HISTORY & FUNCTION
1.) ORGANIZATION
SpS International Enterprises, founded in 2005 (the "Company") is a privately held company. SpS is the parent company of The Air Compensation Board, C&TB Insurance, BSMCH Housing & Construction Group, SurferDude.com, The Free Film School, a 501 (non profit sub.) and Big Score Media Corporation Holdings which encompasses Big Score Films, Big Score Productions/Reel Tyme Studios, Feature Film Financing Group, Literary Consultants, Ltd., World Wide Film Distributors and the 6KMVP. (the "Company") was founded in 1990 by Mr. Shamel P. Smith as Big Score Productions. In 1995 ("The Company") became Big Score Media Corp. Holdings. Pursuant to the Business, Big Score Media Corp. Holdings' primary focus had been the production of Music Videos and local & regional Commercials. The Company is an independent entertainment company that will continue it's primary focus in addition to now producing independent feature films for theatrical & cable distribution both domestically and internationally.
2 .) GENERAL
Mr. Smith has extensive experience in the motion picture industry. He began his career in the production department of Classic Concept Films. He also served as a VJ on air personality for Video Music Box. Mr. Smith has particular experience in Music Video and Commercial production as well as producing and releasing modestly budgeted independent films which appeal to the more sophisticated theatergoer. He has enjoyed success with such films as ROPE, THE ALCHEMIST and THE OUTSIDER.
THE ALCHEMIST and THE OUTSIDER were financed by way of an insurance backed bank loan, the Company has no financial exposure with respect to the film's success. The film had been the subject of litigation between the bank that financed it and the insurer who insured the bank from loss. This litigation has now been settled. The Company does not currently know when or if the film will be licensed for distribution. Mr. Smith was the Art Director of Nicky Marvin and Frank Durabount's The Shawshank Redemption, the celebrated and successful drama which was nominated for five Academy awards, including Best Art Direction & Picture.
3.) FEATURE FILMS
The Company is paid a producing fee for both the services of Mr. Smith and for the Company's services in connection with the development and production of music videos, commercials and each feature film, in addition to a negotiated profit participation. The nature of the profit participation is a function of Mr. Smith's standing as a producer, screenwriter, director and the Company's relative bargaining position with respect to each project. As set forth above, the Company's bargaining position is enhanced by the development and "packaging" of a project to the fullest possible extent before seeking the financial assistance of a studio or distributor.
In 2006, based on continued discussions, the Company anticipates entering into a two year First Look Cable Television Production Agreement with HBO Films. Under this agreement, HBO will contribute to the Company's overhead and provides enhanced producing fees for films produced for HBO.
Typically, the domestic broadcaster of a made-for-television movie pays a license fee which entitles it to a limited number of airings of the movie over a designated period of time (generally 2-5 years). The initial network/cable license fees generally range from $2.5 -$3.5 million dependent upon the broadcaster and the nature and content of the programming. Producers such as the Company have historically been required to expend production costs in excess of the initial domestic network/cable broadcast license fee. The practice of incurring production costs in excess of the initial domestic network/cable broadcast license fee is generally referred to as "deficit financing." This deficit financing is generally recovered through sales of the made-for-television movie in media and territories other than domestic network/cable broadcasting, such as international free television, domestic syndication (post initial broadcast license), domestic and international pay television, and domestic and international home video. Unlike many television producers who must seek licensing arrangements on a project-by-project basis to cover its deficit financing, the Company anticipates entering into output arrangements which provide it the ability to assemble financing more easily and enable it to move forward more efficiently with its television projects. The Company had an output agreement with World Wide Film Distributors, a distribution company which is a wholly owned subsidiary of SpS International Enterprises. ("SpS").
While much of its current development in low budget film had been financed under the SpS Agreement, until such time as a new output agreement is signed, the Company will pre sell its movies on a title by title basis.
