United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SPRING BREAK '83 FILM PRODUCTION, LLC
(Name of small business issuer in its Articles of Organization)
California 7812
_________________
(State or other jurisdiction (Primary Standard
Industrial
(I.R.S. Employer
of organization) Classification Code
Number)
Identification No.)
650 North Bronson Avenue, Suite B - 128
Los Angeles, California 90004
323/871-4466
(Address and telephone number of
principal executive offices and place of business)
Kyndra S. Miller
Miller Dorian & Associates, LLP
650 North Bronson Avenue, Suite B - 128
Los Angeles, California 90004
877/862-0572
(Name, address and telephone number of agent for service)
Copies to:
Law Offices of John W. Cones
794 Via Colinas
Westlake Village, California 91362
310/477-6842
Approximate Date of Proposed Sale to the Public: As soon as
practicable after
the effective date of this registration statement.
CALCULATION OF REGISTRATION FEE
Title of each Proposed Maximum
Amount of
Class of Securities Number of Units Proposed Maximum
Aggregate Registration
to be Registered to be Registered Offering
Price(1) Fee (1)
LLC Units 300 Units $9,000,000 $276.30
(1) Estimated solely for the purpose of calculating the
registration
fee in accordance with Rule 457
under the Securities Act.
The registrant hereby amends this registration statement on such
date or dates as may be necessary
to delay its effective date until the registrant shall file a
further amendment which specifically states
that this registration statement shall thereafter become effective
in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement
shall become effective on such date as
the Commission, acting pursuant to said Section 8(a) may
determine.
SB-1 Prospectus
SPRING BREAK '83 PRODUCTION, LLC
A California Limited Liability Company
(organized on ________________...?)
No minimum and up to a $9,000,000 Maximum
of
Limited Liability Company Interests (Units)
Offered in 300 Units at $30,000 Per Unit
Sold by Upper Level Manager of the Issuer on a "Best Efforts"
Basis
No broker-dealer is participating in this Offering and no sale
commissions
will be paid to any person in connection with this Offering.
The LLC's securities are not listed on any stock exchange.
No escrow account will be used to hold investor funds.
Prior to this Offering, there has been no public market for the
LLC's Units.
The Offering Terminates On _________________...?
Spring Break '83 Production, LLC is a California Limited
Liability
Company,
formed for the purpose of financing, producing, owning,
distributing and otherwise exploiting a feature film
Minimum Purchase One (1) Unit ($30,000)
Except that under limited circumstances the Manager
has the discretion to sell less than the Minimum Purchase.
Offering Price | Commissions 1
|
Proceeds to LLC
Unit Price | $ 30,000
|
$ -0- | $ 30,000
Minimum | $ -0- |
$
-0- | $ -0-
Maximum | $9,000,000 | $
-0- | $9,000,000
1 The issuer Spring Break '83 Production, LLC will pay all
organization and offering expenses, estimated to not exceed
1% of the Offering Proceeds (i.e., not more than $90,000).
INVESTING IN THE LLC'S UNITS INVOLVES SUBSTANTIAL RISKS. INVESTORS
ARE CAUTIONED NOT
TO INVEST UNLESS THEY CAN AFFORD TO RISK LOSS OF THEIR ENTIRE
INVESTMENT.
INVESTORS ARE URGED TO READ THE "RISK FACTORS" SECTION OF THIS
PROSPECTUS
BEGINNING ON PAGE 5 AND THE REST OF THIS PROSPECTUS BEFORE
MAKING AN
INVESTMENT DECISION. NEITHER THE SECURITIES AND EXCHANGE
COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF
THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Development stage company
Long term project
No distribution currently in place
Commercial success not certain
Competitive industry
Big Sky Motion Pictures, LLC -- Manager
650 North Bronson Avenue, Suite B - 128
Los Angeles, California 90004
323/871-4466
Approximate date of commencement of proposed sale to the
public: As
soon as practicable
after the effective date of this Prospectus.
NOTICE
For the convenience of Prospective Purchasers,
certain terms used in this Prospectus
are defined in the Definitions section located
in the forepart of the Operating Agreement (Exhibit "A").
Such defined terms will appear in the Offering Circular
with initial capital letters (see "OPERATING AGREEMENT").
TABLE OF CONTENTS
Title
Page
SUMMARY OF THE OFFERING . . . . . . . .
1
RISK FACTORS . . . . . . . . .
... 5
DESCRIPTION OF BUSINESS . . . . 11
Market Overview/State of the Industry . . .
.
. . . .. 11
The Manager and LLC Management . . . . .
.
. .. .
23
People of Spring Break '83 Production, LLC . .
.
. . . . .
24
Prior Performance and Chart . . . . . .
.
. . .. 26
Description of Property . . . . . . .
.
. .. 26
Plan of Operations . . . . . . . .
.
. .. 26
Script Synopsis . . . . . . . .
.
.. 27
Screenplay Rights . . . . . . .
.
. .. 27
Production Strategy . . . . . . .
.
. .. 28
Production Schedule . . . . . . .
.
. . .
28
Marketing and Distribution . . . . .
.
. . . .
29
Box Office Comparables . . . . . . .
.
. .
. 36
Financing Strategy . . . . . . . .
.
. .. 39
Manager Discretion . . . . . . . .
.
. .. 39
OFFERING INFORMATION . . . . . . . .
.
.. 41
Securities Being Offered . . . . . .
.
. . .. 41
Terms of the Offering . . . . . . .
.
. .. .
42
Plan of Distribution of Units . . . . .
.
. . . . .
43
Estimated Use of Proceeds . . . . . .
.
. . . .
44
Compensation of Manager and Affiliates . . .
.
. . . . .
46
Allocations and Percentage Participations . .
.
. . . . . .
47
SUMMARY OF THE LLC'S OPERATING AGREEMENT . . .
.
. . .
49
MOTION PICTURE INDUSTRY OVERVIEW . . . . .
.
. . .
51
FEDERAL TAX DISCUSSION . . . . . . . .
.
.. 59
MISCELLANEOUS PROVISIONS . . . . . . .
.
.. 69
Reports to Unit Holders . . . . . . .
.
. .. 69
Financial Statements . . . . . . .
.
. . . .
69
Subscriber Representations and Warranties . .
.
. . . . . .
69
Legal Proceedings . . . . . . . .
.
. . .
70
Code of Ethics and Certifications . . . .
.
. . . .. 70
Access to Additional Information . . . .
.
. . . .. 71
FINANCIAL STATEMENTS . . . . . . . .
.
. .
F-1
Exhibits
Section
LLC ARTICLES OF ORGANIZATION. . . . . . .
.
. .. A
LLC OPERATING AGREEMENT . . . . . . . . ..
B
OPINION RE LEGALITY . . . . . . . . .
...
C
COUNSEL'S TAX OPINION . . . . . . . . .
.
.. D
CHAIN OF TITLE DOCUMENTS. . . . . . . .
.
.. E
SHORT FORM OF COPYRIGHT ASSIGNMENTS . . . . .
.
.
. F
ACCOUNTANT'S CONSENT . . . . . . . .
.
.. G
SAMPLE REVENUE PROJECTIONS . . . . . . .
.
.. H
(The Spring Break '83 Production, LLC Subscription Agreement
accompanies this Prospectus)
Spring Break '83 Production, LLC
SUMMARY OF OFFERING
LLC The Spring Break '83 Production, LLC
("LLC") intends to finance the production
Objectives of a single feature-length
motion
picture ("Film" or "Picture") with an estimated
production budget (plus
Offering
expenses) not to exceed $9,000,000. The
Offering has no minimum
required
Offering Proceeds thus the LLC Manager is
authorized to use Investor
funds
for LLC purposes as soon as they are raised. Such
funds will be used to acquire
rights to the Script, produce the Film and market it to
prospective distributors. A
portion of Investor funds may also be used to
supplement distributor
expenses.
Deferments of some or all of the budgeted
salaries of creative personnel
and others providing goods or services used in the
production of the Picture
may be
used in conjunction with the Offering Proceeds.
Such Deferments are not paid
out
of Offering Proceeds but out of the Film's
revenue stream, if any (see
definition of "Deferments" in the LLC Operating
Agreement, Exhibit "B" and
additional discussion at "Estimated Use of
Proceeds"). Although the
Manager
anticipates that most Deferments will be paid
following Investor Recoupment,
the Manager has reserved the right to make deals
with top-level talent so that
their Deferments may be paid out of the LLC's Gross
Revenues, that is, prior to
Investor Recoupment (see "DESCRIPTION OF
BUSINESS"). NO ASSURANCES
CAN BE
PROVIDED THAT SUCH
OBJECTIVES WILL BE ATTAINED
(see
"RISK FACTORS").
LLC The Manager for the LLC is Big Sky
Motion Pictures, LLC a Los Angeles-based
Manager feature film production/development
company organized in December of 2004.
Big Sky Motion Pictures, LLC is
wholly-owned by the individual filmmakers Mars
Callahan and Rand Chortkoff (see
"DESCRIPTION OF BUSINESS--Manager and
People of Spring Break '83
Production,
LLC"). Articles of Organization for the
LLC were filed with the California
Secretary of State on April 20, 2006. Planning
and operations for the film
production
are currently based at 650 North Bronson
Avenue, Suite B-128, Los Angeles,
California 90004; phone 323/871-4466 (see
biographical information on the
individual owners of the Manager in the
"DESCRIPTION OF BUSINESS People of
Spring Break '83 Production, LLC").
LLC The Manager will be responsible for
the management of the LLC (see
Management "OPERATING AGREEMENT"). The
Manager will be supported in its LLC
management activities by
appropriate staff and consultants (see "DESCRIPTION
OF BUSINESS People of Spring
Break '83 Production, LLC" and "The Manager
and LLC Management").
Description of If the Offering is funded (as
described above) the LLC intends to acquire the rights
Film Project to the Script (i.e., the
Screenplay entitled Spring Break '83), produce the feature
film described herein and then
arrange for the distribution of the Film.
Spring Break '83 is a broad
comedy set
in 1983 that spoofs the hugely popular 80s
college and spring break genre films
that remain classics in American cinema. The
Producers intend to model their Film
after the spoof comedy films like Airplane,
Naked Gun and Scary Movie. Much like
the story lines of such classic films as
Animal House, Revenge of the
Nerds and
Old School, the Producers hope to
capitalize on one of America's
largest
theatre going demographics college kids
(see "DESCRIPTION OF BUSINESS--The
Proposed Film"). The Script for Spring
Break '83 was written by Mars
Callahan. The Picture is expected to receive an
MPAA rating of "R". Locations are
tentatively set in and around Los Angeles,
including Raleigh Studios (see
"DESCRIPTION OF BUSINESS--Film Synopsis"
and "OFFERING INFORMATION--Estimated
Use of Proceeds").
Compensation The Manager will waive
receipt of
any compensation relating to the activities of
To Manager the LLC in the nature of LLC
organization and management fees. The Manager
will, however, be paid a
percentage participation in the LLC's Distributable Cash
(see "OFFERING
INFORMATION--Manager and Affiliate Compensation").
Prior The Manager, also a California
LLC, was created in December of 2004, and thus
Performance has limited operating history
with respect to the management of a limited liability
company. The LLC's Manager has
served as the LLC Manager for one prior film
offering (What Love Is,
LLC). The
offering raised $9,000,000 and the film has
completed principal
photography,
is into post-production and a distributor is being
sought. No revenues have been
generated to date. The Manager and its Affiliates,
however do have considerably
more
experience in the entertainment business (see
"DESCRIPTION OF BUSINESS"and
"People of Spring Break '83 Production,
LLC", "The Manager and LLC
Management").
Allocation of Percentage participation
payments
will be made to Member/Investors out of the
Distributions, Picture's revenue stream.
Eighty
percent (80%) of the LLC's Distributable
Profits, Losses Cash will be paid to the
LLC's Member/Investors (shared pro rata amongst such
and Credits Members) until the Members
of the
LLC achieve Recoupment (i.e., defined as
110% of their Original Invested
Capital). Subsequent to Investor Recoupment,
Creative Deferments will be
paid,
if any. After payment of Deferments, the
revenue sharing ratio as
between
the Investors and the Manager changes to 50/50
for the balance of the life of
the LLC (see "OPERATING AGREEMENT" and
"OFFERING
INFORMATION--Estimated
Use of Proceeds", "Manager and
Affiliate Compensation" and
"Allocations and Percentage Participations"). The
Manager has reserved the right,
however, to make deals with top-level talent so
that their deferments may be
paid
out of the LLC's Gross Revenues (i.e., prior to
Investor Recoupment).
Offering Limited Liability Company Units are
being offered hereby in Units of $30,000
Terms each, payable in cash upon
Subscription. The minimum purchase per Subscriber is
one (1) Unit ($30,000), except
that in limited circumstances the Manager has the
discretion to accept
purchases of
less than the minimum. No Minimum Offering
Proceeds has been
established for
the Offering, thus the Manager is authorized to
spend Investor funds for LLC
purposes as soon as they are received and accepted.
The Maximum Offering
Proceeds for
the Offering is $9,000,000. The Offering will
terminate on
_____________________...? unless extended in the discretion of the
LLC Manager. The securities
(LLC
Units) are being offered on a "best efforts"
basis through upper level
management of the Manager.
American Jobs Pursuant to the Special
Rules for
Certain Film and Television Productions at
Creation Act of '04 Section 244 of the American
Jobs
Creation Act of 2004 (which apply to films
commencing production after
October 22, 2004 and before January 1, 2009), if an
investment vehicles such as an
LLC acquires the rights to produce a feature film,
an LLC member/taxpayer may
elect
to deduct his or her pro rata share of 100% of
the direct and indirect
costs of
producing the film as an expense for the taxable
year in which the costs of
production are first incurred, so long as the aggregate
cost of the film does not
exceed
$15 million and 75% of the total compensation
paid to actors, directors,
producers and other relevant production personnel
working on the film is paid for
services performed in the United States. If such
election is made, no other
depreciation or amortization deduction will be allowed
(see "FEDERAL TAX DISCUSSION").
State, Date of The LLC is a manager-managed
limited liability company the Articles of
Organization Organization for which were
filed
with the California Secretary of State on
Termination April 20, 2006. The Operating
Agreement provides that the existence of the LLC
shall continue in perpetuity
unless sooner terminated pursuant to the terms of the
Operating Agreement itself.
Upon
termination of the LLC, the proceeds from the
sale of all LLC assets will be
distributed in accordance with the terms of the
Operating Agreement (see
"OPERATING AGREEMENT").
Risk Factors Investment in the LLC involves
various risks including certain Federal income
tax risks associated with the
lack of
liquidity of the investment, the risk that
insufficient funds will be raised in
conjunction with this Offering, risks associated
with the motion picture industry and
various potential conflicts of interest (see
"REQUIRED NOTICES-Risk Factors".
Tax Ruling The Manager does not intend to
apply for a ruling from the IRS regarding the
LLC's tax status as a limited liability company.
PROSPECTIVE INVESTORS
ARE URGED TO OBTAIN TAX ADVICE SPECIFIC TO THEIR
OWN
INDIVIDUAL CIRCUMSTANCES FROM A TAX ADVISOR OF
THEIR
CHOOSING.
(This Page Left Blank Intentionally)
RISK FACTORS
Investment in the LLC involves various risks relating both to
the nature of the financing vehicle (a
limited liability company) and the movie industry itself and such
investment is therefore suitable only for
persons or entities with the financial capability of making and
holding long-term investments. Prospective
Purchasers should consider the following factors, among others,
before making a decision to purchase
interests:
LLC Risks
1. Development Stage Company The LLC is a newly organized company
with minimal assets and no
history of operations. The LLC was formed specifically for the
purpose of financing, producing and
distributing the Motion Picture, Spring Break '83. Although there
are significant risks in the production and
distribution of such a Film, the LLC is subject to the general
risks
inherent in the establishment of a new
business venture, including the absence of an operating history.
2. Lack of Management Experience The owners of the LLC Manager
(Mars Callahan and Rand Chortkoff)
have limited experience in relation to managing the affairs of a
manager-managed LLC. The LLC's success
may depend in large part upon the services provided by other
individuals not employed by the LLC (however
see the management biographies at "DESCRIPTION OF BUSINESS
People of
Spring Break '83 Production,
LLC").
3. Reliance on Management No assurances can be provided that the
LLC's management will perform
adequately or that LLC operations will be successful. In
particular,
the LLC will depend on the services of the
individuals Mars Callahan and Rand Chortkoff, along with others
associated with the Manager (see
"DESCRIPTION OF BUSINESS People of Spring Break '83 Production,
LLC"
and "The Manager and LLC
Management"). Unit Holders will have no right or power to take
part
in the management of the LLC. All
decisions with respect to the management of the LLC will be made
exclusively by the Manager. Accordingly,
no person should purchase any of the Units offered hereby unless
such Prospective Purchaser is willing to
entrust all aspects of the management of the LLC to the Manager
and
has evaluated the Manager's capabilities
to perform such functions.
4. Manager Conflicts of Interest--The Manager and its owners are
not required to render exclusive services
in connection with the Picture or the LLC. Consequently, the
Manager
and its owners may render services in
connection with other business projects, including entertainment
projects, during any or all phases of
production or distribution of the Picture. The Manager and its
individual owners will be required to use their
discretion in determining how to allocate time and attention among
various ongoing film projects. In addition,
both the Manager and its owners may serve in the same positions
for
other feature film offerings in the future.
5. No Key Man Life Insurance As noted above, the LLC will be
relying
on the management skills of the
individual owners of the Manager and others associated with them.
However, the LLC has not and does not
anticipate purchasing so-called "key man" insurance coverage to
compensate the LLC in the event that an
unexpected loss of the services of such persons occurs.
Consequently, the impact of such a loss on the LLC
and its efforts to produce and distribute the Film may be
significant.
6. Limited Transferability--It is not anticipated that a public
trading market will develop for the LLC's
Units. Neither the LLC nor the Manager are obligated to redeem or
repurchase any of the LLC Units. Thus,
Unit Holders may not be able to liquidate their investments in the
event of an emergency (i.e., the investor
must be able to bear the economic risk of maintaining an
investment
in the LLC for an extended and
indeterminate period of time. In addition, Units may not be
accepted
as collateral for loans. Also, the Manager
may not permit an assignee of Units to become a substituted
Member.
Consequently, the purchase of Units
should be considered only as a long-term investment.
7. Loss Of Limited Liability--The Operating Agreement provides
that
no Member/Unit Purchaser will be
personally liable for any of the debts, contracts or other
obligations of the LLC or for any LLC losses, beyond
the amount subscribed for by each Member in the LLC, plus such
Member's share of undistributed LLC
income. The Operating Agreement further provides that the
Members/Unit Purchasers will not have any right
to take part in, or interfere with, the control of the business of
the LLC (see "OPERATING AGREEMENT").
Notwithstanding the foregoing, in the event any Unit
Purchaser
does take part in the control of the
business of the LLC, or is for any reason deemed to have taken
part
in such control, such Unit Purchaser may
incur personal liability for all debts and obligations of the LLC.
In addition, a Unit Holder who has received in
part or full a return of such Unit Holder's contribution,
nevertheless remains liable for any sum, not in excess
of such return with interest, necessary to discharge the LLC's
liability to creditors who extended credit, or
whose claim arose, before such return. Unit Holders may also be
required to return to the LLC any
distributions determined to be conveyances which operate a fraud
upon LLC creditors.
8. Lack of Marketability for the LLC's Units There is
presently no
market for the LLC's Units and there is
no expectation that a trading market will develop. The
investors in
this Offering should be prepared to hold
their interests for the life of the LLC. The investors may, in
fact,
never be able to sell their Units and recover
any part of their investment.
9. Funds Available to Manager Immediately The Offering proceeds
generated by this Offering will not be
held in a segregated, interest-bearing bank account or escrow
account until a stated minimum has been
achieved. Instead, the Investor funds will be available for use by
the LLC Manager for LLC purposes
immediately upon receipt and acceptance by the Manager. No
assurances can be provided that the Offering
will succeed in raising enough funds to accomplish the LLC's
goal of
producing a feature-length motion
picture. In that event, all funds invested and spent to that point
may be lost.
10. Investor Last In Line--A motion picture typically goes from
the
producer to the distributor who in turn
may send it to territorial sub-distributors, who send it to
theatrical exhibitors. The box office receipts generated
by a motion picture travel this same route in reverse. The
exhibitor
takes a cut and sends the balance to the
sub-distributor, who takes a cut and sends the balance to the
distributor, who takes a cut and sends the balance
to the producer. The problem for the private investors with this
system is that such investors, who have had
their money at risk for the longest time, are at the tail end
of the
box office receipts chain, as well as at the end
of the chain in regards to other revenues. Thus, if the LLC, in
negotiating a distribution deal, has to rely
heavily on a participation in some level of the Film's revenue
stream to be defined at a later date (which date
and level of participation may not be in the Manager's control),
revenues to the LLC and thus Purchasers of
Units are likely to be the last in line to benefit from such a
revenue stream, if any. In addition, of course, LLC
investors cannot expect any cash distributions during the
production
phase of the Film, and no assurances can
be provided that the LLC will be successful in producing the
Film or
generating any revenues from the
distribution efforts, thus, the investors may suffer a loss of
their
entire investment.
11. Indemnification Provisions May Impair LLC--The Operating
Agreement provides that under certain
circumstances the Manager, the Manager's Affiliates, Counsel and
consultants may be indemnified by the
LLC for liabilities or losses arising out of such Manager's
activities in connection with the LLC. Should the
LLC be required to pay damages or claims pursuant to such
indemnification provisions such payment could
reduce or deplete the assets of the LLC.
12. Possible Tax Consequences of Investment--In evaluating the
purchase of Units as an investment, a
Prospective Purchaser should consider the tax risks thereof,
including (i) the possible reallocation of net
income and net loss and credits; (ii) the tax liability resulting
from a sale or other disposition of such
Purchaser's Units, or a sale or other disposition of the Picture,
including income, a portion of which may be
taxed at ordinary income rates; (iii) the risk that the LLC
will be
treated as an association taxable as a
corporation for Federal income tax purposes; (iv) the possibility
that the deductions taken by the LLC in a
taxable year might not be allowed in such year or that certain
expenses may be required to be capitalized; (v)
the possibility that an audit of the LLC's information returns may
result in the disallowance of the LLC's
deductions, and in an audit of such Purchaser's tax return; (vi)
recognition that the Manager will have no
interest in LLC losses and tax deductions until after the Member's
capital accounts have been reduced to zero;
and (vii) possible adverse changes in the tax laws and their
interpretation. All of the above possible tax
consequences may result in an increased tax liability for LLC
Investors or a reduction in anticipated
deductions. In addition, there is a risk that a Purchaser's tax
liability may exceed such Purchaser's share of cash
distributions for a particular tax year possibly resulting in
an out
of pocket expense for the Purchaser above
and beyond any distributions from the LLC. Prospective investors
should seek the advice and counsel of their
own tax advisors (see "FEDERAL TAX DISCUSSION").
13. Tax Opinion Is Qualified The tax opinion appearing at Exhibit
"D" is qualified in that it calls attention
to certain limitations inherent in the opinion itself. The views
expressed therein and concerning essentially
factual issues are based on assumptions concerning future
events and
transactions. If these events and
transactions do not occur, or if other events or transactions
do not
occur, or if other events or transactions not
now contemplated do occur, the federal income tax consequences
of an
investment in the LLC may be
adversely affected. Tax counsel states in such opinion that he can
provide no assurance that the facts,
circumstances and assumptions necessary for favorable federal
income
tax consequences from investing in the
LLC will indeed occur. Moreover, even if the assumed facts do
occur,
tax counsel states that he cannot assure
that the IRS or the courts, which may analyze the same facts
differently, will draw the same conclusions.
Thus, tax counsel states that he can provide no assurance that the
conclusions reached in the tax opinion and in
the Offering Memorandum, if challenged by the IRS, will be
sustained
by a court.
Movie Industry Risks
1. No Distribution Currently In Place--The profitable
distribution
of a motion picture depends in large part
on the availability of one or more capable and efficient
distributors who are able to arrange for appropriate
advertising and promotion, proper release dates and bookings in
first-run and other theatres. There can be no
assurance that profitable distribution arrangements will be
obtained
for the Picture or that the Picture can or
will be distributed profitably.
