Universal Responds To Lawsuit About Its Hollywood Accounting Tricks By Claiming That It Actually Overpaid

from the hollywood-accounting-is-just-that-special dept

A few months back, we wrote about yet another example of Hollywood accounting appearing in the courts, when StudioCanal sued Universal Studios, saying that Universal (which, for many years, was owned by the same parent company) had cheated them out of millions that it owed them for certain movies, according to an audit. These kinds of audits are pretty standard practice in Hollywood. You hear about them all the time. The studios do everything possible not to pay, and eventually the party who’s pretty damn sure they’re being cheated (usually because they are) conducts an audit which shows how much they’re actually owed.

In this case, Universal has hit back with its own “re-examination” of the accounting that doesn’t only say that it doesn’t owe StudioCanal any money but that that it actually overpaid:

“Indeed, as a result of the audit reports, Universal has re-examined its accounting generally and has specifically re-examined almost all of the alleged improper practices identified by StudioCanal’s auditors. In so doing, Universal has determined that not only has its accounting been consistent with both the [Joint Venture] Agreement and the [Co-Financing and Distribution Agreement], but Universal actually significantly overpaid StudioCanal in connection with four movies for which third-party expenses were substantially undercharged. Thus, the net result of the audits and Universal’s re-examination will likely be an amount owing from StudioCanal to Universal.”

I don’t deny that Universal Studios probably has some of the most…. er… creative accountants in the business, so I’m sure they can put together something that supports this claim, but upfront it seems extremely dubious. If you look over the history of Hollywood accounting, this is the thing that the big studios like Universal are the experts at: doing anything possible not to pay what they owe. I imagine this will get more interesting before it’s over. StudioCanal’s lawyers are already flabbergasted, as they told The Hollywood Reporter:

“Honestly, the information they provided in supposed error in their favor is so messed up. All it tells us is that we can have no confidence in their accounting system, and we will have to dig much deeper.”

In fact, he suggests that Universal has now opened a new avenue for investigating the company’s accounting tricks:

He adds that what is being claimed is “horrifying” and that it illustrates the need to do more auditing. “We only audited six films,” he said. “We didn’t audit TV. There’s a lot more digging to do.”

Dig away…

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Companies: studiocanal, universal studios

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Comments on “Universal Responds To Lawsuit About Its Hollywood Accounting Tricks By Claiming That It Actually Overpaid”

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77 Comments
Ninja (profile) says:

Dig away…

——————-WARNING: POSSIBLE SPOILER ON WRECK-IT-RAPLH——————–

It reminds me of Wreck-it-Ralph, the scene where the military woman is looking for some sort of bug virus in Sugar Rush land and finds it underground. A colossal amount of damnation hidden underneath a sugar coated surface.

——————————————–END WARNING———————————————

That’s pretty much what they’ll find if they dig 😉

Anonymous Coward says:

So, Mike. Can you point to any evidence that proves positively that “Hollywood” has cheated anyone? Surely there’s been litigation that you can point to where the court found fraud. If it’s so rampant and so terrible, there must be simple evidence you can provide. Linking to TD articles is not evidence. Let’s see a court opinion or something like that. Thanks!

Anonymous Coward says:

Re: Re:

There’s also obvious cases like the original star wars films still claming to never have turned a profit, and hollywood sure isn’t doing all this stuff with star wars movies and licenses just for our benefit.

Any case where hollywood accounting has been put up before the courts it’s lost.

There’s evidence, we aren’t your personal secretaries, go out and look it up yourself.

Anonymous Coward says:

Re: Re:

“Hollywood” has cheated

As that famous left winger Bill Clinton that depends on what you mean by “Hollywood”, has, and cheated.

While we are at it realize that Los Angeles is not only the home of “Hollywood” but also the world wide porn industry which is not called “Hollywood” in the vernacular but porn.

Also, Los Angeles is home of the propaganda wing of left wing totalitarian conspiracy dedicated to world wide slavery of the masses for benefit of the elite.

Putting all that together any normal person would not ask “Does “Hollywood Cheat?” but “Why to moral people not shut the hell hell of iniquity down?”

