POSTED ON June 17, 2016

For those of us involved in profit participation, either as talent (actors, directors, producers, creators and/or investors) or representatives thereof (lawyers, business managers, agents and/or auditors), the concept of “Breakeven(s)” is becoming ubiquitous at all major motion picture and television studios for profit participation reporting.

You may be asking yourself, “What is a breakeven and, more importantly, why do I care?” If so, this article is meant for you.

To put it is as simply as possible, a breakeven is the point at which one set of things equals another set of things. Breakeven analyses are utilized in many aspects of everyday life (you just don’t realize it). For example, if you have monthly expenses of $3,000 for rent & utilities and $3,000 for food and entertainment, you know that your monthly salary needs to be at least $6,000 to “breakeven” and, in order to be able to save $2,000 a month, you need to make at least $8,000 a month… easy, right?

So, for profit participation reporting, a breakeven is the point in which all of the applicable revenues equal all of the applicable deductions, most commonly (i) Distribution Fees, (ii) Distribution Expenses, (iii) Participations and Deferments, (iv) Negative Costs, and (v) Interest on Negative Costs. The breakeven calculation is as follows: . For example, if the distribution expenses total $120M, the production costs and interest thereon total $80M and the breakeven is contractually defined to include a 20% distribution fee on all attributable revenues, the breakeven equals $200M/ 80% = $250M. Or, $250M in revenues less 20% distribution fee ($50M) less $120M of expenses less $80M of production costs = $0… easy, right?

The calculation itself is not complicated; What makes breakeven(s) complicated (and sometimes down-right intimidating) is that the studios may be using multiple, complex breakevens within the same deal, and each one is contractually defined in different manners. Determining how each breakeven overlaps/interacts with the other and, more importantly, figuring out how the profit participant is actually paid at the end of the day, can be daunting.

Ultimately, reporting to participants is typically done in one of two general ways: (a) Share of “Net Proceeds/Profits” or (b) Share of AGR after Breakeven(s). The primary differences between the two are (i) distribution fees and (ii) what costs are deductible (and when). The Net Proceeds/Profits definition is simple and never changes: Revenues less distribution fees thereon less all deductions.

Breakeven(s) are always contractually defined but fall within 2 main categories, as follows:

  • “Fixed” (or “Initial”): This breakeven is more favorable to the participants, occurs only once, and is thus “fixed.” After the Fixed Breakeven is reached, the studio is may only be able to deduct “off-the-top expenses” (“OTTs”), which typically include only taxes, residuals, trade dues, and checking expenses. As noted above, when breakeven reporting is applicable, most commonly, studios may pay participants a share percentage of “AGR After Breakeven.” AGR is defined as Adjusted Gross Receipts and effectively means revenues less OTTs. Thus, after “Breakeven” is achieved, the studio may no longer able to charge the participant everything else (e.g. distribution fees, prints & advertising expenses, participations and negative cost and interest thereon).
  • “Moving” (or “Rolling”): This breakeven is less favorable to the participants, occurs every statement period and is recalculated each time, and is thus “moving.” The major difference is that the studio is allowed to charge all deductions every statement period. The only real distinction between a moving breakeven and the “Net Proceeds/Profit” deal is that with the moving breakeven, distribution fees are only charged on the revenues necessary to achieve breakeven, as opposed to all

Within each of the 2 main general categories above, other forms of breakevens are as follows:

  • True Cash Breakeven (“TCBE”): In this deal, which is the most favorable, the participant is effectively receiving the exact same deal as the studio, which includes the following components:
    • Home Video (“HV”) and Video-On-Demand (“VOD”) revenues are reported at 100%, as opposed to the industry standard 20%,
    • Absolutely no distribution fees,
    • Absolutely no overhead (production or advertising),
    • All rebates/credits are reported, specifically includes production tax incentives,
    • TCBE’s are very rarely associated with Moving Breakevens.
  • Cash Breakeven: Varies and can be similar to the TCBE, but generally includes the following components:
    • In some cases, an increased HV & VOD Royalty (e.g. 35%), but may include the standard 20%,
    • In some cases, no distribution fees, but may include 5% - 15% distribution fees,
    • In some cases, no overhead (production or advertising), but may include contractual caps (e.g. 10%, but capped at $1M),
    • In some cases, production tax incentives are reportable, but sometimes times not.
  • Artificial Breakeven:
    • Standard 20% HV & VOD Royalty,
    • 10-25% Distribution Fees,
    • Both advertising (10%) and production (15%) overheads are chargeable, without caps,
    • Production tax incentives not reportable.
  • Initial Breakeven Point (“IBP”):
    • Standard 20% HV & VOD Royalty,
    • 25-45% Distribution Fees,
    • Both advertising (10%) and production (15%) overheads are chargeable, without caps,
    • Production tax incentives not reportable.

Easy, right?

However, as noted, the studios may include multiple breakevens within the same deal. For example, your client is receiving (i) 2.5% of first dollar gross up to TCBE, (ii) 5% after TCBE until Cash Breakeven #2 (with a 5% distribution fee and no advertising or production overhead), (iii) 10% after Cash Breakeven #2 until Cash Breakeven #3 (with a 10% distribution fee and capped overheads), (iv) 15% after Cash Breakeven #3 until IBP, and (v) 20% after IBP. You might be thinking, “Wait – you said this was easy??”

Now that, after reading this article, you thoroughly understand each Breakeven and the applicable components thereof, the fact that the studio may be including 5 different elements might sound intimidating but is effectively irrelevant; therefore, in the end, it is still easy!

Considering the complexity of this area, it is prone for errors and misinterpretations and therefore represents a risk area in our profit participation audits. For example, based on the above, it is possible that the studio erroneously (a) capped overhead in Cash Break #1, when it should have completely excluded overhead, or (b) it erroneously excluded the tax incentive in the TCBE (as it was allowed to exclude it in all of the other calculations).

As more studios continue to increase the implementation of breakevens, understanding them is of utmost importance for talent and representatives thereof. I hope that, after reading this, you no longer are asking "what is a breakeven?” But, if you still do or have additional questions, please reach out to myself or any member of the CCF department at GHJ. We will be happy to assist!