summary

Issues in Accounting Education Vol. n.No.i Spring 1996

Instructional Case: Main Line vs. Basinger:

A Case in Relevant Costs and Incremental Analysis

Thomas L. Barton, William G. Shenkir and Brian C. Marinas

ABSTRACT: Important management accounting techniques, such as contribu- tion analysis and relevant costing, are integral to the widely publicized case of Main Line Pictures vs. Basinger. Main Line sued actress Kim Basinger in 1991, alleging that she caused the company to lose profits of $5 to $10 million by withdrawing from a controversial film project in breach of contract. Main Line argued that it would have earned a pretax profit on the film in the range of $3 million to $8 million if Basinger had remained. The profit figures were calculated from pre-sale contract amounts and the film's budgeted cost. Main Line also argued that it expected to lose $2 million on the film as it was eventually made primarily because Basinger's replacement was of much lower box office appeal.

Basinger argued that only a handful of very successful films could generate profits to Main Line in the dollar amounts cited because of the many contractual claims against those profits by others. In addition, her presence in the film was no guarantee that the film would be successful.

At issue here are the reliability and reasonableness of the numbers used in Main Line's lost profit computation. The case relies heavily on the identification of relevant costs and the performance of sensitivity analysis as the reader is asked to consider alternative cost and revenue assumptions to ascertain the impact on the lost profit amount. Finally, the reader is asked to prepare his or her own alternative lost profit calculation.

IN 1991, Main Line Pictures, Inc. suedactress Kim Basinger (and others) forbreach of contract. Basinger had been in negotiation with Main Line to star in the film, "Boxing Helena" but had withdrawn from the project. The suit was heard in early 1993 in the Superior Court of the State of California, for the County of Los Angeles with the Honor- able Judith C. Chirlin presiding.

For the Plaintiff (Main Line), Patricia L. Glaser, Attorney at Law:

Nobody is saying Miss Basinger has to act in this movie. Nobody

Thomas L. Barton is a Professor and KPMG Feat Marwick Fellow at the Uni- versity of North Florida, William G. Shenkir is the William Stamps Farish Pro- fessor of Free Enterprise and Brian C. Marinas is a Graduate Student in Ac- counting, both at the Mclntire School of Commerce, University of Virginia.

The authors wish to acknowledge the re- search assistance of Jan Smiley, Colleen Shapinas and Guy Jackson. The authors are grateful for the useful comments and sugges- tions received from two anonymous review- ers and the Editor (Professor Wallace).

164 Issues in Accounting Education

ever said that. What we said was when she committed to do the project, when her agents negoti- ated the terms of the contract, and when she agreed to do this deal, if she wants to walk away because she changed her mind, she's got to pay the piper. She's got to pay for that. And all I'm saying is we're entitled [to] our damages between 5.1 and 9.7 million dollars. We're entitled to that. Ladies and Gentle- men, because there was an oral agreement, and I'm going to show you there is also a written agreement.

For the Defendant (Kim Basinger), Howard L. Weitzman, Attorney at Law:

First of all, you are being asked to, in effect, order Kim Basinger to pay 5.1 or 9 something or 10, what- ever, multiple millions of dollars for a picture that was not made because Mr. Mazzocone [Main Line president] was angry and wanted to make the movie. She's not responsible for that. No way in the world would I sug- gest to you Carl Mazzocone [or] Main Line Pictures is entitled to $5 or $8 or $10 million because he has a duty under the law to minimize his loss, and it does not include going out and making a picture knowing you are $2 million short, and that's what happened here.

BACKGROUND In the Basinger case, the primary is-

sue for jurists and other legal enthusi- asts was whether Basinger breached an actual contractual agreement or simply engaged in the usual caprice of Holly- wood deal making. The press was awash with stories declaiming the lack of integrity in Hollywood deals and dis- cussing the possible adverse implica- tions for actors and production compa- nies in general.

