Rainbow Chaser Productions
For Information only
This memorandum is a business plan. It is not an offering for sale of any securities of the company. It is for your confidential use only and may not be sold, or redistributed without the prior approval of Rainbow Chaser Productions.
Rainbow Chaser Productions is a start-up enterprise engaged in the development and production of motion picture films for theatrical release. Rainbow Chaser Production’s goals are to make quality films that will be commercially exploitable to a mass audience. The company’s plan is to produce the Chee Chee Club with a budget of $500,000.
At the core of Rainbow Chaser Productions is founder, Producer Writer and Director Kimberly K. Wilson who brings the company experience in motion picture production with a good entrepreneurial background. Her team is supported by a group of consultants and advisers.
Rainbow Chaser Productions owns the rights to the feature script The Chee Chee Club. A drama story about a loner man who becomes addicted to beautiful dancers at a nightclub. One night a week leads to seven nights a week. We slowly watch his world fall apart. Rainbow Chaser Productions expects the film to stand on it own and to produce profits for its investors and to finance future bigger productions.
The total gross box office receipts for 2002 were 8.9 billion as reported by the MPAA (motion picture association of American) The figure represents admissions of $1.3 billion based on National Associations of Theater Owners (NATO) average ticket prices. In the past five years, Box office receipts have increased 23.1 percent and the number of ticket buyers has increased 17.4 percent. Despite many ups and down, such as the advent of television and the froth of the home video market, theatrical distribution has continued to prosper. Theatrical rentals are forecasted to be $3.5 billion in the U.S. and $7.5 billion worldwide in the year 2005.
The structure of the motion picture business has been changing over the past few years. And while U.S. Theatrical distribution is still the first choice of any feature-length film, international markets are gaining even greater strength then they had before. Independent films have been steadily gaining market share in the 2000’s. Today the worldwide market for these films is estimated to be $3 billion.
Drama films with sophisticated and updated story lines have been making a comeback at the box office. The adult public is realizing they need films that get them a break, from the no story and all special effects movie that have been flooding the box office the past several years. The commercial success the past several years of Dramas will draw audiences from far and wide.’
It has historically been true that in hard economic times movies will always be the number one entertainment. People want to be entertained and leave their problems behind for a few hours or more. We feel films that offer diversion and feature strong stories will draw large audiences.
Studios have made most of the majority of these types of films. We believe that the time is right to make cost effective films on smaller budgets. Rainbow Chaser Productions plans to keep its film/films independent in order to maintain quality of story and filming
The Company will seek distribution by independent companies who’s proven ability to handle low budget films with dramatic themes appeals to Rainbow Chaser Production’s desire for special handling. We will hold screenings specifically for the distributors in Los Angeles and/or New York. We will contact individually some of the distributors who have experience in the dramatic themed feature genres. In addition we will take the films to markets and film festivals where appropriate.
The foreign markets have become more profitable for dramatic films in the past few years. As our reputation for quality films grows, both domestic and foreign markets will be anxious to buy our product. Rainbow Chaser Productions expects to have – increasing leverage over the next few years in negotiating deals and attracting major cast and directorial elements.
Investment Opportunity and Financial Highlights
The founders are seeking an equity investment of approximately $500,000 for production of The Chee Chee Club and overhead expenditures. Current projections indicate a pretax net profit of $1,000,000 a 50 percent profit on the initial investment.
Rainbow Chaser Productions is a privately owned California Corporation that was established June 1998. Our principal purpose and business is to create theatrical motion pictures. The Company plans to develop and produce quality films of all genres. The objectives of Rainbow Chaser Productions are as follows.
1. To produce quality films that provide entertainment for both enjoyment and
2. To explore overseas co-production and co-financing potential for the company.
3. To distribute our films through independent distribution companies.
4. To negotiate distribution agreement on a film-by-film basis.
There is a need and a hunger for suspenseful dramas. We feel we can make exciting films for $500,000 without sacrificing quality. Until recently all special effects movies have been the focus instead of suspenseful dramas. We plan to change the movie emphasis from special effects movies to more of a meaningful storyline and wholesome entertainment that will attract teens to adults of all ages.
Management and Organization
The primary strength of Rainbow Chaser Production is its management team.