On occasion, Mr. Smith or other Company executives have produced projects pursuant to "for hire" arrangements with programmers. In such producer-for-hire arrangements, Mr. Smith and the Company do not have financing responsibility or ownership of the films. Mr. Smith receives a substantial producer's fee for such services.
4.) DISTRIBUTION ARRANGEMENT
Pursuant to a Distribution Agreement (the "Distribution Agreement"), dated August 6, 1999 and amended on May 20, 2000, between the Company and SpS, SpS was granted the sole and exclusive right, subject to the production arrangement, to license substantially all of the Company's film library for all forms of film and video worldwide for a period of ten years, subject to automatic renewals in three-year increments. In consideration of SpS's services under the Distribution Agreement, SpS is entitled to retain a distribution fee, ranging from 10% to 35%, depending upon whether such distribution is via domestic television network, syndication, international television, or home video, of the gross receipts from the licensing of each program. In addition, SpS is reimbursed for certain distribution expenses out of gross receipts with the remaining balance remitted to the Company as program licensor.
5.) BUSINESS APPROACH
As an independent producer of low budget feature films, the Company has not had sufficient capital to independently finance its own productions. Accordingly, most of its financial resources have been devoted to financing development activities which include the acquisition of underlying literary works such as books, plays, or newspaper articles and commissioning of screenplays based upon such underlying literary works. A key element in the success of the development process has been Mr. Smith's reputation in the entertainment business and his access to and relationships with creative talent.
It is the ability to identify and develop attractive properties which is instrumental to the success of independent producers such as the Company. In particular, the feature film industry relies heavily on independent producers to identify projects which are then developed further or produced and distributed by the major studios. Independent producers serve a similar function in the television industry. The Company has employed a flexible strategy in developing its motion picture and film properties. Wherever possible, it has employed its own capital and financial resources in developing a project to the point where it is ready to go into production. Typically, this means putting together a "package" which consists of the underlying property, a "Production Ready Script", "Key & Principal Talent" and a Director. The benefit of developing a project to this advanced stage is that it provides maximum leverage in negotiating production and financing arrangements with a distributor. Nevertheless, there are occasions when financial assistance of a studio at an earlier stage can be beneficial. These occasions may be necessary as a result of lengthy development of a script, the desirability of commissioning a script by a highly paid writer, the acquisition of an expensive underlying work, or a significant financial commitment to a director or star. Moreover, when developing a property for series television, it is almost essential to involve a network at an earlier stage inasmuch as development and production of a television series requires a much larger financial commitment than production of a television movie.
In addition to the development and production strategies described above, the Company has also considered various production financing alternatives which are available whereby commitments from various end users such as independent domestic distributors, foreign distributors, cable networks, and video distributors can be combined to finance a project without a major studio financial commitment.
6.) COMPETITION
The motion picture industry is extremely competitive. The competition comes from both companies within the same business and companies in other entertainment media which create alternative forms of leisure entertainment. The Company will be competing with several "major" film studios which are dominant in the motion picture industry, as well as with numerous independent motion picture and television production companies, television networks, and pay television systems for the acquisition of literary properties, the services of performing artists, directors, producers, and other creative and technical personnel, and production financing. Many of the organizations with which the Company will be competing have significantly greater financial and other resources. In addition, the Company's films will be competing for audience acceptance with motion pictures produced and distributed by other companies. As a result, the success of the Company's productions will be heavily dependent on public taste, which is both unpredictable and susceptible to change without warning.
A limited number of independent production companies are as actively involved in the low budget (Ten million dollars or less) feature film productions. Management believes that its established track record of high quality, in the music video and commercial arenas will attract some of the best writing, directing, and acting talent in the industry. In addition, Mr. Smith's years of experience in the business and strong reputation have further enhanced the Company's competitive edge.