2. Long Term Project--The production and distribution of a motion
picture involves the passage of a
significant amount of time. Pre-production on a picture may extend
for two to three months or more. Principal
photography may extend for several weeks or more. Post-production
may extend from three to four months or
more. Distribution and exhibition of motion pictures generally and
of the Picture may continue for years before
LLC Gross Revenues or Distributable Cash may be generated, if
at all.
3. Production Activities May Be Difficult--Particularly as
produced
by independent filmmakers, each
motion picture is a separate business venture with its own
management, employees and equipment and its own
budgetary requirements. There are substantial risks associated
with
film production, including death or
disability of key personnel, other factors causing delays,
destruction or malfunction of sets or equipment, the
inability of production personnel to comply with budgetary or
scheduling requirements and physical
destruction or damage to the film itself. Significant
difficulties
such as these may materially increase the cost
of production.
4. Commercial Success Not Certain The Screenplay has yet to be
produced as a feature film and may never
be completed as such, or, if produced, the Film may not be
commercially acceptable to distributors. In that
event, the LLC will not generate any revenues and no distributions
will be made to investors. In addition, many
films are released each year that are not commercially successful
and fail to recoup their production costs from
United States theatrical distribution. Foreign and ancillary
markets
have, therefore, become increasingly
important. Although both foreign and ancillary markets have grown,
neither provides a guarantee of revenue.
Licensing of a motion picture in the ancillary markets is
particularly dependent upon performance in domestic
theatrical distribution. If a motion picture is not an artistic or
critical success or if, for any reason, it is not
well-received by the public, it may be a financial failure.
5. Production May Be Prematurely Abandoned--The production or
distribution of the Picture may be
abandoned at any stage if further expenditures do not appear
commercially feasible, with the resulting loss of
some or all of the funds previously expended on the production or
distribution of the Picture, including funds
expended in connection with the pre-production of the Picture.
6. Cost Overruns May Occur The costs of producing motion pictures
can be underestimated and may be
increased by reason of factors beyond the control of the
producers.
Such factors may include weather
conditions, illness of technical and artistic personnel, artistic
requirements, labor disputes, governmental
regulations, equipment breakdowns and other production
disruptions.
While the LLC intends to engage
production personnel who have demonstrated an ability to complete
films within the assigned budget, the risk
of a film running over budget is always significant and may
have a
substantial adverse impact on the
profitability of the Picture.
7. Competitive Industry--Some segments of the motion picture
industry are highly competitive. In the
production phase, competition may affect the LLC's ability to
obtain
the services of preferred performers and
other creative personnel. The LLC will be competing with the
producers of other films in arranging for
distribution in all available markets and media. In the
distribution
phase, competition may limit the availability
of such markets and media required for the successful distribution
of the Picture. The Picture will be
competing directly with other motion pictures and indirectly with
other forms of public entertainment. The
LLC will compete with numerous larger motion picture production
companies and distribution companies that
have substantially greater resources, larger and more experienced
production and distribution staff and
established histories of successful production and distribution of
motion pictures.
8. Industry Is Constantly Changing--The entertainment business in
general, and the motion picture business
in particular, are undergoing significant changes, primarily
due to
technological developments. These
developments have resulted in the availability of alternative
forms
of leisure time entertainment, including
expanded pay television, basic cable television, syndicated
television, video cassettes, video discs, DVD, video
games and the Internet. Revenues from licensing of motion pictures
to such media will vary from year to year
relative to each other. The level of theatrical success remains a
critical factor in generating revenues in these
ancillary markets. It is impossible to accurately predict the
effect that these and other new technological
developments may have on the motion picture industry (see "MOTION
PICTURE INDUSTRY
OVERVIEW").
9. Foreign Distribution Is Perilous--Foreign distribution of a
motion picture (i.e., outside the United States
and Canada) may require the use of various foreign distributors.
Some foreign countries may impose
government regulations on the distribution of films. Also revenues
derived from the distribution of the Picture
in foreign countries, if any, may be subject to currency controls
and other restrictions that may temporarily or
permanently prevent the inclusion of such revenue in the
distributor's gross receipts or the LLC's Gross
Revenues.
10. Audience Appeal Is Unpredictable--The ultimate
profitability of
any motion picture depends upon its
audience appeal in relation to the cost of its production and
distribution. The audience appeal of a given
motion picture depends, among other things, on unpredictable
critical reviews and changing public tastes and
such appeal cannot be anticipated with certainty.
DESCRIPTION OF BUSINESS
Market Overview/State of the Industry
MPAA Theatrical Market Statistics Report According to the
2005
Theatrical Market Statistics
Report, U.S. box office for 2005 was $8.99 billion. The MPAA
report
states that for the fourth straight year,
domestic cumulative box office from all studios continued to hold
near $9 billion. The report further states that
Worldwide box office held steady at $23.24 billion in 2005.
Although
down 7.9% from 2004, the worldwide
box office reflected a 46% increase over 2000. U.S. theatre
admissions were down 8.7% in 2005, at a total of
1.40 billion. This compares to 1.54 billion in 2004. In 2005,
PG and
PG-13 films accounted for 85% of the
year's top 20 films. The average cost to make and market an MPAA
film was $96.2 million in 2005. This
includes $60 million in negative costs and $36.2 million in
marketing costs. Also, in 2005, the average ticket
price for the U.S. was $6.41. This represents a 3.2% increase over
the 2004 average ticket price of $6.21. In
2005, the total of new films released increased by 5.6% from 2004,
with 549 new films versus 520 in 2004.
[Source: MPAA 2005 Theatrical Market Statistics Report].
Domestic Box Office 2005 The earliest tabulations for total
domestic box office in the recently
completed year of 2005 were $8.75 billion, down from $9.2
billion in
2004. The rising trend in ticket prices
help to obscure an ever steeper drop in the theatrical admissions
which came in 11% lower than the previous
year (1.32 billion, down from the 1.48 billion of 2004). In
addition, 527 films were released domestically in
2005, compared with 507 in 2004. [Source: Variety.com Box Office
News, December 30, 2005]
In prior years, total box office revenues in the domestic
marketplace for 2004 came in at $9.214
billion as reported by Nielsen EDI. That compares to the 2003
figure
of $9.166 billion. Thus, 2004 only
experienced a very slight 0.5% increase over 2003. In addition,
according to industry analysts, the 0.5% gain in
the overall box office was principally attributable to a 3%
increase
in movie ticket prices, because overall
admissions as theatres fell in 2004 by 2.5% to 1.481 billion. That
was the 2nd year in a row that movie
attendance declined. It fell 5% in 2003.
Worldwide Box Office The global box office fell by 6% in
2005
but is forecast to grow by 12%
over the next five years, according to a new report from Informa
Telecoms and Media. Informa's "Global
Film: Exhibition and Distribution" estimated a worldwide box
office
dip to $22.3 billion in 2005, down from
$23.7 billion in 2004. The report predicts the figure will hit
$24.9
billion in 2010. Also, ticket sales fell to 7.8
billion in 2005 from 8.4 billion in 2004. Ticket sales are
expected
to rebound to 8.2 billion by 2010, according
to Informa.
The report also points out that the geographical split of box
office earnings has not substantially
changed over the past ten years and will not alter at all over the
next five. North America accounted for 45%
of the global box office in 2005, down slightly from 46% in 2000,
but up from 43% in 1995. Informa predicts
that share will remain constant at 45% through 2010. Europe has
gained share marginally since 1995, up to
30% from 28%, at the expense of the Asia-Pacific region, which has
dropped from 23% a decade ago to 18%
in 2005. [Source: Variety.com, "Study has Faith in Global B.O.
Bounce", Adam Dawtrey, January 4, 2006]
Home Video Despite unit sales being up, consumer
spending on
home video declined this year.
Preliminary projections for overall spending on all video rentals
and sales in the U.S. for 2005 indicate a drop
of less than 1% from $24.1 billion of 2004, according to DVD
Exclusive (a sister publication of Daily Variety).
Among the factors for the overall decline of the home video market
to $24 billion are: (1) the continued
collapse of VHS down roughly 60% in 2005 to about $1.5
billion, or
just 6% of the overall homevideo
market; (2) a 4% decline in the overall $7.78 billion rental
market,
which has been sliding since its peak of
$8.4 billion in 2001; (3) rapidly falling DVD retail prices;
(4) the
continued growth of TV DVDs whose many
hours of content keep consumers satisfied longer between
purchases;
and (5) top titles not reaching the same
heights only one title topped $230 million in 2005. In 2004,
there
were three, two of which exceeded $300
million.
Despite the 1% decline in revenue of the entire home video
market, total spending on DVDs alone
was up to $22 billion, a near 10% jump from 2004. [Source:
Variety.com, "Spending on DVDs up 10%", Scott
Hettrick, December 29, 2005]. Furthermore, with the number of DVD
units shipped expected to jump from
715 million to 1.5 billion in the upcoming years, consumer
spending
on DVDs is expected to more than double
to $51 billion by 2008. [Source: "Aud Spending Spike Surprise
Hits
Expected to Push B.O. Up 10%",
Michael Learmonth, Variety.com, August 1, 2004]
International Marketplace 2004's international box
office for
the Hollywood-based U.S. major
studio/distributors, independent distributors, and even local
producers around the world was much improved.
Motion picture ticket sales beyond the North American market
(Canada
and the U.S.) rose to $12.5 billion
with films released by the Hollywood-based major
studio/distributors
and their subsidiaries accounting for
$9.2 billion (73.6%), while the other releases brought in $3.3
billion in the international marketplace (26.4%).
The 2004 international box office figure surpassed the 2003
mark by
$2.4 billion. According to the MPAA the
major studio/distributor pictures earned $10.1 billion at the box
office in 2003. These totals do not include the
box office earnings of Indian or Chinese films in either of those
markets.
A six-year record of the worldwide box office revenues
generated by the film releases of major
studio/distributors appears to demonstrate a steady climb:
1999 $ 7.5 billion
2000 $ 7.8 billion
2001 $ 8.0 billion
2002 $ 9.6 billion
2003 $10.1 billion
2004 $12.5 billion
[Source: "Indie Spirit Takes Hold O' Seas Auds Boffo Biz
Abroad as
Tix Sales hit $12.5 Billion", Don
Groves, Variety.com, January 6, 2005]
Latin American Pay Television The research group Informa
Telecoms &
Media predicts that pay
TV revenues in Latin America will nearly double from 2004
levels to
about $12 billion by 2010. The
Americas Television report also forecasts that subscriber
levels in
Latin America will climb to 26.9 million by
the end of 2010. The damaging recessions in various countries have
passed, the researchers say, and, unlike
previous short-term recoveries, the signs are that this time
growth
will be sustained. Reliable data about pay
TV homes in Latin America is hard to come by given high rates of
piracy and under-reporting of subs to
programmers by some operators. Industry estimates range from 16
million to 18 million cable and satellite
homes, with sub growth essentially flat for the past few years.
The
Informa report also predicts a rapid
increase in the adoption of digital technology. It calculates that
Latin America had 4.7 million digital homes by
the end of 2004, including 1.9 million in Mexico. That figure is
expected to rise to nearly 13 million by the end
of 2010. [Source: "Report Sees Spike in Latam Revs", Variety.com,
April 7, 2005]
PriceWaterhouseCoopers Study According to the latest
industry
forecasts by
PriceWaterhouseCoopers, 88% of U.S. households will have DVD
players
by 2008. With some $7.7 billion in
rental income taken into consideration, consumers will spend
nearly
four times more money on movies and
TV shows on disc than they do at the box office by the end of the
decade. The predictions are part of
PriceWaterhouseCoopers' annual "Global Entertainment and Media
Outlook" review of consumer and intra-
industry spending in all mediums.
The report states that the continued DVD sales boom predicted
for the next three to five years will be
due largely to the addition of more than 40 million DVD households
in the U.S. alone. That kind of hardware
expansion should more than double the volume of DVD units shipped,
from around 715 million units today to
some 1.5 billion within the next five years, which is expected to
more than double the $22 billion currently
spent by DVD consumers today.
In addition, the PWC report predicts that total U.S. cinema
admissions will rise only slightly over the
next five years to around 1.76 billion tickets sold. Ticket price
hikes nevertheless are expected to help fuel a
5.4% total Domestic B.O. gain to $12.3 billion by 2008 versus the
$8.75 billion in 2005. Overall,
PriceWaterhouse sees total filmed entertainment spending at the
worldwide box office and homevideo/DVD
rising at 7.5% annually over the next five years to reach $108
billion, up from $75 billion in 2003. [Source:
"Powerful Disc Drive DVD Spending to Vastly Outweigh Box
Office",
Meredith Amdur, Variety.com, June
28, 2004]
Consumer Spending According to a study conducted by
merchant
bankers Veronis Suhler
Stevenson, consumer spending on filmed entertainment in the U.S.
will increase by more than 8% annually
during the five year period ending in 2009. That means overall
consumer spending on filmed entertainment is
expected to increase to $108 billion during that time period up
from
the $75 billion spent in 2003. That growth
will apparently be fueled by new technologies that will give film
distributors an increasing number of
opportunities to market movies. Such technologies extend the
life of
a movie and multiply its possible revenue
streams and include digital film over the internet, large library
pay-per-view (iPods, computers, satellite), direct
broadcasting, near video on demand, and more.
DVD sales continue to show growth. Total spending by
consumers
and institutions on DVDs was
projected to surpass $100 billion by 2007. As of 2003, there was
reportedly some 26.4 million households
with DVD players in the U.S., which helped generate total video
and
DVD software spending of $24.4 billion
in the previous year. [Source: "Spending on Media Rises Growth
Forecast to Reach $828 bil by 2007",
Meredith Amdur, Variety.com, August 10, 2003] Consumer spending on
DVDs is expected to more than
double to $51 billion by 2008, while spending on the VHS format is
expected to drop sharply in the upcoming
years. [Source: "Aud Spending Spike Surprise Hits Expected to
Push
B.O. Up 10%", Michael Learmonth,
Variety.com, August 1, 2004]
The combination of the Internet, low-cost monthly
subscriptions, and mail order allowing people to
keep DVDs as long as they want, is a winning formula across the
United States, Europe, and Australia. "DVD
rentals in the USA overtook video and have stayed in the lead
since
last June when they hit the 28.2 million
mark against 27.3 million video units", according to figures
published by the Video Software Dealers'
Association. With its strong movie culture, Europe has become a
strong market, and Australia with its rental-
friendly market is seen as the next new market for rentals.
[Source:
DVD News Digest, May 21, 2004]
It is no longer unusual for video sales to be twice or even
three times the volume of theatrical sales.
(The Hollywood Reporter, DVD issue). Moreover, DVD has already
outstripped its VHS counterpart as the
larger of the two components of home video rentals. Neither is it
unusual, even for a mediocre film, to recoup
its costs solely from home video revenues that may far outstrip a
lackluster theatrical run. [Source: VSDA
2003 Annual Report on the Home Entertainment Industry] With
box-office revenues accounting for only 26%
of film's gross revenue, having a product that performs well in
the
ancillary markets is essential to a film's
long-term success. [Source: www.pbs.com "The Monster that Ate
Hollywood" October 8, 2005]
DVD Sales "According to the MPAA, DVD sales now deliver
more
than 40% of a studio's
international income; independent distributors claim gains in
excess
of 30% -- due to insatiable consumer
appetite for rental but particularly sell-through DVD product.
This
phenomenal growth is stimulating the
marketplace in fundamental ways; providing novel business models,
cost-effective exploitation of archive
assets and even first-out distribution that circumvents the tricky
theatrical sector." [Source: Screen
International]
"Discount retail juggernaut Wal-Mart now accounts for a
whopping 33% of all new and used DVD
and VHS purchases in the U.S., according to a new survey of
America's burgeoning population of DVD
lovers . . . Based on data samples between October 2003 and April
2004, NPD found that mass market retailers
as a whole are responsible for 42% of all VHS and DVD purchases.
Best Buy is making inroads on Wal-Mart
with 13% of all units sold, with rental shop Blockbuster and
retailer Target claiming around 6% each."
[Sources: Meredith Amdur, Variety, and NPD VideoWatch]
"According to the latest industry forecasts by
PriceWaterhouseCoopers, some $7.7 billion in rental
income taken into consideration, consumers will spend nearly four
times more money on movies and TV
shows on disc than they do at the box office by the end of the
decade." [Sources: Variety and
PriceWaterhouseCoopers' annual "Global Entertainment and Media
Outlook"]
Brief History of DVD From an historical perspective, the
use
of DVD's did not take off quite as
fast as some of the early predictions, but it has sold faster than
the videotape, CD and laserdisc formats. In
fact, before the third anniversary of the availability of the
DVD as
of March 2000, the DVD had become the
most successful consumer electronics entertainment product
ever. As
of the fall of 2003, 16 million DVD-
Video players had been shipped in the U.S. adding to an existing
installed base of 73.3 million. In addition,
more than 27,000 DVD-Video titles were available in the U.S. at
the
time and that number has certainly
increased since. [Source:
http://dvddemystified.com/dvdfaq.html#1.9]
DVD player Sales in the U.S. from the first year of its
introduction:
1997 315,136
1998 1,089,261
1999 4,019,389
2000 8,498,545
2001 12,706,584
2002 17,089,823
2003 21,994,389
2004 19,999,913
[Source:
http://www.thedigitalbits.com/articles/cemadvdsales.html]
When DVD players became available in early 1997, Warner and
Polygram were the only major movie
studios to release titles. Additional titles were available from
small publishers. The other studios gradually
joined the DVD camp. Dreamworks was the last significant studio to
announce full DVD support.
Paramount, Fox, and Dreamworks initially supported only Divx,
but in
the summer of 1998 they each
announced support for open DVD. [Source:
http://dvddemystified.com/dvdfaq.html#1.9]
Eventually, DVD player sales exceeded VCR sales in 2001. DVD
recorders are expected to hasten the
death of VCRs once the price difference is small enough. DVDs have
many advantages over tapes, such as no
rewinding, quick access to any part of a recording and
fundamentally
lower technology cost for hardware and
disc production. By 2010, VHS may be as dead as vinyl records were
in 2000. [Source:
http://dvddemystified.com/dvdfaq.html#1.9]
Distributor Revenue Streams In a comprehensive media study,
MediaCast 2008, Paul Kagan and
Associates presented estimated revenue forecasts for entertainment
media distributors. According to the study,
entertainment revenues in the U.S. grew at twice the inflation
rate
9.8% per year between 1992 and 1998.
Combined revenues of the entertainment economic sector are
expected
to grow an average of 8.3% per year to
top the one trillion mark in 10 years (i.e., 2008) based on the
study.
Estimated Distributor Revenue Streams ($ millions)
(Source: Paul Kagan Associates, Inc. Mediacast 2008)
Revenue Sources 2008 %
Domestic (North America)
Theatrical Rentals 5,739 19.78
Home Video 13,836 47.69
Broadcast Networks 988 3.41
Pay Television 1,742 6.00
Syndicated Television 268 .92
Basic Cable 2,532 8.73
Merchandising/Licensing 977 3.37
PPV/DBS/VOD/DVOD 2,828 9.75
Hotel/Airlines/Military/Other 104
.36
Total Domestic 29,014 100.0%
Foreign/International
Theatrical Rentals 8,257 29.17
Home Video 6,623 23.40
Network TV/Syndication 4,223 14.92
Pay Television 4,211 14.88
Merchandising/Licensing 1,936 6.84
PPV/Hotel/Airline 3,054 10.79
Total Foreign/International 28,304 100.0%
The data in the above chart shows that the major changes in film
revenues are expected to come from
technologies that have existed for several years but have not yet
emerged as major forces:
Pay-per-view
Direct broadcast satellite
NVOD/VOD
Digital streaming and direct-to-theatre
delivery
The Independent Film Industry
Independent Film An independent film, by definition, is any
film
financed by a source other than a
so-called major studio/distributors, such as Paramount, Universal,
Warner Bros., Sony, Disney and 20th
Century Fox. While the Picture may eventually be distributed by a
major studio, the cost of production and the
final preparation of a ready-to project negative print - the
"Negative Cost" - comes from other sources,
independent of such studios.
Otherwise, the same processes apply to an independent film as
they
do to a studio film
development, pre-production, production and post-production. As
with
Spring Break '83, a smaller production
company usually raises money for one film at a time. Often these
independent production companies are
owned or controlled by the creative people involved, such as a
writer/director, writer/producer, actor/producer
complemented by a financial partner or investment group.
By working outside of the studio system, an independent producer
is free from the homogeneity of a
studio production and can exercise more control over the look and
style of the film, and without the deep
pockets of the studio to fall back on, a high degree of focused,
budgetary vigilance and cost monitoring can be
implemented. This means that independent producers can devote more
time to their projects and plan their
budgets more efficiently by giving greater attention to their
lower-budgeted material. Unlike studios, the
independents avoid the overhead costs of maintaining large
administrative staffs. Consequently, independent
films are generally produced for a fraction of the cost of
studio-produced films.
"Look at the history of major studio releases. One-fourth to
one-third of their films were produced by
indies. There's a reasons for this. Research has shown that
there's
a higher ratio of success with indie-acquired
product over in-house productions." [Source: Larry Sugar, motion
picture financing and marketing consultant
in Los Angeles, as quoted in the Hollywood Reporter]
Independent films also benefit from broader opportunities and
increased flexibility. This is of great
significance in a film's distribution phase where it is
possible to
license the rights to the picture to separate
distribution entities thereby maximizing its earning potential
keeping the revenue streams from domestic
(U.S. and Canada) and international markets separate.
Of significance to potential investors is the consideration that
independently financed pictures provide
an opportunity for both the investors and the producers to
share the
revenues of a film, unlike pictures financed
by a larger studio where significant allocations of overhead and
other charges require substantial deductions
from the film's revenue stream and thereby drastically reduce the
potential for profit.
Growing Importance of the Independent Film Industry The growth
and success of the
independent film is a continuing phenomenon in the motion picture
industry. Somewhat cyclical in nature
from year to year, the trend really took off in the late
1970's. The
boom was Fostered in part by Robert
Redford's Sundance Film Festival and filmmakers like John
Cassavetes
and others who proved, conclusively,
that it was possible to make a film for far less money than the
studios did. This trend grew through the 1980's
and 1990's as major studios underwent a radical process of
restructuring when expensive production facilities
and staff, significant overhead expenses and runaway productions
forced them to follow new business models,
calling for fewer films, but expecting higher grosses per film.
As a
consequence, smaller companies with
lower-budgeted films were able to command a bigger share in the
market. Currently, independent films are
now a firmly established and permanent segment of the motion
picture
industry.
The 2004 box office for independent films accounted for $3.8
billion of North American box office
receipts, 40 percent of a total $9.2 billion total box office
[Source: "Filmmakers and Financing" S. Levison
2004] In addition, the most recent survey of the Independent Film
and Television Alliance (IFTA) shows a
total of $2.6 billion for U.S. independent films in overseas
sales.
[Source: IFTA Annual Survey 2004]
In addition, the production cost and marketing for major
studio/distributor releases have continued to
increase. In 2003, the average cost of producing and marketing a
major studio/distributor motion picture
surpassed $100 million for the first time. With this ridiculously
high price tag on studio films, foreign market
distributors started scavenging film markets hoping to find a
reasonably priced independent film that can
attract audiences and make money. In 2005 alone, the American Film
Market, the largest North American
independently driven trade forum, saw a 15% growth rate in the
number of participating distributors. [Source:
AFM Books Record Number of Exhibitors", G. Kilday, 2005]
Moreover, recent studies show studio produced and released films
have suffered a 6.5% box-office
retreat in 2005 as the studios are being forced to watch some of
their frustrated mainstream audiences turn to
smaller, more independently driven stories, like Crash and Hustle
and Flow. [Source: The Times Herald
"Box-Office Slump has Theaters Reeling", B. Chapin, 2005] Some
industry observers suggest that this is
because the recent strategy of studios to produce remakes,
sequels,
and biopics have left audiences longing for
something more original. This effect could have been foreshadowed
with the extreme success of independent
films in 2004, including the hit sleeper Napoleon Dynamite and the
highest grossing independent film of all
time, The Passion of Christ, which grossed more than $370
million at
the box-office. [Source:
www.imdbpro.com "Title Search Engine" 2006]
Independent Films Benefit Greatly From "Buzz" Events have
recently shown that independent
films with good "buzz" (pre-release notices by reviewers, film
festival success and good public relations, along
with positive word-of-mouth) may not only survive but ripen and
flourish. Significant examples are the Blair
With Project and My Big Fat Greek Wedding. Both pictures were
released on a relatively small number of
screens nationwide. As audience approval grew and friends and
family
were referred, the films began to enjoy
wider and wider release in more and more theatres in more and more
cities. NO ASSURANCES CAN BE
PROVIDED HOWEVER, THAT THE LLC'S FILM WILL ACHIEVE SIMILAR
NOTORIETY.
