The issue in this case that needs to be addressed is whether or not High StakesEntertainment breached its 2020 contract with Seven Rays Theater. In order to come toa conclusion on this we mu
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Executive Summary(NEEDS TO BE COMPLETED)I. Introduction(NEEDS TO BE COMPLETED)II. BLAW?The issue in this case that needs to be addressed is whether or not High StakesEntertainment breached its 2020 contract with Seven Rays Theater. In order to come toa conclusion on this we must analyze both sides of the case to compare and contrastthe arguments and defenses that each side has for Breach of contract. First, to fullyunderstand the case we must understand what exactly warrants a breach of contractlawsuit. There are several different ways that a breach may occur including material,actual, minor, and anticipatory breaches. A breach of contract as defined by theUniversity of New Mexico is as followsa failure,without legal excuse, to perform any
promise that forms all or part of the contract. This includes failure to perform in amanner that meets the standards of the industry or the requirements of any expresswarranty or implied warranty, including the implied warranty of merchantability.? In thiscase, we believe that the best argument that Seven Rays has is for a material breach ofcontract. The reason that this would be a material breach is that within the agreed-uponterms of the contract, it is explicitly stated that, Seven Rays shall have exclusivescreening rights during the contract period. High Stakes Entertainment acknowledgesthat an integral inducement in consideration of the contract is Seven Rays interest inbeing the sole source, without competition from other theaters in the market, during thecontract period.? Not only did High Stakes Entertainment agree to this upon signing thecontract but they also specifically acknowledged the importance of this part of thecontract to Seven Rays Theater. There was valid consideration of this by both parties,therefore, Seven Ray’s best bet for a successful lawsuit would be to argue that whenHigh Stakes Entertainment allowed for their movies to be shown by a different theater inToronto they commit a material breach of the part of the contract, that gave Seven Raysexclusiveshowing rights for all five films. A courtwill have to review whether or not theexclusivity section of the contract applies to movie theaters that may fall outside thecompetitive market of Seven Rays Theater. Is it fair to say that this Toronto theaterposes no competition to Seven Rays? Seven Rays can potentially argue this point bysaying that even though this Toronto theater may not be in direct competition with them,allowing another theater to show these films is negatively affecting their businessbecause they can no longer say that they are the only Theater showing these films. Thefact of being the only theater to show certain films has the potential to provide an
increase in revenue for Seven Rays. Another notable point that can be used in a Breachof contract case against High Stakes Entertainment is the fact that Seven Rays hasalready paid in full the four-million dollars that they owed as part of the agreement tocontract.III. Financial AnalysesA. Budget of Expected Minimum RevenuesDatesBudget of Expected Minimum RevenuesJul-20Signing of contract$ 2,000,000.009/1/2020Commencement of contract$ 2,000,000.003/1/2021Minimum revenue from Hero’s Revenge Exhibition Fees$ 8,835,000.003/1/2021Minimum revenue from HRII-HRV Exhibition Fees$ 14,136,000.00Total Expected Minimum Revenue from Contract$ 26,971,000.00Number of theaters = 465, Exhibition fee for each film showing in each location = $475.00
Minimum number of showings for Heros Revenge per theater = 40Minimum number of showings forEACHother film pertheater = 16Minimum number of showings for Heros Revenge = 40*465 = 18,600Minimum number of showings for HRII-HRV = (16*4)*465 = 29,760Minimum Revenue from Heros Revenge exhibition fees = (40*465)*$475 = 18,600*$475 =8,835,000.00Minimum Revenue from HRII-HRV exhibition fees = ((16*4)*465)*$475 = 29,760*$475 =$14,136,000.00B. Revenue Recognition2B: After the signing of the contract and the distribution of the films to Seven Rays theater, therevenues that High Stakes Entertainment should recognize in 2020 would be the full expectedminimum revenue of $26,971,000. This is because under the Revenue Recognition principlewhich is a part of the Generally accepted accounting principles (Issued by FASB and GASB),companies must recognize revenue in the accounting period in which it is earned. Thismeans regardless of if there is a payment or not, revenue must still be recognized. In this case,during the year 2020, High Stakes entertainment earns revenues of $2,000,000 in July when thecontract is signed. HSE earns revenues of an additional $2,000,000 when the contract periodbegins on September 1. Finally, the revenues earned by the exhibition fees should also berecognized as the distribution of films to the movie theaters constitutes as earnings. The contractstates a minimum number of showings and exhibition fees for each showing at each location, so
with this information, we can determine revenues earned in 2020 regardless of the time cashpayments are made. HSE earns $22,971,000 of revenues upon the distribution of films due to theminimum required showings from the contract. This adds up to a total of $26,971,000 revenuethat should be recognized in 2020.C. Statement of Cash FlowsDatesSchedule of Cash Flows from Seven Rays for Year Ending 12/31/2020Jul-20Signing of contract$ 2,000,000.009/1/2020Commencement of Contract$ 2,000,000.00Net Cash provided by Seven Rays$ 4,000,000.00Cash at beginning of period0Cash at end of period$ 4,000,000.00D. Cash Flows vs. Revenues RecognizedCash flows received from Seven Rays from the contract for the year ending 12/31/2020 differfrom revenues recognized in 2020 mainly because the statement of cash flows does not includeexhibition fees. In fact, it does not include the checks of payment of exhibition fees that Seven
Rays sent to High Stakes Entertainment on January 20, 2021 because this payment was not madewithin the 2020 year. Cash flows only measure the amount of actual cash received and representthe money that is now on hand and can be spent. Revenue, on the other hand, measures theamount that has been earned through providing goods and/or services whether or not you havereceived a payment in cash. In this case, because High Stakes Entertainment had provided anddistributed the five films to Seven Rays within the 2020 year, it is recognized as revenue.Specifically, the amount of $26,971,000 is recognized because it includes the minimum amountof earnings that shall be received under the contracts required agreements. The net cash flow of$4,000,000 from the contract for the year ending 12/31/2020 only includes the $2,000,000 cashthat had been received in July 2020 upon the signing of the contract and the additional$2,000,000 cash that was received on September 1st,2020 for the commencement of the contract.For these reasons, the two differ by $22,971,000.E. Additional ConsiderationsAnother key fact to consider when analyzing this case is the payment made by Seven Rays onJanuary 20, 2021. This payment, along with the audited statement that details the number ofshowings as of December 31, 2020, gives important information regarding the number ofscreenings. Specifically, it tells us how well Seven Rays is holding up their part of the contract.A closer analysis of the number of showings and the limitation on screenings tells us that SevenRays is alarmingly behind schedule. At the end of December 31, 2020, the contract period isnearly 67% complete. Therefore it is reasonable to assume that Seven Rays should have shownaround 67% of the minimum required screenings as per the contract. Instead, the auditedstatement reveals that Seven Rays has only shown Heros Revenge 9,945 times out of theminimum 18,600 showings (53%). And an alarmingly low 3,248 showings out of the 29,760
required screenings of HR II-V (11%). This information is critical because it shows that SevenRays is not on track to complying with theLimitationon Screeningsportion of the contract asthey are far from the minimum required screenings especially when considering the contractperiod is more than halfway complete.IV. Conclusions and Recommendations(NEEDS TO BE COMPLETED)
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