Carolco Seeks Life Beyond ‘Rambo’ Films

In “First Blood” released in 1982 and “Rambo: First Blood Part II” released in 1985, Sylvester Stallone’s machine gun-toting, all-American avenger waved the flag and defeated evil while grossing an awesome $390 million at the box office. Along the way, Rambo became for some people an icon of renewed American patriotism.

Meantime, the films’ producers had the ironic good fortune of avoiding U.S. taxes on their bonanza by funneling their Rambo earnings through a maze of foreign entities and using the Netherlands Antilles as a legal tax haven.

Their enterprise added an American corporate uniform a year ago as Carolco Pictures. It is controlled by two Hollywood transplants, Hungarian-born Andrew Vajna, 42, and Lebanese-born Mario Kassar, 35.

The Americanization of Vajna and Kassar’s empire gained them access to U.S. public capital markets, deemed vital in the money-hungry movie business. Carolco sold 3.6 million shares in an offering on Wall Street last winter.

But unlike Rambo, Carolco Pictures is far from becoming a household word. Even Hollywood insiders seem to know less about Carolco than many smaller, independent movie producers. And, despite its success with Rambo, Carolco Pictures has had its problems recently:

- A lengthy delay in filming “Rambo III” is expected to clobber its 1987 earnings. That has helped to depress its stock price. Then, too, the company has met disappointing U.S. box-office results for its two non-Rambo productions this year, “Angel Heart” and “Extreme Prejudice.”

- Its image suffered somewhat after Carolco acquired a nearly defunct home video business last year from Noel C. Bloom, who has been described by federal and state law enforcement officers as a major purveyor of pornographic films with alleged links to organized crime. Although Carolco was a co-owner with Bloom for six months before buying him out, Carolco maintains that it did not buy into Bloom’s related sex-movie business.

- Carolco and related entities have been accused of fraud and breach of contract in several lawsuits over its Rambo spoils. The accusers have been a Canadian film company, an investor in a limited partnership that owns title to the first Rambo movie and the author of the 1972 novel in which Rambo first appeared.

Raised $80 Million

For the most part, so-called mainstream Hollywood film makers express fairly limited and hazy impressions of the company. What is generally known is that Carolco hit the jackpot with its first movie, “First Blood.” Even though it had relatively little advance publicity, the hit film grossed $120 million. And “Rambo: First Blood Part II,” released three years later, ranks among the all-time box-office winners with $270 million in revenue.

Last November and December, with the aid of some major Wall Street underwriters led by Drexel Burnham Lambert, Carolco Pictures raised about $80 million from an initial offering of stock and bonds to the American investing public. About 13% of its stock went into public hands; the shares, traded on the New York Stock Exchange, closed Friday at $6.50.

Although Carolco Pictures is incorporated in Delaware and based in Los Angeles, it disclosed in a recent public filing that it still expects to be shielded from paying U.S. taxes for two more years. That would more than cover the anticipated premiere of its delayed production, “Rambo III.”

The two-year reprieve is expected because of revenue going through its Netherlands Antilles tax haven. However, the company noted that the Internal Revenue Service could decide to tax Carolco on movie distribution income.

A movie industry accounting specialist said it has been “common practice by several aggressive film companies” to establish Netherlands Antilles subsidiaries to avoid U.S. taxes by keeping revenues abroad.

Carolco Pictures is controlled by a private Dutch company, Carolco Investments B.V., which--in turn--is owned by Vajna, Kassar and related family trusts in Europe, according to U.S. filings. Vajna and Kassar are co-chairmen of Carolco Pictures, but neither is chief executive. That job belongs to the firm’s former outside attorney, Peter Hoffman, who also is president.

A piece of Rambo lore not generally known is that a Lebanese group associated with Kassar’s family was instrumental in financing the first Rambo film. This came to light as a result of disclosures Carolco was required to make because of its new status as publicly traded U.S. company.

One filing disclosed that the Vajna-Kassar group paid $18 million to buy out an “unaffiliated person” as owner of 30% of Carolco S.A., the foreign entity through which Vajna and Kassar had held the Rambo rights. The holder of the 30% interest was disclosed as a Panamanian entity, Bonaparte International.

