cartoons. Wall Street got a taste of the strategy’s riskiness early this month. One of Film Roman’s first proprietary programs, “C-Bear and Jamal,” was not renewed for next season by the Fox network, even though it was the top-rated show in its Saturday morning time slot. Film Roman’s share price plunged 39 percent after that decision, which sources say may have been based on Fox’s desire to air a show to which it owns all licensing rights. Film Roman subsequently announced it would report lower-than-expected results for 1996 and reduced its goals for 1997. The final 1996 figures are due to be reported this month. Schultz said the lowered expectations are due mainly to the company’s efforts to build an infrastructure for proprietary productions, not to the cancellation of “C-Bear.” “Any time a show is dropped like that, the property owners have the right to find another shelf for it somewhere else,” Schultz said. “We are aggressively looking for other opportunities for ‘C-Bear,’ and people are interested. The program doesn’t go away just because it’s rejected by one network.” According to Schultz, Film Roman has already signed licensing deals to exploit the C-Bear characters in consumer products, and he’s confident the show will find another home. But analysts remain troubled that Film Roman has yet to develop its own proprietary hit show. Complicating matters is the fact that many giant studios are buying up cable and broadcast networks and will likely give preference to shows produced by companies they own or have a partnership with. For example, Fox has a joint venture with West L.A.-based animation producer Saban Entertainment, and Disney, owner of the ABC network and the Disney Channel, has a majority stake in Burbank-based animator DIC Entertainment L.P. Most analysts seemed unsurprised at the drop in Film Roman’s share price, saying the stock was overpriced from the outset. One local analyst blamed investment bank Donaldson, Lufkin & Jenrette, the lead underwriter on the IPO, for downplaying the risks when pitching the stock to institutional investors. “They exaggerated the story on this stock, and shortly afterward, when the numbers didn’t materialize, people lost patience,” the analyst said. Bankers Brian McLoughlin and Paul D’Addario, who handled the deal for DLJ, did not return calls from the Business Journal. Despite the problems at Film Roman, analysts said it’s far too early to tell whether its new strategy will ultimately prove successful. “Film Roman has to make this big leap from being a job shop to being a Disney, and that kind of change doesn’t happen overnight,” said Greif. “I’m not saying I would bet against Phil Roman. It’s just going to be a hard row to hoe for a while.”
