Business: RKO Primer

Fabulous are the stories of investors who got in on the ground floor of a new company, were lofted to riches by stock splits, stock dividends. Not related so loudly are accounts of the stockholder who got in on the ground floor, soon found himself in the basement, then the subbasement. Such a story could be written around Radio-Keith-Orpheum Corp. in seven chapters.

Chapter 1. RKO was formed in October 1928 as a holding company for Keith-Albee-Orpheum Corp., F. B. O. (Film Booking Office) Productions, Inc. and a half-dozen other subsidiaries engaged in vaudeville and cinema businesses. RKO then embarked upon an expansion program, acquiring theatre properties at top prices at a time when the public’s desire for vaudeville was diving downward. To speed its entrance into the “talkies,” RKO issued Class B stock (500,000 shares), gave it to Radio Corp. of America in exchange for rights to RCA Photophone sound-picture equipment and special considerations from its subsidiary, National Broadcasting Co., for RKO time on the air. Radio’s president, David Sarnoff, became RKO’s chairman, and Radio acquired a 20% interest in RKO.

Chapter 2, Under this arrangement RKO made $1,669,000 in 1929, $3,385,000 in 1930, although nothing was paid on RKO’s stock. For $4,700,000 in cash and notes, RKO early in 1931 bought the production and distribution facilities of Pathe Exchange, Inc., whose head had been Joseph Patrick Kennedy, later Securities & Exchange Commission chairman. The deal gave RKO a newsreel, enabled it to plunge further into a cinemaking program which proved costly as the depression deepened.

RKO earnings looked rosy for the first quarter of 1931, but additional funds were acutely needed by autumn, and something had to be done to avoid receivership. The Class A stock which sold as high as $50 per share in 1930, was selling at $12 by October 1931, later fell to 75¢.

Chapter 3, To stave off collapse, a recapitalization plan was put forward in November 1931, providing for reduction of capital stock by 75% and the issuance of new stock and ten-year 6% debentures totaling $11,600,000. Stockholders, principally Radio, approved of the plan, which gave them one new share for four old ones.

There were screams from smaller stockholders, resulting in sudden attention from the Senate Banking & Currency Committee, but when the din died Radio (underwriters of the debentures) had more than one-half the stock and over three-quarters of the debentures, an investment eventually carried on Radio’s books at $15,000,000. In 1932 NBC President Merlin Hall Aylesworth became RKO president.

Chapter 4— Despite the money Radio put into it, poor pictures, fancy leases and a mammoth funded debt got RKO eventually. The investments in subsidiaries were written down some $8,000,000 and RKO finished 1932 with a loss of $10,600,000. quickly plunged into receivership.

Chapter 5. Next year the company did better, ending 1933 with a net loss of $4,384,000. The day President Roosevelt signed the 776 amendment to the Federal Bankruptcy Act (June 1934), RKO filed under the new law. Handsome box-office returns on Katharine Hepburn, Fred Astaire and Ginger Rogers in 1934 helped RKO to end the year with a net loss of only $310,575.

Chapter 6. By the summer of 1935, however, Radio was ready to wash its hands of an unhappy stepchild. In the autumn Floyd Bostwick Odium’s Atlas Corp., biggest U. S. investment trust, paid Radio $5,000,000 for half of its interest in RKO, with an option on the rest to be exercised before the end of 1937. Joining Atlas in the purchase was Lehman Bros., interested in Keith-Albee-Orpheum Corp.

from earlier days. Mr. Odium put in as RKO’s president Lawyer Leo Spitz of Chicago, who had been counsel for the old Lubliner & Trinz theatre chain there, later with Balaban & Katz and finally with Paramount. Radio’s Sarnoff resigned as chairman of RKO and NBC’s Aylesworth was moved upstairs. RKO finished 1935 with $684,733, its first profit since 1930.

Chapter 7— Last week, a year after Lawyer Spitz stepped in, Atlas Corp. & friends presented a reorganization plan for unhappy RKO. Chief features: 1) corporate simplification of RKO subsidiaries; 2) sale of new common stock to provide $1,600,000 fresh capital; 3) exchange of $11,600,000 in 6% debentures for new 5½% debentures plus stock; 4) acceptance by Rockefeller Center of 500,000 shares of new stock in settlement of claims for $9,150,000 for unpaid rent on offices, the Center Theatre and huge Music Hall’s reduction of outstanding common stock by one-half.

Thus, an investor who purchased 100 shares of RKO common stock in 1929 found his holdings reduced to 25 shares by the four-for-one reverse split in 1931. If the present reorganization plan goes through those 25 shares will become 12¢ shares. Those shares will, however, be worth about $16 each on the basis of last week’s price for the old stock. For the oddest theme in the RKO story is that while its finances went from bad to worse, its position in the cinema industry showed astonishing improvement. In booming 1929, RKO was hardly more than a promotion. Today it is a first-flight producer, distributor and exhibitor and showed a profit of $1,446,000 for the first 39 weeks of 1936.