The list does not represent an attempt to accuse any specific major studio/distributor, or other distributor of questionable or unethical conduct, creative accounting, sharp negotiating tactics or anti- competitive practices. Nor should it be interpreted as an indictment of the entire distributor segment of the industry. It also does not attempt to achieve any level of "proof" with regard to any reported business practice. There is also no attempt made here to quantify the likelihood that any given discussed practice may or may not occur within the context of an actual and specific industry relationship. Rather this report is merely an attempt to compile in one place a written list of distributor practices that have been reported from time to time in various trade publications, books on the film industry and in discussions with large numbers of feature film producers, other profit participants and attorneys, accountants, auditors and broker/dealers (whose clients work in or relate in some way to the film finance and distribution arenas), for the primary purpose of alerting such persons to the possibility that such business practices may actually be occurring and to help them understand how such practices may impact on them. Also, some of the concepts overlap, (i.e., there is a certain level of redundancy in the list). But, it is better to be redundant than to omit an important concept. Furthermore, some of the references are not actual practices but terms which then lead to a discussion of a specific practice.

Thus, the information relating to such reported film distributor practices and provided here is offered for the purpose of making those profit participants just mentioned and others interested in the financial aspects of the film business, more aware of the potential breadth of the problem and to hopefully aid in the long term correction of the abuses herein described, if in fact they are occurring. The list is specifically designed to help future independent producers and other net profit participants to be more alert to the possible occurrence of such practices, to aid such producers and others whose interests are aligned with them in negotiating film distribution and other entertainment industry agreements that are more fair to all parties and to aid such profit participants in more effectively monitoring the implementation of such agreements.

Since the consistent and persistent occurrence of such practices over a lengthy period of time tends or would tend to facilitate the concentration of decision-making authority and creative power in the hands of a few distributors and/or studio/distributor executives in the film industry, it is also hoped that this list will at least slightly inhibit the ability of such persons to continue such practices, to the extent they are occurring. Thus, it is also hoped that this monograph may contribute in a modest way toward the preservation of a more vigorous and healthy marketplace for ideas as expressed through the important communications medium-- feature films.

This work is an outgrowth of another study of the author, (i.e., a dictionary of film finance and distribution terms). The larger work was published by Silman-James Press in the summer of 1992 (Film Finance and Distribution--A Dictionary of Terms). Thus, the concepts listed and discussed here are first defined, then the manner in which such concepts are or may be used or abused to the detriment of others is explained and finally, in many instances, a strategy for attempting to avoid the impact of such a practice is often suggested. Since the information contained herein may prove useful to a broad audience including independent producers, studio producers, producer groups, investors, financiers, joint venturers, co-financiers, actors, screenwriters, attorneys, accountants, auditors, broker/dealers, investment advisors, mergers and acquisitions specialists and other profit participants and/or their representatives, in the interest of brevity, the phrase profit participants is substituted throughout for this larger potential audience.

By the way, a monograph is initially defined by Webster's as "...a treatise on a small area of learning..." but in the alternative, as "...a written account of a single thing." The author chooses to define the term monograph for purposes of this study as a written report on a narrow topic. In this case, the topic is feature film distributor practices. Enjoy!

1. Account Number--A studio accounting number assigned to a given film production at some film studios and which is generally all that is required of someone to charge expenses for goods or services to the account of a film being produced at the studio. In a studio financing context, profit participants or their representatives must carefully review studio charges to make certain they are all authorized.

2. Actual Breakeven--The point at which revenue generated by exploitation of a motion picture equals the costs incurred in the production and/or distribution of such motion picture for the applicable entity, e.g., the film's distributor. Breakeven in a film context is a contractually defined term, and a significant number of variations have been used to signify specific points in a film's revenue stream, e.g., artificial breakeven, breakeven, cash breakeven, first breakeven, rolling breakeven, etc.

3. Adhesion Contract or Contract of Adhesion--A contract so heavily restrictive of one party, while so non- restrictive of another, that doubts arise as to its representation as a voluntary and uncoerced agreement. The concept implies a grave inequality of bargaining power between the parties. It often arises in the context of so- called "standard-form" printed contracts prepared by one party and submitted to the other on a "take it or leave it" basis. Courts have recognized there is often no true equality of bargaining power in such contracts and have accommodated that reality in interpreting such contracts. Although studios or distributors who offer their so- called "standard" distribution or other agreements to profit participants on a "take it or leave it" basis may be creating an opportunity for a profit participant to subsequently claim the agreement is a contract of adhesion, it is not suggested that any party rely on the uncertain future interpretation of the provisions of such a contract by a court.

4. Adjusted Gross--A negotiated and defined term in a movie distribution deal, typically gross receipts minus certain specified deductions, which may be the basis of negotiated percentage participations in that fund, (i.e., adjusted gross). Such deductions from gross receipts may include prints and advertising costs, taxes, residuals, advances and other specified items from first position gross. If deductions for enough different items are demanded by the distributor and accepted by the prospective adjusted gross participant, the resulting adjusted gross participation may not have any greater value than a net profit participation. Sometimes, the cost of prints and advertising alone may diminish the value of adjusted gross participation to the point that no money will ever be paid to persons or entities with rights to receive such funds (see "First Position Gross" and "Net Profits").

5. Adjustment--The reduction of film rentals owed by an exhibitor to a distributor pursuant to a license agreement, which occurs following a poorer than expected performance at the box office. Such adjustments may be allowed by a distributor in contravention of its obligations to maximize the exploitation of a given film on behalf of net profit participants (see "Selling Subject to Review" and "Settlement Transactions").

6. Admission Price Discrimination--An exhibitor business practice in which an exhibitor would charge a different amount at the box office for theatre admissions depending on which distributor provided the movie being shown. Such price differentials have at times been contractually or otherwise imposed on the exhibitors by the major studio/distributors.

7. Advertising Costs--The direct expenses incurred in preparing and producing advertising for motion pictures. Such costs must be closely examined to make sure they are reasonable whether the advertising for a movie is handled in-house by a distributor's advertising department or by an outside advertising agency. Profit participants or their representatives should watch for "sweetheart" deals where an outside advertising agency artificially inflates the costs of its services on one producer's movie and gives the studio or distributor a more favorable rate on its in-house productions, or in another variation, actually pays some form of "kickback" to the distributor. In other instances, some studio/distributors may charge a 10% advertising fee simply for administering a movie's advertising program when the program is actually conceived, planned, created and implemented by an outside advertising agency. Determine at the distribution agreement negotiation stage whether such fees will be charged and question whether the fee is necessary and whether the percentage is fair and/or reasonable.

8. Advertising Overhead--A charge imposed by all of the major studio/distributors and some independents to cover the costs of operating their internal advertising and publicity departments. Generally, the charge equals 10% of the negative cost of the movie. Net profit participants may have a reasonable basis to question this charge on the grounds that the 10% percentage has no relation to actual costs since certain pictures bear a disproportionate share of such expenses and in many instances this overhead charge will exceed the actual costs of the services actually provided for a given motion picture. In lieu of eliminating or limiting the amount of the advertising overhead charge, net profit participants may choose to seek to impose a ceiling on the amount that can be charged by the studio or distributor.

9. Allocations--The assignment to particular accounts or apportionment among films or entities of the costs associated with distribution, e.g., the costs of advertising several films may be allocated by the distributor among such films. Allocation issues also arise in the licensing of films in a package for television, whether for network or syndication and in foreign distribution, such issues arise with respect to the allocation of a portion of film rentals to shorts and trailers. The profit participant must have access to the information upon which to make a judgment as to the fairness of such allocations. In the alternative the distribution agreement should provide for a fair or objective method of allocation, e.g., to base the allocation on the films' theatrical performances (also see "Apportioned Expense").

10. Allowances--A share or portion allotted or granted or a sum granted as a reimbursement for expenses. Often the film distributor will grant certain allowances to the exhibitor for advertising and exploitation of a film. Again, the profit participant must be sure that such allowances are not excessive in what amounts to a disguised attempt to cross-collateralize one movie's revenue with others the distributor is distributing or will distribute.

11. Ancillary Rights--The additional powers or privileges to which a film's producer or distributor or other person or entity is justly entitled to exercise with respect to the original literary property and the feature film that the producer may own, (i.e., additional to theatrical exhibition). Such rights may include the right to produce a remake, sequel, television series, stage play and/or soundtrack recording. Some distributors will seek to exclude revenue from ancillary sources from being included in their gross receipts or if revenue from ancillary sources is included in gross receipts the studio/distributor may seek to use an approach similar to that used for home video (see "Videocassette Revenue Reporting") wherein the distributor only gets a small royalty payment out of the revenues generated at the wholesale level (a royalty payment instead of a distribution fee) and quite often the distributor is an owner of the wholesale entity.

12. Anticipated Expenses--A concept often found in film distribution agreements which permits the distributor to deduct from gross receipts an amount adequate to cover future estimated distribution expenses. Such provisions often provide that the distributor may in good faith retain sums necessary to pay for costs reasonably anticipated to arise in connection with the picture being distributed. If such a provision is part of the first draft distribution agreement, seek to impose reasonable ceilings on the amounts to be set aside and then, and/or after the fact, make a judgment as to whether the distributor is exercising good faith.