The film "Boxing Helena" was no less controversial than the legal issue. It involves a woman who is injured in a car accident. The doctor who "rescues" her amputates her injured legs and un- hurt arms and keeps her hostage in a box, hoping she will eventually fall in love with him. Basinger testified that she withdrew from the starring role, after ongoing negotiations, because of con- cerns about her character's personality and graphic scenes of an adult nature.

Main Line, however, had $3 million in potential domestic and $7.6 million in foreign pre-sale agreements based on Basinger's participation in the film. Af- ter her withdrawal, a lesser known ac- tress, Sherilyn Fenn (a star of the televi- sion series, "Twin Peaks") was en- gaged, resulting in only $2.7 million in foreign pre-sale agreements and no do- mestic distributor as of the time of the trial. Main Line contended that it in- curred significant financial damages from Basinger's withdrawal from the project.

Of concern here is how to value the actual damages incurred by Main Line if there were a breach of contract. Any value is particularly tenuous given the fact that (1) a film with Basinger was never made, and (2) a reliable revenue prediction for a specific film is very dif- ficult, and frequently impossible, to ob- tain before the film is released. Both Main Line and Basinger presented ex- pert witnesses to deal with the problem.

REVENUES AND COSTS FOR A FILM PRODUCTION

A film project generates revenue to its producer through rentals based on box office receipts and ancillary sources such as home video, cable and network television. Independent producers (i.e., those not affiliated with major studios) typically attempt to raise the capital to produce their films through pre-sale

Barton, Shenklr and Marinas 165

contracts. In a pre-sale contract, a film distributor will agree to distribute a film to theaters in a certain geographic area in return for a fee guarantee. For ex- ample, a distributor in Europe contracts to distribute a film and agrees to pay the producer $5 million against an amount calculated as the revenue to the dis- tributor (based on box office receipts or "gross") less a 40 percent distribution fee and less the costs of advertising, making the copies of the movie (prints), and other distribution elements such as freight. The producer can then borrow against that contract from a bank to help finance the film's production cost, or the distributor can advance production funds to the producer against its own contract.

If the film generates revenue to the distributor in Europe of, say, $15 million (based on total tickets sold), the distribu- tor will calculate the payment to the pro- ducer as $15 million less the 40 percent distribution fee less the cost of prints, advertising and other miscellaneous dis- tribution costs. Suppose the cost of prints, advertising and other distribution ele- ments is $3 million. Then the producer would be paid: $15 million - (40 percent X $15 million) - $3 million = $6 million. But regardless of the film's actual success at the box office, the payment could not be less than the guarantee of $5 million.

The producer's costs of a film pro- duction are the outlays for acquiring the rights to the script, fees to the actors, director and production personnel, film stock and processing, camera rentals, sets, costmnes, special effects, and post- production costs of editing, sound and music. The producer will deliver a mas- ter copy of the film from which prints can be made but the actual cost of the prints, advertising and other distribution ele- ments are borne by the distributor until they are recouped from the producer's share of the box office receipts.

Often there will be contractual ar- rangements that will call for the pro- ducer to share net profits, and in some cases revenues, with key actors, the di- rector and others. While direct costs are charged to the individual film projects as incurred (job order costing), there can be common overhead costs that will re- quire allocation to individual films. This allocation, of course, will affect the pay- ments made to net profit participants and has been a longstanding source of controversy—and litigation—in the in- dustry. But overhead allocation is more of an issue with major studios who pro- duce 15 to 20 films a year than with in- dependent producers who may produce only one or two films a year.

TESTIMONY BY MAIN LINE'S EXPERT

Louis L. Wilde, Ph.D., professor of economics and consultant, appeared as an expert witness for the plaintiff. Wilde testified that the minimum profit differ- ential (and therefore financial loss to Main Line) was $5.1 million. This analy- sis is presented in table 1.

