237. Production Overhead--Those costs and expenses incurred by a studio/distributor in the business of producing and distributing motion pictures generally, that cannot be directly charged to specific pictures, regardless of whether or not such facilities or staff are actually used on a given picture. They include such things as rental of sound stages or other studio facilities such as dressing facilities, vehicles, telephones, office space and equipment, secretaries' salaries, studio executives salaries and their expenses, development and story- abandonment costs and general administrative costs relating to the production area. In view of the fact that distributors are generally permitted to recoup at least 100% of their direct distribution expenses and distribution fees for distributing a film in various media and markets, some take the position that such indirect distribution or other expenses should not be charged against a specific film, either on an actual cost or percentage basis, but rather such studio/distributors should cover such costs as most businesses do with their earned fees. It is particularly troublesome for some to have a studio/distributor finance the production costs of a film, then add such overhead to the negative cost of the film and charge interest on that overhead while delaying recoupment of the negative cost until after distribution fees are collected and distribution expenses are recovered, if ever (see "Gross Participations", "Interest", "Leverage", "Overhead", "Overhead Surcharge" and "Overreaching").

238. Profit Participations--Percentage participations typically based on net profits as defined in the distribution agreement; payments to talent or others computed as a percentage of the profits generated by a film or fixed sums to be paid if a movie's profits reach a certain level. Such participations are negotiable and thus may be based on gross receipts, net profits or other stages in a movie's revenue stream. If reasonable controls and/or limitations are not imposed on the distributor's claim to distribution expenses, the distribution fees are not reasonable and other parties are allowed to participate in the distributor's gross film rentals, net profit participations are not likely to occur. Such practices could impact adversely on the financial interests of investors, producers, executive producers, directors, screenwriters, actors/actresses or others who have negotiated a profit participation interest in a given motion picture.

239. Prompt payment--The timely remittance of amounts due. It is not uncommon for studios or other distributors to hold payments from television and cable sales until actual play dates, even though the funds have been received one or two or more years in advance. Producers may want to negotiate for the prompt payment of all funds due the producer and attempt to define what is reasonably prompt in the case of each type of payment (see "Unethical Business Practices").

240. Propaganda--Ideas, facts or allegations disseminated with the expressed intent of furthering one's cause or of damaging an opposing cause (see "Idea", "Marketplace of Ideas", "Movies With a Message", "Multi- Cultural Society" and "Unfavorable Portrayal").

241. Puffed Number--The inflated reports of the performance of a motion picture at the box office. Exhibitor's sometimes exaggerate the box office performance of a film at a specific theatre when responding to the inquiries of the trades or various box office reporting services in order to create the impression in the industry that a film is doing better at that theatre than it actually is. Distributor's also may "puff" their numbers for industry consumption in order to encourage exhibitors increase their bids for subsequent runs or to continue an ongoing run. Such reports then mislead prospective net profit participants into thinking that a film may achieve net profits when it actually will not (see "Settlement Transaction").

242. Racketeering--Originally, an organized conspiracy to commit extortion, but the concept has in more recent times, been superseded by RICO (acronym for Racketeer Influenced and Corrupt Organizations act), a federal statute which provides for four punishable racketeering offenses (1) for directly or indirectly investing income derived from a pattern of racketeering activity or through collection of an unlawful debt in any enterprise affecting trade or commerce; (2) for acquiring or maintaining any interest in an enterprise through a pattern of racketeering activity or collection of an unlawful debt; (3) for conducting or participating in the affairs of the enterprise through a pattern of racketeering activity or collection of an unlawful debt; or (4) for conspiring to violate the racketeering provisions.

A "pattern of racketeering activity" requires engaging in at least two incidents of racketeering conduct within 10 years of each other. Racketeering activity includes among other acts, certain indictable acts under federal and state laws including bribery, embezzlement from pension and welfare funds, extortionate credit transactions, mail fraud, wire fraud, interference with commerce and fraud in the sale of securities. The term "enterprise" in the federal act includes any individual, partnership, corporation or any union or group of individuals associated in fact though not a legal entity. RICO also makes it unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate commerce to conduct or participate in the conduct of the enterprise's affairs through a pattern of racketeering activity.

Criminal violations may result in fines of $25,000 and/or a 20 year prison term and the forfeiture to the United States of any interest or security or contractual right of any kind affording a source of influence over the enterprise. RICO also provides for civil remedies. Any person injured in his business or property by reason of a violation may sue in any federal district court and may recover triple the substantial damages, cost of the suit, including a reasonable attorney's fees.

The principal purpose of the act, is to strengthen means of preventing money and power obtained from illegal endeavors to corrupt democratic business practices so as to interfere with free competition and to burden interstate and foreign commerce. Essentially Congress is seeking to halt a pattern of infiltration of business by organized crime.

Although most profit participants, including investors in film corporations and film limited partnerships do not think of film distributors as "organized crime", if in fact, a given distributor engages in a number of the practices described herein, and raises production and/or distribution funds through the sale of corporate stock or limited partnership interests (both of which are securities), such distributors may have committed securities fraud since the disclosure of such practices would almost certainly be considered material to prospective investors and issuers of securities are under an obligation to disclose all material aspects of any such securities transaction. Thus, a disgruntled investor or other person "wronged" by the activities of a film distributor may be able to establish that the film distributor engaged in numerous instances of racketeering activity, (i.e., securities fraud by selling its stock or limited partnership interests without disclosing that it engaged in anti- competitive business practices, questionable or unethical conduct, creative accounting or sharp negotiating tactics, all of which may have an adverse impact on the interests of the investor and/or other profit participants).

243. Ratings--A very general system of movie classification provided by the MPAA for films to be released, utilizing the following letter designations: "G" for general audience (all ages, that is, a family film), "PG" for parental guidance (i.e., some of the material might not be suitable for children), "PG-13" (some material may be inappropriate for pre-teenagers), "R" for restricted to those of a certain age (this age varies from sixteen to twenty-one, with eighteen being the Motion Picture Association of America's suggested age) and "NC-17" for adults only. The stated purpose of the rating system is to provide advance information to enable parents to make judgments as to whether they want their children to see certain movies. A full-time rating board (employees of the MPAA), composed of seven persons (all who have shared the parenthood experience), headed by a chairman decide on the rating for a given movie by a majority vote. The rating board does not rate films for quality or the lack thereof. The rating board's criteria include theme, language, nudity, sex and violence. The rating assigned can in some cases significantly increase or decrease the potential audience for a movie and thus impact a movie's potential revenue, e.g., the difference in revenue potential between an "R" rated movie and the previously used "X" rating was substantial. Producers who are not satisfied with the MPAA rating assigned to their film have the right to re-edit the film and re-submit to the ratings board or they can release the film without an MPAA rating. Producers also have a right to appeal a rating board decision to the Rating Appeals Board and can of course litigate the question in court. A number of lawsuits were filed in 1989 and 1990 by independent producers challenging the ratings assigned to their movies, particularly the former "X" rating. This prompted the MPAA to adopt the "NC-17" rating, even though some members of the public and exhibitors contend that such a change is merely a substitution of labels and makes no substantive change. Such lawsuits and criticism have also raised the basic question relating to the inherent conflict of interest in a system which allows an MPAA sponsored organization to rate movies produced by its members as well as the movies produced by non-members of the MPAA, although this issue has yet to be resolved. The MPAA has traditionally been opposed to attempts by any governmental entity (or other organization) which tries to set up a system for rating motion pictures as to their content and has used the existence of the MPAA ratings systems (controlled by the MPAA) as an argument against such efforts (see "Minimum Rating" and "NC-17").

245. Reasonable and Customary--A general standard of conduct for commercial affairs which may only be ascertained on a case by case basis after the fact by testimony in the context of litigation. Somewhat more fair than just "customary by itself (see "Customary", "Deal Memo" and "Ordinary Course of Business").

246. Reasonable Efforts Clause--A provision in film distribution contracts which merely obligates the distributor to put forth reasonable efforts in distributing the film. Less effort is required of the distributor pursuant to a reasonable efforts clause than a best efforts clause. If no higher standard of conduct can be negotiated, the producer should prefer the best efforts standard over reasonable efforts.

