AY CARAMBA! : FILM ROMAN STRUGGLES FOR RIGHTS TO CREATIONS.

Byline: Dave McNary Daily News Staff Writer

Bart Simpson is getting mugged on Wall Street.

Or more accurately, the stock of Film Roman, Hollywood's largest independent supplier of animated TV shows and producer of ``The Simpsons,'' has been hammered since the North Hollywood company went public in October.

Investors in Film Roman's $33 million initial public offering have seen the shares decline since October, making it one of the poorest performing IPOs in recent years. Its IPO opened at $10; on Friday, the company's stock closed at $2.25, down 37.5 cents, matching its all-time low.

Ay Caramba!

Film Roman went public so it could use the money to own the characters it creates. That would allow the company to take advantage of the potentially lucrative market of character merchandising, just like Burbank-based Walt Disney Co. does with everything from Mickey Mouse ears to ``Lion King'' bedsheets.

Film Roman had been a well-established ``fee-for-services'' animator that essentially contracted out its work and thus surrendered the rights to it. In 1994, its last profitable year, the company earned $1.2 million on revenues of $36.2 million.

But it has been bleeding red ink ever since it began demanding the commercial rights to its characters. It lost $1.7 million in 1995 and an additional $850,453 in the first nine months of 1996.

In addition to seeing its stock ``crater,'' in Wall Street jargon, Film Roman warned last month that its yet-to-be-reported 1996 fourth quarter and its 1997 results would not meet expectations.

The new strategy has not worked yet because Film Roman's properties have not been able to draw high enough prices to make up for the production costs at a time when networks are not inclined to let smaller players retain licensing and merchandising rights.

``The big issue is how are smaller independent companies like Film Roman going to compete with the majors, particularly with Walt Disney now owning ABC?'' said David Davis, an entertainment analyst with investment bankers Houlihan, Lokey, Howand & Zukin. ``That's difficult for them to do, given the current environment.''

Reasons for optimism

There was good reason for optimism at the time of Film Roman's IPO - children's TV channels were increasing in foreign markets, a need dwarfed only by the already-enormous programming hole at U.S. networks such as ABC, NBC, Fox, Nickelodeon, UPN, WB, Sci-Fi and Comedy Central.

And merchandising from animated properties - the field Film Roman was just beginning to crack - was generating about $7 billion annually.

Unfortunately for independent suppliers like Film Roman, the networks have tended to program new services with their own libraries, and license fees to suppliers have been cut.

But in October, investors were swayed more by Film Roman's solid reputation, the prospects of a hit show and opportunities in foreign markets and merchandising.

Film Roman did not conceal its problems. They were spelled out in the prospectus, which, as a matter of legal protection, always contains the worst-case scenarios. In Film Roman's case, there were two particularly significant warnings:

``Broadcasters have recently begun to demand a greater percentage of the revenue generated from the exploitation of proprietary rights associated with programs which they license.''

``Since the company (Film Roman) has only recently begun to retain the proprietary rights associated with its animated programs, it has a limited history of operations and management experience related to the exploitation of such rights.''

Solid reputation dtpost

Film Roman, created in 1984 by veteran animator Phil Roman, has a solid reputation with a roster of shows including ``Garfield & Friends,'' ``The Mask,'' ``Bobby's World,'' ``The Critic,'' ``C-Bear and Jamal'' and ``King of the Hill.'' It has several international deals in place, including a three-year, $50 million agreement with Germany's Kirch Group for distribution rights in Europe.

``The company's biggest asset is Phil Roman because he's a really good creator of content,'' Davis said.

The soft-spoken Roman is an embodiment of the American dream. He grew up in the farmlands near Fresno and spoke Spanish until he started kindergarten. Inspired after watching Disney's ``Bambi,'' he decided at age 11 to become an animator and joined Disney in 1955 to work on ``Sleeping Beauty.''

He spent the next three decades in a wide variety of animation jobs before starting his own company.