Sundance Film Festival 2006 The Sundance Film Festival
(held in
Utah late in January each year
and often promoted as the foremost platform for American
independent
cinema) experienced a major jump in
U.S. submissions for this year's festival, 379 more than 2005
for a
total of 1,764 U.S. submissions in 2006.
The Fox specialty distribution subsidiary Fox Searchlight
made the
first buy of the 2006 Sundance
Film Festival, acquiring the worldwide rights to distribute Little
Miss Sunshine in a heated bidding war that
reportedly ended at more than $10 million dollars (plus 10% of the
gross). The picture was produced by the
husband-wife commercial and music-video team of Jonathan Dayton
and
Valerie Faris. Distributors
immediately began making offers on the ensemble film, starring
Greg
Kinnear, Toni Collette and Steve Carell,
after the picture received a standing ovation at its Sundance
premiere. Offers then flooded into sales rep
Cinetic Media from Focus Features, the Weinstein Co, and Miramax
Films. Warner Independent Pictures was
also in the mix. Little Miss Sunshine follows a motley, six-member
family trekking to the Little Miss Sunshine
pageant to fulfill the wish of a big-dreaming 7-year old. The
script
was written by Michael Arndt and produced
through the Big Beach and Bona Fide Prods. Banners by Marc
Turtletaub, David T. Friendly, Peter Saraf,
Albert Berger, and Ron Yerxa. [Source: Variety.com, "Searchlight
Spends the Big Bucks", January 21, 2006
Ian Mohr and Pamela McClintock]
The Science of Sleep was the second major buy of the '06
Sundance
Film Festival. Warner
Independent Pictures acquired rights to writer-director Michel
Gondry's film with the bid coming just 20
minutes after the film premiered. The Warner specialty distributor
subsidiary reportedly paid $6 million for
U.S., U.K., and Canadian rights to the sci-fi drama, which stars
Mexican actor Gael Garcia Bernal. The
Science of Sleep was described as more experimental than any of
the
director's previous work. The film
follows Bernal as a withdrawn man who returns to his childhood
home,
where his fanciful and disturbing
dream life threatens to take over his waking world. WIP president
Mark Gill crafted the deal with WIP
acquisitions executive Paul Federbush, UTA and CAA. WIP is
planning
to release the picture later this year as
a platform rollout to minimize marketing costs. The film was
produced by Georges Bermann. United Talent
Agency and Creative Artist Agency were co-reps on the deal. UTA's
indie unit packaged the film.
[Variety.com, "Film Flurry Brisk Biz Hits Park City," January
23,
2006, Ian Mohr and Pamela McClintock]
Other film acquisition activity at the 2006 Sundance Film
Festival
included IFC's pick up of North
American rights to Bent Hamer's dark comedy Factotum. The film
stars
Matt Dillon, Lili Taylor, Fisher
Stevens and Marisa Tomei. It premiered at Cannes. Based on Charles
Bukowski's semi-autobiographical novel,
the script was written and produced by Bent Hamer with Jim
Stark.
Sony Pictures Classics also closed a deal on this year's Russian
Oscar entry The Italian in North
America for North American distribution. The acquisition, which
was
not a Sundance selection, is the feature
debut of helmer Andrei Kravchuk. The story follows 6-year-old
Vanya
(Kolya Spiridonov), who must choose
between letting himself be adopted by a foreign family or running
away to find the mother who abandoned
him. The picture premiered in Berlin last year. [Source:
Variety.com, "Searchlight Spends the Big Bucks",
January 21, 2006, Ian Mohr and Pamela McClintock]
Miramax Films made its biggest festival acquisition of the
post-Weinstein era at the '06 Sundance
Film Festival, shelling out $3 million for North American
rights to
Patrick Stettner's mystery thriller The Night
Listener. The film, starring Robin Williams and Sandra Oh, marks
Miramax's first Sundance buy under new
president Daniel Battsek. IFC co-financed the picture with Gotham
production banner Hart Sharp and was
reportedly prepared to release the film itself if a major buyer
did
not materialize at Sundance. Lionsgate and
Sony Pictures Classics were among the companies showing interest
before Battsek closed the deal. The picture
is based on an Armistead Maupin story about a popular radio
host who
develops an intense phone relationship
with a young listener and his social worker.
In other '06 Sundance activity, the BBC acquired British
broadcast
rights to IFC's This Film Is Not Yet
Rated, writer-director Kirby Dick's documentary an inside
look at
the Motion Picture Association of
America's rating system. Hong Kong and Amsterdam-based Fortissimo
Films signed on to represent the
documentary's international rights. British distributor Momentum
Pictures acquired all U.K. rights to writer-
director Jody Hill's martial arts comedy The Foot Fist Way, which
screened in the Midnight section at
Sundance. Pathe acquired U.K. distribution rights from the French
sales company Wild Bunch to The Fox and
the Child, the just-announced follow-up from March of the Penguins
director Luc Jacquet. And TF1 Intl.
snapped up all non-English-speaking territories to Christopher
Quinn's documentary God Grew Tired of Us,
which had its world premiere at Sundance. [Source: Variety.com,
"'Listener' Speaks to Miramax Docu Sales
Slow at Fest", January 24, 2006, Pamela McClintock and Ian
Mohr]
Independent distributor Lionsgate acquired world rights to
director Chris Gorak's debut film, the dirty
bomb thriller Right at Your Door. The film follows the
detonation of
a dirty bomb in L.A. and a married man
who decides to seal himself inside his home to escape a possibly
toxic cloud. The picture stars Mary
McCormack and Rory Cochrane. Jonah Smith and Palmer West of
Thousand
Words produced. Lionsgate Intl.
will handle overseas rights.
IFC Films made the festival's first documentary buy, paying
about
$1 million for rights to Wordplay.
IFC beat out a bevy of potential buyers -- including Picturehouse,
Warner Independent Pictures and Roadside
Attractions -- to get Wordplay, which world premiered at
Sundance in
the documentary competition category.
Cinetic Media was repping the film's rights. The picture takes a
look at New York Times crossword editor and
NPR host Will Shortz and the national tournament that he founded.
Patrick Creadon directed Wordplay and
Christine O'Malley produced. [Source: Variety.com, "Sale Spree
Hits
Slopes", January 25, 2006, Ian Mohr and
Pamela McClintock]
The Darwin Awards, the last of the Sundance so-called buzz
titles
to premiere at the festival was
acquired by Bauer Martinez. The picture stars Joseph Fiennes,
Winona
Ryder, David Arquette and Juliette
Lewis. [Source: Variety.com, "'Darwin' Deal Quickly Evolves",
January 26, 2006, Pamela McClintock and
Ian Mohr]
The foreign sales company Katapult picked up overseas rights to
the documentary TV Junkie repped
by ICM, Submarine and Ring the Jing Entertainment at Sundance. The
film is a portrait of journalist Rick
Kirkham as he struggles to balance his personal life while in the
throes of drug addiction. The film was
produced by Michael Cain, who co-directed with Matt Radecki.
Katapult is based in Los Angeles and headed
by Thomas Mai and producer Joni Sighvatsson.
Roadside Attractions and Samuel Goldwyn Films reportedly paid
somewhere in the low- to mid-six
figures for domestic rights to the comedy Stay. The two companies
are partners in the IDP distribution label.
Stay was being repped here by WMA, and the domestic pick-up came
just a day after French company
Gaumont acquired overseas rights to the picture. Stay follows a
young, engaged teacher (Melinda Page
Hamilton) who is haunted by an impulsive sexual encounter from her
past. When she reveals her secret, all
hell breaks loose. The script was written and directed by comedian
Bob Goldthwait. It was produced by Martin
Pasetta Jr. [Source: Variety.com, "TV Junkie', 'Stay' Sell at
Sundance", January 27, 2006, Ian Mohr]
ThinkFilm reportedly paid about $1 million to acquire North
American distribution rights to Half
Nelson starring Ryan Gosling and Anthony Mackie. The film
follows a
unique relationship between a white
school teacher, his African-American student and a local drug
dealer. It is a feature-length version of writer-
director Ryan Fleck's Sundance-winning short film Gowanus,
Brooklyn.
Anna Boden co-wrote the feature
version and also was one of its producers. The film's other
producers included Jamie Patricof, Alex Orlovsky,
Lynette Howell and Rosanne Korenberg. Paul Mezey, Doug Dey,
Charlie
Corwin and Clara Markowicz were
executive producers. [Source: Variety.com, "ThinkFilm Wrestles
'Half
Nelson' Rights", January 29, 2006, Ian
Mohr.
In other activity director Ramin Bahrani's Man Push Cart was
acquired by the independent distributor
Films Philos for a domestic release. The picture already had
foreign
deals for distribution in France, Greece
and Benelux through Paris-based sales rep Wide Entertainment. Man
Push Cart follows a Gotham street
vendor and his struggling life in the city. In addition, domestic
rights for La Tragedia de Macario, directed by
23-year-old first-timer Pablo Veliz, were acquired by Independent
distributor Arrival Pictures. [Source:
Variety.com, "ThinkFilm Wrestles 'Half Nelson' Rights", January
29,
2006, Ian Mohr.
Sundance Film Festival 2005 The '05 Sundance Film Festival
received 2,613 feature submissions
for its 21st year's event (2005). Of those, 1,385 were U.S. films
and 1,228 originated in other countries. Seven
hundred sixty-one (761) American narrative features were
submitted.
For the first time this year, the festival
instituted an international competition. In prior years,
international films were screened but did not have a
competition category of their own. Last year (2004) the festival
received 2,485 total entries, 1,285 domestically
and 1,200 from abroad. A total of 120 films were screened at the
festival in 2005, whereas 137 were screened
there in 2004. [Source: "Sundance Stepping to an Int'l Rhythm",
Todd
McCarthy, Variety.com, November 29,
2004]
At the 2005 Sundance Film Festival, Paramount Pictures and MTV
Films reportedly committed to
paying a $9 million dollar advance for Craig Brewer's film
Hustle &
Flow, in addition to some future
production commitments to the film's producer John Singleton.
Lions Gate Films reportedly paid nearly $4 million (for
worldwide
rights outside the U.K., Spain and
Australia) for the David Slade drama Hard Candy (the story of a
romance between a teenage girl and an older
man that began on the Internet). The film premiered at this year's
Sundance Film Festival. Apparently, Lions
Gate Films, also agreed to give the filmmakers 20% of the film's
gross (most likely meaning some defined
form of adjusted distributor gross receipts).
Dimension Films reportedly bought U.S. rights to Greg Mclean's
Australian horror film Wolf Creek
for $3.5 million just prior to the festival. Paramount Pictures
reportedly paid about $2 million for the
worldwide rights outside Australia and New Zealand for Mad Hot
Ballroom.
The total distributor advances on the 2003 Sundance film's Saw,
Garden State, Napoleon Dynamite
and Open Water only barely exceeded $10 million, but those
Sundance
films have collectively earned $157
million in their domestic releases, and all of them are
expected to
do well in DVD. Moreover, they were all
directed by first time directors. [Source: "Pickup Pace Quickens",
Dana Harris, Variety.com, January 30,
2005]
Key Film Industry Trends--A report on key trends in the media
and
entertainment industry prepared
by Arthur Andersen and released at the beginning of the decade
concluded that "This industry is very robust
and healthy." John Nendick, global managing partner of media and
entertainment at Arthur Andersen stated:
"As the demand for content continues to climb, it has immense
upside." Arthur Andersen surveyed 35
companies, including the major entertainment conglomerates, and
found that the number of new films released
domestically grew 19.5% in the past five years, while the
number of
movie screens decreased by 13%. The
firm also found, however, that less than 50% of the films made in
the past three years have been profitable.
[Source: The Hollywood Reporter, December 26, 2000-January 1,
2001,
pages 3 & 45] The Producers of the
LLC's Film recognize, however, that their Motion Picture may or
may
not be able to participate in this
industry-wide upside potential, since the production and
distribution of an independent film is such a high-risk
venture (see "REQUIRED NOTICES Risk Factors").
Global box office revenue is expected to grow to $28 billion by
the year 2010, although the number of
moviegoers is expected to only rise a modest 19% by that same
year.
Those are the conclusions reported in the
third edition of Global Film: Exhibition and Distribution, a
report
published by the research entity Baskerville
Communications. Despite low admissions growth, global box office
figures are expected to rise 55% over the
first decade of the 21st Century, with much of the increase due to
multiplexes charging higher ticket prices
than traditional cinemas. The U.S. took an estimated 43% of global
box office in 2000, and this share is
expected to fall only slightly to 39% by 2010. The top ten
countries
accounted for about 81% of the global box
office in the year 2000, while this percentage is considered
likely
to fall only slightly by 2010. [Source:
Global Film: Exhibition and Distribution, Baskerville
Communications]
These changes in the marketplace in the U.S. and abroad have
created an ongoing demand for new
movies. And yet, despite this demand, the Producers have observed
that the proportion of motion pictures
produced and released by the major studios has declined in recent
years. Based on periodic reports in the
industry trade publications, this is due largely to increased
studio
overhead and Hollywood production costs
which have driven the budgets of studio films up to an average of
approximately $60 million (without
considering marketing costs). Independent films, conversely, have
experienced a growth in both number and
percentage of total films released. With budgets averaging a
fraction of the major studios, independent
producers have been able to turn out films that have successfully
competed with the higher-cost Hollywood
films, while also offering the possibility of a higher rate of
return. The majors have recognized there is profit
potential in the marketing and exploitation of independent films.
Not surprisingly, this has lead to a significant
consolidation, whereby most all studios now own, or are affiliated
with, an independent or specialty distributor
(i.e., Disney/Miramax, Paramount/Paramount Classics; Sony/Sony
Pictures Classics and Screen Gems, Warner
Bros./New Line, Fine Line and Warner Classics, Universal/Focus
(formerly USA October+Gramercy).
Traditionally, as much as 50% of major/studio releases are of
independently produced films. Thus, the
opportunity for the LLC's Film is to produce a quality motion
picture that will be acquired for distribution by a
major studio/distributor or specialty distributor affiliate or
finally by one or more independent distributors such
as the companies of the International Film and Television
Association, formerly known as the American Film
Marketing Association (see "RISK FACTORS").
New Technologies and Related Revenue Sources--There are
continually new avenues of
distribution and delivery technology. More TV channels are being
created and high-tech movie megaplexes are
changing the landscape of the foreign distribution marketplace,
especially in France, Italy, Eastern Europe and
Russia. In the domestic U.S. market, which started the trend,
giant
cineplexes or megaplexes with 10 to 12
screens per complex have replaced the local single-screen or 3
screen theatres.
A number of new technology-driven film delivery/distribution
methods
are expected to begin
maturing during the "exhibition life" of Spring Break '83 and may
become important additional revenue
sources. Among them are:
Large Library pay-per-view (PPV)
Direct Broadcast Satellite (DBS)
NVOD Near Video on Demand
VOD Video On Demand
Digital Film Over the Internet--Digital film delivered over the
Internet, is also expected to continue
to grow. In addition, changes in the core nature of distribution
brought about by digital or electronic delivery of
media is expected to continue. The 35mm negative is not dead, but
it's days are numbered as may be those of
the neighborhood video store. A report by SRI Consulting recently
stated that "movies encoded as digital data
files, either recorded on optical disk and physically shipped or
broadcast via satellite or land line, will
increasingly replace film prints as the preferred method for
distributing movies to theatres by 2005."
The Movie Piracy Problem--A recent study of movie piracy
indicates
that online piracy (conducted
by peer-to-peer networks) is costing the film business about $850
million per year in revenue. The study,
released in January of 2005 by the Informa Media Group, found that
the estimated lost revenues stemming
from digital piracy is about 25% of that for hard-copy piracy,
which
the group estimated to be around $3.5
billion for 2004. DVD piracy has been estimated at somewhere
between
$3 billion and $4 billion. The Informa
"Film on the Internet" report is the first to attach a figure
to the
growing phenomenon of Internet piracy.
According to the study, digital piracy is expected to nearly
double
to $1.7 billion by 2010, while hard copy
piracy is expected to grow less aggressively to $4.5 billion.
In the meantime, the MPAA has broadened its antipiracy campaign
online with a second round of
lawsuits directed towards alleged downloaders of pirated
movies. The
MPAA's member studios are also suing
operators of indexing servers that help users locate and download
pirated content.
The impact of Internet piracy is somewhat mixed, however. Some
film industry observers indicate that
many of the films being downloaded are of such poor quality that
they are less likely to influence someone's
decision not to purchase the film through legitimate channels. In
other words, the downloading of poor quality
films may actually be serving as an extended promotional
trailer for
the movie, creating an increased desire to
see a better quality version of the same film. On the other hand,
the study also concludes that the biggest threat
from piracy may be its tendency to generate bad buzz for a film,
thereby discouraging people to see the film
legitimately.
Even though the study agrees that piracy is a significant
problem,
the study also noted that if pirated
movies were considered a part of the global film business in 2004,
bootleg DVDs would have represented only
4.3% of revenue worldwide, while the illegal downloads from the
Internet would have represented only 1.1%
of worldwide revenue.
In the meantime, the report suggests that the legitimate online
film business is still in its infancy,
reporting that in 2004, Internet video-on-demand revenues from
sites
such as CinemaNow and Movielink
totaled a mere $11.7 million. On the other hand, the report
indicates that such revenues are expected to
increase to nearly $1 billion in 2010. The study concludes that
the
time may be right to expand those
businesses because of reducing price points, flexible business
models and advancements in home networking.
[Source: "Study: Web Piracy Costing Bix $850 mil Informa's
Report
First to Attach Figure to Growing
Practice", Ben Fritz, Variety.com, January 27, 2005]
The Impact of Significant New Industry Trends--Driven by new
economic trends and the advance
of technology, the film industry continues to evolve rapidly. Some
of these key trends and advances,
summarized below, are expected by the Films' Producers to have a
positive impact on the success of Spring
Break '83 in the form of new distribution and revenue sources.
The International Market has overtaken the Domestic (U.S. &
Canada),
in terms of revenues from
theatrical distribution. Foreign theatrical revenues now
constitute
more than 52% of total theatrical revenues.
[Sources: Los Angeles Times, October, 5, 2002 and Screen
International, January, 2004] Opinions expressed
in this section for which a source is not otherwise cited are
those
of the Producers. NEITHER THE LLC'S
MANAGER NOR ITS OWNERS ARE AFFILIATED IN ANY WAY WITH THE
PUBLISHERS
OF THE
INFORMATION REGARDING THE FILM INDUSTRY AS REPORTED ABOVE.
The Manager and LLC Management
The individual filmmakers Mars Callahan and Rand Chortkoff
are the
owners of the LLC Manager,
the Los Angeles-based feature film development/production company
Big Sky Motion Pictures, LLC. Big Sky
Motion Pictures, LLC serves as the Manager of the LLC and that
newly
formed manager-managed LLC
serves as the investment vehicle and production/development
company
for the Film. Big Sky Motion Pictures
has assembled an experienced group of filmmakers for the specific
purpose of bringing Spring Break '83 to the
screen (see "DESCRIPTION OF BUSINESS People of Spring Break '83
Production, LLC"). The address for
the Manager's base of operations is 650 North Bronson Avenue,
Suite
B-128, Los Angeles, California 90004.
The Manager will provide the LLC with its management's time,
effort, skill and experience, and the
rights to the Screenplay Spring Break '83, along with all
necessary
office, clerical and management support.
The Manager will receive limited consideration for such
contributions to the organization and management of
the LLC (see "OFFERING INFORMATION--Manager and Affiliate
Compensation"). It is anticipated that the
Manager and its individual owners will serve in their respective
capacities throughout the life of the LLC
entity.
The Manager has chosen to produce an independent feature film
that
its management believes will
afford investors a rare opportunity to become involved in the
making
of a feature-length motion picture with
worldwide appeal for sophisticated audiences. Specifically, the
LLC's strategy is to produce a feature-length
comedy with a production budget of approximately $6,000,000 for
exploitation in markets and media in the
United States as well as, to the extent feasible, throughout the
rest of the world, in order for the Members and
Manager to participate in the global revenue generating
prospects of
a continuously growing and somewhat
recession-resistant industry.
The LLC will be formed to finance, produce and arrange for the
distribution of the Picture. The
Picture will be an independent feature film, meaning that it is
being produced outside the Hollywood studio
system. The Manager has intentionally determined to produce an
independent feature film based upon the
belief that such strategy offers a greater likelihood of avoiding
studio interference in the creative decision-
making process. Furthermore, the Manager believes that by
operating
outside the Hollywood studio system it
will be more likely to create a Film of a unique nature and merit
which may create opportunities for effectively
marketing the Film.
The LLC will be managed by the Manager, which, in turn, will
have
the exclusive right to exercise
control of the business of the LLC. In this connection, the
Manager
will make all decisions of the LLC with
respect to most aspects of the financing and production of the
Picture, as well as certain important decisions
relating to the Film's production and distribution. More
specifically, the Manager will have full power,
authority and control over all creative, business, financial and
legal matters in connection with the LLC and the
development, production, and exploitation of the Film, and
acquisition of all subsidiary and ancillary rights
thereto and all exploitation of the Film, including, without
limitation, decisions regarding the budget, the
motion picture studio, the distributor, the name of any Screenplay
and/or Film, structure and terms for Film
deals, the director, cast, producer, music, writers, and the
consideration for any rights granted or services
rendered hereunder by the Manager and others. The Unit Holders are
legally restricted from taking part in the
control of the business of the LLC or in the production of the
Picture and, in this regard, will have no right or
authority to act for or bind the LLC. The Unit Holders will have
only such rights and powers as Unit Holders
as are expressly provided by the Operating Agreement (see
"OPERATING
AGREEMENT" at Exhibit "B").
The Manager, the Manager's Affiliates, Counsel and consultants
shall be held harmless and be
indemnified by the LLC for any liability, loss (including amounts
paid in settlement), damages or expenses
(including reasonable attorney's fees) suffered by virtue of any
acts or omissions or alleged acts or omissions
arising out of such person's activities either on behalf of the
LLC
or in furtherance of the interests of the LLC
if the Manager has determined in good faith that the course of
conduct was in the best interest of the LLC and
such liability or loss was not the result of negligence or
misconduct by such person (see Article 7.11 of the
LLC Operating Agreement at Exhibit "B").
People Of Spring Break '83 Production, LLC
MARS CALLAHAN
Writer, Actor, Director and Producer
Big Sky Motion Pictures CEO and an Owner of the LLC Manager
Mars Callahan began his acting career at age eleven with a
children's musical group for Columbia
Artists, singing and dancing on stage in a thirty-seven state tour
across the United States. By age fifteen, he
landed a supporting role on the hit television series "The Wonder
Years." Continuing to work in television,
Mr. Callahan appeared in many other popular television series,
such
as "Cagney and Lacey", "Growing Pains",
"The Facts of Life", "The Bronx Zoo" and "ER".
After honing his skills as an actor in television, Mr. Callahan
moved into the motion picture industry
and appeared in several motion picture films directed by Dominic
Sena who cast Mr. Callahan opposite Brad
Pitt in Kalifornia; Lawrence Kasdan who featured him with
William
Hurt in The Accidental Tourist and
Tom Hanks -- who cast Mr. Callahan in their second film together:
That Thing You Do. Mr. Callahan has also
appeared in films with other top box office stars, including
Charlize Theron, Liv Tyler, George Clooney,
James Garner and Martin Short.