Pixelation says:

Re: Re:

From Wikipedia…
“Winston Groom’s price for the screenplay rights to his novel Forrest Gump included a share of the profits; however, due to Hollywood accounting, the film’s commercial success was converted into a net loss, and Groom received nothing.[7] That being so, he has refused to sell the screenplay rights to the novel’s sequel, stating that he “cannot in good conscience allow money to be wasted on a failure”.

Stan Lee, co-creator of the character Spider-Man, filed and won a lawsuit after the producers of the movie Spider-Man (2002) did not give him a portion of the gross revenue.[8]

The estate of Jim Garrison sued Warner Bros. for their share of the profits from the movie JFK, which was based on Garrison’s book On the Trail of the Assassins.[9]

Art Buchwald received a settlement after his lawsuit Buchwald v. Paramount over Paramount’s use of Hollywood accounting. The court found Paramount’s actions “unconscionable”, noting that it was impossible to believe that a movie (1988’s Eddie Murphy comedy Coming to America) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.

The film My Big Fat Greek Wedding was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast (with the exception of Nia Vardalos who had a separate deal) sued the studio for their part of the profits. The original producers of the film have sued Gold Circle Films due to Hollywood accounting practices because the studio has claimed the film, which cost less than $6 million dollars to make and made over $350 million at the box office, lost $20 million.[10]

Hollywood accounting is not limited to movies. An example is the Warner Bros. television series Babylon 5 created by J. Michael Straczynski. Straczynski, who wrote 90% of the episodes in addition to producing the show, would receive a generous cut of profits if not for Hollywood accounting.[citation needed] The series, which was profitable in each of its five seasons from 1993?1998, has garnered more than US$1 billion for Warner Bros., most recently US$500 million in DVD sales alone. But in the last profit statement given to Straczynski, Warner Bros. claimed the property was $80 million in debt. “Basically,” says Straczynski, “by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5’s profits.”[11]

Peter Jackson, director of The Lord of the Rings, and his studio Wingnut Films, brought a lawsuit against New Line Cinema after “an audit… on part of the income of The Fellowship of the Ring.” Jackson stated this is regarding “certain accounting practices,” which may be a reference to Hollywood accounting. In response, New Line stated that their rights to a film of The Hobbit were time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to direct The Hobbit, as had been anticipated.[12] Fifteen actors are suing New Line Cinema, claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likeness.[13] Similarly, the Tolkien estate sued New Line, claiming that their contract entitled them to 7.5% of the gross receipts of the $6 billion hit.[14] Overall according to New Lines accounts the trilogy made “horrendous losses” and no profit at all.[15]

According to Lucasfilm, Return of the Jedi despite having earned $475 million at the box-office against a budget of $32.5 million, “has never gone into profit”.[16]

A WB receipt was leaked online, showing that the hugely successful movie Harry Potter and the Order of the Phoenix ended up with a $167 million loss on paper.[17]

Michael Moore is suing Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11. [18]

The famous and critically acclaimed educational TV show Bill Nye the Science Guy was ended because the producers hadn’t “shown a profit” in twenty years due to this practice.[19]

Actress Lynda Carter was also upset with some of the marketing of her image that involved Hollywood accounting. Warner Bros. worked out a deal with the toy company Mego to create a Wonder Woman doll while the series was still on the air. In 1987, on The Late Show with Joan Rivers,[20] Carter commented: “I think that you’re probably familiar with a problem in Hollywood, and that is that they market you, and they use you. They did a mask of my face and put it on the doll, and they put my name on for the first run of it. And then they took my name off and said they didn’t have to pay me anymore. So it’s the kind of thing that you can be used so much in this industry. I make nothing. I don’t even make anything from the reruns. Don’t ever settle for net profits. It’s called creative accounting.””

If that isn’t evidence then pull your head out.

Mike Masnick (profile) says:

Re: Re: Re:

For what it’s worth, the original commenter was being particularly disingenuous in demanding court rulings. Because he’s either totally uninformed or he pretends to not know that most of these settle out of court before going to court.

However, as in some of the examples above, when the courts do look at these, they tend to find that the studios cheated people out of money.

