Hollywood May Be Saying Auf Wiedersehen to Funds

As the cameras panned the Kodak Theatre during this year’s Academy Awards telecast, they caught Jim Broadbent striding to the stage to accept his Oscar for best supporting actor. Next came a shot of his “Iris” co-star, Dame Judi Dench. But most of the movie’s producers were nowhere in sight. The theater couldn’t accommodate the 9,000 Germans who financed the film.

During the last five years, more than $12 billion has quietly poured into Hollywood from Germany, bankrolling everything from art house hits such as “Iris” to megaplex flops such as John Travolta’s “Battlefield Earth.”

Virtually overnight, investors looking for prestige, profits and extraordinary tax breaks began funding as much as 20% of the industry’s output--the most significant source of financing outside the studios themselves.

Without German investors, Arnold Schwarzenegger would not be back as the Terminator for a third time.

Now this torrent of cash is just as suddenly threatening to evaporate because of the collapsing stock prices of German media companies and the German government’s desire to limit generous tax write-offs. As a result, anxiety is spreading throughout Hollywood over how an industry that has become addicted to massive injections of overseas cash will weather the withdrawal.

Although Hollywood always has been adept at picking the pockets of wealthy, star-struck foreigners, the staggering sums coming through various kinds of German investments will be hard to replenish. “Where is the next wave?” asked attorney Schuyler Moore, who specializes in financing independent films. “Nowhere.”

The effect is likely to rattle Hollywood’s rank and file as well.

“If you are making less movies, there are going to be fewer jobs,” said Cassian Elwes, head of the William Morris Agency’s independent film division. “It’s that simple.”

The tightening faucet, Elwes said, was evident at this spring’s Cannes film festival, where German financiers have engaged in bidding wars that doubled the amount paid for distribution rights of American films.

“Two years ago, Cannes was jammed with Germans,” he said. “The German yachts were lined up in the Old Port, at least 30 boats, one bigger than the next.”

This year, Elwes said, the flotilla was down to three.

The loss of German financing also could put even more pressure on studios to shoot outside the United States, especially in Canada, where finance and production costs are cheaper.

“Clearly, the German money allowed us to spend less money making movies,” said one top studio boss. “We’ll have to find other money to replace it, and that will mean making more films outside of the U.S. That’s where the money is. Without the German money, there will be a further shift away from Hollywood. Just the fact.”

Paramount Pictures and Universal Studios, in particular, have used German financing to boost the number of movies they make each year. This has allowed them to stretch their film budgets in an era of corporate belt-tightening.

Ambitious independent studios, meanwhile, have come to rely on Germans to help generate big-budget productions, once the sole province of the majors.

This summer, for example, German investors are underwriting Intermedia Films’ $100-million submarine thriller “K-19: The Widowmaker” starring Harrison Ford. They also are subsidizing Franchise Pictures’ $65-million Michael Douglas comedy, “Till Death Do Us Part,” scheduled for release next year.

“It has leveled the playing field for the independents who want to compete with the studios,” Lions Gate Chief Executive Jon Feltheimer said of the German financing.

Now the biggest competition probably will be the race to lock in deals before it’s too late. “It’s a melting ice cube,” said one studio executive. “Grab what you can.”

That’s why one of the more popular guys in Hollywood these days is Michael Ohoven, chief executive of Infinity International Entertainment, the studio arm of a company that pools money from thousands of investors to finance individual projects.

The investors--doctors, lawyers, industrialists--can write off 100% of their contributions to the investment funds, a boon that the German government is considering limiting, as it has done with other film investment vehicles considered too generous.

Ohoven, 28, serves as the eyes and ears of his father, Mario, who controls funding company Cinerenta, which has invested about $400 million in more than 30 Hollywood movies over the last four years, including “The Contender” and “Jeepers Creepers.”

On one recent day the younger Ohoven was comfortably ensconced in a star trailer in a Hollywood parking lot, where he is overseeing his next movie, “Confidence,” starring Edward Burns and Dustin Hoffman. Ohoven’s powerful role as a source of dwindling money is not lost on him or on those who come knocking.

“Hollywood is very welcoming to us,” he said with a smile.

For some studios, the German investment funds have become a way to avoid spending their own money on movies perceived as box-office risks.

Director Rob Cohen was not happy when he learned that Universal Studios was financing his film, “The Fast and the Furious,” through a German film fund. “It meant that the studio didn’t believe in the movie,” Cohen said. “It was a bummer.”

He learned about the arrangement when Universal executives finally agreed to his $38-million budget after they had pressed him for months to slash it by more than $8 million. Under the deal, the German investors would receive one-third of the profits for underwriting one-third of the movie. Cohen said Universal was so generous because the studio didn’t think there would be any profits to divvy.