Wilde worked from the definition that damages were "a measure of the compensation that would be required to put the person [who was breached] in the position [he] would have been in had there not been a breach in terms of the economic losses to [him]...." Wilde sim- ply compared what Main Line expected to make with Basinger to what Main Line actually was able to make on the same package without Basinger—the difference (presumably a loss) was the damage to Main Line.

Wilde emphasized that a focus on "net profit differential" was especially appropriate because a differential, or incremental value, is independent of the specific values for revenue or expenses. For example, suppose the film without Basinger eventually performed better

166 Issues in Accounting Education

TABLE Minimum Damages,

With Basinger

$6.8 0-8 7.6 3.0

10.6

$3.0

1 Plaintiff Expert

Without Basinger

$2.7 NA

2.7

M 2.7

(4.8)"

($2.1)

Difference

$4.1

M 4.9 3.0

7.9 (2.8)

$5.1

Foreign Pre-Sales Firm Probable

Total Foreign Domestic Pre-Sales

Total Revenue Production Budget

Net Profit/(Loss)

^ Per testimony of producer that film would be made for amount of foreign pre-sales. " Actual budget for film as produced.

than the $2.7 million pre-sale amount, generating ultimate revenues of $12.7 million. Wilde claimed that his profit dif- ferential of $5.1 million would still hold even at the higher revenue amoimt. Rev- enues of $12.7 million for the film with- out Basinger equate to a profit of $7.9 million ($12.7 in revenue less $4.8 in costs). So, according to Wilde, the Basinger film would have earned a profit of $13 million ($7.9 plus $5.1).

Wilde also calculated a maximum profit differential (table 2). He argued

that the private negotiations for the price of domestic distribution lacked market efficiency and, therefore, did not fully reflect the eventual market price of the film if it were released. This flaw in the domestic revenue estimate did not ap- ply to the foreign pre-sales, according to Wilde, because "the foreign pre-sale markets are very well organized. They meet in well-defined places. ...Buyers and sellers come together. The products are there. The transactions take place. Not down in the pit the way the stock

Foreign Pre-Sales Firm Probable

Total Foreign Domestic Pre-Sales

Total Revenue Production Budget

Net Profit/(Loss)

TABLE Maximum Damages,

With Basinger

$6.8 0.8

7.6 7.6*

15.2 (7.6)"

$7.6

2 Plaintiff Expert

Without Basinger

$2.7 NA

2.7 0.0

2.7 (4.8)'=

($2.1)

Difference

$4.1 0.8

4.9 7.6

12.5 (2.8)

9.7

^ Domestic pre-sales adjusted for market inefficiency. Put into 1 to 1 ratio with foreign pre- sales.

" Per testimony of producer that film would be made for amount of foreign pre-sales. *= Actual budget for film as produced.

Barton, Shenkii and Marinas 167

market works, but in a relatively short period of time. Information is very good." Therefore, the foreign pre-sale markets (e.g., Cannes Film Festival, American Film Market, MIFED-International Film, TV Film and Documentary Market, etc.) possess greater market efficiency.

To adjust the privately negotiated domestic price to what would be ex- pected in the public market (i.e., box of- fice), Wilde studied the average ratios of domestic to foreign sales for movies of the same genre. Wilde concluded that the ratio of domestic to foreign for this type of film was one-to-one. Therefore, the potential domestic revenue amount should be revised so that it equals the foreign pre-sales amount. This means an upward adjustment of $4.6 million in the domestic revenue to $7.6 million. With this change, the maximum profit differ- ential is $9.7 million.

As a "gut level check" of his analy- sis and the revenue differentials, Wilde also compared the average revenue of Basinger films (excluding "Batman") with the average revenue of Ferm films. He found that Basinger films had an av- erage revenue of $19 million and Fenn films, an average revenue of $1.6 million.