A few more examples:

http://www.lexology.com/library/detail.aspx?g=30ba0629-019e-43f0-88b7-c89187c42607
http://www.rkmc.com/publications/news/court-affirms-celador-320-million-verdict-against-disney-in-who-wants-to-be-a-millionaire-case

Also, Kevin Smith has recently discussed on his podcast about how the Weinsteins have agreed to pay up for all the money they failed to pay on Clerks II.

Anyone who thinks this isn’t standard operating procedure in Hollywood is either clueless or… well, I’ll let people fill in the blank.

Anonymous Coward says:

Re: Re: Re: Re:

For what it’s worth, the original commenter was being particularly disingenuous in demanding court rulings. Because he’s either totally uninformed or he pretends to not know that most of these settle out of court before going to court.

How is it “particularly disingenuous” if I’m uniformed? That makes no sense. I don’t follow these “Hollywood accounting” stories, so it’s accurate to say I’m uniformed. But it’s completely inaccurate and disingenuous on your part to say that someone who is uninformed and asks for information must himself be disingenuous. It’s incredibly ingenuous for someone who has a lack of information to seek information out. So I don’t really appreciate or understand your attack of me here.

Anyone who thinks this isn’t standard operating procedure in Hollywood is either clueless or… well, I’ll let people fill in the blank.

Thanks for the links, I will check them out. You don’t have to be such a nasty cunt about this though. What is your problem? You claim it’s “standard operating procedure.” I find it highly likely that this, like pretty much everything you say about “Hollywood,” is probably heavily one-sided and missing much balance and perspective. Again, thanks for the links. There is no reason to challenge my credibility because I dared to ask for more information. Way to set the tone around here, Mike.

Anonymous Coward says:

Re: Re: Re:2 Re:

Your original comment was demanding and rude, insinuating that there was no proof to back up his assertions despite not making any effort to look up the term yourself.

This is also not the first time you’ve seen an article about hollywood accounting AJ.

It is standard operating procedure, otherwise you wouldn’t see such flagrant violations occuring the same way so often.

Anonymous Coward says:

Re: Re: Re:3 Re:

This is also not the first time you’ve seen an article about hollywood accounting AJ.

Especially since AJ has been here for years, reading and studying Techdirt, to know, intimately, how wrong Techdirt always is.

“Hollywood Accounting? What’s that? Jesus, I’m a lawyer not an accountant!” – AJ

Anonymous Coward says:

Re: Re: Re:5 Re:

And here you were wrong:

So, Mike. Can you point to any evidence that proves positively that “Hollywood” has cheated anyone? Surely there’s been litigation that you can point to where the court found fraud. If it’s so rampant and so terrible, there must be simple evidence you can provide. Linking to TD articles is not evidence. Let’s see a court opinion or something like that. Thanks!

It’s sad, really.

Anonymous Coward says:

Re: Re: Re:6 Re:

The hostility from Mike is that I call his bullshit all the time and he can’t stand it. He can’t ever beat me on the merits, so all he can do is make excuses and attempt to discredit me personally. It’s incredibly sad that the man is so unsure of himself that he can’t defend what he writes. And dishonest. He can prove me wrong by debating me. Any topic, any time, any place. I’ll be there. He won’t do it because he’s a total chicken and he knows that I’d make him look bad.

Rikuo (profile) says:

Re: Re: Re:7 Re:

Okay – Question (Which I fully expect you not to answer)

According to you, the only people here are Mike and his supporters. Okay – so why then do you constantly trot out the line about Mike’s bullshit and him being a chicken? Given that it’s only Mike’s supporters here (according to you) we don’t believe your accusations. So you’re literally wasting your breath. It would be like if I stood outside the Westboro Baptist Church and constantly called Phelps out on his bullshit for not debating his anti-gay rhetoric with me. I know it’s bullshit, he doesn’t and will never believe it is, so there’s no point to me saying to him it’s bullshit.

Same situation. So why constantly trot out that line, when you and I both know no-one believes it?

Anonymous Coward says:

Re: Re: Re:7 Re:

He also answered your question but you ignored it and continued to attack him. You don’t do any debating you only name call. It is incredibly sad that you have to resort to name calling and eventually your drivel just ends up shouting “debate me” without any positive contribution. If you did actually get into a debate your opinion would only be name calling and ignoring the facts as your past history shows. Why would anyone want to debate you?