13. Anti-Competitive Practices--A broad term referring to all sorts of activities which tend to reduce free competition in the marketplace. This term would include some business practices that are not actionable under anti-trust laws, e.g., even though the MPAA rating system might not be actionable pursuant to a given federal anti-trust regulation, independent producers or distributors whose films are rated in a discriminatory manner by this MPAA sponsored organization may well view this MPAA activity as anti-competitive (see "Anti-Trust Law Violations" below).

14. Anti-Trust Law Violations--Violations of federal and state statutes aimed at promoting free competition in the marketplace, (i.e., to prevent monopolies and restraint of trade). Any agreement or cooperative effort or intent by two or more entities that affects or restrains, or is likely to affect or restrain their competitors, is illegal under these statutes. The two major federal anti-trust laws are the Sherman Act and the Clayton Act. The Sherman Act protects the right of individuals to be free to compete and makes illegal any contract, combination or conspiracy in restraint of trade or commerce. The Sherman Act also makes illegal monopolies and attempts, combinations or conspiracies to monopolize. The Clayton Act regulates price discrimination, tying and exclusive-dealing contracts, stock acquisitions which tend to monopolize and certain interlocking directorates. The relaxation of the federal enforcement of anti-trust laws in the years during and since the Reagan presidency may have resulted in numerous activities that may otherwise be actionable under the anti- trust laws, if such laws were being more vigorously enforced. Movie profit participants and even exhibitors must be more aware of such activities and be willing to litigate when appropriate in order to stem any potential trend toward more anti-competitive practices.

15. Apportioned Expense--Costs which are divided according to the parties' interests; proportionately. Many distribution agreements allow the distributor the discretion to apportion numerous distribution expenses relating to advertising, facilities, employees, etc. among films which are marketed in a package. A profit participant cannot make an informed judgment as to whether such apportionments are fair without having access to the information upon which such apportionments are based. Profit participants should try to make sure the audit rights of the producer and/or profit participants include access to such documentation, (i.e., do not allow the distributor to limit access to documents that relate to the amount of money to be received).

16. Approved Elements--Significant aspects of a film which have been reviewed and approved by the distributor which has committed to distribute the film once it is produced, e.g., script, budget, director and lead actors. If the film as produced does not contain the elements approved in advance of production by the distributor, that distributor may be able to avoid its obligation to distribute the film. Producers and directors must not forget about those approvals as the film is produced. If the distributor does not like the film, the distributor is not likely to forget. If the film as produced significantly departs from the approved script, for example, the distributor may avoid its obligation to distribute the film. The question of what is significant provides an opportunity to disagree. Some effort ought to be made in negotiating the distribution agreement to further define what departures will be allowed and to provide for some mechanism to obtain distributor approvals on changes along the way, if any.

17. Arbitration--The submission of a controversy, by agreement of the parties to persons chosen by the parties for resolution; an informal, non-judicial method for resolving disputes which is usually quicker and less expensive than litigation. Agreements sometimes provide for arbitration to resolve any disputes that arise between the parties. For example, motion picture lenders often require that disputes between a film's distributor and its producer relating to whether the film has been properly completed and delivered pursuant to the terms of the distribution agreement be submitted to arbitration to insure a more rapid resolution of the dispute. In a situation where a producer signs a production-financing distribution agreement with a studio/distributor, the producer may also want to seek an arbitration clause for the same reasons, particularly since the studio will be charging interest on the production costs of the film.

18. Artificial Pickup--A film project originally controlled and developed by a studio/distributor but which is farmed out pursuant to a negative pickup or anticipated acquisition distribution deal to an outside (but friendly) production company, partly to avoid the higher costs of the below-the-line union crews which the studio would have to pay if the project was produced as an in-house production at the studio.

19. Article Twenty--A controversial article of the IATSE contract which allows major studios to fully finance non-union movies and television shows so long as the studios declare they have no creative control and give the union 30-days notice before production starts. Many union supporters contend Article 20 has helped to increase non-union movie production.

20. Artificial Breakeven--A contractually defined multiple of a film's negative cost (e.g., when gross receipts equal three times the negative cost of the motion picture) that is treated as actual break-even.

21. Assignment--The distributor in a film distribution deal typically insists on the right to assign parts of the agreement to sub-distributors and other companies for purposes of meeting its distribution obligations. The profit participant, however, should insist on language requiring the distributor to remain liable for performance of the obligations of the agreement even if they are assigned. In many cases, the producer may also want to require the distributor to handle the first general release itself and not pass its distribution obligations on to an entity that was not a party to the distribution agreement. In addition, the producer should preserve his or her ability to assign the right to receive proceeds resulting from the exploitation of the film and to otherwise enforce provisions of the distribution agreement.

22. Association Anti-Trust Policies--The U.S. anti-trust laws apply to the membership policies of trade and professional associations such as the MPAA, MPEAA, AMPTP, AFMA, AIVF and NATO. Restrictions on which companies may become a member have particular anti-trust implications, since denial of membership, with its attendant benefits, may be held to place the applicant at an economic disadvantage. Generally speaking, trade associations must allow membership to all those in the trade if excluding them would significantly limit their opportunities to compete effectively, thereby creating a restraint on competition. Two other areas of potential concern with respect to the application of the anti-trust laws to professional and trade association policy, are (1) agreements among association members that have the effect of fixing or stabilizing prices for particular services and (2) boycotting or refusing to deal with companies that take action which is opposed by the association members.

23. Attendance Checking--Activities undertaken on behalf of a producer or distributor designed to verify the actual number of paid moviegoers in attendance at a showing or showings of a film. Such activities may include the hiring of checkers to go to the theatre and count those in attendance or to purchase the first and last ticket of the day at a given theatre to then compare the ticket numbers with the exhibitor's attendance reports. There are organizations that provide such checking services for producers and distributors. However, in a rent- a-distributor situation a producer may want to hire its own checking service to conduct random checks of attendance at theatres where the producer's film is being exhibited.

24. Audit--An inspection of the accounting records and procedures of a business, government unit, or other reporting entity by a trained accountant, for the purpose of verifying the accuracy and completeness of the records. It may be conducted by a member of the organization (internal audit) or by an outsider (independent audit). An IRS audit consists of the verification of the information on the return. A film distribution audit should be conducted by an accounting firm with this specialized expertise, hired by the producer and with as few restrictions imposed on the audit as possible, (i.e., a producer or profit participant should insist on broad auditing rights in any agreement which controls the participation in profits).

Broad auditing rights may be defined as a film producer's negotiated authority to audit the books and records of a distributor with few restrictions. Distributors typically want to limit audit rights by restricting when the audit may be started and conducted, limiting the purpose of the audit, restricting who may conduct the audit, requiring that copies of all reports made by the producer's accountant be delivered to the distributor at the same time as the producer, placing limits on the amount of time an audit may take, allowing only one audit each year, only permitting individual records to be audited once, limiting the period during which objections may be made, providing that all statements by the distributor are binding unless objected to in writing within a certain period of time, forever barring the producer or other profit participants from instituting any lawsuit unless timely objection is made and only permitting review of the books of the subject picture even when the picture is marketed with other pictures as a package. Distributors will also insert language which permits them to keep records in their own unique way. Try to reduce such restrictions and limitations.

It is not likely that an audit on behalf of motion picture profit participants will rise to the level of a complete audit which is so thoroughly executed that the auditor's only reservations have to do with unobtainable facts. In a complete audit, the auditor examines the system of internal control and the details of the books of account, including subsidiary records and supporting documents, while reviewing legality, mathematical accuracy, accountability and the application of accepted accounting principles. This is a technical accounting term establishing audit standards (same as unqualified audit). Producers can raise the question of a complete or unqualified audit in negotiations for audit rights although such audits are not likely to be permitted. Experienced entertainment attorneys recommend that profit participants do audit any motion picture that has any likelihood of going into profits. An audit of studio books for a domestic theatrical release may cost $15,000 or more, but few if any of such audits, do not pay for themselves. Audits of major studios have uncovered millions of dollars in errors, most of which seem to be in the studio's favor.

25. Average Negative Cost--An industry statistic usually calculated by the MPAA for films produced by member companies and presented as a statistical median for a given year. The average negative cost for an MPAA movie in 1991 was reportedly in the neighborhood of $28 million dollars. Studio executives and their representatives are fond of pointing to escalating advertising expenses, high labor costs and the demands of gross profit participants as the primary culprits in the escalation of negative costs while spokespersons for "A" level talent counter that if the studios would quit playing games with their books (thus making net profits virtually obsolete) there would be little need to demand gross participations.

26. Bad Debt--An open account balance or loan receivable that has proven uncollectible and is written off; amounts earned by a specific film and which are owed to the distributor of the film but which the distributor will not be able to collect because the debtor is insolvent. Distributors will generally deduct such amounts before making payments to the producer. Limit distributor discretion to claim amounts are uncollectible and establish some objective criteria in the distribution agreement for which "bad debts" may be written off.

27. Bad Faith Denial of Contract--A relatively new tort recovery based on a defendant's bad faith conduct in asserting a stonewall ("see you in court") defense to an ordinary commercial contract. Recent cases have held that the elements of the cause of action are (1) an underlying contract, (2) which is breached by the defendant, (3) who then denies liability by asserting that the contract does not exist, (4) in bad faith and (5) without probable cause.

