Total Free Fall

Under the azure skies of the Mediterranean, on a gleaming white yacht that rocked gently off the French Riviera, Mario F. Kassar, then 39, was proudly holding court. It was early May 1991, and Kassar--the charismatic, Lebanese-born chairman of Carolco Pictures Inc., the world's most successful independent filmmaker--strolled the deck of his 203-foot cruiser, the Maria Alexandra, greeting Hollywood heavies and international financiers. All week, speedboats shuttled luminaries to the yacht from the Hotel du Cap near Cannes, where the film festival was in full swing. Guests included Rene Bonnell, chief of the French TV giant Canal+; Luca di Montezemolo, a Rizzoli executive; even Arnold Schwarzenegger. They nibbled hors d'oeuvres and buzzed about Kassar's soon-to-be-released "Terminator 2: Judgment Day," a $90 million sci-fi thriller.

Beneath the glittery facade, however, a tiny coterie of insiders knew the truth: Carolco's extravagant spending had brought the moviemaker close to collapse. Moreover, relations between Kassar and Peter M. Hoffman, 42, the financial whiz who had masterminded Carolco's growth, had degenerated into mistrust and antipathy. Hoffman thought Kassar's largesse was destroying the company; Kassar suspected Hoffman was scheming to depose him. Although the two remained outwardly cordial, "people were whispering in Mario's ear, 'Watch out for Hoffman'," recalls one guest. "You could feel the tension-the looks, the asides, the overt digs."

It was a dramatic turnabout for two men who had built Carolco from a B-movie producer into a powerful upstart that shook the Hollywood establishment. In half a decade, the independent churned out a string of memorable movies, from "Total Recall" to "Mountains of the Moon," and transformed the way the major studios did business. By gambling unprecedented sums to attract the biggest names in film--Oliver Stone, James Cameron--Carolco drove up fees and incurred the wrath of studio executives. But those grand ambitions also led to its downfall. In November, Carolco came within a whisker of being one of the most spectacular failures in Hollywood history. Ironically, as "Terminator 2" was racking up $490 million, the empire faced a bankruptcy filing, crippled by hundreds of millions of dollars in losses and debt. The company was rescued by a last-ditch cash infusion from three foreign partners-and a restructuring negotiated by Carolco's banks and investors could impose tight controls on Kassar. Hoffman has resigned, and Carolco's stock has plummeted from a $13.875 high to $2, eating up most of Kassar's $200 million paper fortune. While the partners say they're optimistic about the company's future, some analysts and Hollywood insiders question whether Carolco can survive. (Kassar declined to be interviewed for this story, which is based on interviews with two dozen Carolco insiders and others familiar with the company.)

Hollywood has watched the company's downward spiral with fascination, as Hoffman and Kassar turned from allies into antagonists. Insiders paint a portrait of paranoia, power struggles and bitter confrontations as Carolco unraveled. Matters got so bad that Stone sent a wolf muzzle to Kassar to silence his abrasive partner, and Kassar allowed Hoffman to seek a buyer for all Kassar's shares as the ship was sinking last October. (Through a spokesperson, Kassar insists he "never actively sought a buyer.") "They're extraordinary men, but they couldn't prevent confusion, conflict and disintegration," says Daniel Melnick, who produced Carolco's "L.A. Story."

Carolco's own beginnings could have come straight out of a grade-B movie. The son of a film distributor who moved throughout Europe, Mario Kassar had his eyes on the prize as a teenager, sleeping on the beach during the Cannes Film Festival. He cultivated producers and brokered movie rights to Middle Eastern distributors; in Cannes in the mid-1970s, he met Andrew Vajna, a Hungarian emigre who made wigs and distributed films in Hong Kong. Setting up shop in Hollywood, the pair bought and resold foreign rights to U.S. movies and formed partnerships to finance low-budget films. They purchased rights from Warner Bros. to the novel "First Blood," about a deranged Vietnam vet. Backed by European bank loans, they hired Sylvester Stallone to play Rambo. A Reagan-era smash, the 1982 commie-bashing movie grossed $120 million.

That was the film that launched Carolco. But the company began to grow dramatically after Kassar hired Hoffman. graduate and Los Angeles tax attorney, as chief executive in 1986. Hoffman had been introduced to Kassar by Tom Pollock, the entertainment lawyer who later became head of Universal Pictures. While Kassar looked for movies and cultivated "talent," Hoffman tapped Wall Street and private investors for cash and engineered arcane financial schemes. "You find the money and I spend it," said Kassar to his CEO. Hoffman, a fast-talking, bearded figure with a dazzling grasp of tax shelters, believed no independent could survive on its films alone; it needed a more stable source of income. Borrowing heavily, Carolco purchased a majority stake in LIVE Entertainment Inc., a video distributor; acquired a TV syndication arm and paid $40 million for the film library of Hemdale Film Corp., a producer of "The Last Emperor." These new ventures, though, created appetite for new films. "[My plan] was to make some A pictures, acquire as much product as we could and build a nice flow of under-$15 million movies," says Hoffman. That strategy would clash with Kassar's, but as long as the profits rolled in, each could pursue his own agenda. Between 1986 and 1990, Carolco's revenues rose fivefold to $269 million, and the two men acquired the trappings of a major corporation. Carolco bought a BAC 1-11 jet and a seven-story building on Sunset Boulevard.

