Industry
The motion picture industry is a constantly changing and multi-faceted 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 in sequential order of markets, the exhibition of completed motion pictures.
Motion Picture Production
Development of a motion picture begins when a company or individual purchases a literary property, usually a screenplay or a book. Once financed, through studio, equity or other financing, the project will move into pre-production, which involves engaging the creative personnel, finalizing the shooting schedule and the budget. Principal photography consists of the actual filming of the motion picture. After principal photography begins post-production, during which opticals, music and sound effects are added, and music soundtracks and picture are synchronized to produce the negative from which release prints are struck. Also during post-production, materials are created directly relating to the distribution of the motion picture, e.g., trailers for television and theatrical exhibition and advertising campaigns.
Theatrical Exhibition
Shortly after post-production, a motion picture is made ready for distribution. The economic life of a feature film may last for decades; but generally the bulk of the revenues will be earned over the first three-year period. The first two year’s revenues will consist primarily of theatrical revenues and home video rentals, DVD sell-through and pay television revenues. The third year may consist of free television revenues and the continued DVD sell-through market.
Because a film’s perceived value can be increased by theatrical status, even a small theatrical run can have a great impact on the revenue generated in the home-video rental, foreign, cable and DVD sell-through markets.
International Exhibition
Foreign territories continue to be a viable source of income for American filmed entertainment product. With carefully selected cast members, an independent film can generate more revenue overseas than it does domestically.
In many cases, a motion picture may see only moderate success in the United States but do better abroad. Some motion pictures are produced with the intention of distribution only in international markets, skipping the U.S. theaters entirely. It is important to remember, though, that a moderate domestic release still drives more international box office than no release at all.
Non-Theatrical Exhibition
Feature films receive most of their revenue from non-theatrical sources. Beyond domestic and international film rentals these include the pay and cable networks, home video, DVD sales, pay-per-view, and network and syndicated television. Internet streaming technologies are slow and impractical now, but may be a legitimate source of revenue in 2-5 years.
The motion picture industry has gone through an evolutionary change in the last decade, where the bulk of revenue is now generated by home video, with the DVD sell-through market generating the lion’s share. This is more the case for independent releases than it is for most big studio films. According to a recent article in The Hollywood Reporter, Home video is 50% of the revenues for Fox studio releases, but close to 75% of the revenues for releases from its independent specialty arm, Fox Searchlight. (The Hollywood Reporter, Dec. 2-8 2003) With this new trend, major studios and independents alike compete for coveted shelf space at mass-retailers like Wal-Mart and Best Buy, which helped Disney’s “Finding Nemo” sell 15 million units in its first two weeks of release.
Pay-per-view and cable networks have become a major revenue source also, with pay-per-view channels receiving motion pictures at about the same time as video stores. Some pay and cable networks finance their own feature-length motion pictures. However, these motion pictures usually appear on television first and then may go into international distribution and the DVD sell-through market.
The television market has also changed considerably in the last few decades. There was a time when free television, especially the networks, acquired the rights to broadcast motion pictures before they were released on cable or video. 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.
The soundtrack of a motion picture may be separately licensed to a recording company to generate additional revenue. If the motion picture is well received at the box office, a lucrative deal can be struck for the soundtrack. And if the picture isn’t a huge success at the box office, the release of a soundtrack featuring popular recording artists can be a great promotional tool to boost sell-through sales of the DVD.
THE MARKET
Market Overview
Management believes that the motion picture business is a proven stalwart in both good and bad economic times. Despite the difficulties that other sectors of the economy have experienced after the events of 9/11, the U.S. theatrical box office receipts hit $8.41 billion in 2001, and have leveled off in 2005 at $8.99 billion.
Mini-Major Growth
The market segment served by the mini-majors—which Imperia targets—continues to grow. In 2001, all but one of the mini-majors saw significant revenue growth. Miramax, Focus Features, Sony Classics, Lions Gate, Fox Searchlight, and Paramount Classics each enjoyed gains ranging from 39% to 425%, together comprising 40% of the U.S. box office. Worldwide, the market segment served by the mini-majors is a $7 Billion business. Box Office receipts have increased over $6 billion since 1982. In fact, 2002 saw the largest percentage increase in revenues since tracked by the MPAA. Box Office was up 13.2% from 2001 , the highest year-to-year increase in 20 years. In the last 15 year period, box office has more than a 100% increase.