247. Rebate--A return of a portion of a payment. Rebates, like discounts, are often negotiated and/or awarded by exhibitors and other feature film licensees to distributors on a given picture or they are also sometimes based on the volume of pictures provided by the distributor. Distributors often seek to exclude the value of such rebates in profit participation calculations, arguing that the distributor's activities are solely responsible for earning them. However, as with discounts, 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 rebates. Producers should seek to negotiate a fair provision in the distribution agreement which includes the value of such rebates in the profit participation calculations. Even if a producer is successful in negotiating such a provision, it is not unthinkable for a distributor who has a particularly close relationship with a given exhibitor or other film licensee to have the rebate shifted (on paper) to another producer's film and/or included as part of an overall settlement as between the distributor and the licensee, in which case the distributor may have the discretion to allocate the amount of the settlement among various films distributed by the distributor on behalf of several different producers (also see "Discounts").

248. Reciprocal Preferences--Mutual partiality among competing businesses, an illegal trade practice which violates Section 1 of the Sherman Anti-Trust Act. In the context of a vertically integrated motion picture industry, a reciprocal preference might take the form of a group of competing distributors/exhibitors, such as the major studio/distributors providing the other major studio/distributor/exhibitors selective contracts for exclusive first runs in their best theatres or at just the exhibitor level with the competing major exhibition chains, each giving some preference to the other's films by organizing splitting arrangements which can help to guarantee the distribution of the best films in their theatres as opposed to the theatres of the smaller independent exhibitors. The concept of reciprocal preferences may also apply to the exhibitor practice of bidding aggressively on films that are distributed by distributors who are fairly lenient when it comes time to settle with the exhibitor, (i.e., accept a lesser round-dollar amount for the exhibition of a certain film in exchange for the exhibitor's showing a less desirable film in the past or in the future). At least one major studio/distributor reportedly does not engage in these kinds of settlement transactions and thus does not benefit from this form of reciprocal preference, (i.e., it's films are not typically exhibited in the best theatres) [see "Blind Bidding", "Major Exhibition Chains", "Major Studio/Distributors", "Paramount Consent Decree of 1948", "Predatory Practices", "Selling Subject to Review", "Settlement Transaction" and "Vertical Integration"].

249. Relationship-Driven Business--An industry in which business choices and decisions relating to whether business should be conducted with certain other individuals or entities are based to a great extent on some affinity, link, affiliation or association which may or may not be directly related to the nature of the business. In this sense, such relationship choices might be viewed as another barrier to entry in any of the production, distribution and/or exhibition levels of the motion picture business (see "Barriers to Entry", "Insider's Game", "Level Playing Field", "Member of the Club", "Movies With a Message", "Nepotism", "Reciprocal Preferences" and "Role of Government").

250. Release Commitment--The pledges, promises or guarantees of a film distributor relating to the distribution of a given film, e.g., agreements by a distributor to spend a certain amount of money on prints and advertising and/or to release a film in the major population centers in the U.S. Such commitments are usually required by home video companies before such companies will provide a home video advance or guarantee. The producer should check with video companies in advance to determine what level of release commitment from the distributor in the domestic theatrical release will create value in the property from the video company's point of view. At a minimum, the producer should see that the distribution agreement guarantees a theatrical release. However, distributors will generally resist guaranteeing the type or pattern of release of a picture. They feel that even the use of a broad standard such as "reasonable business judgment" or "best efforts" may invite litigation if the distributor uses incorrect judgment in its selection of a distribution pattern. The producer should, however, seek minimum specific commitments for prints and advertising, particularly for theatrical distribution, since such amounts demonstrate the distributor's commitment to exploitation of the film. For low- to medium-budget pictures, it is not unusual for P&A commitments to equal to 50 to 100% of the film's budget. In addition, to the guarantee of a theatrical release, the producer may seek distributor commitments for producer consultation and approval rights relating to the release pattern, a theatrical release in certain cities and specified limits on distribution expenses. It would seem that if the distributor would work with the producer on such issues and obtain producer approvals of its release plan, there would be no grounds for litigation.

251. Release Slots--A limited measure of time or distributor resources that a feature film distributor is able to commit to the distribution of a film. In any one year, most major studio/distributors will not commit to release more than 24 or so motion pictures, (i.e., they have approximately 24 release slots to fill each year or an average of one film released each two weeks or so). On the other hand, the production side of the major studio/distributors is seldom able to produce more than 15 quality films a year (as either in-house product, on a production-financing/distribution basis or as negative pickup where the studio has significant controls and approvals. Thus, in order to be able to amortize the studio/distributor's ongoing operating costs, many will take in other product to fill those release slots and to maintain their relationships and leverage with the exhibitors as consistent suppliers of quality film product. The additional films will be distributed either on a pure acquisition or rent-a-system basis.

252. Remitted or Remittable--Already sent back or that which is able to be sent back. With respect to foreign receipts for the exploitation of a motion picture in international territories, the question often arises as to whether a net profit participant should receive the benefit of monies collected in the foreign territory and that could be remitted back to the United States but which have not yet been sent back. The typical major studio/distributor definition of the term gross receipts excludes foreign receipts until they are collected and converted into dollars here in the U. S. When the distribution agreement is negotiated, net profit participants should take the position that foreign receipts which have been remitted or which are remittable be included in gross receipts (see "Foreign Receipts" and "Net Profit").

253. Reserve for Returns--A deduction by the distributor from video gross receipts to account for the estimated dollar value of videocassettes sent back to the distributor from the video wholesaler because they were defective or for other reasons. The distributor may want to hold back as much as 25% of the video gross receipts as reserves for video returns. The film producer may want to ask for statistics on such returns to determine whether the percentage is reasonable (see "Videocassette Revenue Reporting").

254. Residuals and Royalties Provision--Residuals (or residual payments) are percentage participations for television, (i.e., payments as to an actor or writer for each re-run after the initial showing and pursuant to a union agreement). Residuals are generally based on the number of times the film is exhibited on television, or as a percentage of revenues from television exhibition. Royalties, on the other hand, are payment to the holder for the right to use property such as copyrighted material, (i.e., a negotiated percentage of income paid to an author or composer for each copy of the work sold). A royalty is a share of the product or of the proceeds therefrom reserved by an owner for permitting another to exploit and use his or her property, (i.e., the rental that is paid to the original owner of property based on a percentage of profit or production). Royalty is compensation for the use of property, but it is based as to amount entirely upon the use actually made of the property. The residual and royalty provision in a film distribution agreement is language or a paragraph which provides for the payment of residuals and royalties associated with the picture, e.g., that the distribution company agrees to make all residual and supplemental payments required to be made in the distribution of the picture. Watch for distributors who try to shift the burden of making such payments to the producer and ask the producer to make such payments out of the producer's share, a tactic which would tend to reduce the producer's profit participation in relation to other profit participants.

255. Restraint of Trade--Illegal restraints interfering with free competition in business and commercial transactions, which tend to restrict production, affect prices or otherwise control the market to the detriment of purchasers or consumers of goods and services. What would otherwise be considered a reasonable restraint of trade may be made unreasonable if they are intended to accomplish the equivalent of an illegal restraint (see "Anti-Trust Law Violations", "Conspiracy", "Paramount Consent Decree of 1948" and "TriStar Case").

256. Restricted Currencies--A foreign currency which is or becomes subject to moratorium, embargo, banking or exchange restrictions, or impediments against remittances to the United States. A producer and other net profit participants may want to clarify in the distribution agreement for a film, whether such funds will be included in the distributor's definition of gross receipts (see "Blocked Currencies").

257. Retroactive Basis--The doing of some act in a manner which extends its effect back to a prior time. For example, if a producer of a feature film is also an established producer of soundtrack albums, he or she may be able to negotiate a separate deal for a royalty on the soundtrack recording. If the film distributor is amenable, it is not likely to agree to make such payments until after the motion picture has reached some specified level of breakeven at which time the participation may be awarded on a retroactive basis. Of course, when a participant shares on a separate basis, as described above, the revenue from such a separate source will generally be excluded from the distributor's gross receipts in computing that participant's share of net profits, since if it were included, the participant would be sharing twice in the same revenue. Would it then be unreasonable to ask those distributors who have an ownership interest in video wholesalers to use the same reasoning to avoid their double dip in the video revenue stream? (see "Videocassette Revenue Reporting").