28. Bankruptcy--A state of insolvency of an individual or an organization; an inability to pay debts when they come due. The taking or acquiescing in the taking of any action seeking relief under, or advantage of, any applicable debtor relief, liquidation, receivership, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar law affecting the rights or remedies of creditors generally, as in effect from time to time. Bankruptcy is a legal process under federal law intended to not only insure fairness and equality among creditors of a bankrupt but also to help the debtor by enabling him, her or it to start anew with property he, she or it is allowed to retain as exempt from liabilities, unhampered by creditor pressure and the discouragement of pre-existing debts. Profit participants should make some effort to determine the financial stability of a distributor. A profit participant's share will generally not be forthcoming from a bankrupt distributor.

29. Bargaining Power--The relative ability to control or favorably influence negotiations between parties. Often in negotiations between film distributors and producers, the relative bargaining power of the parties plays a significant role in determining whether numerous negotiated issues are resolved in favor of one or the other. Distributors typically have the stronger position, partly because the law of supply and demand is in their favor, (i.e., there are more motion pictures produced each year than there are distributors who are willing to distribute). The producer, on the other hand must first assemble an attractive package and/or produce a quality picture, then seek to interest more than one distributor in its distribution. To the extent that a producer has more than one distributor interested in distributing the producer's film, the producer will theoretically increase his or her bargaining power, all other things being equal, (i.e., if the parties are negotiating on a level playing field) [see "Anti-Competitive Practices" and "Anti-Trust Law Violations"].

30. Barriers to Entry--The impediments which must ordinarily be overcome in order to enter a particular kind of business or industry. For example, the barriers to entry into the distribution of major motion pictures are extremely high since substantial amounts of capital, significant expertise relating to the market place and relationships with exhibitors are required. The concept of barriers to entry and whether such barriers are natural or artificial plays a role in anti-trust law analysis relating to competition.

31. Below-the-Line Fringes--Compensation paid to or for the benefit of a film's crew in addition to their salaries. When such individuals are members of a guild or union, these benefits may include vacation pay and health, welfare and pension contributions. Also, such payments may be made directly to the guild or union. Studios sometimes overstate the cost of such benefits in determining the negative cost of a movie. Thus, a producer must determine exactly what the below-the-line fringes are and how much they cost.

32. Best Efforts Clause--A provision in film distribution contracts which obligates the distributor to put forth its best efforts in distributing the film. In the event that a dispute arises between the producer and the distributor relating to the distributor's efforts in distributing the film, this clause would serve as a standard by which a court would determine if the distributor had met its obligations under the agreement. Best efforts is a higher standard than reasonable efforts, so use best efforts in such drafting situations. If other more objective standards of conduct are available, use those in place of best efforts.

33. Bidding War--A vigorous competitive auction of a property or property rights. For example, screenwriters and/or their agents occasionally succeed in instigating such competitive bidding for desirable spec scripts. Independent producers also attempt to initiate such bidding contests among distributors for the distribution rights to a completed motion picture. The result in some instances is that the price paid is higher than would have been paid under other circumstances, thus bidding wars sometimes favor the sellers as opposed to the buyers. A recent round of such high prices paid for spec scripts halted rather suddenly fueling speculation that the major studio/distributors conspired to stop such activities or where at least guilty of conscious parallelism.

34. Blacklisting--The listing of persons who are not to be hired. The concept received a great deal of publicity in the '40s and '50s when the fear of communism allegedly prompted many studios to blacklist persons who are suspected of un-American activities. Some in the industry today still maintain that a different form of blacklisting, which targets a another group continues unabated. These persons fear that being openly critical of the status quo within the film industry, (i.e., the dominance of the major studio/distributors, or not going along with the "studio system" continues to result in an informal form of blacklisting today). Thus, it is not necessary for a physical list to actually exist in order for those in control positions to effectively "blacklist" certain persons considered undesirable for any arbitrary reason. Some profit participants who are film industry professionals that hope to continue to work in the film industry, suggest that one of the main reasons why most persons who feel they have legal grounds to bring a cause of action against a major studio/distributor or other distributor is this fear of being blacklisted. Further, it is suggested that one of the main reasons the lawsuits that are initiated are ultimately settled is this same fear (see "Sue Us").

35. Blind Bidding--The film distribution practice by which film-distribution companies (principally the major studio/distributors), through a bid request letter and without having previously screened the film for exhibitors that are invited to bid on exhibition of the film, request that interested exhibition companies submit bids to license a motion picture for showing in a given market. Blind bidding has alternatively been defined as the bidding, negotiating, offering of terms, acceptance of a bid or agreeing to terms for the purpose of entering into a license agreement prior to a trade screening of the motion picture that is the subject of the agreement. Laws that prohibit completion of exhibition contracts before exhibitors have the opportunity to view the movies on which they are bidding have been passed in a number of states. Independent distributors rarely require blind bidding and independent exhibitors consider it unethical at minimum. They ask the question, "How can any retailer in any business be expected to sell a product sight unseen? Blind bidding provides the large theatre chains with a significant competitive advantage over their smaller independent competitors. The larger chains have greater financial resources, thus they can accept the risks inherent in blind bidding, (i.e., that they will contract to exhibit a film that would have been unacceptable if it had been viewed in advance and which results in a poor performance at the box office for the theatre). The independent exhibitors are generally out-bid anyway by their larger competitors for a "can't miss" film like a sequel to a prior blockbuster, but with respect to marginal films, the smaller independent exhibitor does not possess the financial resources to take a chance on the film's success. Thus, the blind bidding process effectively leaves the independent exhibitor with the leftovers which for many, results in financial doom. With the re-entry of the major studio/distributors into exhibition and the presumed accompanying participation in the policy decisions of the National Association of Theatre Owners, the major studio/distributors have also placed themselves in a position to oppose NATO's support for anti-blind bidding legislation at the state level and NATO may have been the only national association which might have advocated the passage of such laws on behalf of independent exhibitors.

36. Block Booking--The film distribution practice of tying together one or more motion pictures for licensing within a market, (i.e., a distributor will accept a theatre's bid on a desirable film or films contingent on the exhibitor's promise that it will also exhibit a less desirable film). This practice was addressed by the Paramount consent decree of 1948, in which the major distributors at that time were forbidden to employ the practice. The basic premise of this decree was to prohibit block booking, (i.e., that motion pictures must be licensed picture by picture, theatre by theatre, so as to give all exhibitors equal opportunities to show a given film). Block booking would have a tendency to prevent independent producer access to certain theatres (see "Paramount Consent Decree of 1948").

37. Blocked Currencies--Generally, monies earned by banks or corporations in a foreign country which cannot be removed from that country except under limited circumstances and thus, generally have to be spent within its borders. In the film industry, blocked currencies may be foreign film rentals and producers may want to negotiate a provision in the distribution deal that requires a certain portion of such funds be deposited in an account in such foreign country for the benefit of the producer.

38. Blurbs--Short highly commendatory public notices. In feature film advertising, it is common for the publicity staff of a motion picture distributor to use a few positive words or phrases from an otherwise negative review to promote a movie, but in some cases they actually will ask movie critics to manufacture a blurb for the distributor's use in advertising a picture. Some critics reportedly will even send out a series of favorable quotes on a newly released movie hoping one will show up in the movie's ad and result in more name recognition for the critic.

39. Boilerplate--Language found almost universally in legal documents of a given type, often in small print. In any dynamic industry such as the film industry, there is seldom any such thing as "standard" language in contracts. A producer should not be intimidated or mislead into accepting such language if it does not meet the needs of the specific parties and the specific transaction.

40. Breach of Contract--A party's failure to perform some contracted-for or agreed-upon act, or such party's failure to comply with a duty imposed by law which is owed to another or to society. In drafting a film distribution agreement vague and subjective terms or phrases must be eliminated, particularly with respect to the film's specifications or delivery requirement. Otherwise, the distributor may seek to use such vague or subjective terms or phrases as an excuse to allege breach of contract by the producer and as grounds for not performing its distributor duties pursuant to the terms of the distribution agreement, (i.e., not distributing the film).

41. Breakeven--The point at which sales equal costs. In film, the specific point at which an exhibited motion picture neither makes nor loses money, (i.e., receipts cover all costs attributed to the picture by the individual or entity calculating breakeven). Above this point, a film begins to show a profit, below it, a loss. In other words, breakeven is the point in a movie's revenue stream at which the income to the exhibitor, distributor or producing entity is said to equal such entity's cost of producing and/or distributing the movie. Breakeven, thus, will be different for each of the different individuals or entities involved with a film, although the most commonly referred to "breakeven" is the distributor's breakeven. Generally, this is the point at which deferred compensation is paid. In many cases, the costs of distribution continue to escalate ahead of the pace at which receipts are generated. Reportedly fewer than 5% of motion pictures released in recent years and using the major studio/distributor net profits definition have earned a profit, (i.e., achieved breakeven).