Instead, the car-racing film became a surprise hit, generating $145 million in U.S. theaters, a total of $200 million in theaters worldwide.

Universal executives privately have vowed never again to use German funds that give investors a share of the profits for movies that look the least bit promising.

But German financiers know it’s not that easy.

“If the studios always knew what would work, they wouldn’t need outside money at all,” said Stefan Lutje, a German attorney and film fund expert.

The truth is that it hasn’t been much easier for the folks putting up the money.

Consider the $60-million Sylvester Stallone thriller initially called “Eye See You.” With a marquee star--and the director of the teen horror hit “I Know What You Did Last Summer”--thousands of German investors in 1998 ponied up. But when executives at Universal, which was going to distribute the film, got a look at this story of hell on Earth at a wilderness Alcoholics Anonymous meeting, they quietly shelved it. Last year, the studio sent the movie straight to video, selling it to Blockbuster Entertainment. Renamed “D-Tox,” it made only $6 million in 30 international markets.

Although the investors could take advantage of the 100% tax break, their money was gone, according to Jean-Louis Rubin, president of Capella International, the film’s supervising producer. “The deal, on paper, made sense,” he said.

One reason: The well-heeled of Germany pay more than half of their income in taxes and are constantly looking for ways to shelter their money.

In the mid-1990s, with the costs of German reunification mounting, the finance ministry reduced the number of tax shelters. But the film funds survived because of a quirk in German copyright law, even though not one frame of film must be shot in Germany and not one German must be hired.

“This is free money from the German taxpayer for Hollywood,” said Bernard Tubeileh, an analyst with Merrill Lynch & Co. “It’s complete nonsense.”

In the next few weeks, the German finance ministry will decide whether these film funds will keep their special status. If not, the last of the German largess will vanish from Hollywood, going the way of the money that gushed from the German stock market before its plunge two years ago.

Few producers will see their world change more dramatically than Elie Samaha, whose travels through Hollywood show how resilient German investors have been and why the industry already is mourning the prospect of their passing.

A dry cleaner turned Hollywood nightclub owner, Samaha used everything from German stock market money to tax-free funds to launch more than a dozen movies, starting in 1999 with “The Whole Nine Yards,” starring Bruce Willis.

His friendships with stars gained him instant entree with the German moneyed class and with Warner Bros. Pictures, which agreed to distribute his films.

Almost all of Samaha’s movies have been box-office disasters, including Travolta’s “Battlefield Earth,” “Get Carter” with Stallone and “3000 Miles to Graceland” starring Kevin Costner.

What’s more, he had a bitter falling-out with his original German partner, Intertainment Licensing, which has since filed a lawsuit accusing Samaha of cheating the firm out of $75 million through fraudulent bookkeeping--an allegation under investigation by the FBI.

As Samaha denied wrongdoing, the money continued to flow from other hopeful investors. “No one has abandoned me,” Samaha said--including Warner Bros.

“He’s a very valuable part of a comprehensive program we have here,” said Steve Spira, a Warner’s executive vice president. “We give him movies we can’t afford to make and he makes them for less than we could.”

Although the German riches may soon be gone, Samaha and others are banking on Hollywood’s enduring sex appeal to attract a new crop of investors.

“These are moths attracted to the Hollywood spotlight,” said John Miller, managing director of J.P. Morgan Securities, the industry’s leading banker. “They are very easily seduced.”

(BEGIN TEXT OF INFOBOX) Investment Returns A sampling of Hollywood films financed in part or in whole with money from German investors, ranked by total domestic gross:

Film title Distributor Domestic gross

The Lord of the Rings New Line Cinema $311,053,126 The Grinch Who Stole Christmas Universal 260,031,035 Mission: Impossible II Paramount 215,397,307 The Fast and the Furious Universal 147,000,000 Shallow Hal Fox 70,836,296 Changing Lanes* Paramount 65,249,207 The Wedding Planner Sony 60,400,856 Jeepers Creepers MGM 37,904,175 Driven Warner Bros. 32,616,869 Angel Eyes Warner Bros. 24,044,532 Battlefield Earth Warner Bros. 21,471,685 The Contender DreamWorks 17,872,723 Small Time Crooks DreamWorks 17,266,359 3000 Miles to Graceland Warner Bros. 15,738,632 Get Carter Warner Bros. 14,967,182 Frailty* Lions Gate 13,103,828 Iris Miramax 5,580,479 Hilary and Jackie October Films 4,874,838 Mansfield Park Miramax 4,775,847 Sweet and Lowdown Sony 4,196,621

*Still tracking Source: Exhibitor Relations