TESTIMONY BY BASINGER'S EXPERT

Bruce St. J Lilliston, an attomey and specialist in independent film finance and production contracts, appeared as an expert witness for Basinger. Lilliston took the position that in order for an in- dependently produced film to yield a net profit of $5.1 million to Main Line (the minimum profit differential of Main Line's expert), it would have to gener- ate worldwide distribution revenues of $82 million. This would come primarily from theaters, video and television (table 3). The analysis assumes the film with- out Basinger exactly breaks even. If to- tal revenue this large was generated by

"Boxing Helena," it wotild place it num- ber 4 on the list of top performing inde- pendent films released between 1985 and 1991, following "Dirty Dancing" and above "Nightmare on Elm Street, Part IV."

Lilliston also presented evidence that to yield the maximum profit differ- ential of $9.6 million, "Boxing Helena" would have to generate worldwide dis- tribution revenues of $144 million, plac- ing it number 3 on the list of top per- forming independent films, following "Teenage Mutant Ninja Turtles" and above "Dirty Dancing."

Lilliston then testified that "big stars in a movie" do not necessarily equate to big revenues. He displayed a chart showing a list of films with well-known stars that had underperformed at the box office. Included in the list was "Homer and Eddie" starring Whoopi Goldberg, which had a box office gross of $14 thousand against a cost of $14 million. Also appearing in the Ust was "Hudson Hawk" starring Bruce Willis, which generated a box office gross of $17 million versus a cost of $54 million.

ADDITIONAL INFORMATION • Basinger was to be paid $600,000 in

guaranteed compensation to appear in "Boxing Helena" with another $400,000 to be paid out of producer revenues "before the bank" was paid on the production loan to fi- nance the film. She received $3 mil- lion to appear in "Final Analysis" following her withdrawal from "Box- ing Helena."

• As mentioned previously, foreign pre-sales are typically used by inde- pendent producers to secure produc- tion loans from banks that provide financing for the production costs. This was the case with "Boxing Hel- ena. "

• The domestic distribution deal cited in Wilde's testimony had not been

168 Issues in Accounting Education

TABLE 3 Revenue Needed for Profit Differentials, Defense Expert

Maximum Minimum Total Revenue Avg. Worldwide Distribution Fees (40%) Prints & Advertising

Amount Payable to Producer Production Budget (assumed) Gross Profit Deferment Payable to Main Line Deferment Payable to Caland^ Net Profit Participation Payment (20.5%)'' Net Profit after Participation Level 1 Split:

50% to Main Line to $2 Million 50% to Caland to $2 Million

Net Profit for Level 2 Split Level 2 Split:

15% to Main Line 85% to Caland

Summary of Payments to Main Line: Deferment Level 1 Level 2 Total Payments to Main Line

$144,207,655 (57,683,062) (12,000,000) 74,524,593 (7,600,000) 66,924,593

(250,000) (250,000)

66,424,593 (13,617,042) 52,807,551

(2,000,000) (2,000,000)

48,807,551

(7,321,132) (41,486,419)

$250,000 2,000,000 7,321,132

$9,571,132

$82,288,150 (32,915,260) (12,000,000) 37,372,890 (7,600,000) 29,772,890

(250,000) (250,000)

29,272,890 (6,000,943) 23,271,947

(2,000,000) (2,000,000) 19,271,947

(2,890,792) (16,381,155)

$250,000 2,000,000 2,890,792

$5,140,792

* Philippe Caland is identified in court documents as a partner with Main Line in the p r o j e c t but is not a plaintiff in the lawsuit.

^ Profit participation to actors Kim Basinger and Ed Harris, and writer/director Jennifer Lynch.

