As filed with the Securities and Exchange Commission on
March 5, 2010
Registration
No. 333-163514
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
THE FILM DEPARTMENT HOLDINGS,
INC.
(to be converted from The Film
Department Holdings LLC)
(Exact name of registrant as
specified in its charter)
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Delaware
(State of
incorporation)
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7812
(Primary Standard
Industrial
Classification Code No.)
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20-5277866
(I.R.S. Employer
Identification No.)
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8439 Sunset Boulevard, 2nd
Floor
West Hollywood, California
90069
(323) 785-3700
(Address, including zip code and
telephone number, including area code of registrants
principal executive offices)
Mark Gill
Chief Executive
Officer
The Film Department Holdings,
Inc.
8439 Sunset Boulevard, 2nd
Floor
West Hollywood, California
90069
(323) 785-3700
(Name, address, including zip
code and telephone number, including area code, of agent for
service)
with copies to:
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Christopher D. Johnson
Joseph M. Crabb
Squire, Sanders & Dempsey L.L.P.
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
(602) 528-4000
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Gary A. Agron
Law Office of Gary A. Agron
5445 DTC Parkway #520
Englewood, Colorado 80111-3009
(303) 770-7254
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Approximate date of commencement of proposed sale to the
public: As soon as practicable following the
effective date.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered
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Price per Share
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Offering Price
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Fee
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Common Stock
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[4,615,385]
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[$14.00]
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$60,000,000
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$3,348.00
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Underwriters Warrants to Purchase Common Stock
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[323,077](1)
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N/A
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N/A
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N/A(2)
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Common Stock Underlying Underwriters Warrants
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[323,077](3)
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N/A
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$4,620,000(4)
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$267.41
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Total Registration Fee
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$3,615.41
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(1)
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Represents the maximum number of
warrants to purchase the Registrants common stock to be
issued to the underwriters in connection with the public
offering.
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(2)
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In accordance with Rule 457(g)
under the Securities Act, because the shares of the
Registrants common stock underlying the underwriters
warrants are registered hereby, no separate registration fee is
required with respect to the warrants registered hereby.
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(3)
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Represents the maximum number of
shares of the Registrants common stock issuable upon
exercise of the underwriters warrants.
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(4)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(g)
under the Securities Act, based on an exercise price of $[14.30]
per share.
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Prior to the closing of this Offering, The Film Department
Holdings LLC, a Delaware limited liability company, will be
converted into a Delaware corporation named The Film Department
Holdings, Inc. pursuant to the Delaware Limited Liability
Company Act
Section 18-216
and the Delaware General Corporation Law Section 265. The
securities issued to investors in connection with this Offering
will be shares of common stock in The Film Department Holdings,
Inc., which is the registrant filing this Registration Statement
with the Securities and Exchange Commission.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION DATED
[ ],
2010
PRELIMINARY PROSPECTUS
[4,615,385] Shares of
Common Stock
$[13.00] Per Share
We are offering [4,615,385] shares of our common stock.
This is our initial public offering of common stock.
We have applied to have our common stock listed on NASDAQ Global
Market under the symbol TFDI. No public market
currently exists for our common stock. We estimate the initial
public offering price of our common stock to be between $12.00
and $14.00 per share.
Investing in our common stock involves a high risk. See
Risk Factors beginning on page 6.
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Total if Over-
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Allotment Option is
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Per Share
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Total
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Exercised
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Public offering price
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$
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[13.00]
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$
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60,000,000
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$
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69,000,000
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Underwriting discount and commissions(1)
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$
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[.91]
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$
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4,200,000
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$
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4,830,000
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Proceeds to us (before expenses)(2)
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$
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[12.09]
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$
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55,800,000
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$
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64,170,000
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(1) |
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Does not include a non-accountable expense allowance payable
with respect to shares purchased by underwriters other than the
Representative in an amount to be mutually agreed upon between
the Company and the Representative but not to exceed, with
respect to any such underwriter, 2% of the gross proceeds of the
shares purchased by such underwriter. See
Underwriting, beginning on page 74. |
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(2) |
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We estimate that the total expenses of this Offering will be
approximately $2,425,000, consisting of $1,200,000 for the
underwriters non-accountable expense allowance (equal to
2% of the aggregate gross proceeds) and $[1,225,000] for legal,
accounting, printing costs and various fees associated with the
registration and listing of our shares. |
The underwriters expect to deliver the shares to purchasers on
or about
[ ],
2010. The underwriters may also purchase up to an additional
[692,308] shares of our common stock at the public offering
price, less the underwriting discounts and commissions payable
to us, to cover over-allotments, if any, within 45 business days
of the effective date of this registration statement. If the
underwriters exercise this option in full, the total
underwriting discounts and commissions will be $[4,830,000], and
our total proceeds, before expenses, will be $[64,170,000]. The
underwriters will also receive warrants to purchase
[323,077] shares of our common stock in connection with
this Offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Girard Securities, Inc.
d/b/a
IPO SOLUTIONS
The date of this prospectus is
[ ],
2010.
You should rely only on the information contained in this
prospectus. Neither we nor the underwriters have authorized
anyone to provide you with additional or different information.
If anyone provides you with additional, different or
inconsistent information, you should not rely on it. We and the
underwriters are not making an offer to sell these securities in
any jurisdiction where an offer or sale is not permitted. You
should assume that the information in this prospectus is
accurate only as of the date on the cover page, regardless of
the time of delivery of this prospectus or of any sale of our
common stock. Our business, prospects, financial condition and
results of operations may have changed since that date.
TABLE OF
CONTENTS
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1
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4
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5
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6
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18
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19
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20
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21
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21
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22
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26
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27
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45
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57
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60
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64
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67
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68
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70
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74
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76
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77
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78
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78
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F-1
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II-1
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PROSPECTUS
SUMMARY
This summary highlights selected information from this
prospectus and does not contain all of the information that you
need to consider in making your investment decision. You should
read the entire prospectus, including the risks of investing
discussed under Risk Factors beginning on
page 7 and the following summary together with the more
detailed information regarding our Company, the shares, our
financial statements and the notes to those statements and the
exhibits to the registration statement of which this prospectus
is a part.
References in this prospectus to The Film
Department, TFD, the Company,
we, us, and our, refer to
The Film Department Holdings LLC (TFD Holdings)
prior to the Corporate Conversion (as defined below) described
in this Prospectus and to The Film Department Holdings, Inc.
after the Corporate Conversion and to its consolidated
subsidiaries, unless otherwise specified.
The Film Department is an independent motion picture finance and
production company that produces star-driven commercial movies
with net budgets between $10 and $45 million. The Company
was founded in 2007 by Mark Gill and Neil Sacker, a management
team with more than 40 years of combined experience as
senior film industry executives at such motion picture studios
as Warner Bros., Columbia Pictures and Miramax Films.
In its first two years of existence, TFD has demonstrated an
ability to develop, produce and sell star-driven, moderate-cost,
studio-quality films to the marketplace under a risk
mitigation strategy whereby we attempt to license the
international rights for a targeted 80% of each films net
budget (i.e., the gross budget less subsidies and TFD producer
and overhead fees). The Company has assembled a slate of 15
commercial projects that management believes are worthy of a
national release including Law Abiding Citizen, starring
Gerard Butler and Jamie Foxx (which has earned more than
$73 million at the North American box office and more than
$115 million to date at the worldwide box office); The
Rebound, starring Catherine Zeta-Jones (recently completed
and now targeted for a Summer 2010 U.S. theatrical release
by TFD); and Earthbound, starring Kate Hudson (which
began production on January 18, 2010 in New Orleans,
Louisiana).
Now TFD plans to take advantage of a significant market
dislocation: consumer demand for movie tickets in the
U.S. is up more than 9% in a recession year and revenues
are about to accelerate due to new forms of distribution in the
digital age, even as the supply of films is dropping
significantly due to capital shortages created by the recession
and the credit crisis. The Company plans to exploit this market
opportunity by launching a U.S. distribution capability to
release six to ten films per year (a combination of its own
productions and movies financed by third parties).
During the year ended December 31, 2009, the Company
generated approximately $40.32 million in revenue with a
net loss of approximately $9.98 million. On
December 31, 2009, TFD had approximately $1.62 million
in cash, cash equivalents and restricted cash, approximately
$46.12 million in total assets and approximately
$39.18 million in current liabilities. As of
November 30, 2009, the company had repaid its senior debt
in full. As an advance against a portion of anticipated receipts
from Law Abiding Citizen (expected to be approximately
$29 million), The Rebound and Earthbound, we
expect to apply approximately $21.6 million of the net
proceeds of this Offering to repay our junior debt. For the year
ended December 31, 2009, the Company recorded an operating
loss of $0.76 million.
MARKET
OPPORTUNITY
The motion picture industry earned $28.1 billion in
worldwide box office receipts in 2008, a 5.2% increase over the
previous year. In 2009, the North American box office increased
9.4% over the prior year. A 2009 PricewaterhouseCoopers report
projects that global box office revenue will jump 33% in the
next five years to $37.7 billion annually.
Management believes that The Film Department is undertaking the
expansion into U.S. distribution at a highly advantageous
time. Film industry research firm OTX reported in December 2009
that box office growth is being driven by audiences seeing a
broader group of films (i.e., not only the biggest hits). Even
as U.S. box office is on the rise, competition is
decreasing. We expect the volume of films released theatrically
in the U.S. to drop over the next two years from a record
high of 610 pictures in 2008 to 520 releases in 2009 to a volume
below the historically normative range of
350-400
pictures annually. This drop in film supply is mainly
attributable to a significant decrease in new debt and equity
financing provided to Hollywood by Wall Street (between 2004 and
2007, it is
1
estimated that such financing totaled $18 billion) and to
an industry-wide trend in which most significant
U.S. distribution companies both major studios
and independents are cutting their output due to
capital shortages. At the major studios, the focus is largely on
the biggest films (budgeted at more than $100 million and
known in the industry as tentpole pictures) which means that the
reduction in their slates has largely come from lower- and
mid-budget films. Additionally, in the last year, several studio
independent divisions have closed or their operations have been
scaled back (including New Line, Picturehouse, Warner
Independent, Paramount Vantage and Miramax Films).
The result is a rare opportunity: consumer demand is up even as
supply is down. This dislocation has created an opening for a
company with the right management acumen, financial discipline,
and a proven ability to develop, produce, market and distribute
star-driven, moderate-budget commercial movies.
STRATEGY
The
six principal elements of our strategy are:
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Independent Studio TFD plans to become one of
what management believes to be only six independent studios in
America with wide-release distribution capabilities. Independent
studios compete directly with the major studios, which are part
of large diversified corporate groups with a variety of
operations, including television networks, cable channels and
distribution divisions. Compared to independents, the major
studios have access to greater financial resources and are able
to offset the fluctuations in the financial performance of their
motion picture operations with revenues provided by their
television network and film libraries and cable channels.
However, independents generally are run with far lower overhead,
production and marketing budgets.
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Production Unlike other independent studios
that had to start from scratch with no reservoir of films to
fill their early slates, TFD has approximately 15 projects that
the Company has spent the last
21/2 years
developing and putting together along with two films
in various stages of production. Management believes this is a
significant competitive advantage. TFD intends to produce a
total of approximately 20 films during the next five years.
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U.S. Marketing and Distribution TFD
plans to build a U.S. theatrical marketing and distribution
operation to release six to ten films per year on a far lower
cost basis than the major studios. Management has successfully
started such operations previously, and as a result believes the
Company will be able to achieve major studio-quality
capabilities without the endemic overstaffing and overpaying
that characterizes major studio operations (TFDs plans
call for approximately 25 people in its marketing and
distribution operation versus more than 100 at each of the major
studios). As a result, TFD will have the opportunity to derive
greater profits from the U.S. performance of its successful
films ($15-25 million per film or more on big hits). In
December 2009, TFD reached an agreement with The Weinstein
Company (TWC) to handle certain aspects of the
distribution function for its movies, while TFD will have all
marketing functions in-house. Under this agreement, working in
conjunction with TWC, TFD retains all final controls, reduces
its overhead requirements and gains the additional leverage that
results from the combination of the two companies film
slates.
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Home Entertainment TFD has reached an
agreement with Twentieth Century Fox, to distribute its films to
the home entertainment market, which includes home videos, DVD,
Video on Demand and mobile. TFD is currently documenting this
deal.
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Pay Television TFD has entered into an
agreement with TWC for its films to be distributed by TWCs
pay television service, which is currently Showtime. This is a
particularly noteworthy accomplishment as, in managements
experience, U.S. pay television agreements are generally
very difficult for independent film companies to secure.
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International Sales In October 2009, TFD
reached an agreement with TWC pursuant to which we will be
represented by an individual whom management believes to be one
of the most experienced independent film sales agents in the
world David Glasser. Under this agreement, TFD
retains control of business affairs and collections and reduces
its in-house overhead. At the same time, the Company gains what
management believes is an experienced sales team headed by
Mr. Glasser to handle licensing of its movies
internationally for a targeted 80% of the net film budget (i.e.,
the gross budget less subsidies and TFD
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producer and overhead fees). Finally, in October 2008, we signed
an output agreement with the leading Canadian distributor,
Alliance Films.
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RISK
MITIGATION
Within the film asset class, The Film Department represents a
more risk-averse opportunity than traditional movie investments
such as single-picture investing or studio slate financing.
TFDs slate comprises movies which span a mix of genres
that appeal to audiences worldwide on a broad commercial basis
(i.e., largely thrillers, love stories, action movies and
romantic comedies). The Companys portfolio approach is
combined with a risk-management discipline that reduces downside
exposure of each individual picture. The central tenet of
TFDs risk mitigation strategy is the licensing of films
internationally for a targeted minimum of 80% of the net film
budget (i.e., the gross budget less subsidies and TFD producer
and overhead fees). TFD also reduces risk associated with its
projects by producing only star-driven, moderate-budget films
(between $10 million and $45 million) and exercising
rigorous cost control over each budget. Lower total film budgets
correlate with lower break even revenue requirements.
Management believes that TFDs focus on international
licensing is consistent with the risk mitigation strategy
employed by other independent studios which have survived the
recent downturn in debt and equity financing provided by Wall
Street. In contrast, in the opinion of management, certain
independent studios with business models more oriented toward
domestic box office revenues have gone out of business or been
forced to significantly scale back their operations.
RISK
FACTORS
Our business is subject to numerous risks, as discussed more
fully in the section entitled Risk Factors beginning
on page 7. In particular, our business would be adversely
affected if:
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we are unable to retain Mr. Gill, Mr. Sacker or other
key members of our management team;
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we continue to experience liquidity constraints;
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we are unable to secure future debt financing for our projects;
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our films are not commercially successful;
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we fail to meet our production goals and release schedules;
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we fail to complete any motion picture on budget and schedule;
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the Company is negatively impacted by advances in technology,
including those which facilitate motion picture piracy; or
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the audience demand for feature films in the U.S. or
internationally decreases.
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CORPORATE
CONVERSION
In connection with this Offering, The Film Department Holdings
LLC will convert from a Delaware limited liability company to a
Delaware corporation (the Corporate Conversion). In
connection with the Corporate Conversion, each class of limited
liability company interests of The Film Department Holdings LLC
will be converted into shares of common stock of The Film
Department Holdings, Inc. See Corporate Conversion
below for further information regarding the Corporate Conversion.
CORPORATE
INFORMATION
The Film Department Holdings LLC, which will be converted into
The Film Department Holdings, Inc. pursuant to the Corporate
Conversion, is a Delaware limited liability company organized on
May 22, 2007. See Corporate Conversion. Our
principal executive offices are located at 8439 Sunset
Boulevard, 2nd Floor, West Hollywood, California 90069, and
our telephone number at that address is
(323) 785-3700.
Our website address is www.filmdept.com. The information
on, or accessible through, our website is not part of this
prospectus.
3
THE
OFFERING
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Common stock offered by the Company
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[4,615,385] shares |
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Common stock outstanding immediately after this Offering
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[11,538,462] shares |
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Use of proceeds |
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We estimate that the net proceeds to us from this Offering,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, will be approximately
$[ ] million. We
intend to use the net proceeds from this Offering for working
capital and other general corporate purposes, including film
production, overhead and the repayment of indebtedness. As an
advance against anticipated receipts on Law Abiding
Citizen (expected to be approximately $29 million),
The Rebound and Earthbound, the Company expects to
use $21.6 million of the proceeds of this Offering (or 36%)
to repay our Second Lien Notes (as such notes are more fully
described in Managements Discussion and
Analysis Liquidity and Capital Resources
Default and Forbearance Agreements). See Use of
Proceeds, beginning on page 20. |
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Dividend policy |
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We currently expect to retain future earnings, if any, for use
in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
Our ability to pay dividends on our common stock may be
restricted by the terms of any future debt, preferred stock or
other securities. See Dividend Policy. |
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Risk factors |
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You should carefully consider all of the information contained
in this prospectus, and in particular, you should evaluate the
specific risks set forth under Risk Factors,
beginning on page 7. |
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Proposed NASDAQ Symbol |
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TFDI |
Unless we indicate otherwise, all information in this prospectus
assumes:
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no exercise by the underwriters of their over-allotment option
or warrants;
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an initial public offering price of $13.00 per share, the
mid-point of the estimated price range set forth on the cover
page of this prospectus; and
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a conversion of all of our existing limited liability company
interests into an aggregate of
[6,923,077] shares of common stock prior to
the consummation of this Offering as described under
Corporate Conversion.
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The number of shares of common stock to be outstanding
immediately after this Offering does not reflect:
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shares issuable upon exercise of the underwriters warrants;
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shares of common stock issuable upon exercise of options to be
granted to our management in connection with the conversion of
our limited liability company interests into shares of common
stock; and
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additional shares of common stock authorized and reserved for
future issuance under the new stock incentive plan. See
Equity Compensation Plan Information Equity
Incentive Plan.
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4
SUMMARY
CONSOLIDATED FINANCIAL DATA
The Film Department Holdings LLC (to be converted into The Film
Department Holdings, Inc. in connection with this Offering) is a
holding company that owns all of our businesses through its
wholly owned subsidiaries. The historical financial statements
and information presented in this prospectus are of The Film
Department and its consolidated subsidiaries.
The summary historical financial data for the fiscal years ended
December 31, 2009, 2008 and 2007 have been derived from our
audited historical consolidated financial statements and the
notes thereto included elsewhere in this prospectus.
The summary unaudited as adjusted balance sheet information as
of December 31, 2009 has been prepared to give effect to
this Offering and the application of the proceeds received by us
therefrom as if they had occurred on December 31, 2009. The
summary unaudited as adjusted balance sheet information is for
informational purposes only and does not purport to indicate
balance sheet information as of any future date.
Because the data in this table is only a summary and does not
provide all of the data contained in our financial statements,
the information should be read in conjunction with
Selected Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the financial
statements and the notes thereto included elsewhere in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
May 22, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(Date of
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception)
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Through
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31, 2009
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Pro Forma
|
|
|
|
(In thousands, except percentages and per share amounts)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
40,317
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Operating loss
|
|
|
(760
|
)
|
|
|
(8,042
|
)
|
|
|
(3,594
|
)
|
|
|
|
|
Net loss
|
|
|
(9,976
|
)
|
|
|
(14,103
|
)
|
|
|
(5,637
|
)
|
|
|
|
|
Net income (loss) attributable to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table contains a summary of our balance sheet at
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Pro Forma(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Adjusted(2)
|
|
|
|
(Dollars in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
1,622
|
|
|
$
|
17,621
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
46,118
|
|
|
|
64,630
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
39,177
|
|
|
|
51,817
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members/stockholders equity (deficit)
|
|
$
|
(30,065
|
)
|
|
$
|
(19,929
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
Pro forma data assumes that the Corporate Conversion has been
completed and reflects the application of the net proceeds of
this Offering. Per share data will be computed based upon the
number of shares of common stock outstanding immediately after
the Corporate Conversion applied to our historical net income
(loss) amounts and will give retroactive effect to the
conversion of our limited liability company interests into
shares of common stock. |
|
(2) |
|
Adjusted to reflect the application of the net proceeds of this
Offering as described in Use of Proceeds. |
5
RISK
FACTORS
Before you invest in the securities offered pursuant to this
prospectus, you should be aware of the risks posed by such an
investment. You should consider carefully the risk factors
described below together with all of the other information
included in this prospectus, and the exhibits to this
prospectus.
If any of the following risks actually occur, our business,
financial condition, results of operations or prospects could be
materially and adversely affected. In such case, the trading
price of our common stock could decline and you could lose part
or all of your investment.
The
loss of Messrs. Gill or Sacker would harm the
Companys business.
The Company will rely heavily on Mr. Gill and
Mr. Sacker for its success and the loss of any of these
officers could disrupt its business. Virtually all material
decisions concerning the conduct of the business, including
which motion pictures the Company will develop and produce, are
made or significantly influenced by Messrs. Gill and
Sacker. The Companys amended and restated executive
services agreements with Messrs. Gill and Sacker are each
for an initial term of five years and expire on the fifth
anniversary of the date of the Offering. While the Company
believes that it will be able to enter into comparable executive
services agreements with them at the end of such terms as
necessary, the Company cannot assure investors that it will be
able to enter into new agreements with Mr. Gill or
Mr. Sacker at the expiration of their current agreements.
Should the Company fail to continue to engage Mr. Gill or
Mr. Sacker, the Company may not be able to maintain the
visibility in the industry that is necessary to maintain and
extend its production, financing and distribution agreements and
attract high quality talent.
The
Company has experienced significant liquidity constraints and
could be challenged by similar constraints in the
future.
Although the Companys original business strategy was to
produce and finance or co-finance up to six motion pictures per
year, due to certain market dynamics caused by (i) the
2007-2008
Writers Guild of America strike, (ii) the threat of a
summer 2008 Screen Actors Guild strike, and (iii) a flood
of capital seeking to invest in motion picture and entertainment
assets, the Company was unable to achieve the desired level of
theatrical production output as production prices were driven up
with prospective investment returns on motion pictures
conversely driven down. During this time, the Company adhered to
a disciplined risk/reward balance when analyzing investment
opportunities and did not pursue unprofitable projects. The
result of the low production output was that two and one-half
years of overhead and development costs (approximately
$12.10 million for the year ended December 31, 2009;
$8.04 million for the year ended December 31, 2008;
and $3.59 million for the period from June 27, 2007
through December 31, 2007) were incurred with
$40.32 million in proceeds generated in the third and
fourth quarters of 2009 from the first two films produced by the
Company, The Rebound and Law Abiding Citizen.