42. Buchwald Case--A breach-of-contract lawsuit filed by humorist Art Buchwald and motion picture producer Alain Bernheim against Paramount Pictures relating to the Eddie Murphy film "Coming to America". The trial judge first ruled in January of 1990 that Paramount breached its option on Buchwald's treatment and that "Coming to America" was substantially based on the treatment. He later rules that the net-profit formula used by Paramount was unconscionable. The judge characterized the profit-participation formula used by Paramount (which is similar to the net-profit formulas used by all of the major studio/distributors in the film business) as "...an insidious device used by the studios to perpetuate their control...and to create an economic caste system in Hollywood...". Paramount testified during the trial that the movie had grossed more than $300 million worldwide but had not yet reached net profits. Some legal experts suggest that the case (once it is finally resolved) will not serve to encourage other plaintiffs who may want to sue the major studio/distributors since an equivalent of some $2 million in attorneys fees and costs were incurred on the plaintiff's side during the trial phase of the litigation. These same experts further suggest that only rarely will anyone hoping to continue to do business in the industry seek a court fight with the major studio/distributors for fear of being blacklisted, whereas in Buchwald's case, he did not have that same concern since he did not ordinarily rely on the motion picture business for his livelihood.

43. Buying A Gross--A huge advertising and promotional campaign for a film that loses money in the domestic theatrical market. If too excessive, such a tactic may make it impossible for a film to ever generate net profits. Producers may want to work with their accountant in establishing a reasonable ceiling on such prints and ads or overall distribution expenditures.

44. Cartel--A group of businesses or nations that agree to influence prices by regulating production and marketing of a product; a group of independent industrial corporations, usually on an international scale, which agree to restrict trade to their mutual benefit. Although prevalent outside the U.S., such groups are generally found to violate federal anti-trust laws. Question: Do the activities of the MPAA companies constitute an illegal cartel?

45. Cash Breakeven--A concept that may be defined in several ways, but which in its most favorable form for a gross participant is defined as that point in a film's revenue stream at which gross receipts equal the film's negative cost, plus interest and distribution expenses excluding production and advertising overhead. A more favorable definition from the studio/distributor's point of view also takes into consideration some distribution fee, although lower than normal, e.g., 17.5%, to reimburse the studio for its internal costs of distribution, plus some level of production overhead. The concept of cash breakeven is sometimes used by the studio/distributors to make sure they have recouped their real costs (as opposed to their real costs plus some profit factor) before the payment of a gross participation obligations is triggered. For example, if gross participations are to escalate at different levels of breakeven, cash breakeven is usually considered the first breakeven.

46. Censorable Material--Part of an audio or visual presentation in a film that may be considered objectionable in a given jurisdiction. This definition actually appears in some film distribution agreements as a producer warranty, (i.e., the producer promises not to include any "censorable material" in the film). An effort should be made to find more suitable language to express this producer warranty, language that does not have such a chilling effect on the first amendment freedoms of producers.

47. Checking and Collection Costs--Distributor expenses incurred in monitoring the activities of exhibitors to insure that reported film attendance is accurate and in obtaining payment of amounts due. These are important activities that can benefit the producer too, but audit for documentation of such costs and consider double checking with the checking services.

48. Closed Bidding--A distributor practice wherein the exhibitor bids on a film about to be released are opened by the distributor privately so that the exhibitors who did not win the bid for exhibition of such picture do not know the particulars of the bids submitted by their competitors. Distributors favor the practice, but exhibitors consider it unethical, since as a result, losing exhibitors are unable to determine how to change their bids so that they might be successful in the future (see "Bid", "Blind Bidding", "Five O'Clock Look", "Product Splitting" and "Unethical Business Practices").

49. Co-Feature--A film which is licensed by the distributor to an exhibitor for theatrical exhibition along with another film, as a package. Such films are typically licensed on a flat rental basis for a week's engagement, thus the distributor will not know and therefore must estimate how much of the film rentals received for the two films is to be allocated to each film in accounting for the revenues of a given film. Distributors will often seek to negotiate a provision in the distribution agreement which allows such allocations to be made in their sole discretion and without allowing the producer of the film to review the percentage allocations made to other films. It is unreasonable not to be able to confirm such allocations. What if the distributor is allocating only 35% of the rentals to each film?

50. Collective Bargaining Agreements--Compacts relating to employment matters between employers and employees negotiated through bargaining agents designated by an uncoerced majority of the employees within the bargaining unit. The major studio/distributors are signatories to collective bargaining agreements between the studios and the various motion picture industry guilds. Recent complaints by studio spokespersons regarding the high costs of motion picture production lay part of the blame on union residual structures and the cost of below-the-line labor both of which are issues determined through collective bargaining. However, it is difficult to expect labor rollbacks on such items in view of the high levels of compensation paid to many studio executives, the gross participations granted to certain artists and studio accounting practices. Also, allegations have surfaced from time to time that the major studio/distributors have succeeded in improperly influencing union and guild executives with respect to agreement provisions that turn out to be less than favorable for the union or guild membership.

51. Combination Ad--One print advertisement in which two or more films are advertised. If combination ads are used, the distributor has to allocate its costs for such ad among the applicable films. Again, the producer's auditor should be able to review both sides of this transaction.

52. Combination in Restraint of Trade--An alliance of individuals or corporations united to achieve an economic end, in this instance, interfering with free competition in business and commercial transactions, where such interference tends to restrict production, affect prices or otherwise control the market to the detriment of purchasers or consumers of goods and services.

53. Commercial Bribery-A statutory expansion of the crime of bribery which includes breach of a duty by an employee who accepts undisclosed compensation from others in exchange for exercising some discretion relating to the employee's work and granted to such employee by his or her employer.

54. Commingling of Funds--The acts of a fiduciary or trustee who mixes his or her own funds with those belonging to a client or customer; generally prohibited unless the fiduciary maintains an exact accounting of the client's funds and how they have been used. A distribution deal may contractually prohibit the co-mingling of the distributor's and producers funds even though no fiduciary or trust relationship is established. It would be even better to require that the producer group's money be separated and deposited into a special trust account in its name (but check with the bank first to see if they will do that). This requirement would be particularly helpful if the distributor declares bankruptcy.

55. Commonly Understood--Customarily and routinely agreed upon in the business. Many motion picture industry agreements provide that certain terms not otherwise defined within the agreement are to be defined as commonly understood in the industry. Such provisions merely provide a mechanism for determining the meaning of a term that comes into question, thus in the context of arbitration or litigation the fact finder will have to entertain testimony from persons with expertise in the industry to determine whether there actually is a commonly understood meaning for such a term. Unfortunately, many terms are not commonly understood in the industry and it is likely that experts with equal authority may be produced to define such terms to favor both sides of a dispute, leaving the fact finder to have to decide between differing interpretations of the same term. The better practice would be to negotiate a definition of the term for the purposes of the agreement and include the definition in that original agreement, otherwise the party implementing the agreement has a certain amount of discretion in its conduct until challenged by the other party. Again unfortunately, the bargaining power of contracting parties in the motion picture industry is often vastly unequal, thus the party with the most power tends to get the definitions it wants.

56. Completion Bond--A contractual commitment in the form of an insurance policy that guarantees that a film will be completed and delivered pursuant to specific requirements, usually relating to on schedule, within the film's budget and with no substantial deviations from the approved script. The completion bond provides protection against overbudget costs and is supplied by a third party guarantor. It is written in the form of a surety instrument and usually authorizes the guarantor to take control over the production of the motion picture if the terms of the agreement are not met. In negotiations with the completion guarantor and the distributor, the producer should seek to prevent the distributor from changing the producer's compensation, credit or continuing creative involvement in the event of takeover, particularly when the takeover is prompted by factors beyond the control of the producer. In other words, the producer should insist on applying reasonable conditions and limitations on the manner in which the completion guarantor asserts its takeover rights.

57. Concentrated Ownership--A situation in which the means of production in a given industry are controlled by only a few companies, e.g., in the film industry, approximately 92% of total box-office gross for feature films is earned by movies distributed by the major distributors (see "Anti-Trust Law Violations" and "Oligopoly").

58. Conduct Provisions--In anti-trust law, elements of court rulings or consent decrees which prohibit certain specified trade practices. For example, the Paramount Consent decrees, in addition to requiring the then five major integrated motion picture companies (Paramount, Loew's, RKO, Warners and Fox) to divorce production/distribution from exhibition, also required these companies, plus three others that did not own theatres at that time (Columbia, Universal and United Artists) to abstain from fixing admission prices and making franchise agreements.

59. Confidence Game--Any scheme whereby a swindler wins the confidence of his or her victim and then cheats the victim out of money by taking advantage of the confidence reposed in the swindler. The elements of the crime of the confidence game are (1) an intentional false representation to the victim as to some present fact, (2) knowing it to be false, (3) with the intent that the victim rely on the representation and (4) the representation being made to obtain the victim's confidence and thereafter his or her money and property (see "Trust Me").

60. Conflicting Dates--A situation that occurs when a single film distributor plans to release more than one film at or about the same time, thus dividing the time, skill and efforts of the distributor's marketing staff between such films. This is of special concern to producers who contract with a distributor on a rent-a-system basis and the distributor is not careful to allow for adequate separation in release dates between one of its own films and the independent producer's film. The independent producer's concern in such instances relates to whether his or her film will receive the marketing support it would ordinarily receive but for the conflict (see "Rent-A-Distributor").

61. Conflicts of Interest--Situations in which regard for one duty leads to disregard of another or might be reasonably expected to do so. Conflicts of interest may be actual or potential. On some issues the film producer and distributor's interests are the same or similar, whereas with regard to other issues, a distributor representing a producer's film, for example, will inevitably be confronted with numerous conflicts of interest which are inherent in the relationship. Some distributors, for example, will seek a representation from the producer in the distribution deal to the effect that the producer knows the distributor is not only distributing other films, but other films similar to the producer's film. It would seem that a distributor would not want to vigorously distribute two similar films that appeal to the same or similar target audiences at the same time and a producer should probably avoid such a conflict or allowing the distributor that freedom.