NOTE: "Amount Payable to Producer" in this table is called "Total Revenue" in tables 1 and 2.

finalized before Basinger withdrew from the project. One of the partners in Main Line advanced $1.7 million against do- mestic revenues to help cover pro- duction costs on the Fenn film. In other words, the advance would be repaid from domestic revenues. Main Line president Carl Mazzocone testified about the $2.8 million dif- ference between the two production budgets (with and without Basinger):

"Well, Miss Fenn and [co-star] Julian Sands both received $100,000. The difference is Kim Basinger would have received $1 million. I had to bank $1 million even though I was paying $600,000 up front, and Mr. Harris [co-star] would have made $500,000. So there is a difference there. I also would have had in- creased producer's fees and would have made more money.

And lastly, the other increase was that I wanted to build a set of this

Barton, Shenkir and Marinas 169

[on a soundstage] instead of using a real house, you have so many limitations and drawbacks [with a real house]. It takes longer. So when you build a set, even though it costs more money to build a set, you will actually save money be- cause it's faster."

• Neither expert witness used State- ment of Financial Accounting Stan- dards (SFAS 1981) No. 53 in his analysis. SFAS No. 53 requires film companies to amortize film produc- tion costs using actual revenues for the period as a percentage of total estimated ultimate revenues for the film. For example, suppose a film costs $5 million to produce and is expected to generate revenues of $7 million over its economic life. During year 1, actual revenues are $3 mil- lion. The film company would "ex- pense" ^h of the $5 million produc- tion cost in year 1, or $2.1 million.

THE VERDICT The jury (in a 9-3 vote) awarded

Main Line $7,421,694 in damages for breach of contract and unanimously added $1,500,000 for bad faith denial of the contract. A request for piinitive dam- ages of $1 million to $2 million was de- nied. Basinger appealed the decision and later filed for bankruptcy protection.

In 1994, the judgment was reversed on appeal and remanded to the lower court. The Appeals Court concluded that jury instructions failed to draw a suffi- cient distinction between the liability of Basinger and the liability of her produc- tion company. Mighty Wind Productions.

QUESTIONS 1. Should Main Line's maximum and

minimum lost profit amounts be re-

vised downward for the following? Why? a. The domestic distribution rev-

enues of $3 million because the deal had not been finalized.

b. The $800,000 of foreign pre-sales because they were "probable" not actual.

c. The loss of $2.1 million on the "Without Basinger" film.

2. Are the following relevant to the determination of lost profits to Main Line? Why? a. Basinger's $3 million salary for

"Final Analysis." b. SFAS No. 53. c. The comparison of revenues for

Basinger films with revenues for Fenn films.

3. Is plaintiff's expert correct in not at- tempting to estimate revenues for "Boxing Helena" beyond pre-sale amounts? Why?

4. Should Main Line's lost profits be adjusted downward to include an es- timate of domestic revenues for the "Without Basinger" fihn? Would it have been valid to use the $1.7 mil- lion advance against domestic rev- enues as the estimate? Explain.

5. Suppose Basinger had remained with the film and assume the $3 mil- lion profit shown in the plaintiff expert's minimum damage calcula- tion was correct. Is it reasonable to assume that Main Line's pretax cash position would have increased by $3 million or would some part of this have been paid to others? Why?

6. If you disagree with the jury's lost profit assessment, briefly prepare one of your own.

Issues in Accounting Education

TEACHING NOTES We have used this as a capstone case in both undergraduate and graduate man-

agement accounting classes with excellent results. Students find it quite interesting and timely, and it contains enough ambiguity to generate spirited if not heated class- room discussion. Obviously, there is no one correct way to calculate lost profits to Main Line Pictures. But the classroom discussion can and should focus on the rea- sonableness of the plaintiff's calculation and include a sensitivity analysis to gauge the impact of changes in key assumptions. We feel this case may be particularly ap- propriate because the management accountant is often called upon to assist in the calculation of the differential profit between alternatives.