Kimberly K. Wilson, Founder a graduate of the Hollywood Film Institute. She studied TV/Film acting with some of LA's finest acting coaches. Ms Wilson pursued an acting career and performed stand up comedy. She has also penned nine film scripts. A well respected acting coach for the past several years, Ms Wilson, recently Produced, Wrote and Directed her first Feature film, “Maggie and Annie.” She has extensive experience in business and the entertainment industry
Mark Allen, CFO. A graduate of University La Crosse of Wisconsin in Finance. He went on to earn his CPA. Mark has been President of Marketing in several large midwestern firms.
Kristen Perry, President. A graduate of the University of San Francisco. She received a BA in Business. She went on to earn her Master. Kristen has held several high-ranking positions with Southern California Businesses.
James Baldwin (no relation to the actors) Producer, A graduate of Pepperdine University. He has extensive experience in creating and managing budgets. He also has experience in project management dealing with time and monetary constraints.
Maggie and Annie, www.MaggieandAnnie.com, Rainbow Chaser Production’s recently completed feature film. A Lesbian Love story. This project is 117 minutes and was Produced, Written and Directed by Kimberly K. Wilson. The project’s total cost was $80,000. It was filmed on DV. (digital video) Which is yet to be recognized and accepted fully by the film industry. For a low budget film, the movie, and Ms Wilson have received high praise from top people in the film business.
The Chee Chee Club, Rainbow Chaser Production’s current project is in preproduction.
The motion picture industry is a constantly changing and multifaceted business. It consists of two principal activities: Production and Distribution. Production involves the development, financing, and making of motion pictures; Distribution involves the advertising, publicizing, licensing, promotion and physical reproduction, delivery, and exhibition of completed motion pictures. The following is a simplified overview of a complex process for the purpose of describing how the business works.
Motion Picture Production
The total gross box office receipts for 2001 were $8.4 billion as reported by the MPAA. The figures represents admissions of $2.3 billion based on National Association of Theater Owners (NATO) average ticket prices. In the past five year, box office receipts have increased 23.1 percent, and the number of tickets buyers has increased 17.4 percent. Despite many ups and downs, such as the advent of television and growth of the home video market, theatrical distribution has continued to prosper. Theatrical rentals are forecasted to be 4.5 billion in the U.S. And $9.5 billion worldwide in the year 2006.
The structure of the motion picture business has been changing over the past few years. While. U.S. theatrical distribution is still the first choice of any feature-length film; international markets are gaining even greater strength than they have before. Independent films have been steadily gaining market share in the 1990’s. Today the worldwide market for these films is estimated to be $5 billion.
Until recent years, the major studios all maintained extensive production facilities. With significant overhead expenses and the rise of the unions and guild, film budgets began to rise. Studios released few pictures but expected greater grosses per film. As a consequence, smaller production entities, the independents arose. Films typically are defined by the source of their financing; even though some of these production entities are public production companies, much of their production financing comes through studio systems.
At a studio, a film begins in one or two ways. Someone inside the company might develop a concept (one or two lines of an idea) or a known writer might make the well-known “30-second pitch” and secure a deal. On the other hand, an agent might bring the script by a new writer to the attention of the studio. Scriptwriters are hired, cast sought, and directors and producers assigned. Then the film is put into development.
Development begins when the studio options or purchases a literary property, usually a script or a book. The nature of the deal depends on those involved in it. During development, the studios hire writers to adapt the book into a screenplay, reworks the original, determines a budget, and even starts casting The next step is preproduction. The period before principal photography when commitments are sought for talent, the director and crew are hired, and contracts are finalized and signed. Producers try to have all contracts in place before filming begins. The filming of a motion picture is called principal photography. It takes from 8-12 weeks, although major cast members may not be used for the entire period. Once the production has gotten to this stage, it is unlikely that a studio will shut it down. Even if the picture goes over the budget the studio will usually find a way to complete it.
During the post-production period that follows principal photography, the film is edited and synchronized with music and dialogue. In certain cases, special effects are added. The post-production used to require six to nine month. With recent technological developments, however, this time has been cut drastically for some films.
The exhibitor pays a percentage of the picture’s box office receipts (called “rentals”) to the studio or distributor. The size of the percentage depends on the distributor’s strength and the exhibitor desire to show the film. A major studio release usually has a 50/50 split, while independent films average 49 percent (up from 47 percent in 1998) from the box office. Of course, the exhibitor keeps all the money for popcorn, candy and soft drinks.