The
recent global recession has adversely impacted the market for
films produced by independent studios, and the recovery of the
independent film market may depend on the recovery of the global
economy.
As a result of the worldwide credit crisis, the international
market for independent motion pictures has experienced
significant changes. International distributor revenue and
liquidity has suffered, driving down the acquisition prices paid
for independent motion pictures by as much as 20 to 30% relative
to pre-crisis prices. In addition, international distributors
have become more cautious when considering entering into
pre-sales (i.e. prior to being able to view a completed motion
picture). In the last year, five studio independent divisions
have closed or significantly scaled back their operations (New
Line, Picturehouse, Warner Independent, Paramount Vantage and
Miramax Films) which TFD management believes is due
to the global recession and credit crisis, and the decline of
the arthouse film market (i.e., upscale, intellectual films that
generally are released on 20 to 500 U.S. screens, far less
than the 1,000 to 3,000-screen nationwide releases planned for
TFD films). A recovery of the independent film market may be
conditioned on a recovery of the overall global economy. We
cannot assure you that the market for independent films will
recover, or, if such recovery does occur, when it will take
place.
6
We
require additional financing, and without it we may have to
limit or discontinue our operations. There is substantial doubt
about our ability to continue as a going concern.
Our failure to raise additional capital or generate the cash
flows necessary to finance our operations could force us to
limit or cease our operations. Our business plan contemplates
that we will finance a significant portion of each films
production budget through external debt financing. Accordingly,
we will need to raise additional funds, and we may not be able
to obtain additional debt or equity financing on favorable
terms, if at all. If we raise additional equity financing, our
stockholders may experience significant dilution of their
ownership interests, and the per share value of our common stock
could decline. If we engage in debt financing, we may be
required to accept terms that restrict our ability to incur
additional indebtedness and force us to maintain specified
liquidity or other ratios. If we need additional capital and
cannot raise it on acceptable terms, we may not be able to,
among other things, finance the acquisition, production
and/or
distribution of motion pictures, which would negatively impact
our business.
Our independent public accounting firm has issued an opinion on
our consolidated financial statements that states that the
consolidated financial statements were prepared assuming we will
continue as a going concern and further states that our
recurring losses from operations, Members deficit and
inability to generate sufficient cash flow to meet our
obligations and sustain our operations raise substantial doubt
about our ability to continue as a going concern. Our plans
concerning these matters are discussed in Note 12 to the
accompanying audited consolidated financial statements. Our
future is dependent on our ability to raise additional capital
and execute those plans successfully. If we fail to do so for
any reason, we would not be able to continue as a going concern.
We
have released only two films to international markets and one
film to the U.S. market, and have not yet had a film distributed
under our domestic distribution agreement with The Weinstein
Company.
Since its formation, the Company has produced and released only
two films: Law Abiding Citizen and The Rebound.
Both films were released to international markets; distribution
rights to The Rebound have been sold in every significant
international territory and the film has been released in select
international markets but has not yet been released in the
U.S. market (TFD plans to do so in Summer 2010). Because of
this extremely limited release history, we cannot assure you
that our future productions will be of similar artistic quality
or experience similar levels of box office success. Further, we
have yet to release a movie under our domestic distribution
agreement with The Weinstein Company, which represents a
significant component of our overall domestic distribution
strategy. We cannot assure you that our current domestic
distribution plans will result in the successful wide release of
our films, nor that our distribution agreement with The
Weinstein Company will ultimately prove profitable for the
Company.
Our
business is dependent upon the success of a limited number of
releases each year, and the commercial failure of one or more of
them could have a material adverse effect on our
business.
We expect to release a limited number of feature films per year
for the foreseeable future. The commercial failure of even one
of those films could result in a significant adverse impact on
our results of operations, not only in the year of release but
also in future periods. If the Company is unable to develop a
track record of successful releases, it may become more
difficult for the Company to attract high quality talent and
other qualified personnel.
The Company cannot assure investors that its films will be
commercially successful. If the commercial performance of the
movies selected by the Company for production falls short of
expectations, the Companys revenues would be negatively
impacted, which could have a material adverse effect on the
Companys business, results of operations and financial
condition.
The
Companys revenues could decline if it fails to meet its
production goals and release schedules.
The production and distribution of motion pictures are subject
to numerous uncertainties, including financing requirements, the
availability of desired talent and quality material, and the
release schedule of the major motion picture studios and
independent production companies. If the Company fails to meet
its production goals and release schedules, its revenues would
decline. The Company intends to produce approximately 20 films
during its first five years of operation. The Company cannot
assure investors that its goals will be met in the future. The
7
Company also cannot assure investors that any of the pictures
scheduled for release in the future will be completed on budget,
or at all, or released following completion.
If the
Company does not complete a motion picture on schedule or within
budget, its ability to generate revenue may be diminished or
delayed.
The Companys success depends on its ability to complete
the films on schedule and within budget. The Companys
ability to adhere to these schedules and budgets will depend
upon many factors that are not necessarily within the control of
the Company, including but not limited to: (i) whether the
Company can attract suitable production and creative staff
within its budget; (ii) the timing of the availability of
principal cast members; (iii) the continued availability of
selected directors, producers, actors and other key personnel;
(iv) delays caused by unpredictable weather; (v) the
availability and affordability of desirable locations; and
(vi) the Companys ability to secure appropriate
facilities for post-production work in a timely fashion.
Therefore, the Company cannot be certain that production of any
of the films will occur on schedule or within budget. If the
Company is forced to exceed its production budgets due to
unforeseen problems, it may be required to raise additional
capital in the form of short-term debt or equity. There is no
assurance that the Company will be able to secure additional
debt or equity, or that approvals will be obtained to raise more
equity. Additionally, if the Company does not complete the films
on schedule, their distribution will be delayed and it will
increase the time before the Company begins to generate
revenues, which may reduce the ultimate financial return to
investors.
The
Companys revenue and profitability may be negatively
affected by advances in technology that create alternative forms
of entertainment.
The entertainment industry in general and the motion picture
industry in particular continue to undergo significant changes,
primarily due to technological developments. Due to this rapid
growth of technology and shifting consumer tastes, the Company
cannot accurately predict the overall effect that such changes
may have on the potential revenue from, and profitability of,
motion pictures. In addition, certain distribution outlets for
the motion pictures the Company produces and co-finances may not
obtain the public acceptance that was predicted. This may result
in the Company paying higher distribution fees or receiving
lower licensing fees when it renegotiates its distribution
agreements.
Motion
picture piracy may adversely affect the Companys ability
to maximize its revenues.
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. The Motion Picture Export
Association, the American Motion Picture Marketing Association
and the American Motion Picture 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 on 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 U.S. government has publicly
considered implementing trade sanctions against specific
countries which, in the opinion of the U.S. government, do
not prevent copyright infringement of
U.S.-produced
motion pictures. There can be no assurance, however, that
voluntary industry embargoes or U.S. government trade
sanctions will be enacted. If enacted, such actions could impact
the amount of revenue that the Company realizes 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 (including the Company) may continue to
lose an indeterminate amount of revenue as a result of motion
picture piracy.
Changes
in the preferences of audiences may have a long-term adverse
impact on licensing revenues, particularly in Japan and other
international markets.
Non-U.S. markets
have traditionally represented a significant source of licensing
revenue for motion picture studios, and our business strategy
contemplates that a substantial portion of our revenue will be
derived from
non-U.S. licensing
agreements. The Japanese market historically has shown a high
demand for
English-language
films, particularly those produced in the U.S. Recently,
however,
Japanese-language
films have become
8
increasingly popular with Japanese audiences. As a result,
demand for
English-language
films has dropped, driving down the prices paid by Japanese
distributors for rights to U.S. motion pictures. It is
possible that the recent preference of Japanese audiences for
films in their native language will continue, or even increase,
in the future. If so, we cannot guarantee that we will be able
to replace this historically important revenue source with
licensing revenues from other international markets. In
addition, other
non-U.S. markets
could undergo similar changes, which could result in decreased
demand for
English-language
films. Any changes in consumer preferences or market demands
that reduce our
non-U.S. licensing
revenues will have a negative impact on our business.
Because
it will be difficult to project the future revenues of the films
individually or cumulatively, the Companys results of
operations may vary substantially from quarter to quarter and
year to year.
The Company has limited operating history from which to base
future operating performance. The Companys ability to
forecast accurately its revenues is further limited because
motion picture productions have long production cycles that make
it difficult to predict the periods in which motion pictures
will be completed, and in turn, released pursuant to a release
schedule. Further, if the Company increases its average
production budgets or overhead, it may increase the financial
risks. Since some portion of the Companys operating
expenses are fixed in the short-term, the Company may not be
able to quickly reduce spending if revenues are lower than
projected. If the Company does not achieve its expected
revenues, operating results will be below expectations.
In accordance with U.S. generally accepted accounting
principles (GAAP) for the motion picture industry,
the Company intends to amortize production costs based on
current estimates of the total revenues expected to be received
from a film. The Company will be required to regularly review
these estimates and revise them when necessary. As a result,
actual results of operations may vary from period to period
based on revisions in estimates caused by changes in conditions
affecting the motion picture industry in general and the viewing
audience in particular. A downward revision in revenue estimates
would potentially require a change in the amortization rate of a
films costs resulting in reduced or negative earnings.
The Company was formed in July 2007 and has a very limited
operating history during which time we incurred a members
deficit of $30.07 million through December 31, 2009.
There is no assurance to investors that the Company will operate
profitably, and if the Company cannot, it may not be able to
meet its obligations regarding debt service, working capital
requirements, capital expenditure plans, anticipated production
of films or other cash needs. The inability to meet those needs
could have a material adverse effect on the Companys
business, results of operations and financial condition.
The
Company faces substantial capital requirements and financial
risks.
The production, acquisition and distribution of motion pictures
require a significant amount of capital. A material amount of
time may elapse between the expenditure of funds on a particular
motion picture and the receipt of commercial revenues from that
motion picture. This timing gap requires that the Company fund a
significant portion of its capital requirements from its equity
capital and from other sources of debt and equity funding.
In accordance with U.S. generally accepted accounting
principles (GAAP) for the motion picture industry,
the Company will be required to expense advertising costs as
they are incurred, which may also cause the Companys
results of operations to vary substantially from quarter to
quarter and year to year.
If
production and acquisition costs increase in the future, that
could adversely affect the Companys margins and therefore
its profitability.
The costs of producing, marketing and distributing motion
pictures, both for the major studios and independent
distributors have increased significantly in the past decade.
The production costs, also referred to as negative costs, are
the various costs, charges and expenses incurred in the
acquisition and production of a motion picture. Production costs
may continue to increase in the future, thereby increasing the
capital required for the operations of motion picture producers
and distributors, and the risk borne by these parties. In
addition, as part of its overall business strategy, the Company
intends to produce and co-finance motion pictures that the
Companys management believes have greater production
values, but more focused audience appeal. As a result of this
focused strategy, the Company anticipates that in the future its
costs and expenses will rise only moderately. However, if these
costs rise
9
at a greater rate than budgeted or if the Company is not able to
increase revenues from such productions at the same rate as
costs, this could have a substantial negative impact on its
financial condition and profitability.
Credit
Facility Risk.
Compliance
with restrictions and covenants in the Companys
anticipated debt agreements may limit the Companys ability
to implement elements of its business strategy.
The Company currently intends to finance its future motion
picture productions in part with funds made available to it
under one or more loan or credit arrangements with as yet
unidentified third-party financing sources (Credit
Facilities). The Company expects that the documents
governing the Credit Facilities will contain restrictive
covenants, possibly including restrictions or prohibitions on
dividends, capital expenditures, indebtedness and the redemption
of ownership interests, which may limit its ability to operate
the business or implement elements of its business strategy. If
the Company fails to comply with the covenants and conditions in
these Credit Facilities, an event of default would exist under
one or more Credit Facilities, which could result in the early
termination of the Credit Facilities by the facility providers.
The Company cannot assure investors that it will be able to
comply with these or other covenants or conditions in the
future, generate sufficient cash flow to repay the indebtedness
to be incurred under such credit facilities or that the terms of
these Credit Facilities will not limit its ability to operate
its business or implement elements of its business strategy. The
Company further cannot assure investors that, in the event the
need arises, it will be able to obtain additional financing or
to refinance its indebtedness under these Credit Facilities on
terms acceptable to the Company, or at all.
We
require additional financing, and without it we may be unable to
theatrically release our films.
Our failure to raise Print and Advertising financing
necessary to promote our films theatrically would have a
negative impact on our business. Our business plan contemplates
that we will finance distribution expenses of our films in the
United States through an $85 million external, high-coupon
debt facility and a $72.5 million senior debt
ultimates facility which Management expects to
contain an accordion feature increasing the total availability
of the facility to $100 million. Accordingly, we will need
to raise these additional funds, and we may not be able to
obtain additional debt financing on favorable terms, if at all.
Further, we may be required to accept terms that restrict our
ability to incur additional indebtedness and force us to
maintain specified liquidity or other ratios. If we need
additional capital and cannot raise it on acceptable terms, we
may not be able to, among other things, finance the distribution
of our motion pictures, which would negatively impact our
business in a significant manner.
Although it is our intent to secure the high-coupon debt
facility and senior debt ultimates facility
concurrently with the closing of this Offering or shortly
thereafter, we cannot assure you that we will be successful in
doing so. If we are unable to obtain either of these two debt
facilities, it may impair our ability to launch our distribution
and marketing operation.
The
Company is required to obtain completion bonds on the motion
pictures it produces as part of the requirements of its credit
facilities and may be unsuccessful in securing completion bonds
for future films.
As a requirement of their commitments to supply the financing
under their respective credit facilities, the facility providers
will demand that the Company obtain completion bonds from a
completion bond company before initiating production on a film.
A completion bond is a promise by a third party, which is
typically a completion bond company, that a film will be
completed and delivered by a particular date. Under the terms of
a completion bond, if the Company requires additional funds to
complete a film by the delivery date, the completion bond
company will either disburse these funds or cause the Company to
abandon production and repay its expenditures toward the
production of the film. The costs associated with securing a
completion bond will increase the budget of a film. Further, if
the Company were unable to obtain a required completion bond on
acceptable terms for any individual film, it could not begin
production on that film. The Companys inability to secure
a completion bond on acceptable terms when required to do so may
reduce the number of films it can produce.
10
If our
motion picture releases fail to meet revenue expectations, our
access to credit to fund P&A expenses may be
significantly curtailed or eliminated altogether.
The capital structure of the U.S. distribution operation
contemplates that prints and advertising (P&A)
expenses will first be paid from proceeds of the P&A
High-Coupon Debt Facility described in Managements
Discussion and Analysis of Financial Condition-Liquidity and
Capital Resources-Future Debt Financing. In addition to
the P&A High-Coupon Debt Facility, it is contemplated that
the Senior P&A Ultimates Facility (as described in
Managements Discussion and Analysis of Financial
Condition-Liquidity and Capital Resources-Future Debt
Financing) may also be utilized to pay for the ongoing
P&A expenses. Therefore, if the results of those movies
funded with the P&A High-Coupon Debt Facility fail to meet
expectations, the Company could experience a liquidity crisis
due to limited access to the senior P&A facility.
Production
Risk.
The
Companys options on its development projects may expire
prior to exercise.
When the Company is interested in acquiring the rights to a
literary work, it typically enters into an agreement with the
rights holder pursuant to which the Company acquires an option
to purchase the property at a later date. This allows the
Company the right to develop, start pre-production and work on
the property to determine if it would like to continue the
process and put it on its slate of films. By optioning the
property, among other things, it means the property can no
longer be shopped around to other companies during the term of
the option. If the Company subsequently elects to acquire the
underlying rights to the property, it must exercise the option
and pay a
pre-negotiated
purchase price in order to do so. It is possible that the
Company may not have the cash it requires to pay the purchase
price at or before the option expiration date and therefore
would be unable to acquire the rights to the underlying literary
property. While the Company intends to take all steps necessary
and appropriate to ensure that it maintains the capital
resources required to make such payments, the inability to do so
would have a negative impact on our business.
If the
Company is unable to continue to attract creative talent, the
quality and/or commercial success of the motion pictures it
produces may decline.
The Company believes the success of a motion picture is tied
closely to recruiting high-quality creative personnel for
production and, if the Company is unable to attract such
creative talent, the motion pictures it produces and finances
may be less commercially successful. Through special-purpose
production service companies, directors, actors and screenplay
writers will be contracted for on a motion
picture-by-motion
picture basis. Competition for these quality creative artists is
intense. Since the quality and success of a motion picture is
largely dependent on the artists who created it, the
Companys inability to attract first-rate creative talent
could cause the quality
and/or
commercial success of the motion pictures it produces and
finances to decline.
Our
schedule of feature films will place a significant strain on our
resources.
Our business plan contemplates that we will simultaneously
produce more than one feature film. Our future performance will
depend on a number of factors, including our ability to recruit,
motivate and retain qualified personnel. Due to the strain on
our personnel from the effort required to produce a film and the
time required for development of future films, it is possible
that we will be unable to maintain our production and release
schedule. We may be required to expand our employee base,
increase capital expenditures
and/or
procure other additional resources in order to accomplish the
scheduled production and release of our feature films. This
growth and expansion could place a significant strain on our
resources. There can be no assurance that any of our films will
be released on the targeted schedule or that this strain on
resources will not have a material adverse effect on our
business, financial condition or results of operations.
11
Because
the terms of a standard completion bond state that the bond
company may take control of the production if the Company does
not produce the film on schedule and within budget, the artistic
integrity and commercial viability of the film may be
reduced.
In those instances where a completion bond is secured to
guarantee the production of a film, the Companys failure
to complete any film on schedule or within budget could result
in the completion bond company taking over production. If a
completion bond company takes over production, it has the right
to replace members of the production team, including
Mr. Gill and Mr. Sacker. The loss of Mr. Gill or
Mr. Sacker may reduce the quality of any finished film or
limit the Companys ability to promote the film in
accordance with original promotion plans, all of which may harm
the business.
Risks
Associated with the Motion Picture Industry.
The
Companys future results of operations may be adversely
affected by a labor strike.
Many film productions employ members of a number of
entertainment industry guilds and unions, including, without
limitation, the Writers Guild of America, the Screen Actors
Guild, the Directors Guild of America, the International
Alliance of Theatrical and Stage Employees, the Teamsters and
the Alliance of Canadian Cinema, Television and Radio Artists. A
strike by one or more of the unions that provide personnel
essential to the production of motion pictures could delay or
halt the Companys ongoing production activities. Such a
halt or delay, depending on the length of time, could cause a
delay or interruption in the release of new motion pictures,
which could have a material adverse effect on the Companys
business, results of operations or financial condition. The
Company is a signatory to several unions (e.g., The Screen
Actors Guild), and as such the Company (through one or more of
its subsidiaries) generally affiliates with one or more unions
on a per production basis in connection with most (if not all)
of its productions. In the event that any collective bargaining
agreement is allowed to expire and a strike occurs, the
Companys ability to produce motion pictures will be
materially adversely affected and the revenues and results of
operations in future periods may be adversely affected.
The
Companys revenues and results of operations may fluctuate
unexpectedly due to factors such as the timing of releases of
competing motion pictures, the public acceptance of the motion
pictures produced by the Company, and other factors that the
Company cannot control.
The Company cannot assure the economic success of any motion
picture it produces or co-finances because the production,
completion and distribution of motion pictures is subject to
numerous uncertainties, including the availability of creative
talent, the release schedule of competing motion pictures,
acceptance by the public and other factors. Predicting the
economic success of a motion picture also is made difficult by
the fact that the rights to a motion picture are often purchased
at a very early stage in the motion pictures development.
The Company is thus exposed to the risk of acquiring rights to
motion pictures that cannot be exploited as anticipated. In
addition, the commercial success of a motion picture also
depends upon the quality and acceptance of other competing
motion pictures released into the marketplace at or near the
same time, the availability of alternative forms of
entertainment and leisure time activities, general economic
conditions and other tangible and intangible factors, all of
which can change and cannot be predicted with certainty.
Therefore, there is a substantial risk that some or all of the
motion pictures the Company produces and co-finances will not be
commercially successful, resulting in costs not being recouped
or anticipated profits not being realized. If some or all of
these motion pictures are not commercially successful, the
creative community may look to the Companys competitors to
produce and finance their motion pictures. This will have a
material adverse effect on the Companys business, and the
results of operations could fall short of it expectations.
If the
Company incorrectly projects revenues of its motion pictures,
industry accounting methods require it to accelerate the
amortization of production costs and recognize unanticipated
book losses.
The Companys results of operations in future years depend
on its ability to project revenues of its titles because, in
accordance with U.S. GAAP and industry practice, the
Company amortizes film costs for each motion picture using the
individual-films-forecast method. Under this method,
costs are amortized for each motion picture in the ratio that
revenues earned in the current period for a particular motion
picture title bear to
12
managements estimate of the total revenues to be realized
from all media and markets for that motion picture title. The
Companys management will regularly review, and revise when
necessary, the total revenue estimates on a motion
picture-by-motion
picture basis, which may result in a change in the rate of
amortization
and/or a
write-down of the motion picture asset to net realizable value.
As a result, in the event the Companys initial total
revenue estimates for a title were too high, under the
industrys accounting method, it would immediately
recognize the entire loss in instances where it expects that a
motion picture will not recover its investment. Comparatively,
the profit of a successful motion picture must be deferred and
recognized over the entire revenue stream generated by the
individual picture. Accordingly, the Companys revenues and
results of operations may fluctuate significantly from period to
period, and the results of any one period may not be indicative
of the results for any future period.
There
is a risk of an oversupply of motion pictures in the marketplace
that may cause the Company to experience a decline in revenues
and harm its results of operations.
Despite a general increase in market size, the number of motion
pictures released by the Companys competitors,
particularly the major U.S. motion picture studios,
especially during peak periods, may create an over supply of
product in the market, and may reduce the Companys share
of gross box-office receipts and make it more difficult for the
Companys motion pictures to succeed. Oversupply may become
most pronounced during peak release times, such as school
holidays and national holidays, when theater attendance is
expected to be highest. The Company cannot guarantee that it
will be able to release all of its films during peak release
times as scheduled. An oversupply of competing motion pictures
may cause its revenues to decline and may harm its results of
operations.
Some
of the Companys competitors are able to devote greater
financial resources to the acquisition and production of motion
pictures. Consequently, even with the Companys planned
addition of U.S. marketing and distribution capability, the
Company may be unable to achieve its projected financial
results.