In our opinion, the primary flaw in the plaintiff's calculation of lost profits is its failure to include a deduction for the various claims on those profits by others includ- ing Basinger herself. We address this issue directly in Question 5. If Basinger had remained with the project and Main Line had, in fact, shown a profit of $3 million (minimum), an extrapolation of the defense expert's testimony would have Philippe Caland, Ed Harris, Jennifer Lynch and Basinger share in it as shown in table 4. (The term "gross profit" is used here to be consistent with table 3 in the case.) There, profit claims lower the minimimi profit to $1,243,750. By a similar analysis, the $7.6 maximum profit amount (table 2) would become $2,496,675 when the contractual profit claims are deducted.

The point of this exercise is to demonstrate that Main Line would not have kept all of the cash shown as "profit" by the plaintiff. In fact, at the $3 million profit level. Main Line retains only 41 percent of it (33 percent at the $7.6 million level).

In his testimony, the plaintiff expert dismissed suggestions that profit distribu- tions be deducted since he considered them to be a function of "accounting profits"

TABLE 4 Main Line Minimum Profit (table 1) with Contractual Payments Deducted

Gross Profit $3,000,000 Deferment Payable to Main Line (250,000) Deferment Payable to Caland (250,000)

Net Profit Participation Payments (20.5%)—

Basinger/Harris/Lynch

Net Profit after Participation Level 1 Split:

50% to Main Line to $2 Million 50% to Caland to $2 Million

Net Profit for Level 2 Split: Level 2 Split:

15% to Main Line 85% to Caland

Summary of Payments to Main Line Deferment Level 1 Level 2

Total Payments to Main Line $1,243,750

2,500,

512,

1,987,

,000

,500

,500

(993,750) (993,750)

250, 993,

0

0 0

,000 ,750

0

Barton, Shenkir and Marinas 171

and he was using "economic profits." But these contractual claims represent poten- tial cash outflows to Main Line that cannot be ignored in an analysis purporting to show the net lost profit impact to Main Line. Put simply, Main Line would have a legal obligation to distribute the profits in accordance with the contracts.

In our view, the second major problem in the plaintiff's lost profit calculation is the failure to include an amount for domestic revenues in the "Without Basinger" film (Question 1-a). According to trial testimony, one of the partners in Main Line advanced $1.7 million against domestic revenues to permit the production of the film after Basinger withdrew (and the domestic distribution deal collapsed).

Plaintiff's expert merely ignored potential domestic revenues because there were no contracts executed by the trial date. But it would be relatively easy to argue that the Main Line partner would not have advanced the money if he didn't feel some- what confident that he would be repaid after the film was distributed. Also, includ- ing the $1.7 million in minimum revenues would remove the somewhat implausible presumption that Main Line would proceed with the production of a film while ex- pecting to lose $2 million on it. This latter point is related to the defense attorney's discussion of mitigation of damages ("He has a duty under the law to minimize his loss," quoted early in the case). For the maximum computation, we suggest that do- mestic revenues for the "Without Basinger" film be set at a one-to-one ratio with foreign revenues or $2.7 million. It would be illogical to use the plaintiff expert's one- to-one ratio for one film project and not the other.

Without any further adjustment beyond these two items, the Main Line mini- mum damage amount falls to $1.6 million (table 5) and the maximum damage amount falls to $2.2 million (table 6).

We are not suggesting that this is the "right" answer. But we do believe that this calculation is as defensible as the plaintiff's calculation. And it illustrates how the result can vary greatly when different assumptions are used.

Questions and Suggested Answers 1. Should Main Line's maximum and minimum lost profit amounts be revised down-

ward for the following? Why?