The U.S. release of a film usually ends within the first year. Major studio films may go out to as many as 4000 screens on the first few weeks. Independent films start slower and build on their success. Although the amount of rentals will decline toward the end of the film’s run, it may very well increase in the first few months. It is not unusual for a smaller film to gain theaters as it becomes more popular.
Because revenues from all other sources are driven by the success of the theatrical distribution, a film’s stay on theater screens is important. Coupled with this is the exhibitor’s basic desire to see people sitting in theater seats. Although the studio has some power to keep a mediocre film on the screen with its greater resources for marketing and promotion, good independent films will be shown. Exhibitors have always maintained that they will show any film they think their customers will pay to see. Depending on the location of the individual theater or the chain, local pressure may play a part in deciding which films are shown. Not all pictures are appropriate for all theaters.
Despite the new technologies on the horizon, theatrical exhibition is not likely to disappear during our lifetime. Forecast calls for the industry to grow from $30 billion to $40 billion in about five years, with an annually compounded revenue growth rate between 2001-2006 of 8.6 percent.
The foreign theatrical market continues to provide a significant source of revenue for theatrical distribution. Major studios have their own distribution offices in many companies, and they also cooperate with local distributors.
The foreign segment continues to grow. In many cases a film may see only moderate success in the United States but do better abroad. Some films are produced with the intention of distributing them only in foreign markets, skipping the U.S. Theaters entirely. It is important to remember, though, that a moderate U.S. release still drives more foreign box office than no release at all.
Feature films also receive considerable revenue from nontheatrical sources. Beyond domestic and foreign film rentals, these include the cable networks, home video, pay-per-view, and network television. The new technologies may be another source of revenue in the future.
As the film industry has gone through evolutionary changes, so have the nontheatrical segments. In the 90s, home video was the top growth area both in the U.S. and abroad. Many video companies gave filmmakers advance payments in return for the home video rights to their films.
The advent of strong cable networks in the late eighties and early nineties has turned the emphasis from video to cable. Many video companies have gone out of business, and advances are not as common as they once were. Cable pay-per-view channels receive films at about the same time as the video stores---generally within seven to nine months of theatrical release, although films with lackluster box office often appear sooner. Some cable channels are financing their own feature-length films. However, these films appear on television first and then usually go into foreign distribution.
The television market has turned around. Until the early 1990s, the networks bought the rights to show films before they were released to cable or video and were the first window for film release. Now movies appear on network television after they have gone to the other ancillary outlets and often a year or two after they appear on cable. Films often are seen on airplanes at about the same time that they appear on the networks.
Some of the other ancillary revenue sources are less certain. Even with big-budget movies, the rights to the novelization of the screenplay or to the creation of comic book versions yield only small amounts of revenue. The soundtrack of a motion picture may be separately licensed to recording companies to generate lucrative soundtracks, the revenue is too uncertain to project ahead of time.
Producers are now exploring the sales of rights to other technologies. Although CD-ROM appeared at one time to be a significant market, that technology is now fading. Factors forecasted by the Kagan Group that will influence film demand into the next millennium are:
· Sales of digital video discs (DVD) are projected to hit $5.3 billion by 2006 and possibly $8.7 billion worldwide.
· Direct broadcast satellite (DBS), already a force in Europe, is becoming a major delivery platform in the Asia/Pacific and Latin American markets, driving pay television and pay-per-view revenues.
· The U.S. has made controlling piracy of intellectual property (primarily videocassettes and music CDs sold in China) a top trade policy.
An independent film goes through the same process from development and preproduction through production and postproduction as a studio film. In this case, however, development and preproduction may involve only two people. And the entrepreneur, whether producer or director, maintains control over the final product.
An independent company is one that finds its production financing outside of the studios. A studio may distribute it, but negative cost has been found from other sources. Many of the large Production companies started with the success of a single film. Carolco was built on the success of the Rocky and Rambo films. New Line achieved prominence and clout with the Nightmare on Elm Street series.
The smaller production company usually raises money for one film at a time, although there may be other films in different phases of development. Many companies are owned or controlled by the creative person, such as a writer/director or writer/producer, in combination with a financial partner or group. These independents make low-budget pictures in the $50,000 to $5 million range.