62. Conscious Parallelism--In anti-trust law analysis relating to an allegation of a conspiracy in restraint of trade, the phrase conscious parallelism refers to the same or similar business practices under circumstances which logically suggest joint agreement. The courts have never held that a showing of parallel business behavior alone conclusively establishes a conspiracy. Thus, in order to show conspiracy, a plaintiff has to demonstrate similar business behaviors that the parties were aware of to infer an agreement and additional circumstances which logically suggest joint agreement as distinguished from individual action. There seems to be a considerable amount of conscious parallelism in the motion picture industry although it is difficult to prove in a court of law.

63. Conspiracy--A combination of two or more persons to commit a criminal or unlawful act or to commit a lawful act by criminal or unlawful means; or a combination of two or more persons by concerted action to accomplish an unlawful purpose or some purpose not in itself unlawful but by unlawful means. Motion picture exhibitors have generally failed in attempts to convince the courts that blind bidding is a conspiracy in restraint of trade in violation of the Sherman Anti-Trust Law partly because of the difficulty in showing a conspiracy.

64. Consultation--The seeking or giving of professional advice. Many film distribution agreements provide that the distributor is obligated to consult with the film's producer regarding various matters relating to marketing the film, distributor editing and so forth. However, there is rarely any effective way for the producer to enforce such consultation rights. Try to be more clear in exactly what is expected of the distributor when consulting with the producer.

65. Continuous Supply of Product--An uninterrupted flow of motion pictures. The ability to provide a continuous supply of quality motion pictures is an extremely important element of the leverage or bargaining power that a producer brings to the table in negotiations with a distributor and that a distributor must possess in order to effectively negotiate with exhibitors. During times when credit and capital markets are constricted some distributors encourage producers to utilize their distribution facilities on a rent-a-system basis partly in an effort to keep enough product flow in the distributor pipeline to maintain a strong bargaining position in relation to the exhibitors.

66. Contractual Breakeven--A point in a motion picture's revenue stream which is defined by agreement to constitute breakeven. Since there are many ways to define breakeven in film distribution agreements and certain breakeven points may never be achieved due to the effect of the so-called "rolling breakeven", it may be advantageous for all profit participants at whatever level to negotiate a contractually defined breakeven for purposes of triggering the payment of bonuses, escalations or various levels of participation.

67. Contractually Defined Profits--A reference to the fact that the terms "profit", "gross profit" and "net profit" and many other terms used in distribution agreements are actually subjective terms and that their meaning may vary somewhat in each film deal depending on how the term is specifically defined in the contract. In other words, there is no industry standard definition for such terms since no one individual or organization has the authority to impose such definition on two individuals or entities negotiating a contract containing those terms. Carefully review these definitions and reduce the overly expansive language. Also, try to keep such concepts simple, so there is less question about how to apply the terms.

68. Contractual Overhead--A motion picture distributor's expenses which cannot be directly allocated to a specific motion picture distributed, but which are deducted from gross receipts as distribution expenses for a specific film by authority of a provision in the distribution agreement which permits such deductions. Nearly all if not all major studio/distributors impose such contractually defined overhead charges on the producers of films they distribute, thus it may be fair to assume that few, if any, feature film producers have the bargaining power to eliminate such charges.

69. Controlled Availability--The practice of manipulating and/or withholding the renting, selling or licensing of motion pictures to exhibitors such that a motion picture is made available to an exhibitor after that film's true availability. Distributors who choose to engage in such practices surely may be able to influence the exhibitor's choice of films that are exhibited. If an independent producer's film is being distributed by an independent distributor, such practices engaged in by the major studio/distributors would have a tendency to limit the available theatres for the independent producer's film. On the other hand, if the independent producer's film is being distributed by a major studio/distributor, the independent producer may benefit from that distributor's "special" clout, but also may be involved in an actionable conspiracy (see "Conspiracy" above).

70. Controlled Theatre--A cinema over which a distributor has power or influence with respect to the choice of movies exhibited therein, usually due to an ownership interest held by the distributor or by virtue of such distributor's market power. The major studio/distributors have historically been able to maintain effective indirect control of production of movies through the control (and in some instances direct ownership of) first- run theatres. Harold Vogel's book "Entertainment Industry Economics" presents a very revealing chart relating to the question of domination of box-office performance by key U.S. movie theatres (the information in the chart apparently first appeared in Variety and was based on the work of Art Murphy). The chart shows that 50% of the U.S. screens generate 67% of box office gross and that 75% of the U.S. screens generate 90% of box office gross. Thus, regardless of the quality of their movies (granted such movies will always meet certain minimum standards), the major studio/distributors merely have to control access to the right 75% of motion picture screens in the U.S. for their films to generate 90% of the box office gross. And, as can be seen from the information reported herein under "Market Share", the movies distributed by the major studio/distributors have consistently generated in excess of 90% of the box office gross throughout the last decade if not beyond. Experienced net profit participation auditors report that "controlled theatres" are generally more than fair in their settlements with their own exhibitors, but on the other hand, they can afford to be since the distributor of a controlled theatre is also now participating in the "house nut" and "concessions" at such theatres.

71. Cooperative Advertising--Film advertising and promotion in which the costs of such are shared between the distributor and exhibitor or other entity. Such advertising expenditures are generally calculated on a weekly basis and the exhibitor's contribution toward the total cost of the ads is either a pre-determined amount set out in the contract between the distributor and exhibitor (usually decreasing from week to week) or a negotiated amount based on a mutually agreed upon ad expenditure. The distributor's contribution may be in the form of a fixed amount or based on a percentage arrangement similar to that used for film rentals. Expenditures for cooperative advertising are more advantageous from a tax standpoint since such costs can usually be deducted in the year in which they are incurred, whereas national advertising may have to be capitalized and amortized over the period in which the major portion of gross revenue from the picture is recorded. The producer's auditor should have the authority to examine exhibitor/distributor contracts and the records relating to such shared expenses.

72. Corporate Opportunity--A situation in which a person who has a close relationship with a corporation takes advantage of the special knowledge he or she thereby acquires for personal gain. The term refers to a legal doctrine that directors or others invested with a fiduciary duty toward a corporation may not appropriate for their own benefit and advantage a business opportunity properly belonging to the corporation.

73. Covenant of Good Faith and Fair Dealing--A contractual agreement or promise to conduct one's business dealings with another in good faith and fairly, (i.e., to conduct such business dealings honestly), in fact; to observe reasonable commercial standards of fair dealing in the trade and not to deny the existence of the contract. Some states provide that the covenant of good faith and fair dealing is implied in every contract executed in that state.

74. Creative Accounting--A derogatory term commonly used to refer to the accounting practices of studio/distributors and which may include everything from actual dishonest practices in reporting and dividing up the revenues generated by a given film at the exhibitor and distributor levels to sharp negotiating tactics used in conjunction with drafting the distribution deal. Such deals often result in agreements weighted heavily in favor of the distributor as opposed to the producer. Although mistakes and misapplication of contractual terms do occur in the industry, often what is sometimes called creative accounting is no more than the film distributor following the terms of the negotiated distribution deal which was clearly disadvantageous to the producer in the first place. Thus, in some instances what producers call creative accounting is merely the result of their own lack of preparation for the distribution negotiation process. Independent producers, must therefore work harder to improve their (or their representatives') negotiating skill and leverage and insist on broad audit rights that are implemented. Such instances of "creative accounting" might involve, account numbers, adhesion contracts, allocations, anticipated expenses, apportioned expenses, bad debts, combination ads, the commingling of funds, cross collateralization, the use of deal memos, direct distribution expenses, discretion, facilities allocations, front-end loads, improperly claimed expenses, kickbacks, overhead, rolling break-evens, settlement transactions, so-called standard contracts, studio accounting practices, subjective terms, the "sue-us" tactic, under-reported rentals and/or usury. Investors and/or shareholders in film distribution companies may feel they are in a better position to benefit from such practices so long as the distribution company does not get caught. On the other hand, why would any distributor who utilized the practices described herein, be inclined to be any more fair and honest with its own shareholders? (See "Due Diligence" and "Stock Fraud" below.)

75. Creative Control--The power and authority to make creative decisions with respect to a film being produced and with respect to significant creative aspects of the film, (i.e., the appearance and content of the final feature film product); often a major point of negotiation between a producer and director but also between producer and distributor. The issue comes up in the context of a distribution agreement with respect to editing rights, (i.e., whether the distributor has the right to make editing changes, have final editing rights or produce the final cut of a movie). Such rights, to some extent, depend on the parties' relative bargaining strength and the stature, as well as the rights of the producer and/or director as between them. The producer may or may not be able or willing to give any editing rights to the distributor, but some editing changes may be required as per government regulation or in order to get a certain motion picture rating. If granted, such rights should be subject to a producer's right of approval, rather than just unlimited editing rights (also called Artistic Control; see "Waiver of Droit Moral").