Within the world of animation, he has a reputation for inspiring loyalty among his employees.

``Phil Roman has always been a gentleman, and I've never heard anyone in the business say bad things about him,'' said veteran animation writer Richard Mueller of North Hollywood. ``I've always felt that he hired good writers and good production people and treated them well.''

Costly cancellation

Film Roman's stock price declined in early February when the Fox network decided not to renew ``C-Bear and Jamal'' despite a top rating for its time slot. Wall Street analysts from the two brokerages that underwrote the IPO - Montgomery Securities and Donaldson Lufkin & Jenrette - suggested the cancellation stemmed from Fox's desire to produce shows itself that it could own rather than letting Film Roman own the merchandising and international rights.

``Fox appears to be prepared to sacrifice ratings to keep more of the upside,'' said Mark Manson of Donaldson Lufkin & Jenrette, who noted he was surprised by the decision. ``While we had stated that vertical integration among media and entertainment companies was a risk for independent producers, we had not expected that a network would cancel a top-rated series in favor of its own programming.''

Three weeks later, Fox renewed ``C-Bear,'' but Wall Street assumed it was at terms less favorable to Film Roman, and the stock has not recovered. Analysts who track the company have reached these conclusions:

The company has contracts for next season for ``Simpsons'' and ``King of the Hill'' with Fox and for a new show, ``The Blues Brothers,'' with the United Paramount Network, so it is not in a risky financial condition.

Donaldson Lufkin Jenrette's Manson has a target price of $8 within 12 months, while Montgomery Securities' Tinker believes it will hit $7, based on ongoing production without a hit show of its own.

With major studios owning or allying with animation producers, it may be a matter of time before Film Roman is sold.

``We believe this tightening of distribution outlets should result in the company's looking for a strategic partner and increases the likelihood that it may be sold,'' Tinker said. ``We would not be surprised if Fox/Saban emerged as a potential buyer as it ramps up production.''

Investment banker Lloyd Greif, who heads Los Angeles-based Greif & Co., said the Fox cancellation was a ``wake-up call'' to Wall Street investors in Film Roman.

``Even though Fox has now renewed the show, the stock hasn't recovered because people are now much more aware of the risks of the strategy of proprietary products,'' Greif said. ``There is still considerable upside, but that's not being reflected in the stock right now.''

Phil Roman said the company, which has 330 employees and occupies three stories of an office building on Chandler Boulevard, is exploring alliances. ``We're looking for any way to strengthen the company and any opportunity that will help us,'' he said in a recent interview.

No second thoughts

Roman said he has no second thoughts about the IPO. ``It made the company stronger and gave us a lot less to worry about,'' he said.

The typical license fee per show is $40,000, according to Roman. ``It got to the point we were creating all these great characters and not being able to exploit them to their full potential in merchandising and international distribution,'' he said. ``We're trying to look at the big picture. Merchandising can be very big if it's a hit show.''

The company owns all or parts of the rights to four of its current shows - ``Bruno the Kid,'' ``C-Bear and Jamal,'' ``Felix the Cat'' and ``Mortal Kombat'' - along with next season's ``Blues Brothers.'' Roman believes that his company can take advantage of the industry's move toward vertical integration with major companies having bought up most of the independents.

``The major studios tend to produce programs that all have the same look, and their shows are very expensive, so I think it will open up for us,'' he said. ``We don't have a particular style or look. It's important to look different from Disney.''

For now, Film Roman has a bit of breathing room as it develops programs to pitch for the 1998-99 season. If a network agrees to a project, the work will start early next year.

He said the loyalty of his work force is a major advantage even though competition for animators, fueled by Fox and DreamWorks SKG ramping up operations, has pushed up salaries.

``Animators have a great opportunity these days, but they keep coming back to us because they're drawn by things like `The Simpsons,' '' he said. ``I try to create the kind of environment that I would enjoy working in, and I think that shows in the work they do. It is a high-paying industry, and we keep having to adjust upwards, but we've been able to keep people for the last eight to 10 years.''