In the past few years, there has been a resurgence of independent filmmaking. Production companies are gearing up again and independent distributors are returning to the market. As small companies go out of business, new ones form to take their place. Since the beginning of the nineties, independent film has been going through one of its “up” cycles. Traditionally, the fortunes of independent filmmakers have always cycled up and down from year to year. The recent success of independent films, such as Memento and Sling Blade, has sent the independent segment into another growth spurt. The specialty film market has also been growing. All across the United States are individual, independently owned theaters that maintain their own mailing list of faithful moviegoers. Often, a film made for $500,000 or less can earn back its cost from these regulars alone. Until recently, the independently owned theaters were thought of as the home of the offbeat and unique film.
Rainbow Chaser Productions feels that its second film will create a new type of moviegoer for these theaters and a new type of commercial film for the mainstream theaters. Just as Billy Bob Thornton’s Sling Blade, found a home in both art houses and malls, so will The Chee Chee Club. Although we expect our film to have a universal enough appeal to play the mainstream houses, at its projected budget, it may begin in specialty theaters. Because of the low budget, exhibitors may wait for the film to prove itself before providing access to screens in the larger movie houses. In addition, the smaller houses will give us a chance to expand the film on a slow basis and build awareness with the public. As word of mouth increases, both the distributor and the owners of the big theater chains will want to have Rainbow Chaser Production’s films in mall theaters.
With the company making films about everyday life the films will appeal to a mass audience. The story will cover romance, mystery, action and generally popular subjects.
Rainbow Chaser Productions is planning a budget of $500, 000 for The Chee Chee Club. The film will be exposed to festivals and a limited run in specialty theaters in targeted areas. This will create awareness for the film with the general public.
Although a major studio would be a natural place to go with this film, we want to remain independent. The niche market is strong enough to support the company as an independent producer.
Most of the marketing strategies commonly employed by independent distributors will be used to market Rainbow Chaser Production’s films. The actual marketing of the film itself is the distributors job. It involves the representation of the film in terms of genre, the placement of advertisements in various media, the selection of sales approach for exhibitors and foreign buyers, and the “hype” (word of mouth, promotional events, alliances with special interest groups, and so on.) All these factors are critical to a film’s success.
Each major studio has its own distribution division. All marketing and other distribution decisions are made in house. This division sends out promotional and advertising materials, arranges screenings of films and makes deals with domestic and foreign distributors. The studios each release 15 to 25 films a year, and they occasionally acquire independent films to release. For our films, however we will seek distribution by an independent company.
We feel that independent distributors often have the knowledge and patience to give special care to eccentric or mixed-genre films. Many independents will allow a film to find its audience slowly and methodically. However, this does not mean that independent distributors will not want to release films with mass appeal. For such films with smaller budgets and lesser names, they often have an expertise that the studios lack. In addition, by focusing their marketing and promotional efforts on a handful of primary markets, these companies are able to keep their cost relatively low. Because their focus is on fewer films, we feel that our films will receive better care than a studio.
The first step in distribution of a film is having copies made of it for motion picture presentation. The prints sent to the theaters are duplications of the “master” print, which is made from the original edited negative. A print usually cost $1, 500 to $2, 000, depending on the length of the film and current film stock cost. Major studio films typically are opened wide—that is, on a thousand or more screens simultaneously. The cost of prints for that type of release is more than a $1 million, which is impossible for low-budget films. Although the independent distributor begins with fewer prints, several hundred may be made throughout the film’s release period. While a film is in release, therefore, the total print cost can be appreciable.
The domestic territory is defined as both the United States and Canada combined. Many of the independent distributors consider the United States and Canada to be one package and prefer not to have them separated beforehand. Domestic rights refer not only to theatrical distribution but also to all other media, such as video, cable, pay-per-view, and television. When a producer secures an advance from one of these media for production financing, he or she makes the deal a little less attractive to potential distributors by fractionalizing the rights. Any source of future revenue that is taken out of potential money pie makes it more difficult for the producer to close the distribution deal.
In terms of foreign sales, there are U.S.- based distributors who specialize in the rest of the world. These companies deal with networks of sub distributors in various countries. It is important to distinguish between a distributor and a foreign sales agent. If a distribution company is granted the rights to the film for the foreign markets, that company is the distributor. Generally, if the ownership of the foreign rights is retained by the producer, who grants someone only a percentage of the receipts in exchange for obtaining distribution contracts in each territory or for various media throughout the world, that person is actually a sale agent.