76. Cross-Collateralization--An accounting practice used by and which benefits distributors whereby distributors offset their profits in one market against losses in another or on one film against another. In a worldwide distribution deal the studios typically seek to cross-collateralize profits and losses among territories. With cross-collateralization the producer can only share in the profits of one territory to the extent that the profits of that territory, exceed the combined losses of all other territories worldwide. In situations where multiple films of a single producer or production company are being distributed by a single distributor, the distributor may seek authorization in the distribution agreement to cross-collateralize the financial performance of each of such films with the others. That practice should be negotiated by and between the producer and distributor. In some instances, no provision is made in the distribution agreement regarding cross- collateralization (at any level) and thus the distributor may choose to use its discretion with regard to this issue. In still other instances, the producer must carefully monitor the activities of the distributor to be certain that it is not effectively cross-collateralizing the financial performance of the producer's film with the performance of the films of other producers. Licensees of film packages may also cross-collateralize the results of the exhibition of such films in foreign territories.

77. Customarily Kept by the Distributor--A reference to the type and manner in which a film distributor maintains its books and records. Some distribution agreements will establish such a loose standard for the distributor to comply with in meeting its obligations to keep accurate books and records relating to the distribution of a film. If such language is used, and the distributor has not heretofore kept any records, such language may not impose any additional obligation on the distributor. Such language should be eliminated from distribution agreements in favor of a more responsible standard.

78. Customary--Commonly practiced, used or observed, (i.e., the provisions which are usually found in motion picture production documentation). With respect to a film distribution agreement (and other motion picture documentation), producers must recognize that the use of such vague and subjective terms are just that "vague and subjective". Their use imposes very little on the studio/distributor and such standards of conduct can only be enforced after the fact, if at all. Such vague standards as "customary practices", "long-standing and well-established practices in the industry" or "customary terms and conditions for agreements of this nature in the motion picture industry" may often appear in so-called short form feature film production documentation or deal memos along with a statement of the intention of the parties to negotiate, draft and sign a more complete written agreement to include such terms at a later date. However, even though there may be a certain level of unanimity regarding the type of provisions that ought to be included in the same or similar feature film related agreements, the specific wording, the application of such terms or their interpretation by the courts in any given circumstance is by no means standardized. In addition, some view the use of such vague standards by the major studios as a means of continuing their dominance and control over the rest of the industry. Whenever possible, such terms should be negotiated out of the agreement and replaced with a more definite standard of conduct (see "Deal Memo" and "Reasonable and Customary").

79. Day and Date--A concept used in making a film available for exhibition which requires that one theatre's run of a film be controlled by (i.e., identical to) another theatre's run of that film. This relationship usually exists in the negative sense, (i.e., forbidding the controlled theatre's exhibition of a film until the controlling theatre is able to exhibit that same film). However, "day and date" may be used in a positive sense, (i.e., compelling the controlled theatre to exhibit a film simultaneously with the controlling theatre's run of that same film) [see "Controlled Theatre"].

80. Deal Memo--A shortened version of a contract, e.g., a distribution agreement utilizing a letter agreement format, which theoretically covers the main points (deal points) agreed to by the parties, such as salary, time schedule, screen credit and percentage participation in the film's profits, if any. A deal memo is often used by the major studio business and affairs departments to get the film production process underway on a given film, with the intent that the studio's legal department will ultimately negotiate and draft a full agreement. For smaller independent producers and distributors, the deal memo may not be necessary or even desirable, since these smaller entities do not have the bureaucracy of a major studio which often slows the negotiating and drafting process, and in fact a deal memo may be dangerous since the more detailed provisions of the full contract may be much more burdensome or onerous for the producer and may even conflict with the original provisions of the deal memo. Watch for important inconsistencies between any preliminary letters from the distributor or deal memos and the actual distribution agreement offered.

81. Deem--A verb meaning to come to think of as true. Film distribution agreements often provide that certain things may be deemed to be so by the distributor and such provisions are examples of distributor discretion that should be examined for reasonableness. From the producer's point of view, a more objective method for determining the truth or circumstances involved in any matter which is considered in the film distribution relationship is likely to be more preferable and therefore should be negotiated where possible.

82. De Facto Cross-Collateralization--The unauthorized arbitrary allocation of gross receipts to a motion picture marketed as part of a package either to networks, cable, syndication markets or foreign territories. Such allocations effectively cross-collateralize the profits of one movie with the profits of other movies in the package (see "Cross-Collateralization", "Cross-Collateralization of Markets", "Cross-Collateralization of Slates", "Discretionary Cross-Collateralization" and "Unauthorized Cross-Collateralization").

83. Default Disaster--A phrase used to describe the potential situation when a motion picture licensee who pre-bought rights, decides to forfeit its deposit (if any), refuse to pay a promised advance and forego exhibition of the film in its territory after seeing the completed picture and determining that it is much worse than expected. This is particularly problematic if the original pre-sales contract was used by the producer as collateral to obtain a production loan. In that event, the bank may demand that the producer repay the loan and the producer may have to seek payment from the distributor. If the producer fails to repay the loan, the bank might foreclose on the negative if it took a lien as further collateral, or attach the film and its proceeds even if it did not have an original lien.

84. Deferments or Deferrals--All or a portion of salaries or compensation for cast, crew or others providing property or services for the production of a movie paid (by agreement) on a delayed basis after the property and/or services have been provided and usually after the release of the film. If such deferments are to be paid out of monies generated by the exhibition of the film they are also by definition contingent upon the film earning enough money to pay such deferments. In a studio financed production deal it is better to have the deferments treated as distribution expenses as opposed to production overhead, since distribution expenses are not recouped until after the film is in distribution, whereas a studio's production overhead will be considered an interest-bearing production expense. Also, the distribution deal should clearly set out who pays such deferments as between the distributor and producer.

85. Delivery--In legal terminology, a voluntary transfer of title or possession from one party to another. A term defined in a film distribution agreement usually as a schedule which lists the physical items which are to be provided by the producer to the distributor (through the lab) and sets the deadlines for such items to be delivered. Delivery is usually defined as a series of objective events and does not rely on distributor approval. Producer should watch out for the distributor who tries to insert subjective approval language in the delivery mechanism. Also, examine the delivery schedule carefully with all providers of items on the list, e.g., film lab and E&O insurance carrier, to make certain that each item can be provided. Also, see that the delivery schedule is presented in chronological order for the convenience of those obligated to meet its requirements. Draft the delivery schedule so that it can be a useful and working document, not something that is signed and forgotten. Also, distributors sometimes want access to the producer's original delivery materials but the producer may want to insist that those original materials being provided through a lab remain at the producer's laboratory, assuming that the producer actually selected the film lab (see "Breach of Contract").

86. Delivery Date Acceleration--A rarely used provision in a film distribution deal which may permit the distributor to move the date for delivery of certain items forward in the event that the producer is in breach of specified provisions of the agreement, e.g., in exercising the producer's or distributors cutting rights, he or she does not comply with the distributor's release schedule or bidding and distribution requirements.

87. Delivery Requirements--A provision in a film distribution agreement which sets out the actions to be taken and the items to be delivered to a film's distributor pursuant to the distribution agreement. The delivery requirements section of a film distribution agreement must be carefully drafted so that the distributor will not be able to refuse delivery of the completed film on subjective grounds. In addition, if the delivery requirements provision is not carefully drafted, a negative pickup agreement may not be acceptable to a lender, investors or other motion picture financiers.

88. Development Deal--Typically, an agreement by a studio or production entity to provide early funding for a producer during the development of a motion picture project or projects. Development funds may also be provided to directors or screenwriters. The major studios commonly fund the development costs of many screenplays that are never approved for production and those costs are recouped from the budgets of the movies that are produced as part of the studio's overhead charge (see "Creative Accounting" and "Overhead").

89. Development Hell--A film project that enters the development process, never actually gets production funding, but is not actually placed in turnaround either (see "Turnaround Hell").

90. Direct Distribution Expense--All costs and expenses incurred, paid, payable or accrued, in connection with the distribution, advertising, exploitation and turning to account of the film, (i.e., the activities directly related to the distribution of a film). The largest two items relating to the release of any picture are prints and advertising/publicity costs. Other direct expenses may include, but are not limited to, such things as checking costs, freight, guild payments and some taxes. Items like trade-association fees and assessments, along with market research should be considered indirect or at most, allocated amongst several films that benefit from such expenditures. Generally such direct expenses are specifically defined or described in some detail in a section of the distribution agreement or in an exhibit to the distribution agreement. If the distribution agreement limits distributor expense deductions to direct expenses, the profit participant auditors will be concerned with ferreting out indirect expenses that are claimed by the distributor as direct expenses. Specific categories of direct expenses which the distributor may deduct should be itemized. Other "indirect expenses" such as the distributor's general administrative overhead and similar internal costs, should be regarded as a normal cost of doing business for the distributor and not recoupable from the picture's proceeds or at least the producer should negotiate for as small a percentage of such expenses to be charged to the picture as possible. Otherwise the producer should be certain that the word "direct" is inserted in front of the general description of what kind of expenses are to be deducted as distribution expenses. Maybe some relationship should be established between that percentage and the number of films distributed by the distributor in the course of a year.

91. Discounts--A reduction in price. Such reductions are often negotiated and/or awarded by exhibitors and other feature film licensees to distributors on a given picture or they are sometimes based on the volume of pictures provided by the distributor. Distributors often seek to exclude the value of such discounts in profit participation calculations, arguing that the distributor's activities are responsible for earning such credits. However, without the feature film or films made available to the distributor by the producer and other profit participants, the distributor would not be in a position to either negotiate or receive such discounts. Producers should seek to negotiate a fair provision in the distribution agreement which includes the value of such discounts in the profit participation calculations (also see "Rebate").

