1. PARTIES. It's important to state the exact legal name of each of the parties to the distribution agreement. Particularly when money is changing hands you want to make sure that various corporate entities are validly formed. It is a good idea to do a UCC search and Dunn & Bradstreet search to make sure that the companies don't have any major financial or legal problems.

A. The specific services to be provided by the distributor/sales agent should be specified, for example, that the Sales Agent will use its best efforts to otherwise promote and market the Picture, that it will hold a minimum number of screenings, that it will attend at a minimum, the American Film Market, MIFED in Milan, and the Cannes Film Festival in Cannes and actively license the Picture in those markets, that it will create a trailer and marketing campaign, that it will use its best efforts to publicize the Picture and that it will spend a minimum amount of money on advertising, promoting, and marketing the Picture.

2. TERM. It is essential that a specific term of the agreement be identified. Most international distribution/sales agency agreements have terms ranging anywhere from seven years to in perpetuity. This particular agreement has a relatively short three year term with an extension for an additional three years provided that a certain dollar level and gross receipts is paid back to the producer. The agreement also provides that the sales agent is authorized to enter into sub-license agreements extending up to twelve to fifteen years.

3. TERRITORY. The specific territory must be defined. This particular agreement defines the territory as the entire universe excluding the United States and Canada and their respective territories and possessions. Many sales agents/distributors will try to obtain the entire world as their territory. From a producer's point of view it is very important to separate foreign from domestic so that revenue streams from each of those sources are kept separate and advances and expenses are not cross-collaterallized between foreign and domestic revenue.

4. RIGHTS. The rights that are being granted to the distributor/sales agent must be specifically delineated. In our particular agreement, all rights in all media now are hereafter known are being granted, including electronic publishing. Many producers today are attempting to exclude or reserve electronic publishing rights and in this particular agreement, if the electronic publishing rights have not been exploited within five years from execution, the rights will revert back to the producer.

A. Other rights that the producer can typically exclude are soundtrack album, music publishing, merchandising, book publishing and novelization rights.

B. Remakes, sequels, television pilot and series rights should also be reserved by the producer.

5. DIVISION OF GROSS RECEIPTS. This provision defines the financial relationship between the producer and the distributor/sales agent and is extremely important. The sales agent wants to make sure that he has actually received the money from the foreign distribution companies before it is deemed included in gross receipts. The producer will try to exclude any withholding taxes and collection costs from the definition of gross receipts so that a commission is not paid on revenues that are not received.

A. Sales Agent/Distribution Fee. In our agreement, the distributor is taking a 20% distribution fee. These fees generally range anywhere from a low of 10% up to 35% and 40%.

B. Marketing Fee. The distributor in our agreement is also retaining a flat marketing fee to cover travel, hotels, temporary personnel, sales office, entertainment, equipment rentals, sales trips and overhead. In our particular agreement, the distributor took a $30,000 flat fee off the top to cover these costs. These fees generally range anywhere from $15,000 to $50,000, and can go even higher.

C. Distribution Costs and Expenses. The distributor next deducts all of its actual out-of-pocket direct distribution costs and expenses including advertising, creative fees, printing, screening rooms, cassettes and the like. Our particular agreement also requires the distributor to produce and create a professional quality trailer, a one-sheet and a poster for the Picture. Many sales agents like the producer to prepare those items, but a seasoned distribution/sales agent will want to create his own based on his knowledge of his buyers. Our particular agreement also requires the producer to expend a minimum amount in direct out-of-pocket distribution expenses to promote the picture.

1. Consultation. There is a consultation provision which requires the distributor to consult with the producer in connection with the marketing plan and artwork, although it is understood that the distributor's decisions will be final and controlling regarding these matters.

2. Consent for Expenses. This particular agreement has an unusual provision which does not allow the distributor to deduct any distribution expenses without the producer's prior written approval which is not to be unreasonably withheld. Most distributors will not agree to this provision. However, they may agree to an overall cap on distribution expenses which can range from $30,000 to $200,000 for international sales agency agreements.

D. Producer's Share of Profits. After the deduction of the sales agent or distribution fee, the flat marketing fee, and the distribution expenses in this particular agreement, the balance of the gross receipts are paid over to the producer of the Picture. Particularly when there is an advance payable to the producer, the distributor will generally insist upon a percentage of the profits also being paid to the distributor/sales agent. These amounts range anywhere from 5% to 50% of the profits payable to the producer.

E. ADVANCE. Not all sales agencies/distribution agreements have advances. This particular agreement provides for an advance which is payable on the later of execution of the agreement or complete delivery of delivery items which are to be itemized in a delivery schedule which is attached to the agreement. This delivery schedule, although attached as an Exhibit is a major negotiating point in any distribution/sales agency agreement. Producers generally want to limit the extent and amount of delivery items required to be delivered under a distribution agreement and the distributor/sales agent generally wants to hand the producer a five to twenty page detailed list of all the delivery items necessary to be delivered before an advance is payable. Obviously, what is going on here is that the distributor wants to lay off as many distribution costs and expenses on the producer as possible and the producer wants to lay off as many distribution expenses off on the distributor as possible.