The Company will compete with major studios, large diversified
entertainment companies, independent motion picture and
television production and distribution companies, companies in
other industries which create alternative forms of leisure
activities and other companies. The Companys principal
competitors are companies that are part of large diversified
corporate groups with a variety of operations, including
studios, television networks, cable channels and distribution
divisions, including the major studios and independent
production companies. Many of these companies have a variety of
operations in addition to the production of motion pictures,
including television network libraries and cable channels that
can provide a means of distributing their products and providing
a stable source of revenues to offset fluctuations in the
financial performance of their motion picture operations.
The Company will rely almost exclusively on its motion picture
operations for its revenues. In order to compete more
effectively and expand its motion picture operations, and in
light of recent developments in the motion picture industry, the
Company plans to capitalize on its success to date by adding
U.S. marketing and distribution capacity, which would allow
the Company to release its own films as well as third-party
films. Motion picture acquisition, production and distribution
are highly competitive businesses, and the Company cannot assure
investors that it will compete effectively in these businesses,
that it will be able to successfully form the desired alliances
with third parties or distribute any third party films or that
the planned expansion of its motion picture operations will have
the desired increase in revenue and profitability for the
Company. If the Company is unable to compete effectively in the
U.S. marketing and distribution capacity or in the motion
picture acquisition, production and distribution industry in
general, it will have an adverse effect on its business as a
whole.
Because
some of the Companys films may contain mature themes, it
may be subject to ratings restrictions and censorship which
would reduce its ability to commercialize its motion
pictures.
The Company intends to produce films in such a manner that they
will ultimately receive a rating classification from the MPAA no
more restrictive than R. However, many of the films
will contain mature themes, and it is difficult to predict how
the MPAA will ultimately classify the Companys motion
pictures. If a film does not initially obtain a rating less
restrictive than NC-17, then the Company will need
to make revisions before exhibiting the
13
film, further adding to its expenses and potentially adversely
affecting the artistic quality or commercial appeal of the film.
The
Company is dependent on the activities of significant exhibitors
and other distribution channels.
The Companys ability to successfully exploit its films is
dependent on the contractual arrangements and other
relationships it has with motion picture exhibitors, home
entertainment retailers and rental outlets, and broadcasters or
other distribution media. For many of the distribution platforms
through which a motion picture distributor releases motion
pictures, certain key chains and operators in a territory
exercise significant control over access to the relevant
distribution media. Additionally, as a result of changes in the
theatrical exhibition industry, including reorganizations and
consolidations, the number of available screens may decrease,
thus reducing the number of motion pictures that may be
distributed in the market at any one time. If the number of
screens decreases, theatrical box office receipts may also
decrease. Similarly, the ability to secure shelf
space and other premium distribution opportunities with
major retailers or video outlets directly affects the ability to
drive higher sell- through or rental revenues. Accordingly, any
failure by a motion picture distributor to develop or maintain
its relationships with important market participants in its
distribution channels could have a material adverse effect on
the Companys business.
The
Company may not succeed in securing renewal on favorable terms
for home video distribution of its films, or may fail to secure
such a distribution agreement altogether.
The Company has reached an agreement with Twentieth Century Fox
(which is currently being documented) for distribution of its
films to the home video/DVD/video-on-demand market because of
the economies of scale and market penetration of these firms. If
we fail to achieve renewal after the initial term, our revenues
will be negatively impacted and our profitability will suffer.
Failure to successfully reach home video markets may also limit
the visibility of our films and our brand among end
consumers and within the film industry, thereby making it more
difficult to cast and market future productions.
The
Company is reliant on The Weinstein Company (TWC) for a number
of important aspects of its operations. If TWC does not continue
as a going concern, the Companys business may be severely
impacted.
The Company has reached agreements with The Weinstein Company
(TWC) to handle its theatrical distribution, pay television
output, free television sales and international sales. If TWC
does not continue as a going concern, the Companys
revenues and operations may be substantially impacted, and there
is no assurance that the Company would be able to replicate any
of these functions at a comparable level in-house or with other
third parties.
Fluctuations
in the value of the U.S. Dollar against foreign currencies could
adversely impact our production costs and the fees we are able
to charge our international licensees.
In the future, we may film or conduct certain of our production
activities in international locations. If the value of the
U.S. Dollar falls with respect to the domestic currency of
a foreign country in which we are conducting production
activities, and we have not hedged against such a decrease, the
price in dollars of these production activities will rise
proportionately.
Similarly, substantially all of our international licensing
agreements are denominated in U.S. Dollars. If the
U.S. Dollar appreciates against some or all of the domestic
currencies of our various international licensing territories,
then the cost of these licenses to our international
distributors will rise proportionately. If such appreciation
occurs, it will place a downward pressure on our licensing fees
and decrease the economic competitiveness of our films against
those produced in
non-U.S. markets.
14
Risks
Related to the Offering.
Management
has significant discretion over the use of proceeds from the
Offering.
The Companys management, including its Board of Directors,
has significant discretion over the use of proceeds raised in
this Offering. Therefore, investors must rely on the judgment of
the Companys management in the application of the proceeds
from the Offering.
Because
the Company will spend significant funds with no ability to
predict whether a film will be successful, the investors will
encounter substantial financial risk.
Producing motion pictures requires that the Company spend
significant funds based entirely on its preliminary evaluation
of a films commercial potential. It is impossible, with a
high degree of accuracy, to predict the success of any film
before its production starts. The ability of a film to generate
revenues will depend upon a variety of unpredictable factors,
including: (i) public taste, which is always subject to
change; (ii) the quantity and popularity of other films and
leisure activities available to audiences upon a films
release; (iii) the competition for exhibition at movie
theatres, for shelf space with video retailers, on network,
cable and syndicated television and through other forms of
distribution; (iv) the potential inability of the Company
to accurately estimate the revenue it can achieve resulting from
international distribution licenses in its films; and
(v) the fact that not all films are distributed in all
media. For any of these reasons, a motion picture may be
commercially unsuccessful and the Companys business may
suffer.
The Company intends to try to reduce the risk of motion picture
production through its greenlighting process, which
is the process by which capital commitments for individual film
projects are considered by studios. However, that process is
based on a number of estimates of the ability of the Company to
license international distribution rights and the anticipated
revenues from North American distribution. Any failure to
achieve the estimated international sales or to achieve
anticipated North American revenues will adversely affect the
Companys performance.
Purchasers
in this Offering will experience immediate and substantial
dilution in the book value of their investment.
The assumed initial public offering price of our common stock is
substantially higher than the net tangible book value per share
of our outstanding common stock immediately after this Offering.
Therefore, if you purchase our common stock in this Offering,
you will incur immediate dilution of
$[ ] in net tangible
book value per share from the price you paid. In addition,
following this Offering, purchasers in the Offering will have
contributed [ ]% of
the total consideration paid by our stockholders to purchase
shares of common stock. Moreover, we issued options in the past
to acquire common stock at prices significantly below the
assumed initial public offering price. As of
[ ],
2009,
[ ] shares
of common stock were issuable upon exercise of outstanding stock
options with a weighted average exercise price of
$[ ] per share. In addition, in
connection with our initial public offering we have agreed to
issue the Underwriters Warrants, which are exercisable for up to
[323,077] shares of common stock at an
exercise price of $[14.30] per share. To the
extent that any of these outstanding options and warrants are
ultimately exercised, you will incur further dilution. For a
further description of the dilution that you will experience
immediately after this Offering, see the Dilution
section of this prospectus.
We
will sell underwriters warrants to our underwriters in
connection with the public offering.
We will sell to the underwriters for the public offering, as
additional compensation, warrants to purchase an aggregate
number of shares equal to 7% of the total number of shares sold
in the public offering (the Underwriters
Warrants). The Underwriters Warrants may be
exercised at any time beginning 180 days following the
effective date of this registration statement and ending on the
fifth anniversary of this registration statement. Holders of the
Underwriters Warrants may purchase shares of common stock
at an exercise price equal to 110% of the offering price of the
shares in this Offering.
During the term of the Underwriters Warrants, their
holders will have the opportunity to profit from an increase in
the price of the shares. The existence of the Underwriters
Warrants may adversely affect the market price of the shares if
they become publicly traded and the terms on which we can obtain
additional financing. The holders of the Underwriters
Warrants can be expected to exercise them at a time when we
would, in all likelihood,
15
be able to obtain additional capital on terms more favorable
than those contained in the Underwriters Warrants. Please
see Underwriting and Description of Capital
Stock and Related Shareholder Matters for additional
information regarding the Underwriters Warrants and our
common stock.
If
securities or industry analysts do not publish or cease
publishing research or reports about us, our business or our
market, or if they change their recommendations regarding our
stock adversely, our stock price and trading volume could
decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
may publish about us, our business, our market or our
competitors. If any of the analysts who may cover us change
their recommendation regarding our stock adversely, or provide
more favorable relative recommendations about our competitors,
our stock price would likely decline. If any analyst who may
cover us were to cease coverage of our Company or fail to
regularly publish reports on us, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline.
Because
there is no existing market for our common stock, our initial
public offering price may not be indicative of the market price
of our common stock after this Offering, which may decrease
significantly.
Prior to this Offering, there has not been a public market for
our common stock, and an active trading market may not develop
or be sustained after this Offering. The initial public offering
price for the common stock will be determined by negotiations
between us and the representatives of the underwriters and may
not be indicative of prices that will prevail in the open market
following this Offering. We cannot predict the extent to which
investor interest in our Company will lead to the development of
an active trading market on the NASDAQ Global Market or
otherwise or how liquid that market might become. Further, we
cannot assure that our application for listing on the NASDAQ
Global Market will be successful; if our application is not
successful, the development of an active trading market in our
stock will be significantly hindered. The lack of an active
market may reduce the value of your shares and impair your
ability to sell your shares at the time or price at which you
wish to sell them. An inactive market may also impair our
ability to raise capital by selling additional shares of our
common stock and may impair our ability to use equity-based
incentives to recruit and retain employees.
Our
stock price may be volatile, and the market price of our common
stock after this Offering may drop below the price you
pay.
The market price of our common stock could be subject to
significant fluctuations after this Offering, and it may decline
below the initial public offering price. Market prices for
securities of early stage companies have historically been
particularly volatile. As a result of this volatility, you may
not be able to sell your common stock at or above the initial
public offering price.
We do
not expect to pay any cash dividends on our common stock for the
foreseeable future.
We do not anticipate paying any cash dividends on our common
stock for the foreseeable future. Accordingly, you may have to
sell some or all of your common stock in order to generate cash
flow from your investment. You may not receive a gain on your
investment when you sell our common stock and may lose some or
all of the amount of your investment. Any determination to pay
dividends in the future on our common stock will be made at the
discretion of our Board of Directors and will depend on our
results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable law, capital
requirements and other factors that our Board of Directors deems
relevant.
We
will incur increased costs as a result of being a public
company.
As a public company, we will incur significant legal, accounting
and other expenses. In addition, the Sarbanes-Oxley Act, as well
as rules implemented by the Securities and Exchange Commission
(SEC), require us to adopt corporate governance
practices applicable to public companies. We also expect to
incur additional compliance costs as a result of our common
stock being included for quotation on the NASDAQ Global Market.
We expect these rules and regulations to increase our legal and
financial compliance costs and to make some activities more time
consuming and costly. We will incur additional costs associated
with our public company reporting requirements. We also expect
these rules and regulations to make it more difficult and more
expensive for us to obtain director and
16
officer liability insurance, and we may be required to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain our desired coverage. In the aggregate, we
estimate that additional annual costs related to being a public
company will be between $1 million and $2 million. As
a result, it may be more difficult for us to attract and retain
qualified persons to serve on our Board of Directors or as
executive officers.
Our
executive officers do not have significant experience in
managing a public company, which could hamper our ability to
function effectively as a public company.
Our management team has historically operated our business as a
privately-owned limited liability company. The individuals who
now constitute our senior management do not have significant
experience managing a publicly-traded company. Due to the very
limited experience of our executive officers with the management
of publicly-traded companies, we may experience difficulty in
fully complying with accounting pronouncements and public filing
requirements on a timely basis. If we are unable to comply, our
financial condition could be adversely affected.
In addition, although we are in the process of updating our
systems and processes to public company standards, such systems
and processes in some aspects still reflect those of a
non-public limited liability company. As a result, we cannot
assure you that we will be able to execute our business strategy
as a public company. You should be especially cautious in
drawing conclusions about the ability of our management team to
provide guidance or other forward-looking information regarding
our operating or financial results with a reasonable degree of
consistency and accuracy.
Our
compliance with the Sarbanes-Oxley Act and SEC rules concerning
internal controls will be time consuming, difficult, and
costly.
It will be time consuming, difficult and costly for us to
develop and implement the additional internal controls,
processes and reporting procedures required by the
Sarbanes-Oxley Act. We may need to hire additional financial
reporting, internal controls, processes and reporting procedures
personnel. If we are unable to comply with the requirements of
the Sarbanes-Oxley Act, we may not be able to obtain the
independent accountant certifications that the Sarbanes-Oxley
Act requires publicly traded companies to obtain.
If we fail to comply in a timely manner with the requirements of
Section 404 of the Sarbanes-Oxley Act regarding internal
control over financial reporting, or if we identify or fail to
remedy any material weaknesses in our internal controls, such
failures could result in material misstatements in our financial
statements, cause investors to lose confidence in our reported
financial information, limit our ability to raise capital and
have a negative effect on the trading price of our common stock.
Under Section 404 of the Sarbanes-Oxley Act and current SEC
regulations, beginning with our annual report on
Form 10-K
for our fiscal year ending December 31, 2010, we will be
required to furnish a report by our management on our internal
control over financial reporting. We will soon begin the process
of documenting and testing our internal control procedures in
order to satisfy these requirements, which is likely to result
in increased general and administrative expenses and may shift
management time and attention from revenue-generating activities
to compliance activities. While we expect to expend significant
resources to complete this important project, we may not be able
to achieve our objective on a timely basis.
Anti-takeover
provisions contained in our certificate of incorporation and
bylaws, as well as provisions of Delaware law, could impair a
takeover attempt.
Our certificate of incorporation, bylaws and Delaware law will
contain provisions that could have the effect of rendering more
difficult or discouraging an acquisition deemed undesirable by
our Board of Directors. Our corporate governance documents
include provisions:
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authorizing blank check preferred stock, which could be issued
with voting, liquidation, dividend and other rights superior to
our common stock;
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limiting the liability of, and providing indemnification to, our
directors and officers;
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17
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limiting the ability of our stockholders to call and bring
business before special meetings and to take action by written
consent in lieu of a meeting;
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requiring advance notice of stockholder proposals for business
to be conducted at meetings of our stockholders and for
nominations of candidates for election to our Board of Directors;
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controlling the procedures for the conduct and scheduling of
Board of Directors and stockholder meetings;
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providing the Board of Directors with the express power to
postpone previously scheduled annual meetings and to cancel
previously scheduled special meetings;
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limiting the determination of the number of directors on our
Board of Directors and the filling of vacancies or newly created
seats on the board to our Board of Directors then in
office; and
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providing that directors may be removed by stockholders only for
cause.
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These provisions, alone or together, could delay hostile
takeovers and changes in control of our Company or changes in
our management.
As a Delaware corporation, we are also subject to provisions of
Delaware law, including Section 203 of the Delaware General
Corporation Law (DGCL), which prevents some
stockholders holding more than 15% of our outstanding common
stock from engaging in certain business combinations without
approval of the holders of substantially all of our outstanding
common stock. Any provision of our certificate of incorporation
or bylaws or Delaware law that has the effect of delaying or
deterring a change in control could limit the opportunity for
our stockholders to receive a premium for their shares of our
common stock, and could also affect the price that some
investors are willing to pay for our common stock.
SPECIAL
NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that
involve a number of risks and uncertainties.
Certain information in this prospectus contains statements that
are forward-looking in nature. All statements included in this
prospectus, or made by the management of The Film Department,
other than statements of historical fact, are hereby identified
as forward-looking statements. Examples of
forward-looking statements include statements regarding our
future financial results, operating results, business
strategies, projected costs, products under development,
competitive positions and plans and objectives of The Film
Department and our management for future operations. In some
cases, forward-looking statements can be identified by
terminology such as may, will,
should, would, expects,
plans, anticipates, intends,
believes, estimates,
predicts, potential,
continue, or the negative of these terms or other
comparable terminology. Any expectations based on these
forward-looking statements are subject to the Risk
Factors discussed herein. These risk factors could affect
our future operating results and financial condition and could
cause actual results to differ materially from expectations
based on forward-looking statements made in this document or
elsewhere by us or on our behalf. All references to
we, our, or us refer to The
Film Department.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, after the date of this
prospectus to conform them to actual results. All of the
forward-looking statements are qualified in their entirety by
reference to the factors discussed under the caption Risk
Factors.
We operate in a continually changing business environment and
new risk factors emerge from time to time. Management cannot
predict such new risk factors, nor can it assess the impact, if
any, of such new risk factors on our businesses or the extent to
which any factor or combination of factors may cause actual
results to differ materially from those projected in any
forward-looking statements. In light of these future risks,
uncertainties and assumptions, the forward-looking events
discussed in this prospectus might not occur.
You should carefully read this prospectus in its entirety. It
contains information that you should consider when making your
investment decision.
18
USE OF
PROCEEDS
We estimate that we will receive net proceeds from our offering
of our common stock, after deducting the estimated underwriting
discount and commissions and other estimated offering expenses
payable by us, of approximately
$[ ], or
approximately $[ ] if
the underwriter exercises its over-allotment option in full, in
each case assuming the shares are offered at $13.00 per share,
the mid-point of the estimated price range set forth on the
cover page of this prospectus.
We currently expect to use the net proceeds from this Offering
as follows:
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approximately $5.0 million to fund the launch and first
12 months of operations of our distribution business;
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approximately $21.6 million to accelerate the repayment of
our Second Lien Notes as described below;
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approximately $ million to
fund the equity portion of our planned production and
acquisition of films; and
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the remaining approximately $6.0 million to fund working
capital and for general corporate purposes.
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In addition to the net proceeds of this Offering, we also expect
to receive at least $29 million in additional proceeds from
Law Abiding Citizen.
While we estimate that these Law Abiding Citizen
proceeds, together with anticipated proceeds from
The Rebound and Earthbound, would be
sufficient to repay in full our Second Lien Notes (which
currently accrue interest at a default rate of 16%), we intend
to accelerate such repayment by using approximately
$21.6 million of the net proceeds of this Offering to fully
repay the Second Lien Notes immediately following closing of the
Offering. Accordingly, the additional proceeds we receive from
Law Abiding Citizen, as well as proceeds we receive from
The Rebound and Earthbound, will be available to
us for working capital and for general corporate purposes.
In addition, the Company may use certain net proceeds from this
Offering to make a payment in the amount of $2.75 million
owing to an investor which contributed $2.75 million of the
additional $9.36 million funding from HWMP pursuant to the
recapitalization agreement reached with HWMP as described in
Management Discussion and Analysis Liquidity
and Capital Resources HWMP Investment. The
Company will only be required to make this payment if the
investor elects, prior to June 30, 2010, not to keep these
funds in the Company as an equity investment but instead
notifies the Company that it wants to be repaid in full.
The expected uses of the net proceeds from this Offering reflect
our current intentions based on our present plans and business
conditions. As of the date of this prospectus, we cannot specify
with certainty all of the particular uses for the net proceeds
we receive from this Offering. The amounts and timing of our
actual expenditures will depend on numerous factors, including
our ongoing development and production activities and the launch
of our distribution function. Accordingly, our management will
have broad discretion in the application of the net proceeds,
and investors will be relying on the judgment of management
regarding the application of the net proceeds from the Offering.
We may find it necessary or advisable to use the net proceeds
for other purposes. Pending application of these proceeds, we
intend to invest the net proceeds of this Offering in highly
liquid, investment grade securities.
19
CAPITALIZATION
The following table sets forth our actual consolidated cash and
cash equivalents and capitalization as of December 31, 2009
to give effect to (1) the issuance of
[4,615,385] shares of common stock by us in
this Offering, after deducting underwriting discounts and
estimated offering expenses and (2) the application of the
estimated net proceeds to us as described in Use of
Proceeds.
The information in this table should be read in conjunction with
Use of Proceeds, Selected Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and the notes thereto
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Actual
|
|
|
Pro Forma(1)
|
|
|
As Adjusted(2)
|
|
|
|
(Dollars in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
204
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving borrowing base credit facility(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Notes, net of discount
|
|
|
36,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
36,486
|
|
|
|
|
|
|
|
|
|
Redeemable members units
|
|
|
37,006
|
|
|
|
|
|
|
|
|
|
Members deficit
|
|
|
(30,065
|
)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value
$[ ] per share,
[100,000,000] shares authorized, shares issued and
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members/stockholders equity (deficit)
|
|
$
|
(30,065
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
43,427
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
DIVIDEND
POLICY
We currently intend to retain any future earnings to finance our
business operations. We do not intend to declare or pay cash
dividends on our capital stock in the foreseeable future. Any
future determination to pay dividends will be at the discretion
of our Board of Directors and will depend upon a number of
factors, including our results of operations, financial
condition, future prospects, contractual restrictions,
restrictions imposed by applicable law and other factors our
Board of Directors deems relevant. Our ability to pay dividends
on our common stock may be restricted by the terms of any future
debt, preferred stock or other securities.
DILUTION
Dilution is the amount by which the portion of the offering
price paid by the purchasers of the common stock to be sold in
this Offering exceeds the net tangible book value or deficiency
per share of our common stock after the Offering. Net tangible
book value or deficiency per share of our common stock is
determined at any date by subtracting our total liabilities from
our total assets less our intangible assets and dividing the
difference by the number of shares of common stock deemed to be
outstanding at that date.