JMT says:

Re: Re: Re:7 Re:

How about instead of making the same lame points over and over and over again, why don’t you just discuss the actual topic of the article? I know you’re incapable of agreeing with anything on TD, so why don’t you lay out your case for why this article is wrong. You can do that, can’t you?

John Fenderson (profile) says:

Re: Re: Re:5 Re:

any pointing out of the errors is met with hostility and/or silence from the principals.

Absolutely untrue. What is true is that hostility is met with hostility and/or silence. When errors are pointed out without name-calling or attacks, they are considered and responded to the vast majority of the time, in my observation.

As it should be.

Anonymous Coward says:

Re: Re: Re:3 Re:

I have never delved into the details. The claims make little sense to me on their face. If the practice is so well known, then how is it that the lawyers that write these contracts don’t include language that prevents these practices? Is this actually fraud happening, or is it that people are getting what they in fact bargained for? I don’t have these answers because I’ve never really looked into it. My interest is primarily in legal doctrines and theories, not mundane contract disputes. Though it is something that I would like to know more about and I do plan on looking into it at some point.

Josh in CharlotteNC (profile) says:

Re: Re: Re:4 Re:

then how is it that the lawyers that write these contracts don’t include language that prevents these practices?

Simple – the studios won’t make the deal if they can’t get the language they want into the contract. There’s probably plenty of investors out there that want “to make a movie” bad enough to be sloppy or gullible, not hire a competent lawyer, or have been convinced (possibly by their own lawyer) that its “standard boilerplate contract language” and nothing bad will happen. It’s no different that new artists that don’t know any better being convinced into signing completely one-sided record label contracts.

The investors smart or careful enough to see what a farce it is don’t get into the deals, since they realize they easily would have a higher ROI by fronting cash to some math prodigy to beat the house in Vegas, betting on the Astros (are they still a MLB team?) to win the World Series, or simple burning their cash for warmth in the winter.

Maybe you should take a step outside your legal theories to understand how the real world works.

Anonymous Coward says:

Re: Re: Re:2 Re:

“How is it “particularly disingenuous” if I’m uniformed?”

“I find it highly likely that this, like pretty much everything you say about “Hollywood,” is probably heavily one-sided and missing much balance and perspective.”

Uninformed enough to act indignant, but not uninformed enough to have an opinion.

Where I come from, we have a name for people who form strong opinions on things they don’t understand: stupid.

Either that, or politician. But I’m going to be nice and assume that you are stupid.

Rikuo (profile) says:

Re: Re: Re:2 Re:

” don’t follow these “Hollywood accounting” stories, so it’s accurate to say I’m uniformed.”

Really? You don’t read the Hollywood Accounting articles here?
Check this one out, from March 4th
http://www.techdirt.com/articles/20130301/02573122169/hollywood-accounting-strikes-again-universal-sued-screwing-over-its-own-sister-company.shtml

I went through the comments. There’s a particular, shall we say critic of Techdirt in there, who’s writing style matches up with yours.
It has to be you AJ. Of the three regular trolls here, you’re the most literate. Bob and OOTB can barely form a working English sentence and that’s when they’re putting forth some actual effort.

Anonymous Coward says:

Re: Re: Re:2 Re:

How is it “particularly disingenuous” if I’m uniformed? That makes no sense. I don’t follow these “Hollywood accounting” stories, so it’s accurate to say I’m uniformed. But it’s completely inaccurate and disingenuous on your part to say that someone who is uninformed and asks for information must himself be disingenuous. It’s incredibly ingenuous for someone who has a lack of information to seek information out. So I don’t really appreciate or understand your attack of me here.

maybe because all you need to do was type hollywood accounting in google to get the article first quoted to you.

If it was that easy to get informed maybe you should have done that simple search BEFORE you attacked mike

google wilful blindness before you respond.

Anonymous Coward says:

Re: Re: Re:4 Re:

did you google wilful blindess like i told you

based on your current ATTACK it appears you did not

You just admitted your were ill informed, i showed you how you could get informed about the issue with a 3 second search.

If your never looking for the details yourself who’s fault is it that he can’t find the details.

Did you compare the profitibility of the movie companies (universal) against the total losses those movies supposely made based on their current accounting.