1. Delivery Items; Costs. Delivery items necessary to properly deliver a film can range from a low of $30,000 up to $75,000 to $100,000 depending on the policies and practices of the sales agent/distributor. One international distributor requires five inter-positives to be furnished to the distributor for various regions around the world (i.e. one in Asia, one in Europe, one in North America, one for Spanish language, etc. etc.). This can become costly. It is important to have a clear understanding up front what delivery items are available and which party is expected to pay for each particular item.

2. Laboratory Access. Many times the schedule of delivery items is used as a way to avoid paying the advance. I have seen advances held up for more than a year based upon the stringent requirements set forth in the delivery schedule. From the producer's point of view, you want to have a simple, clean, limited delivery schedule. The easiest and cleanest of course, would be delivery is deemed complete upon the furnishing of a laboratory access letter to the distributor granting laboratory access to all motion picture and sound materials for the picture. Once the lab certifies that these items are of first class technical quality delivery is deemed complete and the advance is paid.

6. DELIVERY. I previously dealt with a number of the delivery issues in the advance section simply because the advance is generally triggered upon complete delivery of the picture. Some other items to be aware of in the delivery of the Picture include placing a limit on the time period within which the distributor has to approve or disapprove the technical quality of the delivery items. Our particular agreement provided for three weeks. This is a relatively short period, but many distributors can accomplish this review within that time period. As discussed above a irrevocable laboratory access letter is given to the distributor so the distributor can have access to all motion picture and sound materials.

A. Errors & Omissions Insurance. One of the important delivery items is a Certificate of Errors & Omissions Insurance. Many producers forget about the Errors & Omissions Insurance and when they go to sell a film find that they cannot sell the film, because of the fact that they haven't obtained Errors & Omissions Insurance. They then have to go back and hire an attorney to review the entire film, the script, the Chain of Title, and render an opinion as to whether or not the picture is insurable. The producer then has to go out and pay for the Errors & Omissions Insurance Policy which is much more costly after the completion of the film. Generally, insurers will reduce the price of the Errors & Omissions Insurance when you buy an overall production package for insurance to cover your entire production. It is impossible to sell a film to HBO, Showtime, or any of the networks and most distributors, without a three year Errors & Omissions Policy naming the various distributors, broadcasters, and pay and free television networks as additional insureds.

B. MPAA Rating. Another delivery item that producers generally neglect to budget for is an MPAA rating which may be costly. Most distributor/sales agents require the MPAA rating certificates as a delivery item and try to get the producer to pay for it. The producer obviously feels that it is an expense of distribution and should be paid for by the distributor.

C. T.V. Version. Many distributors also require the Producer to deliver a T.V. version of the Picture which complies with U.S. network television standards and practices. Where there is nudity, excessive violence, and profanity, the Producer must budget to shoot and cut a separate version of the Picture to comply with network standards and practices. It may become very costly or even impossible to create a T.V. version without proper planning, scheduling, and budgeting up-front.

7. PRODUCER'S CONSULTATION RIGHTS. Many distributors really don't want to give producers consultation rights on sales throughout the various territories. Distributors believe that distribution is their business and producers don't really understand that end of the business. Additionally, during the heat of the various international markets, (generally the American Film Market in Los Angeles in February, the Cannes Film Festival in France in May and the MIFED Film Market in Milan, Italy in October-November) which are extremely hectic, it is virtually impossible to take the time to consult with the producer on each and every deal or proposed deal that the distributor/sales agent intends to make.

A. Limited Consultation Rights. In this particular deal the distributor is nevertheless required to consult prior to entering into sub-licensing agreements in the major territories i.e. Italy, Germany, England, Spain, France, Japan and Australia.

B. Pre-Approved Minimums. An additional protection built into this agreement is a pre-approved schedule of territorial minimums where the distributor can enter into an agreement without consulting the producer as long as the territorial minimum has been met. If the distributor wants to enter into an agreement for less than the territorial minimum, the distributor will have to get the producer's consent to do so.

8. DISTRIBUTOR'S RIGHTS. The distributor/sales agent must have a broad set of rights to advertise, promote, sell, assign, sub-license, and exploit the picture. Many times the distributor must also have the right to edit or change the picture and producers generally will agree provided that it is only in connection with censorship requirements. Other creative editing generally requires the producer and the director's approval. The distributor will also generally also want to have the right to edit the picture to meet various broadcast timing requirements in the various territories around the world.

