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FIRST NATIONAL EXHIBITORS' CIRCUIT 23
notices to the exchanges requesting each exchange to pay to the head office a portion of the total cost of the picture. Each exchange was assessed in proportion to the sales value of its territory as already determined. By this method, the entire cost of the picture was paid by the exchanges. The payment was considered as an advance by the exchange against the anticipated earnings of the picture. As the exchanges received payments for the exhibition of the picture, they retained them except for a commission of 10% of gross receipts which they paid to the company to cover overhead expenses of the head office. When an assessment or a commission was paid by an exchange, that exchange was credited for the payment, on the books of the company. As receipts were reported by the exchange they were debited to the account and were retained by the exchange in its own bank account and were its property. It was expected that the receipts eventually would exceed the payments to the head office and that there would be a debit balance in the account. When this occurred the excess amount was to be paid to the head office. Thus the exchanges were financing the operations of the company and recovering from the earnings of the pictures only the amount of their advances. The exchanges' only opportunity to share in the profits of the company was in the receipt of dividends on the stock which they held. All other relationships between the exchanges and the company were expected to balance.
Each of the franchise holders in the new company issued subfranchises to selected exhibitors in their territories. In most cases they organized companies to which they sold their stock in Associated First National Pictures, Incorporated. They retained a controlling proportion of the stock of the local company and sold the rest of the stock to exhibitors. Subscribers to this stock were required to accept sub-franchises by which they agreed to exhibit in their theaters all pictures distributed by Associated First National Pictures, Incorporated. Most of the agreements covering the subscription to stock in the local companies contained substantially the same provisions about pricing as those quoted from the sub-franchise agreement of the Cleveland exchange.
In 1920 the company had outstanding 34 franchises to exhibitors who also operated exchanges for the distribution of the company's pictures, and about 3,400 sub-franchises to exhibitors. The plan of operation of the new company was effective and