Our net tangible book value as of December 31, 2009 (after
giving effect to the Corporate Conversion) was approximately
$[ ] million, or
$[ ] per share of common
stock. After giving effect to our receipt and intended use of
approximately $[ ] million
of estimated net proceeds (after deducting underwriting
discounts and commissions and estimated offering expenses
payable by us) from our sale of common stock in this Offering
based on an assumed initial public offering price of $13.00 per
share of common stock, the mid-point of the estimated range set
forth on the cover page of this prospectus, our adjusted net
tangible book value as of December 31, 2009 would have been
approximately $[ ] million,
or $[ ] per share of common
stock. This amount represents an immediate increase in net
tangible book value of $[ ]
per share of our common stock to existing stockholders and
an immediate dilution of $[ ]
per share of our common stock to new investors purchasing
shares of common stock in this Offering at the assumed initial
public offering price.
|
|
|
(1) |
|
Pro forma data assumes that the Corporate Conversion has been
completed and reflects the application of the net proceeds of
this Offering. Per share data will be computed based upon the
number of shares of common stock outstanding immediately after
the Corporate Conversion applied to our historical net income
(loss) amounts and will give retroactive effect to the
conversion of our limited liability company interests into
shares of common stock. |
|
(2) |
|
Adjusted to reflect the application of the net proceeds of this
Offering as described in Use of Proceeds. |
|
(3) |
|
As of November 30, 2009, the revolving borrowing base
credit facility has been repaid in full. |
The following table illustrates this dilution on a per share
basis:
|
|
|
|
|
Assumed initial public offering price per share
|
|
$
|
[13.00]
|
|
Net tangible book value per share as of September 30, 2009
(after giving effect to the Corporate Conversion)
|
|
|
|
|
Increase per share attributable to cash payments made by
investors in this Offering
|
|
|
|
|
Adjusted net tangible book value per share after this Offering
|
|
|
|
|
Dilution per share to new investors
|
|
$
|
|
|
If the underwriters exercise their over-allotment option in
full, the adjusted tangible book value per share after giving
effect to the Offering would be
$[ ] per share. This
represents an increase in adjusted net tangible book value of
$[ ] per share to existing
stockholders and dilution in adjusted net tangible book value of
$[ ] per share to new
investors.
A $1.00 increase (decrease) in the assumed initial public
offering of $[13.00] per share would increase (decrease) our
adjusted net tangible book value per share after this Offering
and dilution to new investors by
$[ ], assuming the number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us.
21
The following table summarizes, as of December 31, 2009,
the differences between the number of shares purchased from us,
the total consideration paid to us, and the average price per
share paid by existing stockholders and by new investors in this
Offering. As the table shows, new investors purchasing shares in
this Offering will pay an average price per share substantially
higher than our existing stockholders paid. The table below
assumes an initial public offering price of $13.00 per share for
shares purchased in this Offering and excludes underwriting
discounts and commissions and estimated offering expenses
payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
Existing stockholders
|
|
|
6,923,077
|
|
|
|
60
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
4,615,385
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
$
|
[13.00]
|
|
Total
|
|
|
11,538,462
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
100.0
|
%
|
|
$
|
|
|
To the extent that we grant restricted stock or stock options to
our employees in the future and those options are exercised or
other issuances of common stock are made, there will be further
dilution to new investors.
CORPORATE
CONVERSION
In connection with this Offering, our Board of Directors will
elect to convert the Company from a Delaware limited liability
company to a corporation organized under the laws of the State
of Delaware. In order to consummate such a conversion, a
certificate of conversion will be filed with the Secretary of
State of the State of Delaware prior to the closing of this
Offering.
Prior to giving effect to the Corporate Conversion, we had four
classes of limited liability company interests: Class B,
Class G and Class J units, or common units (referred
to herein as the Class B units, Class G units and
Class J units, respectively), and Class H management
equity incentive units (referred to herein as the Class H
units,). In connection with the Corporate Conversion, the
Class B units, Class G units, Class H units and
Class J units will be automatically converted into an
aggregate [6,923,077] shares of common stock.
The allocation of such shares of common stock amongst the former
holders of the Class B units, Class G units,
Class H units and Class J units will be determined
based upon the relative percentage ownership interests thereof
at the time of conversion.
22
Organizational
Structure
The diagram below depicts our organizational structure
immediately following the consummation of this Offering and
after giving effect to the Corporate Conversion.
The Film
Department Corporate Organizational
Structure
The Company maintains wholly-owned subsidiary entities
responsible for particular components of the Companys
business. Subsidiaries fall into one of two general categories:
(1) task-specific entities, and (2) film-specific
entities. Task-specific entities include TFD Literary
Acquisitions, LLC, the vehicle used to acquire screenplay rights
and commission writing services; The Film Department
International, LLC, responsible for international licensing of
TFD-financed pictures Law Abiding Citizen and The
Rebound; TFD Music, LLC and Film Department Music, LLC,
which are responsible for the licensing of original scores
composed for TFD pictures; and 8439 Holdings, LLC and 8440
Holdings, LLC, responsible for development of certain future
projects. In preparation for the launch of its domestic
distribution arm, TFD also intends to form a task-specific
entity responsible for U.S. distribution of TFD films and
films acquired from third parties. Existing film-specific
entities include Rebound Distribution, LLC, the distribution
company for The Rebound; LAC Films, LLC, the production
and distribution company for Law Abiding Citizen; BD
Productions, LLC, the production and distribution company for
The Beautiful and the Damned; and Earthbound Films, LLC
and Earthbound Productions, LLC, the distribution and production
companies, respectively, for Earthbound. Going forward,
the Company intends to establish at least one film-specific
entity for the production of each greenlighted movie.
23
HWMP
Investment
On December 2, 2009, we entered into an agreement with
H&W Movie Partners, LLC (HWMP) pursuant to
which HWMP agreed to make equity investments in the Company in
exchange for the issuance to HWMP of Class G units. HWMP
also agreed to make equity investments in Earthbound Films, LLC
and Earthbound Productions, LLC (collectively, the
Earthbound Films Entities), 8439 Holdings, LLC
(8439) and 8440 Holdings, LLC
(8440), and the Company and HWMP entered into a
put/call agreement pursuant to which the parties agreed that
HWMP would transfer to the Company 100% of the equity of the
Earthbound Films Entities, 8439 and 8440 in exchange for the
issuance by the Company to HWMP of Class G units. The
primary purpose of this transaction was to facilitate the
financing by HWMP of certain production expenses of
Earthbound incurred by the Earthbound Films Entities as
well as the acquisition of new motion picture development
projects, but to allow the Company to subsequently acquire all
rights to Earthbound and other assets then held by the
Earthbound Films Entities, 8439 and 8440 by acquiring 100% of
the equity of each such entity in consideration for the issuance
to HWMP of Class G units. Upon exercise of the put/call
agreement, Class G membership units will constitute a
majority of the equity of TFD prior to the closing of this
offering.
The aggregate investment commitment of HWMP per the
recapitalization agreement was $14.33 million, of which
$7.29 million was to be funded by December 31, 2009.
Of the aggregate $7.29 million investment amount for 2009,
$3.83 was committed for overhead expenditures of the Company and
a payment due to Eton Park under the buyout agreement and
$4.5 million was committed for investment in the Earthbound
Films Entities, 8439 and 8440. The additional HWMP commitment of
$6.5 million was to be funded to the Company if this
Offering did not commence prior to January 10, 2010. As of
December 31, 2009, the Company had received
$4.24 million from HWMP. Additionally, through
March 8, 2010, the Company will have received an additional
$9.36 million from HWMP. The anticipated total amount
actually invested by HWMP prior to the Offering will be
approximately $13.6 million, in exchange for which HWMP
will have received Class G units that will be converted
into an aggregate of
[ ] shares
of common stock upon the Corporate Conversion.
The Earthbound Films Entities have entered into a loan agreement
for up to $12.56 million with a third party production
lender to finance the production of Earthbound. As
collateral for the production loan, the production lender
acquired a first position lien over the assets of the Earthbound
Films Entities and took a pledge of the membership interests in
the Earthbound Films Entities. Accordingly, the production
lender will have liens over the Earthbound Films Entities
assets and a pledge of the membership interests when the equity
of such entities is acquired by TFD pursuant to the put/call
agreement described above. Such liens will remain in effect
until the production loan is repaid in full. Under the loan
agreement, the Company may be required to utilize
$1.25 million of the Offering proceeds to pay down the
production loan if certain thresholds are not met by the date
the Offering becomes effective.
Eton Park
Refinancing
On November 23, 2009, we entered into a buyout agreement
(the Eton Park Buyout Agreement) with holders of
notes (the Second Lien Notes) issued under that
certain Securities Purchase Agreement dated as of June 27,
2007 (as amended, the Securities Purchase Agreement)
by and among the Company, the other Note Parties thereto (as
defined therein), the holders of notes signatory thereto
(collectively referred to as Eton Park) and Union
Bank, N.A., as Collateral Agent (the Agent). In
connection with this agreement, HWMP agreed to an equity
investment in TFD of $1.2 million to fund certain operating
expenses of the Company pending closing of this Offering and
repayment of the Second Lien Notes.
In connection with the Eton Park Buyout Agreement, Eton Park and
the Agent consented to the purchase by HWMP from TFD of all
rights to the motion picture entitled Earthbound in
exchange for the cash purchase price of $0.15 million plus
8.6% of the adjusted gross receipts after cash breakeven of such
motion picture (such participation interest to revert to the
Company upon the payment to Eton Park as detailed in the next
paragraph). This acquisition was effectuated though the
Earthbound Films Entities, which was owned 100% by HWMP at the
time of such acquisition. As described above under HWMP
Investment, 8439, 8440 and the Earthbound Films Entities
will become wholly owned subsidiaries of the Company upon
exercise of the put/call agreement.
We also agreed, in connection with the Eton Park Buyout
Agreement, to apply a portion of the proceeds of this Offering
to repay the Second Lien Notes. In particular, we agreed to make
a cash payment equal to the lesser of
24
(i) $37.5 million or (ii) the aggregate
outstanding obligations owing to Eton Park under the Second Lien
Notes minus $1.5 million (the Initial Cash
Paydown). In addition, at the closing of this Offering, we
agreed to issue to Eton Park a number of shares of common stock
having a value of $1.5 million based on the price at which
our common stock is sold in this Offering. Effective immediately
upon receipt by Eton Park of the Initial Cash Paydown,
TFDs obligations to Eton Park under the Second Lien Notes
will be terminated, and all liens securing those obligations
will be extinguished.
In addition to the Initial Cash Paydown, and in consideration of
the release and discharge of TFDs obligations under the
Second Lien Notes referenced above, to the extent that the
aggregate outstanding obligations owing to Eton Park under the
Second Lien Notes at the time of the Initial Cash Paydown
exceeds $39 million (such excess, the Additional
Payment Amount), we agreed to pay to Eton Park an amount
equal to all U.S. cash receipts actually received by (or
credited to) the Company from Overture Films, LLC
(Overture) under the Companys distribution
agreement with Overture in respect of Law Abiding Citizen
until such time as the Additional Payment Amount (together
with accrued and unpaid interest thereon at a per annum rate of
16.0%) is repaid in full.
As of February 24, 2010, the Company has paid Eton Park
$10.2 million. Accordingly, as an advance against a portion
of future expected receipts on Law Abiding Citizen
(including approximately $29 million in future proceeds
from anticipated U.S. receipts based on an ultimates
projection the Company received from Overture Films), The
Rebound and Earthbound, we expect to apply
approximately $21.6 million of the net proceeds of this
Offering to repay the Second Lien Notes, and we expect to issue
to Eton Park an aggregate of [115,385] shares of common
stock, based on the mid-point of the estimated price range set
forth on the cover page of this prospectus. Effective
immediately upon receipt of the repayment proceeds as described
above, Eton Park has agreed that all obligations under the
Second Lien Notes and related documents will be discharged and
satisfied in full, and that all liens and security interests
relating thereto shall be released and terminated. Thus, all
receipts from any source including additional
revenues from Law Abiding Citizen (other than Eton
Parks participation) and The Rebound
will go directly to the Company.
25
SELECTED
CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical financial
data as of the dates and for the periods indicated. The selected
historical financial data as of December 31, 2009, 2008 and
2007 and for each of the indicated periods ending on those dates
have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The pro forma
consolidated financial data for the year ended December 31,
2009 reflects financial data after giving effect to the issuance
of common stock by us pursuant to this Offering.
You should read the data presented below together with, and
qualified by reference to, our consolidated financial statements
and the notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
each of which is included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Film Department Holdings LLC (Historical Values)
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
May 22, 2007
|
|
|
|
|
|
|
|
|
(Date of
|
|
The Film Department, Inc.
|
|
|
|
|
|
|
Inception)
|
|
Pro Forma Consolidated
|
|
|
Year Ended
|
|
Year Ended
|
|
Through
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(In thousands, except per share data)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
40,317
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating loss
|
|
|
(760
|
)
|
|
|
(8,042
|
)
|
|
|
(3,594
|
)
|
|
|
|
|
Net loss
|
|
|
(9,976
|
)
|
|
|
(14,103
|
)
|
|
|
(5,637
|
)
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
|
1,622
|
|
|
|
17,621
|
|
|
|
13,185
|
|
|
|
|
|
Total assets
|
|
|
46,118
|
|
|
|
64,630
|
|
|
|
53,031
|
|
|
|
|
|
Total current liabilities
|
|
|
2,691
|
|
|
|
4,581
|
|
|
|
1,148
|
|
|
|
|
|
Long-term obligations
|
|
|
36,486
|
|
|
|
47,236
|
|
|
|
33,332
|
|
|
|
|
|
Redeemable Member units
|
|
|
37,006
|
|
|
|
32,742
|
|
|
|
24,506
|
|
|
|
|
|
Members deficit
|
|
|
(30,065
|
)
|
|
|
(19,929
|
)
|
|
|
(5,955
|
)
|
|
|
|
|
Total Members/Stockholders equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
26
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion of our financial condition and
results of operations should be read in conjunction with our
Consolidated Financial Statements and the related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements, which involve risk and
uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result
of certain factors including, but not limited to, those
discussed in Risk Factors and elsewhere in this
prospectus.
Introduction
The Film Department is an independent movie finance and
production company founded in 2007 by Mark Gill and Neil Sacker,
two experienced film industry executives. Since that time we
have produced two films and entered pre-production on a third.
The first film released in the U.S., Law Abiding Citizen,
has earned $73 million at the North American box office and
more than $115 million worldwide to date.
Our business strategy is to produce four motion pictures with
net budgets between $10 million and $45 million each
year for release worldwide. The Company also plans to launch a
U.S. distribution business, in which we would distribute
movies that we produce along with approximately two to six
additional movies produced by third parties. In general, motion
pictures produced
and/or
distributed by The Film Department will be exhibited
theatrically in the U.S. and internationally, followed by
their release on DVDs,
video-on-demand,
pay and basic cable television, broadcast television, digital
media and other outlets (which may in some cases include
exhibitors such as airlines and hotels).
Management believes that the Company has demonstrated its
ability to successfully develop, produce and sell star-driven,
moderate-cost, high-quality films to the marketplace, and that
its forthcoming slate of 15 motion picture projects at
various stages of development combined with a new
U.S. distribution capability provides the Company with a
robust pipeline and a solid foundation for future revenue growth.
Factors
and Trends that Affect Our Results of Operations
In reading our financial statements, you should be aware of the
following factors and trends that we believe are important in
understanding our financial performance.
Revenue
Generation
The Film Department was formed in May 2007 and commenced
business operations in June 2007. Since inception, we have
produced two films The Rebound and Law
Abiding Citizen - and we are in pre-production on
Earthbound. Although Law Abiding Citizen had a
successful release in October 2009, it is the only motion
picture that we have released domestically so far. Accordingly,
although we have been in operation for over two years, our
business operations did not begin to generate any significant
revenue until the third quarter of 2009.
The Company incurred production expenditures related to the
production of Law Abiding Citizen and The Rebound
in 2008 and 2009. In accordance with U.S. GAAP these
production costs will be amortized over the revenue stream of
each movie as required by Accounting Standard Codification
(ASC) 926, Entertainment Films
(ASC 926), formerly AICPA Statement of Position
00-2 (see
Note 2 to the Consolidated Financial Statements for the
year Ended December 31, 2009 and the Consolidated Financial
Statements for the year Ended December 31, 2008 and for the
Period from Inception, May 22, 2007 to December 31,
2007). If revenues from a particular film do not exceed our
investment in that film, we recognize a net loss for that film.
Launch
of Distribution Operations
TFD intends to enhance its business opportunities by creating a
U.S. marketing and distribution capability that would
secure the release of films produced by both TFD and third
parties. To achieve this, TFD would incur additional overhead
costs of approximately $5.0 million annually. Management
believes creating this new capability will enhance the overall
profitability of TFDs business. However, if TFD is unable
to produce its target of four films per year or acquire its
target of two to six films per year, and the lesser number of
films the Company releases do not perform well at the
U.S. box office, this incremental annual overhead cost
could adversely affect our results of operations.
27
Corporate
Conversion
Immediately prior to this Offering, we will convert from a
Delaware limited liability company to a Delaware corporation
pursuant to Section 265 of the DGCL. As a limited liability
company, we were treated as a partnership for U.S. federal
and state income tax purposes and, as such, we were not subject
to taxation. For all periods subsequent to such date, we have
been and will continue to be subject to
corporate-level U.S. federal and state income taxes.
The accumulated losses have been allocated to the previous
members of the Limited Liability Company and the new corporation
will not be able to offset such losses from future income.
Public
Company Expenses
Upon consummation of our initial public offering, we will become
a public company, and, provided our listing application is
approved, will have our shares listed for trading on the NASDAQ
Global Market. As a result, we will need to comply with laws,
regulations, and requirements that we did not need to comply
with as a private company, including certain provisions of the
Sarbanes-Oxley Act of 2002, related SEC regulations, and the
requirements of NASDAQ. Compliance with the requirements of
being a public company will require us to increase our general
and administrative expenses in order to pay our employees, legal
counsel, and accountants to assist us in, among other things,
external reporting, instituting and monitoring a more
comprehensive compliance and board governance function,
establishing and maintaining internal control over financial
reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002, and preparing and distributing
periodic public reports in compliance with our obligations under
the federal securities laws. In addition, being a public company
will make it more expensive for us to obtain director and
officer liability insurance. We estimate that incremental annual
public company costs will be between $1 million and
$2 million.
Highly
Leveraged Capital Structure
Since our formation in 2007, we have incurred a significant
amount of indebtedness to fund our business operations. In
addition to interest expense, we have incurred a substantial
amount of administrative expenses, non-use fees, amendment fees,
legal fees and other
out-of-pocket
costs relating to our credit facilities, particularly the Senior
Revolving Facility. Although we intend to use some of the net
proceeds of this Offering to repay a portion of our outstanding
indebtedness, we expect to continue to maintain a significant
amount of indebtedness following the Offering. In addition, we
expect to incur project-specific indebtedness, as available, to
fund development, production, marketing and distribution
expenses of our motion picture projects. Accordingly, while we
expect to continue to incur substantial interest expense, it is
managements expectation that administrative and other
expenses relating to our production credit arrangements will be
reduced.
Stock
Based and Other Executive Compensation
Upon the consummation of this Offering, we intend to make equity
incentive awards to our directors, officers, and employees,
including certain grants to our executive officers that will be
fully vested upon grant. As a result, we expect to incur
non-cash, stock-based compensation expenses in future periods.
The employees of the Company currently hold 15% of the Company,
which will be converted to common stock on a common-diluted
basis upon the consummation of the Offering.
The Company will also establish a stock option plan for its
current and future employees; however at this point only the
allocation matrix among the various current and future employees
has been determined but not the number of shares that will be
available for the equity incentive plan. This will be determined
by the compensation committee at a later point in accordance
with the Equity Incentive Plan (See Equity Compensation
Information Equity Incentive Plan).
General
and Administrative Expenses
Compensation expenses, will be higher beginning in the first
quarter of 2010 due primarily to the addition of various
personnel to support the launch of TFDs distribution
business in the first quarter of 2010.
28
Key
Financial Metrics
Revenue
Our revenues are derived from the following business sources:
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Domestic Theatrical Exhibition: Revenues are
derived from the release of films in U.S. theaters. The
financial terms that TWC will negotiate on our behalf with
theatrical exhibitors generally provide that we receive a
percentage of the box office results and are negotiated on a
picture-by-picture
basis. Generally, the degree of success a particular film
achieves at the domestic box office is the primary determining
factor for all other U.S. revenues of that film.
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U.S. Home Entertainment (including DVD, Blu-Ray, Video
on Demand, mobile and other digital
media): Generally, home entertainment revenues
correlate very strongly with U.S. box office results. Films
are sold on an individual basis (as packaged goods via retailers
to consumers; and directly to consumers in the case of Video on
Demand, mobile and other digital media). We have reached an
agreement with Twentieth Century Fox (and are currently
documenting the deal) to distribute our films on home video. Fox
will be entitled to recoup its distribution costs as well as a
distribution fee.
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U.S. Pay Television: TFD has reached an
agreement with TWC for our movies to be distributed through
TWCs pay television service, which is currently Showtime,
and for which we will receive a license fee that is a percentage
of U.S. theatrical revenues as part of the TWC output deal.
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U.S. Free Television: As part of the TWC
distribution agreement, TWC will acquire U.S. free television
rights and subsequently license them to broadcast networks and
local stations as well as cable networks. Films are generally
licensed on a single picture basis for fees that are negotiated
based in part on the theatrical performance of the film.
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International: Rights for each picture are
sold
territory-by-territory
to independent distributors around the world, generally in all
media (although on some occasions, media within a territory will
be split to maximize revenue). Generally, revenue to the Company
consists of a minimum guarantee plus contingent compensation
(box office bonuses or other forms of overages).
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Expenses
Our primary operating expenses include the following:
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Direct Operating Expenses, which include amortization of film
and television production or acquisition costs, participation
and residual expenses and provision for doubtful accounts.
Participation costs represent contingent consideration payable
based on the performance of the film to parties associated with
the film, including producers, writers, directors or actors,
etc. Residuals represent amounts payable to various unions or
guilds such as the Screen Actors Guild, Directors
Guild of America, Writers Guild of America, International
Alliance of Theatrical Stage Employees, Moving Picture
Technicians, Artists and Allied Crafts of the United States, and
American Federation of Musicians based on the performance of the
film in certain ancillary markets.
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U.S. Distribution and Marketing Expenses, which primarily
include the costs of theatrical prints and
advertising (P&A). Theatrical P&A
represents the costs of the theatrical prints delivered to
theatrical exhibitors and advertising includes the advertising
and marketing cost associated with the theatrical release of the
picture. The aggregate cost of prints for a particular film
varies depending on the number of screens which will be showing
the film in the U.S. Each print costs approximately $1,500,
so a film with a wide release (which is typically considered to
be a release to at least 1,000 screens) will require an
up-front prints investment of at least $1.5 million. The
total P&A expenditure for a film will fluctuate depending
on numerous factors (including the breadth of release, the
performance of the film after opening day, and managements
judgment about the commercial viability of the picture, the
breadth of its potential audience, the efficacy of advertising
and publicity campaign, the audience response to the film in
pre-opening screenings, and the level of competition). It is not
uncommon for the P&A budget for a film released nationally
by an independent studio to be $20 million to
$35 million, or more if the film is successful in its
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29
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opening weekend and additional funds need to be spent, in
managements judgment, to maximize box office revenue on an
ultimate basis. The distributor of a film typically pays the
P&A expenses, and these costs are then recoupable from the
net box office revenue generated by the film, as well as from
revenue the film generates in other media.