Foreign Pre-Sales Firm Probable

Total Foreign Domestic Pre-Sales

Total Revenue Production Budget

Gross Profit/(Loss) Contractual Profit Claims

Net Profit/(Loss)

TABLE Revised Minimum

With Basinger

$6.8 0.8

7.6 3.0

10.6 (7.6)

3.0 (1.8)

$1.2

5 Lost Profits

Without Basinger

$2.7 NA

2.7 1.7

4.4 (4̂ 8)

(0.4) 0.0

($0.4)

Difference

$4.1 0 ^

4.9 1.3

6.2 (2£) 3.4 (18) $1.6

Issues in Accounting Education

Foreign Pre-Sales Firm

Probable

Total Foreign Domestic Pre-Sales

Total Revenue Production Budget

Gross Profit/(Loss) Contractual Profit Claims

Net Profit/{Loss)

TABLE 6 Revised Maximum Lost Profits

With Basinger Without Basinger

$6.8 0 8

7.6 7.6

15.2

7.6 (^l) $2.5

$2.7 NA

2.7 2.7

5.4 {4£) 0.6

(0^) $0.3

Difference

$4.1 0.8

4.9 4.9

9.8 (2^)

7.0

m) $2.2

a. The domestic distribution revenues of $3 million because the deal had not been finalized.

No. The $3 million represents as reasonable an estimate of the future cash flows from domestic distribution as was available. The fact that the deal had not been finalized doesn't diminish that.

b. The $800,000 of foreign pre-sales because they were "probable" not actual. No. The $800,000 represents a reasonable estimate of the future cash flows

from these potential contracts. As in the previous question, the fact that the deals have not been finalized doesn't diminish that.

c. The loss of $2.1 million on the "Without Basinger" film. Yes. As discussed previously, we feel that it is unreasonable to assume

Main Line would produce a film on which it expected to lose a large sum of money. One student put it this way, "There is strong argument, based on the budget figures, that Main Line would never have made the movie if Fenn had originally been cast to play Helena. Therefore, it is improper to hold Basinger hable for any loss incurred by Main Line when producing the Ferm version."

2. Are the following relevant to the determination of lost profits to Main Line? Why? a. Basinger's $3 million salary for "Final Analysis."

It appears not to be relevant. But some students have used this amount as the market value of Basinger's services in this type of film. They then ar- gued that Main Line would have received a "windfall" if the film had been made with Basinger since Main Line was only paying Basinger about $1 mil- lion in minimum compensation. These students have said it isn't fair to force Basinger to reimburse Main Line for a windfall.

It is interesting that this $3 million compensation is the same as the plaintiff expert's calculation of minimum net lost profit to Main Line. If Basinger's mar- ginal contribution to this type of film is really $3 million, why would Main Line be able to contract for her services at $1 million?

Jb. SFASNo. 53. Not relevant. SFAS No. 53 prescribes how the film production costs will

be written off against revenue over time. It governs the timing of the film's profit recognition.

Barton, Shenkir and Marinas 173

c. The comparison of revenues for Basinger films with revenues for Ferm films. Probably not relevant because it is so flawed. Although plaintiff expert

appropriately excluded "Batman" from the computation, he included films such as " Never Say Never Again" and" The Natural," in which Basinger clearly had a supporting role. Certainly, no moviegoer would dispute that Basinger's films have been much more successful than those of Sherilyn Fenn. But the issue here is the effect of Basinger's participation on this particular film, a film which is unconventional to say the least.

3. Is plaintiff's expert correct in not attempting to estimate revenues for "Boxing Helena" beyond pre-sale smuounts? Why?

Yes. Although every producer and distributor will attempt a projection of an individual film's revenues prior to embarking on a project, it is well known in the industry that estimates of box office gross prior to a film's release can be very unreliable. As an example, consider the following caveat taken from the offering prospectus for Silver Screen Partners III, a limited partnership formed to raise capital for film production:

"The success of a film in theatrical distribution, television, home video and other ancillary markets is dependent upon public taste which is unpredictable and susceptible to change. The theatrical success of a film may also be signifi- cantly affected by the number and popularity of other films then being distrib- uted. Accordingly, it is impossible for anyone to predict accurately the success of any film at the time it enters production, and the production of a motion picture requires the expenditure of substantial amounts based largely on a pre-produc- tion evaluation of the commercial potential of the proposed project." (Silver Screen Partners III, L.P. 1986, 9)

Surprisingly, this relative inability to predict box office success can often con- tinue right up until the film's release date. The action film "Mortal Kombat" was released on August 18, 1995, and grossed $22 million during its opening week- end, establishing it as one of the big hits of the summer season. But according to Klady (1995), only a few days before release, industry tracking studies—consid- ered to be one of the best available sources of film marketing data—predicted an initial box office gross of only $10 to $12 million, a 100 percent error rate!

