Paramount’s Net Profit Central to Buchwald Suit : Law: Second phase of ‘Coming to America’ case could jeopardize 40 years of studio accounting practices.

What does net profit mean in Hollywood?

Attorneys for both humorist Art Buchwald and Paramount Pictures agree that an ongoing legal tug-of-war over an estimated $250 million to $300 million in ticket sales, video rights, TV licensing fees and other revenues from the studio’s 1988 comedy hit “Coming to America” may come down to how a Los Angeles Superior Court judge answers that deceptively simple question.

In so doing, Judge Harvey Schneider will have the opportunity to affirm at least 40 years of studio accounting practices or throw the entire entertainment industry into accounting chaos, according to lawyers for the studio and the columnist.

“We hope that (Judge Schneider) does (redefine net profit) because it is a grossly unfair system that goes on, year after year, unchallenged,” said Buchwald’s attorney Pierce O’Donnell. “The net profit system in Hollywood is a scam. The only question is whether it’s legal.”

Counters Paramount attorney Charles Diamond: “It’s unfortunate that Art Buchwald has spent a year and $1 million on a suit that is now relegated to the argument that the contract (i.e., the net profit definition) is illegal.”

Since Jimmy Stewart negotiated Hollywood’s first profit participation deal on the 1950 Western “Winchester ‘73,” studios have--as a matter of course--had to cut their stars, directors, writers and producers in on the profits of movies. To get around that bottom line drain, however, studio contracts have defined and redefined a film’s expenses before it actually goes into profits. As a result, contract semantics can often make it impossible for a motion picture to ever break even, leaving many of the people who make motion pictures with virtually worthless net profit shares of a bottom line that is almost always drawn in red ink.

The case of Buchwald vs. Paramount Pictures could change all of that.

Buchwald sued Paramount claiming that he, not Eddie Murphy, authored the story for “Coming to America.” After a two-week trial in December, Judge Schneider ruled in Buchwald’s favor.

Paramount’s attorneys have maintained all along, however, that Buchwald is bound by a contract he signed eight years ago, when he wrote the story that “Coming to America” was based upon. Buchwald and his partner Alain Bernheim agreed to receive $250,000 plus 19% of the film’s net profits.

Buchwald and Bernheim guess that they are owed 19% of at least $2 million. Paramount, however, maintains they are entitled to 19% of nothing, for under Hollywood’s unique accounting system the Eddie Murphy comedy about an African prince who comes to New York to find his bride is somewhere between $17 million and $18 million in the hole.

Beginning today, using a legal Q&A; process called “interrogatories,” Paramount will start formally answering specific questions posed by Buchwald’s attorneys about how one of the most successful movies the studio has ever released can still remain $17 million in the red. What they will ultimately find, said Diamond, is that Paramount was correct in describing the dispute as being little more than a squabble over about $50,000 in up-front salary that the studio may or may not owe Buchwald and producer Alain Bernheim.

In figures released this week, Paramount has maintained that distribution expenses, fees, interest, overhead, production costs and other expenses have already eaten up the $125 million that the studio had taken in as of Dec. 31.

Accountants, attorneys and auditors for both sides will spend the next several weeks going over Paramount’s books before the case actually goes to court July 9. The July court hearing is the second phase of the trial, in which Buchwald will attempt to show that Paramount is hiding profits by bloating expenses.

“They’re trying to low ball their figures,” said O’Donnell.

O’Donnell said the studio has a history of inflating its expenses and will introduce profit statements from another hit Paramount movie, “Fatal Attraction,” during the second phase to show how the studio systematically drains its biggest hits of all money before any of its profit participants get anything. A studio profit statement on “Fatal Attraction” dated Dec. 23, 1989, showed that it had earned $166 million for the studio, but still showed a net deficit of $100,000.

O’Donnell maintains that documents he obtained through pre-trial discovery last fall show a gross of $151 million as of last October, not $125 million as it has reported this week. In an interview, O’Donnell said the studio leaked the lower figure to the media this week as part of “a campaign of disinformation” prior to the trial.

Attorney Diamond said that the figures, which are accurate, were not leaked to the press, but, rather, openly given as part of the studio’s attempt to set the record straight.

“We’re not subject to a gag order in this section of the trial, so we can show the exaggerated and distorted expressions (of O’Donnell) as what they are,” said Diamond.

Diamond’s figures show that “Coming to America” grossed $125 million (about half what it earned at the box office, after splitting worldwide receipts with theater owners) as of Dec. 31. Paramount took a standard 35% “distribution fee” of $42 million up front as “Coming to America’s” distributor, characterized in the entertainment industry as a kind of “banking” fee that is always charged against any movie a major studio releases. That left $83 million.

Next, according to the Paramount breakdown, the studio took out $36 million for distribution expenses: the cost of advertising, making prints of the movie and getting it out to theaters around the world. That reduced the bottom line to $47 million.

Unlike net profit participants Buchwald and Bernheim, Eddie Murphy and the movie’s director, John Landis, had “gross” profit deals that entitled them to cuts of the film’s gross receipts, totaling another $11 million, according to Paramount. That reduced the bottom line to $36 million.

Paramount also charged about $5 million interest on the movie’s production budget or so-called “negative” cost, lowering the profit margin to about $31 million.

And, finally, the total negative cost for “Coming to America” (i.e., actual production cost plus studio overhead) came to $48 million, by Paramount’s figures, leaving a deficit of between $17 million and $18 million.

Buchwald and Bernheim have stated publicly that they will settle out of court for $5 million, but are unwilling to agree to any stipulation that they remain silent about the settlement details or any information surrounding Paramount’s finances that they discovered in the course of their lawsuit.

Despite being admittedly weary by the extended legal battle, Buchwald remained lighthearted when he visited Los Angeles last weekend during an awards presentation dinner sponsored by the Writers Guild of America. He characterized the audit of Paramount’s books as “The search for Red October, and November and December . . . ,” referring to the studio’s current blockbuster “The Hunt for Red October,” which, Buchwald predicted, will also probably come up profitless. According to Daily Variety, the Sean Connery thriller took in $53.9 million the first 17 days it was in the nation’s theaters.

“If Paramount makes any more money, they’re going to have to declare bankruptcy,” he quipped.

‘COMING TO AMERICA’--THE BOTTOM LINE Worldwide box-office receipts: About $250 million Film rental income to Paramount: $125 million Distribution fee taken from rentals by Paramount: $42 million Distribution and marketing costs: $36 million Film production costs (including payments to Eddie Murphy and John Landis): $57 million Interest on financing: $5 million Net loss to date: ($17 million) SOURCE: Paramount Pictures