Now that Harvey Weinstein has left Miramax, the
distribution company he founded in 1979 and sold to Disney in 1993, he has
truly grandiose plans for his new vehicle, the Weinstein Company. Together with
his brother Bob, he plans to build a giant "multimedia company, just like
we have always wanted." This summer, he formulated a business plan that
stipulates a capital investment of three-quarters of a billion dollars, which
would make the Weinstein Company one of the richest independent movie companies
in America. So far, according to an SEC filing on Oct. 5, Weinstein has raised
$230.5 million in equity. While rounding up the rest, he can borrow up to $150
million in bridge loans from a Goldman Sachs affiliate.
Harvey's charming of Wall Street is no doubt helped
by his image as a ruthlessly successful mogul, an image that he has brilliantly
engineered over the years. Even stories about his cruel treatment of others
have become part of the legend. When Ken Auletta asked Harvey about his
reputation in a New Yorker profile, he replied: "It's brutal to tell the
truth in an industry where everyone lies." The "truth" according
to Weinstein was relatively simple: Miramax was an enormously lucrative movie
company that not only yielded Disney a double-digit rate of return on its films
but, in recent years, accounted for most of Disney's profits.
Disney now has a different take on Weinstein's
success story. With the help of an internal audit, Disney has found that
Miramax's financial picture was far less rosy than Weinstein painted it. In
fact, rather than buoying Disney's profits, Miramax was hemorrhaging rivers of
red ink. This reversal of fortune proceeds from a loophole in the original deal
that Jeffrey Katzenberg, then Disney's studio head, negotiated with Weinstein
in 1993. (That was the year Disney bought Miramax for $70 million.) The
Weinsteins had demonstrated a superb gift for finding, shaping, and marketing
independent films like sex, lies, and videotape and The Crying Game. To give
the brothers a powerful incentive to ferret out similar arty winners, Disney
agreed to give them a performance bonus of between 30 percent and 35 percent of
their film profits, a bonus that would be calculated each fiscal year.
The deal also tied Miramax's capital budget for
acquiring and producing films to its annual performance. So, the more money
Miramax made in a fiscal year, the more money the Weinsteins made and the
bigger the capital budget of their Miramax division. Disney further agreed to
calculate Miramax's profits in a fiscal year solely on the films released that
year. In making what seemed like a minor concession to Weinstein so that he
could use his discretion in timing the marketing of art films, Disney did not
foresee how brilliantly he would game this loophole. Through it, Weinstein was
able to create the illusion of profits for Miramax and the reality of huge
bonus payments for himself and his brother.
How did Harvey do this? He simply shifted potential
money-losing films into future fiscal years so that they didn't reduce either
his bonus or Miramax's capital budget. To prevent Weinstein from overspending,
Eisner later imposed a further condition on the deal: For every dollar Miramax
exceeded its capital budget, a similar amount was deducted from the Weinsteins'
annual bonus. To avoid this penalty, Weinstein could delay releasing
high-budget films in years in which he was close to exceeding his capital
budget. As a result, even more films got dumped into Weinstein's limbo of
unreleased movies. For example, Zhang Yimou's Hero, which had been acquired at
Sundance in 2002, was held for more than two years so that its nearly $20
million cost would not count against the Weinsteins' bonus. Hero was released
in 2004, a year less profitable for Miramax in which no bonus would be paid
anyway.
In 2005, after the Hollywood super lawyer (and
Shakespearean scholar) Bert Fields negotiated the Weinsteins' exit package,
Miramax began releasing many of the delayed movies, including The Brothers
Grimm, Underclassman, and The Great Raid, and, with their costs, it became
clear to Disney executives that much, if not all, of Miramax's profits over the
last five years would be wiped out by these losses. In 2005 alone, the
estimated losses will exceed $120 million. And, to add insult to injury, the
Weinsteins' exit package, reported to be between $130 and $140 million, was
partially based on what turned out to be Miramax's phantom profits in prior
fiscal years. (It also included compensation to the Weinsteins for Disney's
right to make sequels, to take over stars' contracts, and to continue to use
the Dimension name.)
Of course, Weinstein could argue that even if Miramax
turns out to be much less profitable than he previously depicted, it provided
award-winning artistic films such as Pulp Fiction, The Piano, My Left Foot, The
English Patient, and Shakespeare in Love that greatly enriched the film
culture. If so, perhaps Weinstein acted for the sake of art in expanding his
capital budget (and, along the way, gilding his bonuses by millions). OK. But
why did Disney allow him to get away with this legerdemain? One Disney
executive explained that even though Disney had 100 or so people watching
Miramax, they were stymied by Weinstein's mercurial and evasive actions.
To be sure, even Weinstein's own people were baffled
by his elusive behavior. Two top subordinates recalled how Weinstein's aides
rescheduled a conference call with them every half hour for four hours and with
each call reported that he had shifted his location. Finally, at 5 p.m., they
were told they were being put through to "Harvey's room." They began
talking over the speaker phone only to be told that Harvey was no longer in
Harvey's room. He had, like the Wizard of Oz, vanished to yet another location.
Edward Jay Epstein is the author of The Big Picture:
The New Logic of Money and Power in Hollywood. (To read the first chapter,
click here.)
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