258. Retroactive Increase--A larger payment which is not triggered until a certain event occurs, but which when triggered, permits the recipient to go back to the first revenue dollars relating to the transaction and recoup at the higher rate. Some film distribution agreements provide for distribution fees that escalate retroactively. In such instances, it is important to limit or segregate the revenues from which the retroactive recoupment can be extracted. If the distribution agreement does not address this point, the distributor will most likely take its retroactive increase from 100% of the subsequently accruing revenues (i.e., after the triggering event occurs, the distributor will take all of the next revenues to pay for the increase in its distribution fees back to the first dollar). Thus, the susceptible payment corridor from which the retroactive increase is paid should be limited in some reasonable manner (e.g., 50% of gross receipts), which allows the production company and other participants to continue receiving their percentage participations while the distributor is recouping retroactively.

259. Revolving Door--A concept more commonly applied to government which refers to the practice of private citizens, such as attorneys, who go into the service of the government, typically in some regulatory capacity, only to return to private practice following government service and in a position to utilize the expertise and/or contacts gained in government service to enhance their abilities and economic prospects in the commercial marketplace. The problem with this practice typically occurs in the form of conflicts of interest, (i.e., the government official makes a government decision influenced by a possible private benefit which might accrue to such individual when he or she becomes a private citizen again).

Generally speaking, in a private industry such as the film business, the revolving door concept is not a problem. However, when a relatively small but highly visible industry like film, with a high concentration of its participating companies primarily based in one city, like Los Angeles, is dominated by a small number of corporate entities and individual executives, with large monetary rewards floating around, it is not unusual to see people in that industry, entertainment attorneys, in particular, move from private practice into the corporate structure of major studio/distributor and back, creating similar opportunities for conflicts of interest. In addition, any independent producer utilizing the services of an entertainment attorney must have to wonder whether that attorney is going to be a film producer or a studio executive next year and thus effectively compete with his or her former client. This constant movement back and forth between and among the studios and other segments of the industry does create numerous conflict of interest opportunities, which many in the industry are not even aware of or seem to completely disregard in their blind quest for fame and fortune.

260. RICO--Acronym for Racketeer Influenced and Corrupt Organizations, a federal statute which provides for four punishable racketeering offenses (1) directly or indirectly investing income derived from a pattern of racketeering activity or through collection of an unlawful debt in any enterprise affecting trade or commerce; (2) acquiring or maintaining any interest in an enterprise through a pattern of racketeering activity or collection of an unlawful debt; (3) conducting or participating in the affairs of the enterprise through a pattern of racketeering activity or collection of an unlawful debt; or (4) conspiring to violate the racketeering provisions. A "pattern of racketeering activity" requires engaging in at least two incidents of racketeering conduct within 10 years of each other. Specified offenses involved in racketeering include criminal usury, theft and forgery. Theft may include larceny (i.e., the taking of another's property unlawfully with the intention of depriving the owner of its use). The term "enterprise" in the federal act includes any individual, partnership, corporation or any union or group of individuals associated in fact though not a legal entity. Many states have also passed RICO statutes (see "Anti-Trust Law Violations", "Fraud", "Mob-Controlled Distribution Company", "Money Laundering", "Racketeering", "Self-Dealing", "Usurious Contract" and "White Collar Crime").

261. Rising Production Costs--The seemingly ever increasing expense involved in the making of a motion picture. Many in the film industry have complained for the last several years about the rising production costs (reportedly down 3% in 1991 for MPAA movies to $26.1 million) which have been occurring during a period that has witnessed declining theatrical admissions, a slowing of home video cassette sales worldwide, a leveling off of U.S. made programming sales to Europe and reduced margins of profit. The warning has gone out that this lack of profitability in the film business will make it more and more difficult to attract capital. But it appears that the only thing the business leaders in various segments of the film industry can suggest to lower production costs is for the other guy to quit being so greedy. For example, the studio/distributors complain that the agents and their actor clients need to reduce their up front and gross participation demands. In response the high priced talent attorneys counter that they will consider such a proposal if the studio/distributors will handle net profit participations more fairly, particularly in the area of home video. This inter-industry economic warfare is unfortunate, in light of what has happened in recent years to other great American industries which could not downshift across the board as the rest of the world became increasingly more competitive and globally integrated.

262. Role of Government--The function and activities of the sovereign ruling agency in any given jurisdiction. In a country like the United States where an essentially free enterprise economy is part of the national fabric the role of the federal government is generally minimized, except in situations where private enterprise engages in business practices which reduce or tend to reduce the competitiveness within an industry, (i.e., businesses engage in unreasonable restraints of trade, or other civil or criminal violations of the U.S. laws). In the current economic environment, one of the government's regulatory dilemma's relating to the balancing of competitive interests in an industry like the motion picture industry is how to permit combinations of businesses to grow large enough to compete in an increasingly international economy without stifling the small business interests within the domestic industry. However, so long as no organized interest group speaks up for the interests of the small businesses in such an industry, the government is very likely to respond favorably to requests from the larger entities in that industry to allow them the freedom to grow and compete effectively on an international scale. On the other hand, it may be possible to allow business combinations for the purpose of international trade without permitting the same combinations in the domestic marketplace (see "Anti-Trust Law Violations", "Fair Competition", "Free Enterprise", "Predatory Practices", "Money Laundering", "Movies With a Message", "Political Influence", "Restraint of Trade", "Unfair Competition" and "Vertical Integration").

263. Rolling Break-Even--A point at which a film's revenues are equal to expenses on a continuing basis, (i.e., after all appropriate deductions are taken from film rentals in each accounting period, those persons who have been able to negotiate a percentage or fixed participation at such accounting stages may be paid if the film is in a profit position). Too much discretion, latitude, flexibility in the standards of conduct, lack of definition and too little auditing leeway, etc. in the distribution deal, creates an opportunity for the distributor to keep pushing break-even back.

264. Royalty Basis--The payment of percentage compensation based on the use of property or rights as a royalty as opposed to making such payments in the form of a distribution fee. Unlike other areas of the feature film business, home video revenue percentage participations have been handled on a royalty basis (similar to the record industry) rather than on a distribution fee basis. Royalty payments are traditionally much lower than distribution fees. Also, although the royalty approach is used for determining what goes into the film distributor's gross, the film distributors have, not surprisingly, generally opted for the distribution fee approach with regard to home video revenue once it reaches the distributor's gross receipts pool (see "Videocassette Revenue Reporting").

265. Rules--Another term with different levels of meanings, (i.e., [1] a prescribed guide for conduct or action, [2] an accepted procedure, custom or habit and [3] a law or regulation governing procedure or conduct). One of the more common statements made by film industry "insiders" who participate in discussions regarding film finance is "There are no rules". In at least a couple of ways, this may be true, (i.e., there is no overall best way to go about financing a motion picture [it really depends on the project] and there are no prescribed guidelines for what works at the box office). But in other ways, this can be an extremely misleading and dangerous statement in that there certainly are a great number of rules when it comes to forming a corporation, creating a limited partnership, running a business, contracting with others, structuring a deal with tax considerations in mind, etc. In that sense, the people who are making the statement "There are no rules" may in reality be saying, "We know there are rules, but we are not going to abide by them because we know that no one who wants to stay in this business will complain and even if they do, their remedies are woefully inadequate." (see "Anti-Trust Law Violations", "Blacklist", "Conduct Restrictions", "Conflicts of Interest", "Extortion", "Insider's Game", "Larceny", "Merger Guidelines", "Sue Us" and "Usury").

266. Running Time--The total length of time needed to project a film at its normal speed. Feature films usually require a running time of 90 to 120 minutes. However, many distribution agreements specify a range in which the running time must fall and may make compliance a condition of delivery. Thus, if the producer comes close but fails to come within the prescribed running time, the distributor may be able to use this technical default to avoid its obligations to make payments to the producer pursuant to pre-sale or negative pickup agreements and avoid its obligation to distribute the picture.

267. Same Percentage as Film Rental Earned (SPFRE)--A financial arrangement negotiated between a film distributor and exhibitor in which the exhibitor agrees to pay the same percentage of the week's advertising cost for the movie as the exhibitor's percentage of the box office receipts received by the exhibitor in that same week. Query: Why can't a producer use a similar concept in negotiating a feature film distribution deal with a distributor, using the SPFRE concept in place of the distributor's "discretion" to make allocations among films licensed as a package (see "Allocation").

