MAXIMIZING PRODUCER PROFITS IN FILM DISTRIBUTION

	By John W. Cones, Attorney

	The economics of the motion picture business in recent years has clearly demonstrated
that making a "great" movie does not always result in net profits for independent
producers and other net profit participants.  Using a negative pickup arrangement
to finance the production costs of a motion picture will eliminate some of the
"unconscionable"  practices of distributors, at least with respect to studio interest.
However, the following checklist focuses on another twenty-one (21) specific ways that
the financial interests of independent producers and other net profit participants in
the upside potential of a motion picture can be adversely affected unless such producers
and their attorneys can successfully negotiate to improve their prospects for maximizing
net profits by raising and prevailing on these issues.

The Big Five Issues

	1.  Settlement Transactions--The independent producer and counsel should seek to
contractually require the distributor (on behalf of the producer group and all other
net profit participants) to in turn make a contractual demand in the distributor/exhibitor
agreement that each exhibitor pay the full amount of film rentals to the distributor
in specifically in accordance with the original terms of the distributor/exhibitor
agreement, i.e., do not allow the distributor to settle for less than the contractual
amount owed.  This is apparently a fairly common practice among exhibitors and many
distributors allow this to occur in an effort to maintain their on good relationship
with the exhibitor.  This one issue (clearly a conflict of interest for the distributor
and possibly a violation of the distributor's fiduciary duty to the producer and
all other net profit participants) may account for a 10% to 30% reduction in the
gross receipts revenue stream at this earliest and most critical stage.

	2.  No Gross Participants--Since in a negative pickup deal the independent producer
will control this issue as opposed to the studio/financier, he or she should not
allow any other individuals or entities to participate in gross receipts besides
the distributor.  This means that the producer will have to stand up to the agents
and attorneys representing directors, actors, actresses and others who demand a
gross profit participation.  Allowing anyone to siphon off a percentage of the distributor's
gross receipts either at some defined level of pure, accountable or adjusted gross
will substantially decrease the likelihood that any net profits will ever materialize.

	3.  Videocassette Revenue Reporting--The independent producer and his or her counsel
should inquire of the distributor or investigate as to whether the distributor has
an ownership interest in the videocassette manufacturer or wholesaler and thus will
be twice participating in the home video revenue stream generated by the producer's
movie.  If that is the case, the producer may want to ask that the distributor conduct
its video sales on a sub-distribution fee basis as opposed to a royalty basis and
to reduce the percentage of the sub-distribution fee.  If the distributor insists
on the royalty approach, the producer may want to ask that the royalty percentage
be increased from the traditional 20% of the video wholesale price utilized by many
of the major studio/distributors (which may be an example of "conscious parallelism"
and possibly a violation of antitrust laws).  In the alternative, the producer may
attempt to negotiate a segregated gross video corridor, i.e., a specified percentage
of the distributor's gross receipts resulting from the exploitation of the film
in the home video market.

	4.  Gross Receipts Exclusions--Again, since gross receipts to the distributor is
the earliest and largest defined pool of monies in a motion picture's revenue stream,
any unreasonable effort by the distributor to exclude any revenues generated by
the exploitation of the motion picture in all markets and media should be resisted.

		(a)  Discounts and Rebates--Do not allow the distributor to exclude the pro rated
value of volume discounts or rebates from third party service providers or suppliers,
e.g., film labs or advertising agencies.  Without the feature film or films made
available to the distributor by the producer and other profit participants, the
distributor would not be in a position to either negotiate or receive such discounts
or rebates.
		(b)  Distributor Commercials--Provide that if the distributor receives a fee or
any form of compensation for a distributor commercial, trailer or product placement,
appearing before, after or during the producer's feature film, the amount should
be included in the distributor's gross receipts.
		(c)  Ownership\Film Library--If the producer cannot get the distributor to agree
that the producer owns the copyrights to the picture and that certain limited rights
are merely being licensed to the distributor, the producer and counsel should seek
to provide in the distribution agreement that any moneys generated from the sale
or licensing of the picture as part of a film library will be included in the distributor's
gross receipts for purposes of calculating the interests of net profit participants.
		(d)  Overseas Rentals--Quite often the distribution agreement will provide that
motion picture revenues earned by the exploitation of a film in a foreign country
but not yet remitted to the distributor in U.S. dollars is excluded from distributor
gross receipts, which in turn means that such monies are not included in any net
profit calculation for any given accounting period.  The producer should try to
see that revenues under the control of the distributor but still in a foreign country
are included in gross receipts for purposes of net profit calculations.
		(e)  Net Recoveries--While including any expenses incurred in litigating or defending
against (a) any claims for unauthorized exhibition, distribution or other use of
the film and/or (b) for any infringement, plagiarism or other interference by any
party with the copyright of the film or (c) for breach of contract in connection
with the distribution and/or exhibition of the film, many distributors will sometimes
exclude from gross receipts all revenues on any related settlement, court judgment
or decree.  Certainly, if such expenses are deducted as a distribution expense,
then the producer and other net profit participants should be allowed to benefit
from any net recoveries.
		(f)  Prompt Payment--Other issues relating to gross receipt exclusions focus on
when certain monies or included.  For example, a distributor may seek to avoid any
language in the distribution agreement which will obligate it to promptly include
funds received for television and cable sales, but instead will allow itself to
hold such funds until the actual play dates of the movie on such media.  Sometimes
this lag time, which allows the distributor to benefit from the use of such monies
can be as much as one to two years.  The producer should seek to limit the distributor's
ability to hold such payments and not include these funds in the net profit calculation.
 Such funds should be included in gross receipts when received.
		(g)  Charitable Contributions--Some distributors will include language in the
distribution agreement which permits the distributor to exercise its discretion
in excluding from the gross receipts pool any contributions the distributor chooses
to make to a favorite charitable organization.  This may not involve a significant
amount of money, but on the other hand, there is no reason that a producer or other
net profit participant should agree to allow such gross receipts exclusions, particularly
since such net profit participants may never see any profit participation at all.
 Another aspect of this particular gross receipts exclusion which is even more offensive
is that the distributor will most likely be able to take a U.S. income tax deduction
for such charitable contributions.
		(h) Other Exclusions from Gross Receipts--Do not allow the distributor to exclude
the following expense items from distributor's gross receipts: (a) advances from
exhibitors and other licensees, (b) ancillary rights revenues, (c) the exploitation
or use of stock footage, film and sound materials retained for library purposes,
featurettes and still photographs, (d) the sale of physical properties the cost
of which was included in the negative cost of the picture and (e) salvage revenues.

