Editing Never Split Tens (movie prospectus) (section)

==Finances==
===Principal Risks===

Investment in motion pictures is a high-risk venture.    You may lose money by investing in the Motion Picture.  Your investment is not a deposit in or obligation of, or guaranteed or endorsed by, any bank, and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the United States government or any agency of any state.

Because investing in motion pictures is speculative and risky, this investment opportunity will be offered only to accredited investors, as defined by Regulation D of the United States Securities and Exchange Commission (SEC).  Regulation D requires, a) a minimum net worth exceeding $1 million at the time of the investment, not to include the value of the investor's primary residence, or an income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years, and b) a reasonable expectation of the same income level in the year in which the investment is made.  Investors must be able to afford to lose a significant portion or all of their investment without negatively affecting their lifestyle.
  
Because this investment opportunity is being directed solely to or through acquaintances, it need not, and is not, currently registered with the SEC or with the regulatory agencies of any state.  The Producers make no representations as to the tax consequences of any investment losses and investors shall be responsible for obtaining legal and tax advice from professionals of their own choosing.

The sharing of profits with Investors will occur only if the total revenues generated by the distribution in domestic and foreign theaters, and sale of rights for television broadcast, reissue on electronic media, and ancillary sources as described in Section 10, Sources of Non-Box Office Revenues, exceeds the production budget.

Although production budgets are designed in good faith with best estimates, cost overruns resulting from labor disputes, overtime pay, and acts of God may occur.

The investment is subject to management risk in that the director and production staff make creative decisions.  Both the director and production staff include cost considerations in their creative decisions but there can be no guarantee that these decisions will not lead to costs exceeding preliminary production budget and thereby erode profits.

Profits may in addition be adversely affected by a) the release of a motion picture starring the same lead actors, b) the release of a motion picture in the same genre, c) a national economic downturn affecting leisure spending, d) adverse publicity concerning lead actors, e)  a Screen Actors Guild or teamsters strike and consequent picketing of movie theaters, f) an act of violence occurring at a movie theater leading to a reduction in movie attendance, g) a proliferation of pirated electronic versions of the motion picture, and other unforeseen circumstances.

===Risk Quantitative Analysis and Considerations===

Investments in motion pictures are risky, but we believe that the degree of risk is overstated by those who have not analyzed the actual returns on investment.   Utilizing the Nash database of motion picture production budgets and gross box-office revenues, when only gross revenues from theatrical distribution in the U.S. are included, the risk increases with the size of the production budget, as shown in the table.  For motion pictures with a production budget exceeding $100 million, a greater than 50% chance exists that U.S. gross revenues in theaters will not cover the budget.  This highly conditional finding is the only substantial evidence for the often-quoted statement that "more than 50% of all motion pictures lose money for their investors."

The results, however, change markedly when foreign distribution is included in the gross revenues, as shown in the second table.  Motion pictures in all ranges of production budgets will, of course, become more profitable with the additional source of revenue.  The fraction of motion pictures that lose money is halved, from 47% to 23%, when foreign distribution is included.

The monotonic increase in risk seen when only U.S. gross revenue is considered no longer exists.  Indeed, now the most expensive motion pictures incur the least risk.   This is understandable.  The high budget, blockbuster motion picture is developed to appeal to audiences worldwide.  The production budgets of such motion pictures include large amounts for marketing in Europe, Asia, and South and Central America as well as in the United States and Canada, cast several major stars, and will therefore attract multiple distributors and numerous exhibitors.


Fraction of Motion Pictures With U.S. Gross Box Office 
Less Than Production Budget

Production Budget	Sample
Size	Losers	Winners	Fraction of Losers
< $1 Million	 207	  76	 131	0.37
$5 - $7 Million	 242	 100	 142	0.41
$5 - $10 Million	 601	 273	 328	0.45
$10 - $15 Million	493	225	268	0.46
All	3543	1663	1880	0.47
> $100 Million	 206	 105	 101	0.51
> $200 Million	26	14	12	0.54

Fraction of Motion Pictures With Worldwide Gross Box Office 
Less Than Production Budget

Production
Budget	Sample
Size	Losers	Winners	Fraction of Losers
< $1 Million	  79	 10	  69	0.13
$5 - $7 Million	 116	 30	  86	0.26
$5 - $10 Million	 267	 78	 189	0.29
$10 - $15 Million	289	74	215	0.26
All	2329	535	1794	0.23
> $100 Million	 206	 29	 177	0.14
> $200 Million	26	1	25	0.04

In the range of production budgets from $10 to $15 million, the fraction of motion pictures that gross less than their production budget decreases from 46% to 26% when foreign box-office revenues are included in the gross.   A 74% chance exists, based on previous motion pictures and without including non-box office revenues, that a motion picture in this production budget range will be profitable.  Details of these calculations are provided in the tables.