Asked who owned Bonaparte, Hoffman replied: “The exact control of that company is unknown to us, because of the way in which the agreement was done.”

However, he said the person who guaranteed the obligations of Bonaparte was a Lebanese banker who had provided Carolco with the loan to make “First Blood.”

Vajna and Kassar were not available to be interviewed for this article, but it’s known that before their success with Rambo they made their living distributing other producers’ pictures overseas.

According to biographical material provided by the company, Kassar was born in Beirut and moved to Rome at age 16, working for his father in movie sales overseas until setting up his own film distribution business at 18. In 1975, he linked up with Vajna, who had been raised in Los Angeles after arriving from Hungary and who had his own overseas distribution firm.

After deciding to begin producing films themselves, they found “First Blood” among rejected movie projects at Warner Bros. (Before Rambo, Stallone had been known mostly for his “Rocky” films.)

These days, Hoffman’s big task has been to make Carolco a more diversified entertainment company with something other than Rambo going for it.

He has hired a number of new officers, including Jose Menendez, former chief operating officer of RCA/Ariola International. Menendez has the job of transforming Bloom’s old home video operation into a full-service video company.

Carolco’s overall strategy is to make two or three high-budget films a year, broadening its base with home video, television syndication and distribution of other producers’ movies while avoiding costs of operating a production studio.

Although “Angel Heart” and “Extreme Prejudice” were disappointments at U.S. box offices, the company said it believes that both films will make money worldwide. Carolco obtained more advance money and guarantees by “pre-selling” rights such as home video than the reported $40-million total cost of making the two pictures. (By comparison, the announced budget of “Rambo III” is $40 million by itself.)

Sweeter Contract

But despite its efforts to diversify, it’s likely that Carolco’s mainstay will continue to be the rights to the Rambo character for films, cartoons and toys.

In what it calls an effort to make Stallone as happy as possible, Carolco recently sweetened his compensation for “Rambo III” to a staggering $16 million up front plus an undisclosed percentage of the picture’s profits. (Carolco hasn’t said what the original terms were but acknowledges that the current contract is an improvement.)

“Since we have a contract with him,” Hoffman says, “we went out of our way to make this a very, very attractive proposition for him.”

And just how important is Stallone to Carolco? Carolco has insured Stallone’s life for $37 million and will increase that by an additional $10 million when “Rambo III” starts shooting. The company also has contracted to pay $750,000 a year just for security services to protect him.

“He’s very important to us,” Hoffman explains. “We don’t want anybody doing anything to him.”

Stallone was not available to be interviewed for this article.

The company also agreed in December to pay Stallone’s own production company $100 million to $125 million in guarantees on foreign distribution and home video rights to make 10 films-- five of them to star Stallone. Carolco will have foreign distribution and video rights. United Artists, which made the “Rocky” films, agreed to pay $90 million for U.S. distribution of the pictures.

As partial consideration on the 10-picture deal, Stallone is to receive 140,500 shares of Carolco stock from its parent. That amounts to only half of 1% of its shares outstanding, but he also has a 12% stake in its home video subsidiary.

With several delays in starting “Rambo III,” attributed to difficulties in selecting the best location, Carolco Pictures shares have dropped lately. Although the stock hit the market at $9 a share last winter, the stock has since languished just above $6. The firm does not expect to get “Rambo III” to the theaters until next summer.

“The main problem the company faces,” Hoffman said, “is we’re perceived as being dependent upon Rambo. Also . . . the constant market rumors and concerns that maybe Stallone isn’t going to do the picture, (that) maybe he’s going to do something else. . . . There’s only one way to stop the gossip; that’s to start the picture. We know it’s going to be his next picture. We know he has a big stake in it. And we know we have a big stake in it.”

Meanwhile, the company’s net profit for the first quarter ended March 31 was a pale $1.7 million, compared to $4.6 million a year earlier. The company’s net income for all of 1986 reflected a year without a new Rambo on the screen, dropping to $12.1 million from $44 million in 1985.