92. Discretion--The reasonable exercise of a power or right to choose between alternative courses of action or inaction. Many film distribution agreements are currently drafted so as to include numerous situations in which the distributor is allowed to exercise its discretion, e.g., in the manner and extent of the film's release and the markets selected, as well as the theatres in each such market, with respect to sales methods, policies and terms, by refraining from commencing distribution or discontinuing distribution in any country or place at any time and in allocating license payments among films marketed as a package. In negotiating with distributors, independent producers should seek to eliminate unnecessary or unreasonable distributor discretion.

Pay particular attention to the provisions which include the following words or phrases which indicate someone, usually the distributor is being allowed to exercise its discretion: "discretion", "good faith", "apportion", "allocation", "best efforts", "reasonable efforts", "latitude", "reasonably", "deem", "reasonably deem", "usual", "customary", "customarily" and "industry standards". When such a word or phrase is used, determine who's discretion is involved and then consider whether it is possible to negotiate and draft language which provides a more objective standard with which to comply. Some discretion will almost always be necessary, but discretion can also be an invitation for abuse (see "Trust Me").

93. Discretionary Cross-Collateralization--The offsetting of motion picture profits by a distributor between markets or films in situations where the distribution agreement does not address the practice, (i.e., such cross- collateralization is left to the discretion of the distributor) [see "Cross-Collateralization", "Cross- Collateralization of Markets", "Cross-Collateralization of Slates", "De Facto Cross-Collateralization" and "Unauthorized Cross-Collateralization"].

94. Discrimination--The treatment of someone differently on a basis other than on merit (see "Problem Producer" and "Reciprocal Preference").

95. Distribution Commitment--An agreement or pledge to provide a domestic or foreign theatrical release for a film; also agreements or pledges to provide certain specified aspects of such distribution, e.g., a specified level of expenditures for prints and ads. Producers should seek to negotiate reasonable commitments with distributors and see that they are met.

96. Distributor Commercials--Commercial messages, e.g., previews of other films and ads for the theatre's concessions, are typically used before or after, but not during, the exhibition of a picture. This provision should limit such commercials to before and after the exhibition of the film. In a feature film context, a commercial may also be any paid appearance of a product, commodity or service in the film (often referred to as product placement). It is unlikely that a distributor would arrange for this form of commercial, but it so and it receives a fee, that fee should be included in the distributor's gross receipts for purposes of calculations involving the producer.

97. Distributor Credit--Any extension of payment terms offered by the Distributor to sub-distributors and/or exhibitors or indebtedness owed to the Distributor by such entities. An abuse of such extension delays payment to the producer.

98. Dividend--Distribution of corporate profits or earnings to the corporation's shareholders, prorated by class of security and paid in the form of money, stock or company products or property. The amount is decided in the discretion of the corporation's board of directors and is usually paid quarterly. Dividends must be declared as income by the recipient and thus are taxable in the year they are received. If the top level executives, (i.e., management in a corporation) are able to control the corporation's board of directors, they may be able to successfully siphon off more of a corporation's revenue stream for their own compensation as opposed to allowing a larger amount of such corporate revenue to flow through to the corporate shareholders.

99. Dominant Media Conglomerates--The largest and most influential corporations in the communications industries including feature film production, distribution and exhibition, network television, cable television, radio, newspaper, magazines, book publishing, etc. When the Reagan administration eased regulatory restraints, (i.e., adopted a policy of less government regulation--specifically a relaxation of the enforcement of the U.S. anti-trust laws in the entertainment industry), the dominant media conglomerates including the major U.S. studio/distributors regained control over some of the most important theatre chains. These exhibitor circuits are not only the largest in terms of the total number of theatres and screens, but are also the most strategically located in the leading film markets (see "Number of Screens", "Major Exhibition Chains", "Paramount Consent Decree of 1948" and "TriStar Case").

100. Double Add-Back--A commonly used over-budget penalty included in agreements for studio production financing of a film which permits the studio to recoup from the film's producer or director twice the amount of the overage prior to breakeven on the film. Notwithstanding the fact that unreasonable contractual penalties may not be enforceable, this studio overbudget policy raises a question as to whether such overbudget costs, when added twice, bear interest and overhead charges the second time around. Also, a determination has to be made as to whether the increased costs are due to certain factors excluded from the calculations relating to the question "was the overbudget threshold exceeded". Distribution agreements sometimes exclude such costs as losses covered by insurance, losses caused by events of force majeure, changes initiated by or approved by the studio, third-party breaches, currency fluctuations, union increases and/or lab increases.

101. Double Distribution Fees--In situations in which a film's distributor utilizes the services of a sub- distributor in certain markets or territories the film's producer and other profit participants may be subjected to distribution fees from both entities, portions of which are redundant. The producer should seek to have the primary distributor absorb the distribution fee of the sub-distributor within its own distribution fee retaining the balance as a supervision fee or have the fees of the sub-distributor passed through without markup. In the alternative the producer may seek to negotiate a minimal override for the primary distributor on the distribution fees of sub-distributors.

102. Double Feature--The exhibition of two motion pictures in the same theatre (one after another) for which patrons are only charged the price of a single ticket. The distributor of such a pairing must allocate (based on a pre-determined formula or otherwise) the film rentals generated by the joint exhibition of the films. The producer's auditor must be able to confirm the fairness of these allocations. The distribution agreement negotiations might include some discussion of an objective standard on which to base such allocations, such as the box office performance of the movies in single exhibition (see "Co-Feature").

103. Dues and Assessments--The charges levied by the Motion Picture Association of America (MPAA), the Association of Motion Picture and Theatrical Producers (AMPTP) and other industry groups for their work in representing the interests of their respective segments of the motion picture industry. These dues payments are allocated to each film based on a percentage of the gross receipts generated by the film. Thus, such payments are considered a distribution expense and are paid prior to any payments to net profit participants. The MPAA distribution companies reportedly extract these dues allocations from theatrical revenues generated by MPAA distributed films whereas the percentage used is based on the anticipated revenues from television, video and theatrical distribution. Thus, producers may want to seek to negotiate a cap on the amount of dues charged to a given film.

104. Duress--Action by a person which compels another to do what he or she would not otherwise do. Duress is a recognized defense to any act, such as a crime, contractual breach or tort, which must be voluntary in order to create liability for the person committing the act (see "Blacklisting" and "Contract of Adhesion").

105. Economic Abuses--Unfair, exploitative or offensive business practices. A state has a legitimate interest in eliminating economic abuses which are harmful to its citizens (see "Anti-Competitive Practices" and "Blind Bidding").

106. Economic Reprisal--A retaliatory act by a business or industry segment. In response to the passage of anti-blind bidding statutes in various states, some of the major studio/distributors have reportedly threatened from time to time to take their lucrative location filming to non-regulatory states (see "Anti-Blind Bidding Statutes", "Blind Bidding" and "Economic Abuses").

107. Entire Agreement Clause--A provision included in most contracts, including film distribution agreements which provides that the agreement constitutes the entire agreement and supersedes and cancels all prior negotiations, undertakings and agreements, both written and oral between the parties with respect to the subject matter of the agreement. The clause may provide further that no officer, employee or representative of either party has any authority to make any representations or promises not contained in the agreement and that neither party has signed the agreement in reliance on any such representations or promises. Producers negotiating with various representatives of distributors should make notes of any oral representations made by such persons and systematically see that such representations are incorporated into the distribution agreement, otherwise, they may be worthless (see "Oral Representations").

108. Errors and Omissions Insurance--E&O coverage is intended to protect against claims based on certain types of occurrences in the course of a film's production and distribution, such as the failure to obtain requisite releases. The producer usually pays for such coverage, at least initially, but if the coverage is expanded to include possible distributor error, the distributor should pay for some or all of the coverage for the distribution period. Also, when errors and omissions insurance is provided, there is no long any need for the distributor to withhold sums of money from distribution proceeds to cover such claims, unless there is a possibility that such claims may exceed the limits of the insurance coverage. The producer should discuss the E&O requirements as set out in the distribution deal with his or her insurance agent or carrier to make sure the distributor is not obligating the producer to provide coverage that is not available in the current marketplace.

109. Exclusions--A term used and defined in some distribution agreements to be the amounts of all adjustments, credits, allowances (other than advertising allowances), rebates and refunds, given or made to sub- distributors, exhibitors and licensees, which are excluded from accountable gross, when that concept is used. Also monies in the nature of security deposits, or advance or periodic payments are not included in accountable gross until they have actually been earned (such as by the exhibition of the film) or forfeited. In other words, some distribution deals will allow the distributor to not count and therefore not be obligated to include in its net calculations, certain items that otherwise might be included in gross receipts. Such exclusions must be carefully reviewed for reasonableness.

110. Exploitation Film--A feature motion picture which contains obligatory or gratuitous sex, violence, horror, catastrophic events or a combination of any or all of such themes and which has little socially redeeming value. The exploitation film blatantly advertises and uses these themes to attract audiences. Such films typically enter and exit the theatrical market more quickly than other feature films.

