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Legal In Depth Analysis

There must be a clarification between the exclusive rights to Kombat Rex I thru V, within PACE theaters. Are MV-Link’s actions not applicable since it was advertised outside the U.S. market or have they committed a breach of contract by marketing their movie to a competitor with PACE losing the exclusivity they agreed upon?

Breach of Contract: In order to see if there is a breach of contract, one party had to have reasonable expectations to be fulfilled, and the other must have not fulfilled those expectations. For PACE, they expected that MV-Link would “grant exclusive screening rights” becoming the “sole source.” For MV-Link, the expectations were that PACE would play Kombat Rex at a maximum of 42 times and the accompanying sequels with a minimum of 18 times for each of the 4 movies.

MV-Link’s Side: MV-Link believes there were was no breach of contract by marketing the movie outside of PACE’s market and competition. Based on the contract, there was no indication geographically of which markets were involved.

PACE’s Side: PACE is arguing that since MV-Link advertised the movie well-within the agreed 6-month period within the competitive market that they have breached the contract by not maintaining the exclusivity of the movie with solely PACE.

Agreement Evaluation and the Purpose of the $5,000,000 Total: Upon the agreement, PACE paid a total of $5,000,000, a payable of $2,500,000 upon contract signature, and another $2,500,000 on September 1, 2006. Due to lack of clarity of what the $5,000,000 is for, PACE may have a stronger or weaker argument about exclusive rights depending on what this total was for. The strength of PACE’s geographical limitation argument will vary depending on what the $5,000,000 was intended for. The 3 expectations are if the $5,000,000 was for 1) The exclusive right to the films, 2) The signing of the contract, 3) Additional amounts for showing films.

The Exclusive Right to the Films: If the purpose of the $5,000,000 was for exclusive rights to the films, PACE’s no geographical limitation argument would be considered exceptionally strong. Because it was PACE’s full expectation that they would be the “sole source,” geographical limitation would not matter, even if the competing theaters were out of their market. It would appear that MV-Link breached the contract in this case.

The Signing of the Contract: If the purpose of the $5,000,000 was for the contract signing, the PACE’s no geographical limitation argument would be fairly strong, but not as strong as the first expectation of exclusive rights to the films. The contract states that PACE’s would be “the sole source, without competition from other theaters in the market, during the contract period.” This would allow MV-Link to argue that they are marketing outside of PACE’s market by promoting in Canada because all of their theaters are located in the U.S.

Additional Amounts for Showing Films: If the purpose of the $5,000,000 was for additional amounts for showing films, then PACE’s no geographical limitation argument would be weakest of the 3, because the $5,000,000 would then be focused solely on being able to just play the films with less implications of exclusivity.

Financial Accounting in Depth Analysis

Generally Accepted Accounting Principles (GAAP): According to the Generally Accepted Accounting Principles (GAAP), Revenues are recognized and earned when 1) products are exchanged for cash or claims to cash, 2) related assets received are convertible to cash, 3) products are delivered/ services performed. Recognition is the process of recording an item into a financial statement. Realization is the process of converting non-cash resources into cash.

Revenue vs. Cash Flow: Revenue is the amount earned by providing goods and service to customers. Cash flow is the amount of cash received, they increase your bank balance for spending. Evaluating revenue would be more accurate by giving a detailed list of the amount of showings and the amount of exhibition fees they should be paying.

GAAP’s Application: GAAP applies to PACE’s exhibition fees by processing financial statements needed to apply the revenue amongst PACE and MV-Link. The revenue ($5,462,500) that was realized on December 31 was accurate and it was the correct amount of revenue for their showings. Unfortunately, under in depth analysis, it would appear that PACE is falling behind in their showings for KR II-V. Given a full breakdown of expected total exhibition fees, this is an estimate of what PACE would pay by the end of the contract:

Given that the audit report was given during December, to be on track with the contract, PACE would have to have exhibition fees ⅔’s of the $27,075,000, which would be around 18,050,000. This means for the audit statement given, PACE is falling behind around $12,407,500. Isolating the revenues for the sequels, it is very clear that PACE is not doing well in showing KR II-V. The following chart below details the expected revenues for KR II-V only.

When recognizing revenues, it is important to detail and recognize when revenues should be taken account for. Since the contract is 6 months long, and the audited statement was approximately ⅔’s of their contract time on December 31, 2006, the number of times shown has been fractioned off to represent what PACE should be paying at this point. PACE is expected to play each of the 4 equals 18 times, which means they should have played each around 12 times by this point. PACE is far off and there is a large gap and the next chart details approximately how far behind PACE is as of December 31, 2006.

According to the audited statement as of 12/31/2006, PACE is far behind what they should be making in regards to the agreed minimum of 18 showings per movie. Another way of looking at the calculation could be by taking the revenue in the audited statement ($1,187,500), dividing it by the exhibition fee ($500), dividing it by the amount of movies (4), and dividing that number by the estimated number of theatres (475) The calculation would then look like this:

According to the calculations, PACE has played KR II-V approximately 1.25 times per movie theater. Having only 2 months left in their contract, PACE has an overwhelming gap that they must fill before February. It is clear that PACE is not interested in playing the sequels according to the contract. If they do not pay for the amount due for exhibition fees by the end of February, PACE could be found with a breach of contract on their end for failing to play each movie at a minimum of 18 times.

Conclusion and Recommendations

This report assessed the legal standards of PACE’s demands for reparations before filing a lawsuit against MV-Link on the claims of a Breach of Contract. Based on the agreement between both parties the contract states that PACE agreed to display MV-Link’s Kombat Rex I-V a specific amount of times with the exception of being the exclusive movie holder within the market. PACE’s grounds towards MV-Link is the fact they marketed the movie in Canada, however Canada is outside PACE’s competitive market in the U.S. In addition to the this, our data suggests that the amount of expected revenue required to be generated for the sequels of Kombat Rex, being around $11,400,000 does not equate to the amount that PACE is currently on track of which is a mere $1,187,500, which is equal to about 1 or 2 showings per movie opposed to the required 18. Our team strongly suggests MV-Link to pursue a revision and extension of the contract so Kombat Rex I-V is displayed for an additional 2 months with an absolute minimum of 9 showings for Kombat Rex II-V.