268. Scam--A planned deception in which persons pretending to be engaged in some form of business transaction are actually involved in a ruse designed to separate a victim from his or her money. Among independent feature film producers who are desperately seeking financing for their latest project, the typical pattern is for a money finder, and in some cases, small distributors, to promise full production money funding of the motion picture if the producer will provide a certain amount of up front money to demonstrate to the supposed financing source that the producer is serious. In some instances, it is extremely difficult to distinguish between a legitimate operation and a total fraud until after the fact. It may help to get an attorney involved and create a substantial paper trail relating to the transaction while checking to confirm as much information about the parties as possible, e.g., calling the Secretary of State's office to determine whether an entity which is purported to be incorporated, is in fact, a corporation in good standing (see "Fraud" and "White Collar Crime").

269. Scrapping of Prints--The selling of used feature film prints for their salvage value. Some provision ought to be made for reducing the distributor's costs of making prints by the reasonable value of the prints as salvage.

270. Script Changes--Modifications to a screenplay. Such changes will inevitably occur during production of a picture and may create problems with a distributor and/or the completion guarantor. In the event that a distribution agreement was negotiated and signed prior to principal photography, the distributor typically includes a provision providing for script approval. The producer should also include a mechanism for approving subsequent changes and for determining which changes during production require distributor approval, otherwise, the producer risks creating a situation in which the distributor may avoid its obligations under the distribution agreement because of what it considers substantial script changes that have not been approved by the distributor. In addition, when a completion guarantee has been provided, it typically does not cover budget overruns caused by script changes. The producer, however, should at least insist on a provision in the completion guarantee that covers script changes prompted by uninsured events that are beyond the control of either the producer or the director.

271. Second Breakeven--A contractually defined point in a motion picture's revenue stream when revenues equal costs again, (i.e., following the first such occurrence) [see "Actual Breakeven", "Artificial Breakeven", "Cash Breakeven", "First Breakeven" and "Rolling Breakeven"].

272. Self-Dealing--Transactions in which a fiduciary uses or appropriates the property held in his or her fiduciary capacity for his or her own benefit. Many federal and state statutes prohibit self-dealing (see "Conflicts of Interest", "RICO" and "Videocassette Revenue Reporting").

273. Settlement--A conclusive fixing or resolution, usually a compromise, between the distributor and exhibitor or distributor and sub-distributors relating to the amount of monies due to be paid to the distributor for a film's exploitation. Generally, settlements are calculated or negotiated on a weekly basis, at least initially between the individual theatre and the branch office of the distributor. As between the distributor and exhibitor, settlement is sometimes used to refer to the percentage retained by the exhibitor. The amount actually settled upon may be 10% to 30% below what the contractual amount would have been. There is almost never any written communication between the distributor and exhibitor relating to such settlement negotiations, (i.e., it's all oral, thus the net profit participation auditor can only compare what was paid with what should have been paid pursuant to the contract between the distributor and exhibitor). These settlements may significantly reduce the chances that a given film will ever reach net profits, thus such negotiations impact on the financial interests of a film's producer and its other net profit participants. For example, a distributor may be willing to settle for less than the money actually owed by an exhibitor on a given film in order to help the distributor obtain more favorable exhibition terms on its next film. Some entertainment attorneys have suggested that these settlement transactions would not hold up in court if challenged because the distributor, in its distribution agreement, generally has contracted to maximize its distribution revenue on the film on behalf of all gross and net profit participants. Few if any producers or other profit participants, however, have chosen to litigate this issue and even when confronted by profit participation auditors, this appears to be one of those issues the distributors routinely respond to by saying "sue us" (see "Blacklisting", "Contract of Adhesion", "Creative Accounting", "Outstandings", "Problem Producer", "Selling Subject to Review" and "Sue Us").

274. Settlement Transactions--Agreements between exhibitors and distributors (or distributors and sub- distributors) which settle their respective accounts and which often cover the receipts, deductions, fees etc. for several movies exhibited by such exhibitor and distributed by such distributor (or sub-distributor). The actual numbers in such transactions are typically rounded off, averaged or compromised, thus making it difficult for a producer of a movie involved in such a transaction to determine what amount paid to the distributor should be properly allocated to such producer's motion picture. This is a form of cross-collateralization which producers should object to. To prevent this problem, the producer should require that the distributor insert "floors" in its agreements with sub-distributors and exhibitors. A "floor" is a minimum percentage of the box office gross receipts, with the floors or percentages varying from territory to territory on a sliding scale over time. In addition, the producer should see that a "good faith" standard is inserted as part of the distributor's obligations relating to such settlements (see "Audit", "Creative Accounting", "Cross Collateralization", "Selling Subject to Review" and "Sue Us").

275. Shared Employee Salaries--A movie studio accounting concept in which the compensation paid to certain employees of the studio are allocated among the various movies that are being produced at the studio. Actual instances of studio executives being given time cards to arbitrarily fill out so that the studio can allocate their as a cost of a given film have been reported.

276. Shell Corporation--A corporation that is formed without significant assets or ongoing operations. Some banks require that a feature film producer seeking a production money loan as part of a negative pickup or split rights transaction incorporate a shell corporation for the sole purpose of holding the single film being financed as its only asset and to start operations with no liabilities. This helps to insure that the bank will have a first priority claim against all of the assets of the newly formed company (as opposed to any other prospective creditor) as the corporation begins operations. The term "shell corporation" is also sometimes used to describe companies set up for fraudulent purposes, e.g., as fronts to conceal money laundering or tax evasion schemes (see "Mafia", "Mob Controlled Distribution Company" and "Money Laundering").

277. Significant Barriers--Serious things that impede or separate. In an anti-trust law context, the phrase "significant barriers" refers to the serious things that may keep a business from either entering or continuing to do business in a particular field, e.g, feature film distribution or exhibition. Several of the U.S. Justice Department vertical merger guidelines relate to the issue of whether or not a feature film distributor or exhibitor must be vertically integrated in order to enter or continue in the distribution or exhibition business (i.e., to successfully compete in those levels of the motion picture business today). As a means of analyzing proposed vertical mergers in the motion picture business, these guidelines further ask how difficult is it to achieve such vertical integration (assuming it is necessary to succeed in today's marketplace), and if vertical integration is required and there are significant barriers to such integration, is the market otherwise conducive to non- competitive performance. In other words, the U.S. Justice Department has apparently taken the position that in a market not otherwise conducive to single firm market power or coordination among several firms, even significant increases in barriers to entry are unlikely to affect competitive market performance adversely (see "Barriers to Entry", "Merger Guidelines", "Paramount Consent Decree of 1948" and "TriStar Case").

278. Skimming--Stealing at various stages in a film's revenue stream, e.g., by a theatre's cashier and doorman, the theatre owner under reporting ticket sales to the sub-distributor, the sub-distributor taking a little off the top before reporting to the distributor or the distributor doing the same before reporting to the producer. It is important for the producer to inquire about and to see that the distributor has vigorous ongoing checking and collection programs.

279. Slate Cross-Collateralization--A feature film distributor practice in which the distributor offsets the financial performance of one motion picture against the financial performance of other films produced by the same production company (see "Cross-Collateralization").

280. Squeeze-Out--In corporate law, any transaction engaged in by the parties in control of a corporation for the purpose of eliminating minority shareholders. In a more general business sense, the gradual elimination of smaller less powerful competitors through the use of anti-competitive practices (see "Anti-Competitive Practices", "Anti-Trust Law Violations" and "Cartel").

281. Standard Contract--An often abused term; a document which does not exist in reality in any business transaction involving negotiations. Producers should avoid doing business with distributors who suggest that they have a standard contract or that there is a standard contract for the industry or a segment of the industry. Every material term of a contract should be considered negotiable.

282. Standards and Practices--The guidelines and procedures imposed by the Standards and Practices Departments of the major free television networks on material presented for broadcast. For example, "R" rated feature films are not considered in compliance with these more restrictive free television requirements. Film distribution agreements typically require that additional television cover shots be provided on such movies. If such cover shots are not provided and/or the movie does not meet the networks' standards the film distributor may avoid its obligation to make payments to the producer or distribute the film pursuant to the distribution agreement.