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General and Administration Expenses, which include salaries and
other overhead.
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Development Costs for the development of future projects, which
include writing services, option payments and other costs.
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Our primary other expenses consist of interest expense relating
to our outstanding borrowings. We have incurred a significant
amount of indebtedness to fund our business operations, and
although we intend to use a portion of the net proceeds of this
Offering to repay a portion of our outstanding indebtedness, we
expect to continue to maintain a significant amount of
indebtedness, and thus continue to incur interest expense,
following this Offering.
Film-Specific
Financial Metrics
Domestic
adjusted gross revenue
In the United States, the Company generates gross revenue from
the theatrical exploitation of its films, as well as from other
media, including home entertainment and television.
There are, however, numerous costs and recoupments that must be
satisfied before the Company receives any portion of the
remaining revenue. The following chart summarizes, in general
terms, the typical flow of revenue from the U.S. theatrical
exhibition of a motion picture:
Theatre box office receipts
minus portion of
receipts paid to exhibitor and distribution fee paid to TWC
= Gross Film Rentals, paid to distributor
plus other net
distribution revenue, as applicable (e.g., DVD, VOD, cable, free
TV, etc.)
= Gross Receipts
minus P&A expenses
minus talent
residuals
= Domestic Adjusted Gross Revenue
International
Gross Revenue
Outside the United States, the Company generally licenses all
rights in all media to third-party distributors for its films in
each territory. In a typical license deal, the Company receives
a minimum guarantee in a fixed amount that is paid generally
10-20% on
signature of a bankable distribution agreement, and the balance
upon delivery of the completed film to the distributor, plus
additional contingent compensation depending on the films
actual box office performance.
Minimum guarantee paid to TFD by international distributors upon
delivery of film
plus overages
= total advance and overages
less international
residuals, applicable withholding taxes, and sales agency
fees
= International Gross Revenue
Net
Revenue
After determining the Companys total gross revenue in all
media (from the U.S. and international sources), the
Company must deduct its actual costs for the production as well
as talent participations.
30
For each individual production, the Company generally enters
into agreements with key participants (including, as applicable,
writers, directors, actors, and producers) to compensate those
participants, in whole or in part, by granting such participants
a percentage interest in future revenue or profits received by
the Company. These percentages, as well as the calculation
methodology, vary greatly and can include floors, ceilings, and
other pro forma adjustments. As such, the Company does not have
a typical revenue sharing financial model. However,
the following table summarizes, in general terms, the revenue
allocation to the Company in those cases where it utilizes a
third-party distributor:
Worldwide gross revenue (domestic plus international)
minus the gross production
cost of the film (including TFD fees)
plus tax
rebates / incentives
= Adjusted worldwide gross revenue
minus talent
participations
= TFD net revenue before fees
plus TFD producer fee (7.5%
of the budget)
plus TFD overhead fee (2.5%
of the budget)
plus TFD development fee
(as applicable)
= TFD net revenue
TFD believes it can enhance its business opportunities by
creating a U.S. marketing and distribution capability that
would secure the release of not only films produced by TFD, but
also a limited number of films produced by third-parties. For
films produced by third parties, net revenue to TFD would
include a distribution fee (negotiated separately on each
picture) and then following recoupment of
distribution costs a negotiated percentage split of
remaining proceeds from all media in the U.S.
To achieve this, TFD would incur additional overhead costs of
approximately $5.0 million annually, but it would also be
able to retain a larger percentage of the available gross
revenue (for example, on one film, Law Abiding Citizen,
TFD will pay approximately $14 million in distribution fees
to Overture Films; had TFD overseen the films release, it
would have reduced those fees by approximately half). Management
believes creating this new capability will enhance the overall
profitability of TFDs business. However, if TFD is unable
to produce its target of four films per year or acquire its
target of two to six films per year and the lesser
number of films the Company releases do not perform well at the
U.S. box office, this incremental annual overhead cost will
put additional strain on the Companys capital resources.
It is managements expectation that TFD would continue to
utilize third-party distributors for areas other than the United
States.
Results
of Operations
The following discussion provides an analysis of our results of
operations and should be read in conjunction with our
consolidated financial statements. The operating results of the
periods presented were not significantly
31
affected by general inflation in the U.S. economy. The
following table sets forth the components of net loss for the
periods indicated:
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Inception,
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Year Ended
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Year Ended
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May 22, 2007 to
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December 31,
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December 31,
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December 31,
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2009
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2008
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2007
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(Dollars in thousands)
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Revenues
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$
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40,317
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|
$
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|
$
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Expenses
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|
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Direct operating expense
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30,028
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|
|
26
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168
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Distribution and marketing expense
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1,222
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615
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240
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General and administrative expense
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9,636
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7,230
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3,125
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Depreciation and amortization expense
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191
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|
171
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|
61
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Total expenses
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$
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41,077
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|
$
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8,042
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3,594
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Operating loss
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(760
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)
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|
(8,042
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)
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|
(3,594
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)
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Other expenses (income)
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Interest expense
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Contractual interest expense
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5,741
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5,110
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2,387
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Amortization of debt discount
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475
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|
183
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|
91
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Amortization of debt issuance costs
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5,270
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1,207
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683
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Amortization of debt administration fees
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188
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|
63
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Total interest expense
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$
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11,674
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6,563
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3,161
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Other expense
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3
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7
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Interest and other (income)
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(2,461
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)
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|
(954
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)
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|
(1,125
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)
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Investment Loss
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452
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|
260
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Total other expenses, net
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9,216
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|
6,061
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2,303
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|
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Loss before income taxes
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(9,976
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)
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(14,103
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)
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(5,637
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)
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Income tax provision
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|
|
|
|
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|
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|
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Net loss
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$
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(9,976
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)
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|
$
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(14,103
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)
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(5,637
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)
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|
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|
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Unrealized Investment Loss
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|
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|
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(260
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)
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|
|
|
|
|
|
|
|
|
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Comprehensive Loss
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$
|
(9,976
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)
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|
$
|
(14,103
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)
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|
$
|
(5,897
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)
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Year
Ended December 31, 2009 Compared to the Year Ended
December 31, 2008
Revenue
Our revenue for the year ended December 31, 2009 was
$40.32 million as compared to revenue of $0 for the year
ended December 31, 2008. This increase was primarily due to
revenue recognition of international sales of The Rebound
and international and domestic sales of Law Abiding
Citizen totaling $13.19 million and $26.42 million,
respectively. The recognition of revenue from sales of
international delivery materials to international licensees of
The Rebound and Law Abiding Citizen for the year
ended December 31, 2009 was $0.71 million as compared
to $0 for the year ended December 31, 2008.
Direct
Operating Costs
Direct operating costs for the year ended December 31, 2009
was $30.03 million as compared to $0.03 million for
the year ended December 31, 2008. This increase primarily
represents film amortization expense and residual and
participation expense associated with the international release
of The Rebound and the worldwide release of
32
Law Abiding Citizen totaling $6.35 million and
$22.39 million, respectively. Abandoned development project
expense increased $1.05 million due to write-offs of
projects in development and international sales consultant fees.
Table
of Contents
Distribution
and marketing expense
Our distribution and marketing expenses for the year ended
December 31, 2009 were $1.22 million, an increase of
$0.61 million, or 99%, as compared to distribution and
marketing expenses of $0.62 million for the year ended
December 31, 2008. This increase was primarily due to
distribution expenses related to the delivery of international
materials to the international licensees of The Rebound
and Law Abiding Citizen. The Company earns revenue
through the sale of international materials, as noted in
Revenue above.
General
and administration expense
General and administration expenses for the year ended
December 31, 2009 were $9.64 million, an increase of
$2.41 million, or 33%, as compared to general and
administration expenses of $7.23 million for the year ended
December 31, 2008. The increase is primarily due to
professional services incurred during the year ended
December 31, 2009 totaling $2.71 million as compared
to $0.51 million for the year ended December 31, 2008.
The increased professional services incurred were primarily
related to the Companys recapitalization efforts, i.e. the
Eton Park buyout agreement and the recapitalization agreement
reached with H&W Movie Partners, LLC. The remaining
increase in general and administrative expenses are a result of
contractual compensation increases and the annual contractual
increase in rent expense.
Depreciation
and amortization expense
Depreciation and amortization expense includes depreciation of
property, plant, and equipment. The increase to
$0.19 million for the year ended December 31, 2009 as
compared to $0.17 million for the year ended
December 31, 2008 is due to the annual depreciation of the
Companys fixed assets.
Interest
expense
Our interest expense for the year ended December 31, 2009
was $11.67 million, an increase of $5.11 million from
$6.56 million for the year ended December 31, 2008.
This was primarily the result of accelerated amortization of
debt issuance costs related to the forbearance agreements for
the Credit Agreement governing the Senior Revolving Borrowing
Base Credit Facility and the forbearance agreement for the
Second Secured Lien Notes in September 2009. As part of the
forbearance agreements, the scheduled maturity dates for both
credit facilities were amended. This change led to an
acceleration of the debt issuance costs. Additionally, under the
forbearance agreement with the Second Secured Lien Note Holders
the interest rate was changed from 12% to 16%, which led to an
increase in the interest expenses.
Other
expenses
No material variance.
Interest
and other (income)
Interest and other income for the year ended December 31,
2009 was $2.46 million, an increase of $1.51 million
from $0.95 million for the year ended December 31,
2008. This increase was primarily a result of change in fair
value of Class C, D, and E warrants totaling
$2.44 million, offset by a decrease in interest income on
short-term investments due to the sale of the investments in
January 2009.
Net
loss
Our net loss for the year ended December 31, 2009 was
$9.98 million, a decrease of $4.12 million, or 29.3%,
as compared to net loss of $14.10 million for the year
ended December 31, 2008, and was due to the factors
discussed above.
33
Year
Ended December 31, 2008 Compared to the Period May 22,
2007 through December 31, 2007
Results of operations for 2007 are for a partial period and not
a full year, and therefore comparisons of results of operations
for 2008 and 2007 are not necessarily meaningful.
Revenue
No variance.
Direct
Operating Costs
Direct operating costs for the year ended December 31, 2008
was $0.03 million as compared to $0.17 million for the
period ended December 31, 2007. Abandoned development
project expense decreased $0.14 million due to less
write-offs of projects in development in the year ended 2008 as
compared to the period ended 2007.
Distribution
and marketing expense
Our distribution and marketing expenses for the year ended
December 31, 2008 were $0.62 million, an increase of
$0.38 million, or 158%, as compared to distribution and
marketing expenses of $0.24 million for the period ended
December 31, 2007.
General
and administration expense
General and administration expenses for the year ended
December 31, 2008 were $7.23 million, an increase of
$4.10 million, or 131%, as compared to general and
administration expenses of $3.13 million for the period
ended December 31, 2007.
Depreciation
and amortization expense
Depreciation and amortization expense includes depreciation of
property, plant, and equipment. The increase to
$0.17 million for the year ended December 31, 2008 as
compared to $0.06 million for the period ended
December 31, 2007 is due to the 12 months versus six
months of depreciation of the Companys fixed assets during
the year ended December 31, 2008 and the period ended
December 31, 2007, respectively.
Interest
expense
Our interest expense for the year ended December 31, 2008
was $6.56 million, an increase of $3.40 million from
$3.16 million for the period ended December 31, 2007.
Other
expenses
No material variance.
Interest
and other (income)
Interest and other income for the year ended December 31,
2008 was $0.95 million, a decrease of $0.18 million
from $1.13 million for the period ended December 31,
2007. This was primarily due to the 2008 recognition of
$0.26 million realized capital loss in 2008 related to
available-for-sale
investments. There was no other income or capital loss realized
in 2007.
34
Net
loss
Our net loss for the year ended December 31, 2008 was
$14.10 million, an increase of $8.46 million, or 150%,
as compared to net loss of $5.64 million for the period
ended December 31, 2007 and was due to the factors
discussed above.
Liquidity
and Capital Resources
General
The Company commenced operations on June 27, 2007 and, at
formation, issued equity interests to various investors in
exchange for an aggregate investment of $25 million. The
Company subsequently issued additional equity interests to
various investors for aggregate additional investments (not
including the HWMP investment described below) of
$7.6 million. In addition, on June 27, 2007, the
Company also raised $30 million in operating capital
through the issuance of Second Lien Notes and entered into the
Senior Revolving Borrowing Base Credit Facility with borrowing
availability of up to $140 million (which credit facility
was subsequently repaid in full from revenues generated by
Law Abiding Citizen and The Rebound and terminated
in November, 2009). Upon closing the Company paid approximately
$7.5 million in closing costs for fees for the credit
facilities, legal costs, finders fees and other costs.
Our principal ongoing uses of cash are to meet working capital
requirements, fund debt obligations and to finance our
operations.
Year
Ended December 31, 2009 Compared to the Year Ended
December 31, 2008
Cash used in operating activities in the year ended
December 31, 2009 was $13.61 million compared to
$32.89 million in the year ended December 31, 2008.
Despite an increased investment in feature films as well as an
increase in operating expenditures, the Company was able to
decrease the use of cash used in operating activities by
$19.28 million compared to the year ended December 31,
2008. The Company was able to achieve this result by offsetting
a portion of the investment in the film Law Abiding Citizen
as well as a portion of the operating expenditures with
revenues generated from the release of the films The Rebound
and Law Abiding Citizen compared to the previous year.
Cash provided by investing activities in the year ended
December 31, 2009 was $10.35 million compared to
$21.72 million in the year ended December 31, 2008.
The $11.37 million decrease in cash provided by investing
activities was principally due to sales of short-term
investments of $21.77 million during the year ended
December 31, 2008 compared to $10.35 million during
the year ended December 31, 2009.
Cash provided by (used in) financing activities in the year
ended December 31, 2009 was ($10.22) million compared
to $18.02 million in the year ended December 31, 2008.
During the year ended December 31, 2008, the Company had
proceeds from the Senior Credit Facility and issuance of
additional Class B member units. During the year ended
December 31, 2009, the Senior Credit Facility was paid down
in full for a total of $10.37 million and
$3.51 million was used to pay down principal Second Lien
Notes borrowings. The $13.88 million of cash used in
financing activities is partly offset by proceeds from the
issuance of Class G and Class J redeemable units in
the amount of $3.61 million.
Year
Ended December 31, 2008 Compared to the Period Ended
December 31, 2007
Cash used in operating activities in the year ended
December 31, 2008 was $32.89 million compared to
$8.16 million in 2007. The $24.73 million increase in
cash used in operating activities was principally due to
increased film costs related to the production of The
Rebound, Law Abiding Citizen, and costs associated
with projects in development.
Cash provided by investing activities in the year ended
December 31, 2008, was $21.72 million compared to cash
used in investing activities of $32.62 million in 2007.
Commencing in January 2008, the Company invested available funds
in the production of its two films, The Rebound and
Law Abiding Citizen.
35
Cash provided by financing activities in the year ended
December 31, 2008 and 2007 was $18.02 million and
$47.67 million, respectively. The $29.65 million
decrease in cash provided by financing activities was
principally due to $30.00 million of principal borrowings
on Second Lien Notes and $25.00 million proceeds from
issuance of Class B redeemable units in 2007, partially
offset by $10.37 million of proceeds from Senior Revolving
Borrowing Base Credit Facility in 2008 and the
$7.64 million on additional Class B redeemable units
issued in 2008.
We are highly leveraged. As of December 31, 2009, we had $36.49
million in aggregate indebtedness consisting of the aggregate
principal amount outstanding of the Second Lien Notes. As of
November 30, 2009, the debt under the senior credit facility had
been repaid in full from revenues generated by Law Abiding
Citizen and The Rebound.
Subject to any contractual restrictions, we and our
subsidiaries, affiliates or significant stockholders (including
the Sponsor and its affiliates) may from time to time, in their
sole discretion, purchase, repay, redeem or retire any of our
outstanding debt or equity securities (including any publicly
issued debt or equity securities), in privately negotiated or
open market transactions, by tender offer or otherwise.
As of December 31, 2009, we had total cash and cash
equivalents of $1.62 million including $0.58 million
of restricted cash in an overhead reserved controlled and paid
to the Company bi-weekly by the administrative agent for the
Companys first and second-lien lenders. Our ongoing cash
needs for the year ended December 31, 2009 were
substantially met from the proceeds of the Companys
initial capital raise (equity and second lien notes), and the
subsequent equity raise in the fourth quarters of 2008 and 2009.
Subsequent to December 31, 2009 and as part of the
recapitalization agreement reached with HWMP, the Company will
have received an additional $9.36 million from HWMP by
March 8, 2010 to be used for production expenditures for
the picture Earthbound as well as to cover overhead and
development expenditures.
Default
and Forbearance Arrangements
During the first quarter of 2009, the Company entered a period
of limited liquidity and capital resources. This was primarily
the result of four factors: (1) The Rebound had not
been released in the United States; (2) the amount of
equity required to fund the production of The Rebound and
Law Abiding Citizen was greater than anticipated due to
capital shortages among U.S. distributors who had
customarily paid advances for North American rights to
comparable films; (3) international licenses for selected
territories not achieved prior to the credit crisis and global
recession were reduced
and/or
delayed; and (4) the Company did not achieve the level of
production anticipated in its original Business Plan (which
contemplated 4-6 films per year). The Companys initial
revenue projections included profit, production and overhead
fees based on a production level of four to six films annually;
accordingly, the production shortfall resulted in a revenue
shortfall which required the Company to utilize a larger than
anticipated portion of its available capital resources to fund
overhead expenses.
On June 27, 2007, the Company and its affiliated entities
entered into a $140 million senior secured syndicated
revolving credit facility (the Senior Credit
Facility, which was subsequently repaid in full and
terminated in November, 2009) and a $30 million second
lien note purchase agreement (Securities Purchase
Agreement) pursuant to which it issued $30 million of
secured second lien notes (the Second Lien Notes)
fully underwritten by GE Capital Markets, Inc.
(GECM).
The Second Lien Notes as originally issued included a payment in
kind (PIK) feature that permitted the Company to
capitalize and add to the aggregate outstanding principal amount
of the Second Lien Notes each and every quarterly interest
payment due thereunder and defer payment thereof to the
scheduled maturity date of June 27, 2014 (although as
originally issued the Second Lien Notes also permitted the
Company in its discretion to pay quarterly interest in cash
subject to satisfaction of certain conditions). At the request
of GECM, and in order to assist GECM in its post-closing
syndication efforts, the Company entered into an amendment to
the Securities Purchase Agreement on August 7, 2007,
pursuant to which, among other things, the Second Lien Notes
were amended and restated to eliminate the PIK feature for, and
require the cash payment of, all quarterly interest payments
required to be made by the Company after September 30,
2008, subject to the ability of the Company to elect to defer
the payment of interest due on any quarterly interest payment
date to the next succeeding quarterly interest payment date (on
which date all accrued and unpaid interest for the preceding two
quarterly periods would be required to be paid in cash). The
Second Lien Notes currently accrue interest at the default rate
of 16% per annum.
36
Interest on these notes accrued interest for the first five
quarters of the Companys operation. The interest was
capitalized and added to the aggregate outstanding principal
amount of the Second Lien Notes. The Company paid the interest
that was due for the quarter ended December 31, 2008 and in
accordance with the Securities Purchase Agreement the Company
elected to defer (PIK) the interest that was due on
March 31, 2009.
Due to liquidity constraints resulting in part from the
aforementioned amendments to the Second Lien Notes, the Company
was unable to pay scheduled quarterly interest payments totaling
$2.16 million on June 30, 2009 under the Second Lien
Notes. The Company then entered into three successive amendments
extending such interest payment date to August 28, 2009 in
order to give the Company time to attempt to complete its then
contemplated equity recapitalization. Ultimately, the
recapitalization plan was not approved by all required equity
holders and the Company was unable to obtain the anticipated
capital necessary to enable it to make such interest payment.
This resulted in the occurrence of Events of Default under the
Securities Purchase Agreement and the Senior Credit Facility. In
addition, the Company was unable to fully fund a $5 million
P&A reserve account by the August 28, 2009 deadline
required under the terms of the Senior Credit Facility in
connection with the Overture distribution agreement for Law
Abiding Citizen, resulting in the occurrence of Events of
Default under the Senior Credit Facility and Securities Purchase
Agreement.
Despite the occurrence of such Events of Default, the Company
was successful in negotiating forbearance agreements in early
September 2009 with the lenders under the Senior Credit Facility
and holders of the Second Lien Notes, pursuant to which such
lenders and holders agreed to forbear from exercising any rights
and remedies under the Senior Credit Facility and the Securities
Purchase Agreement (absent the occurrence of any additional
events of default thereunder) until December 31, 2009, and
June 30, 2010, respectively. In addition, the forbearance
agreement under the Senior Credit Facility effected a
termination of the revolving credit commitments with respect to
any future films. Finally, the lenders under the Senior Credit
Facility required that funds held in the interest reserve
account at that time ($4.29 million) be used to effect an
immediate repayment of the obligations under the Senior Credit
Facility.
The Company has subsequently repaid all of its outstanding
obligations under the Senior Credit Facility from revenues
generated by Law Abiding Citizen and The Rebound.
The Senior Credit Facility was terminated in November 2009
concurrent with this repayment.
The Company has also entered into a Buyout Agreement relating to
the Second Lien Notes, which provides among other things that,
concurrently with the receipt by the Company of the net cash
proceeds of this Offering, the Company will be required to repay
the Second Lien Notes in an aggregate amount equal to the lesser
of (i) $37.5 million or (ii) the aggregate
outstanding obligations owing to Eton Park under the Second Lien
Notes minus $1.5 million (the Initial Cash
Paydown). In addition, at the closing of this Offering, we
agreed to issue to Eton Park a number of shares of common stock
having a value of $1.5 million based on the price at which
our common stock is sold in this Offering. Effective immediately
upon receipt by Eton Park of the Initial Cash Paydown,
TFDs obligations to Eton Park under the Second Lien Notes
will be terminated, and all liens securing those obligations
will be extinguished.
