Hollywood Accounting, and other horror stories

What accounting lesson Winston Groom learned from the movie Forrest Gump?

Forrest Gump was the fastest grossing Paramount film to pass $100 million, $200 million, and $300 million in box office receipts (at the time of its release). It took only 66 days to surpass $250 million and became one of the highest-grossing movies of all time. The movie was based on the book Forrest Gump authored by Winston Groom. The author was contracted by the Paramount group for the screenplay rights for his book for $350,000 and for a 3 percent share of the film’s net profits. Winston found the deal attractive and agreed for it.

Now the movie went to production and then to distributors. It was an instant hit. Winston was on cloud nine after hearing the success stories of the movie. He was thinking about the profits that he would get. He kept on waiting for the cheque for weeks. But the cheque didn’t come. He thought that maybe they lost his address. So he called Paramount and asked them: “Where is my 3% share?” They replied: “3% of what?” He said: “3% of the accounting profits of the movie.” [The contract was such that he had to receive 3% of the accounting profit and the accounting profit was based on the studio accounting practice]. They replied that they are not making any money but are losing money. He asked that how can you guys be losing money on this movie as it has grossed more than $200 million in revenues. They asked him to come and take a look at their accounting books.

He went to their office to have a look at the accounting books and found out that they were making $80 million loss. So he looked down at the expense items and he noticed a big expense item of $140 million. He asked them about that. They said that they haven’t named that yet but that’s a provision. He asked provision for what? They replied that provision for future bad movies. [The studio accounting allows a movie company to make a portion of the revenue of a movie and set it aside as the provision for the future bad movies.]

Winston Groom said that it’s not fair and decided to contest it in the court. The case lasted only 15 minutes. The judge took a look at the contract and asked: “Mr. Groom, is this the contract you signed?” He replied yes. The judge said: “So basically you put your faith in the hands of the accountant? Is that right?” He said: “I guess so.” The judge said: “The case dismissed. You got what you deserved.” This is what happens when you put your faith in the accounting profit.

Do you know what Steven Spielberg‘s contract specifies as a percentage of? Movie ticket receipts. He gets his percentage share when the ticket gets sold and after that, the movie company can do with the revenue whatever they want to do. That’s why he ended up with billions of dollars in his bank account while Winston Groom couldn’t.​

 

Everyone knows that H'wood cooks the books to avoid paying points. Never take points on a movie unless your last name is Spielberg, DeCaprio, Pitt or Nichelson.

 

You can take points, they just have to be the right points

Clearly, you don't take a piece of the accounting profits

 

Whenever possible, you have to ask for gross profit points and not net profit. As I've said many times in the "Hits & Bombs" threads elsewhere, when the studios have the ability to define what profit is in the contract, that can greatly limit what kind of real money the recipient can get.

The best book to read on the subject is this one:



https://www.amazon.com/Fatal-Subtraction-Inside-Buchwald-Paramount/dp/0787104949

The TL;dr version of the book: award-winning writer Art Buchwald came up with an idea of an African prince who looks for a new wife in America. The idea was rejected by Eddie Murphy's production company, but about a year later, Eddie Murphy wrote a very similar idea that turned into the movie Coming to America. Buchwald sued, spent over $1 million dollars on legal expenses, but because Paramount proved that, because of the wording of their contract, the movie technically made no net profits. And yet it cost $39 million to make and grossed $288 million (which by any definition is a blockbuster hit). The book was one of the first to peek inside what the real P&L sheets look like on a movie. Here's an example:



So here's a film that cost $150 million and made $940M -- actually more, once you figure in home video, streaming, syndication, and the other ancillary markets -- where the studio claims it still hasn't yet broken even.

My favorite line from the Coming to America book: Buchwald lamented after the trial ended, "there's a beautiful tennis court on the Paramount lot, but nobody can play. You know why? There's no net."

The book (which is almost 600 pages long) will tell you more than you ever wanted to know about actual profit, studio profit, adjusted profit, gross profit, net profit, and a dozen other legal terms that are awe-inspiring in their obfuscation. Suffice it to say it's not a simple subject.

People always ask, "well, gee, why not just ask for gross profit points?" And the answer is, "because then the studio will say no and will hire somebody else." You would be amazed how few filmmakers and celebrities actually have the clout to demand net points.

 

What I learnt in my time in the distribution business is that if someone is willing to give you something, it's because they're taking back 10 times as much as they are giving you.

 

Universal Headed to $77 Million Loss in 'Columbo' Profits Lawsuit

A panel of accounting referees, tasked with figuring out what Universal City Studios owed to the creators of the 1970s detective series Columbo, have concluded the right amount is $76.95 million.