Mr. Callahan made his career debut as a motion picture
director in
1998 when he wrote and directed
the short film "The Red Bag," which opened that years' Hollywood
Renaissance Film Festival. Shortly
thereafter in 1999, he wrote and directed the feature-length
motion
picture Double Down starring Jason
Priestly. In 2000, Mr. Callahan wrote, directed and starred in the
feature-length motion picture film Poolhall
Junkies with a supporting cast, including Academy Award winner
Christopher Walken, Academy Award
winner Rod Steiger and Academy Award nominee Chazz Palminteri. The
film was nominated for best sports
movie at the 2003 ESPY Awards.
Mars Callahan continues to write and direct new material,
including the new romantic comedy What
Love Is, which completed principal photography in January 2006 and
is currently in post-production. The
producers describe What Love Is as a character-driven piece
about a
man, played by Academy Award-winner
Cuba Gooding, Jr., who discovers a "Dear John" letter from his
long-time girlfriend on the day he intends to
propose marriage. Mr. Callahan directs, edits and oversees
post-production for the films he produces.
At age 34, Mr. Callahan resides in Los Angeles.
RAND CHORTKOFF
Producer and Music Acquisitions Executive
Owner of the LLC Manager
Rand Chortkoff has more than twenty years experience in music
production and promotion. His
entertainment industry experience includes film financing and
production, promotion and production of music
festivals and the production of award-winning records.
Mr. Chortkoff's company, Delta Groove Productions, Inc. has
raised
more than $30 million to
facilitate the production of seven independent feature films
during
the last six years. Delta Groove also
specializes in the production of movie soundtracks, music
licensing,
music publishing and marketing services.
In addition, Delta Groove has produced and promoted many
successful
live concerts.
Mr. Chortkoff is a 30-year veteran music producer and a lifelong
devotee of American roots, blues
and R&B. For almost a decade, he produced the annual Blues Hall of
Fame Festival in Los Angeles, which
showcased many legendary artists. He has also produced music for
such artists as Albert King, Otis Rush,
Chicago blues legends Jimmy Rogers and Billy Boy Arnold and Louis
and Dave Myers of "The Aces."
Currently, Mr. Chortkoff's Delta Groove Productions is involved
with recording and marketing the
traditional blues sound. He also seeks to discover those young
artists who are honoring blues traditions and are
carrying blues to today's music fans.
Mr. Chortkoff oversees the production and acquisition of
music for
Big Sky Motion Pictures.
At age 56, Mr. Chortkoff resides in Los Angeles.
Consultants
JOHN W. CONES
Attorney/Author/Lecturer
Counsel to LLC Manager
John Cones is a securities/entertainment attorney licensed to
practice in the states of California and
Texas. His primary area of expertise is federal and state
securities
compliance for entertainment oriented
business plans, limited partnership, limited liability and
corporate
stock offerings providing financing for
feature films, Internet companies, television pilots, live stage
plays, documentaries and infomercials. Mr.
Cones has worked in that area of the law for 18 years in
Houston and
Los Angeles and has participated in the
production of the required disclosure documents for more than 200
securities offerings. Some 35
independently produced feature and documentary films have been
produced as a result of those investor
offerings. In addition, he has incorporated, licensed and
counseled
regarding compliance matters, a half dozen
securities broker/dealer firms engaged in such offerings. Mr.
Cones
has lectured on film finance topics for the
past 18 years throughout the United States.
He has authored four books Film Finance and Distribution--A
Dictionary of Terms (Silman-James
Press, 1992), Film Industry Contracts (1993) and 43 Ways to
Finance
Your Feature Film (Southern Illinois
University Press-Summer of 1994). The fourth book, The Feature
Film
Distribution Deal--A Critical Analysis
of the Single Most Important Film Industry Agreement was
released in
December of 1996.
Mr. Cones is a graduate of the University of Texas at Austin
(Bachelor of Science in Communications
'67 and Doctor of Jurisprudence '74) and currently resides in West
Los Angeles, California.
Prior Performance and Chart
The LLC's Manager has served as the LLC Manager for one prior
film offering (What Love Is, LLC).
The offering raised $9,000,000 and the film has completed
principal
photography, is into post-production and
a distributor is being sought. No revenues have been generated to
date.
Film Title Dates of Offering Offering Type Offering Maximum
Amount Raised
What Love Is Dec '04 - Dec '05 Reg D, 506
$9,000,000
$9,000,000
Description of Property
Neither the LLC Manager nor the LLC own any principal
plants or
other materially important
physical properties. As noted elsewhere herein, the Manager
proposes
to conduct the LLC's business from
offices at 650 North Bronson Avenue, Suite B-128, Los Angeles,
California 90004. Production offices for the
Film may be established elsewhere as needed. The LLC will share
rental costs with the Manager.
Plan of Operations
The Spring Break '83 Production, LLC intends to finance the
production of one feature film ("Film"
or "Picture") with an estimated production budget of approximately
$6,000,000. The Offering has no
minimum, but has established a Maximum for Offering Proceeds at
$9,000,000. The Manager is authorized to
expend Investor funds for LLC purposes as soon as they are
received
and accepted. The Manager intends to
use the Offering Proceeds plus creative Deferments, if
necessary, to
acquire rights to the Script, produce the
Film, market it to distributors and engage in other distribution
activities if necessary.
Deferments of some or all of the budgeted salaries of
creative
personnel and others providing goods or
services used in the production of the Picture may be used in
conjunction with the Offering Proceeds. Such
Deferments are not paid out of Offering Proceeds but out of the
Film's revenue stream, if any (see definition of
"Deferments" in the LLC Operating Agreement, Exhibit "B" and
additional discussion at "Estimated Use of
Proceeds"). Although the Manager anticipates that most Deferments
will be paid following Investor
Recoupment, the Manager has reserved the right to make deals with
top-level talent so that their Deferments
may be paid out of the LLC's Gross Revenues (i.e., prior to
Investor
Recoupment).
It is the Manager's opinion that the Offering proceeds will
satisfy the LLC's cash requirements to
produce its stated objectives and that it will not be necessary to
raise additional funds. The proposed Film is
designed for release to markets and media throughout the world.
The
Picture is expected to receive an MPAA
rating no more restrictive than "R".
The balance of this Plan of Operations provides information
relating to the nature of the story told
through the subject Script, the rights to the Screenplay, the
details of production plans (including a timetable)
and the plans for marketing and distribution of the Film.
Should the
Film be completed and obtain distribution,
it is anticipated that the Film will generate revenue for the LLC
and its Member/Investors through an ongoing
percentage participation in the Film's earnings in each market and
media in which it is exploited (see
discussion relating to "Marketing and Distribution" below, as well
as the discussion contained in "MOTION
PICTURE INDUSTRY OVERVIEW").
Neither the LLC Manager or the proposed LLC is currently
in any
preliminary contact or discussions
with, and neither has any present plans, proposals,
arrangements or
understandings with any representatives of
the owners of any business of company regarding the possibility of
any acquisition, merger or joint venture
transaction.
Script Synopsis Spring Break '83
Spring Break '83 opens on Beverly Hills High School's
graduating class dressed in cap and gown and
preparing to receive their diplomas. In the back row we find our
four heroes, our lovable losers vowing to each
other that next year when they go away to college that things
will be different. That they will become
popular making certain to cast aside the stigma of lameness that
has haunted them their entire high-school
careers. Their goal is to start a new chapter in their lives.
But no
such luck. As our four heroes get up on stage
to receive their diplomas, their four arch rivals - the rich, good
looking, popular, preppie kids ambush them
with a practical joke that humiliates our four heroes in front of
the entire school.
After a summer of ridicule and continued persecution, our
four
heroes arrive at what they hope will be
their sanctuary . . . Arizona State University. Their only hope is
to recreate themselves, obtain some semblance
of a decent social life and have some fun. To their horror they
discover that they are attending the same
college as their high school arch rivals. In an act of underhanded
treachery their four enemies find a way to
get our heroes wrongfully expelled from ASU.
Now kicked out of college with no friends or ideas for
moving
on with their lives our four heroes
realize that they have one last chance to redeem themselves
and get
even with their arch enemies once and for
all . . . they must go to Lake Havasu during spring break and win
the Kings of the River contest and save the
Cantina from being torn down by developers that want to build sky
rise condominiums.
In the end our heroes are vindicated, our antagonists are
vanquished, the Cantina is saved and
everyone lives happily ever after.
Screenplay Rights The Screenplay for Spring Break '83 was
written and is owned by the
writer/producer Mars Callahan. The Screenplay is in the process of
being registered with the U.S. Copyright
Office. When sufficient funds are raised, certain movie and
related
rights to the Script will be assigned by the
owner to the Manager, which, in turn, will assign those same
rights
to the LLC. The Short Form Assignment
(see Exhibit "F") will be recorded in the U.S. Copyright Office as
evidence of the transfer of rights.
Production Strategy As funds are raised through this
Offering,
the LLC will continue to develop the
Script and produce the Film. The production of Spring Break '83
will
be divided into three main phases: pre-
production, principal photography/production and post-production.
Preparation for filming will involve
selecting each member of the cast and crew, scheduling each day of
production, constructing sets and
costumes, and negotiating arrangements with suppliers of equipment
and facilities.
Locations and Logistics--Prior to the commencement of
pre-production, the Film's director,
Producers and cinematographer will scout locations, pre-cast and
secure deals with film labs, equipment rental
houses and studio/sound stages, if necessary. It is the
intention of
the director and Producers that Spring Break
'83 will be shot on locations in and around Los Angeles, including
Raleigh Studios.
Casting While casting is important to the success of any
motion
picture, Spring Break '83 is not a
"star dependent" movie. The majority of the cast is most likely to
be comprised of Los Angeles area talent. As
has been demonstrated in the past with other successful
independent
films, casting talented but relative
unknowns can ultimately be a positive selling point in a
marketplace
saturated with overexposed and
overhyped stars. Without preconceived expectations, critics,
distributors, film festival goers, and ultimately
audiences around the world, can "discover" the fun of a picture,
like Spring Break '83, and make it their own.
Their subsequent enthusiasm and "word of mouth" may then become a
major, cost-effective tool used to
market and promote the movie.
Crew--The majority of below-the-line crew for Spring Break
'83
will be selected from the capable
pool of West Coast film crews.
Principal Photography and Post Production--Filming of Spring
Break '83 is tentatively scheduled
to begin in the summer of 2007 and last for approximately eight
(8)
weeks. After principal photography is
completed, the post-production phase will take place in Los
Angeles.
During this phase, the Director will
supervise the editing of the work print, build up the sound track,
score the Film, conform the negative, add
titles and optical effects and ultimately produce an answer print
from which a distributor can strike release
prints.
Production Schedule and Timetable
The following is the preliminary schedule of events and
expenditures for Spring Break '83:
Pre-production-- 4 months
Active pre-production commences with the successful
funding of
the project. Thereupon, a skeletal
staff of key personnel will begin the preparations for the
production. The purpose is to organize and prepare
for principal photography. Approximately 20% of the budget is
used
during pre-production.
To be accomplished: Complete casting
Finalize script changes
Crew allocation
Lock in production schedule
Lock in all locations
Allocation of equipment, props, wardrobe
Principal Photography/Production -- 8 weeks
Production or principal photography begins when shooting
actually starts. At this point the entire crew
is employed on the film, and the cast is traveling or working
according to need. Approximately 60% of the
budget is used during production.
To be accomplished: Meet each day's production needs, in
terms of equipment, actors,
crew, lodging, food, supplies,
locations, props, effects,
construction, set dressing,
etc.
Process film
Begin post production editing
Cut the trailer to initiate industry
attention
Post-Production -- 6 to 9 months
Post-production commences upon the completion of principal
photography. Production personnel are
released and equipment is turned in. During Post-Production the
Director supervises the editor's "cutting" of
the Film and it is readied for presentation and distribution.
To be accomplished : Director supervises editing of
the Film with editor
Edit sound
Creation and integration of visual and
sound effects
Compose, record and edit score
Shoot any required pick-up shoots, or
re-shoots
Re-record any necessary dialogue
Creation of main and end titles
Spot music and sound effects
Mix music, sound effects and dialogue
Color time (color correct) the film
Create digital Intermediary
Master DVD
Screen Spring Break '83 for distributors
Marketing and Distribution
The Producers of Spring Break '83 will begin to seek
distribution during pre-production since it is
never too early to create a "buzz" around the Los Angeles and New
York based film communities. During
production the Producers plan to cut a trailer that can be sent to
possible distributors and other media
companies to continue to garner interest. The Producers believe
that
the key to selling an independent film is to
do so when its value is at its greatest. Typically holding off
until
after the project is completed is preferred, at
which time the Film has hopefully captured the attention of choice
distributors by timely and appropriate
industry screenings and by exploiting favorable reviews at high
profile festivals such as Sundance (January),
the American Film Market (February), Cannes (May), Toronto
(September) and Milan (October).
The goal of the LLC's marketing strategy is to promote the
Film
to potential distributors both directly
and through the film festival circuit in order to sell the
distribution rights outright. The LLC's first priority is
to secure a single worldwide or major market distributor. In
lieu of
this approach, the LLC will then consider
market by market sales.
The distribution companies to be targeted are the major
players
in the independent film world. A brief
list of the distributors to be approached on behalf of Spring
Break
'83 are set forth below:
Miramax Films is known for producing and distributing
Oscar-nominated movies including The
Hours and Frida. Although the company originally distributed and
produced lower budget, quirky art house
films, Miramax briefly strayed into bigger, more costly movies
such
as Chicago and Martin Scorsese's Gangs
of New York. Walt Disney Studios bought Miramax in 1993 for about
$75 million. The Weinsteins opted out
of their contract and left Miramax in late 2005.
Lions Gates Entertainment is a Canadian
production-distributor
company, a subsidiary of Lions
Gate Entertainment, that is currently the largest and most
successful independent film distributor-studio in
North America. It focuses mainly on foreign and independent films,
and is perhaps best known for distributing
films that are too controversial for the large American companies
like and American Psycho. Other successes
included Affliction, Gods and Monsters, Dogma and Michael Moore's
Farenheit 9/11 which turned out to be
the studio's highest grossing film in their history at over
$100
million.
The Weinstein Company is an independent film company
founded by
Harvey and Bob Weinstein in
2005 after the pair left the Disney-owned Miramax Film, which they
had co-founded in 1979. The Dimension
Films label of Miramax followed the brothers to their new company.
Advisors to the new company include
Paul Newman and Robert Redford. Among their recent releases are
Derailed, Transamerica, Hoodwinked and
Mrs. Henderson.
Picturehouse Films is the independent film division of New
Line
Cinema and co-venture of fellow
Time Warner subsidiary HBO formed in 2005 to replace the indie
distributor Fine Line Features. Their
releases include Dancer in the Dark, Gummo, Hedwig and the Angry
Inch and The Sea Inside.
Fox Searchlight Pictures is the specialty film division of
20th
Century Fox, established in 1994. It
has a more indie slant than its parent company, and has produced
and/or distributed such films as Bend It Like
Beckham, Boys Don't Cry, Napoleon Dynamite, Thirteen, 28 Days
Later
and Sideways.
IDP (Independent Distribution Partnership) is the joint
marketing and distribution venture of
Samuel Goldwyn Films and Roadside Attractions. The two companies
release movies on their own, but also
market and distribute joint releases under the IDP banner, such as
the independent motion pictures El Crimen
de Padre Amoro (North America), Tortilla Soup, Super Size Me, and
Raising Victor Vargas.
IFC Films is an American film distribution company based
in New
York, owned by the Independent
Film Channel. It exclusively distributes independent films and
documentaries, its first release being the 1999
drama film Spring Forward. Other releases include Y tu mam
tambi n,
Nobody Knows and Turtles Can Fly.
Magnolia Pictures is an American film distributor, and is a
holding of 2929 Entertainment, owned by
Todd Wagner and Mark Cuban. They specialize in both foreign and
independent films. 2929 Entertainment is
a private company owned by Todd Wagner and Mark Cuban. Its
holdings
include Landmark Theatre
Corporation, Magnolia Pictures, Rysher Entertainment, and the
HDNet
cable channel. It also has an interest in
Lions Gate Films. Films released by them include the documentary
film Control Room, and the 2005 release
Ong-Bak: Muay Thai Warrior.
New Yorker Film was founded in 1965 by Daniel Talbot as an
outgrowth of his legendary movie
house, the New Yorker Theater. Unable to obtain several crucial
foreign titles, Talbot was obliged to import
them himself. Early acquisitions such as Bertolucci's Before the
Revolution, Godard's Les Carabiniers, and
Sembene's Black Girl. Controversial and challenging works
considered
untouchable by other distributors have
been regularly taken on by New Yorker including Claude Lanzmann's
monumental Holocaust documentary
Shoah, and Emir Kusturica's unruly epic Underground.
Newmarket Films is the distribution arm of the Newmarket
Entertainment Group of companies.
Most recently the company released, with Icon Pictures, Mel
Gibson's
record-breaking The Passion of Christ,
which has earned more than $350 million at the box office; Patty
Jenkins' critically acclaimed Monster, which
garnered Charlize Theron a Best Actress Academy Award for her
staggering portrayal of prostitute turned
serial killer Aileen Wuornos; and Whale Rider for which 13-year
old
Keisha Castle Hughes also earned a
nomination for a Best Actress Academy Award, making her the
youngest
woman to ever earn this honor.
Palm Pictures since 1998 has been responsible for such
critical
and commercial successes as The
Basketball Diaries, Sex and Lucia, The Believer, and The
Director's
Label Series, an ongoing retrospective of
the work of the world's most acclaimed music video directors. The
first three installments debuted in October,
2003 and featured the works of directors Spike Jonze, Michel
Gondry,
and Chris Cunningham. Upcoming
theatrical releases include Ondi Timoner's DIG!, the 2003 Sundance
winner for Best Documentary, and Time
of the Wolf (Les Temps du Loup), an apocalyptic tale starring
Isabelle Huppert, from the director of The Piano
Teacher.
Paramount Classics is the specialty films division of
Paramount
Pictures, charged with producing,
purchasing, distributing and marketing films, generally those
with a
more "art-house" feel than films made and
distributed by its parent company. Recent releases include The
Machinist, You Can Count on me and Better
Luck Tomorrow.
Sony Pictures Classics is the specialty films division of
Sony
Pictures. Founded in 1992, Sony
Pictures Classics produces, acquires and distributes independent
films from America and around the world.
Recent releases include The Fog of War, Dogtown and Z-Boys, 2046,
Kung Fu Hustle and The Statement.
THINKFilm is a distributor of independent films such as Being
Julia and The Dangerous Lives of
Altar Boys. The company also releases documentaries that perform
well at the box office, including The
Aristocrats, Murderball, and Spellbound, which in 2003 received an
Academy Award nomination for Best
Documentary. THINKFilm was founded in 2001 by president and CEO
Jeff
Sackman.
Focus Features is the art house films division of Universal
Pictures, and acts as both a producer and
distributor for its own films and a distributor for foreign films.
Focus was formed from the 2002 divisional
merger of USA Films and Good Machine. USA Films was created by
Barry
Diller in 1999 by combining
October Films, Gramercy Pictures, and USA Home Entertainment.
Their
releases include The Pianist, Gosford
Park, Lost in Translation, Swimming Pool, 21 Grams and The
Motorcycle Diaries.
Warner Independent Productions is the specialty film label of
Warner Bros. Pictures. The unit was
created in 2003 to produce and acquire smaller-budgeted films than
those of its parent studio. It releases about
10 films a year, each with a budget of $20 million or less.
Productions include Before Sunset, A Very Long
Engagement, The Jacket, and Eros.
None of the above-named film distribution companies have been
contacted on behalf of the LLC's
Film as of the date of this private placement offering memorandum.
Distribution Options--A variety of distribution possibilities
exist for an independently produced film
like Spring Break '83. Some of those options are discussed
below.
No two distribution deals are exactly alike,
a statement that holds true for any business, and the motion
picture
industry is no exception. Following are
several possible scenarios for selling an independent film.
Studio Distribution It is possible that an independently
produced feature film like Spring Break '83
could be acquired for distribution by a major studio/distributor.
All marketing and distribution decisions are
then made in-house at the studio which sends out promotional and
advertising materials, arranges for
screenings of the films and makes deals with domestic and foreign
distributors. For the foreign markets,
studios have offices around the world either singly or with other
studios, to distribute their films in other
countries. The studio acquires (or licenses) the copyright,
which it
licenses to the foreign distributor for a
specific length of time. Once the studio receives its share of the
box office grosses from the exhibitors, the
distribution arm will charge a distribution fee that can range
from
30-40%. The studio then takes the entire
fixed cost of the distribution division and applies a portion
of it
to each film, often around 12% of the studio's
share of the box office gross. They also charge for the cost of
advertising and prints. Although these numbers
sound high, there are some advantages to studio distribution. The
studios have the ability to put 3,000 prints of
one film in circulation on opening weekend. Its own channels of
distribution are manifold. The studio has the
financial resources to inundate television and the press with ads,
and it has significant clout in getting
placements for producers, directors, and actors on
early-morning and
late-night national interview shows.
Studio Advance, Buy-Out or Guarantee Some independent films
acquired by studios or
distribution companies receive an advance or guarantee against
future proceeds. Shine was reported by The
Los Angeles Times (March 4, 1997) to have a negative cost (the
negative cost of a film is defined as the total of
all the various costs, charges, and expenses incurred in the
acquisition and production of a motion picture, in
all its aspects prior to release, that is, to produce the final
negative) of $4.5 million. The film reportedly
received $10 million as domestic and international advances.
According to The Hollywood Reporter
(November 14, 1996) Slingblade had a negative cost of $1
million and
was acquired by Miramax with a $10
million guarantee. Spitfire Grill reportedly had a negative
cost of
$6.1 million and was acquired by Castle
Rock for a $10 million advance. Miramax is reported to have
paid $5
million for Swingers, a film with a
reported negative cost of $2 million (Filmmakers and
Financing). In
2002, the indie film Better Luck
Tomorrow, reportedly produced for a mere $150,000 was acquired
for a
theatrical release with a $1,000,000
advance from MTV Films. The vast majority of independently
produced
feature films, however, are not picked
up for distribution by a major studio/distributor (or subsidiary),
thus no such studio advances, buy-outs or
guarantees are available. NO ASSURANCES CAN BE PROVIDED THAT THE
RIGHTS TO DISTRIBUTE
THE LLC'S FILM IN ANY MARKET OR MEDIA WILL BE ACQUIRED BY ANY
DISTRIBUTOR.
Independent Distribution Independent distribution is
similar to
studio distribution but independent
companies typically release fewer movies each year (per
distributor)
therefore they are presumed to be able to
spend more time on providing individual attention to a motion
picture's release. They also have expertise in
marketing films that are smaller in scale with less "marquee"
value.
The fee an independent distribution
company takes will depend largely on their involvement in the
film,
how large a risk they are taking and how
badly they want to distribute the film. The amount of risk is
primarily related to the amount of money the
distribution company pays out of its pocket. The more up-front
expenses it has to assume, the greater the
percentage of incoming revenues it will seek. Their distribution
fees apply only to the revenues generated by
the distributor's own agreement (i.e., if they are not the foreign
distributor they do not share in the foreign
profits). When an independent distributor acts in the same way a
studio would (i.e., advance all the up front
costs or prints and advertising) the distribution deal often
provides for a 50/50 split of net profits between the
producer and distributor. But unlike a studio, which typically
deducts any distribution costs off the top or takes
their 30-40% of the domestic gross box office rentals and deducts
the distribution expenses from the
producers' share, an independent distributor may split the
distribution expenses equally between themselves
and the producer.
Foreign Sales It is common for a producer to make
distribution
deals with separate distributors for
domestic and foreign releases. In order to reach a foreign
distributor a sales agent is usually employed. A sales
agent is more likely to secure foreign distribution for a film if
there is already a deal for domestic theatrical
release already in place, but, as discussed in the Distribution
section, a domestic theatrical release is not
necessarily an indicator of a film's eventual success overseas.
Sales in foreign countries center around the big
three international markets: the American Film Market (AFM)
held in
Santa Monica, California in February,
The MIF (Marche International du Film) held in Cannes, France
concurrently with the Cannes International
Film Festival and MIFED (Mercato Internazionale Filme e
Documentario) held in Milan, Italy in October.