283. Standard Terms and Conditions--A major section of the typical studio/distributor feature film distribution agreement which sets out the terms and provisions relating to the distribution of a feature film that the studio considers standard. It is important to recognize that what is considered standard for that studio may or may not be standard for another major studio/distributor or for an independent distributor, regardless of the fact that such provisions are often similar. For example, it would be a violation of the anti-trust laws for competitors like the major studio/distributors, even through the facilities of their trade association (the MPAA) to get together and agree on standard terms and conditions. Thus, the phrase "standard terms and conditions" does not necessarily mean that such terms and conditions are standard in the industry, nor should independent producers allow themselves to be led to believe that is the case. In other words, a distributor's standard terms and conditions should also be negotiable. Generally, the studio/distributor distribution agreement will also contain a provision which says "To the extent any terms or conditions of the Standard Terms and Conditions are inconsistent with the Deal Terms, the Deal Terms shall govern. Thus, the studio is setting out in the "Standard Terms and Conditions" section what it would prefer with respect to certain issues and if producers want something different, they need to speak up during the negotiations and ask that the language in the "Standard Terms and Conditions" section be crossed out, modified or otherwise altered or that different language be included in the "Deal Terms" section of the agreement which overrules the "Standard Terms and Conditions" section (see "Anti-Trust Law Violations").

284. Stock Fraud--In the sale or offer of corporate stocks, the intentional misrepresentation, concealment or omission of the truth, for the purpose of deception or manipulation to the detriment of an investor or prospective investor. It would appear that the failure of any feature film studio/distributor or independent distributor which is publicly or even privately owned by shareholders, to disclose that they engage in many of the practices described herein (if in fact such is the case), might constitute stock fraud. It is also possible that the publication of this list of distributor/industry practices might create a greater need for stock brokers who offer or sell the stocks of studio distributors, independent distributors or other film industry corporations, to conduct more thorough due diligence investigations of such entities before offering their stocks, otherwise the stock brokers themselves may be exposed to greater liability based on their failure to discover and disclose such practices which tend to be detrimental to the interests of the investor clients of the stock brokers. This compilation may also encourage closer scrutiny by shareholders of the manner in which a film distributor operates and could conceivably prompt shareholder lawsuits in instances where such practices seem to be prevalent and harmful to such shareholders (see "Creative Accounting" and "Due Diligence").

285. Stockholder--Individual or organization with an equity ownership interest in a corporation. Stockholders must own at least one share. The shareholders of corporate entities may be individuals or other corporations. Some corporate conglomerates that have purchased equity ownership interests in motion picture production companies and/or distributors where a certain level of autonomy for the existing management remains intact as part of the deal have been somewhat disappointed in the financial results of their investment. In other words, even though the entertainment entity operates at an acceptable level of profitability, for various reasons, the profits do not always seem to flow through to the equity shareholders (also called "Shareholder" or "Shareowner"; see "Dividend", "Greed" and "Rising Production Costs").

286. Stonewall Defense--A position taken by a prospective defendant in negotiations between parties designed to avoid litigation in which the defendant simply says "see you in court". The tort of "bad faith denial of contract" seeks to provide a recovery based on a defendant's bad faith conduct in asserting a stonewall defense to an ordinary commercial contract (see "Bad Faith Denial of Contract" and "Sue Us").

287. Studio Accounting Practices--Various methods of accounting for motion picture revenues which have long been alleged to be unfair. Such methods include the practice of charging unauthorized and excessive expenses to a given film being produced at the studio; the rolling break-even which keeps rolling just beyond net profits; and unfair overhead charges imposed by the studio on net profit participants. In other words, the studio has the books and records, it interprets the production/distribution agreement, it computes the profit and it decides how much should be paid. Industry insiders have long maintained that there is a certain amount of inadvertent and some intentional abusive or unconscionable accounting practices regularly occurring at the studios.

288. Sub-Distribution--Depending on the size and extent of the distributor's organization, it may contract directly with exhibitors or it may utilize sub-distributors, (i.e., distributors who handle a specific, limited geographic territory for a film--territorial distributors who have contracted to represent an independent distribution company). Sub-distributors sub-contract with the main distributor who co-ordinates the distribution plans and marketing for all the sub-distributors of a film. Sub-distributors specialize in cities, states or territories. For foreign distribution, the distributor may contract with sub-distributors who cover entire countries. Since sub-distributors handle a limited territory or "exchange", they generally have an excellent working knowledge of their markets.

However, they are paid a commission for booking a film and this system of sub-distribution often makes it difficult to audit the independent distributors. Also, the producer should be careful not to commit to pay the distributor a specified fee percentage in each territory while allowing the distributor the discretion as to whether or not to use a sub-distributor whose commission is in addition to the distributor's fee (that amounts to a double fee). This same double distribution fee might also occur if an independent distributor utilizes the services of a major distributor on a given film. Distribution fees should be established at a level which allows the distributor to pay the sub-distributor's commission out of the distributor's fee. In other words, in a sub- distribution situation the producer should insist on a ceiling for the distribution fee to be paid by the producer to the distributor and it's up to the distributor to arrange for the sub-distributor's fee.

To help provide an incentive to the distributor, the producer may want to negotiate the authority in the distribution agreement to make deals directly with sub-distributors in certain territories if the distributor fails to issue licenses in those territories within a specified period of time. To be fair, the distributor should have the right to match the deal obtained by the producer or lose the territory (also see "Outright Sales").

289. Subjective Terms--Words or expressions used in contracts that are subject to or likely to be interpreted differently by different individuals, as opposed to more objective terms whose meaning may be more readily agreed upon. Subjective terms should be clearly defined or eliminated in the negotiation of such contracts, e.g., usual and customary practices in the industry (see "Creative Accounting" and "Ordinary Course of Business").

290. Submission Release--A written agreement which producers and/or production companies sometimes require to be signed by screenwriter or others submitting literary material to the producer/production company for consideration as the basis for producing a motion picture. Typically, in such submission releases the screenwriter is asked to give up his or her rights to make certain claims against the producer/production company. Some of the submission releases drafted and used by the major studio/distributors and other distributors in the industry today are ridiculously one-sided (see "Contracts of Adhesion", "Overreaching" and "Unconscionable Contract").

291. Substitution Clause--A provision in a film distribution agreement which permits the producer to choose an alternate distributor. Such provisions are more likely to appear in distribution agreements with small distributors and are included so as to protect the producer who may produce a movie that is desired by a much stronger distributor who can provide a wider release and more distributor support. Usually, such provision will require that the original distributor's expenses be reimbursed, that a substitution fee be paid and, sometimes a percentage participation is retained. To some extent, the substitution clause, serves a purpose similar to the turnaround provision in a studio deal, except that the size of the distributor's involved are typically reversed.

292. Sue-Us--A phrase which is descriptive of the attitude and a "business as usual" tactic of some major studio/distributor and other film distributors in their dealings with profit participants and which is used when the profit participant inquires about his or her share of net profits following the distribution of a film. Such distributors take the position that any net profits due the profit participant will not be voluntarily paid to the profit participant, thus the profit participant must audit and/or sue in order to be paid. Even then, if an audit is conducted, unpaid profits are uncovered and a lawsuit is filed, the distributor will generally settle out of court for a lump sum that is less than was originally owed. So what's to keep a distributor from using this tactic? An association of independent producers or of industry profit participants must be created to, among other things, monitor such unfair business tactics and publicly expose the consistent use of such practices on the part of any distributor.

293. Sufficient Detail--Enough information to permit a full understanding. A concept that relates to the negotiation of the audit rights provision in a feature film distribution agreement. The producer should seek to insert language in the audit rights provision requiring the distributor to provide accounting statements with sufficient detail to permit a full understanding of how the accompanying payment was determined (see "Audit").

294. Syndicated Films--Motion pictures which are licensed for use by individual television stations or cable systems for exhibition in their own local markets. Films are usually packaged as a group for television syndication. There are some 200+ television syndication markets in the U.S. The syndication of films may create an allocation issue with respect to how the fee paid for syndication rights is allocated among the various films in the syndication package. Generally, a rather arbitrary syndication formula is imposed on the producers of the various films in the package by the distributor and the application of this formula does not vary from market to market. Producers may want to negotiate for an approval right over any such syndication formula used by a distributor on that producer's film when and if it is included in a syndicated package (see "Allocation").