The ultimate hollywood accounting “trick” is to give the distribution contract to an owned subsiduary even though their prices are no way close to market competitive.

If you pay your distributor $100 for $10 worth of work and you own that distributor $90 of expense shows up as profits for your company.

That how these movies companes turn such big profits when every movie they make keeps “losing” money.

Jay (profile) says:

Re: Re: Re:4 Enough is enough

“What percentage of “Hollywood” contracts involve this practice? “

Enought that this has become standard business practice.

“Is it fraudulent, or are people getting what they bargained for?”

They can’t bargain for better in an industry where the advantages all favor corporations over people.

” All I’m hearing is FUD, not details.”

Because that’s all YOU want to hear, AJ.

Holy crap, you’ve been on this site for close to four years. You argue about how legal something is while forgetting the constitutionality of it. You say that morality doesn’t matter so long as it helps your argument and you’ve gotten worse since you’ve resorted to mere taunts, ad homs, and non sequitors that don’t help people see the merits of your arguments.

Copyright is in the best interest of corporations over the people. This is a well known fact since 1978 when innovation was slowed to a crawl for the Big Record label studios of the time who have only gotten smaller while their profits got larger.

You might not think that this is mercantilism, where a small cabal of groups control markets, but it is.

You haven’t presented any evidence that your argument holds merit. So why don’t YOU do so now? Show us something other than FUD. Show an argument that isn’t based on bad rulings and bad precedents. Show us why copyright has helped out the artists and the public who is the focus of more innovation and learning.

Anonymous Coward says:

Re: Re: Re:3 Re:

So no explanation about how it’s disingenuous to ask a question when one wants to know the answer. Typical. Great job setting the tone around here, Mike. Dissenting views and reasonable inquisitions are being stifled to the max. Just the way you want it. No zealot wants to be challenged, least of all you. It’s a shame you aren’t more down to earth, open, and awesome. This place could be something special if only you weren’t such an overly-sensitive and defensive asshole. Your good ideas, the few that exist, get drowned out by the rest of the noise. Oh well, you’ve obviously resigned yourself to pandering to the dipshits of this world. Good for you if that’s all you want to be in this life.

Anonymous Coward says:

Re: Re: Re:4 Re:

you have been presented with 5 examples of this Hollywood accounting how about you find 5 examples that pay back their profit participants properly and fairly.

Hell that only a request to meet what you have already given half way.

IF you were to simple present 5 examples of a movie actually turning a profit and actually paid back profit participants that would mean that the industry as a whole has a proven 50% failure rate.

It should be that hard to produce an EQUAL number of successes if these examples already presented are exception rather then the rule.

JP Jones (profile) says:

Re: Re: Re:2 Re:

How is it “particularly disingenuous” if I’m uniformed? That makes no sense. I don’t follow these “Hollywood accounting” stories, so it’s accurate to say I’m uniformed. But it’s completely inaccurate and disingenuous on your part to say that someone who is uninformed and asks for information must himself be disingenuous. It’s incredibly ingenuous for someone who has a lack of information to seek information out. So I don’t really appreciate or understand your attack of me here.

First of all, “uniformed” != “uninformed”. They’re close, but I don’t think Mike was criticizing your work attire. Your attempt to sound smart in this paragraph fails pretty epically when you use the wrong word twice in a row.

Second, you called him out to prove something so well-known it has it’s own Wikipedia article. You don’t get to call someone else out for being wrong when you haven’t done one iota of research yourself.

Here’s the thing; if you want people to take your opinions seriously, the first step is to have a factual basis for your opinion. You don’t get to demand people prove stuff then get indignant when they call you out, and we’re not stupid enough to believe it was just an “innocent question.” You asked because you wanted to prove Mike wrong, then played the victim once you got called out for it.

So go get uniformed…er, informed, about the topics at hand before you start spewing baseless opinions. Thanks.

anonymouse says:

Re: Re:

Why ask others to do research for you, go and damn do it yourself. One example though is the fact that star wars the first movie after making billions over the many years since it was created is supposedly still not making a profit, if you cannot understand that this is impossible and only a result of fraudulent accounting then nothing will convince you.