Distributors come to these markets from around the world to view
films. Sales to foreign distributors usually
involve an advance against a percentage from the territory for
which
the sale is made.
The following chart lists the top 15 foreign territories in
terms of theatrical sales, video sales and TV
sales for the independent distribution entities that make up the
American Film Marketing Association. The
territories are ranked by company revenues and the figures are
stated in millions (Source: AFMA, Data
compiled through October 4, 2000 and reported in The Hollywood
Reporter MIFED Edition, October 24-30,
2000).
1999 Theatrical Video TV
Total
Rank Territory Sales Sales Sales
Sales
1. Germany & Austria $109.2 $106.1 $263.3
$474.1
2. Italy $ 94.5 $ 76.0 $148.1
$318.6
3. Spain $ 92.6 $ 71.1 $136.1
$299.8
4. Japan $101.7 $ 84.4 $
86.3
$272.4
5. France $ 54.6 $ 60.6 $112.8
$228.0
6. U.K & Ireland $ 46.1 $ 53.5 $
75.4
$175.0
7. Korea $ 42.8 $ 33.2 $
31.4
$107.4
8. Australia/NZ $ 16.4 $ 28.8 $
44.3
$ 89.4
9. Scandinavia $ 16.6 $ 19.7 $
34.3
$ 70.6
10. Benelux $ 15.7 $ 16.8 $ 3.2
$ 67.6
11. Argentina $ 19.4 $ 23.3 $ 22.5
$ 65.3
12. Canada $ 14.7 $ 14.3 $
30.9
$ 59.9
13. Taiwan $ 19.4 $ 13.2 $
17.9
$ 50.5
14. Brazil $ 19.2 $ 11.8 $
15.1
$ 46.0
15. C.I.S. $ 13.2 $ 7.7 $
20.0
$ 41.0
Total Sales of Top 15 $676.1 $615.9
$1,073.6 $2,365.6
Rest of World $117.0 $ 85.2 $
220.2
$422.5
Four Wall Distribution Although not a common form of
distribution, four walling is an alternative
way to distribute an independent film and can be profitable. In
this
case a producer rents a theatre usually for a
flat weekly fee. The rental fee for the theatre includes the
theatre
staff (manager, projectionist, ticket and
concession counter salespeople). The entire box office income is
paid to the producer. The producer is also
responsible for the cost of the print as well as any advertising.
Rent-A-Distributor Somewhere between turning your film
over to
a distributor and four-walling
falls a practice known as renting-a-distributor. The producer puts
up the money for all film prints and
advertising and rents a distributor's in-place distribution and
collection system. The producer usually pays
12.5% to 17.5% of the gross film rentals (the box office receipts
received by the distributor), which is far less
than a producer gives up when a distributor risks money in
advances,
guarantees and the cost of an advertising
campaign. The producer retains control over the marketing and
advertising of a campaign. The distribution
company provides its internal system, which includes in-house
bookers to book the film into the theatres, a
bookkeeping system to keep track of the money and follow up on
receivables. A major studio will typically
get a much faster response from a theatre chain on an overdue
account than a single producer. The "rented"
distributor will often take care of preparing and shipping
publicity
material and film prints although the
producer will typically cover the cost.
Markets There are multiple markets and media from which a
producer of a completed motion picture
can seek to generate revenue. These include: domestic and foreign
theatrical, the home video market, foreign
and domestic pay, cable and syndicated television, network
television, the newly emerging internet/broadband
audience, as well as ancillary distribution to airlines, military
services, educational institutions and other non-
theatrical venues.
These markets and media may be handled by a single
distributor
or the Producers may elect to seek
separate distributors who specialize in various markets and
media.
In the event that sufficient funding is
raised, the Producers may also seek to arrange for a so-called
Rent-a-Distributor deal or even engage in self-
distribution. In situations other than self-distribution, the
Producers plan to approach such prospective
distributors with a completed or nearly completed film, thus
potentially maximizing the LLC's bargaining
position with respect to negotiating the terms of distribution
arrangements.
Sales Strategies--The Producers' goal throughout all
phases of
the production will be to produce a top
quality motion picture competitive with the best of the industry,
while maintaining strict cost control.
Ultimately the Producers intend to seek out and make Spring Break
'83 known to all distributors with the
capability to market the Film with the specialized attention and
care necessary to maximize its potential
revenues. In order to achieve this, the Producers intend to do one
or more of the following:
(1) Establish and maintain an ongoing dialogue with
potential
distributors throughout the Film's
production and post production period;
(2) Employ the services of a producer's representative, to
carefully promote and create awareness of
Spring Break '83 with these same buyers, and ultimately make a
deal
or deals for the Film;
(3) Offer private screenings of the finished film to
distributors;
(4) Create a web site for Spring Break '83 (after the
Offering
is closed) where the Manager can
engage in preliminary promotional activities to build awareness
for
the Film, targeting both the trade and
potential viewers (e.g., run trailers, interviews with actors,
show
behind the scenes footage and/or hold
contests geared to the Film's demographic); and
(5) Enlist a sales agent or utilize the Film's producer's
representative to sell the film in individual
foreign and domestic markets and media, if necessary.
On the other hand, no assurances can be provided that the
Film
will be accepted into any film
festivals, or, that the Producers will be able to enter into any
arrangement with any distribution company for
the Film. In general, the risk for a distributor acquiring a
property at this stage, once the Film has been
completed, is greatly reduced, and, if the "buzz" generated by
test
screenings, film festivals and word-of-mouth
is strong enough, a producer may be able to negotiate more
favorable
terms than under a pre-production
arrangement. Conversely, if the Film makes a poor test showing,
the
terms are likely to be less favorable.
The terms of agreements between feature film producers and
distributors vary widely depending on
the perceived potential of a film and the relative bargaining
strength of the parties. Customarily, a distributor
will advance funds to the production company for the right to
distribute its film and will agree to expend a
minimum amount for prints and advertising. An advance or guarantee
may range from a token fee, to an
amount in excess of the entire production cost. The distributor
ordinarily requires that all its advances and
expenses be recouped before percentage participation monies are
returned to the production company. The
advertising costs plus the costs of publicity, print purchases,
shipping, accounting and collecting are
customarily deducted, along with a distribution fee, by the film
distributor from gross film rentals. For a film
such as Spring Break '83 the costs incurred by a distributor to
market and promote the film may be equal to,
or, often exceed the cost of production.
Theatrical Release Strategy In order to generate the highest
possible box office gross in the first
weekend, big budget studio pictures usually rely on a blitzkrieg
release strategy, with massive advertising and
media spending, and often a thousand or more prints of a film in
circulation. Independent or specialty films
usually employ a much different model. Primary among these is the
"Platform Release", whereby a film is
released slowly, with a limited number of prints, in a limited
number of cities, in order to build critical acclaim
and word-of-mouth. As the film finds its audience base, the
scope of
distribution gradually expands, adding
cities and theatres to meet demand. This method is the most common
for specialty theatrical film distribution
and the one the Manager expects will most likely be employed
for a
film like Spring Break '83.
Domestic Theatrical Distribution Assuming the LLC produces
the
Film, the Manager plans to hold
onto all distribution rights until the Picture is completed. The
Manager will most likely license domestic rights
to an independent or studio-affiliated specialty distributor,
but if
the opportunity arises, will also consider
major studio/distributors. If the Manager is able to select among
multiple proposals for domestic distribution
arrangements, its management will consider numerous factors,
including: amount of advance, if any, the
distributor's reputation, the distributor's enthusiasm for the
Picture, the distributor's proposed marketing
campaign, print and ad commitments and the distributor's
willingness
to allow the Producers to contribute to
the formation of the marketing campaign. In the unlikely event
that
the Manager has the opportunity (or are
required by circumstances) to parcel out rights in domestic
media to
multiple distributors, the Manager will
seek to maximize the value of each right in the Film. The most
likely scenario for this occurrence would be if
the Manager was not able to secure a theatrical release for the
Picture. In such event, the Manager might still
have the opportunity to license video, television and other
U.S. or
foreign rights to separate distributors.
Ancillary Rights--In addition to the domestic and foreign
theatrical market, there are a variety of
other markets and media in which a finished film may be exploited.
These include: Home Video, Domestic
TV (including Pay, Cable, Syndication and Network), Foreign TV and
Non-theatrical airlines, hotels,
military bases and other facilities. Revenue may also be derived
from rights such as the creation of books,
novelization of the screenplay, published music, soundtrack albums
and merchandise. The Manager will
attempt to generate revenues from all ancillary rights held by the
LLC (for a more detailed description of each
market, see "MOTION PICTURE INDUSTRY OVERVIEW").
The Internet and Broadband Access--In addition to the above
mentioned ancillary markets, there is
also an exciting new distribution model emerging within the
context
of filmed entertainment. Technological
advances such as digital satellite transmission, cable modems and
DSL, all geared to high speed broadband
internet access, are providing another potential avenue for
audiences around the world to view their
entertainment product. Already numerous well-financed online
entities are actively distributing "net-
casting" short-form archived and streaming media entertainment
content over the web.
By the time Spring Break '83 is completed, the Producers
anticipate there may be several "Net-
casters" with the ability to release and distribute a theatrical
quality, full-length motion picture over the
internet, on a global basis, essentially by-passing traditional
distributors, with their high costs and fee structure.
The advantages are clear: the potential for global distribution
and
worldwide release, content immediately
available for repeated viewings, no print costs, no shipping costs
and instantly verifiable next day collections.
Plus, the ability to better target the Film's potential
audience, as
well as run trailers and online promotion,
twenty four hours a day, seven days a week, without costly
network
television media buys. The challenge is to
get people to the site and motivate them to pay for the
viewing.
Intense competition among emerging companies to establish a
recognizable brand in the internet
entertainment space will likely lead to increased distribution
opportunities, and a new class of buyers to whom
independent producers may license their product. As a result, the
Producers believe that independent feature
filmmakers and their investors, at least in the near-term, are
likely, if they make a deal with a "net-caster", to
retain greater leverage and creative control over how their films
are marketed and released, and, in the process,
reap higher profits from the intellectual property they create.
However, given rapidly changing technological
developments and shifting consumer tastes, it is not possible to
predict with any certainty, what effect, if any,
this or other new distribution channels will have on potential
overall revenue for feature length motion
pictures.
Box Office Comparables
The following discussion provides information relating to
other
films the Producers believe are similar
in some respect to the LLC's proposed Picture.
Selected recent independent films are listed in the following
table, to provide the Prospective
Purchaser with a relatively current perspective on the films'
comparative performances. Unless otherwise
indicated, the revenue numbers shown are the "Cumulative Gross
Revenues" and include Domestic and
International Box Office and Domestic and International Home Video
sales. NO ASSURANCES,
HOWEVER, CAN BE PROVIDED THAT THE LLC'S FILM WILL PERFORM AS
WELL AS
ANY OF
THE MOTION PICTURES LISTED.
Film Distributor Budget
Revenues
Clueless Paramount $11,000,000 $
56,600,000
Road Trip Dreamworks N/A $
68,500,000
American Pie Universal N/A
$102,600,000
Thirteen Fox Searchlight N/A
$
4,600,000
28 Days Later Fox Searchlight $
3,500,000
$ 46,000,000
Barbershop MGM $ 5,500,000 $
77,000,000
Bend it Like Beckham Fox Searchlight $
4,200,000 $ 35,000,000
Blair Witch Project Artisan/Lions Gate $ 300,000
$240,500,000*
The Full Monty Fox Searchlight $
3,200,000
$245,900,000*
Cabin Fever Lions Gate $ 1,500,000
$192,100,000
Lost In Translation Universal/Focus $ 4,000,000
$
31,500,000
My Big Fat Greek Wedding IFC/Gold Circle $
4,500,000
$244,000,000
The Pianist Universal/Focus $
4,500,000
$ 33,500,000
The Ring Dreamworks $ 4,500,000
$129,300,000
The Texas Chainsaw Massacre New Line $ 5,000,000
$
81,200,000
*Worldwide Box Office Gross Only [Sources: Internet Movie
Data
Base, Kagan Reports, Baseline]
The above reported revenues do not include Foreign Sales,
Home
Video/DVD sales and rentals, Cable
TV or Broadcast TV. Overall domestic sales for films has
significantly increased with the advent and
proliferation of DVD sales and rentals (see "DESCRIPTION OF
BUSINESS-Market Overview/State of the
Industry"). NO ASSURANCES, HOWEVER, CAN BE PROVIDED THAT THE LLC'S
FILM WILL
PERFORM AS WELL AS ANY OF THE MOTION PICTURES LISTED.
The following list is The Hollywood Reporter compilation
of the
Independent Films of 2001 (by U.S.
Box Office). NO ASSURANCES CAN BE PROVIDED THAT THE LLC'S FILM
WILL
PERFORM AS
WELL AS ANY OF THESE LISTED, AFTER ALL, MOST INDEPENDENTLY
PRODUCED
FEATURE
FILMS ARE NOT PROFITABLE.
Title Distributor
U.S.
Gross
Rush Hour 2 New Line Cinema
$226,000,000
What Women Want Paramount
$183,000,000
Crouching Tiger, Hidden Dragon Asia Union Film & Entertainment
Ltd. $128,000,000
Traffic Initial Entertainment
$124,000,000
Spy Kids Dimension $113,000,000
The Others Miramax $
96,500,000
The Score Mandalay Pictures $
71,100,000
Bridget Jones' Diary Studio Canal
$
71,500,000
Chocolat Miramax $ 71,300,000
Scary Movie 2 Dimension $
71,300,000
The Enemy at the Gates Mandalay Pictures
$
51,400,000
The Wedding Planner Intermedia $
60,400,000
Rat Race Filmworks Ent. $
56,600,000
Blow New Line Cinema $
52,900,000
K-PAX Intermedia $
50,300,000
Serendipity Tapestry $
50,000,000
Hardball Fireworks Pictures $
40,200,000
Jeepers Creepers American Zoetrope $
37,900,000
Bounce Miramax $
36,800,000
In the Bedroom Good Machine $
35,900,000
Thirteen Days Beacon $
34,600,000
Dracula 2000 Dimension Films $
33,000,000
Driven Franchise $
32,600,000
Jay and Silent Bob Strike Back Miramax
$
30,100,000
The Musketeer The Carrousel Picture Co.
$
27,100,000
Crocodile Dundee in Los Angeles Silver Lion Films
$
25,600,000
Memento Newmarket $ 25,540,000
Captain Corelli's Mandolin Miramax $
25,540,000
15 Minutes New Line Cinema $
24,400,000
Heist Franchise Pictures $
23,500,000
In addition, the following statistical information
compares the
production budgets with worldwide box
office figures and provides a ratio as between the two. The ratio
is determined by dividing the worldwide box
office figure by each film's production budget. This information
demonstrates that true profit for a feature film
is not necessarily proportional to the size of the film's budget.
AGAIN, THERE CAN BE NO ASSURANCE
THAT THE PICTURE ASSOCIATED WITH THIS OFFERING MEMORANDUM WILL
PERFORM AS
WELL AS ANY GIVEN FILM IN THIS LISTING (see "REQUIRED
NOTICES--Risk
Factors"). On the
other hand, these figures do not include any revenues from the
exploitation of these films in the ancillary
markets.
Production Worldwide
Budget Box Office
Ratio
Four Weddings and a Funeral $3,500,000
$250,000,000 71.4
The Full Monty $3,500,000
$205,400,000
58.7
Sling Blade $1,100,000 $
41,000,000
37.3
Muriel's Wedding (Miramax/Ciby) $3,000,000 $
57,500,000 19.2
Celebrity $1,000,000 $ 13,000,000
13.0
Secrets & Lies $2,000,000 $
26,770,000
9.9
The Spanish Prisoner $1,500,000 $
10,080,000 6.7
Strictly Ballroom $2,000,000 $
11,700,000
5.9
Eat Drink, Man Woman $1,500,000 $
7,200,000 4.8
My Family/Mi Familia $3,000,000 $
11,075,827 3.7
Antonia's Line $2,200,000 $
7,810,000 3.6
Blankman $2,500,000 $
7,446,031
3.0
Smoke Signals $2,000,000 $
6,910,758 2.9
The Last Seduction $2,600,000 $
5,839,395 2.2
Financing Strategy and Sample Revenue Projections
With this production strategy in mind, the Producers for the
Picture have chosen to finance the
production through a limited liability company Offering. This
structure offers flexibility in regard to Deferring
pay to creative personnel and giving profit sharing incentives to
investors. There is no established minimum
for the Offering, thus the LLC Manager is authorized to begin
spending Investor funds for LLC purposes as
they are received and accepted.
The Sample Revenue Projections appearing at Exhibit "H"
are not
necessarily based on conditions
and courses of action which the Producers believe are necessarily
the expected results of operations for the
period projected. They illustrate what would happen if certain
assumptions upon which the projections are
based do occur. Some but not all of these assumptions are based on
projected figures for the year 2007 and
beyond which have been prepared by third-party industry analysts.
SUCH ASSUMPTIONS ARE KEY
FACTORS UPON WHICH THE FINANCIAL RESULTS OF THE PICTURE DEPEND.
SOME
ASSUMPTIONS MAY NOT MATERIALIZE AND UNANTICIPATED EVENTS AND
CIRCUMSTANCES MAY OCCUR SUBSEQUENT TO THE DATE OF THESE
PROJECTIONS.
THEREFORE, THE ACTUAL RESULTS ACHIEVED DURING THE PROJECTION
PERIOD MAY
VARY FROM SUCH PROJECTIONS AND THE VARIATIONS MAY BE MATERIAL
(see
"SAMPLE
REVENUE PROJECTIONS" at Exhibit "H").
NO REPRESENTATION OR WARRANTY IS TO BE INFERRED FROM SUCH
PROJECTIONS.
INVESTORS ARE URGED, THEREFORE, TO CONSULT THEIR OWN ADVISOR
(WHOSE
VIEWS
MAY DIFFER FROM THOSE DESCRIBED IN THESE PROJECTIONS WITH RESPECT
TO
THE
STATED ASSUMPTIONS OR PROJECTED NUMBERS). SPECIFICALLY, THE
ASSUMPTIONS AND
PROJECTIONS REGARDING THE AMOUNT AND TIMING OF DISTRIBUTIONS TO
MEMBERS
MUST BE CONSIDERED OBJECTIVES. NO ASSURANCES CAN BE PROVIDED
THAT
SUCH
OBJECTIVES WILL BE MET. THE "RISK FACTORS" SECTION OF THIS
MEMORANDUM IS AN
INTEGRAL PART OF THE SAMPLE REVENUE PROJECTIONS.
Manager Discretion Regarding Production and Distribution Matters
The Manager has reserved in the Operating Agreement the
specific authority to enter into
agreements on behalf of the LLC with motion picture or television
studios, distributors or other third-parties
pursuant to which the LLC in exchange for such studios',
distributors' or other third-parties' assistance in
financing, producing, distributing and/or otherwise exploiting the
Picture may commit to pay such parties
out of revenues generated by the Picture at a point in the
Picture's
revenue stream prior to the calculation of
Distributable Cash. Such agreements may include but are not
limited
to flat fee arrangements, negative
pickup deals or an outright sale of the Picture (see "OPERATING
AGREEMENT" at Exhibit "B"), if in the
judgment of the Manager's owner, such a sale would be in the best
interest of the LLC. In addition, the
Manager has reserved the right (1) to seek the most advantageous
distribution agreement for the LLC's
Picture, (2) to modify the budget of the LLC's Picture to adapt to
changing contingencies, so long as in the
judgment of the Manager such budget changes improve the LLC's
ability to produce a better Picture, (3) to
choose locations for shooting such movie other than the locations
disclosed herein, (4) to enter into
agreements on behalf of the LLC which provide that persons
providing
financing, rendering services or
furnishing literary material or other materials or facilities in
connection with the production, distribution or
other exploitation of the Picture shall receive as salary or other
compensation, Deferred amounts or a
percentage participation in LLC revenue and (5) to pay
Deferrals to
Above-the-Line talent prior to Investor
Recoupment. SUCH RELIANCE ON THE JUDGMENT AND DISCRETION OF THE
MANAGER
PLACES A GREATER EMPHASIS ON THE SKILLS AND JUDGMENT OF THE
MANAGER AND
ADVISORS AND THEREFORE MAKES IT IMPERATIVE THAT PROSPECTIVE
INVESTORS
CAREFULLY EXAMINE THE ABILITIES OF SUCH MANAGER AND ITS
ASSOCIATES
BEFORE
CHOOSING TO INVEST IN THE OFFERING (see "People of Spring Break
'83
Production, LLC" and
"The Manager and LLC Management" above).
OFFERING INFORMATION
Securities Being Offered
Description of Units--Units offered by means of this
Prospectus
are interests in a California limited
liability company. Such Units are being offered pursuant to the
SEC's Regulation SB and compatible state
registration regulations. No Unit will be assignable or
transferable
(except for certain gifts or upon death)
without the consent of the Manager (see Article 8.1 of the LLC
Operating Agreement at Exhibit "B").
Management and Voting Rights The rights of a Member and
Manager
are summarized below, but
more fully described in Article III of the LLC Operating Agreement
appearing at Exhibit "B" to the Offering
Memorandum, and such rights are controlled by said Agreement, the
LLC's Articles of Organization and the
California limited liability company statute.
Percentage Interest--For voting purposes, the percentage
of a
Member or Manager's interest will be
set forth opposite the name of the Member or Manager (upon
completion of the Offering) under the column
"Member/Manager's Percentage Interest" in Appendix "A" to this
Offering Memorandum (page A-25 at the
end of the LLC Operating Agreement). In addition, with respect to
allocations of Net Profits and Net Losses,
the percentage of a Member or Manager's interest will also be set
forth opposite the name of the Member or
Manager in the designated column of Appendix "B" (page A-26 at the
end of the LLC Operating Agreement),
as such percentage interests may be adjusted from time to time
pursuant to the terms of the LLC's Operating
Agreement. Percentage Interests will be determined, unless
otherwise
provided in the Operating Agreement, in
accordance with the relative proportions of the Capital
Accounts of
Members and Manager, effective as of the
first day of the LLC's fiscal year but with all distributions
under
Article VI to be deemed to have occurred on
such day immediately prior to determination of Percentage Interest
of a Member or Manager (see "LLC
Operating Agreement" at Exhibit "B").
Election of Manager--The election of the Manager to fill the
initial position shall be by declaration of
the Original LLC Manager. Subscribers are asked in the
Subscription
Documents to confirm this designation
of the LLC Manager when they sign the Subscription Agreement.
Subsequent vacancies will be by the
affirmative vote of a majority in interest of the Members. Item
2.11
of the accompanying Subscription
Application and Agreement provides that by completing such
application and by signing it, the Prospective
Purchaser is specifically confirming the selection of Big Sky
Motion
Pictures, LLC to fill the initial Manager
position of the LLC pursuant to the LLC's Operating Agreement.
Meetings--(a) Meetings of Members may be held at any place,
either within or without the state of
California, selected by the person or persons calling the
meeting or
as may be stated in or fixed in accordance
with the Articles of Organization or the Operating Agreement.
If no
other place is stated or so fixed, all
meetings will be held at the principal executive office of the
LLC.
(b) A meeting of the Members may be
called by any Manager or by any Member or Members representing ten
percent (10%) or more of the interests
of Members for the purpose of addressing any matters on which the
Members may vote. (c) the Manager shall
provide all Members within ten (10) days after receipt of said
request written notice of a meeting to be held on
a date not less than fifteen (15) days nor more than sixty (60)
days
after distribution of such notice. The
scheduling of such meetings shall not interfere with the duties of
the Manager or its owners in the production
of the Film (see Article 7.14 of the LLC's Operating Agreement at
Exhibit "B").
Rights of Assignee--An assignee, legal representative or
successor in interest of a Unit Holder will be
subject to all of the restrictions on a Unit Holder provided in
the
LLC Operating Agreement. An assignee of a
Unit Holder's interest, or a portion thereof, who does not
become a
substituted Member in accordance with the
provisions set forth in the LLC's Operating Agreement will have no
right to an accounting of LLC
transactions, to inspect the LLC's books, or to vote on any of the
matters on which a Member would be entitled
to vote. Upon the giving of notice of the assignment to the other
Members and the Manager, such an assignee
will be entitled to receive only the share of LLC profits or other
compensation by way of income, or the return
of the assignor's contribution, to which the assignor would have
been entitled (see Article 8.3 of the LLC's
Operating Agreement at Exhibit "B").