A. Licensing in Packages. Many times distributors/sales agents will sell a group of pictures in a package to one territorial distributor. The distributor/sales agent and the foreign distributor will haggle over the price of the entire package of the films and then one set price will be agreed upon for five films.

B. Allocation of Prices in Packages. A problem arises when it is time to allocate the total purchase price or licensing fee for the five pictures to each separate individual picture. (For example, if the sales agent agrees to a $1,000,000 advance for five pictures, is each picture allocated a $200,000 advance, or is one allocated $500,000 and the balance of the four other pictures allocated $125,000 each?) Many producers try to negotiate a provision that the pictures not be sold in packages, however, as a practical matter this is done all the time and it is hard to get distributors to agree not to do it. In this particular agreement there is a requirement that the distributor allocate gross receipts received from a package equitably and in good faith. While this provision on its face may not seem very strong, it does impose a good faith duty (which is subject to scrutiny in an audit or litigation) on the sales agent to allocate the package fee fairly.

9. ACCOUNTING. Accounting is a very important part of any sales agent/distribution agreement. Most distributors don't want to negotiate their standard accounting provisions which generally provide for quarterly statements payable 60-90 days after each quarter for the first year or two and semi-annual accountings thereafter. This particular agreement has some reasonably favorable accounting provisions from the producer's point of view.

A. Quarterly for Life of Contract. The accounting is quarterly for the life of the agreement.

B. Separate Trust Account's Bank Statements. Many distributors will not agree to this provision but this particular agreement provides that the distributor is required to maintain a separate trust account for gross receipts derived from the picture and furnish a copy of all bank statements directly to the producer. The producer's share of the gross receipts is deemed held in trust by the distributor for the producer and the producer has a lien on the producer's share of the gross receipts.

. C. Early Dispersal of Funds; Interest. Even though the distributor is only required to account quarterly, in this particular agreement, the distributor is also required to disperse funds received in the trust account within thirty days of receipt, subject to a reasonable retention for reserves for distribution expenses and if the distributor fails to do so, interest will accrue at the rate of 1-1/2% per month on any sums more than thirty days past due.

D. Statements within 30 days of Close. This particular accounting provision also provides that the accountings will be sent within thirty days following the close of the quarterly accounting period. This is unusual since most distributors want sixty to ninety days to account.

E. Copies of Licensing Agreements. This agreement also requires the distributor to furnish the producer the copy of each and every distribution and licensing agreement entered into. Many distributors do not want to do this, particularly when they enter into package licensing deals involving several films.

F. Right to Audit; Reimbursement of Audit Costs. As in most agreements, the producer has the right to audit distributor's records, but in this particular agreement if the audit discloses that the producer has been underpaid by the greater of 5% of the amount paid or $1,000, the distributor will pay the producer's reasonable audit costs.

G. Contestability of Statements. Most distributors want the accounting statements to be incontestable after a year or eighteen months. In this particular agreement the accounting statements are incontestable thirty-six months after they have furnished, which gives the producer a pretty long period of time to challenge an accounting statement.

H. Direct Payment to Producer's Representative. In this particular agreement 10% of the sums paid to the producer are paid directly to the producer's representative who negotiated the deal on behalf of the producer.

10. WARRANTIES. The distributor needs representations and warranties from the producer that the producer owns the picture; that the producer owns the copyright; it hasn't been sold, and there are no claims, lawsuits or legal entanglements which would in any way inhibit or diminish the rights granted to the sales agent/distributor. Distributors also want to know that a third party won't come forward and claim money that the distributor has already paid to producer which may be due to a third party.

A. Distributor's Warranties. The distributors generally don't like to make any representations or warranties. In this particular agreement, the distributor is representing and warranting that it has the capacity to enter into the agreement, it is not insolvent or in danger of bankruptcy, that any changes the distributor makes to the picture except for censorship will not expose the producer to liability, and that the distributor is in the motion picture distribution business and will continue in the business during the term of the distribution agreement. These are unusually generous warranties that are not normally given by distributors.

11. INDEMNIFICATION. Each of the parties are going to want to have to be indemnified and held harmless against any claims, obligations, costs, and expenses arising from a breach of each of their representations and warranties under the agreement. In addition, if the distributor adds material to the picture, the producer is going to want to be indemnified if any claims arise out of that added material.

12. AGENCY COUPLED WITH AN INTEREST. The Sales Agent/Distributor generally want a provision which couples the sales agency relationship with an interest in the picture. This is because the sales agent/distributor is expending money in the marketing, distribution, and sales of the picture and may also have given the producer an advance, and he does not want to be in a position to have his sales agency or distributorship terminated by the producer. In fact, this is an unusual agreement because this particular agreement does not have a "no recision"/"no injunctive relief" clause which virtually all distributors/sales agents require so that their investment in the advance, advertising, marketing and prints will not be lost in the event that the producer decides he is unhappy and wants to rescind or terminate the agreement.