The Company is one of the first production companies to specialize in the low budget total package production and will be an acknowledged quality producer in this field. However, cable companies, often in association with major films studios, are increasingly producing their own programs and securing ownership of each program's copyright. Programs are being produced by staff producers or by producers for hire for a specific project. Consequently, cable companies are acquiring ownership of the back end (income deriving from the subsequent licensing of programs) and are now licensing their programs to a world market. Faced with these new circumstances, the Company anticipates a significant fluctuation in sales to overseas buyers but anticipates a leveling off to a strong economic recovery once it is established that the caliber of our feature work is just as high as our music video & commercial formats, if not better. Also, the development of digital video and the increasing number of new delivery systems in new areas of the world are creating a renewed hunger for this format.
7.) MAJOR CUSTOMERS
The Company's revenue has historically been derived from a relatively small number of music videos & commercials productions. Given this fact, the limited number of outlets for the Company's productions, and the individually significant license fees generated from certain of its sales, certain customers have historically accounted for a significant portion of the Company's revenue. The Company derived approximately 63% and 21% of its total revenue for the year ended December 31, 2005 from Music Video Productions for various musical artist, respectively.
8.) EMPLOYEES
As of December 31, 2005, the Company had 10 full time employees.
THE MOTION PICTURE INDUSTRY
GENERAL
The motion picture industry consists of two principal activities:
production, which involves the development, financing, and production of motion pictures; and distribution, which involves the promotion and exploitation of feature-length motion pictures in a variety of media, including theatrical exhibition, home video, television, and other ancillary markets, both domestically and internationally. The United States motion picture industry is dominated by the "major" studios, including The Walt Disney Company, Paramount Pictures, Warner Brothers, Universal Pictures, Twentieth Century Fox, Columbia/Tri-Star Pictures, and MGM/UA. The major studios are typically parts of large diversified corporations that have strong relationships with creative talent, exhibitors, and others involved in the entertainment industry and whose non-motion picture operations provide a stable source of earnings and cash flow which offset the variations in the financial performance of their new motion picture releases and other aspects of their motion picture operations. The major studios have historically produced and distributed the vast majority of high grossing theatrical motion pictures released annually in the United States.
INDEPENDENT FILM
At the same time that films released by the major studios have become more expensive, currently with average budgets exceeding $40 million (as reported by the Motion Picture Association of America ("MPAA")), low budget "independent films" have successfully entered the market. Typically, such films are more character driven than plot driven and originally they lacked major stars. Miramax, originally an independent distributor (now owned by Disney), broke ground in this area with films like MY LEFT FOOT and THE PIANO. Over the last several years there have been other notable "independent-type" films such as FOUR WEDDINGS AND A FUNERAL, PULP FICTION, SCREAM, THE FULL MONTY and THE BLAIR WITCH PROJECT. Indeed, given the relatively small financial risk of producing and releasing such films, all of the major studios have started or are studying the feasibility of production and distribution units focusing on smaller, independent-type films.
The growth of this product and market segment should provide opportunities for the Company which hopes to be a pioneer in this area.
MOTION PICTURE PRODUCTION AND FINANCING
The production of a motion picture begins with the screenplay adaptation of a popular novel or other literary work acquired by the producer or the development of an original screenplay having its genesis in a story line or scenario conceived or acquired by the producer. In the development phase, the producer typically seeks production financing and tentative commitments from a director, the principal cast members and other creative personnel. A proposed production schedule and budget are also prepared during this phase. Upon completing the screenplay and arranging financing commitments, pre-production of the motion picture begins. In this phase, the producer engages creative personnel to the extent not previously committed; finalizes the filming schedule and production budget; obtains insurance and secures completion guaranties, if necessary; establishes filming locations and secures any necessary studio facilities and stages; and prepares for the start of actual filming. Principal photography (the actual filming of the screenplay) generally extends from seven to twelve weeks, depending upon such factors as budget, location, weather, and complications inherent to the screenplay.
Following completion of principal photography in what is typically referred to as post-production, the motion picture is edited; opticals, dialogue, music, and any special effects are added; and voice, effects, and music sound tracks and pictures are synchronized. This results in the production of a fully edited negative from which release prints of the motion picture are
made.