2004 Motion Picture Industry Statistics
Total US Box Office - $8.99 Billion
(MPAA)
Indie Share of US Box Office - $3.2 Billion - 40%
(Levison)
Indie Share of International Box Office - $2.9 billion
(AFMA)
2005 Motion Picture Industry Statistics
Total US Box Office - $9.5 Billion
(MPAA)
Indie Share of US Box Office - $3.2 Billion - 40%
(Levison)
Indie Share of International Box Office - $3.1 Billion
(AFMA)
Two interrelated factors account for the steady growth of the mini-majors. One is the increase in the number of films they distribute in the commercial genres of thriller, family, romance, and horror, which feeds into the other factor, the increase in the number of screens showing films from the mini-majors. Historically, these films have received limited initial releases in ‘specialty’ theatres targeting urban and collegiate audiences. These films stayed in the specialty theatres, appearing on only 250 to 500 screens nationwide. Now, however, an increasing number become ‘crossover hits’ able to garner screens in the mainstream multiplexes after successful initial releases. In some cases these films appear on 1500 to 3000 screens, comparable to a major studio release.
Crossover Hits
In recent years, examples of such ‘crossover hits’ abound. In 1999, The Blair Witch Project became the most successful independent film of all time, grossing $140 million in the U.S. alone on a budget of under $1 million. Then in October 2002, My Big Fat Greek Wedding raised the bar yet again. This $5 million film is still in release, yet has a total U.S. box office gross of over $246 million. While these films are the rare exceptions, they illustrate how far this market segment has come in recent years.
More relevant examples include The Deep End (2001), with a budget of $3 million and a U.S. gross of $9 million; Memento (2000)—budget $5 million, U.S. gross $25 million; Billy Elliot (2000)—budget $5 million, U.S. gross $22 million; One Hour Photo (2002)—budget $12 million, U.S. gross $32 million; and Crouching Tiger, Hidden Dragon (2000)—budget $15 million, gross $128 million, and Napoleon Dynamite (2004)-budget $400,000, gross $44 million. These recent examples show that independent films now can achieve both critical acclaim and commercial success with high-quality, character-driven storytelling like that found in our slate of films.
The Independent Market
An independent company is one that finds its production financing outside of the studios. The project may be distributed by a studio, but the cost of creating the film negative is found from other sources. New technologies have lowered production costs and created a surge in independent film production in the last decade. Many of the now large production companies and “mini-major” studios started with the success of a single independently-financed motion picture. New Line Cinema which just released Peter Jackson’s $3750,000,000 grossing Lord of the Rings: Return of the King, achieved prominence and clout with the Nightmare on Elm Street series. The market is also now seeing the emergence of another significant player on the horizon, with it’s release of Mel Gibson’s The Passion of the Christ which just crossed the $350,000,000 mark.
The smaller production company usually raises money for one motion picture at a time, although there may be other films in different phases of development. Many companies are owned or controlled by one creative principal, such as a writer/director or writer/producer in combination with a financial partner or group. These independents make low-budget pictures, usually in the $25,000 to $5 million range.
An independent motion picture goes through much the same process as a “studio” film, from development and pre-production through production and post-production. But working independently, outside the “studio” environment, provides many financial and creative opportunities.
Independently financed motion pictures released in 2003 such as Pieces of April and The Station Agent were brought to distribution companies after being financed by independent sources. The reported budget for Pieces of April was $300,000 and sold to United Artists for $4 million. The Station Agent, with a budget of “mid six figures”, sold all English-speaking territories and Italy to Miramax for $1.5 million. (figures obtained from The Film Entrepreneur and Filmmaker Magazine)
The movie-going public continues to prove that the cost of a motion picture and the revenues generated do not necessarily correlate. Notable examples of low-cost motion pictures that have gone on to become box office successes include My Big Fat Greek Wedding ($5 million budget/$241 million domestic box office gross), Swimfan ($5 million budget/$28 million domestic box office gross) and Whale Rider ($3.5 million budget/$20.8 million domestic box office gross).
