In one of the most striking examples yet of creative Hollywood accounting, the makers of “Forrest Gump,” the fourth-highest-grossing movie ever, say the blockbuster is more than $60 million in the red.
It’s called “net profits” accounting. It’s standard industry practice, and this is not the first time it has caused jaws to drop.
“Forrest Gump,” winner of this year’s best picture Oscar and five other Academy Awards, claims worldwide ticket sales of $661 million and strong sales in its first month of home video release.
The movie has been hugely profitable for Paramount, Tom Hanks and the director, Robert Zemeckis. People close to the film estimate they each will earn close to $40 million.
Paramount, Hanks and Zemeckis enjoy a percentage of the film’s gross receipts - taking a cut of the first dollars that come in from theaters, video stores and soundtrack sales.
As for others involved in the project, they’ll have to wait before they see the really big money.
Winston Groom, who wrote the novel; co-producer Steve Tisch; and screenplay writer Eric Roth are what are known as “net profit participants”: Their share comes from the net profits - the profits left after various costs are deducted.
And so far, Paramount says, the movie has yet to show a net profit.
Groom, who is writing a sequel novel, was paid $350,000 for the book’s rights and is entitled to 3 percent of the net profits. He has hired a lawyer to claim his share from the movie.
Paramount said the film will eventually show a net profit and has advanced Groom $250,000.
“We are treating everyone fairly and respectfully and we won’t be goaded into bad behavior,” the studio said.
In columnist Art Buchwald’s 1988 lawsuit against Paramount, a judge ruled that the studio’s “net profit” accounting was “unconscionable.” Nevertheless, it continues to be standard industry practice.
Hal Vogel, an industry analyst at New York’s Cowen & Co. and the author of “‘Entertainment Industry Economics,” said net profit participants are hardly the “babes in the woods” they make themselves out to be.
“They all have the highest paid attorneys money can buy and they’re all millionaires,” Vogel said. “They know how the system works. The gross participants in effect block off the net participants.”
By December, Paramount had collected about $191 million from domestic and international “Forrest Gump” ticket sales (theater owners keep half), according to a Paramount accounting document. That figure will increase when 1995’s significant home video revenue is included.
Paramount deducted $50 million in “Forrest Gump” production costs, a distribution and marketing fee of about $74 million, $62 million in distribution expenses, payments to Hanks and Zemeckis of close to $62 million and $6 million in interest.
The result: a loss of more than $60 million.
Throughout the industry it’s recognized that such charges often are arrived at arbitrarily and could be inflated. For instance, a source who spoke on condition of anonymity said Paramount’s distribution expense was far less than the $62 million reported.
In the Buchwald case, Superior Court Judge Harvey Schneider ruled the Eddie Murphy hit “Coming to America” was based on a Buchwald movie idea and deserved compensation. But the columnist and a partner were net profit participants, and Paramount claimed the movie had lost money.
Murphy said during the trial that net profits were “monkey points” because only fools would believe they were worth anything.
Warner Bros. also maintained in 1992 that the hugely successful “Batman” lost more than $20 million, according to net profits accounting.
News of the unusual accounting on “Forrest Gump” was first reported by Forbes magazine this week.
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