The corporate cleansing hasbegun at Vivendi Universal's film operations in the wake of strategic re-evaluation meetings that have taken place in the French town of Deauville.

Three months after mergingwith Barry Diller's USA Networks, the French-owned studio has shut downits specialist division Universal Focus and also severed StudioCanal's co-production venture with Michael Ovitz's ArtistsManagement Group (AMG) before even a single film was made under the three-year agreement.

The decision to pull theplug on Universal Focus had been widely expected, since its operationsoverlapped with those of the much larger USA Films. However, its timing raiseda few eyebrows, coming just days before the Academy Awards, where David Lynchwas nominated as best director for his work on Mulholland Drive. That film was fully financed by StudioCanal andreleased in the US through Universal Focus.

Universal Focus' othernotable release was Billy Elliot,produced by Working Title, the UK production powerhouse that is currently jointlybankrolled by corporate siblings Universal and StudioCanal.

But it is the fall-outbetween StudioCanal and Ovitz that was attracting the most attention over theweekend. According to two successive reports in the New York Times, Vivendi Universal has not only decided to extricateStudioCanal from its joint production venture with AMG but is also questioninghow some of its money was being spent by Ovitz' operation.

Vivendi Universal is said tohave launched a full-scale audit into AMG's film division, the ArtistsProduction Group (APG), amid concerns that between $1m-$2m may have been usedfor other expenses. 'Money is missing - the facts are thefacts,' one unidentified executive engaged in the audit is reported tohave said. 'We're trying to figure it out.'

For its part, AMG hasacknowledged the audit but insists that there is nothing to hide.'Everything was done appropriately and completely above board and inconcert with our partner, StudioCanal, ' said Jon Vein, AMG's chiefoperating officer.

Then, on Saturday, a spokesman for AMG confirmed that the joint film production venture with StudioCanal was officially over. Under their settlement agreement, Vivendi Universal will now pay APG a "substantial amount of money" but will stop providing it with overhead and development financing, AMG's Michael Burns told Associated Press.

StudioCanal, whose US officeis expected to be another casualty of Vivendi Universal's film overhaul,first announced its joint production venture with Ovitz in July 2000. Under theterms of the three-year deal, the venture was to co-finance and produce as manyas 12 to 15 features, with StudioCanal holding international distributionrights to the titles. US distribution was to be decided upon jointly by the twopartners.

That initial agreement, asreported by the New York Times,also called upon StudioCanal to provide APG with $8m, to be split evenlybetween development costs and overhead costs. It is a portion of that money that came under dispute during the settlement process.

Ovitz retained the prominentHollywood lawyer Bert Fields to represent his company in the severancenegotiations with Vivendi Universal as they tried to settle the remaining 16months still left to run on the joint venture agreement. Fields was quoted assaying the disagreement was no more than a 'contractual dispute'over the time that APG employees spent on projects that were rejected by StudioCanal.

APG was founded in 1999alongside AMG - the management entity created by Ovitz, Rick Yorn andJulie Silverman Yorn with clients that include Leonardo DiCaprio, MartinScorsese, Cameron Diaz, Robin Williams, Tom Clancy, Samuel L Jackson and HeatherGraham.

Since then it has producedwith AMG clients Ed Burns' Sidewalks Of New York and his brother Brian Burns' You Stupid Man, as well as setting up Michael Crichton's Timeline at Paramount with Richard Donner directing, TomClancy's Rainbow Six and WithoutRemorse at Paramount and TessGerritsen's Gravity at 20thCentury Fox.

On the APG/StudioCanal slateare as many as 17 projects still in development, but none so far has entered production. Theyinclude Godsend written by MarkBomback, The Discrete Charm Of Charlie Monk adapted from David Ambrose's novel by PeterBuchman, Nightmare Creatures towhich Ralph Zondag (Dinosaur) isattached to direct, Conquest Of Mexico written by William Wittliff and Tell No One being adapted from the novel by Harlan Coben by AlexKurtzmann and Roberto Orci.

Under the terms of the severance, Vivendi Universal will retain a retain a financial interest in those projects developed with StudioCanal, although APG will assume control of them as it now sets about finding alternative production and distribution funding. Already, four projects that had been initiated under the partnership have since been picked up by other studios, Burns said.

In January this year,concerned perhaps at the lack of production impetus, Ovitz turned to formerHollywood studio head Mark Canton and named him chairman and CEO of APG. Butnow that StudioCanal has withdrawn from APG, Canton' film unitmay find itself having to find additional new investors in order to keep going once the Vivendi Universal payout is finished.