If the film does better than everyone expects, Filmstar and the foreign subdistributor will split the overage, with Filmstar's share declining as the gross rises. Filmstar in turn passes this revenue back to the producer after taking out its sales fee -- 25% in this case.
The nice thing is that Filmstar has not put a single dollar at risk in the deal. The subdistributor could be buying a pig in a poke. The kicker is that the payouts are often structured so that Filmstar gets its cash from the subdistributor months before its payouts to the producer are due.
In the 12 months ending last May 31, its first full year in the business, Kleiman's foreign-distribution arm handled rights for 11 films -- 7 completed and 4 in preproduction. That makes Filmstar a significant but not major player in an industry that produced more than 500 feature films in 1988.
The company is building its relationships with foreign subdistributors and with producers -- the suppliers of films. The subdistributors, Coy says, will do business with anyone who can supply them with a continuous flow of the pictures their audiences want to see. Right now, the taste of fans overseas as well as here is running to high-budget productions -- so-called A films as opposed to cheaper B and cheapest C movies -- in the action-adventure genre. That means, she and Kleiman both acknowledge, that Filmstar has to hustle to continue upgrading the movies it can procure for foreign distribution.
Here, again, is where Kleiman's synergistic concept comes in. Theoretically, the company's foreign-distribution arm will gain an advantage in attracting makers of quality films, because Filmstar will also offer producers services such as:
* Financing. Whatever else they might need, producers always need money. Filmstar plans to be able to help producers raise it in several ways. For instance, it might issue a producer a letter of credit, which the producer could use as loan collateral in exchange for future distribution rights. Filmstar could make loans directly to producers -- both pay-or-play and bridge loans. The first helps producers get a commitment from their talent, who will not sign without a promise of pay whether or not they are "played." The loan lets a producer make that promise and get on with fund-raising. Bridge loans help producers finish films when other cash has run out. With either type of loan, Filmstar will negotiate not only repayment but future rights and, if it can, some equity in the picture. It still won't be taking much of a risk, though. Any loans or letters of credit will be backed by distribution rights to the film. Filmstar could also act as a producer's agent or broker, arranging for a bank or other lender to discount the producer's receivables (presold distribution rights, for instance) for production financing.
* Payroll. A Filmstar subsidiary can handle a production's payroll accounting and disbursements -- such as employee paychecks, workers' compensation insurance, and tax withholding.
* Marketing, advertising, and media buying. One or more subsidiary companies could provide the creative as well as production services required to market and promote a producer's film.
* Product licensing. Want to buy a Batman T-shirt or an E.T. doll?
* Product merchandising. Actors do not drink Coke on camera because they necessarily prefer it to Pepsi. Coca-Cola has paid for that tacit endorsement.
* Production services. Someone has to run the budget and manage the staff while a movie is being made. A Filmstar company, for a fee, could do that.
* Financial management. With all the money producers are going to make working with Filmstar, they are going to need help managing their personal finances. Another Filmstar company could do that.
Filmstar could do most of these things, but so far it does not. The company lacks the capital required to acquire the operating subsidiaries and provide financial services to independent producers.
So far, Filmstar has acquired a small payroll company that services television awards specials and is expanding into television series and films. It has issued one letter of credit to the producer of Bethune, which stars Donald Sutherland as a Canadian doctor working in Mao's China.
The trial partnership Filmstar had with a company to provide film marketing services didn't work out -- a personality conflict, Filmstar's Peter Kares says.
Kares, 46, is the president of the company and owned Producers Funding Corp., which Filmstar acquired in early 1988. But the company's arrangement with an East Coast merchant bank for production loans to producers that Filmstar brought to the bank didn't pan out. Kares's role now is to scout out the films whose foreign-distribution rights Filmstar would like to acquire and to strike deals with these producers.
Kleiman has hired 31-year-old Robert Wolpert, a product of Harvard Business School whose last activity was training for triathlons, to help him structure his holding company and act as its chief of operations. "My personal interest," Wolpert says, "is making the acquisitions work." However, managing acquisitions is not an acute issue just now with only a single portfolio company showing on the organization chart. As yet, Kleiman and Wolpert have not articulated how the organization will be structured and managed when there are more.