Given the difficulty in predicting box office results for a completed film, it would have been inappropriate for plaintiff's expert to attempt the prediction of revenues beyond pre-sale amounts for a film that was never made. Accordingly, pre-sale amounts represent the most reliable estimates of revenue available.

4. Should Main Line's lost profits be adjusted downward to include an estimate of domestic revenues for the "Without Basinger" film? Would it have been valid to use the $1.7 million advance against domestic revenues as the estimate? Explain.

We believe the answer is "yes" to both questions for the reasons given in the discussion at the beginning of this teaching note.

5. Suppose Basinger had remained with the film and assume the $3 million profit shown in the plaintiff expert's minimum damage calculation was correct. Is it reasonable to assume that Main Line's pretax cash position would have increased by $3 million or would some part of this have been paid to others? Why?

We believe the answer is "no" because there are contractual claims against the profits. See our analysis at the begirming of this teaching note.

6. If you disagree with the jury's lost profit assessment, briefly prepare one of your own.

174 Issues in Accounting Education

We have found that most, if not all, students believe the Main Line lost profit numbers to be greatly overstated. Students are particularly critical of plaintiff expert's apparent inconsistency in including items in the "With Basinger" film but not in the "Without Basinger" film. For example, he included probable for- eign pre-sales and the unfinalized domestic revenues in the "With Basinger" numbers but completely excluded domestic revenue estimates from the "With- out Basinger" numbers even though a Main Line partner had advanced $1.7 mil- lion against these potential domestic revenues.

Some students suggest that Main Line aggravated its own situation by not attempting to make "Boxing Helena" with a star of Basinger's stature. Basinger should not be held accountable for Main Line's failure to do that, they say.

Other students suggested that the production budget number in tables 1 and 2 for the "Without Basinger" film should be adjusted upward by the amount of the savings in not building the sets and by the reduced producer's fees. They believe that these amounts artificially inflate Main Line's lost profits, were brought about by decisions made by Main Line after Basinger left the project, and should not be considered Basinger's responsibility. In the words of one student, "De- spite what the president of Main Line says, he cannot construct a 'wish list' of building a set vs. using a real house for the film as additional leverage in this suit for damages. This decision by Main Line is irrelevant because it appears to have been made after Basinger left the film and it is not attributable to her."

POSTSCRIPT "Boxing Helena" was released domestically on September 3, 1993. It played in

161 theaters and ran for a total of four months. Domestic box office gross was $2 million. The video was released on February 23, 1994 with 80,000 units shipped. It was on the top 40 chart of rentals for eight weeks. On the international level, the film was released on September 17, 1994, and grossed $5 million.

REFERENCES Financial Accounting Standards Board. 1981. Financial Reporting by Producers and

Distributors of Motion Picture Films. SFAS No. 53. Stamford, CT. Klady, L. 1995. "Kombat" Martials Forces. Daily Variety (August 21): 1/12. Main Line Pictures, Inc., A Delaware Corporation, Plaintiff, vs. Kim Basinger, An

Individual; Mighty Wind Productions, Inc., A California Corporation; Interna- tional Creative Management, Inc., A Delaware Corporation; and Does 1 To 20, Inclusive, Defendants; Superior Court of the State of California For the County of Los Angeles, No. BC 031180. 1993.

Silver Screen Partners III, L.P. 1986. Prospectus. New York: Silver Screen Partners III, L.P.