The lawsuit was brought by William Link and heirs of Richard Levinson, who waited 45 years before getting their first profit participation check despite Columbo reaping hundreds of millions in revenue from broadcast and home video distribution.

The case went to trial in March, and the jury's conclusion was that the plaintiffs hadn't waited too long to bring claims, and furthermore, that Universal wasn't entitled to deduct distribution fees in accounting to profit participants. Thereafter, the judge referred the matter to referees to analyze income and expense statements and competing interpretations from the parties' respective experts.

The panel's report, dated July 22, returned the results.

The referees concluded that Link's and Levinson's loan-out companies were shorted about $36 million and additionally tacked on nearly $41 million in prejudgment interest. The total amount wasn't quite the $105 million that the plaintiffs insisted was due, but it was certainly more than Universal's contention.

The report now goes to Los Angeles Superior Court Judge Richard Burdge, who will issue final judgment.

Details about Universal's potential liability in this case comes just as Disney settled a profits dispute over Home Improvement. The two cases had similarities. An appellate court's ruling reviving the Home Improvement case helped the Columbo profit participants with their contention that they had brought a timely claim, and ultimately, the Home Improvement case also addressed the issue of charging distribution fees.

The Columbo plaintiffs are represented by a team led by Alton Burkhalter at Burkhalter Kessler, while Universal is being handled by a team led by Robert Klieger at Hueston Hennigan​

 

Disney Avoids Trial by Settling Long-Running 'Home Improvement' Profits Lawsuit

Disney has struck a settlement with the creators of Home Improvement to put an end to a six-year-old lawsuit that resulted in a consequential appellate ruling and was within weeks of going to trial.

Back in 2013, Wind Dancer Production Group and writer-producers Matt Williams, Carmen Finestra, Tam O'Shanter and David McFadzean filed suit with the allegation that they had been cheated from a show starring Tim Allen that had generated $1.5 billion for Disney. The creative team targeted syndication money and alleged that Disney had charged massive distribution fees as well as sold the hit comedy into the New York market for no money, undercutting the pot of net profits, upon which they asserted a 75 percent stake.

The lawsuit represented the second major legal action over Home Improvement. Back in the 1990s, the creators had brought one of the first actions over "vertical integration" in the entertainment industry, challenging how Disney had licensed the show to its affiliates. As consolidation has gripped entertainment, "vertical integration" suits have since become more common, including ongoing legal disputes over AMC's The Walking Dead and Fox's Bones.

The 2013 suit made its own huge mark when a judge dismissed the case due to Disney's citation of an "incontestability" clause in the profits contracts that required an objection to participation statements within 24 months after the date sent and legal action initiated within 24 months after the date sent. A California appeals court then revived the case with the opinion that the trial court should have explored whether Disney should be prevented from asserting the incontestability clause due to its alleged conduct frustrating a challenge. According to the suing producers, Disney had a practice of delaying audits or only allowing one audit at a time such that they were unable to timely object.

That appellate decision now gets frequently cited by plaintiffs in profits cases. It opened the door to more viable claims of accounting fraud inside the industry.

In the Home Improvement litigation, the parties then went through a discovery process, and while the lawsuit was trimmed along the way, a Los Angeles Superior Court judge put the case on track for trial after denying Disney's summary judgment motion in April. In particular, the plaintiffs zeroed in on the way that Disney applied 35 and 40 percent distribution fees when licensing the domestic basic cable rights of the series. Disney contended that it was authorized to do so under the contracts, but the judge ruled this to be a triable issue. The plaintiffs also questioned the royalties they were getting from subscription video-on-demand services including Hulu.

The Home Improvement creators identified $40 million as their damages target for trial, which was scheduled to begin Sept. 9.

Instead, the plaintiffs, represented by a Robins Kaplan team including Roman Silberfeld and Mark Passin, and Disney, led by O'Melveny partner Daniel Petrocelli, have informed the court of a settlement.

On Tuesday, the judge vacated the trial date.

Neither party has responded to an opportunity for comment, and the terms of the settlement have not been revealed.​

 

The lesson is always ask for the gross not the net profits when you get points in a movie. Otherwise, it's like dealing with the Mafia and always has been. They're crooks.

 

I speak from experience on this. I worked on a low budget film and my "salary" was supposed to be any profits made with the film. It wan't a huge money maker but, after sales overseas and on home video, the film ("Alien Warrior" directed by Ed Hunt) the film more than broke even. I swear that at least half the budget went up producer's nose during the shooting). I never saw a dime from the film not that I really expected it--I expected that I would just get the experience).

 

I know people who were paid very low money for small films, and the general consensus is that maybe 1 out of 10 makes enough money to actually get you a small check at the end of a couple of years -- I'm thinking maybe a couple of grand, at the most.