In addition to the Initial Cash Paydown, and in consideration of
the release and discharge of TFDs obligations under the
Second Lien Notes referenced above, to the extent that the
aggregate outstanding obligations owing to Eton Park under the
Second Lien Notes at the time of the Initial Cash Paydown
exceeds $39 million (such excess, the Additional
Payment Amount), we agreed to pay to Eton Park an amount
equal to all U.S. cash receipts actually received by (or
credited to) the Company from Overture Films, LLC
(Overture) under the Companys distribution
agreement with Overture in respect of Law Abiding Citizen
until such time as the Additional Payment Amount (together
with accrued and unpaid interest thereon at a per annum rate of
16.0%) is repaid in full.
As of February 24, 2010, the Company has paid Eton Park
$10.23 million. Accordingly, as an advance against a
portion of future expected receipts on Law Abiding Citizen
(including approximately $29 million in anticipated
future proceeds from U.S. receipts based on an ultimates
projection the Company received from Overture Films), The
Rebound and Earthbound, we expect to apply
approximately $21.6 million of the net proceeds of this
Offering to repay the Second Lien Notes.
37
On a going-forward basis, TFD will be capitalized with the
proceeds of the HWMP investment described below and the net
proceeds from this Offering. In the first quarter of 2010, the
Company also anticipates closing additional debt facilities to
fund marketing expenditures totaling $157.5 to
$185 million. Management believes these funds, together
with single-picture bank loans covering approximately 50% of the
budget on each new film, will provide sufficient capital to
execute its business plan.
HWMP
Investment
On December 2, 2009, we entered into an agreement with HWMP
pursuant to which HWMP agreed to make equity investments in the
Company in exchange for the issuance to HWMP of Class G
units. HWMP also agreed to make equity investments in the
Earthbound Films Entities, 8439 and 8440, and the Company and
HWMP entered into a put/call agreement pursuant to which the
parties agreed that HWMP would transfer to the Company 100% of
the equity of the Earthbound Films Entities, 8439 and 8440 in
exchange for the issuance by the Company to HWMP of Class G
units. The primary purpose of this transaction was to facilitate
the financing by HWMP of certain production expenses of
Earthbound incurred by the Earthbound Films Entities, but
to allow the Company to subsequently acquire all rights to
Earthbound and other assets then held by the Earthbound
Films Entities, 8439 and 8440 by acquiring 100% of the equity of
each such entity in consideration for the issuance to HWMP of
Class G units prior to this Offering. As a result, and
after giving effect to the exercise of the put/call arrangement,
the Company will own 100% of each of the Earthbound Films
Entities, 8439 and 8440, and thus will have reacquired all
rights to Earthbound and the other assets held by the
Earthbound Films Entities, 8439 and 8440. HWMP will receive
additional Class G units in exchange for its investment,
which will at that time constitute a majority of the equity of
TFD.
The Earthbound Films Entities have entered into a loan agreement
for up to $12.56 million with a third party production
lender to finance the production of Earthbound. As
collateral for the production loan, the production lender
acquired a first position lien over the assets of the Earthbound
Films Entities and took a pledge of the membership interests in
the Earthbound Films Entities. Accordingly, the production
lender will have liens over the Earthbound Films Entities
assets and a pledge of the membership interests when the equity
of such entities is acquired by TFD pursuant to the put/call
agreement described above. Such liens will remain in effect
until the production loan is repaid in full. Under the loan
agreement, the Company may be required to utilize
$1.25 million of the Offering proceeds to pay down the
production loan if certain thresholds are not met by the date
the Offering becomes effective.
The aggregate investment commitment of HWMP per the
recapitalization agreement was $14.33 million, of which
$7.29 million was to be funded by December 31, 2009.
Of the aggregate $7.29 million investment amount for 2009,
$3.83 was committed for overhead expenditures of the Company and
a payment due to Eton Park under the buyout agreement and
$4.5 million was committed for investment in the Earthbound
Films Entities, 8439 and 8440. The additional HWMP commitment of
$6.5 million was to be funded to the Company if this
Offering did not commence prior to January 10, 2010. As of
December 31, 2009, the Company had received
$4.24 million from HWMP. Additionally, through
March 8, 2010, the Company will have received an additional
$9.36 million from HWMP. The anticipated total amount
actually invested by HWMP prior to the Offering will be
approximately $13.6 million, in exchange for which HWMP
will have received Class G units that will be converted
into an aggregate of
[ ] shares
of common stock upon the Corporate Conversion.
Future
Debt Financing
The Company intends to finance its future films on a
single-picture basis. The Company will attempt to arrange for
one or more lenders to provide debt financing for a particular
project, which will be collateralized by certain rights to
proceeds ultimately generated by such project. Typically, this
type of funding can be arranged for approximately 50% of a
particular films production budget. Management has
substantial experience with this type of financing, and the
Company believes there is currently sufficient availability of
single-picture bank financing at competitive pricing.
Management believes (based on current market conditions and
recent discussions) that the following is a reasonable
approximation of the single picture debt terms:
14-month
term; pricing at LIBOR + 3.25% (with a LIBOR floor of 2%) for
collateralized lending; additional 4% fee for unsecured lending
in an amount not to exceed 20% of films net budget; loan
origination fee of 2%; guaranteed by TFD.
38
The Company also intends to secure approximately $157.5 to
$185 million of additional debt financing to fund marketing
and distribution expenditures. While the structure and terms of
this additional debt financing are in the discussion phase with
various providers and thus have not been fully negotiated,
management believes (based on current market conditions and
recent discussions) that the following is a reasonable
approximation:
High-Coupon P&A Debt ($85 million), which funds
P&A, interest reserve, closing costs and P&A reserve:
6-year term
(with prepayment penalty of 0.5% per year); pricing at LIBOR
(floor of 2%) + 8%, plus 5% of the first-cycle cash flow profits
from each film; coupon paid current and quarterly; 5% share of
cash flow profits paid as earned. A $20 million P&A
reserve is expected to be funded by $10 million of
high-coupon debt and $10 million of motion picture
receipts; any draw-down based on P&A loss must be
replenished by the party who incurred the loss. The interest
reserve is estimated to be one year interest or
$8.5 million, which will be funded from the initial
proceeds of the facility.
Senior P&A Debt ($72.5 million with accordion
feature increasing total availability to $100 million),
which functions as a P&A accounts
receivable/U.S. ultimates facility. Loan value is expected
to be 100% of domestic box office on a weekly basis, converting
into traditional receivables lending based on an ultimate
revenue projection from all media provided by the distributor
(i.e., TFD) six weeks after initial theatrical release. The loan
rate is expected to be LIBOR (floor of 2%) + 4%. This facility
will be senior to the High-Coupon P&A Debt. The accordion
feature on the Senior P&A Debt facility of approximately
$27.5 million will most likely be utilized to pay down a
portion of the High Coupon P&A Debt. If the Companys
U.S. Receipts are sufficient to warrant a further expansion
of this feature, management plans to increase the Senior
P&A Debt facility beyond the contemplated $100 million
to an amount which may enable the Company to pay off the High
Coupon P&A Debt in full. This would lower the cost of funds
the Company would incur for the financing of its P&A
expenditures.
If the Company is unable to secure the additional debt financing
required to fund marketing and distribution expenditures, it
will most likely be unable to execute its plan to participate in
the marketing and distribution of its films. Failure to develop
self-marketing and self-distribution capabilities could
adversely impact the growth and profitability of the Company.
Goguen
Development Fund
On October 4, 2007, the Company entered into an agreement
with Michael Goguen, an original equity investor in the Company,
to establish a five-year revolving development fund (the
Goguen Fund). Goguen capitalized the fund with
$2 million. The agreement provided that the Company could
utilize the Goguen Fund, subject to availability of funds, to
pay for 50% of the costs of certain development projects
(Goguen Projects), subject to certain limitations.
The remaining portion of the development costs would be funded
by the Company. All right, title and interest in and to the
Goguen Projects and all pictures produced based upon a Goguen
Project are owned 100% by the Company.
In consideration of the Goguen Funds contributions, it
receives the following benefits:
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For any picture produced based upon a Goguen Project, the Goguen
Fund is to be reimbursed an amount equal to 150% of its
contribution to the development of that particular Goguen
Project.
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For any picture produced based upon a Goguen Project, the Goguen
Fund is to be paid an executive producer fee equal to 100% of
the amount of the contribution by the Goguen Fund to that
particular project, capped at $0.15 million; provided, that
if the Goguen Fund has a cash balance of between
$1.5 million and $2 million as of the completion of
its 4th year, then the executive producer fee on future
pictures based upon a Goguen Project shall be 150% of the amount
of the contribution by the Goguen Fund with no cap until such
time that the cash balance of the Goguen Fund is at least
$2 million (at which time the executive producer fee on
future films based upon Goguen Projects reverts back to 100% of
the Goguen Fund contribution capped at $0.15 million); and
provided, further, that if the Goguen Fund has a cash balance of
less than $1.5 million as of the completion of its
4th year, then the executive producer fee on future
pictures based upon a Goguen Project shall be 200% of the amount
of the contribution by the Goguen Fund with no cap until such
time that the cash balance of the Goguen Fund is at least
$2 million (at which time the executive producer fee on
future
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39
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films based upon Goguen Projects reverts back to 100% of the
Goguen Fund contribution capped at $0.15 million).
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For each picture produced based upon a Goguen Project, the
Goguen Fund is entitled to 2% of all adjusted gross receipts
after breakeven (i.e., when revenues exceed contractually
approved reported costs) provided that the definition of
breakeven and adjusted gross receipts would be no less favorable
than accorded to any third party participant on that particular
film.
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Michael Goguen shall be accorded an executive producer credit on
screen and in paid advertising in second position of all
executive producer credits on all pictures based upon Goguen
Projects.
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At the end of the 4th year of the Goguen Fund, Michael
Goguen is entitled to receive a distribution in an amount equal
to the excess, if any, of the cash balance of the Goguen Fund
over $0.9 million; provided, that the payment to Goguen
shall not exceed $1 million. Following the end of the
5th and 6th years, Michael Goguen shall be entitled to
100% of the cash balance of the Goguen Fund. In all subsequent
years, any amounts due the Goguen Fund shall be paid directly to
Michael Goguen.
|
Contractual
Obligations and Commitments
The following table sets forth, as of December 31, 2009,
the aggregate amounts of our significant contractual obligations
and commitments with definitive payment terms due in each of the
periods presented:
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Contractual Obligations and Commercial Commitments
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Payable in
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Payable in
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Payable in
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Payable in
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Payable
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Total
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2010
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2011/12
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2012/13
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2013/14
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After 2014
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(Dollars in thousands)
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Operating Leases
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$
|
171
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|
|
$
|
171
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|
|
$
|
|
|
|
$
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|
|
|
$
|
|
|
|
$
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|
|
Employment Contracts
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7,431
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|
3,167
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3,589
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675
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|
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Senior Credit Facility, excl. interest reserve (including
interest)
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Second Secured Lien Notes (including interest)
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37,038
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37,038
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|
|
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|
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|
|
|
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Development Spending
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|
|
187
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|
|
|
187
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,827
|
|
|
$
|
40,563
|
|
|
$
|
3,589
|
|
|
$
|
675
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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Off-Balance
Sheet Arrangements
In conjunction with the licensing agreement for domestic
distribution rights of one film, the Company guaranteed a
shortfall in distribution expenses that Overture Films might
have incurred on Law Abiding Citizen. As the film is now
profitable on an ultimate basis, management does not anticipate
any shortfall. Going forward, management does not expect to
incur such obligations, as TFD will be the U.S. distributor
of its films, and international licensing agreements do not
customarily call for such arrangements.
Impact of
Inflation
We do not believe that general inflation in the
U.S. economy has had a material impact on our financial
position or results of operations. There can be no assurance
that future inflation will not have an adverse impact on our
operating results and financial condition.
Seasonality
The timing of revenue reporting, and our receipt of cash,
fluctuates based upon the timing of our films theatrical
and subsequent release dates and our recoupment of distribution
and market costs on a
film-by-film
basis, which varies depending upon a films overall
performance. As a result, our annual or quarterly operating
results and cash flows for any period are not necessarily
indicative of results to be expected for future periods.
40
Quantitative
and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest
rates. We do not use derivative financial instruments for
speculative or trading purposes.
Our earnings are affected by changes in short-term interest
rates as a result of borrowings under our credit facilities. We
currently do not use interest rate swap agreements or other
derivatives to manage our interest rate exposure. We invest any
cash in excess of current operating requirements in short-term
certificates of deposit and money market instruments.
At December 31, 2009, the fair value of our total debt,
which has a carrying value of $36.49 million, was
$36.49 million. We had $0 of variable rate debt outstanding
at December 31, 2009, as all debt is under the Second
Secured Lien Notes.
Substantially all of our
non-U.S. distribution
agreements are denominated in U.S. Dollars. Accordingly,
currency exchange risk does not represent a significant market
risk for the Company.
Critical
Accounting Policies and Estimates
The application of the following accounting policies, which are
important to our financial position and results of operations,
requires significant judgments and estimates on the part of
management. As described more fully below, these estimates bear
the risk of change due to the inherent uncertainty attached to
the estimate. For example, accounting for films and television
programs requires us to estimate future revenue and expense
amounts which, due to the inherent uncertainties involved in
making such estimates, are likely to differ to some extent from
actual results. For a summary of all of our accounting policies,
including the accounting policies discussed below, see
Note 2 to our audited consolidated financial statements.
Generally
Accepted Accounting Principles (GAAP)
Our consolidated financial statements have been prepared in
accordance with U.S. GAAP.
Revenue
Recognition
Revenue from the sales or licensing of films is recognized upon
meeting all recognition requirements of Accounting Standard
Codification (ASC) 926, Entertainment
Films (ASC 926) (formerly AICPA Statement of
Position
00-2. These
requirements are (a) persuasive evidence of a sale or
licensing arrangement with a customer exists, (b) the film
is complete and, in accordance with the terms of the
arrangements, has been delivered or is available for immediate
and unconditional delivery, (c) the license period of the
arrangement has begun and the customer can begin its
exploitation, exhibition, or sale, (d) the arrangement fee
is fixed or determinable, and (e) collection of the
arrangement fee is reasonably assured. Cash payments received
are recorded as deferred revenue until all the conditions of
revenue recognition have been met.
Film
Costs
We capitalize costs of production and acquisition, including
financing costs and production overhead, to investment in films.
These costs are amortized to direct operating expenses in
accordance with ASC 926. These costs are stated at the lower of
unamortized films costs or estimated fair value. These costs for
an individual film program are amortized and participation and
residual costs are accrued in the proportion that current
years revenues bear to managements estimates of the
ultimate revenue at the beginning of the year expected to be
recognized from exploitation, exhibition or sale of such film
over a period not to exceed ten years from the date of initial
release.
We regularly review and revise, when necessary, our ultimate
revenue and cost estimates, which may result in a change in the
rate of amortization of film costs and participations and
residuals
and/or
write-down of all or a portion of the unamortized costs of the
film to our estimated fair value. We estimate the ultimate
revenue based on experience with similar titles or title genre,
the general public appeal of the cast, actual performance (when
available) at the box office or in markets currently being
exploited, and other factors such as the quality and acceptance
of motion pictures or programs that our competitors release into
the marketplace at or near the same
41
time, critical reviews, general economic conditions and other
tangible and intangible factors, many of which we do not control
and which may change. In the normal course of our business, some
films and titles are more successful than anticipated and some
are less successful. Accordingly, we update our estimates of
ultimate revenue and participation costs based upon the actual
results achieved or new information as to anticipated revenue
performance when it becomes available. An increase in the
ultimate revenue will generally result in a lower amortization
rate while a decrease in the ultimate revenue will generally
result in a higher amortization rate and periodically results in
an impairment requiring a write-down of the film cost to the
titles fair value. These write-downs are included in
amortization expense within direct operating expenses in our
consolidated statements of operations.
Development
Costs
Development costs are capitalized costs related to projects not
in production. If a film is greenlit, the costs are reclassified
as Film Costs
and/or
Investment in Films. If the Company decides to abandon any
project, an allowance for the costs incurred to date will be
included in the Companys consolidated statements of
operations and comprehensive loss. Abandoned projects totaled
$1.05 million and $0.02 million, respectively, for the
fiscal years ended December 31, 2009 and 2008 and include
the write-offs of international sales consultant fees.
Property
and Equipment
Property and equipment are recorded at historical costs.
Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets of three years.
Debt
Issuance Costs
Debt issuance costs are being amortized using the effective
interest method, over the expected term of the underlying Second
Lien Notes and Senior Credit Facility. As a result of the
forbearance agreement that we entered into with the lenders
under our Senior Credit Facility, the amortization of the Debt
Issuance Costs was accelerated to reflect the reduction in the
Senior Credit Facility.
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
|
|
|
Senior Credit Facility
|
|
Second Lien Notes
|
|
|
(In thousands)
|
|
2007
|
|
$
|
600
|
|
|
$
|
83
|
|
2008
|
|
|
1,041
|
|
|
|
166
|
|
2009
|
|
|
4,788
|
|
|
|
881
|
|
2010
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,429
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
Impact
of Recently Issued Accounting Pronouncements Fair
Value Accounting
Effective January 1, 2008, the Company adopted ASC 820,
Fair Value Measurements (ASC 820). ASC 820
does not require any new fair value measurements; rather, it
defines fair value, establishes a framework for measuring fair
value in accordance with existing generally accepted accounting
principles and expands disclosures about fair value measurements.
Warrant
Liabilities
Liabilities measured at market value on a recurring basis
include warrant liabilities resulting from a previous financing.
In accordance with ASC
815-40
(formerly EITF (Emerging Issues Task Force)
00-19,
Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Companys Own Stock), the
warrant liabilities are being marked to market each reporting
period until they are completely settled. The warrants are
valued using the Black-Scholes method, using assumptions
consistent with our application of ASC 718 (formerly
SFAS 123R). The gain or loss resulting from the marked to
market calculation is shown on the Consolidated Statements of
Operations as Gain on warrant derivative liability.
42
New
Accounting Standards
In September 2006, the FASB issued ASC 820. ASC 820 establishes
a framework for measuring fair value, and expands disclosure
about such fair value measurements. The Company adopted this
guidance at the beginning of the first quarter of fiscal 2009
except for those non-recurring measurements for non-financial
assets and non-financial liabilities subject to the partial
deferral. The adoption of this guidance did not have an impact
on the Companys financial position or operating results.
The Company adopted non-recurring measurements for non-financial
assets and non-financial liabilities at the beginning of fiscal
2009. The adoption of this guidance for non-financial assets and
liabilities did not have a material impact on the Companys
consolidated financial position or results of operations.
In December 2007, the FASB issued ASC 805 Business
Combinations (ASC 805), previously referred to
as SFAS No. 141 (revised 2007). This guidance changes
the requirements for an acquirers recognition and
measurement of the assets acquired and liabilities assumed in a
business combination. The Company adopted this guidance at the
beginning of fiscal 2009. The adoption of this guidance did not
have a material impact on the Companys consolidated
financial position or results of operations.
In December 2007, the FASB issued ASC No. 810
Transition Related to Noncontrolling Interests in
Consolidated Financial Statement (ASC 810),
previously referred to as SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements an
amendment of Accounting Research Bulletin (ARB)
No. 51. The guidance requires that noncontrolling
(minority) interests be reported as a component of equity, that
net income attributable to the parent and to the non-controlling
interest be separately identified in the income statement, that
changes in a parents ownership interest while the parent
retains its controlling interest be accounted for as equity
transactions, and that any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary be initially
measured at fair value. The Company adopted this guidance at the
beginning of fiscal 2009. Other than the change in presentation
of noncontrolling interests, the adoption of this guidance had
no impact on the Companys consolidated financial position
or results of operations.
In April 2008, the FASB issued ASC 350 Determination of
the Useful Life of Intangible Assets (ASC
350), previously referred to as FSP
SFAS No. 142-3.
This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The intent of
this guidance is to improve the consistency between the useful
life of a recognized intangible asset and the period of expected
cash flows used to measure the fair value of the asset in a
business combination. The Company adopted this guidance at the
beginning of fiscal 2009. The adoption of this guidance did not
have a material impact on the Companys consolidated
financial position or results of operations.
In June 2009, the FASB issued ASC 105 FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles (ASC 105) concerning the
organization of authoritative guidance under U.S. GAAP.
This is a replacement of The Hierarchy of GAAP (formally
SFAS 162). The Codification has become the source of
authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative U.S. GAAP for SEC
registrants. On the effective date, the Codification superseded
all then-existing non-SEC accounting and reporting standards.
All other nongrandfathered non-SEC accounting literature not
included in the Codification will become nonauthoritative. The
Codification became effective for the Company during fiscal
2009. As the Codification is not intended to change or alter
existing U.S. GAAP, it did not have any impact on the
Companys consolidated financial statements.
In April 2009, the FASB issued ASC 825 Disclosure about
fair value of financial instruments (ASC 825),
previously referred to as FSP
FAS No. 107-1
extends the disclosure requirements to interim period financial
statements, in addition to the existing requirements for annual
periods and reiterates requirement to disclose the methods and
significant assumptions used to estimate fair value. The Company
adopted this guidance during fiscal 2009. The adoption of this
guidance did not have a material impact on the Companys
consolidated financial position or results of operations.
In April 2009, the FASB issued ASC
320-10-65.
This guidance modifies the requirements for recognizing
other-than-temporarily
impaired debt securities and changes the existing impairment
model for such securities. This guidance also requires
additional disclosures for both annual and interim periods with
respect to both debt and
43
equity securities. Under the guidance, impairment of debt
securities will be considered
other-than-temporary
if an entity (1) intends to sell the security,
(2) more likely than not will be required to sell the
security before recovering its cost, or (3) does not expect
to recover the securitys entire amortized cost basis (even
if the entity does not intend to sell). The guidance further
indicates that, depending on which of the above factor(s) causes
the impairment to be considered
other-than-temporary,
(1) the entire shortfall of the securitys fair value
versus its amortized cost basis or (2) only the credit loss
portion would be recognized in earnings while the remaining
shortfall (if any) would be recorded in other comprehensive
income. This guidance requires entities to initially apply the
provisions of the standard to previously
other-than-temporarily
impaired debt securities existing as of the date of initial
adoption by making a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. The
cumulative-effect adjustment potentially reclassifies the
noncredit portion of a previously
other-than-temporarily
impaired debt security held as of the date of initial adoption
from retained earnings to accumulated other comprehensive
income. The Company adopted this guidance during fiscal 2009.
The adoption of this guidance did not have a material impact on
the Companys consolidated financial position or results of
operations.
In April 2009, the FASB issued ASC
820-10-35.
