Kleiman spends most of his time these days in meetings, on the phone, and booking flights -- all in a search for companies to acquire and for new capital to help him acquire them. Though he has a preferred order of acquisitions in mind, he recognizes the necessity of responding to opportunities as they arise, he says. He'll take them in the order in which he can get them -- assuming he can afford them. He would also like to expand the distribution business to television and video.
Filmstar has to raise more capital if Kleiman's ambitions are not to be frustrated. Its only significant equity infusion was the $2.2 million that came in the original private placement and IPO. There are some warrants outstanding, but they are not likely to be exercised unless the price of Filmstar's stock picks up. It has traded at slightly less than $2 a share, more than $2 off its post-IPO high of 4. With an investor loan of $350,000, the company bought a certificate of deposit that it used to collateralize part of the bank letter of credit it gave to the producer of Bethune. It sold part of the rights to pay for the rest. Recently, an investor group signed a letter of intent to drop $1.25 million into the company.
Currently, Kleiman is circulating a business plan in hopes of finding an underwriter to help him sell several million dollars in debt or convertible debt. Debt at this point would be preferable to equity, Kleiman says, in order to minimize equity dilution. The largest chunk of the money, if he can get it, will back the financing arm of the business. The ability to issue bankable paper to producers will make Filmstar a stronger player in the competition to acquire foreign rights to the big-budget, potential blockbusters that overseas moviegoers increasingly prefer.
The company's batting average to date isn't bad, apparent testimony to Kares's eye and Coy's sense of what the market will pay. "Every film we have acquired to date," Kleiman claims, "has been or will be profitable." Nonetheless, Filmstar's May 31 year-end audited financials show a heavy loss. While the company has written contracts worth, it says, $9.5 million, its auditors won't permit the company to claim these revenues until they are received. Sales for 1989 were $3 million with a loss of $961,000.
Almost everyone who moves to Hollywood gets star struck. Who doesn't want to be in the movies, given the chance?
Not he, Kleiman insists, in his fifth-floor Wilshire Boulevard office in West L.A., a few blocks short of Beverly Hills. Filmstar will not make movies. "I want a business that's very simple. I want one level of business we can control and predict and one level with upside potential that we don't have to put a lot of money into. I'm not afraid to deal with the mundane and make it exciting. I get thrilled with the opportunity to drive just a part of this industry."
For an update on this company, see Anatomy of a Start-Up Revisited: Try Harder, Part II
Research assistance was provided by Leslie Brokaw.
EXECUTIVE SUMMARY
THE COMPANY
Filmstar Inc., Los Angeles
Concept: One-stop supermarket of financial and marketing services for independent film producers, which would provide them an alternative to turning their movies over to studios
Projections: Expected May 31, 1989, year-end loss of $961,000 on revenues of $3 million; projected 1990 profit of $520,000 on revenues of $9.7 million
Hurdles: Getting the capital required to (1) acquire the operating subsidiaries the concept calls for and (2) back the loans and letters of credit it must extend in order to attract independent producers, especially those making the A movies sought in foreign markets
PROJECTED SALES AND PROFITS
($ thousands) 1989 1990 1991
Fiscal year Projected Projected
Revenues* $2,976 $9,703 $17,186
Net income (loss) (961) 520 1,545
Cash, year end 581 2,680** 1,356
* In 1989, 82% from distribution services; in 1990, 95% from distribution services; remainder from payroll services
** Assumes $5 million private debt offering, FY 1990
THE FOUNDER
Harlan Kleiman
Chairman and CEO, Filmstar Inc.
Age: 49
Source of idea: Attempted to produce a movie in Hollywood and was disgusted by the terms the studios tried to exact
Personal funds invested: $650,000
Equity held: Nearly 30%
Other businesses started: Long Wharf Theatre, regional professional theater in New Haven; Caravatt-Kleiman Inc., video software; Leslie Kleiman Inc., pay-TV video production
Typical workweek: 65 hours
Outside board of directors: Yes
What I lose sleep over: Running a publicly traded company
PRODUCER'S CHOICE
Why movies make money (or don't)
An independent producer can get a movie financed in one of two ways: (1) sell the movie to a studio, which pays the producer a flat fee, typically 5% of the negative cost and a percentage of the profits, and assumes liability for all costs; or (2) use services such as those offered by Filmstar to make and market the movie, retaining ownership, eventual profits, and also liability for losses, if any. Here's how a ledger might look for making the same film under each scenario:
COSTS ($ thousands) Filmstar Studio
Negative cost 1 $8,000 $10,000
Prints and advertising 4,000 4,000
Finance charges 2
Two-year production loan at 11% 1,760 2,200
3% bank-commitment fee 240 --
One-year loan for prints 560 440
and advertising 3
15% commitment fee 600 --
SUBTOTAL 15,160 16,640
15% studio overhead charge -- 2,496