The Hoffman-Kassar team became ascendant when Kassar forced Vajna aside in 1989. Vajna had clashed with Kassar over Carolco's strategy; he used to walk the halls, stare at the new faces and joke, "Who are these people?" The rift had reached a crisis during the filming of "Rambo: First Blood Part III" in Israel in 1987, when Vajna became irate at the $40 million budget and tried to fire Stallone. In 1989 Hoffman arranged loans for Kassar to buy Vajna's stock for $108 million; the deal gave the impresario 62 percent of Carolco but left him deeply in debt. It also set the stage for the cataclysm that would turn Kassar and Hoffman against each other.

For the time being, freed of Vajna and fueled by Hoffman's ability to find cash, Kassar went on a binge never before seen in Hollywood. In 1989 and 1990 the studios became enamored by so-called event movies-and Kassar caught the fever. He paid Schwarzenegger $10 million to star in the gory Martian thriller "Total Recall." He made a preemptive $3 million bid for Joe Eszterhas's "Basic Instinct." Impressed by Renny Harlin's "Nightmare on Elm Street 4: The Dream Master," he paid the young director $3 million for the hurricane movie "Gale Force." (The film was dropped after five scripts and $4 million.) Kassar also cornered the market on Hollywood directors-like John Hughes-providing many with offices and staffs. "He was a big-time riverboat gambler," says Brian Grazer, who coproduced the $43 million "The Doors" with Kassar. Kassar argued that he had to outspend the studios, since he was an outsider fighting to compete. "The talent loved him, and why wouldn't they?" says one studio head. "Mario was the man who couldn't say 'no'."

But the movie stars weren't the only ones raiding the till. Kassar plunged into the lavish life of the Hollywood mogul. He paid himself a reported $1.5 million a year, lived in a heavily guarded Beverly Hills mansion and owned several cars, including a Rolls-Royce with RAMBO license plates. At Kassar's urging, Hoffman purchased Dino De Laurentis's bankrupt studio in Wilmington, N.C., and Kassar named the lot's streets after members of his family, including daughter Tatiana.

Yet signs of strain began to show between Kassar and the abrasive, bean-counting Hoffman. Though "Total Recall" earned net profits of $30 million in 1990, Hoffman was concerned with Kassar's appetite for big-budget action pictures and unhappy over the failure of "quality" movies like "Music Box." Although revenues almost doubled between 1989 and 1990, profits barely grew as expenses took their toll. In a September 1990 Los Angeles Times profile of Kassar called HOLLYWOOD'S BILLION-DOLLAR MAN, Hoffman, in frustration, said of movie audiences: "They want crap." Schwarzenegger and Stallone felt insulted. Hoffman apologized, but the damage was done. "Arnold could barely stand being in a room with him," says a source. Kassar chewed out Hoffman, who resented it. "[Hoffman felt) 'I'm finding money to support this guy's huge outflow of cash, and I'm blamed'," says an insider.

The rift became permanent later that fall. Kassar wanted to unload the huge debt he incurred in the stock buy from Vajna; with the board's approval, Hoffman arranged for him to sell 3.4 million shares of his Carolco stock to the company at $13 a share. But in the two months it took the deal to close, the market price plunged to $7.25. One insider remembers some uneasiness at Carolco from the start of the transaction: "One lawyer said, 'Is this OK?' And Hoffman said, 'Of course-it's a slamdunk'." Some shareholders sued Kassar, Hoffman and other Carolco executives, alleging self-dealing by Kassar. For Kassar, who fretted about his public image, the results were unbearable: an embarrassing courtroom rebuke and an injunction freezing 2.2 million shares of his stock. (The case was eventually settled.) "Mario was publicly humiliated, branded a thief by a judge," says a source close to him. "Afterwards, he said things to Peter that can never be taken back. In essence, he told him, 'Everything you've done was designed with one purpose: to screw me.' It was very unhappy and bitter." Hoffman defends the deal and blames the changing moral climate for the storm of protest. "People tied it to Mike Milken, greed, Hollywood craziness. Nobody cared what the facts were," he says.

Kassar, meanwhile, was taking ever-bigger gambles. He paid Michael Douglas $15 million to star in "Basic Instinct" and poured tens of millions more into "Terminator 2," which employed 2,000 people. "He bet the company," says one close associate. Carolco assured investors that it covered production costs by pre-selling distribution rights. In fact, considering Carolco's bloated staff, development fees and debt, that hardly guaranteed profits.

Angered by Kassar's largesse, Hoffman argued bitterly with his partner-and Carolco's filmmakers. One day in early 1991, Oliver Stone walked into Kassar's spacious, seventh-floor office overlooking Spago, the ever-popular power restaurant. He asked for an extra $2.5 million for special effects in "The Doors," plus a two-month delay in the delivery date. Hoffman told him no, and Stone stared back silently, eyes shielded behind dark glasses. Days later he sent Kassar a wolf muzzle and told him to use it on Hoffman. Says Stone: "I don't need more pressure from somebody barking at me." (Kassar signed the check.)

