Carolco’s New Lease on Life: Will It Last?

With a series of sexually charged projects ready to roll if bondholders sign off on a reorganization this week--including a Marquis de Sade biography and writer Joe Eszterhas’ “Showgirls”--Mario Kassar’s Carolco Pictures appears to have a new lease on life.

But others will ultimately determine whether it’s a long- or short-term lease.

As he emerges from a financial abyss, Kassar still must convince skeptics that he can operate within the modest confines of his new company. He also faces an uncertain future with his foreign partners and an IRS audit that is said to focus on Carolco’s offshore dealings.

The audit, which has been widely discussed in industry circles, remains in high gear nearly a year after Carolco acknowledged it in a securities filing. Some Hollywood executives take that as a troubling sign for the company. But others say it’s too soon to predict the outcome.

While the IRS declined to comment, the production company apparently has come under scrutiny because of foreign financing deals. Carolco, one of the last surviving independent operators of the rambunctious ‘80s, pioneered the practice of pre-selling rights to overseas companies.

“Any company with a tax haven issue is a red flag, and that means Carolco,” said one source. “The IRS will do their darndest to find something if there’s something to find.”

The IRS may have inadvertently added to the speculation at an entertainment tax conference in Washington last month. Mitchell Miller, a Beverly Hills entertainment tax lawyer, said it was clear from the conference that the agency “is very concerned about foreign operations, foreign corporations and foreign financing.” Added Miller: “They start off with the belief that every foreign operation is a device to shield profits from U.S. taxation.”

A Carolco spokeswoman Monday confirmed the IRS audit but called it routine.

“The company has been working with the IRS for a period of years and is working its way through this,” she said. Asked if it involves Carolco’s offshore activities, the spokeswoman said that “there has been no special focal point to this.”

It remains unclear whether the IRS’ entertainment task force is involved in the audit, which began before its formation. The presence of the Los Angeles-based group would be significant since its members are specially trained in the Byzantine ways of entertainment accounting.

One top Hollywood accountant called the Carolco audit a “big deal.” But another indicated that Carolco’s partners do not see it as a major liability. A lawyer familiar with the company predicted the IRS will be pragmatic and not do anything that could jeopardize the company.

Carolco hopes to get final approval from bondholders by Friday for its $200-million restructuring. Carolco’s partners--Japan’s Pioneer, France’s Canal Plus, Italy’s Rizzoli and Metro-Goldwyn-Mayer Holdings Inc.--have agreed to kick in $120 million under the plan. The three foreign partners would control nearly two-thirds of the company, with MGM getting 17.5%. MGM would also distribute Carolco’s movies. About 15% would be publicly held, with a small chunk reserved for Kassar and Andy Vajna, his onetime partner who now heads Cinergi productions.

Another $90 million in backing would come from Tele-Communications Inc. in a pay-per-view deal. Carolco has also pared its bank debt to $14 million, compared to $200 million two years ago.

Over the weekend, the Hollywood trade paper Variety reported that media conglomerate Rizzoli is considering pulling out of the partnership sometime next year. Others close to Carolco confirmed that such discussions have taken place.

But Carolco dismissed the speculation, saying, “They are a major investor in the production fund going forward, and they have a member on the board.”

Creatively, the restructured Carolco plans to concentrate on a limited number of “event” movies, which are considered a specialty of Kassar’s after “Terminator 2” and “Basic Instinct.”

Yet some people see Kassar’s new contract as an event in itself. The deal, announced in May, guarantees Kassar $2 million this year, with $250,000 annual step raises.

Kassar also receives a belated $500,000 bonus for “Terminator 2” and $7,500 a month in non-accountable business expenses. But what has really raised eyebrows is the provision giving Kassar 1% of gross rentals up to the break-even point and 3% of gross rentals after breaking even, plus a non-refundable $1-million advance against his producer’s fee on each film.

Compensation expert Graef Crystal says the package shows that Hollywood still marches to its own “stoned drummer.” But at least one analyst insists that Carolco has “gotten religion.”

“There’s reason to believe they can make money,” said the analyst, who asked not to be named. “They’ve trimmed overhead. . . . They’ve even given back the corporate jet.”

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Redefining Success: In a two-page ad this week aimed at the international television market, Warner Bros. touts its new line of TV shows as “The Sign of Success!” But that’s a bit of a stretch.

One of those featured prominently in the ad, “The Trouble With Larry,” has already been canceled. Several others resided in the Nielsen dead zone for the period between Sept. 20 and Sept. 26, including “Lois and Clark,” ranked 51st; “The John Larroquette Show,” tied for 54th; “Cafe Americain,” at 68th, and “It Had to Be You,” at 76th.