Production costs consist of acquiring or developing the screenplay, film studio rental, principal photography, post-production, and the compensation of creative and other production personnel. Distribution expenses, which consist primarily of the costs of advertising and preparing release prints, are not included in direct production costs and vary widely depending on the extent of the release and promotional markets. Average studio budgets currently exceed $40 million. Average independents are far lower and are often less than $10 million. The major studios generally fund production costs from cash flow generated by motion picture and related activities or, in some cases, from unrelated businesses or through off-balance sheet methods. Substantial overhead costs, consisting largely of salaries and related costs of the production staff and physical facilities maintained by the major studios, also must be funded. Independent production companies generally avoid incurring overhead costs as substantial as those incurred by the major studios by hiring creative and other production personnel and retaining the other elements required for pre-production, principal photography, and post-production activities on a
picture-by-picture basis. Sources of funds for independent production companies include bank loans, "pre-licensing" of distribution rights, equity offerings, and joint ventures. Independent production companies generally attempt to obtain all or a substantial portion of their financing of a motion picture prior to commencement of principal photography, at which point substantial production costs begin to be incurred and require payment.
"Pre-licensing" of film rights is often used by independent film companies to finance all or a portion of the direct production costs of a motion picture. By "pre-licensing" film rights, a producer obtains amounts from third parties in return for granting such parties a license to exploit the completed motion picture in various markets and media. Production companies with distribution divisions may retain the right to distribute the completed motion picture either domestically or in one or more international markets. Other production companies may separately license theatrical, home video, television and all other distribution rights among several licensees.
In connection with the production and distribution of a motion picture, major studios and independent production companies generally grant contractual rights to actors, directors, screenwriters, owners of rights, and other creative and financial contributors to share in revenues or net profits (as defined in their respective agreements) from a particular motion picture. Except for the most sought-after talent, these third-party participants are generally payable
after all distribution fees, marketing expenses, direct production costs, and financing costs are recouped in full.
Major studios and independent film companies typically incur obligations to pay residuals to various guilds and unions including the Screen Actors Guild, the Directors Guild of America, and the Writers Guild of America. Residuals are obligations arising from the exploitation of a motion picture in markets other than the primary intended market for such picture. Residuals are primarily calculated as a percentage of the gross revenues derived from the exploitation of the picture in these secondary markets. The guilds and unions typically obtain a security interest in all rights of the producer in the motion picture which is usually subordinate to the financier of the motion picture, and the completion bond company if any. The producer may transfer the residual obligation to a distributor if the distributor executes the appropriate guild assumption agreement.
MOTION PICTURE DISTRIBUTION
GENERAL. Distribution of a motion picture involves domestic and international licensing of the picture for (a) theatrical exhibition, (b) non-theatrical exhibition, which includes airlines, hotels and armed forces facilities, (c) videocassettes and video discs, (d) television, including pay-per-view, pay, network, syndication or basic cable, and (e) marketing of the other rights in the picture and underlying literary property, which may include books, merchandising, and soundtrack albums. In recent years, revenues from the licensing of rights to distribute motion pictures in secondary (i.e., other than domestic theatrical) markets, particularly home video and international theatrical pay and free television, have increased significantly. The distributor typically acquires rights from the producer to distribute a motion picture in one or more markets and/or media. For its distribution rights, the distributor generally agrees to pay to the producer a
certain minimum advance or guarantee upon the delivery of the completed motion picture, which amount is to be recouped by the distributor out of revenues generated from the distribution of the motion picture in particular media or territories. After the distributor's distribution fee is deducted from the gross receipt of the picture, the distributor recoups the amount advanced (if any) plus its distribution costs.