There is no typical distribution deal. The distribution company will take as much as it can get. It is Rainbow Chaser Production’s job to give away as little as possible. Based on industry averages, we have used a distribution fee of 36 % of the total revenue in our projections. These percentages apply only to the revenues generated by the distributor’s deal; if that company is only making foreign sales, then it takes a percentage of only foreign revenues. How much the distribution company wants depends on its participation in the entire film package. The greater the up-front expense that the company must assume, the greater the percentage of incoming revenues it will seek.
In acquiring a project, the distributor looks at the following elements, among others.
· Uniqueness of story line
· Ability of the cast members to attract audience or buyers on their names alone.
· Past successes of the producers and/or director
· Name tie-in from another medium: for example, a best selling novel.
· Special audience segment for the type, or genre, of film
· Attached money
We will do all we can to meet the above criteria. Most important to selling a film is a mix of elements, although the story always is the first concern. The exhibitors to whom the distributors sells must see something in the film that they can promote to the audience. This changes from country to country and depends on the perspective of the buyer.
The ways in which a film is distributed domestically (in the United States and Canada) vary with the size of the distribution company and the type of film. Audience segmentation is determined by critical appraisal and the likely interest that the film will generate. For example, the distributor might release a film carefully, market by market, and use revenues from the first group of theaters to finance the prints and advertising for the second group, and so on.
Independent distributors use several standard patterns of release strategies. The usual method is to release a film to a few theaters at a time and slowly take it to more theaters. A popular film may well end up in large multiplexes, but usually after the film has been out for while. This method adds two advantages. It allows unique films to receive special handling, and it allows a popular genre, small-budget films to move as fast as its advertising budget permits
Saturation, Platform, rollout, and sequencing are variations on this theme. The film opens in a few selected theaters and moves to others throughout the country in some sort of pattern. A particular film might work best in one market because of the makeup of the population, because the film was shot there, or because residents will go to see almost anything. With good reviews, a film will continue to move through the country in one of several fashions. It might move to contiguous states, open in successive theaters based on a certain pattern, or cascade into the markets that are expected to produce the highest revenue. Whatever method is used, the film continues to open in more and more theaters. Eventually, the number of theaters will decline, but the film will remain in distribution as long as it continues to attract audiences.
The plan for Rainbow Chaser Production’s second film is to realize sizable opening audiences (relative to the budget and theme of the film) and good reviews, then use the money and revenues to continue releasing the film in additional theaters. Clearly, no one expects a $500,000 film to sell $17 or $20 million in tickets during it first weekend, or at all. The distributor will fund the copying of more prints out of the revenues from the first couple of theaters. Advertising will work in the same way. Ads in major city newspaper can cost anywhere between $1000 and $10,000. As a moderate-budget film earns money, it finances the advertising in the cities in which it will open later.
A very small company may use another method of distribution: 90/10 deals are actually a booking procedure that goes hand it hand with the release of small films. The distributor makes a deal with the theater to put up 90 percent of the advertising money and take 90 percent of the gross, after the exhibitor takes an agreed-upon minimum guarantee to earn the house “nut”. This type of deal could be done at other percentages, but 90/10 is common. The type of distributor that we hope to attract will probably use this procedure for our second film. As we move to the higher budgeted level, to the even higher budgeted levels, we will be able to move out of the specialty arena and into more chain theaters.
The financial projections for Rainbow Chaser Productions assume a conservative level of success for each fill project. Many factors affect the success for each film project, including the following.
· Innate commercial appeal
· Timing of release
· Distribution patterns
A film’s commercial appeal is undoubtedly the single most significant factor in
determining its financial success. This is closely followed in importance by the agreement that the production company has with its film distributors. However, all of these factors affect the eventual bottom line.
Should our film earn above-average dollars, it will increase the projected revenues, putting us ahead of our anticipated profit levels. Although the print and advertising expenditures may increase at the same time, their amount is expected to be minimal compared to the additional revenues.