	5.  Distributor Expenses--Another set of problems is presented by the list of cost
items that the distribution agreement defines as distribution expenses and which
in turn are deductible from a specified level of gross receipts:
		(a)  Foreign Taxes--Many foreign countries will levy some form of gross receipts,
remittance or other tax on the exploitation of the film in their country.  The distributors
will seek to provide in the distribution agreement that the payment of such taxes
constitute authorized deductions as distribution expenses.  However, the distributor
will also claim a U.S. tax credit for the payment of such taxes, which in reality
were charged against the producer and other net profit participants (i.e., since
such payments were deducted from distributor gross receipts as a distribution expense).
Thus, to the extent that the distributor actually pays any gross receipts, remittance
or similar taxes in any foreign country based on the exhibition of the picture,
the producer should not allow the distributor to deduct its payment of such taxes
from the film's gross receipts as a distribution expense.
		(b)  Anticipated Expenses--The distributor may seek to have the unlimited discretion
to set aside monies out of the gross receipts revenue stream to pay for distribution
expenses it anticipates in the future.  The producer should seek to place a reasonable
limit on the amounts that can be set aside as reserves by the distributor for such
anticipated distributor expenses, otherwise, the distributor will be in a position
to eliminate net profits for any given accounting period, merely by over-estimating
future expenses.
		(c)  Cap on Distribution Expenses--In addition to negotiating a specific commitment
from the distributor with respect to the minimum expenditures for prints and advertising,
it may also be in the producer's best interests to seek a reasonable ceiling on
the amount of money the distributor can spend in distributing the film (at least
an upper limit beyond which the distributor cannot go without the approval of the
producer).  If not, the distributor may choose to spend more money than necessary
to promote the film in its domestic theatrical release (buying a gross) in an effort
to create more value in the subsequent video release where the distributor gets
a better deal and has a better chance of making more money anyway.  In the meantime,
the producer and other net profit participants are so far in the hole because of
the excessive expenditure of distribution funds in the domestic theatrical marketplace
that no net profits will ever be realized.
		(d)  Improperly Claimed Expenses--Build in some sort of penalty provision for
improperly claimed expenses, e.g., distributor pays the auditor's fees or puts back
into the gross receipts revenue stream twice the amount wrongfully deducted.  Without
a penalty provision, distributors have less reason to be careful to avoid the "mistakes"
that typically seem to work in their favor.
Other Issues

	6.  Guarantee--Be certain that the negative pickup distribution agreement includes
a distributor guarantee that a specific sum of money will be paid to the producer
upon delivery.  The producer may then be able to assign this commitment to a production
money lender.  A distribution agreement without a guarantee will generally not serve
as adequate collateral for a bank loan.

	7.  Incremental Bonuses--Negotiate a specified bonus for the producer group for
every increment of film rentals or gross receipts that exceed agreed upon levels
of revenue.

	8.  Net Receipts--If the distributor insists on deducting its distribution fees
and distribution expenses (however defined) prior to any revenue sharing with the
producer and or others, provide that the producer group receive 100% of net receipts
(also sometimes called net profits or net proceeds) after the distributor has deducted
its distribution fees and expenses.

	9.  Producer Audit Rights--Provide that the producer has broad auditing rights
with respect to auditing the distributor's distribution of the picture.  Check with
a profit participation audit firm in advance of signing the distribution agreement
to determine what language in the distribution agreement would provide the auditor
with the most freedom to conduct a useful audit.  Also consider hiring the audit
firm to review the distribution agreement before signing it.  Provide that if amounts
discovered by the auditor to be due the net profit participants exceed 10% of what
was actually paid, the distributor must pay the auditor's fees.

