In the Seashore Entertainment office, Mary sat across from Michael Davenport, asking, "How should we calculate these accounts?"
Yesterday, Sony Entertainment's payment for the overseas rights arrived in two installments. "The Purge" was a typical project financed through external funding, and Michael had signed contracts with investors from Abu Dhabi. With plans to seek additional financing in Abu Dhabi, it was crucial to ensure profit distribution.
"We need to be as standardized as possible," Michael said. Since May, he had been studying Hollywood's financial norms, accounting standards, and relevant laws. He had considered this issue from the moment he signed the contract with Sony. "This involves our next funding plan; we can't be too aggressive."
Mary nodded, understanding the balance needed.
Michael sipped tea before continuing, "We'll deduct next year's taxes first, followed by a 15% management fee."
This fee covered the legitimate expenses incurred during the film's production. Although external investors funded the film, Seashore Entertainment handled the project, incurring costs for workforce, time, wear and tear, office operations, and management.
Mary noted this down. The 15% management fee amounted to $3.75 million, calculated before taxes.
Michael continued, "The $25 million includes both 'The Purge' and 'Survival Quest.' It wouldn't be fair to split it equally between them."
Mary reminded, "We can't go too far, considering our plans for further funding."
"How about one-quarter for 'Survival Quest'?" Michael suggested.
After some thought, Mary agreed, "That sounds reasonable."
Michael nodded and said, "Let's allocate $3 million to 'Survival Quest.'"
As a conscientious entrepreneur and capitalist, he felt this was generous. Industry norms often allocate one-third or even half of the revenue to underperforming bundled films.
Mary agreed, noting that allocating $3 million out of $25 million to 'Survival Quest' was reasonable, especially since its North American box office was only $800,000 and its overseas rights had little interest without the bundle.
"Finally, the profit share," Michael said. "We'll follow the legal and contractual terms, which give us 20% of the profits as the production company."
This 20% profit share was part of the original contract, where Seashore Entertainment, as the producer, was entitled to a priority share of the profits.
Mary recorded another $5 million in her ledger.
Michael resisted the urge to fabricate more expenses and instructed Mary, "Make the accounts look clean and standardized."
Mary nodded and went to work on the financials.
In just two days, Mary presented Michael with the financial report for the overseas market revenue of "The Purge." After deducting the $3.75 million management fee, $3 million for 'Survival Quest,' $5 million production profit, and various taxes and fees, $11 million remained.
Michael knew this detailed report would be crucial when he travelled to Abu Dhabi for more funding, demonstrating his reliability and trustworthiness.
With over $10 million in legitimate earnings, Michael felt confident as he set three plans in motion:
The upcoming trip to Abu Dhabi, code-named "Desert Operation."
Securing distribution channels, a key reason for further funding.
A potential future trip to India, code-named "Operation A3."
Robert had discovered that Indian investors were increasingly active in Hollywood, signalling potential investment opportunities.
Additionally, Michael emphasized the need to model Seashore Entertainment after Lionsgate by acquiring a distribution company. After reviewing two small companies with George and Robert, they decided it was more feasible to establish their own distribution company due to the inadequacy of the existing options.
Recognizing the critical role of distribution, Michael knew its importance firsthand from Lionsgate's handling of "The Purge."
After six weeks in theatres, "The Purge" exhausted its North American box office potential and ended its run before Thanksgiving. It outlasted Jamie Lee Curtis's "Halloween 7" by over a week, grossing $52.5 million in North America against a production cost of $11 million.
As the film left theatres, Lionsgate swiftly secured several ancillary distribution deals, generating significant licensing fees alongside the box office revenue.
Lionsgate had its own VHS and DVD distribution channels, licensing North American home video rights for a $5 million upfront fee plus 20% of rental and sales revenue. Public TV rights for ten years fetched $3 million, cable TV rights for ten years earned $2 million, and internet streaming rights for five years brought in $500,000—the merchandise rights, typically weak for horror films, sold for $1 million.
Working closely with Seashore Entertainment, Lionsgate adhered to contractual terms, ensuring timely payments.
In total, Seashore Entertainment received $20.2 million in various payments over a little more than a week starting in late November. This amount included the North American box office share and ancillary rights revenues.
After accounting for the $11 million production cost and marketing expenses, Seashore Entertainment's profits were substantial, though still less than Lionsgate's earnings as the distributor.
(Note: The revenue calculations referenced works by Dina Appleton's "Hollywood Dealmaking" and Augustus Finney's "The Business of Independent Film." While there might be some discrepancies, the authors are industry professionals ensuring the information is accurate.)