In the electronic media age, non-box office revenues are substantial.  One scholarly reference states that revenues from video rental alone in the United States are 50% of domestic box-office revenues (Ref. 12) for motion pictures that become so available.  

===Sources of Non-Box Office Revenues===

Approximately 50% of the revenue from a feature-length motion picture results from distribution through non-box office outlets.  These include DVD/Blu-ray, Video-on-Demand, Electronic Sell-Through, Internet Streaming, Pay and Free Television, and ancillary media.  As a result, motion pictures can be distributed for an indefinite length of time domestically and internationally through retailers and various electronic media.  Although the majority of theater box-office revenue is typically earned within the first weeks after the release of a motion picture, with such new markets additional income may continue to be generated for an indefinitely long period.  

DVD/Blu-ray
The majority of DVD/Blu-ray revenues are generated from sales in retailers such as WalMart, Target, and Best Buy, as well as online vendors such as Amazon and DVD Empire.  Firms such as Netflix, Redbox, and Blockbuster provide additional revenue by purchasing a substantial number of units for rental at the early high-price points.

Video-on-Demand
Video on Demand allows consumers to rent a one-time viewing of a film without the use of an electronic device such as a DVD or videocassette player.  “Premium” VOD has a short window of accessibility, almost immediately after or even during the theatrical release, in which case a higher fee is charged.  “Standard” VOD is available later at a reduced rate.  In both cases, suppliers include all cable and satellite TV companies as well as multi-operational platforms such as PlayStation and Xbox.  

Electronic Sell-Through (Digital Download)
Digital download or electronic Sell-Through allows the consumer to download a film onto his or her computer, tablet, smartphone, or PDA device for unlimited use for unlimited time for a fee less than the cost of purchasing a DVD.  Many firms are involved in this rapidly growing method of film distribution including Amazon and iTunes. 

Internet Streaming
With Internet Streaming, the newest form of digital distribution, consumers can view a film in real-time on their televisions, computers, gaming systems, and mobile devices for a monthly fee.  Leaders in this field include Netflix, Hulu, and Google, with numerous other firms expected to be coming online soon.

Pay and Free Television
Pay Television sales typically begin nine months after the initial release of a motion picture.  For a monthly subscription fee, premium cable channels such as HBO,  Showtime, Starz, and Cinemax provide consumers with films prior to their showing on network or basic cable stations.  Although exceptions exists, pay TV agreements generally produce revenues in the tens of thousands of dollars.  The major source of revenue from such agreements is commercial advertising. Free television buyers include the networks, including CBS, NBC, ABC, FOX, TNT, USA, and AMC. 

Ancillary Media
Films can be distributed through many additional platforms.   Ancillary media includes in-flight, educational, military, prisons, hotels, and cruise ships.  While this demand is limited, it is a potential significant additional source of revenue.

Foreign Sales
Foreign box-office revenue constitutes a significant portion of worldwide box-office receipts.  Figure 3 displays the revenues for the 2329 motion pictures in the Nash database for which foreign box-office receipts are reported.  

Details of these figures are instructive.  Figure 5 displays the percent of motion pictures for which the ratio of foreign gross box-office revenues to domestic box-office gross revenues is at least a given value.  The 50% mark, designating the median value of this ratio, occurs at a value equal to 0.87.  This corresponds to foreign sales contributing approximately 47% of the total worldwide box-office revenues of a film.  

A value of the ratio equal to unity indicates that the total gross box-office receipts are doubled and a value of the ratio equal to two indicates that the total gross box-office receipts are tripled with the addition of foreign distribution, for examples.  

Similarly, Figure 6 displays corresponding results for the 289 motion pictures in the database with production budgets between $10 and $15 million.   The contribution of foreign receipts is even more striking for these motion pictures.  The 50% mark, designating the median value of this ratio, occurs at a value equal to 0.68.  This corresponds to foreign sales contributing approximately 40% of the total worldwide box-office revenues of a film.  