A. Agency Coupled With Interest Only Until Recoupment. Our particular agreement provides that there is an agency coupled with an interest but only until recoupment of all advances and expenses incurred by the distributor in connection with the picture.

13. ARBITRATION AND JURISDICTION. When both parties are in the same city, jurisdiction is generally not an issue as both parties want disputes to be resolved close to home. Many times however, the distributor will be in New York or London and the producer will be in Los Angeles and there is usually some discussion about jurisdiction and venue for the settlement of disputes. The producers obviously want their home court advantage. Generally, the distributors who have more clout win this argument.

A. AFMA Arbitration. This particular agreement provides for the settlement of disputes before a single arbitrator in accordance with the rules and procedures of the American Film Marketing Association. It is generally a very convenient way of resolving disputes concerning distribution agreements as there is an extremely experienced panel of arbitrators who have dealt with many of the issues concerning disputes among distributors and producers as well as disputes between distributors. Generally, but not always, one of the participants in the dispute must be a member of the American Film Marketing Association in order for the dispute to be handled pursuant to the AFMA rules. Accordingly, in this agreement there is a provision that anticipates AFMA refusing to accept jurisdiction in which event the parties agree to arbitrate the dispute with a retired judge or an arbitrator procured through the judicial arbitration and mediation service. This particular agreement provides for jurisdiction and venue to be in Los Angeles and the arbitration to be held in Los Angeles.

14. ADDITIONAL DOCUMENTATION. Generally, the distributor wants the producer to agree to sign any and all additional documents and instruments required to carry out the purposes and intents of the distribution agreement. Many times the distributor will insist that the producer appoint the distributor his attorney-in-fact to execute those documents on the producer's behalf. This particular agreement does not require the appointment of the attorney-in- fact, but simply states that the producer and distributor will negotiate in good faith and execute additional documents necessary to carry out the agreement.

A. Estimates; Projections. There is an important provision at the end of this paragraph concerning the estimates and projections made by the distributor. Many times the distributor will be asked to make estimates and projections prior to entering into the agreement. When the distributor does not meet those estimates and projections, the producer turns those estimates and projections around and uses them as a basis to sue the distributor for misrepresentation. This particular agreement simply states that the estimates and projections are deemed a statement of opinion and not binding on the parties, thereby reducing the possibility of any claims that the distributor misled the producer.

15. RIGHT OF FIRST NEGOTIATION. The distributor will generally want the right of first negotiation and a last refusal with respect to extension of the term of the agreement and also with respect to any remake, sequels, or subsequent productions based upon the original picture. This particular agreement only provides for right of first negotiation with respect to the extension of the term.

16. ASSIGNMENT. This paragraph is relatively customary. The distributor does not want the producer assigning the distribution agreement to a third party and generally neither does the producer without the prior consent of the other party. The parties generally want to know who they are dealing with. This particular agreement does allow the producer the right to assign the right to receive money under the agreement to a third party upon written notice specifying the name, address of the Assignee. Many distributors will want to limit this provision to one or two assignees so they don't have to send money and copies of statements to many different parties.

17. TERMINATION. As discussed above, most distributors have very specific provisions concerning injunctive relief, recision, and termination, which essentially prohibit a producer from seeking an injunction or obtaining other equitable relief or rescinding or terminating the agreement simply because the distributor has provided an advance and/or is advancing significant advertising, promotion and distribution expenses in connection with the picture. The distributor therefore views himself as essentially a partner in the revenue stream of the picture. Generally this type of provision provides that the producer will be entitled to seek money damages for a breach, but will not be entitled to rescind, terminate or enjoin the distribution of the picture.

A. Right to Terminate Subject to Existing Licenses. This particular agreement has no such provision. Instead it provides for a termination by either party and particularly allows the producer to regain all of its rights in the picture subject to any existing outstanding third party licenses to foreign distributors. This is a highly unusual provision but was obtained in this particular agreement.

B. Bankruptcy/Security Interest. While most distribution/sales agency agreements have so called "bankruptcy clauses", many of these bankruptcy clauses are simply unenforceable. Where there is a substantial amount of money at stake, it is an extremely good idea to have expert bankruptcy counsel review distribution/sales agency agreements for bankruptcy issues and to suggest enforceable bankruptcy provisions which protect each party. This particular agreement has a bankruptcy/security interest clause which has not been tested and was drafted by attorneys who are not expert in the bankruptcy arena. While the basic concepts seem to make sense, it is not certain whether this particular provision is enforceable or not.

1. Termination on Filing of Petition. The provision provides for the producer to terminate the sales agency/distribution agreement in the event that the sales agent/distributor files a petition and bankruptcy or consents to an involuntary petition and bankruptcy or any reorganization under Chapter 11 of the Bankruptcy Act, subject to any pre-existing agreements with third party international