295. Takeover--The assumption of control over the production of a motion picture by a financier (i.e., studio) or a representative of a lender (i.e., completion guarantor). A production-financing/distribution agreement will typically set out the studio's takeover rights, e.g., if, based on the information available (including, but not limited to, the weekly reporting papers furnished by the production company), the distributor reasonably believes that the estimated cost of production of the picture will exceed the contingency, the studio may enter into negotiations with the production company in an effort to come up with a plan designed to reduce the projected negative costs, but if not successful the studio may take over primary responsibility for the continued production of the picture. With respect to a completion guarantor takeover the completion bond company may assert its contractual rights to assume responsibility for completing the film since the producer defaulted in some way, e.g., went over-budget or did not complete the film on time. Generally, the event which triggers the takeover rights of the completion guarantor is the subjective judgment of its on site representative that the film is going overbudget (see "Subjective Terms").

296. Talent Participations--Financial interests of writers, directors and/or actors who negotiate percentage participations based on a film's earnings at some specific level of the film's revenue stream. Such participations are often expressed as points, (i.e., a percentage of the revenue at a given level), (e.g., "gross points" which can be defined on a number of different grosses, such as distributor's gross or film rentals). Net points may also be defined at different levels of return, such as the producer's net or partnership net for films financed by means of a limited partnership. If a studio has the right to award gross participations, the producer must have a gross floor.

297. Television Cover Shots--Alternate depictions of portions of a film, (i.e., scenes shot from different camera angles, thus providing differing points of view of the same action but which provide scenes which are more acceptable to presentation on free television). In order to avoid another possible barrier to payment in a distribution pre-sale situation, the film's producer should request that the distributor designate the scenes in the screenplay for which television cover should be provided by the producer.

298. Theatre-by-Theatre Basis--The prescribed manner in which theatrical distributors were supposed to license their film product to exhibitors in the U.S. theatrical marketplace, pursuant to the Paramount consent decrees, (i.e., without discrimination in favor of affiliated theatres) [see "Paramount Consent Decree of 1948", "TriStar Case" and "Vertical Integration"].

299. Theatrical--Of or relating to motion picture theatres where full-length feature films are exhibited to the public for a charge. It is extremely important that this word be used as a modifier of the word "release" in a film distribution deal since without the word "theatrical" the film distributor would be free to merely sell the motion picture to cable with its being exhibited at theatres.

300. There Are No Rules--One of the most commonly held myths among some populations within the Hollywood community, a myth which is often repeated by so-called industry insiders in speeches, lectures and seminars. A belief that probably started out as a positive expression that newcomers to the industry should not be held back by conventions relating to creative endeavors, has (as evidenced by the distributor practices related in this monograph), been perverted by some to mean that the Hollywood community is different from all other "commercial worlds" and the usual rules do not apply. This part of the Hollywood community must be reminded that the anti-trust laws, securities laws, contractual provisions and criminal laws still apply to their conduct.

301. Threat--A declaration of an intention or determination to inflict punishment, loss or pain on another, or to injure another by some wrongful act (see "Extortion", "Racketeering" and "RICO").

302. Three Sets of Books--A reference to the alleged practice that distributors maintain several different versions of their business records, one for their own records, one for the producer and net profit participant group and another for the IRS (see "Creative Accounting" and "Unethical Business Practices").

303. Track System--An arrangement under which most of a distributor's films are customarily exhibited at a certain exhibitor's theatres; additionally "track system" and "track" means a group of theatres within a major key, which may be operated by different exhibitors, chosen by a distributor (through negotiations with the exhibitors) to play a film simultaneously.

304. Trade Association Dues and Fees--A category of distributor expenses that are deducted from gross receipts (sometimes off-the-top) and paid as the distributor company's allocable portion of the dues and assessments of the trade association or associations to which the distributor belongs, e.g., the MPAA and AMPTP or similarly constituted or substitute organizations throughout the world. This category of distributor expense may include legal fees to such association's outside counsel (not its in-house counsel) relating to anti- trust matters, which means the major distributors are deducting from gross receipts, (i.e., reducing the amount of funds that other participants may share in), to pay for activities which help to continue or improve their position of market dominance. Thus, most independent producers who have to wait until a film's revenue stream reaches net profits (since most producers are relegated to a net profit's position), are contributing to the payment of the distributor association's costs incurred in conjunction with fighting anti-trust claims or taking positions on issues most of which would be opposed by the independent producer whose funds are being used. That being the case, it would seem only fair that if an association of independent feature film producers were formed, then each film produced by a member production company and distributed by an MPAA distributor would contribute a portion of its gross receipts to the independent producer's association as association dues at the same time that the MPAA and other distributor trade organization dues were being deducted and paid. In addition, independently produced films that were distributed by AFMA member distributors would also contribute an allocable portion to the support of such an organization. In any case, a producer is able to negotiate a flat-dollar cap on the amount of gross receipts that may be deducted for association dues, e.g., $75,000 (see "Blind Bidding", "Gross Receipts", "Lobbying", "Off-the-Top" and "TriStar Case").

305. Trailer Revenues--A distributor may incur substantial expense in preparing trailers and advertising accessories. If such expenses are charged against the distributor's proceeds as expenses of distribution then any amounts of revenues derived from trailers and advertising accessories should be included in gross receipts to the distributor for purposes of calculating profit participations. Such payments may be made by exhibitors in certain territories. Legal requirements in many countries provide that a short or trailer be included with any film sent into such country, thus allocation issues arise with respect to what portion of a film's rentals should be allocated to the costs associated with producing the shorts or trailers. If the distributor wants to keep its revenues from trailers and accessories, it should not be able to deduct costs associated with the preparation of such items as distribution expenses.

306. Transnational Cartelization--The combining of independent commercial enterprises beyond national boundaries in an effort to limit competition (see "Cartel").

307. TriStar Case--A series of court hearings relating to the application of the Paramount consent decree to the motion picture distributor TriStar. In 1980, Loews' Theatres petitioned the judge who had been supervising the implementation of the Paramount consent decrees for slightly more than three decades for relief which would allow Loew's to enter the motion picture distribution business in addition to its activities as an exhibitor. The motion was granted subject to several conditions including (1) Loew's could not could not exhibit any films it distributed or any films in which it had a financial interest and (2) as a distributor, Loews's had to abide by the same conduct restrictions imposed by the original Paramount decree. After TriStar acquired Loews's in 1986 those two entities applied to the court for interim relief (1) to allow the exhibition of TriStar films in Loews theatres during the important Christmas holiday season and (2) for removal of the trade practice injunctions prohibiting TriStar from conducting business as a distributor with any other exhibitors except Loews. This relief was also granted, but on an interim basis. In 1987 TriStar and Loews went back to the court and asked for permanent relief from the Paramount consent decree and from the 1980 order. At that point the U.S. Justice Department offered its vigorous support for the TriStar application (based on its 1984 merger guidelines for vertical mergers) and again the TriStar/Loews motion was granted (see "Conduct Restrictions", "Merger Guidelines", "Paramount Consent Decree of 1948" and "Vertical Merger").

308. Trust--A combination of business firms or corporations formed by a legal agreement, particularly a combination that reduces or threatens to reduce competition (see "Anti-Trust Law Violations", "Cartel", "Monopoly", "Oligopoly" and "Transnational Cartelization").

309. Trust Me--At some point in the conversation between representatives of film distributors and film producers, it is very likely that the distributor will say something to the effect of "Trust Me" or "There is going to have to be a certain amount of trust here." When that happens, the producer should look the distributor in the eye, smile and say, "Trust is for emergencies. So long as we have the opportunity to communicate, negotiate and express in writing, the way we think this transaction ought to occur, there is no need for trust. And even when a situation comes up that was not anticipated, there is no reason why we cannot communicate about that. Only in the rare circumstances that do not permit negotiation or consultation, should either of the parties to a film distribution agreement rely on trust."

310. Turnaround Provision--A provision in a studio development deal which provides the right to a producer or screenwriter to submit a film project to another production company or studio if the original developing production company (studio) at which the project was being developed elects not to proceed with the production of the film, e.g., "...film project will be turned back to the producer for twelve months if the studio does not begin production within six months after the 120-day development period." Such right is often contingent upon the original developing production company's development expenses to date being repaid and sometimes the original development company may retain an interest in the film's earnings. The producer needs to be certain that reasonable time limits and other conditions are imposed on the studio in relation to releasing the project to the producer for acquisition by others.