Examination of these figures shows that larger fractions of motion pictures with production budgets in the range of $10 to $15 million, compared to all motion pictures, obtain significantly larger fractions of their gross box-office revenues from foreign distribution.  Including foreign box-office revenues leads to the worldwide gross revenues at least doubling for 44% of all motion pictures and 46% of the motion pictures with these moderate production budgets. (In other words, about 44% of all motion pictures that report foreign gross revenues have at least equal gross box-office receipts from foreign distribution as from domestic distribution.)  Including foreign box-office revenues leads to the worldwide gross revenues at least tripling for 18% of all motion pictures and 24% of the motion pictures with these moderate production budgets.  As a final illustration, including foreign box-office revenues leads to the worldwide gross revenues at least quadrupling for 10% of all motion pictures and 19% of the motion pictures with these moderate production budgets.   

This trend of larger percentages of the moderate production budget motion pictures than of all motion pictures exceeding a given multiple continues at all higher multiples.  With such considerations, obtaining significant foreign distribution is a major strategy of the Producers.

This strategy requires marketing overseas.  More than 50 foreign territories are targeted by motion picture producers, including ten so-called major foreign territories of which Japan and Germany are the largest.  Sales representatives promote motion pictures at  international markets and events, including those in Cannes, Berlin, and Toronto, and at trade shows such as those of the National Association of Television Program Executives (NAPTE), MIPCOM, and American Film Market (AFM).  

The contracts to obtain foreign distribution within the territories usually have several characteristics.  Normally, “all media” rights, including theatrical, electronic, and ancillary, are sold to a single buyer within a territory.  The contract includes an advance, which is typically paid to the production company in two portions, upon signing and upon delivery of the motion picture.  As with contracts in the book publishing industry, additional revenues are paid to the production company if sales exceed the amount of the advance.  The sales representative receives a sales commission from the gross receipts.  The security of the foreign revenues are ensured by their being deposited in accounts controlled by a third party.

The Nash database does not provide or attempt to estimate difficult-to-obtain revenue figures for sources other than theatrical box office.  These additional sources are increasingly significant sources of revenue as computer and telecommunication innovations are introduced to the modern movie-going public.  With such sources of revenue other than box office, modern motion pictures have greater changes of exceeding the production budget than in prior decades.  The Producers will vigorously seek distribution through these various modes of non-box office revenues.

===Model Revenues===

To obtain an idea of the relative contributions of these various modes of revenue generation, we present a model of typical relative amounts of revenues.  These are hypothetical figures for a $5 million production budget motion picture and are presented to demonstrate the common relative contributions of non-box office receipts to the cash flow of a motion picture.  The gross revenue reported for domestic box office is the $13.7 million median value quoted for motion pictures with production budgets between $10 and $15 million as quoted in Section 7.b, Historical  Production Budgets and Revenues of Motion Pictures, Revenues. The gross revenue reported for foreign box office is the sum of the similarly reported median value and an estimated $8 million for revenue from electronic media. The figures provided do not constitute a representation or guarantee concerning the actual non-box office performance of the Motion Picture.  

Model Income Statement1
(Based on a motion picture with a $10 million production budget)

A.	Revenues from Domestic Box Office	$13,700,000

	     Less 50% Distribution Fees and Expenses	($6,850,000)

	Net Revenue from Domestic Box Office	$6,850,000	
B.	Revenues from Domestic Home Video2	$3,000,000

	     Less 35% Distribution Fees and  Expenses	($1,050,000)

	Net Revenue from Domestic Home Video	$1,950,000

C.	Revenues from Domestic Television (Premium/ Basic Cable) 	$5,000,000

	     Less 20% Distribution Fees and  Expenses	($1,000,000)

	Net Revenue from Domestic Television	$4,000,000

D.	Revenues from Foreign Sales (Box Office and Other Media)	$21,000,000	
	     Less 35% Distribution Fees and  Expenses	($7,350,000)

	Net Revenue from Foreign Sales	$13,650,000

E.	Revenues from Illinois Film Services Tax Credit3	$1,800,000

	     Less 10% Discount and Sales Commission	($180,000)

	Net Revenue from Illinois Film Services Tax Credit	$1,620,000

	Total Net Revenue	$28,250,000

	     Less  Investor Principal Investment	($10,000,000)

	     Less 15% Investor Preferred Return 	($1,500,000)
$1,500,000

	Net Profits 	$16,750,000

	65% Investors’ Share of Net Profits 
$10,887,500
$10,887,500

	Investor’s ROI on $10,000,000 – nearly 125%
	$12,387,500

1The income projections, distribution costs, and tax credit values listed are hypothetical examples to demonstrate the common relative contributions of various receipts to the revenues of a motion picture and do not constitute a representation or guarantee concerning the actual revenue performance of the Motion Picture.  
2 DVD/Blu-ray, Video-on-Demand, Electronic Sell-Through, and Internet Streaming.
3 Distributed to Investors unless used to augment budget for post-production.