Carolco is banking on home video as one means to expand beyond Rambo, but that move is still dogged with controversy. Carolco acquired International Video Enterprises (formerly NCB Entertainment Group) from Bloom in two steps. The first, last June, came when it arranged $25 million in financing in return for 25% of Bloom’s stock in the venture.

Stallone obtained a 6% interest, and movie and record producers Ben and Anthony Scotti 4%, in return for guaranteeing proportionate shares of the home video subsidiary’s debt. Bloom remained as president until Carolco bought out his remaining interest last December for $350,000.

Hoffman sees it as a good deal, even though “the negative aspects of the business were greater than what had originally been told to us at the time we got involved in June.”

One reason for the buyout, Hoffman says, was to get rid of problems associated with Bloom. The Carolco executive claimed that Bloom, among other things, had represented that the home video unit had a net worth of $7 million, when it actually was “a negative number.”

Hoffman said Carolco ended up absorbing more than $1 million in debt owed the company by Caballero Control Corp., which court records show has been a distributor of sexually explicit films and which Bloom reportedly had spun off earlier to his associates.

Problem Acknowledged

According to Carolco’s filings with the Securities and Exchange Commission, Bloom recently retained a “non-ownership relationship” with Caballero, which was not explained. Bloom could not be reached for comment.

Menendez, whom Carolco put in charge of the subsidiary, acknowledges that the company has had a problem “mending our relationship with both the creative community and the distributors” in the post-Bloom period, as well as removing the “stigma” of Bloom’s sex movies. He contends that that has been accomplished.

After Carolco bought out Bloom, Stallone’s interest in the home video unit doubled to 12%, with an additional 8% going to the Scotti brothers. In addition, entertainment giant MCA received an option to buy a 20% stake after agreeing to handle U.S. distribution for International Video. Meantime, lawsuits filed against Carolco disclose several legal dogfights that have arisen over the success of Rambo.

The company settled fraud claims filed last year by Iowa novelist David Morrell, who created Rambo in his novel “First Blood,” but additional fraud allegations are being pressed by a Canadian film firm and an investor in a limited partnership, First Blood Associates.

Morrell, who said in a recent telephone interview that he is now happy with his settlement, previously had accused the company of falsely charging hundreds of thousands of dollars in expenses against the film’s income.

“That was a real commercial suit,” Hoffman says, and even though the company felt that it had a good defense, “it was settled.”

A pending case against Carolco, brought by Stephen J. Cannell Productions--a Canadian firm with offices here, accuses Carolco and five related firms of violating a 1985 oral contract under which Cannell was to be the “exclusive agent” for licensing merchandise based on the characters in the second Rambo movie.

The suit, which seeks $50 million in punitive damages in addition to $15 million in compensatory damages, alleges that Carolco breached the contract by licensing certain foreign merchandising rights to Coleco Industries. Carolco acknowledges the existence of an oral contract but claims that no damages are due.

Another pending, Rambo-related suit is a class action filed last November in New York by Stanley B. Block as a limited partner in First Blood Associates. The suit said the partnership and its general partner offered to investors 28 limited partnership units at $200,000 each.

In September, 1982, the partnership acquired title to the movie “First Blood” from Anabasis Investments N.V. However, it alleges, Vajna and Kassar retained “actual de facto control” through Anabasis, a predecessor of Carolco Pictures.

The suit said the partners were to get a share of the net profits of the picture but had not received any distributions.

Carolco Pictures said it was not a party to the partnership deal. It added that it has no financial exposure to the lawsuit because it has been indemnified from damages by the general partner.

Even though his company did not sell the limited partnerships, Hoffman said the investors stood to get “a very nice after-tax rate of return if only a certain minimum guaranteed level of return is reached. . . . That’s a legitimate tax shelter as far as I’m concerned.”

Carolco countersued Block and his attorney, Howard B. Sirota, in Los Angeles County Superior Court in March, alleging defamation and abuse of process. The case, which was transferred to the federal courts on Sirota’s motion, accuses the lawyer of trying to get a $500,000 settlement from Carolco by threatening to interfere with its public offering.

“Every company has to deal with this kind of stuff,” Hoffman commented recently. “I think it shows the way we deal with it. . . . We take a sledgehammer and we smash their fingers. That’s how we deal with it.”