To help protect Rainbow Chaser Production and the company’s investors from losses Rainbow Chaser Productions will endeavor to secure presale, distribution, and other financing agreements. Given that this company is new, an agreement will be entered into only if it is perceived to benefit all equity investors. In a presale agreement, a foreign organization or person buys the ancillary rights (domestic or foreign) in advance. The filmmaker takes this commitment, which includes a guarantee to pay a specific amount upon delivery of the completed film, to one of several specialized entertainment banks and, if the bank accepts the commitment, it is able to raise money to finance production. In exchange for the presale contracts, the U.S. or foreign buyer obtains the right to keep the revenue (rentals) from a particular territory and may also seek equity participation. The agreement can be for a certain length of time, a revenue cap or both.
The Financing Plan
This section contains Rainbow Chaser Production’s sales projections and income statements. Beginning with production financing. The projections are based on the history of other films as well as current trends in the industry. The following are significant elements of our forecast.
1. The Company seeks capitalization equal to the full budget of $500,000. All development and production data starts from the date of capitalization with funds in the bank.
2. Box office reflects gross dollars of ticket sales before the exhibitor splits the total with the distributor. Domestic Rentals reflect the distributor’s share of the box office split with the work television, and television syndication. Foreign revenue includes all monies returned to distributors from all venues outside the U.S. and Canada.
3. All funds flow from each revenue source to the distributor, who deducts his prints and ads expense and, generally, pays back the production cost before any money goes to the producer/investor line. The gross profit, therefore, is shown as the Distributor Gross Profit.
4. A one-year period from start of principal photography to distribution release is projected for each film. Although new technologies may make the actual time shorter, there is no precedent for changing the standard production period.
5. The Budget also known as the film’s “negative costs,” covers only the expenses that are needed to create the master print of the film. All marketing costs are included under P&A (Prints and Advertising), often referred to as “releasing cost” or “distribution expenses” These expenses also include the cost of making copies of the print from the master, advertising, video duplication, and marketing costs.
6. Distribution Fees (the distributor’s share of the revenues as compared to his expenses, which represent out-pocket cost) are based on 34 percent
of all distributor gross revenue, both domestic and foreign, a generally accepted estimate by industry analysts and trade papers. (Note: The exhibitor’s portion has been removed before this calculation.) Distribution deals are based on negotiation and vary greatly. There is no “typical”
deal. This estimate takes into account the filmmakers with moderate experience have little leverage with distributors; nevertheless, the company will seek to negotiate the most advantageous deal possible.
7. Advances from presales to foreign territories, video, cable and free and syndicated television will be accepted when it is in Rainbow Chaser Production’s best interest.
8. Because of the timing of the cast requirements needed to produce and distribute Rainbow Chaser Production’s film, substantial amounts of the initial capital will be deposited in a an interest-bearing account to be drawn as needed.
9. Net Producer/Investor Income represents the projected profit after the distributor’s expenses and fees have been deducted.
10. Completion bonds, which provide an insurance policy for the film, are not always available for low-budget films. We will make every attempt to secure one.
RISK FACTOR: The business of producing and exploiting low-cost theatrical release films is highly speculative, with many risks uncommon to other businesses. No assurance can be given of the economic success of any motion picture. The revenues derived from the production and distribution of a motion picture depends primarily upon acceptance by the public, which cannot be predicted. In addition, the competitive nature of the film industry, the possible box office failure of a motion picture being distributed, and the potential inability of a distributor to distribute the motion picture properly, collect distribution revenues, or remit funds properly to Rainbow Chaser Productions, make the successful distribution of any motion picture subject to substantial risk. The commercial success of a motion picture also depends on general economic factors and other tangible and intangible factors, all of which can change our forecasts and cannot be predicted with certainty.
The entertainment industry in general, and the motion picture industry in particular, are continuing to undergo significant changes, primarily due to technological developments. Although these developments have resulted in the availability of alternative and competing forms of leisure time entertainment, such technological developments have also resulted in the creation of additional revenue sources through licensing of rights to such new media, and potentially could lead to future reductions in the cost of producing and distributing motion pictures. In addition, the theatrical success of a motion picture remains a crucial factor in generation revenues in other media such as videocassettes/DVD and television. Because of the rapid growth of technology, shifting consumers tastes, and the popularity and availability of other forms of entertainment, it is impossible to predict the overall effect these factors will have on the potential revenue from and profitability of feature length motion pictures.
Rainbow Chaser Productions