Anonymous Coward says:

Re: Re: Re:

IP extremists are lazy and are used to having everyone else doing all the work while they collect all the money through their gatekeeper position. That’s how it works you know. To task them to do work or to think or to possess any intellect is like asking a rock to do math.

Josh in CharlotteNC (profile) says:

Re: Re:

Can you point to any evidence

Why bother with evidence. We have accusations. If you can assume that DMCA complaints automatically mean infringement, and grabbing an IP address out of a torrent tracker autmatically means the account holder of that IP is responsible for sharing a copyrighted work, then all we need to do is accuse Hollywood of corrupt accounting practices and we’re right.

Right?

Anonymous Coward says:

Re: Re:

perhaps the fact that universal claims its ENTIRE catalog lost money?

or the fact that 20th Century Fox claims its ENTIRE catalog lost money?
or the fact that MGM claims its ENTIRE catalog lost money?
or the fact that Paramount claims its ENTIRE catalog lost money?

In fact its probably easier just to link to wikipedia’s article on “List of Film Production Companies”…take your pick from that list.

http://en.wikipedia.org/wiki/List_of_film_production_companies

Anonymous Coward says:

they say the best form of defense is attack, which is exactly what has happened here. i think, however, that if i were Universal, i would be extremely careful as to the claims being made in retaliation. it could, hopefully, come back and bite them seriously in the arse! that could then lead to a lot more similar suits and not just with Universal but with other studios. now that will make Universal very popular, i dont think!

MikeC (profile) says:

IRS Problem too??

If you look at the accounting issues from a more legal light, I am curious. Since Warner says they overpaid the plaintiff doesn’t that open the internal Warner audit to discovery, can’t they then use that to do a forensic discovery of their books on this case. If they are found to have some creative accounting, would it be a RED FLAG to the IRS to evaluate the tax issues on this film? Would you think that California would be interested in this too – budget woes aside.

More likely not since Hollywood owns a fair chunk of Washington and it’s easier for Minn to go after a starving cross-dresser artist right? But seriously there are probably many millions of dollars in tax liability here. All we need is a plaintiff to not do a gag order settlement, take the thing all way to the end to expose this. The tax vultures might do the rest.

Mike

Anonymous Coward says:

Re: IRS Problem too??

The issue is Hollywood accounting is still reported by the primary company appropriately, what ISNT reported appropriately is the studios set up to fund each individual film.

The studio with the film claims huge losses, but the parent rakes in all the profits due to dubious inter company transactions. But because they aren’t the ones who have to pay anything for the film, it doesn’t matter what profits they report and taxes are paid on the consolidated income of the parent anyways.

Anonymous Coward says:

Re: Re: IRS Problem too??

Transfer pricing. It is extremely popular in europe to have part of a company in Ireland. The reason is the very low company tax and the fact that transfering assets outside of europe for tax-purposes is becoming extremely difficult and is easy to see. Google is one of the primary sinners in this context, so I smell a copyright suit against them in the future!

Anonymous Coward says:

Undercharged my ass!

“Universal actually significantly overpaid StudioCanal in connection with four movies for which third-party expenses were substantially undercharged.”

The key words there would be “third party”. I find it unlikely a studio with real third-party expenses would undercharge the production company when the contract allows them to do just that.

Anonymous Coward says:

Hollywood accounting

Hollywood accounting is simple. I ask you to build me a lemonade stand. I promise to give you 50% of the profit of the stand. I promise someone else 50% of the profit to run the lemonade stand. It’s wildly successful. Millions of dollars are made. But I never pay you or the other person anything. After a while you come to me demanding your cut of the profits. Sadly, I tell you, there are no profits. The lemonade stand actually lost money. You’re shocked. You do a quick calculation and figure that the profit margin on the lemonade should be like 90% since you were just using cheap store-bought lemonade mix and water from a hose. Oh, I tell you, well there are other expenses as well. As CEO of LemonadeStandCo I get paid $100,000 a year. Plus there was the executive retreat in Las Vegas where I planned out our strategy. That cost a pretty penny. Then there was the marketing tour in the Bahamas. The company car costs money too. All in all I’d say we’re about half a mil in the red. I might have to sell my, I mean the company’s executive housing. But don’t worry, you’re not on the hook for any of that.

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