This guidance requires (1) estimating the fair value of an
asset or liability when the volume and level of activity for the
asset or liability have significantly declined and
(2) identifying transactions that are not orderly. This
guidance also amends certain disclosure to require, among other
things, disclosures in interim periods of the inputs and
valuation techniques used to measure fair value. The Company
adopted this guidance during fiscal 2009. The adoption of this
guidance did not have a material impact on the Companys
consolidated financial position or results of operations.
In May 2009, the FASB issued ASC 855 Subsequent
Events (ASC 855), previously referred to as
SFAS No. 165. This guidance is intended to establish
general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires
the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date that
is, whether that date represents the date the financial
statements were issued or were available to be issued. The
Company adopted this guidance fiscal 2009. The adoption of this
guidance did not have any impact on the Companys
consolidated financial position or results of operations.
In June 2009, the FASB issued ASC 860 Accounting for
Transfers of Financial Assets (ASC 860),
previously referred to as SFAS No. 166. The guidance
eliminates the concept of a qualifying special-purpose
entity and changes the requirements for derecognizing
financial assets. The Company will adopt Statement No. 166
at beginning of fiscal 2009. The adoption of this statement is
not expected to have a material impact on the Companys
consolidated financial position or results of operations.
In June 2009, the FASB issued ASC 810 Consolidation of
Variable Interest Entities (VIE) (ASC
810), previously referred to as SFAS No. 167.
This guidance amends current U.S. GAAP by: requiring
ongoing reassessments of whether an enterprise is the primary
beneficiary of a VIE; amending the quantitative approach
previously required for determining the primary beneficiary of
the VIE; modifying the guidance used to determine whether an
entity is a VIE; adding an additional reconsideration event
(e.g. troubled debt restructurings) for determining whether an
entity is a VIE; and requiring enhanced disclosures regarding an
entitys involvement with a VIE. The Company will adopt
this guidance at the beginning of fiscal 2009. The adoption of
this guidance is not expected to have a material impact on the
Companys consolidated financial position or results of
operations.
In August 2009, the FASB released new Accounting Standard Update
(ASU)
2009-05
under ASC 820 Fair Value Measurement concerning
measuring liabilities at fair value. The new guidance provides
clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a
reporting entity is required to measure fair value using certain
valuation techniques. Additionally, it clarifies that a
reporting entity is not required to adjust the fair value of a
liability for the existence of a restriction that prevents the
transfer of the liability. This new guidance is effective for
the first reporting period after its issuance, however earlier
application is permitted. The Company will adopt this new
guidance during fiscal 2009. The adoption of this guidance did
not have a material impact on the Companys consolidated
financial position or results of operations.
44
OUR
BUSINESS
Overview
The Film Department is an independent motion picture finance and
production company founded in 2007 by Mark Gill and Neil Sacker,
a management team with more than 40 years of combined
experience in the film industry. In their previous roles as
senior executives, they oversaw production, marketing and
distribution for three of the most successful independent films
of the past few years Crash, March of the
Penguins and Good Night, and Good Luck as
well as many of the most profitable independent films of
all-time including The Talented Mr. Ripley,
Frida, In the Bedroom, Under the Tuscan Sun
and The Illusionist. Films in which they have had
significant involvement as executives
and/or
producers have earned more than $1.1 billion at the
worldwide box office.
The Companys strategy has been to produce star-driven
commercial movies with net budgets between $10 and
$45 million and to license those movies to film
distributors worldwide for release. In its first two years of
existence, TFD has demonstrated an ability to develop, produce
and sell star-driven, moderate-cost, studio-quality films to the
marketplace under a risk mitigation strategy whereby
we attempt to license the international rights for a targeted
80% of each films net budget (i.e., the gross budget less
subsidies and TFD producer and overhead fees). The Company has
assembled a slate of 15 commercial projects that management
believes are worthy of a national release including Law
Abiding Citizen, starring Gerard Butler and Jamie Foxx
(which has earned $73 million at the North American
box office and more than $115 million worldwide to date);
The Rebound starring Catherine
Zeta-Jones
(recently completed and targeted for a Summer 2010
U.S. theatrical release); and Earthbound, starring
Kate Hudson (which began production on January 18,
2009 in New Orleans, Louisiana).
This has been achieved despite the occurrence of four
unfavorable macro-economic events: a Writers Guild strike; the
threat of a Screen Actors Guild strike (which reduced the
availability of talent because the major studios increased their
film output in anticipation of a work stoppage); the severe
worldwide economic downturn; and most recently the dramatic
cutback in release slates and marketing expenditures by the
major studios, which has slowed their acquisitions of
independent films to a near standstill. The impact of these
events was substantial: in the past two years, more than 50% of
TFDs peer film finance/production firms have ceased
competing with us. Notwithstanding these challenging conditions,
The Film Department has continued operations and has the added
advantage of far less competition going forward.
Now the Company plans to take advantage of what management
believes to be a significant market dislocation in the film
industry: consumer demand for movie tickets in the U.S. was
up 9.4% in a recession year (over 2008) and revenues are
about to accelerate due to new forms of distribution in the
digital age, even as the supply of films dropped by more than
14% in 2009 and management expects it to drop further in 2010
due to capital shortages created by the recession and the credit
crisis. The Company plans to exploit this market opportunity by
launching a U.S. distribution capability to release six to
ten films per year (a combination of its own productions and
movies financed by third parties).
As of November 30, 2009, the Company has repaid all of its
outstanding obligations under the Senior Credit Facility from
revenues generated by Law Abiding Citizen and The
Rebound. On a going-forward basis, TFD will be capitalized
with the proceeds of the HWMP Investment and the net proceeds
from this Offering. In the first quarter of 2010, the Company
also anticipates closing additional debt facilities to fund
marketing expenditures totaling $157.5 to $185 million.
Management believes these funds, together with single-picture
bank loans covering approximately 50% of the budget on each new
film, will provide sufficient capital to execute its business
plan.
Description
of Industry
The motion picture industry earned $28.1 billion in
worldwide box office receipts in 2008, a 5.2% increase over the
previous year. In 2009, the North American box office was up
9.4% over the prior year. Of total worldwide box office
receipts, approximately 65%, or $18.5 billion, was
attributable to sales outside of the domestic
markets of the United States and Canada. A 2009
PricewaterhouseCoopers report projects that global box office
revenue will jump 33% in the next five years to
$37.7 billion annually. After films complete their run in
theaters, they continue to
45
generate additional revenue throughout the remaining phases of
the film distribution life cycle including home video/DVD,
digital distribution, pay and free television.
The majority of motion picture revenues are generated by films
distributed by one of six major studios, which are generally
recognized in the entertainment industry to be Paramount
Pictures Corporation, Sony Pictures Entertainment, Inc.,
Twentieth Century Fox Film Corp., Universal Pictures, Walt
Disney Studios Motion Pictures and Warner Bros. Entertainment,
Inc. All of these companies are owned by media conglomerates
with a variety of operations, including studios, television
networks, cable channels and distribution divisions, including
the major studios and independent production companies. Many of
these companies have a variety of operations in addition to the
production of motion pictures, including television network
libraries and cable channels that can provide a means of
distributing their products and providing a stable source of
revenues to offset fluctuations in the financial performance of
their motion picture operations. The major motion picture
studios also have large and diversified film slates which
mitigate the financial risks associated with any one particular
film.
By adding a wide-release U.S. marketing and distribution
capability, TFD will become one of what management believes to
be only six independent studios in America with the capacity for
wide-release U.S. self-distribution (joining the ranks of
Lionsgate Entertainment Corp, Overture Films, Summit
Entertainment, CBS Films and The Weinstein Co.). These smaller,
less-diversified firms have made significant gains in market
share and brand visibility during the past two decades. Although
independent studios compete directly with the major studios by
releasing commercial movies nationwide, the independents
generally are run with far lower overhead, production costs and
marketing budgets. As a result, management believes independent
studios can achieve favorable results by generating meaningful
revenue with much lower costs.
The motion picture industry is generally composed of two major
business segments: production and distribution. Production
consists of the greenlighting and financing of
motion pictures, as well as the development of the screenplay
and the actual filming activities and post-filming
editing/post-production process. Distribution refers
to the marketing and commercial or retail exploitation of films
throughout the world, including theatrical release, home
entertainment (including home video, DVD, Blu-Ray, Video on
Demand (VOD) and mobile/digital distribution),
licensing for television and merchandising.
Production of a motion picture consists of four principal
phases, whose timing is generally as follows:
|
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Principal
|
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Development
|
|
Pre-Production
|
|
Photography
|
|
Post-Production
|
|
Approximate Duration
|
|
A few months to several years
|
|
2-4 months
|
|
2-4 months
|
|
3-5 months
|
Principal Activities
|
|
Develop original story or
|
|
Complete budget, shooting schedule
|
|
Film movie
|
|
Edit film
|
|
|
Acquire rights to a novel, story or original
screenplay
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|
Secure location, studio facilities, financing
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Music, dialog and special effects finalized
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Finance writing of screenplay
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|
Prepare for filming/contract for creative
talent
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Final cut of film completed
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Seek tentative commitments from key talent
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The typical distribution cycle for a feature film consists of
five distinct periods and generally begins with its release in
U.S. and Canadian movie theatres, which normally precedes
or is contemporaneous with its release in overseas markets.
Depending on the films reception, its theater run can end
within a few weeks or last three months or more.
The film is then released to wholesalers and retailers for sale
or rent to consumers for private viewing through various home
entertainment media including DVD and Blu-Ray.
The third stage is the release of the film, usually
3-4 months after its initial theatrical release, to
pay-per-view
and digital rental and sales outlets, including digital media
platforms such as InDemand. An Adams Media
46
Research report said revenue from digital delivery grew 79% in
2008 over the prior year due to increased broadband penetration
and consumer acceptance.
The fourth and fifth stages consist of release to premium cable
channels (e.g., HBO, Showtime, Encore/Starz and Epix) and the
broadcast networks or basic cable channels, respectively. Films
are normally released for airing on premium cable channels nine
to twelve months after theatrical release, and for network or
basic cable showings approximately two years after the
theatrical release.
The international distribution cycle generally follows the same
cycle as domestic distribution. Historically, the international
distribution cycle has begun a few months after the start of the
domestic distribution cycle. However, the increasing
sophistication of film piracy operations in international
markets, as well as the ease with which the dominant DVD format
can be copied, has resulted in a much higher percentage of films
being released simultaneously to U.S. and international
markets. A Motion Picture Association of America
(MPAA) study estimated that the major studios lost
$6.1 billion in total revenue to piracy in 2005, of which
80%, or $4.8 billion, was attributable to piracy in
international markets.
Market
Opportunity
The Film Department will undertake its expansion into
U.S. distribution at what management believes is a highly
advantageous time. Film industry research firm OTX reported in
December 2009 that box office growth is being driven by
audiences seeing a broader group of films (i.e., not only the
biggest hits). Even as U.S. box office is on the rise,
competition is decreasing. Management expects that the volume of
films released theatrically in the U.S. to drop over the
next two years from a record high of 610 pictures in 2008 to 520
releases in 2009 to a volume below the historically normative
range of
350-400
pictures annually. Management believes this drop in film supply
is mainly attributable to a significant decrease in new debt and
equity financing provided to Hollywood by Wall Street (between
2004 and 2007, it is estimated that such financing totaled
$18 billion) and to an industry-wide trend in which most of
the significant U.S. distribution companies
both major studios and independents are
cutting their output due to capital shortages. At the major
studios, the focus is largely on the biggest films (budgeted at
more than $100 million and known in the industry as
tentpole pictures) which means that the reduction in their
slates has largely come at the expense of lower- and mid-budget
films. Additionally, in the last year, five studio independent
divisions have closed or scaled back their operations (New Line,
Picturehouse, Warner Independent, Paramount Vantage and Miramax
Films) which management believes is due to the
global recession and credit crisis, and the decline of the
arthouse film market (i.e., upscale, intellectual films that
generally are released on 20 to 500 U.S. screens, far less
than the 1,000 to 3,000-screen nationwide releases planned for
TFD films).
The result is what management believes to be a rare opportunity:
consumer demand is up even as supply is down. This dislocation
has created an opening for a company with the right management
acumen, financial discipline, and a proven ability to develop,
produce, market and distribute star-driven, mid-budget
commercial movies.
A result of the dramatic, industry-wide reduction in films being
produced is that talent pricing has dropped substantially even
as talent availability has risen. Consequently, TFD believes it
will be even better able to attract well-recognized,
high-quality talent. Management believes this market dynamic of
less than 400 theatrical release per year will continue for
many years to come.
After films complete their run in theaters, they continue to
generate additional revenue throughout the remaining phases of
the film distribution life cycle including home video/DVD,
digital distribution, pay and free television. In the current
recession DVD sales are down, while Blu-Ray sales, DVD rentals
and Video on Demand (VOD) revenues have increased.
Taken altogether, total U.S. video revenue was off 6% to
$22.4 billion in 2008, and is down 4.9% in 2009. But in
2010, Blu-Ray and VOD (which have been growing steadily and
significantly over the last three years), are projected to
achieve replacement value for falling DVD revenue, according to
a June 2009 FutureSource Consulting report. In 2009, Blu-Ray
sales increased 70% over the prior year, and VOD was up 32% over
2008.
The full transition from DVD to VOD is expected to occur within
the next three to five years, fueling a rapid increase in growth
mirroring the explosive rise in revenue that occurred when the
home entertainment business transitioned from videotape to DVD.
At that time, wholesale pricing dropped from $65 per videotape
to $10 per DVD, and volume exploded, generating $87 billion
in incremental revenue to the industry over the past
13 years,
47
according to Adams Media Research. When the industry fully
shifts from DVD to VOD, wholesale pricing is expected to drop
from $10 per unit for DVD to $3-4 per unit for VOD, and Adams
Media Research projects volume and revenue will rise
significantly. This is one of several reasons why management
remains optimistic about the long-term growth possibilities for
the film industry.
On the production side of the business, the market premium
placed on moderate-cost, high-quality, star-driven films
continues to grow throughout the world. In managements
experience, international distributors are more interested than
ever in these higher-quality, cast-driven films, while American
art films and B movies have declined in popularity.
The U.S. is experiencing a similar shift in audience tastes
away from B movies. Irrespective of the genre,
management believes the minimum quality a commercial film has to
achieve in order to be successful is on the rise.
In a world of expanding entertainment choices, managements
experience is that audiences increasingly do not want the same
old thing from their movies (in Hollywood parlance, a
retread). Instead, they want a star they know and an
appealing storyline that is distinctive and emotionally
satisfying.
Managements view is that the major studios have spent the
last three decades making too many low-quality films, and then
relying on increasingly large marketing expenditures to get
audiences into the theaters. For a long time, this formula
worked reasonably well. But, with the exception of the
$100 million-plus tentpole movies, fooling the audience is
getting much harder in the age of twittering, cell phone text
messaging, Blackberries, blast emails and instant messaging.
Good buzz spreads quickly, but bad buzz spreads even faster. All
of this underscores what we are already seeing: the trend is
toward audiences increasingly rewarding commercial movies of
higher quality.
Notwithstanding this need, very few companies have the expertise
to create the necessary supply of product. There are two primary
reasons for this supply shortage:
1. At the major studio level, the focus increasingly is on
making a handful of $100 million-plus tentpole pictures
each year, with a dramatic reduction in the overall number of
pictures produced and released due to the credit crisis. Most
major studios are not adept at keeping costs down on films of
any size, and as a result fewer moderate-cost, commercial films
are being produced and released by the major studios.
2. Outside of the studios, most independent film companies
are struggling to produce pictures in any significant number.
Even if these firms do get the occasional film into production,
most of their pictures are not commercially viable given the
current demands of the worldwide audience. As a result, more
than 50% of TFDs peer film finance/production firms have
ceased competing with us in the past two years. This leaves only
a few independent financiers who have proven
abilities in development and cost-conscious
production to fill a genuine audience need.
Strategy
Until recently, TFDs strategy has been to finance, produce
and license film rights worldwide for star-driven pictures with
net budgets of $10 million to $45 million. For
U.S. distribution, that meant licensing to the major
studios. However, the Company now plans to take control of
U.S. marketing and distribution of its films, which will
allow the Company to significantly increase potential revenues.
This will allow the Company to enjoy significant additional
revenue from hit films. One illustration of the potential
savings comes from the distribution arrangement on Law
Abiding Citizen. TFD expects to pay Overture Films more than
$14 million in distribution fees to handle that one film in
the U.S. If TFD had been overseeing its own marketing and
distribution effort (at an annual overhead cost of approximately
$5 million), the Company could have paid for the annual
overhead costs and approximately $7 million in distribution
fees, and booked an additional $2 million in net receipts
from just this one film.
Theatrical: TFD intends to become one of what
management believes to be only six independent studios in
America with wide-release U.S. marketing and distribution
capabilities. Although independent studios compete directly with
the major studios by releasing commercial movies nationwide, the
independents generally are run with far lower overhead,
production and marketing budgets. TFD plans to build a
theatrical marketing and distribution operation to release six
to ten films per year. This slate would be dominated by films
that are initially released wide (i.e., on more than
1,000 screens in the U.S.), but would also include the
occasional picture that would start out in fewer theaters and
widen to more than 1,000 U.S. screens by its sixth week. In
December 2009, TFD reached an
48
agreement with The Weinstein Company (TWC) to
handle certain aspects of the U.S. distribution function
for its movies, while TFD will have all marketing functions
in-house. Under this agreement, working in conjunction with TWC,
TFD retains all final control, reduces its overhead requirements
and gains the additional leverage that results from the
combination of the two companies film slates. TWC will
handle the following administrative aspects for TFD: theatrical
distribution (including booking theaters and shipping film
prints), exhibitor relations (including placement of trailers
and posters in theaters) and collections, as well as executing
the paid media advertising buy. TFD will oversee all of those
functions and will solely handle creative advertising, media
planning, new media, research, publicity, promotion and field
operations. Management has successfully started such operations
previously, and as a result believes it will be able to achieve
major studio quality capabilities without the endemic
overstaffing and overpaying that characterizes major studio
operations. While the major studios have a staff of more than
100 in their theatrical release divisions, TFD plans to create a
theatrical release division composed of approximately
25 people. The extensive downsizing and numerous closures
by independent studios has created a large pool of available
talented professionals in these disciplines.
TFD intends to hold its P&A expenditures to much lower
levels than the major studios, whose marketing budgets, in the
experience of our management, are inflated, inefficient, and
often run as high as $50-75 million per film. By contrast,
independent studios generally spend $20 million to
$35 million to open films nationwide. TFDs marketing
budgets in virtually all cases are expected to be in this
moderate range. Mr. Gill has substantial experience
marketing motion pictures on moderate budgets.
Home Entertainment: TFD will not actively
participate in the distribution of its films to the home
entertainment market (including home video, DVD, Blu-Ray, VOD,
and mobile/digital distribution). Rather, home entertainment
distribution will be outsourced to a leading video distribution
company due to their existing relationships and economies of
scale. TFD has reached an agreement with Twentieth Century Fox
and is currently documenting the deal.
Pay Television: TFD has entered into an
agreement with TWC for our films to be distributed through
TWCs pay television service, which is currently Showtime,
for which we will receive a license fee that is a percentage of
U.S. theatrical revenues. This is a particularly noteworthy
accomplishment, as U.S. pay television agreements are
generally very difficult for independent companies to secure.
International: Historically, TFD licensed its
films to individual territories outside of the U.S. through
an in-house sales operation. In October 2008, TFD signed an
output agreement with the leading Canadian distributor, Alliance
Films (Alliance). In October 2009, the Company
reached out to an individual whom management believes to be one
of the most experienced independent film sales agents in the
world David Glasser, who is now employed by TWC.
Under this new international sales agency agreement with TWC,
TFD retains control of business affairs and collections, reduces
its in-house overhead, and gains an exceptional sales team.
Management believes this improved sales capability will
compensate for the third-party sales fees on each movie and
improve the chances of achieving or even exceeding 80% coverage
of each films net budget (i.e., the gross budget less
subsidies and TFD producer and overhead fees) from international
sales even in a challenging market, where sales values have
dropped by approximately 20% in the last year. International
pricing may rebound as the world economy recovers and the glut
of independent American films turns to a shortage. In that case,
management believes TFD would be in an excellent position to
profit from such a recovery.
Production: The Film Department plans to
produce four moderate-cost, high-quality, star-driven films
annually based on its slate of 15 projects. The number of
pictures is driven by managements experience in balancing
a sufficient number of films to achieve a portfolio effect with
a modest enough slate to assure maintenance of cost and quality
control. (The Companys portfolio approach, achieved
through a target of 20 productions over the next five years of
operations, is combined with a risk-management discipline
intended to reduce downside exposure on each individual picture.)
Management plans to allocate pictures in its annual slate of
four productions as follows: two in the $15
$30 million range (generally love stories or romantic
comedies) and two in the $30 - $45 million range (generally
action movies or thrillers). To ensure that the Company takes
the most financially conservative approach, its models assume
that each film is fully capitalized to include 1) the
direct cost of the movie; 2) bond, finance costs and
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contingency; 3) overhead and producer fees (payable to
TFD); 4) residuals, which are payable during the windows
for video and television distribution internationally (i.e.,
18 months to four years after the start of principal
photography); and 5) profit participations.
TFD manages the pre-production, filming, and post-production of
its films. During pre-production, the Company selects a filming
location, negotiates government incentives and contracts with
the cast, director and other independent contractors (production
staff, film crew, sound crew, etc.). During filming, the Company
monitors the filming schedule and budget and drives on-time
completion of the film while maintaining the films
artistic integrity. During post-production, TFD oversees the
work of independent contractors in editing and refining the
film, including the addition of visual effects and music.
In return for these services, the Company charges two fees in
the budget of each film: a producer fee that is 2.5% of the
budget and a 7.5% overhead fee, which must be paid to TFD before
any profit participations are paid (except first-dollar gross
paid to movie stars, if any). Additionally, development expenses
on each project (i.e., payments for rights to literary material
or to screenwriters to adapt or improve that material), are
repaid to the Company out of each films budget at 150% of
cost.
In the area of acquisitions (i.e., films that TFD does not
produce but instead acquires for U.S. distribution),
management believes the market has an acute need for a new
distributor. Although the number of independent
single-picture
financiers has dropped substantially, the strongest companies
have survived. However, many of these companies can no longer
rely on consistently selling their films to the major or
independent studios. Eight of the leading single-picture
financiers have been in discussion with TFD even
prior to the Company establishing
U.S. distribution about the possibility of TFD
distributing their films, either on a per-film basis or
multi-film output deal.