Removal of Manager--The Manager may be removed, but only for
good and sufficient cause, by a
majority vote of the Members without concurrence of the Manager
at a
meeting called expressly for that
purpose. Any removal will be without prejudice to the rights, if
any, of the Manager under any contract of
employment, and if the original Manager is removed, all rights
relating to the Screenplay (as contributed by the
Manager to the LLC) will revert to the Manager. Upon the
effectiveness of such removal, the Members may
by the consent of a majority of the Unit Holders and the remaining
Manager, if any, elect a successor Manager
to continue the business of the LLC, or continue the business
of the
LLC with the remaining Manager acting in
that capacity (see Article 8.8 of the LLC's Operating Agreement at
Exhibit "B").
Events of Dissolution--The LLC will be dissolved at the time
specified at Article 2.5 of the LLC's
Operating Agreement or upon the earlier occurrence of any of the
following: (a) upon the happening of events
specified in the Articles of Organization; (b) by the vote of a
majority in interest of the Members, (c) upon the
occurrence of a Dissociation Event, unless the business of the LLC
is continued by a vote of a majority in
interest of the remaining Members within 90 days of the
happening of
the event, or (d) by decree of judicial
dissolution pursuant to the California limited liability company
statute (see Article 10.1 of the LLC Operating
Agreement at Exhibit "B").
Liability--No Unit Holder will be personally liable for
any of
the debts, contracts or other obligations
of the LLC or any of the losses thereof, except to the extent of
such Unit Holder's Capital Contribution, plus
such Unit Holder's share of undistributed LLC income if any.
When a
Unit Holder has rightfully recovered the
return in whole or in part of such Unit Holder's Capital
Contribution, such Unit Holder will nevertheless be
liable to the LLC for a period of one year thereafter for any sum,
not in excess of such return with interest,
necessary to discharge such Unit Holder's liability to all
creditors
who extended credit or whose claim arose
during the period the contribution was held by the LLC. No Unit
Holder will be required to contribute any
amounts to the LLC except as provided for in the LLC's Operating
Agreement (see Article 7.11 of the LLC's
Operating Agreement at Exhibit "B").
Terms of the Offering
Terms of Purchase--The purchase price for each LLC Unit
("Unit") consists of a $30,000 cash
payment. The Minimum purchase per investor is one (1) Unit
($30,000), except that at the discretion of the
Manager qualified investors may be allowed to purchase less
than the
Minimum Purchase. No minimum has
been established for the Offering, thus the Manager is
authorized to
expend Investor funds as soon as they
are received and accepted. The Maximum Offering Proceeds
("Maximum") is $9,000,000.
Subscription Requirements--Each person desiring to become a
Unit Holder must complete,
execute, acknowledge and deliver to the Manager the executed
copies
of the Subscription Materials
accompanying this Offering Memorandum. By executing the
Subscription
Agreement, the subscriber or
Prospective Purchaser is agreeing that, if the Subscription
Agreement is accepted by the Manager, such
subscriber will become a Unit Holder and will be otherwise
bound by
the terms of the Subscription
Agreement and associated Operating Agreement.
The Manager reserves the right, at its sole discretion, to
reject any Prospective Purchaser's
subscription in whole or in part and to allocate to any Unit
Purchaser less than the number of Units applied
for by such Purchaser (with a refund of any unused portion of the
Unit Holder's investment). Subscriptions
will be rejected for failure to conform to the requirements
described in this Offering Memorandum,
over-subscriptions to the Offering, or such other reasons as the
Manager determines to be in the best
interests of the project. A subscription may not be revoked,
canceled or terminated by the Prospective
Purchaser.
Holding of Subscription Funds--Funds received from accepted
Prospective Purchasers for Units
are available for use by the Manager for LLC purposes as soon as
they are received and accepted. Such
funds will not be placed in a segregated, interest-bearing bank
account or escrow account. It is contemplated
that the Offering will Close not later than
___________________...?
(unless extended by the Manager).
Subscribers will be admitted as Members within thirty (30)
days
of the date their subscription was
accepted by the LLC. Subsequent subscriptions will be accepted or
rejected by the LLC within thirty (30)
days of their receipt; if rejected, all subscription monies
will be
returned to the subscriber within ten (10)
business days.
Plan of Distribution of Units
The Offering--The Offering will continue until the earlier
of:
(i) the date on which the Maximum
of 300 Units have been sold and the Subscribers are accepted by
the
Manager; or (ii) the termination date of
the Offering, (i.e., ____________________...?), unless extended in
the discretion of the Manager (see
"OPERATING AGREEMENT").
Subject to availability, there is no limit on the maximum
number of Units that may be purchased by
any Investor. However, the minimum purchase per Investor is one
(1)
Unit ($30,000) except that in the
discretion of the Manager qualified investors may be allowed to
purchase fractional Units. Each Subscriber
will be required to comply with the minimum purchase
requirement and
Investor Suitability Standards of his
or her state or country of residence or, if such Investor's
state or
country of residence does not impose such
standards or the LLC's standards are more strict, the minimum
purchase requirement and the Investor
Suitability Standards imposed by the LLC shall govern the
transaction (see "REQUIRED NOTICES--
Investor Suitability Standards").
The full purchase price for each Unit is payable in cash
or in
bartered products or services at the
time of subscription. A subscription is not subject to termination
by the Subscriber. The Units are being
offered on a "best efforts" basis through the Manager and its
upper
level management. The Manager may
sell Units in the Offering so long as its activities are in
compliance with Rule 3a4-1 of the Securities and
Exchange Act of 1934. Thus, no transaction-related compensation
will
be paid to such individuals or entities
for issuer sales. The Manager and its Affiliates are prohibited
from
directly or indirectly paying or awarding
any fees, commissions or other compensation to any person
engaged by
a prospective purchaser for
investment advice as an inducement to such advisor to advise in
favor of the purchase of Units.
The Units are offered subject to the right of the Manager to
reject, in whole or in part, any
subscription and subject to the approval of certain legal
issues by
Securities Counsel and the satisfaction of
certain other conditions. Purchasers of Units at Closing will be
admitted as Members not later than 15 days
after the release from the segregated bank account of the gross
proceeds of the Offering to the LLC. Offers
to purchase Units will be accepted or rejected by the Manager
within
30 days after their receipt and, if
rejected, associated funds will be immediately returned. If the
Manager rejects a subscription, the funds
tendered with that subscription will be returned to the subscriber
within 10 days after the rejection, along
with notification of rejection.
Estimated Use of Proceeds
The Proceeds of this Offering will be used to pay the
expenses
associated with the organization and
management of the LLC and the conduct of the Offering and to
finance
the production of the Picture as well
as a portion of the films' marketing and promotion. The table
below
sets forth the current estimated use of
the Offering Proceeds upon the sale of the Maximum of 300 Units at
$30,000 per Unit ($9,000,000). The
LLC's Offering Proceeds may be used in conjunction with Deferments
(i.e., the delay of payment of some
or a portion of the budgeted salaries or other compensation to
providers of goods or services in the
production of the Film). Such Deferments are not paid out of the
Film's budget (i.e., the Offering Proceeds),
but instead are paid out of the Film's revenue stream, if any,
(i.e., the LLC's Distributable Cash), and in
most instances, after Investor Recoupment. Parties agreeing to
such
Deferments assume the risk that they
will not be paid. The amount of such Deferments do not vary
with the
amount of Offering Proceeds.
Although the Manager anticipates that most Deferments will be paid
following Investor Recoupment, the
Manager has reserved the right to make deals with top-level talent
so that their Deferments may be paid out
of the LLC's Gross Revenues (i.e., prior to Investor
Recoupment).
Maximum1
Development $ 150,000
Script $ 360,000
Producing Unit $1,400,000
Direction $ 360,000
Cast and Casting $1,250,000
Travel/Accommodations $ 75,000
TOTAL ABOVE-THE-LINE $3,595,000
Production Personnel & Office $ 175,000
Extra Talent $ 100,000
Production Design $ 45,000
Set Construction $ 49,299
Set Decoration $ 18,659
Property Department $ 34,306
Camera Operations $ 100,503
Electric Operations $ 39,254
Grip Operations $ 45,831
Production Sound $ 50,308
Mechanical Effects $ 45,670
Special Visual Effects $
31,000
Set Operations $ 20,205
Wardrobe Department $ 84,256
Makeup & Hair Department $ 31,306
Location Department $ 127,919
Transportation Department $ 106,957
Atmosphere $ 24,216
Production Film/Lab $ 44,430
Second Unit $ 30,000
Animals $ 19,230
TOTAL PRODUCTION PERIOD $1,223,349
Editorial $ 97,490
Post-Production Film/Lab $ 52,000
Post-Production Sound $
61,400
Music $ 25,000
Titles & Opticals $ 12,500
Post-Production Video $
39,400
TOTAL POST PRODUCTION $ 287,790
Production Legal $ 25,000
Insurance $ 130,807
Contingency $ 751,054
TOTAL OTHER $ 906,861
Total Above-the-Line
$3,595,000
Total Below-the-Line $1,511,139
Total Above & Below-the-Line $5,106,139
Total Other $ 906,861
FILM BUDGET TOTAL $6,013,000
Marketing to Distributors $ 150,000
Supplemental for Distribution Expense
$2,717,000
LLC Operating Expense $
30,000
Offering Expenses (not more than .001%)2
Organizational 3 $ 30,000
Syndication 4 $ 60,000
TOTAL OFFERING EXPENSES (ceiling) $ 90,000
GROSS OFFERING PROCEEDS $9,000,000
Notes to Estimated Use of Proceeds:1 This Offering has no
minimum Offering Proceeds, thus the LLC
Manager is authorized to begin expenditures on behalf of the
LLC and
for LLC purposes as such funds are received and
accepted. Investor funds will be used to pay the Offering
expenses,
along with the expenses associated with acquiring
rights to the Script, producing the Film and marketing it to
distributors. In the event that it is necessary and the Investor
funds are available, the LLC Manager may also utilize some of the
funds to supplement distributor expenses. Most
Deferments, if any, will be paid after Investor Recoupment,
however,
the LLC Manager has reserved the right to make
deals with top-level talent so that some Deferments may be paid
out
of the LLC's Gross Revenues.
2 Offering expenses for the Offering will not exceed
.001% of
the Gross Proceeds of the Offering, thus at least
99.999% of the monies raised by virtue of the Offering will
contribute directly to the quality of the motion picture which
ultimately appears on the screen and its marketing.
3 Please see the definition of Organizational Expenses in
the
Glossary of the Operating Agreement at Exhibit
"B" (see "Manager and Affiliate Compensation" at "OFFERING
INFORMATION".
4 Please see the definition of Syndication Expenses in the
Glossary section of the Operating Agreement at
Exhibit "B". The Manager plans to sell Units through upper level
management of the LLC Manager and no transaction-
related remuneration will be paid to such persons for the sale of
Units (see "Plan of Distribution of Units").
5 Cash on hand may be temporarily invested in short-term,
interest-bearing financial instruments guaranteed or
insured by the United States Government or its agencies.
The Estimated Use of Proceeds of the Offering is intended to
reflect the Manager's best estimates
of all costs of organizing the LLC, selling the limited liability
company interests and producing the Picture
up to and including the delivery of the required elements to the
Distributor for the LLC's Film. Additional
Investor funds may be utilized to supplement distributor expenses.
These estimates are made at the time of
the preparation of this Offering Memorandum and are necessarily
tentative ones. Other than as stated
herein, the Manager makes no representations with respect to the
final cost of any items (including those
specified above) relating to the production of the Picture. The
Manager reserves the right to modify the
budget of the LLC's Picture to adapt to changing contingencies.
Compensation of Manager and Affiliates
The following table summarizes the form and estimated amounts
of compensation, fees and
Percentage Participations to be paid to the Manager and its
Affiliates. Such items have not been determined
by arm's-length negotiations (see "OPERATING AGREEMENT"). Other
than
as set forth herein, in the
Operating Agreement and in the Estimated Use of Proceeds
section of
the Offering Memorandum, no other
compensation or remuneration in any form is to be paid to the
Manager or its Affiliates.
Organization Fee The Manager has waived any right to
receive
an LLC Organization Fee for
services rendered in connection with the
organization of the LLC.
Reimbursement The Manager has, and will during the
course
of this Offering, advance
of Expenses necessary funds for LLC organizational
and
offering expenses and the
Manager will be reimbursed for such
expenses out of the Gross Offering
Proceeds. Such reimbursement shall not
exceed a
ceiling equal to .001% of
the Offering Proceeds.
Management Fee The Manager has waived any right to receive an
LLC Management fee for
services rendered in connection with ongoing
management of the LLC.
Interest in The Manager will have a twenty percent
(20%) interest in Distributable
Distributable Cash Cash until the Members achieve Recoupment
(110% of their Original
Invested Capital) and then (after
Deferments, if any, are paid) the Manager
will have a fifty percent (50%)
interest in
Distributable Cash for the
balance of the life of the LLC.
Interest In The Manager will have no interest in LLC
Losses and tax deductions for
Tax Items federal income tax purposes until after the
Member's capital accounts have
been reduced to zero.
Film Budget The individual owner of the Manager (Mars
Callahan) will be paid
Items $360,000 out of the Film's budget for his
directing services and $360,000
for the Script. The individual owner
of the
Manager (Rand Chortoff) will
be paid $900,000 for his services as
Producer.
No other compensation in any form shall be paid to the
Manager,
or any of its Affiliates, except as
set out above. At the conclusion of the LLC, however, all property
rights and ancillary rights in the Picture
shall revert to and be distributed to the Manager.
Allocations and Percentage Participations
LLC Gross Revenues--The total amount of revenue received
by the
LLC from all sources for LLC
activities, including, but not limited to, all the revenues
derived
from distribution, exhibition and
exploitation of the Picture, along with all forms of contingent
compensation paid to the LLC as a result of
the exploitation of the Picture in all markets and media, but not
including any monies due to be paid to any
co-financing entity.
Distributable Cash--All funds received by the LLC from LLC
activities ("LLC Gross Revenues")
minus (a) all operating expenses of the LLC, including, if any,
all
remaining unreimbursed offering
expenses and expenses incurred by the LLC in connection with the
distribution and exploitation of the
Picture and the ancillary rights thereto; (b) such reserves as the
Manager deems necessary in accord with
good business practice to cover future LLC expenses; (c) all costs
of production of the Picture which have
not been supplied by the LLC, by a completion guarantor or by any
pre-sales or other similar agreements
(such as, for example production funds obtained through loans);
(d)
any deferrals or third-party percentage
participations granted by the Manager for products or services
provided in connection with the financing,
production or distribution of the Picture; or (e) any
distributions
necessary to fund income tax liabilities of
Members.
Member/Investor Recoupment--Percentage participation payments
will be made to Members out
of the Picture's revenue stream, as defined above. Eighty percent
(80%) of the LLC's Distributable Cash
will be paid to the Members until such Members achieve Recoupment
(i.e., specially defined as 110% of
their Original Invested Capital).
Distribution of Funds to Participants--Subsequent to Investor
Recoupment, and for the balance
of the life of the LLC, the Manager and the Member/Investor group
will share Distributable Cash, if any, on
a 50/50 basis. The Manager plans to make quarterly
distributions to
Members of Distributable Cash
beginning at the end of the first full calendar quarterly period
following the release of the Film by the
motion picture distributor. However, if in the judgment of the
Manager there is an insufficient amount of
Distributable Cash at the end of any given quarterly period to
justify the preparation of investor checks in
small amounts, such funds will be held over until sufficient
amounts
are available. Distributions of
Distributable Cash may vary in amount depending on the amount of
distributions the LLC receives from
film distributors and the amounts to be deducted from such LLC
Gross
Revenues as per the definitions of
such terms (see "OPERATING AGREEMENT--Glossary" and "RISK
FACTORS").
Allocations Of Net Losses--The LLC will allocate net loss for
each fiscal year one hundred percent
(100%) among the Members until the Members' capital accounts have
been reduced to zero. Thereafter all
losses will be allocated to the Manager. On dissolution of the
LLC,
all items of income and loss will be
allocated first to the Members' capital accounts as set forth
below
and other credits and deductions to the
Members' capital accounts will be made before final distributions
are made. The LLC will make the final
distributions to the Members and Manager in an amount equal to its
positive capital account balances,
thereby adjusting each Members' and Manager's capital account
to
zero.
By signing the Subscription Agreement, each Member
consents to
the methods described above and
set forth in the Operating Agreement by which allocations of net
income, net loss, tax credits and other
items are made as an express condition to becoming a Member. In
general, that portion of all items of
income, gain, loss, deduction or credit allocable to the
Members as
a group for any year shall be allocated
among them in the same proportion as the number of Units owned by
each bears to the total number of
Units issued and outstanding and owned by Members during the
applicable year, unless otherwise required
by law. Net income and net loss of the LLC will be allocated
at the
close of each fiscal year.
SUMMARY OF THE LLC'S OPERATING AGREEMENT
The LLC's Operating Agreement ("Agreement") accompanying this
Offering Memorandum as
Exhibit "B" contains (at Article I) a glossary of terms used in
the
Agreement and Offering Memorandum.
The Agreement provides at Article II for the formation of the LLC,
sets forth required filings, provides for
the name of the LLC, its offices and establishes that the LLC may
exist in perpetuity. The Agreement also
indicates that Big Sky Motion Pictures, LLC will be designated as
the LLC's Manager and that one of the
individual owners of Big Sky Motion Pictures (Mars Callahan) will
serve as agent for service of process.
Article III of the Agreement sets forth the purposes of the LLC
and
establishes its power to conduct its
business. Article IV of the Agreement sets forth the Unit price
and
describes the capital contributions of the
Members and Manager. This section also establishes the Maximum for
the Offering and sets forth the
Members' share of the LLC's revenue. This Article further
establishes LLC policy relating to the
withdrawal of capital and the payment of interest, places
limits on
the liability of the Manager for capital
contributions and describes the creation and maintenance of
capital
accounts.
Article V of the Agreement provides for the allocation of the
LLC's net profits and losses, for the
treatment of syndications costs, establishes the LLC's accounting
policy and fiscal year, sets forth certain
business records that must be kept, provides for the bank
deposit of
LLC funds, discloses the compensation
to be paid to the Manager and its Affiliates and prohibits Unit
holder compensation. Article VI sets forth the
revenue sharing ratio as between the Manager and Member/Investors.
Article VII of the Agreement provides
for the election of the Manager, describes the Manager's powers
and
authority, establishes LLC policy with
regard to the Manager's time commitment to LLC affairs, allows the
Manager to engage in other business
activities not related to the LLC, sets a standard for possible
agreements between the Manager and
Members or others, designates the Manager as the LLC's Tax Matters
Partner, places limits on the ability of
the Manager to withdraw, provides for the indemnification of the
Manager, the Manager's Affiliates,
Counsel and consultants under specified circumstances, sets forth
the rights and obligations of the Unit
holders, specifies required reports to be made to Members and
others, provides for the circumstances under
which meetings may be called and held and describes the fiduciary
nature of the relationship between the
Manager and the LLC's Members.
Article VIII describes restrictions on the transfer of
interests in the LLC, permits the assignment of
the Manager's interest, provides for the rights and
substitution of
an assignee, discusses the impact of the
death, disability or bankruptcy of a Unit holder, sets forth the
standard for the removal of the Manager and
sets forth the circumstances under which the business of the
LLC may
be continued in the event of the death
or incapacity of the Manager. Article IX describes the manner in
which this Agreement may be amended.
Article X of the Agreement provides for the dissolution,
winding up
and liquidation of the LLC and its
assets. Article XI provides for the delivery of notices,
contains a
severability provision, provides for the
application of California law, provides for arbitration in the
event
of a dispute, limits the meaning and
influence of section headings within the Agreement, makes the
Agreement binding on successors, provides
for written consents and agreements, contains an attorney fee
provision, provides for the waiver of certain
claims, limits the use of injunction as a remedy in disputes,
provides for the opportunity to cure any alleged
breaches and allows for the Agreement to be executed in
counterparts.
Article XII sets forth the representations of the Unit Holder
and also contains an indemnification
provision. Appendix "A" to the LLC Operating Agreement sets forth
the format pursuant to which the
Member/Manager Voting Interests will be listed and Appendix "B"
creates a format for setting forth the
respective Member and Manager percentage interests when the LLC's
Offering is closed.
MOTION PICTURE INDUSTRY OVERVIEW
This motion picture industry overview provides background
information regarding the motion
picture industry generally, for persons who may not be familiar
with
such matters. The information set forth
in this overview has been prepared by the issuer of the
securities,
but may or may not apply to the specific
project described in this Offering Memorandum.
General--The theatrical motion picture industry in the United
States has changed substantially over
the last three decades and continues to evolve rapidly.
Historically, the "major studios" financed, produced
and distributed the vast majority of American-made motion pictures
seen by most U.S. moviegoers. During
the most recent decade, many of the motion pictures released have
been produced by so-called independent
producers even though some of the production financing for such
pictures and distribution funds have been
provided by the major studio/distributors. Other independent
films
are distributed by so-called independent
distributors (i.e., those not affiliated with the major
studios).
The following general description is a simplified overview of
the complex process of producing and
distributing motion pictures and is intended to be an aid to
investors in understanding the motion picture
business. This overview does not describe what will necessarily
occur in the case of any particular motion
picture.
Production of Motion Pictures--During the film-making
process,
which may take approximately
12 to 24 months from the start of the development phase to
theatrical release, a film progresses through
several stages. The four general stages of motion picture
production
are development, pre-production,
principal photography and post-production. A brief summary of each
of the four general movie production
stages follows:
Development--In the development stage, underlying literary
material for a motion picture project is
acquired, either outright, through an option to acquire such
rights
or by engaging a writer to create original
literary material. If the literary material is not in script
form,
a writer must be engaged to create a script.
The script must be sufficiently detailed to provide the production
company and others participating in the
financing of a motion picture with enough information to estimate
the cost of producing the motion picture.
Projects in development often do not become completed motion
pictures.
Pre-Production--During the pre-production stage, the
production
company usually selects a
director, actors and actresses, prepares a budget and secures the
necessary financing. In cases involving
unique or desired talent, commitments must be made to keep
performers available for the picture. Some
pre-production activities may occur during development.
Principal Photography--Principal photography is the
process of
filming a motion picture and is
the most costly stage of the production of a motion picture.
Principal photography may take twelve weeks or
more to complete for some projects. Bad weather at locations, the
illness of a cast or crew member, disputes
with local authorities or labor unions, a director's or producer's
decision to re-shoot scenes for artistic
reasons and other often unpredictable events can seriously
delay the
scheduled completion of principal
photography and substantially increase its costs. Once a motion
picture reaches the principal photography
stage, it usually will be completed.
Post-Production--During the post-production stage, the
editing
of the raw footage and the scoring
and mixing of dialogue, music and sound effects tracks take place,
and master printing elements are
prepared.
Distribution of Motion Pictures--Motion picture revenue is
derived from the worldwide licensing
of a motion picture in some or all of the following media: (a)
theatrical exhibition; (b) non-theatrical
exhibition (viewing in airplanes, hotels, military bases and other
facilities); (c) pay television systems for
delivery to television receivers by means of cable,
over-the-air and
satellite delivery systems; (d)
commercial television networks; (e) local commercial television
stations and (f) reproduction on video
cassettes, DVDs (and video discs) for home video use. There are
also
several new technologies including
Direct Broadcast Satellite, Video on Demand (VOD), Near Video On
Demand (NVOD) and the Internet
that may allow a film to generate additional revenues. Revenue may
also be derived from licensing
"ancillary rights" to a motion picture for the creation of books,
published music, soundtrack albums and
merchandise. A picture is not always sold in all of these markets
or media.