Roman said he has no regrets. ``When I started, I was happy to be doing just two half-hours a year,'' he said. ``What I'd like is for us to be a major player. It took a lot to get us here because the industry keeps changing. Hopefully, we'll still be there in a few more years.''

PLAYERS IN TV ANIMATION

Producer and programs currently airing or in production

Disney: ``Brand New Spanking Doug'' and ``Mighty Ducks'' on ABC, ``101 Dalmatians,'' ``Recess'' and ``Pepper Ann'' next fall

Bohbot Entertainment: ``Dangerous Dinosaurs'' next fall, ``Extreme Ghostbusters'' with Columbia TriStar next fall

Cartoon Network: ``Cow and Chicken,'' ``Dexter's Laboratory,'' ``Big Bag,'' ``Johnny Bravo'' and ``Space Ghost Coast to Coast,'' all for the Cartoon Network

Columbia TriStar: ``Jumanji'' on UPN, ``Project Gee.K.er'' on CBS 

DIC Entertainment: ``The Wacky World of Tex Avery,'' ``Mummies'' next fall

DreamWorks: ``Invasion: America'' for WB next fall

Film Roman: ``Simpsons,'' ``C-Bear and Jamal'' and ``Bobby's World'' on Fox, ``The Mask'' on CBS, ``Mortal Kombat'' for USA Network, ``Blues Brothers'' next fall for UPN

Fred Wolf: ``Budgie, the Little Helicopter,'' ``The Fantastic Voyages of Sinbad the Sailor,'' ``Dino Babies''

Harvey: ``Casper,'' produced with Universal on Fox

HBO: ``Spawn'' in May, ``Spicy City'' in July

Hyperion: ``Life With Louie'' on Fox, ``Happily Ever After'' on HBO

Klasky Csupo: ``Rugrats'' for Nickelodeon

Marvel: ``Spider-Man'' on Fox, ``The Incredible Hulk'' on UPN, ``The Silver Surfer'' for Fox in the fall

MTV: ``Beavis and Butt-head,'' ``Daria'' for MTV

Nickelodeon: ``Angry Beavers,'' ``Kablam!'' ``Hey Arnold'' on Nickelodeon

Saban: ``X-Men'' on Fox, ``The Mouse and the Monster'' and ``Bureau of Alien Detectors'' for UPN

Sunbow: ``The Tick'' on Fox and Comedy Central

Universal: ``Wing Commander Academy'' for USA; ``VOR-Tech'' in syndication

Warmer Bros: ``Adverntures of Batman and Robin,'' ``Animaniacs,'' ``Superman'' for WB

ANIMATED MOVIES IN THE WORKS

Disney: ``Hercules'' in June, ``Mulan,'' ``Tarzan'' and ``Bugs'' in 1998, ``Fantasia Continued'' in 1999, ``Kingdom of the Sun'' to be announced 

DreamWorks: ``Prince of Egypt'' in late 1998, ``El Dorado: City of Gold`` and ``Ants'' in 1999, ``Shrek'' to be announced

Fox: ``Anastasia'' in November

Paramount: ``Rugrats: The Movie'' in 1998

Warner: ``Cats Don't Dance'' in 1997, ``The Quest for Camelot'' in late 1997 or 1998, ``Iron Man'' to be announced.

CAPTION(S):

5 Photos, Box

Photo: (1--Color) Phil Roman's firm, Film Roman, has been losing money ever since it began seeking commercial rights to its characters.

Hans Gutknecht/Daily News

(2) Phil Roman signs autographs fro students touring his studio, Hollywood's largest independent supplier of animated TV shows.

Hans Gutknecht/Daily News

(3--Color) No caption (Butt-head)

(4--Color) No caption (Batman)

(5--Color) No caption (Dalmatians)

Box: Players in TV Animation (See text)