By spring, insiders say, Hoffman knew the company was in trouble. His bank line from Credit Lyonnais and Bankers Trust was being squeezed, and money was flowing out faster than it came in. Hoffman told Kassar the only way for Carolco to survive was to sell more stock. As Hoffman contrived new money-raising schemes, Kassar became suspicious; he believed Hoffman was conspiring to reduce his control and make Kassar a figurehead. Was he right? Hoffman insists he planned to leave when his contract expired in March 1992. But some at Carolco say Hoffman had ambitions to run the company, with a weakened Kassar. In any event, Kassar grew testy. Wandering into Hoffman's office, he would grumble that Hoffman's expensive acquisitions had gotten him into this mess.

Kassar became increasingly nervous, say Carolco sources. In July, Hoffman called a telephonic board meeting to talk about merging Carolco with LIVE to help solve the cash squeeze. Mulling it over at home that weekend, Mario "went nuts," says an insider, called board members and canceled the meeting. Hoffman threatened to resign, but the board persuaded him to stay. Meanwhile, money from Kassar's biggest gamble, "Terminator 2," was pouring in, but it wasn't easing Carolco's problems. "The picture is making millions-and I'm struggling to stay alive," Kassar told colleagues. In October, apparently with Kassar's passive acceptance, Hoffman made a last-ditch effort to raise cash: he phoned industry contacts looking for a buyer for Kassar's 16.6 million shares. It was pointless, since nobody believed Carolco stock would have any value without Kassar.

In November, Carolco fell apart. Third-quarter earnings were made public, revealing Carolco lost $91 million in the first nine months of 1991-partly from moviemaking, partly from other operations. The LIVE merger soon disintegrated, and the banks, with about $175 million on the line, threatened to call in loans. Renny Harlin had just come back from the Italian Alps, where he'd been scouting locations for a Stallone plane-crash thriller. "Mario was depressed," says Harlin. "I said, 'If this movie is going to be made, I'll wait. But if it isn't tell me--because I need to work.' Mario said, 'I'm going to pull it together'."

Kassar staved off a bankruptcy filing by a painful retrenchment. The company terminated 49 people, and, in a now infamous memo, informed employees the company would no longer provide free milk at coffee machines. But rescue came from three partners who had already pumped more than $150 million into Carolco. Desperate to protect their investment, RCS Video International Services B.V., Le Studio Canal + and Pioneer LDCA Inc. agreed to provide another $45 million. The cash should encourage the banks to ease off. Carolco will sell domestic TV rights to its film library, raising $64 million to pay down debt. The partners will receive additional board seats and, insiders say, authority over Kassar. Hoffman says he and the board agreed he should resign. The real story remains unclear, but some Carolco sources say the board forced him out, betting on Kassar's showmanship to rebuild Carolco.

Who deserves fault for the Carolco mess? Although Kassar and Hoffman point at each other, there's plenty of blame to go around. Some analysts and Carolco investors judge Hoffman harshly. Though brilliant at raising money, he also overpaid for TV and video libraries, they say, and created divisions that sucked up desperately needed cash. Moreover, Carolco, through its LIVE stake, made acquisitions that were poorly managed and hit hard by the recession. Others say Kassar bears most responsibility. An inside source says Carolco spent $900 million between 1987 and 1990 to make 16 movies and has earned back just $600 million; after all the money is received, the shortfall could be $75 million. (Kassar won't confirm the figures.) The biggest problem was shortsightedness: Kassar and Hoffman thought good times could go on forever. Says one top Hollywood executive: "Their plan wasn't right for what was happening in the movie business, and they couldn't recognize that or change in time."

In many ways, Carolco's near collapse is an epilogue for a Hollywood era, when first-time screenwriters became instant millionaires, and everyone chased the big cinematic spectacle. Many in the industry continue to single out Carolco as the instigator of the spending spree forgetting how eagerly they jumped on the bandwagon. "Everyone's saying 'I told you so'," says one studio chief. Still, in its stripped-down form, the company might survive and even flourish. Carolco's steamy $49 million thriller, "Basic Instinct," will be released March 20 and should enhance Kassar's reputation as a great impresario. But the real test of Carolco's staying power could come this April, when Harlin plans to film his new-big-budget thriller in Italy. If it gets off the ground at all, it could be a shot in the arm for the once mighty independent. The title is appropriate for the company's volatile history: "Cliffhanger."

      
Mixed Returns
HITS
Worldwide Box-Office Gross Terminator 2 $490 million Rambo II $300 million Total Recall $262 million Rambo III $189 million First Blood (Rambo I) $120 million MISSES Worldwide Box-Office Gross The Doors $65 million L.A. Story $41 million Jacob's Ladder $32 million Music Box $20 million Mountains of the Moon $12 million SOURCE: CAROLCO PICTURES INC.