311. Twenty Percent Rule--An informal guideline allegedly used by most of the home video companies which are wholly owned or controlled by the major film studio/distributors for determining what portion of wholesale video revenue is to be remitted to the studio/distributor as part of the studio/distributor's gross. Pursuant to such rule, an arbitrary share of 20% of the total of such monies remitted to the studio/distributor. The twenty percent rule is based on an early estimate of what video profits would be and may have no relationship to the actual current numbers. Some in the industry have alleged that by uniformly applying this twenty percent rule, the studios are conspiring to deny profit participants in movies and television shows their fair share from the sale of videocassettes (see "Videocassette Revenue Reporting").

312. Tying Arrangements--The sale of one product on the condition that the purchaser also buy another product, or agree to not buy the other product from anyone else. A tying arrangement is a per se violation of the Sherman Antitrust Act, in that it allows the seller to exploit his or her control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all or might have preferred to purchase elsewhere on different terms. If a seller does not possess sufficient market power to cause an actual adverse effect on competition, a court will not find a tying arrangement and therefore the per se rule will not apply (see "Anti-Trust Law Violations" and "Vertical Integration").

313. Ultra Vires Activities--Actions of a corporation or its officers and directors that are not authorized by its charter and that may therefore lead to shareholder or third-party lawsuits and personal liability of the corporations officers and/or directors.

314. Unauthorized Cross-Collateralization--A feature film distributor's unauthorized offsetting of the profits of a movie against the same movie's profits in another market, against the profits of one movie against the profits of another movie produced by the same production company or against the profits of another movie produced by a different production company. A cross-collateralization provision may authorize one but not the other (see "Allocation", "Creative Accounting", "Cross-Collateralization", "Cross-Collateralization of Markets", "Cross-Collateralization of Slates", "De Facto Cross-Collateralization", "Discretionary Cross- Collateralization", "Overage" and "Unrecouped Expenses").

315. Unauthorized Distribution--The sale, rental or other exploitation of a film without a grant of distribution rights; an activity which the distributor may seek to prevent and in the process incur costs which are typically defined as deductible distribution expenses. Distributor association dues, fees, assessments or other levies are typically made to cover the costs of such activities conducted on behalf of its distributor members. Individual distributors may also incur such costs, but as with any distribution expense, such costs must be carefully reviewed, confirmed and adjudged reasonable to prevent over-stated expenses. The producer may want to ask the distributor if it anticipates any such costs beyond industry assessments for such activities.

316. Uncollectible Indebtedness--Debts owed to a debtor or creditor which are determined to be impossible or impractical to collect, e.g., debts owed by a sub-distributor, exhibitors or licensees to a film's distributor, which the distributor has determined to be uncollectible. Independent producers must be wary of unscrupulous distributors who may fraudulently claim that such debts cannot be collected when in fact they have been or will be in the future (see "Bad Debts").

317. Unconscionable Contract--A contract that is so unreasonably detrimental to the interests of a contracting party as to render the contract unenforceable. The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. This term refers to a bargain so one-sided as to amount to an "absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered into a one-sided bargain. But when a party of little bargaining power and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent was ever given to all the terms. In such a case the usual rule that the terms of an agreement are not to be questioned may be abandoned and a court may consider whether the terms of the contract are so unfair that enforcement should be withheld (see "Contract of Adhesion").

318. Under-Reported Rentals--The false and understated totals relating to the revenues earned by a given film as prepared and filed by the film's distributor with the film's producer. This is less likely to occur if the distribution fee is a percentage of the distributor's gross receipts, but if the distributor fee is based on some form of adjusted gross, (i.e., not calculated until after certain deductions are made from gross receipts) it would make more sense for the unscrupulous distributor (see "Creative Accounting").

319. Unethical Business Practices--Procedures and activities engaged in by commercial enterprises that are not in conformance with accepted standards (see "Anti-Trust Law Violations", "Anti-Competitive Practices", "Blind Bidding", "Closed Bidding", "Creative Accounting", "Five "O'Clock Look", "Franchise Agreements", "Predatory Practices", "Price Fixing" and "Reciprocal Preferences").

320. Unfair Competition--A tort (private or civil wrong or injury resulting from a breach of a legal duty that exits by virtue of society's expectations regarding interpersonal conduct rather than by contract or other private relationship) consisting of representations or conduct that deceives the public into believing that the business name, reputation or good will of one person is that of another; unfair, untrue or misleading advertising that is likely to lead the public into believing that certain goods are associated with another entity; imitation of a competitor's product, package or trademark in circumstances where the consumer might be misled.

321. Unfair Negotiating Tactics--Inequitable, unethical or unjust bargaining methods (see "Anti-Competitive Practices" and "Negotiation").

322. Unfavorable Portrayal--The negative depiction of someone or something in a motion picture. It would be wrong for the motion picture industry to consistently portray any particular group of persons in a negative manner in its feature films (see "Discrimination", "Hidden Agenda" and "Prejudice").

323. Unrecouped Expenses--The expenses incurred in the production or distribution of a film that have not been recouped in distributing the film. Distributors may seek to offset such losses with profits on other films or in other markets (see "Cross-Collateralization").

324. Usurious Contract--A contract that imposes interest on a debt at a rate in excess of that permitted by law (see "RICO" and "Usury").

325. Usury--An unconscionable or exorbitant rate of interest; an excessive and illegal requirement of compensation for forbearance on a debt (interest). State legislatures in each state determine the maximum allowable rates of interest that may be demanded in any financial transaction, however, usury laws generally do not apply to corporate borrowers. Independent producers whose films are being financed by a studio which charges interest on the production monies provided may want to consider whether usury laws apply to the transaction.

326. Vertical Integration--The unified ownership of several different levels of production and distribution in the same industry, e.g., a film industry in which the same owner is allowed to own or control a studio facility, a production company, a distribution entity, exhibitor chain or (technically) any two of the above which deal directly with each other, is vertically integrated. Following the issuance of the U.S. Justice Department merger guidelines and the TriStar Case, questions relating to whether film industry companies are vertically integrated at the distributor/exhibitor levels, and if so, whether such integration makes it more difficult for other companies to compete at those levels of the industry without being vertically integrated have been pivotal to the analysis regarding the anti-competitive effects of vertical mergers in that industry (see "Anti- Competitive Practices", "Anti-Trust Law Violations", "Blind Bidding", "Formula Deal", "Major Exhibition Chains", "Merger Guidelines", "Number of Screens", "Paramount Consent Decree of 1948", "Transnational Cartelization", "TriStar Case" and "Vertical Merger").

327. Vertical Merger--The combining of the ownership of two companies at different levels in a given industry, e.g., the combining of a feature film distribution company with an exhibitor (see "Merger Guidelines")

328. Vertical Price Fixing--Price Fixing engaged in by members of different levels of production, such as manufacturer and retailer (see "Anti-Trust Law Violations" and "Price Fixing").

329. Videocassette Revenue Reporting--The videocassette market has been the fastest growing revenue source for films in recent years, thus, the major studios have created wholly-owned subsidiaries or joint ventures to act as videocassette manufacturers and these entities typically only pay 20 percent of wholesale receipts as a royalty fee to the parent company. In other words, unlike other areas of motion picture revenue reporting, home video is handled on a royalty basis (more like the record industry) rather than remitting the distributor's share of the wholesale revenues on a distribution fee basis. The system then switches back to the distribution fee basis at the distributor level, since the parent distributor, in turn, charges a distribution fee (usually about 30%) leaving only a very small percentage remaining for profit participants. In addition to allowing a studio/distributor to take a fee on a related company transaction, this structure and these calculations permit the distributor to keep a disproportionate share of videocassette revenues. In situations, where the distributor is participating in the wholesale revenues of the video company, producers must address this issue in negotiations relating to the distribution agreement and seek to substitute a reasonable distribution fee for the typical 20% royalty at the wholesale level so that the distributor will include a higher percentage of the wholesale revenues in its gross. This in turn may allow the profit participants to participate in a larger net profit pool. In addition, the producer should seek to reduce the distribution fees being taken by the distributor in recognition of the fact that the distributor is also sharing in the wholesale revenues of its wholly-owned or subsidiary video company.

