Independent Film Performance Risks

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Some segments of the motion picture industry are highly competitive. In the Production Phase, competition will affect the Company’s ability to obtain the services of preferred performers and other creative personnel. The Company will be competing with the producers of other films in arranging for distribution in the domestic theatrical marketplace and in other markets and media. In the Distribution Phase, competition will limit the availability of theaters required for the successful distribution of the motion picture. The film project will be competing directly with other motion pictures and indirectly with other forms of public entertainment. The Company will compete with numerous larger motion picture production companies and distribution companies, which have substantially greater resources, larger and more experienced production and distribution staff and established histories of successful production and distribution of motion pictures.

Many films are released each year, which are not commercially successful and fail to recoup their production costs from U.S. 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 theatrical distribution. If a motion picture is not well received by the public, it may be a financial failure. The primary risks for a motion picture project are as follows:

1. Production

Particularly as produced by independent filmmakers, each film property is a separate business venture with its own management, employees and equipment and its own budgetary requirements. There are substantial risks associated with motion picture 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 or may cause the entire project to be abandoned.

2. Audience Appeal

The ultimate profitability of any film 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.

3. Cost Overruns

The costs of producing motion pictures are often 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 Company 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 motion picture.

4. Distribution

The profitable distribution of a film 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 theaters. There can be no assurance that profitable distribution arrangements will be obtained for the film or that the film can or will be distributed profitably.

5. Long Term Project

The production and distribution of a motion picture involves the passage of a significant amount of time. Pre-production on a motion 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 motion picture specifically may continue for years before the Company generates recoupment of any investments in the Units, the Fixed Rate of Return, or any Back-end Participation generated from the exploitation of the motion picture, if any at all.

6. Foreign Distribution

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 motion picture in foreign countries, if any, may be subject to currency controls and other restrictions, which may temporarily or permanently prevent the inclusion of such revenue in any of the Company’s returns.

7. Prospective 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 film 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. Thus, if the Company, in negotiating a nonton film streaming terbaru deal, has to rely heavily on a participation in the film’s net profits, revenues to the Company and thus Subscribers will be the last in line to benefit from such a revenue stream, if any.

8. Industry Changes

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 and basic cable television, syndicated television, DVDs and video games. During the last several years, revenues from licensing of motion pictures to network television have decreased (and fewer films are now being licensed for any price to network television), while revenues from pay television and DVD’s have increased relative to network. 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.

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