Motion pictures may continue to play in theaters for up to six months following their initial release. Concurrently with their release in the United States, motion pictures generally are released in Canada and may also be released in one or more other international markets. A motion picture is typically available for distribution during its initial distribution cycle as follows:
MONTHS AFTER INITIAL APPROXIMATE
MARKETPLACE DOMESTIC THEATRICAL RELEASE PERIOD
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Domestic theatrical ---- 4-6 months
International theatrical ---- 6-12 months
Domestic home video (initial release) 4-6 months 6 months
Domestic pay-per-view 6-9 months 2 months
International Video (initial release) 6-12 months 6-12 months
Domestic pay television 12-15 months 18 months
International television (pay or free) 18-24 months 12-36 months
Domestic free television* 30-33 months 1-5 years
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* Includes network, barter syndication, syndication, and basic cable.
A substantial portion of a film's ultimate revenues are generated in a film's initial distribution cycle (generally the first five years after the film's initial domestic theatrical release). Commercially successful motion pictures, however, may continue to generate revenues after the film's initial distribution cycle from the re-licensing of distribution rights in certain media, including television and home video, and from the licensing of distribution rights with respect to new media and technologies.
THEATRICAL. The theatrical distribution of a motion picture involves the licensing and booking of the motion picture to theatrical exhibitors, the promotion of the picture through advertising and publicity campaigns, and the manufacture of release prints from the film negative. The size and success of the promotional advertising campaign can materially affect the financial performance of the film. Moreover, as the vast majority of these costs (primarily advertising costs) are incurred prior to the first weekend of the film's domestic theatrical release, there is not necessarily a correlation between these costs and the film's ultimate box office performance. In addition, the ability to distribute a picture during peak exhibition seasons, including the summer months and the Christmas holidays, may affect the theatrical success of the picture.
The distributor and theatrical exhibitor generally enter into license agreements providing for the exhibitor's payment to the distributor of a percentage of box office receipts after deducting the exhibitor's overhead or a flat working amount. The percentage generally ranges from 45-60% and may change for each week the film plays in a specific theater, depending on the success of the picture at the box office and other factors. The balance ("gross film rentals") is remitted to the distributor. The distributor then retains a distribution fee from the gross film rentals and recoups the costs of distributing the film, which consist primarily of advertising, marketing, and production cost, and the cost of manufacturing release prints. The balance of film rentals, if any, after recouping any advance or minimum guarantee previously paid to producer and interest thereon is then paid to the producer based on a predetermined split between the producer and distributor.
HOME VIDEO. A motion picture typically becomes available for DVD distribution within four to six months after its initial domestic theatrical release. Home video distribution consists of the promotion and sale of DVDs to local, regional and national video retailers which rent or sell DVDs and or videocassettes to consumers primarily for home viewing. The market for DVDs for home use has expanded rapidly over the past ten years, although the rate of growth in this market has slowed in recent years. Most films are initially made available in DVD form at a wholesale price of $55 to $60 and are sold at that price primarily to video rental stores, which rent the DVDs to consumers. Owners of films generally do not share in rental income. Following the initial marketing period, selected films are remarketed at a wholesale price of $10 to $15 or less for sale to consumers. These "sell-through" arrangements are used most often with films that will appeal to a broad marketplace or to children. Some films are initially offered at a price designed for sell-through rather than rental when it is believed that the ownership demand by consumers will result in a sufficient level of sales to justify the reduced margin on each DVD sold. Home video arrangements in international territories are similar to those in domestic territories except that the wholesale prices may differ.
TELEVISION. Television rights are generally licensed first to pay-per-view for an exhibition period within six to nine months following initial domestic theatrical release, then to pay television approximately twelve to fifteen months after initial domestic theatrical release, thereafter in certain cases to free television for an exhibition period, and then to pay television again. These films are then syndicated to either independent stations or basic cable outlets. Pay-per-view television allows subscribers to pay for individual programs, including recently released movies and live sporting, music and other events on a per use basis. Pay television allows cable television subscribers to view such services as HBO/Cinemax, Showtime/The Movie Channel, Starz, or Encore Media Services offered by their cable system operators for a monthly subscription fee. Since groups of motion pictures are typically packaged and licensed for exhibition on television over a period of time, revenues from these television licensing "packages" may be received over a period that extends beyond five years from the initial domestic theatrical release of a particular film. Motion pictures are also "packaged" and licensed for television broadcast in international markets.
