By SARA FISHER

Staff Reporter

At first glance, the math seems relatively simple.

"Titanic," the film immortalized for its 14 Oscar nominations, is said to have cost a record-breaking $200 million. The movie's worldwide box office performance similarly shattered records by passing the $1 billion mark a couple of weeks ago. That leaves $800 million at the bottom line, right?

Of course not.

Studio accounting systems are so complex that they rival "L.A. Confidential" for plot twists. Since the studios normally don't need to disclose their figures or calculations regarding any particular project, arcane and in some cases inexplicable accounting rules have evolved. The L.A. courts are loaded with disputes over the profit of various films.

As Academy Award night draws closer, and the box-office grosses are routinely published in the press, it is nearly impossible to determine how much actual profit will be generated by the five best-picture nominees.

"The accounting system is a morass that absolutely no one has figured out except for (studio) accountants," said one industry executive.

The trouble starts over what is considered "net profits."

Art Buchwald's case regarding the Eddie Murphy movie "Coming to America" brought to light just how convoluted those calculations can be.

The Washington columnist, who wrote a script treatment on which a court later judged the movie to be based, sued Paramount Pictures for a share of the net profits on the film.

The 1988 movie was considered a hit, yet the studio claimed that according to its accountants, it lost money. The suit was settled out of court in 1995 after a judge deemed Paramount's definition of net profits to be "unconscionable."

"Most movies will never see a 'net profit' according to the existing accounting methods," said John Shaeffer, managing partner of O'Donnell & Shaeffer, the firm that handled the Buchwald case. "Does that mean that the studio didn't make money? Of course not."

"Titanic" is one film whose profit potential has been the talk of Hollywood.

Its epic production budget of $200 million, along with $120 million to cover print and advertising, generated plenty of skepticism in advance of its release.

But this month the film's box office receipts topped the $1 billion mark, and some are saying it will be the biggest-grossing film in history when all the receipts are in. Still, biggest grossing and most profitable are not necessarily one in the same.

First off, there is the so-called "house nuts" the percentage of the box-office proceeds that movie theater owners get for running the movie. That cut generally is on a sliding scale, dependent upon a contract established for each movie. The average percentage of the box office taken by the theaters is about 45 percent. For first weeks of big movies, or if a movie continues to attract large audiences over extended periods, a studio usually negotiates a smaller house nut.

To be conservative, assume that the studios behind "Titanic" Paramount Pictures and Twentieth Century Fox Film Corp. negotiated an average nut of 40 percent. That means the studios would only see $600 million from the $1 billion box-office take.

Factoring the $200 million production cost and $120 million print-and-advertising cost, the studios' return is now $280 million.

Yet another slice to be taken off the gross is studio distribution fees. As distributors of their own productions, the studios claim a hefty percentage of the gross. Sources said distribution fees tend to hover between 30 percent and 40 percent of gross earnings.

This further reduces the "net profit" pot available to the other participants. In many cases, these distribution costs levied by the studios are responsible for movies never showing any net profits.

Last but not least on the debit side comes interest on the studio's investment. When considering the $300 million-plus price tag on "Titanic," the average 15 percent annual interest rate studios charge pushes the net profit even lower, if one even still exists at this point.

So where does that leave the actors, directors and other industry members who hold profit-sharing agreements? It depends.

It's common for actors, directors and writers with established box-office appeal to write into their contracts "back ends," industry jargon for profit sharing. But as the calculations above show, what constitutes a profit for the studio is a different than the money that ends up in a general profit pool.

"People negotiating contracts that involve net profit sharing make the mistake of thinking that net profits at a studio mean something in real accounting terms," Shaeffer said.

Consequently, mega-star actors and directors are now more likely to negotiate back-end deals based on gross rather than net profit. Often, they will discount or waive up-front fees in exchange for a back end that involves a percentage of the gross profits.

At the other extreme of "Titanic" is "The Full Monty," which was made for a paltry $3.5 million and generated more than $200 million at the box office.

A windfall, right? Not necessarily.

Since most of the actors didn't have star power, they didn't have back-end clauses in their contracts. Consequently, they wouldn't normally see any of the profits.

Steve Huison, one of the film's leads, earned a mere 1,500 British pounds per week ($2,445) during the nine-week shoot, for a total of $22,005.

That's normally pretty good money, but by Hollywood standards, it's chump change, especially given the movie's success. Fortunately for Huison and his co-stars, the producers set up a trust fund to provide the cast and crew with a percentage of the profits.

And what will those profits amount to? No one is saying, as usual, but print-and-advertising costs alone ran between $30 million and $40 million taking a significant bite off the bottom line.

Another problem with determining profits is that revenues these days involve a lot more than the box-office take.

Studios sell videocassettes to video rental stores for up to $70 per unit a price that is recouped over time through rental income and that leaves a hefty profit for the studios. But the studio again takes a distribution fee for the videos, which according to sources, runs around 80 percent. The remaining 20 percent or so of the video market net goes to the general profit pool.

Television rights to movies are another major source of revenue. Between pay-per-view rights, cable rights, domestic and foreign television broadcast rights, and rights for developing the movie into a TV series, these deals become huge moneymakers for the studios.

So has anyone besides a movie studio profited from a film in Hollywood? Certainly, but it's often the exception to the rule. Even blockbusters like "Forrest Gump" and "J.F.K" have been labeled by their respective distributors to have been money-losing projects.

In response, the estate of Jim Garrison, the former New Orleans district attorney whose memoirs inspired Oliver Stone's film, filed a suit against several studios for violating antitrust laws, thus challenging their accounting methods. The case is ongoing. But the charge that studios juggle their books to avoid paying back ends is a common one.

Partly in response, the group that oversees national accounting procedures last month approved several changes in film accounting to limit the leeway studios now enjoy.

One key change involves the lengthy period in which studios write off advertising costs. Although most advertising money is spent upon the film's opening, studios defray costs by spreading them gradually over the years. The revised rule would force studios to write off all marketing for theater release within the first three months.

The group's changes in methodology have yet to be approved, but some version is expected to be implemented by the year 2000.

For reprint and licensing requests for this article, CLICK HERE.