	10.  Sub-Distributor Fees--Clarify in the distribution agreement under what circumstances
and in which markets the distributor will utilize the services of a sub-distributor.
To the extent that the distributor utilizes the services of a sub-distributor,
see that such sub-distributor's fees are paid by the distributor out of its distribution
fees and not in addition to its distribution fee.  In other words, the distributor
should not receive its full distribution fee for distribution services actually
being handled by a sub-distributor and for which a sub-distributor also charges
a distribution fee.

	11.  Foreign Sales--Provide that the distributor not effect outright sales or other
flat fee arrangements of the picture in the top eight foreign theatrical markets,
i.e., Japan, France, Germany, Britain/Ireland, Spain, Italy, Australia and Sweden.
Those are the territories that may generate gross receipts for the distributor beyond
the guarantee.

	12.  Dues and Assessments Cap--Negotiate a cap on the payment of dues and assessments
paid by the distributor to industry trade associations to which it belongs.  Also,
stipulate that such trade association dues are not to be used to defray the costs
associated with lobbying activities that favor the major studio/distributor over
the independent producers or that help defend antitrust actions against association
member companies unless a similar dues deduction is set aside in a fund that may
be claimed by a duly organized association of independent feature film producers
who may also use such association dues (deducted from the gross receipts revenue
stream generated by independently produced films) to help defray the costs associated
with prosecuting such antitrust actions or lobbying activities favorable to independent
producers.

	13.  Advertising Overhead--If an advertising overhead charge cannot be avoided
altogether, negotiate for the payment of an actual pro rated overhead charge as
opposed to an arbitrary percentage and if stuck with a percentage negotiate a flat
dollar ceiling on such charges.  A percentage has no relationship to the actual
allocated overhead expense.

	14.  Artificial Breakeven--Establish an objective and mutually satisfactory definition
of breakeven at some specified level of gross receipts in lieu of other forms of
breakeven which may result in a rolling breakeven which is never achieved.

	15.  Assignment of Profit Participation Interest--Do not provide the distributor
with a right of first refusal to acquire the net profit participant's interest.
Make the net profit participation interest freely assignable, although in the event
of multiple assignees, the distributor should be allowed to appoint a disbursing
agent.

	16.  Controlled Theatre--Now that the U.S. Justice Department has relaxed its enforcement
of the federal antitrust laws in the motion picture industry and is permitting vertical
integration once again, if your distributor has an ownership interest in theatres
and plans to exhibit the film at one or more of such theatres, you may want to consider
negotiating for a reduced distribution fee in those theatres.  After all, less work
is involved in booking films and collecting rentals from a distributor owned theatre
and the distributor will be participating in the exhibitor's profits in addition
to receiving its distribution fee.

	17.  Final Judgment--Eliminate any requirement that the producer has to reimburse
the distributor for legal fees if the producer files a lawsuit against the distributor
but fails to obtain a final judgment against the distributor.  Most lawsuits are
settled prior to "final judgment" and substantial legal fees may have been incurred.
Provide that both parties assume the burden of paying their own legal fees.

	18.  E&O Insurance--If the producer's errors and omissions insurance coverage is
expanded to include possible distributor error the distributor should be charged
with its pro rata share of the premiums.  Also, the distributor should not be allowed
to withhold sums of money from distribution proceeds to pay for the anticipated
expenses associated with claims covered by the E&O policy, unless there is a reasonable
likelihood that such claims will exceed the limits of the insurance coverage.

	19.  Offset Rights--Seek to place a reasonable limit on the distributor's discretion
to adjust accounting records to compensate for a credit or loss incurred by a third
party doing business with the distributor.  Such adjustments can adversely affect
the financial interests of net profit participants and result in a subtle form of
cross-collateralization since they may cover more than one film.

	20.  Residuals and Royalties Provision--Do not allow the distributor to shift the
burden of making residual and royalty payments to the producer to be made out of
the producer's share of net profits.  This arrangement puts the producer at a disadvantage
vis a vis the other net profit participants.

	21.  Gross Floor--The distributors will negotiate a gross floor with the film's
exhibitors and most all of the picture's other sub-licensees.  Thus, it is only
fair and reasonable that the distributor, in turn, allow the producer and other
net profit participants to have a minimum level of backend participation (gross
floor) in the distributor's gross receipts regardless of the number or amount of
distributor or other deductions from this segment of the picture's revenue stream.

Good luck!



	John Cones is a Los Angeles based securities/entertainment attorney who primarily
works with independent producers in meeting their securities compliance needs relating
to investor financing of feature films.  He has also been an active lecturer on
film finance and distribution topics for the past five years for UCLA Extension,
the USC Cinema-TV Alumni Association, the American Film Institute and The Movie
Money Seminar.  He is the author of the book "Film Finance and Distribution--A Dictionary
of Terms", the Loyola Entertainment Law Journal article "Feature Film Limited Partnerships--A
Practical Guide Focusing on Securities and Marketing for Independent Producers and
Their Attorneys" and the monograph "337 Reported Business Practices of the Major
Studio/Distributors".