NON-THEATRICAL AND OTHER RIGHTS. Films may be licensed for use by airlines, schools, public libraries, community groups, the military, correctional facilities, ships at sea, and others. Musical compositions contained in a film which have been commissioned for that film may be licensed for sound recording, public performances, and sheet music publication. A soundtrack album may be released including music contained in a film. Rights in motion pictures may be licensed to merchandisers for the manufacturer of products such as video games, toys, T-shirts, posters, and other merchandise. Rights may also be licensed to create novelizations of the screenplay and other related book publications.
INTERNATIONAL MARKETS. Motion picture distributors and producers derive revenue from international markets in the same media as domestic markets. The growth of foreign revenues has been dramatic, now accounting for more than 50% of the total revenues of many films. The increase in revenues is currently being driven primarily from the growth of television abroad. The increase in foreign television values and foreign revenues is likely to continue. Although the increased level of foreign values affects the revenues of most films, the effect is not uniform. Action films and films with major stars benefit most from foreign revenues; films with uniquely American themes with unknown actors benefit the least.
REGULATION. Distribution rights to motion pictures are granted legal protection under the copyright laws of the United States and most foreign countries, which laws provide substantial civil and criminal sanctions for unauthorized duplication and exhibition of motion pictures. Motion pictures, musical works, sound recordings, art work, still photography, and motion picture properties are separate works subject to copyright under most copyright laws, including the United States Copyright Act of 1976, as amended. The Company plans to take appropriate and reasonable measures to secure, protect, and maintain or obtain agreements to secure, protect, and maintain copyright protection for all Company pictures under the laws of applicable jurisdictions. Motion picture piracy is an industry-wide problem. The MPAA operates a piracy hotline and investigates all reports of such piracy. Depending upon the results of such investigations, appropriate legal action may be brought by the owner of the rights. Depending upon the extent of the piracy, the Federal Bureau of Investigation may assist in these investigations and related criminal prosecutions.
Motion picture piracy is an international as well as a domestic problem. Motion picture piracy is extensive in many parts of the world, including South America, Asia (including Korea, China, and Taiwan), the countries of the former Soviet Union, and other former Eastern bloc countries. In addition to the MPAA, the Motion Picture Export Association, the American Film Marketing Association, and the American Film Export Association monitor the progress and efforts made by various countries to limit or prevent piracy. In the past, these various trade associations have enacted voluntary embargoes of motion picture exports to certain countries in order to pressure the governments of those countries to become more aggressive in preventing motion picture piracy. In addition, the United States government has publicly considered trade sanctions against specific countries which do not prevent copyright infringement of United States produced motion pictures. There can be no assurance that voluntary industry embargoes or United States government trade sanctions will be enacted. If enacted, such actions could impact the amount of revenue that producers such as the Company realize from the international exploitation of motion pictures depending upon the countries subject to such action and the duration of such action. If not enacted or if other measures are not taken, the motion picture industry may continue to lose an indeterminate amount of revenues as a result of motion picture piracy.
The Code and Ratings Administration of the MPAA assigns ratings indicating age-group suitability for theatrical distribution of motion pictures. The Company has followed the practice of submitting its pictures for such ratings.
United States television stations and networks, as well as foreign governments, impose additional restrictions on the content of motion pictures which may restrict in whole or in part theatrical or television exhibition in particular territories. The Company has tended to produce motion pictures for which there will be no material restrictions on exhibition in any major territories or media. This policy often requires production of "cover" shots or different photography and recording of certain scenes for insertion in versions of a motion picture exhibited on television or theatrically in certain territories.
There can be no assurance that current and future restrictions on the content of the Company's pictures may not limit or affect exhibition of certain pictures in certain territories and media.
