Indian Institute of Management

Ahmedabad IIMA/F&A0126
Revised 2002, 2003

Symphony Theatre
By December 2001, Symphony Theatre completed a year of its existence. Two films had been
screened, one of which ran for 30 weeks and the other for 15 weeks. A third film which was
currently being screened had run for the last seven weeks. Seth Pitambardas, one of the two
partners owning symphony, thought that the time had come to take stock of the situation
and see how well the theatre was doing.

Seth Pitambardas had entered into a partnership with Maharaja Mayurdhwajsingh to start
the Symphony Theatre. When the two partners had decided to enter the theatre business, an
old theatre was available for sale in Mumbai. It was located in a good spot, but because of its
inadequate facilities and poor image, it had not been a profitable venture for its former
owner. Seth Pitambardas and his partner believed that by demolishing the structure and
constructing a new airconditioned theatre, it would be possible for them to earn a
substantial return on their investments.

Construction of the New Theatre

The old theatre was acquired at a cost of Rs.100 lakh in March 2000. Before the new theatre
could be constructed the old one had to be completely razed to the ground and a new
foundation be laid. Demolition expenses amounting to Rs. 10 lakh were paid in March 2000
but the sale of old furniture, scrap and other materials fetched cash worth Rs.30 lakh. The
construction of new Symphony Theatre was completed by December 2000 and the screening
of films commenced in January 2001.

Construction Costs

According to Seth Pitambardas, Symphony was constructed at a cost of Rs.450 lakh, out of
which Rs.250 lakh had been spent on constructing the new theatre building, Rs.100 lakh on
sound systems and projecting equipment and Rs.50 lakh on the furniture and fixtures and
Rs.50 lakh on air-conditioning system. Pitambardas anticipated that, although the
constructed theatre might last for 25 years, the sound and projecting equipment, furniture
and fixtures, and air-conditioning systems would have to be replaced at the end of 20, 10,
and 20 years respectively. Besides the construction costs, Symphony made an initial
payment of Rs.1.25 lakh in December 2000 for the installation of integrated communication
network – including telephone and internet connectivity to enable on-line booking and
interaction with the distributors under a new own-and-use scheme. Details of the
installation are described in a later paragraph.

Each of the partners invested Rs.200 lakh and the rest of the money had been borrowed from
banks, private financing agencies, friends and relatives. The private financing agencies made
an investment of Rs.100 lakh at an interest of 12 percent per annum. The remaining Rs.50
lakh was given by friends and relatives and the partners had agreed to pay 10 percent per

Prepared by Professor Suresh A Seshan. Indian Institute of Management, Ahmedabad.

Case material of the Indian Institute of management, Ahmedabad, is prepared as a basis for class
discussion. Cases are not designed to present illustrations of either correct or incorrect handling of
administrative problems.
 1970 by the Indian Institute of Management, Ahmedabad.
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annum interest on this sum. According to the agreements signed with the private financing
agencies and friends and relatives, one-tenth of the total loan amount had to be repaid at the
end of each year, the first installment being due during Symphony’s first year of operations.
Besides, no interest was payable on the borrowing until the commencement of the theatre’s
operations. Money from all these sources having been received and costs paid for, the net
cash available as on January 01, 2001 was Rs.18.75 lakh.

First Year’s Operation

According to the film distribution process the producer had to sell the distribution rights to
a film distributor. The distributor in turn hired a theatre for screening the film. For this
purpose, an agreement specifying the weekly rent at which the theatre had been hired was
necessary. Generally, a distributor agreed to hire a theatre for a minimum period, which was
specified in the agreement. When a film proved a box office success, the distributor, if he
desired to extend the running time of the film, negotiated a further agreement to extend the
rental period. On the other hand, if a distributor desired to withdraw a film before the
completion of the specified period, he was required to pay a penalty equal to two weeks
rental. In addition, he had to give at least 17 days notice of his desire to withdraw a film.

The first film Symphony screened was originally signed to run for 35 weeks. Since this was
the first film screened at Symphony, the partners had agreed to charge a rental of Rs.1.75
lakh per week for 35 weeks. However, after a good run for about 15 weeks, the daily box-
office collections began to drop considerably. Five weeks after the completion of the silver
jubilee, the distributor withdrew the film from Symphony after giving proper notice. Since
the film was withdrawn before the completion of the contractual period a penalty of Rs.3.5
lakh had to be paid for the withdrawal of the film before its due date.

