Which of the following is the correct order of the categories of deductions that a distributor takes from net profits?

• A. Marketing, Distribution Costs, Distribution Fee, Residuals, Overhead, Interest, Gross Participants, Negative Costs
• B. Distribution Fee, Marketing, Distribution Costs, Overhead, Residuals, Gross Participants, Interest, Negative Costs
• C. Distribution Fee, Marketing, Overhead, Distribution Costs, Residuals, Gross Participants, Interest, Negative Costs
• D. Distribution Fee, Marketing, Distribution Costs, Residuals, Gross Participants, Interest, Overhead, Negative Costs

Answer: (D)

In a net profits waterfall, deductions from what the project earns are paid in a fixed order so that certain obligations are recouped before others. The sequence starts with the distributor’s own compensation, the distribution fee, because the distributor is entitled to its fee upfront. Next come the marketing costs—P&A—to recoup the spending that enables the film to be released and marketed. Then the distribution costs are recouped.

Residuals come next, since payments to guilds and performers for reruns or residuals are contractual obligations that must be satisfied. After that, the gross participants receive their share from the net profits. Financing costs follow to ensure lenders are paid before other profit participants. Then overhead, the distributor’s ongoing administrative costs, are recouped. Finally, negative costs are addressed last, as unrecovered or additional production costs are considered only after the other deductions.

This ordering reflects prioritizing risk and entitlement: the distributor’s fee and essential marketing and distribution costs are recouped first, followed by contractual entitlements (residuals and gross participants), then financing, then overhead, with negative costs last. The other options mix these categories in a way that doesn’t align with how these obligations are typically prioritized in practice.