111. Extortion--The illegal taking of money by anyone who employs threats, or other illegal use of fear or coercion in order to obtain the money, and whose conduct falls short of the threat to personal safety required for robbery, e.g., the use or the threat to use violence in order to collect interest or the debt itself. Question: Wouldn't it amount to a form of extortion for a distributor to suggest or imply that a profit participant might be "blacklisted" if such profit participant did not forego a lawsuit or settle a lawsuit for less money than is owed? (see "Racketeering").

112. Facilities Allocations--The apportionment of studio or distributor operating expenses among the studio's various components for the purpose of charging such expenses against a given film's costs. In studio or distributor financed films, the producer should consider negotiating to exclude such indirect costs from the permissible distribution expense deductions or to place a limit on the percentage of such allocations or in the alternative, carefully review such allocations to make certain they are reasonable. If facilities allocations are made by an independent distributor, such expense allocations are no different than studio overhead.

113. Feature Film Limited Partnership--A film financing vehicle through which passive investors (the limited partners) typically provide some or all of the production monies for producing one or more motion pictures. Like corporate stock, interests in limited partnerships are securities, thus the federal and state securities laws, including the anti-fraud provisions apply to the sale and offer of limited partnership interests (see "Stock Fraud" below). In recent years, the film limited partnership has often been portrayed in a negative light by many broker/dealers, financial commentators, investment advisors and certainly film industry professionals who have expertise in other forms of film finance, ostensibly because investors have not fared well, with their investments in such film financing vehicles. In some specific instances, it is entirely possible that greedy general partners or others help to create a situation in which excessive up front fees or expenses are deducted from the offering proceeds, (i.e., the monies raised through such limited partnership offerings, thus not leaving enough of such funds to actually produce the movie promised or envisioned). It is also possible that such excessive up front payments to key people do not leave enough profit participation incentive to provide adequate motivation for the producer to negotiate a distribution deal that treats such passive investors fairly, (i.e., the producer has a conflict of interest with such investors). It might just as accurately be pointed out, however, that the industry and distributor practices cited elsewhere in this monograph probably play an even more significant role (in most feature film limited partnership situations) in actually determining whether such investors recoup or see a reasonable profit on their investment. If, in fact, any feature film distributor engages in very many of the practices described herein, it is not likely that any profit participant including limited partnership investors are going to see any share of such profits.

114. Fiduciary--A person or entity having a legal duty, created by his, her or its undertaking, to act primarily for the benefit of another in matters connected with an undertaking, (i.e., a person in a position of trust and confidence). General partners of limited partnerships are considered fiduciaries in their relationship with the limited partner investors. Under certain circumstances, feature film distributors may also be considered fiduciaries on behalf of all net profit participants (see "Conflicts of Interest").

115. Film Rentals--The money owed and/or paid by an exhibitor to a distributor under a film's lease agreement, (i.e., the monies paid by the exhibitor and/or earned and due to be paid to the distributor as rental fees for the right to license a film for public showing). Authorities do not seem to agree on this issue of "owed" versus "paid" thus most film distribution agreements do not even use the term "rentals" but instead use and contractually define the broader concept of "gross receipts". Film rentals are generally computed weekly on a consecutive seven-day basis (Wednesday through Tuesday or Friday through Thursday, depending on the day on which the film first opens in the market). Film rentals as between the distributor and exhibitor are negotiable and may be determined by several different methods, including a 90:10 basis, sliding scale, fixed percentage, minimums (floors) that relate specifically to the gross box-office receipts and a flat-fee basis that is a predetermined, unchanging amount. In many distributor/exhibitor contracts, the film rentals earned will change from week to week, with the distributor's relative share generally decreasing and the exhibitor's share increasing from the first through subsequent weeks. Quite often the exhibitor and distributor will negotiate a settlement amount for film rentals which is actually less than the actual amount owed by the exhibitor. The term also refers to the accumulated film rentals for a given film from all theatres in a market or all markets (also called "Distributor Film Rentals"; see "Fiduciary", "Selling Subject to Review" and "Settlement Transaction").

116. Film Schools--Colleges and universities which offer a degree program in film. Some of the better known film schools include New York University, the University of Southern California and the University of California at Los Angeles. Recent reports indicate film-study programs across the U.S. graduate some 26,000 students each year, but that only 5% to 10% of those graduates actually end up making a living in their chosen

field. Is it possible that both the industry and the film schools are actively misrepresenting the promise of career opportunities in the film industry; that they are misleading some 23,400 individuals annually and persuading them to pretty much waste their undergraduate studies on subjects which are not likely to be of much value in their lives? And does anyone recognize that the film industry actually has a self-serving reason for actively or passively encouraging this fraud on unsuspecting students? (see "Law of Supply and Demand" below).

117. Final Cut--The last fine-tuning of a motion picture immediately following acceptance of the fine cut version, wherein the sound is mixed and the picture conformed and made ready for the lab to run off the answer print. The final cut is the finished version of the work print to which the negative is conformed in order to strike the release prints that are to be exhibited in theatres. Who has the ultimate authority to approve this version of a film is a significant negotiating point between producers and directors and also between producers and distributors. Many film distribution agreements provide that the distributor has sole discretion to edit the film as it sees fit. Producers generally want to limit the rights of distributors to edit the film without the producer's approval to certain situations, (i.e., to meet censorship and MPAA rating requirements) [see "Discretion", "Editing Rights" and "Marketplace of Ideas"].

118. Final Judgment--Many distribution agreements require the producer to reimburse the distributor for legal fees if the producer files a lawsuit against the distributor but fails to obtain a final judgment against the distributor. The producer should, at a minimum, see that such language is reciprocal, but even more important, should eliminate the "final judgment" requirement since most lawsuits are settled prior to "final judgment" and substantial legal fees may have been incurred anyway.

119. Final Marketing Outlet--The retail level of a business. In the feature film theatrical business exhibition is the final marketing outlet. From 1940 to 1948 (most of the years during which the Paramount case was being litigated) the major studio/distributors of that period produced about 62% of the films and distributed approximately 71% of the domestic films released. The major studio/distributors gained effective indirect control of feature film production through their control of first run theatres. By monopolizing the final marketing outlet they successfully curtailed entry by independent producers. The Paramount consent decree was partly intended to weaken the market dominance of the major studio/distributors. But, in the last ten years of so (a period which has witnessed relaxed U.S. Justice Department enforcement of anti-trust laws in the entertainment industry) the feature films distributed by the current group of major studio/distributors generate about 93% of the domestic box office gross in any given year (see "Barriers to Entry", "Major Exhibition Chains", "Number of Screens", "Paramount Consent Decree of 1948" and "TriStar Case").

120. Financial Management--The direction of the fiscal aspects of a business. Some financial analysts say that a commonly held notion about the film industry is false, (i.e., that the primary reason for most of the recent film production company bankruptcies is the failure of their motion pictures to perform at the box office). Instead such analysts point to improper financial management (e.g., increasing debt during good times, rather than decreasing debt) as one of several reasons for such failures. Other reasons cited include the failure to use sophisticated computerized financial modeling on a continuous basis and the abandonment of successful actions (while substituting new, untried ideas, without first piloting them with limited financial commitments). Other industry observers suggest that improper financial management may be irrelevant in an industry that is so dominated by a few major players who have long-standing reputations for engaging in numerous questionable business practices (see "Anti-Competitive Practices", "Barriers to Entry", "Conscious Parallelism", "Creative Accounting" and "Reciprocal Preferences").

121. First Position Gross--A share of the gross receipts or total revenues from a given source or stage in a movie's revenue stream, such as film rentals or home video, which is accounted for before distribution fees, distribution expenses, negative costs or other gross participations are deducted. First position is generally considered to be the most sought-after participation in a movie deal but it is seldom awarded by movie studio/distributors, except to a handful of the most-recognized talent in the industry. To the extent that anyone other than the distributor is participating in distributor rentals in a first position, chances for that film generating net profits are substantially diminished.

122. First-Run Zoning--Arbitrary, fixed rankings of exhibitors for film releases. In other words, not all theatre owners have the same opportunity to show movies at their theatres on the first run of certain motion pictures. The major studio/distributors have resorted to what in effect is "tier releasing", (i.e., the categorization of exhibitors based on the arbitrary judgment of the distributors and the releasing of the distributors' films only to the "more desirable" theatres first while denying the less desirable theatres an opportunity to exhibit such films until later in the film's release schedule, if at all). First-run zoning was one of the conduct restrictions of the Paramount consent decree (see "Admission Price Discrimination", "Blind Bidding", "Block Booking", "Conduct Restrictions", "Five O'Clock Look", "Paramount Consent Decree of 1948" and "TriStar Case").

123. Five O'Clock Look--An unethical business practice allegedly engaged in by some distributors who wait until the exhibitor bids for the first-run of an about-to-be-released film are in, then the distributor calls an exhibitor to whom the distributor would like to award the movie and reports the highest bid received for the film to that point from the favored exhibitor's competitors. The distributor then allows that exhibitor to come in late with a higher bid and awards the first-run of the movie to the late (and highest) bidder. Such a practice obviously favors the financially stronger theatre chains (see "Blind Bidding", "Closed Bidding", "Conduct Restrictions", "Predatory Practices", "Selling Subject to Review" and "Unethical Business Practices").

Copyright 1992 John W. Cones All rights Reserved