We have had issues with producers who run out of money at the "finish line" just as the film is almost done, and they turn to us -- in post -- and say, "hey, we can't really pay the bill we agreed on, so how about we just give you a percentage of the profits?" Usually at that point we unplug the hard drives, hand them the material, and wish them well. Our usual line is: "sorry, we're technicians -- we're not investors in your film." No question, the hardest part of show business is the business, not the show.

 

Or you could include a morals clause that entitles you to millions of dollars should anyone from a studio ever misbehaves. Just sneak it in there on page 53, subparagraph 8.33.03 C 2

 

You need to hire a hard-nosed attorney who knows his business - and yours.

 

The only reason that (as I recall) Harrison Ford, Carrie Fisher and Mark Hamill were able to do well off of the Star Wars films is that George Lucas (wisely) gave them gross points to thank them for their help in making the films. Even when acting roles for Fisher and Hamill weren't as forthcoming later(or paid as much money), they did fairly well as I recall.

 

As a former accountant I would recommend to anyone who's in this business to get paid a flat rate (upfront) that you are happy with + if you have the clout a % of the box office gross revenue. Make it as simple as possible for yourself because if you ask for a % of gross or net profits you will need an addendum that's a mile long defining what can and cannot be included in the Statement of Income for the purposes of your deal and a team of forensic accountants to go thru everything to make sure you're not getting screwed and KPMG doesn't work for free...

Ex: fee is $500,000 + varying %'s of Domestic, All Foreign and China payable 60 days after end of theatre run. Subject to audit.

 

It’s obvious he didn’t have an attorney negotiate the agreement. The person who represents himself has a fool for a client.

 

In my experience that's good advice for the music industry as well, get paid upfront for any work you do, points are rarely worth the paper they are written on. Wayneklein's mention of the budget going up the producer's nose reminds me that I once worked for someone who blew a large portion of the label's income on fruit desserts, I kid you not, we move in very different worlds.

 

My memory of the story is after the film made about $100 million by the fall of 1977 -- which at the time was an astronomical amount of money -- Lucas voluntarily gave Ford, Fisher, Hamill, and John Williams each 1 point of the gross from the 10% George had. I thought that was an incredibly kind and gracious thing to do. (They also got enormous raises from Fox for the two sequels.) Lucas still did extraordinarily well financially on the film and could afford to be generous.

Note that each actor also made a small amount of money on any merchandising using their likenesses as well. Hamill was a sci-fi fan, so he asked in the contract for one sample of any toy or model or piece of clothing that had his face on it. He revealed a few years ago that he's had to spend a fortune on four separate warehouses in NYC (where he lives) just to store all the toys and tchotchkes, and he has a couple of people who work for him who constantly sell the stuff for him on eBay... because he can. Hamill admitted that Lucasfilm makes quite a few "limited edition" Star Wars toys produced in very small quantities, and those can be worth thousands of dollars... and if it has to do with Luke Skywalker, he gets one for free.

Nobody has the clout to do that. They'll just laugh at you and tell you to get F'd, and then they'll call one of the five or six other people desperate to work on the film. My guess is that there are probably fewer than 100 people in all of show business that are lucky and talented enough to get gross profit participation.

As an example: Howard Stern recently had actor Orlando Bloom on as an interview guest. Howard wondered allowed about the millions Bloom had made on Lord of the Rings, and the actor laughed at him and revealed he only made a total of $175,000 for all three films... combined. Howard said, "well, surely you got all kinds of additional money in profit points on the movies and the home video," and Bloom shook his head and said no, he only got the one lump sum payment. Period. And this is a fairly big-name actor. He did say he was very grateful for the role and that he did "extremely well" on The Hobbit, kind of as a way of making up for his relatively low pay on the original films.

What does happen instead is that the studio will sometimes give the actor or director or writer or producer a concession, where if the film hits certain milestones -- for example, if it's #1 at the box office, or if it makes more than $50 million the first weekend, or if it grosses more than $100 million in America -- they get a bonus. So maybe everybody gets another $50K or $100K every time one of those milestones gets hit. (Famously, Robin Williams only got about $100,000 to do the cartoon voice of the Genii in Aladdin, then he complained about not getting any more money after the movie became a massive hit. Somewhat embarrassed, Jeffrey Katzenberg at Disney sent Robin a $1 million original Picasso painting as a bonus and a thank-you note, for which the actor was very happy.)