For its second film Symphony increased its rentals from Rs.1.75 lakh to Rs.1.95 lakh per
week. The second film was originally scheduled to run for ten weeks and the hire charge for
this period was Rs.1.95 lakh per week. However, box-office collections during the first eight
weeks were so good that the distributor decided to extend the running time of the film by
another five weeks. By this time, the partners had decided to increase the rental value of
their theatre from Rs.1.95 lakh to Rs.2.15 lakh, but as a special case to this distributor, the
rental for the additional five weeks was increased only by an extra ten thousands i.e., Rs.2.05
lakh. The film, which was currently being shown, had been signed to run for 35 weeks at a
rental of Rs.2.15 lakh per week.

At the end of each week, the total box-office collections were turned over to the distributor
after subtracting the rental for that week. For a full house in all these shows the total weekly
collections were approximately Rs.7 lakh. In those cases where the collections fell short of
the rental value, the distributor was required to reimburse the theatre owners for the
shortfall in the weekly rental. For Symphony’s first film, box office collections during the 29th
and 30th weeks fell short of the rental value of Rs 1.75 lakh by Rs.20,000 and Rs.25,000
respectively. The distributor screening this film had yet to reimburse Symphony for the
shortfall in the weekly rental, and the penalty of Rs.3.5 lakh. From informal sources, Seth
Pitambardas had learnt that this distributor was involved in bankruptcy proceedings, and
that Symphony’s debt would be paid only to the extent of Rs.2 lakh. In all other cases total
collections exceeded the weekly rentals. However, box office collections for the last week of
December 2001 totalling Rs.6.5 lakh had not been paid to the distributor at the end of
December 2001.
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Besides weekly rentals, Symphony had two other minor sources of revenue. A cafeteria and
snack bar was being operated by a contractor who paid Rs.5,000 per month to the theatre for
the rights to operate this facility. The other source of revenue was from the screening of
advertising shorts and slides. The revenue on this account during the year amounted to
Rs.3.5 lakh of which Rs.50,000 had yet to be received from the advertisers at the end of the
year.

Symphony employed 70 persons including technicians, ushers, booking clerks, a theatre

manager and other staff for cleaning and maintaining the theatre. The theatre employees
had two strong unions and their demands for salary and bonus had to be negotiated each
year. Symphony was paying Rs.1.5 lakh a month as salary and allowance for these
employees. All the personnel were employed on a monthly basis and their salaries were
paid on the first day of each month following the month for which the salaries were due.

Other than salary and allowances for cleaning and maintenance staff, a sum of Rs.30,000 was
spent each month for cash purchases of cleaning materials and supplies required for this
purpose. Ticket books, seating charts, posters and other items of stationery worth Rs.24,000
had also been purchased on cash during the year. Of this, stationery costing Rs.4,000 had
remained unused at the end of the year.

The electricity bill for running the airconditioning system and other electrical fittings and
equipment was abour Rs.1.2 lakh per month. Such bills were usually paid within 15 days
after the receipt of the bill. As on December 31, 2001, the electricity bill for December had no
yet been received, but on the basis of past experience, Seth Pitambardas estimated this
would be about Rs.1.2 lakh.

As mentioned earlier, a integrated communication facility had been installed at the theatre
under a Own-and-Use scheme. Under this scheme, a lump sum payment of Rs.1.1 lakh was
initially collected from a subscriber, and in consideration of this a rebate of Rs.5,000 per
quarter was allowed in the fixed quarterly rental for a period of 5 years. The fixed quarterly
rental for a leased connection (non Own-and-Use) was Rs.20,000, and this was payable in
advance of each quarter. Thus the payment of Rs.1.25 lakh (Rs.1.1 lakh and Rs.15,000 as
advance rent for the first quarter of 2001) was made in December 2000. In 2001 Symphony
paid an additional amount of Rs.80,000 to the service provider. Of this, Rs.60,000 was the net
rental for four quarters (including January-March 2002), and the balance was for services
used beyond the minimum free internet hours provided by the service provider.

Two other items of expenses were property taxes and insurance premium. Property taxes
(approximately Rs.12 lakh annually) were payable to the municipal corporation in advance
of each quarter. Thus, by the end of December 2001, Symphony had paid its property taxes
for the period from January-March 2002 to the municipal corporation. Another item of
expense was insurance premium. Symphony had been insured for Rs.550 lakh for the next
three years for a lump sum premium of Rs.3 lakh. The premium on this policy started in
January 2001.

When the two partners had invested in Symphony it had been their objective to earn a 12 per
cent return on investment. Seth Pitambardas was wondering whether Symphony had
achieved this objective for the first year, and for this purpose requested an accountant-friend
to draw up financial statements in a suitable manner.