===Profit Sharing and Accounting===

====Distribution of Excess Funds====

If the total amount of funds raised for the production of the Motion Picture is less than the actual money spent in production of the Motion Picture, those excess funds shall be reimbursed pro rata, without interest, to the Investors no more than six (6) months after the opening screening of the Motion Picture.

====Distribution of Profits====

Net profits will be distributed to Investors on a pro-rata basis.  Accounting will be made annually in April for the preceding calendar year, and payments due the Investors will be remitted thereafter in U.S. dollars. The Producers agree to render a statement of account to the 30th day of April immediately following the opening screening of the Motion Picture and thereafter similar statements for all periods during which revenue from the Motion Picture have been received by Producers and to send such statements, together with payment of the amount due thereon, on or before the 31st day of May.  If in any period the total payment due to the particular Investor is less than five hundred ($500) dollars, the Producers may defer the rendering of a statement and payment until such time as the sum of five hundred ($500) dollars or more shall be due.  Upon the Investor’s written request, the Producers shall render a detailed statement which shall include the revenues from all sources, including foreign distribution.

====Examination of Accounts====

Financial reports will be prepared and distributed to the Investors by the accounting firm retained by the Producers for that purpose.  A certified public accountant designated by the Investor may inspect the Producers’ books and records, insofar as they relate to the Motion Picture, no more than once a financial quarter during normal business hours upon written request in order to verify the accuracy of the Producers’ statements issued in respect to the Motion Picture.  If an error is discovered as a result of any such examination, the party in whose favor the error was made will promptly pay to the other the amount of the error without interest. 

====Payments to Financial Intermediaries====

All investments are sent directly to the Producers.  No intermediary exists, no fees are imposed by intermediaries, and no potential conflict of interest exists resulting from an intermediary directing investment in the Motion Picture as opposed to other investment vehicles.

===Taxes and Tax Benefits===

Proceeds to Investors are generally taxable as ordinary income, unless the Investor is investing through a tax-deferred arrangement, such as a 401 (k) plan or an individual retirement account.

Section 199 of the Internal Revenue Code allows producers and investors to receive under certain circumstances a 9% deduction.  A second relevant portion of the Internal Revenue Code, which had expired at the end of 2012, has been renewed as part of the American Recovery Act.  Section 181 states that investment in a motion picture filmed in the United States is 100% tax deductible for the investor in the year of investment.  Unlike other investment vehicles, the deduction is not contingent on loss.   The total amount invested is deductible independent of the outcome of the investment.  These effectively reduce the tax rate on qualified production activities income (QPAI), which includes profits and/or other taxable income resulting from domestic motion picture production.
 
The Motion Picture is eligible for the Illinois Film Services Tax Credit, worth 30% of all qualified in-state expense.  The tax credit is transferable and can be divided into ten transferable portions.  If the Investor has no need for the Illinois tax credit himself, the credits can be sold.  They are typically sold for at least 87.5 cents on the dollar.  The proceeds can be collected from the State of Illinois approximately three to six months after the completion of principal photography.  

This tax credit is effectively additional revenue for the Motion Picture, which the Producers may use to augment the Motion Picture budget in post-production or, if not needed for that purpose, distributed to Investors in proportion to their principal investment.  (If Investors have taxable income in Illinois, 100% of the credit could be directly transferred to offset said income, again in proportion to their principal investment.)   Similar considerations apply to motion pictures filmed in Canada.

As a result of the 100% federal deduction and the 30% Illinois tax credit, various scenarios can be developed.  These are shown in the table.   


Model Tax Benefits for Motion Picture Production

Federal Bracket	Percentage Spent in Illinois	Total Tax Benefits	Effective Investment	Revenue/Costs to Break Even
10%	50%	$2,500,000	$7,500,000	75%
10%	75%	3,250,000	6,750,000	68%
20%	50%	3,500,000	6,500,000	65%
20%	75%	4,250,000	5,750,000	58%
30%	50%	4,500,000	5,500,000	55%
30%	75%	5,250,000	4,750,000	48%


For example, take an Investor who invests $10 million in the Motion Picture.  If the Investor is in the 20% federal income tax bracket and if 50% of the production budget is spent in Illinois, then the effective investment is only $6.5 million.  As a result, the revenues need only amount to 65% of the costs of the Motion Picture for the investor to begin earning a profit.