The timing of revenues received from the various sources
varies
from film to film (see release
sequence chart below). Typically, theatrical receipts from United
States distribution are received
approximately 90% in the first twelve months after a film is first
exhibited and 10% in the second twelve
months. Theatrical receipts from the rest of the world are
typically received 40% in the first year following
initial theatrical release, 50% in the second year and 10% in the
third year. Home video royalties are
typically received 80% in the first year following theatrical
release and 20% in later years. Pay and cable
license fees are typically received 65% in the third year, 25% in
the fourth year and 10% in the fifth year
following theatrical release. The majority of syndicated domestic
television receipts are typically received
in the fourth, fifth and sixth years after theatrical release if
there are no network television licenses and the
sixth, seventh and eighth years if there are network licenses.
The
markets for film products have been
undergoing rapid changes due to technological and other
innovations.
As a consequence, the sources of
revenues available have been changing rapidly and the relative
importance of the various markets as well as
the timing of such revenues has also changed and can be
expected to
continue to change.
Feature Film Release Sequence--Movie release sequences are a
function of the marketplace and
to some extent the prerogative of individual distributors. Thus,
release sequences change from time to time,
as new delivery technology is introduced and may vary with
specific
films. As a result of the different time
periods during which movies are exhibited and/or viewed in various
markets and media, the revenue stream
generated by a given movie may typically continue for seven (7)
years or more.
In the sample release sequence provided on the following
page,
all but home video, network
television, the presentation of classic pictures on pay television
and television syndication are completed by
the end of year two, thus the great percentage of the revenue
generated by movies comes during and
immediately after the earlier windows, assuming payments are made
promptly. Also, the percentages of
revenue generated by each market vary from year to year (e.g.,
foreign has been growing in recent years
relative to domestic theatrical). The release sequence chart below
does not consider the potential revenue
from a movie sound track album, merchandising possibilities or its
value as part of a film library.
Years of Movie Release
_____________________________________________________
1 2 3 4 5 6 7
_________________________________________________________
Domestic Theatrical ||||||||||
Pay Per View ||||||||||
Foreign Theatrical ||||||||||||||||||||
Home Video
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pay Television +++++ ++++++++
Foreign Television ++++++++++++++++++++++++++++++++
Network TV ++++++++++++
TV Syndication +++++++++++++
______________________________________________________
Legend: Windows with open-ended time periods |||||||||||||||
Windows with exclusive runs ++++
Sources: LINK Resources, Off-Hollywood & Entertainment Industry
Economics, 2nd Edition.
The following is a brief summary of each of the sources of
revenue of motion pictures and the
distribution/licensing process associated with such sources:
United States Theatrical Distribution--In recent years,
United
States theatrical exhibition has
generated a declining percentage of the total income earned by
most
pictures, largely because of the
increasing importance of cable and pay television, home video and
other ancillary markets. Nevertheless,
the total revenues generated in the United States theatrical
market
are still substantial and are still likely to
account for a large percentage of revenues for a particular
film. In
addition, performance in the United
States theatrical market generally also has a profound effect
on the
value of the picture in other media and
markets.
Motion pictures may be distributed to theatrical markets
through branch offices. Theatrical
distribution requires the commitment of substantial funds in
addition to a motion picture's negative cost.
The distributor must arrange financing and personnel to: (a)
create
the motion picture's advertising
campaign and distribution plan, (b) disseminate advertising,
publicity and promotional material by means of
magazines, newspapers, trailers ("coming attractions") and
television, (c) duplicate and distribute prints of
the motion picture, (d) "book" the motion picture in theatres and
(e) collect from exhibitors the distributor's
share of the box office receipts from the motion picture. A
distributor must carefully monitor the theatres to
which it licenses its picture to ensure that the exhibitor keeps
only the amounts to which it is entitled by
contract and promptly pays all amounts due to the distributor.
Distributors will sometimes reach negotiated
settlements with exhibitors as to the amounts to be paid and such
settlements may relate to amounts due for
several pictures.
For a picture's initial theatrical release, a United States
theatre exhibitor will usually pay to a
distributor a percentage of box office receipts which is
negotiated
based on the expected appeal of the
motion picture and the stature of the distributor. The negotiated
percentage of box office receipts remitted
to the distributor is generally known as "film rentals" and is
typically characterized in distribution
agreements as a portion of the distributor's "gross receipts".
Such
gross receipts customarily diminish during
the course of a picture's theatrical run. Typically, the
distributor's share of total box office receipts over the
entire initial theatrical release period will average between
25 to
60 percent depending on the distributor; the
exhibitor will retain the remaining 75 to 40 percent (Source: The
Feature Film Distribution Deal, by John
W. Cones, Southern Illinois University Press, 1997). The exhibitor
will also retain all receipts from the sale
of food and drinks at the theatre (concessions). Occasionally, an
exhibitor will pay to the distributor a flat
fee or percentage of box office receipts against a guaranteed
amount. Pay television and new home
entertainment equipment (such as video games, computers and video
cassette players) offer a more general
competitive alternative to motion picture theatrical exhibition of
feature films.
Major film distributors are often granted the right to
license
exhibition of a film in perpetuity, and
normally have the responsibility for advertising and supplying
prints and other materials to the exhibitors.
Under some arrangements, the distributor retains a distribution
fee
from the gross receipts, which averages
approximately 33% of the film's gross receipts (again, see The
Feature Film Distribution Deal) and recoups
the costs incurred in distributing the film. The principal costs
incurred are the cost of duplicating the
negative into prints for actual exhibition and advertising of the
motion picture. The distribution deal usually
provides that the parties providing the financing are then
entitled
to recover the cost of producing the film.
However, bank financed productions will typically require that the
bank be paid back its principal, interest
and fees by the distributor.
Expenses incurred in distributing a motion picture are
substantial and vary depending on many
factors. These factors include the initial response by the public
to the motion picture, the nature of its
advertising campaign, the pattern of its release (e.g., the number
of theatres booked and the length of time
that a motion picture is in release). The amount film
distributors
spend on prints and advertising is
generally left to the discretion of the distributor. In some
instances, however, the producer may negotiate
minimum expenditures or ceilings on such items.
Foreign Theatrical Distribution--While the value of the
foreign
theatrical market varies due to
currency exchange rate fluctuations and the political
conditions in
the world or specific territories, it
continues to provide a significant source of revenue for
theatrical
distribution. In recent years foreign
theatrical revenues have often been accountable for more than
50% of
a domestically produced U.S. film's
gross theatrical revenue. Due to the fact that this market is
comprised of a multiplicity of countries and, in
some cases, requires the making of foreign language versions, the
distribution pattern stretches over a longer
period of time than does exploitation of a film in the United
States
theatrical market. Major
studio/distributors usually distribute motion pictures in foreign
countries through local entities. These local
entities generally will be either wholly-owned by the
distributor, a
joint venture between the distributor and
another motion picture company or an independent agent or
sub-distributor. Such local entities may also
distribute motion pictures of other producers, including other
major
studios. Film rental agreements with
foreign exhibitors take a number of different forms, but they
typically provide for payment to a distributor
of a fixed percentage of box office receipts or a flat amount.
Risks
associated with foreign distribution
include fluctuations in currency values and government
restrictions
or quotas on the percentage of receipts
which may be paid to the distributor, the remittance of funds
to the
United States and the importation of
motion pictures into a foreign country.
New Technologies in Distribution and Delivery--High-tech
movie
megaplexes are changing the
very landscape of the domestic and foreign distribution
marketplace,
especially in France, Italy, Eastern
Europe and Russia. In the U.S. market, which started the trend,
giant cineplexes or megaplexes with 10 to
12 screens per complex, have forever replaced the local single or
3-screen theatres. The 35mm negative is
not dead, but its days may be numbered. A report by SRI Consulting
recently stated that: "movies encoded
as digital files, either recorded on optical disc and physically
shipped or broadcast via satellite or land line,
will increasingly replace film prints as the preferred method for
distributing movies to theatres by 2005."
This assumes also that audience-acceptable digital projection
technology will develop and be installed.
Home Video Rights--Since its inception, the home video market
in the United States has
experienced substantial growth in the last decade. Certain foreign
territories, particularly Europe, have seen
an increased utilization of home video units due to the relative
lack of diversified television programming,
although those circumstances have been changing also.
Consequently,
sales of video cassettes have
increased in such markets in recent years. Although growth in
this
area may be reduced because of an
increase in television programming in such foreign territories,
receipts from home video or DVD in these
markets can be expected to continue to be significant.
Films are generally released on home video six to nine months
after initial domestic theatrical
release of the picture, but before the exhibition of the
picture on
cable/pay or network television.
Domestic Television Distribution--Television rights in the
United States are generally licensed
first to pay television for an exhibition period following home
video release, thereafter to network television
for an exhibition period, then to pay television again, and
finally
syndicated to independent stations.
Therefore, the owner of a film may receive payments resulting from
television licenses over a period of six
years or more.
Domestic Cable and Pay Television--Pay television rights
include rights granted to cable, direct
broadcast satellite, microwave, pay per view and other services
paid
for by subscribers. Cable and pay
television networks usually license pictures for initial
exhibition
commencing six to twelve months after
initial domestic theatrical release, as well as for subsequent
showings. Pay television services such as Home
Box Office, Inc. ("HBO") and Showtime/The Movie Channel, Inc.
("Showtime") have entered into output
contracts with one or more major production companies on an
exclusive or non-exclusive basis to assure
themselves a continuous supply of motion picture programming. Some
pay television services have required
exclusivity as a precondition to such contracts.
The pay television market is characterized by a large
number of
sellers and few buyers. However,
the number of motion pictures utilized by these buyers is
significantly large and a great majority of motion
pictures which receive theatrical exhibition in the United States
are, in fact, shown on pay television.
Domestic Network Television--In the United States, broadcast
network rights are granted to ABC,
CBS, NBC or other entities formed to distribute programming to a
large group of stations. The commercial
television networks in the United States license motion
pictures for
a limited number of exhibitions during a
period that usually commences two to three years after a motion
picture's initial theatrical release. During
recent years, only a small percentage of motion pictures have been
licensed to network television, and the
fees paid for such motion pictures have declined. This decline is
generally attributed to the growth of the
pay television and home video markets, and the ability of
commercial
television networks to produce and
acquire made-for-television motion pictures at a lower cost than
license fees previously paid for theatrical
motion pictures.
Domestic Television Syndication--Distributors also license
the
right to broadcast a motion picture
on local, commercial television stations in the United States,
usually for a period commencing five years
after initial theatrical release of the motion picture, but
earlier
if the producer has not entered into a
commercial television network license. This activity, known as
"syndication", has become an important
source of revenues as the number of, and competition for,
programming among local television stations has
increased.
Foreign Television Syndication--Motion pictures are now being
licensed in the foreign television
market in a manner similar to that in the United States. The
number
of foreign television stations as well as
the modes of transmission (i.e., pay, cable, network, satellite,
etc.), have been expanding rapidly, and the
value of such markets has been likewise increasing and should
continue to expand.
Producers may license motion pictures to foreign television
stations during the same period they
license such motion pictures to television stations in the United
States; however, governmental restrictions
and the timing of the initial foreign theatrical release of the
motion pictures in the territory may delay the
exhibition of such motion pictures in such territory.
Non-Theatrical Distribution--In addition to the markets and
media discussed above, the owner of
a film may also be able to license the rights for non-theatrical
uses to specialized distributors who, in turn,
make the film available to airlines, hotels, schools, off-shore
oil
rigs, public libraries, prisons, community
groups, the armed forces and ships at sea.
The Internet and Broadband Access--Recent technological
advances such as digital satellite
transmission, cable modems and DSL, all geared to high speed
broadband internet access, provide another
potential revenue source for feature films. In the near future,
there may be several "Net-casters" with the
ability to release and distribute a theatrical quality,
full-length
motion picture over the internet, on a global
basis, essentially by-passing traditional distributors, with their
high costs and fee structure.
Relicensing The collective retained rights in a group of
previously produced motion pictures is
often a key asset, as such pictures may be relicensed in the
pay and
commercial television, home video and
non-theatrical markets, and occasionally may be re-released for
theatrical exhibition.
Although no one can be certain of the value of these rights,
certain older films retain considerable
popularity, and may be relicensed for theatrical or television
exhibition. New technologies brought about by
the continuing improvements in electronics may also give rise
to new
forms of exhibition which will
develop value in the future.
Other Ancillary Markets--A distributor may earn revenues from
other ancillary sources, unless
the necessary exploitation rights in the underlying literary
property have been retained by writers, talent,
composers or other third parties. The right to use the images of
characters in a motion picture may be
licensed for merchandising items such as toys, T-shirts and
posters.
Motion picture rights may also be
licensed for novelizations of the screenplay, comic book
versions of
the screenplay and books about the
making of the motion picture. The soundtrack of a motion
picture may
be separately licensed for soundtrack
records and may generate revenue in the form of mechanical
performance royalties, public performance
royalties and sheet music publication royalties.
FEDERAL TAX DISCUSSION
CAUTION: NOTHING STATED IN THE BRIEF DISCUSSION THAT FOLLOWS
IS OR SHOULD BE CONSTRUED AS TAX ADVICE TO A PROSPECTIVE
PURCHASER, INDIVIDUALLY. THE FOLLOWING DISCUSSION
REPRESENTS THE BROAD VIEWS AND INTERPRETATIONS OF THE
MANAGER'S TAX COUNSEL ON COMPLEX TAX MATTERS WITH WHICH
THE IRS MAY NOT AGREE. PROSPECTIVE PURCHASERS SHOULD SEEK
INDIVIDUAL TAX ADVICE FOR SUCH INDIVIDUAL'S UNIQUE TAX
SITUATION APART FROM THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE LLC INTERESTS.
Introduction--The following discussion summarizes the
material
federal income tax consequences
associated with the acquisition and ownership of units of the LLC
("Units"). The discussion is not intended,
however, as a comprehensive analysis of every federal income tax
consideration that may be relevant to
purchasers of Units of the LLC ("Unit Holders") and the federal
income tax consequences to each Unit
Holder may vary. Further, the discussion does not address the
state,
local or foreign tax laws that could
affect the LLC or the Unit Holders. Accordingly, each prospective
Unit Holder should consult with his or
her own tax advisor before acquiring any such Units.
This summary is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), existing
and proposed Treasury Regulations and judicial decisions and
administrative interpretations thereunder, as
of the date hereof, all of which are subject to change or to
differing interpretation, possibly with retroactive
effect. Prospective investors should note that any such change or
interpretation with retroactive effect could
result in federal income tax consequences different from those
discussed below. This summary does not
purport to address all tax considerations that may be important
to a
particular Unit Holder in light of the
Unit Holder's circumstances or to certain categories of investors
(such as certain financial institutions,
insurance companies, tax-exempt organizations, dealers in
securities
or foreign currency, controlled foreign
corporations, passive foreign investment companies, foreign
personal
holding companies or others) that may
be subject to special rules.
Classification as a Partnership for Federal Income Tax Purposes
--The federal income tax
consequences anticipated as a result of investment in the LLC will
be applicable to the LLC and the
Members only if the LLC is classified as a partnership and not
as an
association taxable as a corporation for
federal income tax purposes. The IRS has promulgated the
so-called
"Check-the-Box" regulations that
provide that if an eligible entity is domestic and has two or more
members, the entity is a partnership by
default, unless it elects to be treated as a corporation. If
the LLC
does not choose to be treated for tax
purposes as a corporation, it may be presumed that the LLC will be
treated as a partnership. No assurances
can be given, however, that the IRS will not challenge the LLC's
classification as a partnership for federal
income tax purposes.
Publicly Traded Partnerships
The Omnibus Budget Reconciliation Act of 1987 (the "1987
Act")
contains provisions that will
produce adverse tax consequences for publicly traded
partnerships.
Under the 1987 Act, publicly traded
partnerships that were not in existence on December 17, 1987
will be
taxed as corporations (see Code
7704). The LLC was not in existence on December 17, 1987 but the
term "publicly traded partnership" is
defined for purposes of these new provisions as any partnership
whose interests are traded on an established
securities market or are readily tradeable on a secondary
market or
the substantial equivalent thereof.
The LLC may avoid being classified as a publicly traded
partnership under this definition if (1) the
Units will not be traded on an established securities market; (2)
restrictions placed on transfers of Units are
exercised to prevent public trading; and (3) the LLC Manager
prevents the Units from being considered as
readily tradable on a secondary market or the substantial
equivalent
thereof.
The adoption of the provisions affecting publicly traded
partnerships address some of the same
issues as the earlier legislative proposals directed at "large"
partnerships. Since the Offering Memorandum
does not limit the number of Members to 35, the LLC would very
likely be characterized as a "large
partnership" under the prior legislative proposals. It is not
anticipated, however, that Congress will adopt a
proposal directed at "large partnerships" in the immediate future,
since the "publicly traded partnership"
provisions of the '87 Act address much the same concerns.
Limitations on Deductibility of Losses by Unit Holders
A. In General--The deduction of LLC losses by a Unit
Holder is
subject to three limitations.
Initially, under Section 704(d) the Unit Holder's deduction for
his
or her distributive share of LLC loss is
limited to and may not exceed his or her basis for his or her LLC
interest (see discussion below). Further,
even though the loss may be allowable to a Unit Holder to the
extent
of that Unit Holder's basis, it is also
subject to the "at risk" rules of Section 465 (see discussion
below). Then, after the "at risk" rules are met,
the loss is also subject to the passive loss rules of Section 469
(see discussion below). Each of the three
limitations provides for a carryover of any disallowed loss. Thus,
the limitations may be viewed as timing
concepts more than true disallowance provisions. The
limitations are
applied in the following order: First
the basis limitation of Section 704(d), then the "at risk"
limitation, and third the passive loss limitation of
Section 469.
B. Basis of LLC Units--The basis of LLC interests is
relevant
in determining a Unit Holder's gain
or loss on the sale or other disposition of an interest in the
LLC,
and may limit the ability of a Unit Holder to
deduct losses attributable to the operations of the LLC. A Unit
Holder will be entitled to deduct his or her
distributive share of any LLC tax losses (if any) only to the
extent
of the adjusted basis in his or her LLC
interest at the close of the LLC taxable year in which the loss
occurs. The basis of a Unit Holder's interest in
the LLC initially will equal his or her cash contribution or
adjusted basis of other property contributed to the
LLC in exchange for such interest. Such basis will be increased by
the Unit Holder's share of certain LLC
nonrecourse liabilities [determined in accordance with applicable
Treasury Regulations (see discussion
below) and his or her share of LLC profits] and by his or her
share
of the LLC's taxable income. A Unit
Holder's basis for his or her LLC interest will be reduced by; (i)
any decrease in such Unit Holder's share of
LLC nonrecourse liabilities; (ii) the amount of cash distributions
received by the Unit Holder; and (iii) such
Unit Holder's share of LLC tax losses, if any.
C. "At Risk" Limitations--The so-called "at risk" rules
contained in Code Section 465 generally
provide that a limited partner (and by analogy a member of a
manager-managed LLC) cannot claim his or
her distributive share of the losses incurred by the investment
vehicle (entity) to the extent such losses
exceed his or her amount "at risk" in the business activity
undertaken, as determined at the close of the
taxable year of the entity. Only deductions in excess of income
received from the activity in the taxable year
are "losses" for these purposes, and thus a limited partner (or
LLC
Member) generally is entitled to claim
his or her share of the entity's deductions to the extent of
his or
her share of entity income for a taxable year,
even if the investor has no amount "at risk". The "at risk" rules
of Code Section 465 are applicable only to
individuals (including individual partners in a partnership),
estates, trusts, shareholders of an "S"
corporation, and certain closely-held "C" corporations in which
five
(5) or fewer individuals own more than
fifty-percent (50%) of the stock.
An investor generally will be treated as "at risk" under Code
Section 465 to the extent of; (i) the
unborrowed cash and the adjusted basis of other property he or she
contributes to the entity's business
activity; and (ii) the investor's share of amounts borrowed for
use
in the entity's business activity if the
investor is personally liable therefor or has pledged his or her
property (other than property used in the
entity's business activity) as security for the borrowed
amount. An
investor will not be considered "at risk"
with respect to amounts borrowed from a person who has an interest
in the activity or from a person related
to a person (other than the taxpayer) with an interest in the
activity. For this purpose, a person whose
interest in the activity is solely that of a creditor generally
will
not be considered to have an interest in the
activity. Further, an investor will not be considered "at risk"
with respect to any amounts as to which he or
she is protected against loss through nonrecourse financing,
guarantees, stop loss or reimbursement
agreements, insurance or other similar arrangements.
A Unit Holder should be able to include in his or her amount
"at risk" his or her cash contribution
to the LLC made from unborrowed funds or from proceeds of a
borrowing that he or she is personally liable
to repay, provided such borrowing is from a person who; (i)
does not
have an interest other than as creditor
in the LLC; and (ii) is not related, within the meaning of Code
Section 168(e)(4)(D), to a person with a non-
creditor interest in the LLC (other than the Unit Holder).
Although
the IRS could assert that any pre-sale
license agreements relating to any given Film should be treated as
guarantee or stop-loss arrangements, thus
causing a reduction in the Unit Holder's "at risk" amounts, any
such
arrangements entered into on an arms'-
length basis of the type commonly used in the motion picture
industry should not constitute a guarantee or
stop-loss arrangement under Code Section 465, because the amounts
received under such agreements would
be income from the activity of exploiting the Film. If the
above-discussed rules are followed, each Unit
Holder could reasonably expect to have sufficient amounts "at
risk"
in the LLC to deduct his or her
distributive share of any tax loss that may be experienced by the
LLC, to the extent of his or her cash capital
contribution or the adjusted basis of property contributed to the
LLC. On the other hand, there is a risk that
the "at risk" limitations would operate to defer the deduction for
advertising costs paid with borrowed funds,
if funds were borrowed to pay advertising costs.
LLC losses deducted by a Unit Holder will reduce his or her
amount "at risk", and this reduced "at
risk" amount would then be carried forward to the succeeding
taxable
year. The "at risk" amount will also
be reduced by any cash distributions by the LLC to the Unit
Holder.
If deductions are suspended due to an
insufficient amount "at risk", the suspended amount will be
available to the Unit Holder as a deduction in
subsequent taxable years subject to the "at risk" limitations.
Suspended amounts will be deductible no later
than the taxable year in which a Unit Holder disposes of his or
her
interest in the LLC. If the amount "at
risk" of a Unit Holder is reduced below zero, the Unit Holder must
include as income the amount of
previously allowed losses to the extent of the negative amount "at
risk". This recaptured amount would be
taxable to the Unit Holder as ordinary income in the subject
taxable
year.
D. Passive Loss Limitation--Possibly the most significant
change made by the Tax Reform Act of
1986 was the passive loss limitation enacted by Congress in
Internal
Revenue Code Section 469. Congress
expressly sought to eliminate the so-called "abusive tax
shelter".
Section 469 accomplished Congress'
intent by denying a taxpayer the use of deductions and credits
generated by "passive" activities against
income from other activities until the taxpayer disposes of the
interest in the passive activities. The
determination of whether or not an activity is "passive" is
defined
by the statute based on whether or not a
taxpayer "materially participates" in the activity and the
activity
involves the conduct of a trade or business.
The material participation test divides taxpayers into "active"
participants and "passive" participants. The
active/passive determination must be made separately for each
taxpayer and for each activity in which a
taxpayer participates.
To "materially participate" in an activity, a taxpayer
must be
involved in its operations on a
sufficiently regular, continuous, and substantial basis.
Definitions of the terms "regular", "continuous" and
"substantial"are deferred to the regulations, which are
lengthy, and
far from clear. Nonetheless, it is clear
that generally member/investors in manager-managed limited
liability
companies are presumed to be not
materially participating in the relevant activity, subject to
certain exceptions [see Internal Revenue Code
Section 469(h)(2)].
The passive activity loss rules apply to individuals,
estates,
and trusts. They also apply to personal
service corporations [provided that more than ten-percent (10%) of
the stock by value is held by the
employee--owner(s)] and closely-held C corporations that have five
(5) or fewer individuals holding more
that fifty-percent (50%) of the stock.
After each activity in which a taxpayer is involved is
classified as either a passive or an active
activity as to that taxpayer, income or loss is determined on an
activity-by-activity basis. Deductions from
all passive activities that exceed income from all passive
activities (excluding portfolio income) may not be
deducted from other income.
