numbers behind the industry.
Harvey Weinstein Rides Again
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 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.
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.
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.
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
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.