330. Waiver of Droit Moral--The intentional and voluntary giving up, relinquishment, or surrender of the rights known as droit moral (French for moral right). Moral rights refer to the right of an author or artist (such as a film producer or director) to object to any deformation, mutilation or other alteration of his or her work. Although the term is widely recognized in civil law countries, it is not mentioned in the U.S. Copyright Act. Nevertheless, a right analogous to moral right has been recognized in this country in several situations in which the integrity and reputation of an artistic creator was protected by the courts. The express grounds on which common law protection has been given include libel, unfair competition, copyright and the right of privacy. The right of droit moral gives the author of a work certain power to prevent changes, notwithstanding the provisions of his or her contract, e.g., a director may be able to prevent cutting and editing of his or her picture (except for editing for television and censorship. Producers should be aware that film distribution agreements often contain such a waiver and unless the producer is satisfied with the provisions of the distribution agreement with respect to the distributor's editing rights, as discussed above at "Creative Control", the producer should consider deleting any attempted waiver of droit moral rights (see "Creative Control").

331. Warranty--An assurance by one party to a contract of the existence of a fact upon which the other party may rely, intended precisely to relieve the promisee of any duty to ascertain the fact, and amounting to a promise to indemnify the promisee for any loss if the fact warranted proves untrue. Such warranties are either made overtly (i.e., express warranties), or by implication, (i.e., implied warranties). In a film distribution agreement producer warranties and representations are likely to be made regarding the quality of the picture, i.e, it will be fully edited, titled, synchronized with sound and of a quality, both artistic and technical, for general theatrical release, as well as for numerous other matters relating to content, ownership, the discharge of the producer's obligations, no infringements, no advertising matter, no impairment of rights granted, valid copyright and MPAA rating. On the other hand, film distributors seldom provide many warranties relating to their side of the bargain, if any (see "Covenant of Good Faith and Fair Dealing").

332. Warranty of Quiet Enjoyment--A warranty given by the producer (i.e., the producer warrants that the distribution has the right to the unimpaired use and enjoyment of the film property) if it does not know of any actual, or potential, adverse claims which might be made against the distribution of the picture. If the distributor wants this warranty and representation included in the distribution agreement, the producer should seek language limiting the warranty to matters known as of the date the agreement was signed.

333. Watered Stock--In corporate law, shares of stock that have been issued by the corporation for less than full lawful consideration; also stock representing ownership of overvalued assets, a condition of overcapitalized corporations, whose total worth is less than the invested capital.

334. We're Different--Often distributors will make oral representations early in discussions with producers that their distribution organization is not typical of other feature film distributors, (i.e., suggesting indirectly that they do not conduct their activities in a manner substantially characterized as described herein). The proof of such self-serving descriptions, should lie in the actual conduct of the distributor over a period of time and in a consistent pattern of behavior which avoids much of the business practices described in this monograph.

335. White-Collar Crime--A phrase connoting a variety of frauds, schemes, corruptions and commercial offenses committed by business persons, con artists and public officials; a broad range of non-violent offenses that have cheating and dishonesty as their central element (see "Fraud" and "Racketeering").

336. Withholding--Another form of over-budget penalty sometimes imposed by a studio which is financing the production of a film, in which the studio will withhold a significant amount of the producer's fee until delivery of the film's answer print. If the picture is delivered within budget the producer receives his or her complete fee, but if the film has gone over budget, the producer has to wait until first net profits to receive the balance as a deferment (see "Double Add-Back" and "Over-Budget Penalty").

337. Year End Adjustments--Changes in the accounting statements on a motion picture made at the end of a given year. The authority to make such adjustments is commonly provided for in the film distribution agreement in relation to the net profits computation. Such adjustments are ostensibly made to make corrections and/or to report items overlooked (see "Selling Subject to Review" and "Settlement Transaction").

To the extent that the film distributor practices described in this monograph are actually occurring, they are very likely to continue to occur unless and until more net profit participants, whether they be investors, producers, directors, screenwriters, actors, actresses, or others take more aggressive steps to protect their own financial interests in feature films by (1) more effectively negotiating the numerous provisions in the film distribution agreements which impact on their future potential profit participation, (2) specifically negotiating broad auditing rights, (3) actively monitoring the distributor's implementation of the terms of the negotiated distribution agreement, (4) making sure they have the funds available to vigorously pursue such audit rights by hiring one of only a handful of experienced feature film profit participation audit firms in the Los Angeles area, (4) by promptly making written demands on the distributor to correct any and all inequities discovered through such audits, (5) by setting aside the funds in advance to cover the costs of litigation and being willing to go to court on the matter and (6) refusing to settle out of court for a round number which is substantially less than what is actually owed. The more often that scenario occurs, the more likely it is that distributors will begin to be more fair at the beginning of the process, (i.e., in negotiating actual distribution agreements). Profit participants must collectively demonstrate to film distributors that, after all, there really are "rules" and that they must abide by them.

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John W. Cones is a securities/entertainment attorney based in Los Angeles, California. He is licensed to practice law in the states of California and Texas. He currently maintains a private solo practice advising independent feature film, video and television producer clients regarding federal and state securities law compliance obligations in passive investor corporate, limited partnership and investment contract offerings and related entertainment law matters. He prepares the "camera ready" offering disclosure documents for such offerings, serves as a liaison to managing and selling broker/dealers and prepares or aids his clients in negotiating entertainment contracts, including feature film distribution agreements.

Mr. Cones is a 1967 graduate of the University of Texas at Austin with a Bachelor of Science degree in Communications and a 1974 graduate of the UT Austin School of Law with a Doctor of Jurisprudence degree.

Prior to 1975 Mr. Cones was a Radio-Television News Reporter at KTBC (Channel 7) television, Austin where he worked at varying times as a television news anchor, general & film assignments, sports and weather. Mr. Cones worked at KTBC full-time while attending law school at UT Austin. He had also performed on-the-air duties previously at KRIS-TV Corpus Christi & KITE radio in San Antonio.

In 1975 he served as legislative counsel to the Texas House of Representatives. In that position he drafted, edited and reviewed state legislation, counseled legislator sponsors with respect to constitutional requirements and supervised union proof-readers.

During the years 1976 through 1981, Mr. Cones worked as a lobbyist association executive and in- house counsel for professional associations headquartered in Austin and Chicago. In those positions he prepared and delivered congressional testimony, drafted legislation, wrote and edited books, magazines, newsletters, speeches and press releases; was involved in long term planning, board meetings, conventions, seminars, staff supervision and the associations' membership activities.

Mr. Cones engaged in the private practice of law in Houston and Dallas from 1981 through 1986. In that practice he supervised state securities compliance aspects of Regulation D (private placement) limited partnership and corporate offerings (including movie production/distribution, oil and gas, real estate, equipment leasing, night clubs, restaurants, cattle breeding/feeding, thorough-bred breeding and medical technology. In his securities law practice, Mr. Cones has participated in the preparation of disclosure documents and the supervision of federal/state compliance for 130+ public or private limited partnership, investment contract or corporate stock offerings. In addition, he has worked with clients who sought active investor financing of their entertainment projects utilizing investor financing agreements and joint venture entities. Mr. Cones moved his law practice to California in 1987 specifically to work with independent film, television, video and theatrical producers in the manner described above.

Mr. Cones is the author of state and national association magazine articles and his law journal article "Feature Film Limited Partnerships" was published in the January 1992 edition of the Loyola of Los Angeles Entertainment Law Journal. He is also the author of a book entitled Film Finance and Distribution--A Dictionary of Terms, a dictionary with more than 3,600 entries relating to film finance and distribution in which such terms are defined, discussed and explained. The terms in this monograph were extracted from this larger work. He also wrote the Entertainment Law & Finance article "Maximizing Producers' Negative Pick- Up Profits" (June 1992).

He has lectured extensively (in Los Angeles, Las Vegas, Dallas, Houston and San Francisco) on "Investor Financing of Entertainment Projects" for the American Film Institute, the University of Southern California Cinema-Television Alumni Association, UCLA Extension, Loyola Marymount Continuing Education Division, Cinetex '90 and other film industry organizations. Mr. Cones has also presented a one-day UCLA Extension sponsored seminar on "The Film Distribution Deal" and appeared as a guest speaker on film finance and distribution in the UCLA extension evening courses "Financing Feature Film Production" and "Contractual Aspects of Producing, Financing and Distributing Film".

Copyright 1992 John W. Cones All rights Reserved