"Portfolio income" is a third classification of income,
created
by Congress (along with "active"
income and "passive" income), which includes items such as
interest,
dividends, royalties and gains from
the sale of property held for investment. Portfolio income,
expenses, gains, and losses are excluded from the
determination of net income or loss from a passive activity. For
example, interest income earned by LLC
funds held in a bank account, or other interest-bearing instrument
pending use in LLC operations will be
considered portfolio income, and when it is allocated, pro rata,
among the Unit Holders, it will not be
offsettable by "passive" deductions, even though the passive
deductions are generated by the LLC.
The income and losses from "active" activities are netted.
If a
net loss results from an "active"
activity, the loss can be deducted against any other income.
Similarly, the income and losses from "passive"
activities are also netted. If net income results, the passive
activity limitations do not apply. However, if a
net passive loss results, the loss cannot be deducted against
income
from any other source. Instead, such
losses become suspended until a later tax year when the
taxpayer has
net passive income from other passive
activities, or until the taxpayer disposes of his or her entire
interest in the passive investment that generated
the loss. A disposition that will trigger the usability of carried
forward passive losses must be in the form of
a fully taxable transaction, and the person acquiring the interest
cannot be related to the taxpayer. Upon such
a disposition, the suspended losses, which can be carried forward
indefinitely, are applied first against the
income resulting from the disposition, if any, and thereafter, may
be applied to offset any income. A
disposition of less than the entire interest in the passive
activity
will not be sufficient to trigger the
allowance of suspended losses.
Existence of Trade or Business--Although the LLC should be
entitled
to treat deductions claimed in
connection with the Film as expenses incurred in the LLC's overall
trade or business of financing,
producing, and exploiting films, the IRS may assert that otherwise
deductible items (other than depreciation)
incurred in connection with the Film, if any, should not be
treated
as ordinary and necessary business
expenses under Code Section 162(a), because the LLC itself is not
actively engaged in film production or
distribution.
The IRS may take the position that expenses incurred prior to
commencement of principal
photography constitute "start-up" expenses that would be
capitalized
and amortized over a sixty (60) month
period pursuant to Code Section 195, on the theory that such
expenses are incurred to create a trade or
business, prior to becoming an active trade or business. Such a
position would not appear to be well
founded, since the business of the LLC includes financing and
production of the Film.
Profit Motive and Code Section 183--In order for certain
expenses to
be deductible by the Unit Holders,
such expenses must be incurred in a trade or business or other
activity engaged in for profit. If for any
reason such expenses were determined not to have been incurred
in a
trade or business or other activity for
profit, the deductions attributable to the activity would be
allowed
to Unit Holders who are individuals or S
corporations only to the extent permitted by Code Section 183.
Pursuant to Code Section 183, all
deductions that are not dependent on a profit motive (such as
interest or taxes) generally would be
allowable, and the balance of the deductions that would
otherwise be
permitted only if the activity were
engaged in for profit would be allowed only to the extent of the
amount that gross income from the activity
exceeded the deductions that were not dependent on a profit
motive.
The determination as to whether an activity constitutes an
activity engaged in for profit for tax
purposes is based on all the facts and circumstances and is
determined at the Unit Holder, not entity level, so
the requisite intent of the Unit Holder controls this
determination.
Since the test of whether an activity is deemed to be
"engaged
in for profit" is based on facts and
circumstances that exist from time to time, no assurance can be
given that the IRS will not attempt to apply
Section 183 of the Code in order to disallow deductions by the
Unit
Holders for LLC operations. However,
if it is the intention of the Manager to at all times operate the
LLC in a business-like manner and to create its
product with the intention of generating an overall profit, the
"engaged in for profit" test should be met.
Allocation of LLC Tax Items
The allocation among the Unit Holders of the LLC's income,
gains, losses, deductions and credits
("Tax Items") will be determined under the Operating Agreement
except to the extent an allocation stated in
the Operating Agreement both (I) lacks "substantial economic
effect", and (ii) is not in accordance with the
Unit Holders' interests in the LLC, as determined under all the
facts and circumstances [see Code Section
704(b)].
Treasury Regulations define the term "substantial economic
effect" and describe an investor's
interest in the entity for purposes of Code Section 704(b) [see
Treas. Reg. Section 1.704-1(b)(2)&(3)].
Under these Treasury Regulations, an allocation of a flow-through
entity's Tax Items to an investor
generally has "economic effect" only if (i) the allocation is
reflected in the investor's capital account balance
and capital accounts are otherwise maintained in accordance
with the
tax accounting principles set forth in
the regulations; (ii) liquidation proceeds are, throughout the
term
of the entity, distributable in accordance
with the investor's capital account balances; and (iii) any
investor
with a deficit capital account balance
following the distribution of liquidation proceeds must restore
such
deficit to the entity [see Treas. Reg.
Section 1.704-1(b)(2)(ii)]. However, as discussed below, an
alternative test is available concerning point
(iii). The Treasury Regulations contain detailed rules
relating to
the maintenance of capital accounts for this
purpose.
The economic effect of an allocation is deemed to be
"substantial" if there is a reasonable
possibility that the allocation will affect substantially the
dollar
amounts to be received by the investors,
independent of tax consequences. The economic effect of an
allocation generally will not be substantial if
(i) the overall tax liability of the investors for the taxable
year
is reduced by reason of the allocation and the
overall capital account adjustments for all investors in the
taxable
year would be substantially the same in
the absence of the allocation; or (ii) there is a strong
likelihood
that the initial economic effect of the
allocation will be offset by one or more allocations in subsequent
years and the investors' tax liability is
reduced thereby [see Treas. Reg. Section
1.704-1(b)(2)(iii)(b)&(c)].
If the allocation of the investment vehicle's Tax Item
does not
have "substantial economic effect",
the proper allocation of such item will be determined in
accordance
with the investor's interest in the entity
with respect to such item. IRC Section 704(b). Under the Treasury
Regulations, the investor's interests in
the entity with respect to an entity Tax Item is generally
determined by examining the manner in which the
investors have agreed to "share the economic benefit or burden"
attributable to such item. The economic
arrangement of the investors with respect to an entity Tax Item is
to be determined on the basis of all the
facts and circumstances, including (i) the investors' relative
capital contributions to the entity; (ii) the
interests of the investors in economic profits and losses;
(iii) the
interests of the investors in operating
distributions; and (iv) the rights of the investors with
respect to
liquidating distributions [see Treas. Reg.
Section 1.704-1(b)(3)].
LLC Tax Deductions and Credits--The LLC is not designed to
generate
tax deductions for the Unit
Holders, and prospective Unit Holders should not acquire Units for
the purpose of sheltering income from
other sources. Nevertheless, the LLC will incur expenses in
connection with its business activities, many of
which will result in tax deductions. The discussion below
describes
certain Tax Items that may be
deductible for federal income tax purposes.
American Jobs Creation Act of 2004 Pursuant to the Special
Rules for Certain Film and
Television Productions at Section 244 of the American Jobs
Creation
Act of 2004 (which apply to films
commencing production after October 22, 2004 and before January 1,
2009), if an investment vehicles such
as an LLC acquires the rights to produce a feature film, an LLC
member/taxpayer may elect to deduct his or
her pro rata share of 100% of the direct and indirect costs of
producing the film as an expense for the
taxable year in which the costs of production are first
incurred, so
long as the aggregate cost of the film does
not exceed $15 million and 75% of the total compensation paid to
actors, directors, producers and other
relevant production personnel working on the film is paid for
services performed in the United States. If
such election is made, no other depreciation or amortization
deduction will be allowed.
In the event that the investor/taxpayer chooses not to
make the
above-described election, an
investment in the LLC may result in three types of deductions for
LLC Investors:
(1) Ordinary and Necessary Business Expense Most of the
expenses incurred by an LLC in
acquiring, developing and packaging it's Film are considered
ordinary and necessary business expenses.
However, each Investor's pro rata share of such deduction (as
reported annually on the LLC's K-1 and
prepared by the LLC's accountant) would not be deductible in the
year in which such expense is incurred,
rather in the year in which the resulting Film is sold or
placed in
commerce, if it is placed in commerce.
(2) Organizational Costs--A second, much smaller, category of
LLC expense that may provide
deductible items for Investors pursuant to the pre-2004 law,
are the
LLC's organizational expenses. These
expenses, paid in connection with the start up of the LLC's
business
and organization of the LLC are
amortized over a period of not less than sixty (60) months
(beginning with the month in which the LLC
begins business). Under these rules, no deduction can be taken for
syndication fees (costs of selling the
Offering) nor may syndication fees be amortized.
(3) Advertising Expense It is also possible that some LLC
funds
may be used in for certain
advertising expenses in connection with the pursuit of its
activities. Each Investor's pro rata share of
advertising expense will be deductible in the year in which it is
incurred.
Taxable Income May Exceed Distributions--Prospective Unit Holders
should be aware that there is a
substantial possibility that taxable income that is allocated to
Unit Holders will exceed the cash distributed
to such Unit Holders in a given taxable year.
Taxable Year of LLC--Section 706(b) of the Code requires the
LLC to
adopt the taxable year of the Unit
Holders owning a majority interest in the LLC capital and profits.
It is anticipated that the LLC will adopt a
calendar taxable year under this provision. If Unit Holders who
are
calendar year taxpayers do not hold a
majority interest in LLC capital and profits, the LLC would be
required to adopt the taxable year of its
"principal partners" if all such partners have the same taxable
year. If there were principal partners with
different taxable years, adoption of a calendar year would be
required.
Liquidation of the Partnership--The dissolution and liquidation of
the LLC will generally not result in any
gain or loss being recognized by the LLC. Each Unit Holder will
recognize gain to the extent that the sum of
money received (which includes any decrease in a Unit Holder's
share
of LLC liabilities) exceeds such Unit
Holder's adjusted tax basis in the LLC [see IRC Sections 731(a)
and
752(b)]. Subject to the rules concerning
"unrealized receivables" and "substantially appreciated inventory
items" ("Section 751 property"), such
gain will be capital gain.
Capital loss will be recognized only if "money" (which
includes
a reduction in a Unit Holder's share
of LLC liabilities) and Section 751 property are distributed, and
only to the extent a Unit Holder's adjusted
basis for such Unit exceeds the sum of such money (as defined
above)
and the basis to the Unit Holder of
his or her share of Section 751 property. If the liquidating
distribution includes property other than money
(as defined above) and "Section 751 property", no loss will be
recognized.
Where property other than money is distributed in
liquidation,
each Unit Holder's basis for such
property received will be such Unit Holder's adjusted basis for
his
or her Unit in the LLC reduced by any
money (as defined above) distributed to such Unit Holder. To the
extent "Section 751 property" is
distributed, a special allocation of a Unit Holder's basis for his
or her interest in the LLC must first be made
to such property, with any remaining basis allocated to other
property in proportion to his or her adjusted
basis to the LLC (see IRC Section 732).
The dissolution and liquidation of the LLC will generally
result in each Unit Holder recognizing
income only to the extent cash received in the distribution
exceeds
the Unit Holder's basis of his or her LLC
interest. So long as the LLC's Operating Agreement requires the
liquidation of all LLC property prior to
winding up the LLC and that liquidating distributions be made only
in cash, the rules for distributing
money, described above should govern the tax consequences upon
dissolution and liquidation of the LLC.
Tax Exempt Investors--Tax-exempt organizations, such as pension
and
profit sharing plans, Keogh Plans,
which are qualified under Section 402 of the Code, and Individual
Retirement Accounts, usually are not
subject to federal income taxation. However, a tax is imposed by
Section 511 of the Code on an exempt
organization's "unrelated business taxable income" ("UBTI"). This
tax is computed at the rates provided in
Section 11 of the Code.
UBTI is generally defined in Section 512 of the Code as gross
income derived by any organization
from any unrelated trade or business (i.e., not related to the
exempt purpose of the Unit Holder). UBTI
received by an otherwise tax-exempt organization in excess of
$1,000
during any taxable year is subject to
tax. For computing UBTI, a Unit Holder that is a tax-exempt
organization would be required to take into
account its share of income from the LLC to the extent such income
was UBTI. Certain items are excluded
from UBTI, including dividends, interest, royalties, most rents
from
real property and gains from the sale of
property other than "inventory" or "property held primarily for
sale
to customers in the ordinary course of
business". (Such exclusions do not apply to income generated by a
"publicly-traded partnership", although
the LLC should not be considered a "publicly-traded partnership"
under the parameters of IRS Notice 88-
75, I.R.B. 1988-27).
Future Legislation--In recent years, there have been a number of
proposals made in Congress by individual
representatives, government agencies and the executive branch
of the
federal government for changes in the
federal income tax laws. In addition, the IRS has proposed and may
still be considering changes in
regulations and procedures, and numerous private interest groups
have lobbied for regulatory and legislative
changes in the federal income tax laws.
It is impossible to predict with any degree of certainty the
likelihood of adoption of any of such
proposals or the probable effect of any such proposals upon the
income tax treatment presently associated
with investment in the LLC, or the effective date of any
legislation
that may derive from any such proposals.
PROSPECTIVE PURCHASERS ARE STRONGLY URGED TO
CONSIDER ONGOING DEVELOPMENTS IN THIS UNCERTAIN
AREA OF THE LAW AND TO CONSULT THEIR OWN TAX
ADVISORS IN ASSESSING THE RISKS OF THE PURCHASE OF AN
INTEREST IN THE LLC.
State and Local Taxes--In addition to the federal income tax
consequences described above, prospective
Unit Holders should consider potential state and local tax
consequences of an investment in the LLC. A
Unit Holder's income or loss from the LLC may be required to be
included in determining such Unit
Holder's reportable income for purposes of state and local
taxation.
THIS DISCUSSION MERELY ADVISES THAT POTENTIAL STATE
AND LOCAL TAX RISKS MAY BE ASSOCIATED WITH
INVESTMENT IN THE LLC. EACH INVESTOR IS ADVISED TO
CONSULT HIS OR HER OWN TAX ADVISOR FOR ADVICE AS TO
STATE AND LOCAL TAXES WHICH MAY BE PAYABLE IN
CONNECTION WITH INVESTMENT IN THE LLC.
General Tax Considerations--The foregoing summary is not
intended as
a substitute for careful tax
planning, particularly since the income tax consequences of an
investment in the LLC are complex and
certain of these consequences will not be the same for all
taxpayers. Accordingly, prospective purchaser of
Units are strongly urged to consult their tax advisors.
Importance of Obtaining Professional Advice--THE FOREGOING
ANALYSIS IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL INDIVIDUAL TAX PLANNING.
THE TAX
MATTERS RELATING TO THE LLC AND THE TRANSACTIONS DESCRIBED
HEREIN ARE
COMPLEX AND ARE SUBJECT TO VARYING INTERPRETATIONS. MOREOVER,
THE
EFFECT
OF EXISTING INCOME TAX LAWS AND POSSIBLE CHANGES IN SUCH LAWS
WILL
VARY
WITH THE PARTICULAR CIRCUMSTANCES OF EACH INVESTOR. EACH
PROSPECTIVE
INVESTOR SHOULD CONSULT WITH AND RELY ON HIS OR HER OWN
ADVISORS WITH
RESPECT TO THE POSSIBLE TAX CONSEQUENCES (FEDERAL AS WELL AS
STATE
AND
LOCAL) OF AN INVESTMENT IN THE LLC. Such individual tax advice is
suggested for an individual's
unique tax situation apart from the tax consequences of an
investment in the LLC interests.
MISCELLANEOUS PROVISIONS
Reports to Unit Holders
The Manager shall cause to be prepared and distributed to
Members during each year the following
reports: (a) Semi-annual reports which may be unaudited but
prepared
in accordance with generally
accepted accounting practices (GAAP). The reports must contain a
balance sheet, a statement of income,
statement of Unit holder equity, statement of cash flows and other
pertinent material regarding the LLC and
its activities during the period covered by the report. (b) Within
120 days after the end of the fiscal year,
audited financial statements (containing the same reports as the
foregoing ) all of which shall be prepared in
accordance with GAAP and accompanied by an auditor's report
containing an opinion of an independent
certified public accountant. Each of the financial statements and
documents referred to above will be
conclusive and binding upon the Members unless written objection
thereto is received by the Manager
within 60 days after the statement has been delivered to the
Members.
Financial Statements
Articles of Organization for the Spring Break '83 Production,
LLC were filed with the California
Secretary of State on April 20, 2006, however, the LLC has not yet
been funded, thus no financial statement
exists for that entity. The LLC's Manager is Big Sky Motion
Pictures, LLC. Its financial statements appear
in the Financial Statements section of the Prospectus.
Subscriber Representations and Warranties
By signing the accompanying Subscription Agreement, each
Subscriber is being asked to warrant,
represent, understand, certify, acknowledge and/or agree that
he or
she has received this Prospectus; has had
a reasonable opportunity to ask questions of the LLC and its
officers and such questions have been
answered; and that the address set forth in the Subscription
Agreement is the Investor's true and correct
residence.
In addition, each individual Investor is being asked to
represents that he or she is over eighteen (18)
years of age and is a bona fide citizen or permanent resident
of the
United States; if more than one person,
that the obligation of the Investor and such other persons will be
joint and several, and the representations
and warranties set forth in the Subscription Agreement will be
deemed to be made by and be binding upon
such persons, and ownership of the LLC Units subscribed for
will be
set forth as described in the
Subscription Agreement; if a trustee of a revocable inter vivos
trust the Investor represents that he/she is the
sole and true party in interest and is acquiring the LLC Units for
the accounts of a revocable trust of which
he/she and/or other members of his/her immediate family are the
sole
beneficiaries during his/her lifetime or
their lifetimes; in the event that the Investor is a trust, it is
authorized and otherwise duly qualified to
purchase and hold the LLC Units, has its principal place of
business
at its resident address set forth on the
signature page of the Subscription Agreement, has not been formed
for the specific purpose of acquiring the
LLC Units, has submitted and executed all documents required
pursuant to the Certificate for Trust and
Joint Purchasers and Special Subscription Instructions, the person
executing the Subscription Agreement
and all other documents related to the offering represents that
such
person is duly authorized to execute all
such documents on behalf of the entity and if the Investor is
one of
the aforementioned entities, it agrees to
supply any additional written information that may be required by
the LLC.
Further the Investor is being asked to warrant, represent,
understand, certify, acknowledge and/or
agree that if there should be any adverse change in the
representations and information set forth in the
Subscription Agreement prior to the LLC's acceptance or
rejection of
the subscription, the Investor will
immediately notify the LLC of such change; that he or she
understands that the Subscription Agreement
does not constitute an offer by the LLC to sell LLC Units but is
merely a request for information;
understands that the LLC reserves the right to reject
subscriptions
in whole or in part; represents that the
only consideration given for payment for the LLC Units is as set
forth in the first paragraph of the
Subscription Agreement; that by completing this Subscription
Application and by signing such Subscription
Agreement, the Investor is specifically confirming the appointment
of Big Sky Motion Pictures, LLC to fill
the initial Manager position of the LLC pursuant to the Act; at
the
request of the LLC, the Investor will
promptly execute such other instruments or documents as may be
reasonably required in connection with
the purchase of the LLC Units; agrees that the representations and
warranties set forth in this Subscription
Agreement will survive the acceptance hereof by the LLC, will be
binding upon their heirs, executors ,
administrators, successors and assigns; and the Subscription
Agreement will be governed by and construed
in accordance with the laws of the state of California.
None of the above subscriber representations and
warranties are
intended to imply and may not be
construed or interpreted to imply that any prospective investor is
waiving of any of such investor's rights
under the Federal securities laws.
Legal Proceedings
The Manager is not aware of any pending or threatened legal
proceedings (or any legal proceedings
commenced or resolved with the past 10 years) to which it or its
owners or the LLC have been, are or may
be parties to and that is materially relevant to this Offering or
their participation herein. However, a single
pending action for alleged breach of an oral agreement is pending
against Big Sky Motion Picture, LLC,
Rand Chortkoff and Mars Callahan (Phillip Bromberg v. Chotkoff, et
al, Case No. BC344249 in Los
Angeles Superior Court). The amount being sued for is $1,000,000.
The court sustained the
demurrer/motion to strike to the first amended complaint on
June 19,
2006. The Plaintiff filed a second
amended complaint on July 7, 2006. The parties are scheduled to
have
a hearing on the demurrer on
September 19, 2006. The original complaint was filed on
December 9,
2005. If the demurrer is sustained
without leave to amend, the case will be dismissed.
Code of Ethics and Certifications
Pursuant to the SEC's Regulation SB, Section 228.406 (Item
406)
the small business issuer Spring
Break '83 Production, LLC and its Manager Big Sky Motion Pictures,
LLC have adopted a code of ethics
that applies to the small business issuer's principal executive
officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions. The signed and dated Code of
Ethics is on file at the principal offices of the LLC.
The certifications required by Rule 13a-14(b) (17 CFR
240.13a-14(b)) or Rule 15d-14(b)
(17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of
the United States Code (18
U.S.C. 1350) have been signed by the owners of the LLC's
Manager and
are on file at the offices of
the LLC. Such certifications are hereby specifically incorporated
into the Prospectus by reference.
Access To Additional Information
Prospective Purchasers are urged to read this Prospectus and
the attached Exhibits carefully and to
have the documents reviewed by an investment adviser. To the
extent
possible, the Manager will answer
any questions that Prospective Purchasers, or their advisors may
have, and will attempt to provide any
additional documentation to verify the statements included herein.
The Manager will keep at the principal place of business
of the
LLC adequate books of account of
the LLC, and each Unit Holder and his or her authorized
representatives will have at all times, during
reasonable business hours, free access to and the right to inspect
and copy such books of account.
NOTICE
Prospective Purchasers of Units in the Spring Break '83
Production, LLC
should complete the accompanying
"SPRING BREAK '83 PRODUCTION, LLC SUBSCRIPTION
AGREEMENT".
FINANCIAL STATEMENTS
[to be prepared by LLC accountant and inserted here as part of
main
body of Prospectus..?]
SIGNATURES
The issuer has duly caused this offering statement to be signed on
its behalf by the undersigned,
thereunto duly authorized, in the city of Los Angeles, state of
California on the ____________ day of
___________________________________, 200____.
Spring Break '83 Production, LLC (Issuer)
By: __________________________________________________
Mars Callahan, Co-Owner of LLC Manager
By: __________________________________________________
Rand Chortkoff, Co-Owner of LLC Manager
VERIFICATION
THE STATE OF CALIFORNIA )
COUNTY OF ________________ )
This instrument was acknowledged before me on the ____ day of
_________________, _______, by
Mars Callahan, co-owner of Big Sky Motion Pictures, LLC, the
Manager
of Spring Break '83 Production,
LLC and he is known by me or has demonstrated by sufficient
evidence
to be the person represented.
__________________________
Notary Public in and for
the State of California
(Notary Seal)
__________________________
Printed Name of Notary
My Commission Expires:
_______________________
THE STATE OF CALIFORNIA )
COUNTY OF ________________ )
This instrument was acknowledged before me on the ____ day of
_________________, _______, by
Mars Callahan, co-owner of Big Sky Motion Pictures, LLC, the
Manager
of Spring Break '83 Production,
LLC and he is known by me or has demonstrated by sufficient
evidence
to be the person represented.
__________________________
Notary Public in and for
the State of California
(Notary Seal)
__________________________
Printed Name of Notary
My Commission Expires:
_______________________
PART III EXHIBITS
Index of Exhibits
(3)(i) LLC Articles of Organization
Exhibit "A"
(3)(ii) LLC Operating Agreement
Exhibit "B"
(5) Opinion re: Legality
Exhibit "C"
(8) Opinion re Tax Matters (and consent)
Exhibit "D"
(10) Material Contracts Chain of Title Documents
(Certificate of
Authorship) Exhibit "E"
(10) Material Contracts Short Form of Copyright Assignments
Exhibit "F"
(14) Code of Ethics (incorporated by reference see page 72 of
the
Prospectus)
(23) Accountant's Consent
Exhibit "G"
(31) Certifications (incorporated by reference see page 72
of the
Prospectus)
(99) Sample Revenue Projections
Exhibit "H"
Subscription Agreement