Perhaps more impressive are the number of recent movies produced for $1 million or less that have demonstrated remarkable earning power. Tadpole, with a budget of less than $400,000 took in $2.9 million at the box office. Raising Victor Vargas, with a reported budget of $800,000 had a domestic gross of $2.1 million. Better Luck Tomorrow was completed for $250,000 and sold to MTV Films immediately after it’s Sundance Film Festival premiere. It went on to earn $3.8 million at the domestic box office.
Quality independent films that perform well at the box office and even some that don’t can rake in even bigger profits on home video. Theatrical releases for independent titles are often loss leaders meant to drive video, DVD and TV sales in the future. Boondock Saints, with a budget of $6 million, was acquired by Blockbuster’s DEJ productions and released on only a few screens to give it theatrical status before the home video premiere. It took in less than $30,000 theatrically but went on to become a cult hit and the most successful release for Blockbuster Home Video at the time.
Bifurcation of Rights
The first is the opportunity to bifurcate rights. When a motion picture is independently financed, there is an opportunity for the motion picture to be licensed to separate domestic and international distribution entities to maximize the earning potential for the film. This process is called “Bifurcation of Rights” which enables filmmakers to keep revenue streams from domestic (U.S. and Canada) and international markets separate as well as from domestic home video and domestic theatrical. The last few years have demonstrated that motion pictures, which have not performed well in the domestic theatrical market, may perform exceedingly well in the home video or international markets.
If motion pictures are cross-collateralized, or licensed by one distributor for worldwide rights, then all the un-recouped fees and costs from a poor domestic market performance may consume all the profits from an excellent international performance, resulting in minimum revenue for the filmmakers. When rights are bifurcated and not cross-collateralized, a poor domestic performance may result in no profit while a strong international market performance still provides healthy profits.
Studios Go Independent
The most compelling testament to the increasing value of the independent arena is the creation of independent specialty divisions by the major studios. Twentieth Century Fox has established Fox Searchlight Films, a division whose expressed purpose is to produce and/or acquire six to twelve less-expensive, quality films per year. Dream Works has Go Fish and Sony has Sony Picture’s Classics as their ‘Art House’ divisions. The Walt Disney Company acquired Miramax Films in 1993 for $60 million and in 2003 Warner Brothers established the Warner Independent Pictures specialty division to produce and acquire “smart movies for grown ups.” Also notable are the cable channels devoted exclusively to televising quality independent motion pictures: the Independent Film Channel and the Sundance Channel.
Underlying this boom in corporate acquisitions, independent film production and growth of the DVD sell-through market is the unrelenting demand for filmed entertainment, the continued expansion of ancillary markets, continued technological advances providing exploitable markets for filmed entertainment, and the resulting soaring values of motion picture libraries.
THE DISTRIBUTION PROCESS
The distribution process involves licensing the motion picture to a distributor (the acquisition) in order to pursue revenue streams in all markets. The distributor acquires the rights to the following markets: domestic theatrical (US and Canada), international theatrical; and non-theatrical or ancillary. The ancillary markets are home video (VHS and DVD), network TV, cable TV (HBO, Showtime), and cable video services (pay-per-view and video-on-demand). Additional ancillary markets include schools, museums, airlines, merchandising (games, toys, and clothing), and music soundtracks.
Producers screen films for distributors in private executive meetings, at public theatres, and at public film festivals. During screenings the distributors decide whether or not to bid to acquire the film and immediately begin negotiating with the producers, creating an opportunity for competition. Recent examples include Tadpole (2002) and Swingers (1996), both produced for under $1 million and the subject of heated competition at the Sundance Film Festival. Miramax ended up paying $5 million for all distribution rights to Swingers and $5 million for Tadpole.
Theatrical Release
Once the film is acquired, distributors license it to exhibitors for domestic and foreign theatrical release in return for a percentage of the ‘box office gross’ or revenue from ticket purchases. The distributor’s share is called the ‘film rentals’ and is roughly 50% of the box office gross. It is important to note that the domestic theatrical release and foreign theatrical release generate separate revenue streams.
