This Terminator Isn't Half As Scary As Its Budget

Some 40 minutes north of Los Angeles, movie history, of a sort, is in the making. There, in a tightly guarded studio, production is being completed on Terminator 2: Judgment Day, the movie that Hollywood insiders are predicting will be the costliest piece of celluloid ever made.

For nearly five months, star Arnold Schwarzenegger, director James Cameron, and five separate special effects houses have been shooting the sequel to the 1984 film that starred Schwarzenegger as a rampaging cyborg. Estimates for the cost of making the action-packed 1991 version range as high as $100 million, more than 10 times the cost of the original and a huge sum for Carolco Pictures Inc., an independent studio that blazed its way into prominence with big-budget Rambo blockbusters. In the new, cost-conscious Hollywood, this huge outlay is forcing Carolco to defend itself against growing industry concern that it is flirting with financial danger.

SCREEN DOORS. Since 1985, when Carolco scored with Rambo: First Blood Part II, earnings have been lackluster, ranging from $44.3 million in 1985 to $14 million in 1989. For the first nine months of 1990, the company earned $7.4 million. Even worse, the company has spent a staggering $326 million more than it has brought in over the past five years, forcing it into a mad dash to line up new debt and equity partners. Carolco is counting on Terminator 2 to be a megahit. Although it made some money with Schwarzenegger's Total Recall last summer, three other recent films bombed--Air America, Music Box, and Mountains of the Moon. The studio's much-ballyhooed The Doors has taken in $ 30 million but was expected to do far better.

To minimize its risks, Carolco has sold pieces of its films to U. S. and overseas distributors. That cut profits, and to fuel its expansion plans Carolco has turned to heavy borrowing (chart). In 1990, the company's debt jumped to $304.9 million from a mere $1.2 million in 1985. To get a $100 million extension from its longtime banker Credit Lyonnais, Carolco agreed to restrictions on future debt and to the purchase of completion bonds to insure against costly overruns.

The reluctance of banks to lend it money is forcing Carolco to turn increasingly to equity partners. Last year, it raised $90 million by selling

stock to the French cable giant Canal Plus and the laser-disk arm of Japan's Pioneer Electronics Corp. Canal Plus receives French cable rights while Pioneer will sell Carolco films worldwide on laser disks. In late March, Carolco received a $14 million cash infusion from Carlton Communications PLC, the British-based parent of Technicolor Inc., in exchange for 1 million shares, or 3% of the company. Carolco is currently negotiating an estimated $200 million deal with Italy's RCS Video, part of Gianni Agnelli's Fiat empire.

Carolco's spending binge hit its peak with Rambo III in 1988, when Chairman Mario F. Kassar, well known to the industry for his glittering parties and multimillion-dollar deals, paid Stallone $16 million. For Rambo IV, said to be budgeted at $60 million, Stallone wants $20 million and a healthy piece of the action. Last year, Kassar also paid a staggering $3 million to Joe Eszterhas for the script to Basic Instinct, the highest amount ever paid to a screenwriter. To make the thriller, Kassar signed actor Michael Douglas for $10.5 million. The film will cost at least $55 million, say Hollywood insiders. Big numbers, but they're small potatoes compared with Terminator 2. To get the rights to the film, Carolco paid $ 5 million. Schwarzenegger wanted $14 million--in the form of a Gulfstream jet--plus 15% of Carolco's revenues from the movie. Director Cameron, hot from Aliens, got another $6 million, plus points. Special effects are expected to run $17 million, roughly the total cost of the current hit, Home Alone.

If the studio executives at Carolco are worried about excessive spending, they aren't saying so. Referring to the company's negative cash flow, Carolco Executive Vice-President Roger R. Smith says: "Those numbers are to be expected for a company that is growing." Smith points to a string of acquisitions that has improved the studio's ability to syndicate its movies on television or sell them on videocassette.

But others in the entertainment business are not so sanguine. "We're all a little concerned," concedes entertainment lawyer Tom Hansen. "So far, they've been smart."

Smart, however, doesn't always work in Hollywood. If Schwarzenegger doesn't wow 'em in Terminator 2, it could be Carolco Pictures that faces its Judgment Day.

Before it's here, it's on the Bloomberg Terminal.