Last story: It's even worse in TV. People think the actors in Seinfeld made a lot of money, but the reality is that they got only "decent" pay all the way through about season 4. Jerry Seinfeld and Larry David always owned a piece of the show, but they were working multiple jobs as co-creators, co-producers, and (essentially) co-showrunners. Around season 5, the other actors negotiated major raises, and by the final season they were each making about $600,000 per episode, but Jerry was doing $1 million per episode. The actors were bitter that they never got back-end profit participation. When the studio did the boxed DVD set years later, the other actors got together and refused to do any interviews for the home video release. The studio execs huddled after realizing the inequity involved and understood the home video release and promotion would be hurt without their participation. They reluctantly gave each of the actors a $1 million bonus for one day's work, reminiscing about working on the show, their favorite episodes, memories from shooting different shows, funny stories, and so on, and the actors also agreed to do a limited tour promoting the boxed set on talk shows.

But years later, Jason Alexander revealed he was still somewhat bitter knowing that Jerry and Larry David had each made more than $500 million dollars (!!!) on the syndication of Seinfeld, while the actors only got a few thousand dollars in residuals for each season as per SAG rules. Note that the Seinfeld exclusive streaming rights just sold to Netflix for $500 million, and I'm guessing Jerry & Larry will split at least $100 million (20%) of that.

 

What's your definition of gross profit? My understanding is that most actors are paid a flat rate, if you happen to be someone like Tom Cruise, Robert Downey, Leonardo DiCaprio etc...you can also get a % of the box office revenue (details vary per deal).

 

Kevin Costner is suing the distributors of Open Range over profits to the 2003 movie.

Kevin Costner Sues 'Open Range' Distributors Over Profits

 

All the definitions are in the Art Buchwald book I cited earlier, but be warned that different studios define "gross profit," "studio profit," "net profit," "actual profit," "rolling gross," "adjusted net profit," and "adjusted gross" by different terms. This is not a simple subject; I think that book is 600 pages long.

Here is a link to a free 111-page legal document that goes into some of the definitions and shenanigans that plague Hollywood contracts:

https://www.immagic.com/eLibrary/ARCHIVES/GENERAL/JOURNALS/L980130W.pdf

 

Thanks but I'll pass, I'm done reading accounting/tax related textbooks. Bottom line get a good lawyer & accountant who knows the business inside/out if you're going to get anything beyond a straight flat rate fee for your services.

 

Speaking of people getting screwed over profits, Kevin Costner is now suing over not getting his fair share on Open Range, which he did back in 2003...

Kevin Costner Sues 'Open Range' Distributors Over Profits

 

And this slices the smug story about the judge and Winston and Forrest Gump in half.

Because Buckwald didn't sign any contract agreeing to take accounting profits. He sued because his idea was stolen, and lost because the legal system accepted the accounting showing there were not profits.

So even if Winston's contract had been different, it's likely he would still have received nothing.

 

It was a contract law issue: Buchwald signed a deal with the studio that said that Paramount had the power to define what "profit" was before he wrote a single word. Paramount lost the case and had to admit that they stole parts of his story idea for Coming to America, and Buchwald won a share of the profits; but when they added up that money, it was less than $200,000. He spent over $1 million dollars on legal fees, which Paramount did not have to pay.

Read the book I cited -- it's a fascinating story (but again, 600 pages long).

 

Unlike the patina of legality that seems to cover the notorious Hollywood accounting practices, "Begelgate" was actually illegal but it seems to belong here. The following are excerpts from an October 11, 1982 People magazine article: ...David Begelman, had been charged with grand theft in 1978, thereby opening a Pandora’s box on financial finagling at the studios...Begelman’s spectacular fall began in February 1977, when actor Cliff Robertson questioned an IRS notification of a $10,000 payment from Columbia Pictures—money he had never received, for work he had never contracted to do. It was subsequently discovered that Begelman, then president at Columbia Pictures, had embezzled money from the studio by forging checks and padding his expense account...Begelman resigned from Columbia in 1978, when he was under indictment, only to be named president of MGM, which acquired United Artists the next year and installed him as chairman. Though UA axed him last month...Hollywood insiders attributed the downfall strictly to the failure of his films; of 11 Begelman releases at UA, only Poltergeist is a solid smash.


And this from Wikipedia: Kirk Douglas, in his autobiography The Ragman's Son (1988), wrote of the scandal:

This is the town where Cliff Robertson exposed David Begelman as a forger and a thief, with the net result that Begelman got a standing ovation at a Hollywood restaurant, while Robertson was blacklisted for four years. On the bad days, you think of what Tallulah Bankhead said: "Who do I have to **** to get out of this business?"[4]

A writer for New West magazine, working on this story, queried Begelman's claimed alma mater, Yale University, listed in his Who's Who entry. Yale responded that Begelman had never attended that university. The New West article said that "although Begelman was indicted for forgery and grand theft, the Hollywood types were more outraged that he had listed Yale in Who's Who. Apparently they figured that everybody steals money. It was the fact that he lied about Yale that drove them crazy."