Ancillary Release
After the film’s theatrical run, distributors license it for ancillary release to a host of companies, such as Blockbuster for home video, AT&T for video-on-demand, HBO for cable, and NBC for television. Typically, the higher the box office gross during theatrical release, the higher the ancillary revenues. Although theatrical performance drives ancillary demand, with the recent popularity of DVD home video, ancillary often surpasses theatrical revenues.
Distributor Expenses
Distributor expenses are all costs incurred in the distribution and marketing of the film. Although every film’s distribution agreement is unique, most follow a similar pattern: the distributor receives a fee as a percentage (30% to 40%) of the gross revenue and also recoups marketing and distribution expenses separately. The remaining net profit goes to the producers and investors. Although distributors occasionally will overspend on marketing and distribution, the much-publicized ‘Hollywood accounting’ measures of the past are uncommon among mini-major distributors.
Producer Advances
To prevent distributor fees from squeezing net profits, producers can negotiate an advance against revenues. The distributor ‘advances’ a portion of the future revenues to the producers and investors up-front, insuring that they at least recoup the production budget and in some cases earn a profit before the distributor releases the film. Swingers and Tadpole negotiated such deals, receiving prior to theatrical release $5 million each, on budgets of $1 million or less. While most distributors are reluctant to pay such large advances, they are an important negotiating strategy.
Another option for producers is the ‘negative pick-up’ in which a distributor pays for (or ‘picks up’) the actual cost of the film ‘negative’, covering the entire budget for development, pre-production, production, and post-production. Depending on the agreement, the relationship can end there with the distributor buying out the producer, or the producer can share in net profits once the distributor recoups the negative pick-up price, marketing and distribution expenses, and its distribution fee.
Future Film Development and Distribution
Imperia receives Apitches@ from screen writers and producers on a daily basis, through its web sites. We also have one more original story in the development stage. We will evaluate all of these opportunities and take advantage of those that we feel will be the most successful. We anticipate making four feature films per year. We also will attend the markets to exhibit our films to buyers and to negotiate for distribution contracts to distribute the completed films of other independent film makers.
PATENTS
Imperia holds no patents for its products. Imperia is the owner of the registered trademarks, Autograph.7” and “Imperia Entertainment 7" It has a trademark application pending for the trade name, “Never Submit,” and “MMAA.” It is also the owner of the Internet domain names, www.autograph.tv, www.sayitinrussianmovie.com, www.neversubmit.com, and www.Imperiaentertainment.com. It is the copyright owner of 26 Autograph programs, and two original screenplays.
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The members of the Board of directors of Imperia serve until the next annual meeting of stockholders, or until their successors have been elected.
The officers serve at the pleasure of the Board of directors. Directors serve a term of one year, or until the following annual meeting of shareholders, whichever period is longer.
The current executive officers, key employees and directors of Imperia are as follows:
Name Position
Kenneth G. Eade Chairman, Director
Gregory Allen Webb Vice President/Head of Production
Kenneth G. Eade. Mr. Eade is the current Chairman of Imperia, since July 2005, and has served as CEO since March 2007. From October 5, 2003 through June 2005, he served as President. From 1998 to the present time, he has been engaged in the practice of corporate and securities law, doing public and private offerings, SEC filings, blue sky state filings, mergers and acquisitions, and helping small to medium sized development stage companies to obtain quotations of their securities on recognized quotation mediums. From 1987 through 1998, he was engaged in the practice of general law, emphasizing corporate and securities law. He is a member of the California Bar, the federal District Court for the Central District of California, and the Ninth Circuit Court of Appeals. He holds a Juris Doctor in Law from Southwestern University School of Law, anda B.A. in Liberal Studies from California State University, Northridge.
Gregory Allen Webb. Gregory Allen Webb is the current Vice President and Head of Production since December 2006. Webb began working in the television and motion picture industry while still attending the University of North Carolina in Greensboro North Carolina working for a Local CBS affiliate station he worked in all phases of live television. Upon completion of his Bachelors degree in Broadcasting Cinematography he moved to New York City and started over at the bottom of the film industry though enthusiastic hard work he has amassed a credit list to include over 200 music video credits, 100 commercials , and 45 feature credits. A well rounded leader , creative, assertive, bankable, bondable reliable, and passionate Greg is a asset to any project from concept to answer print.