One example of the shortage of U.S. distribution options
for single-picture financiers came from the Toronto Film
Festival, which traditionally has been a hub for 5-10
significant acquisitions every year. At this years
festival in September 2009, out of the 273 feature films shown
in the festival, only one significant picture was acquired for
U.S. distribution. A number of star-driven pictures left
the festival without a U.S. distributor.
For all of the above reasons, management believes that the
Companys strategy of acquiring two to six pictures per
year to augment its own production slate has the potential to
provide a significant source of additional revenue.
Risk
Mitigation
Within the film asset class, The Film Department believes its
portfolio approach represents a more risk-averse opportunity
than traditional movie investments such as single-picture
investing or studio slate financing.
Unlike single-picture investing, TFD attempts to lower risk by
funding a portfolio of films. Compared to studio slate
investments in which a financier jointly funds a number of films
produced by a studio, investment in TFD offers four distinct and
favorable attributes: 1) an absence of distribution fees
that studios typically charge to their investors, which leads to
misalignment of the studios and the investors
respective financial interests; 2) far better production
and overhead cost control to maximize upside; 3) the
absence of selection bias in which a studio may have financial
incentives to exclude its top films from a co-financing slate;
and 4) a targeted 80% reduction in capital at risk for each
TFD production through a combination of government-funded
production rebates, subsidies or tax credits (which in
managements experience account can for
15-20% of a
films budget) and international sales made prior to the
release of each film.
TFDs slate comprises movies which span a mix of genres
that are intended to appeal to audiences worldwide on a broad
commercial basis (i.e., largely thrillers, love stories, action
movies and romantic comedies). The Companys portfolio
approach is combined with a risk-management discipline that
reduces downside exposure of each individual picture.
The central tenet of TFDs risk mitigation strategy is the
licensing of films internationally for a targeted minimum of 80%
of the net film budget (i.e., the gross budget less subsidies
and producer & overhead fees payable to TFD). The
Company also reduces risk associated with its projects by
greenlighting only moderate-cost films (with net budgets between
$10 million and $45 million), exercising rigorous cost
control over each budget. Lower total film budgets correlate
with lower break-even revenue requirements.
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In addition, we obtain completion guaranties on our productions,
which is a standard requirement of third-party lenders. Under
the typical bonding arrangements, the Company pays an up-front
fee (approximately 2% of a films production budget) to the
guarantor. The terms of the guaranty provide protection for the
Company against budget overages, generally totaling more than
10% of a films total budget (i.e., the amount budgeted in
each of our films contingency account). These terms allow
the guarantor to take over the production process under certain
conditions, including if the project runs substantially over
budget or behind schedule. We expect to obtain completion
guaranties on our future projects, and these costs are included
in our film project budgets.
Film
Selection
In the independent film industry, it is managements
experience that successful picture selection begins
with and is heavily dependent on
screenplay quality and marketability. Ironically, the high
quality of our scripts has a very direct influence on keeping
costs down. We believe that the most consistent way to attract
recognizable directors and stars to moderate-cost projects is to
deliver a script of significantly higher quality than the
customary major studio projects. Our key executives have proven
their ability to do this repeatedly.
The post-crisis drop in the production and release of films has
been mirrored by significant cuts in development budgets at the
major studios. The result is that more commercial projects are
available to independent studios, and at lower prices.
In some cases, scripts come to The Film Department that we
believe are strong enough to package with talent immediately. In
other cases, screenplays may need a polish or rewrite, which
must be accomplished prior to talent packaging. The sources for
this type of material are:
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Talent agencies, which are the primary brokers of scripts and
packaged films.
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Independent producers with successful track records but without
access to financing. Five to ten years ago, nearly all of these
producers had first-look deals at studios. But in recent years,
in an effort to cut costs, the studios have shed most of these
deals, with the notable exception of agreements with producers
of tentpole movies. As a result, producers of quality films now
often seek out independent financiers as their first choice to
get their movies made.
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Writers, directors and actors who control projects.
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Studios which, due to increased financial pressures from
corporate parents, are willing to give third-party financiers a
low-cost option to purchase an inactive project (to redevelop,
package and produce at low cost).
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At the same time, to help insure that the Company has a steady
supply of top-quality films, it is also drawing on internally
developed projects. TFD believes that very few of its
competitors have the expertise or funding for this endeavor. The
result is that the Companys active, low-cost development
slate has proved to be a significant competitive advantage.
With this development capability notwithstanding the
significant delays caused by the writers strike in the
Companys first year management believes that
TFD has been able to stand out from its competitors, get more
projects in front of A-list talent, and ultimately is well
positioned to generate the flow of star-driven productions
contemplated in its business plan going forward.
Talent
and Packaging
With Law Abiding Citizen and The Rebound, the
Companys principals demonstrated an ability to attract
strong directors and stars to their projects at a lower price.
The Film Department follows the financial precedents that
management established in the past keeping up-front
fees low and being careful not to give away too much of the back
end (i.e., contingent compensation).
We believe talent is eager to participate in moderate-cost,
high-quality pictures for several reasons:
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Stars are no longer punished by the major studios (in terms of
their big budget movie fees) for making an independent film,
which normally entails a lower fee for the actor; star salary
pricing is now widely accepted as a two-tier system.
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Actors who make an independent film are often rewarded with
career resurgence or at least added prestige.
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Actors want to perform in roles that stretch and satisfy them.
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The major studios have cut back on production of mid-budget
films (choosing instead to focus on their tentpole films with
budgets of $100 million or more). As a result, there are
not enough big-budget movies getting made to keep all of the
significant actors working for full fees at any given time. It
is also worth noting that more and more of the major studio
tentpole movies are predicated on a proven brand, not a movie
star. This makes many more actors a great deal more willing and
available to perform in independent films, and generally at
lower rates for comparable films than when the Company began
operations in 2007.
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TFD takes an active and expert role in overseeing
day-to-day
production operations, assuring talent agents that their clients
(actors and directors) are in safe hands on each film set. Many
of the Companys competitors do not do this. As a result,
we believe that agents are even more favorably inclined toward
placing their clients in TFD pictures (notable recent examples
of this at TFD include Jamie Foxx, Gerard Butler, Catherine
Zeta-Jones, Kate Hudson and Keira Knightley).
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Government
Economic Incentives
Many states have implemented incentive programs designed to
attract film production to their state as a means of economic
development, and TFD views these incentives as an important tool
in minimizing production costs. Government incentives typically
take the form of sales tax refunds, transferable tax credits,
refundable tax credits, direct subsidies or cash rebates, which
are calculated based on the amount of money spent in the
particular state in connection with the production. Some states
also allow state owned facilities to be used as shooting
locations at no charge. Each state determines the regulations
that must be complied with, as well as the conditions that must
be satisfied, in order for a production to qualify for the
rebate.
It should be noted, however, that several states have eliminated
or scaled back their incentives in the last year. Among those
are New York, Massachusetts and Iowa. Notwithstanding this, many
other states continue to offer incentives, among them Louisiana,
where TFD plans to film Earthbound. Internationally,
government incentives are available in a large number of
countries. However, the benefit of those incentives must be
weighed against the cost of shooting in those locations, as well
as the value of their currencies against the U.S. dollar.
The Company has been successful in obtaining significant
government incentives for both of its completed films. By
shooting the film Law Abiding Citizen primarily in
Philadelphia, Pennsylvania on a gross budget of approximately
$52 million, the Company was able to obtain a transferable
tax credit in the gross amount of $8.65 million. In
situations where the subsidy is a transferable tax credit, the
credit often can be sold to a person or entity with state tax
liability, with the transferor receiving a cash payment in an
amount less than the gross amount of the credit. In the case of
the Pennsylvania credit relating to the production of Law
Abiding Citizen, the Company was able to transfer the credit
to a third party in exchange for a net cash payment of
$7.68 million or 89% of the gross amount of the credit. In
return for shooting The Rebound in New York City on a
gross budget of approximately $21 million, the Company
received cash rebates of $3.57 million from New York State
and $0.57 million from New York City.
Greenlighting
Productions
In the motion picture industry, greenlighting refers
to the process by which capital commitments for individual film
projects are considered by studios. This process is central to
TFDs risk mitigation strategy.
The Companys Greenlight Committee currently consists of
Mark Gill, Neil Sacker, Robert Katz (the Companys
President of Production) and Bernd Stephan (the Companys
Chief Financial Officer). The Greenlight Committees
initial review of a project consists of an analysis of three key
economic factors:
1. International Value: The estimated
aggregate value of a films international distribution
rights is the single most significant variable in determining
whether TFD will produce a particular movie. The films
screenplay is presented to key international distributors to
gauge its chances of commercial success within the
distributors territory. Distributors are also asked to
suggest preferred actors for the lead roles, and to estimate the
licensing fee they would be willing to pay for the movie given
their suggested casting.
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2. Production Budget: TFD management
determines a production budget which leverages TFDs
economies of scale with respect to such items as film stock,
equipment, post-production facilities, lab work, and bond fees.
3. Economic Incentives: TFD management
also analyzes the availability of government economic incentives
(including tax credits, subsidies, rebates and reduced labor
costs) for production in various locales. Managements
experience is that these incentives generally reduce a
films budget by
15-20%.
In order for a proposed project to be greenlighted, it must
satisfy each of the following criteria:
1. Estimates for international licenses must cover 80% of
the proposed gross budget less subsidies and TFD producer and
overhead fees.
2. Estimates of international license fees must be analyzed
and approved by a third-party, buy-side expert on international
distribution. The Company currently engages Darius Kapfer, who
we believe to be one of the top representatives of international
film buyers.
3. The minimum expected North American returns must be at
least 20% of the net production budget (i.e., the gross budget
less subsidies).
4. A thoroughly researched and detailed budget must be
complete and total no more than $45 million (including
direct cost, bond, contingency, and financing fees net of
subsidies and rebates).
5. An option or ownership interest in the script and
underlying rights has been obtained.
6. The script must be complete (with allowance for minor
production polishing).
If the project satisfies all of the criteria, the Company will
officially greenlight the film and confirm a start date, move
forward with production financing, and proceed to oversee
production of the film. If the film does not meet all of the
greenlight criteria but management nonetheless would like to
greenlight the project, it must receive an affirmative vote from
the majority of its Board of Directors.
In evaluating a particular project, TFD management also
considers the possibility of additional revenue streams,
including: (1) overages beyond the applicable international
license fee that accrue at fairly significant levels on a hit
film, (2) completion of the film under budget,
(3) publishing of music originally written for the film,
(4) merchandising and licensing, and (5) product
placement within the films. However, these potential sources of
revenue are considered to be highly unpredictable and are not
given significant weight in the Greenlight Committees
final decision.
To date, international sales on the first film the Company
greenlighted, The Rebound, total approximately
$15.5 million, which is 90.6% of the films
$17.1 million net budget. Additional revenue may become due
to TFD if the film performs well in selected territories around
the world; international distributors are contractually obliged
to pay TFD overages (i.e., payments above the initial minimum
license fee) in the event that film performs particularly well
in their territory. Finally, revenue from the U.S. release
of the picture will not be realized until the film is released
by TFD, which is currently anticipated to be in Summer 2010.
TFDs second greenlighted film, Law Abiding Citizen,
was produced for a net budget of approximately $45 million
($52 million gross budget less subsidies and
TFD producer and overhead fees). Based on the North
American box office of $73 million, management expects
Law Abiding Citizen to return to TFD approximately
$30 million from U.S. distribution of the film (of
which $7.6 million of box office revenue has been received
as of January 5, 2010). Many international sales on this
picture were concluded at or above our estimates prior to the
film being greenlighted in summer 2008 (and perhaps more
importantly, prior to the credit crisis and global recession).
Since that time, most international distributors have been
impacted and the minimum guarantees available in most
territories have dropped significantly. As a result, TFD has
been unable to license four territories at levels commensurate
with its greenlight estimates. As a consequence, international
license fees are expected to be approximately $27 million
against a greenlight target of $35.5 million. If the film
performs as well internationally as in the U.S., management
believes the Company will receive significant additional revenue
from overages that could help substantially close this gap.
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Going forward, its worth noting that the Company has
adjusted its production budgets to reflect the new pricing in
the international market. Fortunately, talent pricing has
dropped significantly in the crisis as well. As a result, on its
first post-crisis film, Earthbound, management was able
to negotiate talent and other costs to reduce the films
net budget from $24 million to $17.1 million, which
conforms with the new international sales estimates generated in
the post-crisis market.
Greenlighting
Acquisitions
In addition to the Companys four annual productions, TFD
will need to acquire several films financed by third parties for
North American distribution each year to fill out its release
schedule at the targeted 6-10 films per year. This process is
far simpler than film production. In this case, the greenlight
committee will be required to approve a financial model on each
project which shows minimum expected North American returns of
at least 20% of the net expenditure.
Production
History and Future Slate
TFDs current film slate includes approximately 15 projects
as part of its plan to produce approximately 20 films over the
next five years. Among those projects are:
Law Abiding Citizen: Starring Gerard Butler
and Jamie Foxx, and directed by F. Gary Gray (The Italian
Job). A thriller about a psychopathic mastermind who
orchestrates a series of murders across the city of
Philadelphia all from inside his prison
cell and the prosecutor responsible for putting him
away, who is the only one who can stop him. The film has earned
$73 million at the North American box office and more than
$115 million worldwide to date. Based on this initial
result, managements experience indicates that the film
will be commercially successful not only in theaters, but also
in home entertainment and on television.
The Rebound: Starring Catherine Zeta-Jones and
Justin Bartha (The Hangover) and directed by Bart
Freundlich. A romantic comedy about a
25-year-old
man and his new neighbor, an older, sexy, newly single mother
who catches more than his eye. TFD plans to release this film in
the Summer of 2010.
Earthbound: A romantic comedy starring Kate
Hudson and Gael Garcia Bernal about finding real love in the
most unpredictable place, at the most inconvenient time.
Production of this film began on January 18, 2010 in New
Orleans, Louisiana.
The Peak: A
3-D
supernatural thriller set in the Himalayan mountains. To be
directed by Simon Crane (Mr. and Mrs. Smith).
The Beautiful and the Damned: Keira Knightley
stars in the untold true (love) story of Zelda and
Scott Fitzgerald, the Jazz Age icons known for living
large, soaring high, and crashing hard. Directed by John Curran
(The Painted Veil).
The Pre-Nup: A romantic comedy about a middle
class guy on the verge of his first big deal, who has just
proposed to the woman of his dreams. Before he gets married, all
his friends say, he should protect his newfound assets. And
thats what prompts him to offer a pre-nuptial agreement to
a woman who turns out to be the daughter of a billionaire.
Fireworks ensue. Written and directed by Jordan Roberts
(March of the Penguins).
Law Abiding Citizen 2: TFD has begun the
development process on a sequel to its hit film, working with
the same writer, director and producers with the goal of
creating a worthy successor to the original film.
Murder, Inc.: A thriller about two estranged
brothers whose parents were brutally murdered when they were
young. Bill Oakley is now an FBI agent who needs someone to
infiltrate the infamous Jewish mafia known as Murder
Incorporated. His solution: get his long-lost brother out of
jail and into the mob under cover, and in the process take out
one of the crime syndicates leaders, the man who killed
their parents many years before. From Steve Golin, the Academy
Award-nominated producer of Babel.
Brothers In Arms: An action movie. The true
story set at the end of World War II about a determined
young captain chosen to lead a small platoon on an impossibly
dangerous mission of utmost secrecy, all to save one man:
General George Pattons own
son-in-law.
TFD has an agreement to tie into the hit video game franchise of
the same name.
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Agent Fabulous!: From the producers of
Austin Powers comes a spy thriller with a twist: this
secret agent is unflappable, unstoppable and hilariously,
unrelentingly gay.
Galahad: A revisionist take on the Arthurian
legend. In this retelling of the classic action-adventure story,
Camelot has gone to hell. King Arthur is an aging coward whose
young, ambitious Queen Guinevere murders him and
blames the crime on Sir Galahad. Now its up to Galahad to
escape near-certain death, vanquish the forces of evil, and
return Camelot to its rightful glory.
Food of Love: This is Cyrano de Bergerac
with food, set in Italy. This story is a love triangle
between a handsome Italian playboy, a beautiful young American
woman who comes to visit for a year, and a great chef, who is
immediately in love but at a loss for words.
True Memoirs of an International Assassin: An
action-comedy about an ordinary guy who leads the dull life of
an accountant by day. But at night, hes writing a novel
about the life he wishes he had: the tale of a brilliant,
fearless, glamorous assassin. When a publisher buys his book, he
quits his job. But when the book comes out, its called
The True Memoirs of An International Assassin. And the
whole world thinks he really is his alter ego. So naturally,
when he goes on vacation to Belize, hes met by a drug lord
with several trunkloads of weapons, $2 million in cash, and
an offer he cant refuse to kill the prime
minister. Theres no easy way out now, so hell just
have to stand up and become the hero hes always written
about but never dreamed hed be.
The Perfect Man: A remake of an Italian film.
Its a romantic comedy about three young adults
two women and one man who have been friends since
childhood. When the man gets engaged to one of the women, the
other woman plots to break up the union by hiring a male model
and training him to become a perfect match for her girlfriend.
And of course, nothing goes according to plan. Directed by Peter
Chelsom (Shall We Dance).
Good People: A thriller about a couple in
their 30s who got into severe debt for all the right reasons.
And then they find the tenant in their downstairs apartment has
passed away and left $400,000 in cash. All they have to do is
take the money, and all of their problems will be solved. So
they do, and thats when very bad things start happening to
good people. Tobey Maguire is attached.
The Company may revise the development, production
and/or
release schedule of any or all of its projects and
may expand or reduce the slate at any time.
Furthermore, there can be no assurance that any project will be
greenlighted, produced or released, or that completion will be
achieved on budget or on schedule, or that the creative talent
listed above will necessarily be involved.
In the film industry, the term attached is used to
indicate an actors strong interest in a film project.
While a star attachment often leads to a contractual agreement
to play a role in a film, it is not a binding or enforceable
contract in any form.
Intellectual
Property
We are currently using the trademark THE FILM
DEPARTMENT and corresponding F logo as shown
on the cover of this prospectus in connection with films
distributed domestically and licensed internationally. At the
Companys inception, we filed applications with the United
States Patent and Trademark Office for registration of the
trademark and logo. The applications were rejected on the basis
that the marks were not in use because none of our motion
pictures had yet been released commercially in the United
States. Following the release of Law Abiding Citizen to
the U.S. market on October 16, 2009, we filed a
Statement of Use Authorization for both the F logo
and the trade name. We expect to receive confirmations from the
United States Patent and Trademark Office of registration of our
trademark and logo not later than April 1, 2010. We regard
our trademark and logo as valuable assets and believe that our
trademark and logo are important factors in marketing our
products.
We also hold various domain names relating to our trademark and
motion pictures including, but not limited to,
filmdept.com,
the-rebound.com,
and lawabidingcitizenmovie.com.
The Company establishes and maintains intellectual property
rights in the films which it produces. Chain of
title generally refers to the legal documentation that
evidences the transfer of a films exhibition rights. The
value of a film comes from the ability of the copyright holder
to sell or license to others the right to exhibit the film.
Accordingly, having
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an appropriately documented chain of title that vests the
Company with title to these rights is critical to the
Companys ability to generate revenue from the exhibition
of its films. The Company has a rigorous due diligence process
to insure that its chain of title on each movie is complete. The
documentation that results from this process must also pass
inspection by both the senior debt lender on each film as well
as the completion guaranty company.
Copyright protection is a significant problem in the motion
picture distribution industry because of the relative ease in
which unauthorized duplication, dissemination and exploitation
of motion pictures may occur. In the past, the lax attitudes of
the governments of certain countries toward motion picture
piracy caused us to heavily discount the distribution value of
these markets. Video and online piracy continues to be prevalent
across the entertainment industry. We have taken legal actions
to enforce copyright protection when necessary or appropriate.
Competition
Motion picture production and distribution are highly
competitive businesses. We face competition from companies
within the entertainment business and from alternate forms of
leisure entertainment including television, video games,
internet, and other cultural activities as well as from sporting
events, outdoor activities and travel. We compete with the major
studios and independent studios and production companies for the
acquisition of literary and film properties, the services of
actors, directors, producers and other creative and technical
personnel, all of which are essential to the success of our
business. The success of any of our motion pictures is dependent
not only on the quality and audience acceptance of a particular
film or program, but also on the quality and acceptance of other
competing motion pictures and other leisure time activities
available to the marketplace at or near the same time.
Employees
As of December 31, 2009, we had 23 employees, all of which
were full-time.
One of our employees is a member of the Directors Guild of
America (DGA). Although none of the Companys
other employees are represented by labor unions, many of the
independent contractors engaged by the Company are union
members. In order to engage these union members, certain of the
Companys subsidiaries have become signatories
with the unions, which means the subsidiary agrees to abide by
the terms of the unions guidelines with respect to matters
such as pay scales, benefits, payment schedules, screen credits
and other matters. The Company currently has subsidiaries that
are signatories with the DGA, the Writers Guild of America
(WGA), the Screen Actors Guild (SAG) and
the International Alliance of Theatrical and Stage Employees,
Moving Picture Technicians, Artists and Allied Crafts
(IATSE). In addition, the Company also regularly
engages contractors that are members of the American Federation
of Musicians (AFM) and other unions.
Properties
The Company leases the space for its principal offices in West
Hollywood, California under a non-cancelable operating lease
which commenced in June of 2007 and expires in June of 2010.
Aggregate annual lease payments for this facility are
approximately $0.34 million. As of February 24, 2010,
payments remaining prior to expiration of this lease total
approximately $0.11 million.
56
MANAGEMENT
The Film Departments senior management currently consists
of Mark Gill, Neil Sacker and Robert Katz.
The principals have managed all aspects of the independent
motion picture business including: acquisition and selection of
projects, script development, packaging talent and negotiating
talent contracts, financial modeling and budgeting, production
financing, production and postproduction management, negotiation
and licensing of key international deals and securing additional
revenues from tax incentive and production rebate programs. All
four principals have hired and managed employees in fast-paced,
high-growth environments.
The following table sets forth information regarding the
executive officers and directors of The Film Department. The
subsequent paragraphs contain biographical data for each
executive officer and director.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with the Company
|
|
Mark Gill
|
|
|
47
|
|
|
Chairman, Chief Executive Officer and Director
|
Neil Sacker
|
|
|
48
|
|
|
Vice Chairman, Chief Operating Officer and Director
|
Robert Katz
|
|
|
46
|
|
|
President of Production
|
Bernd Stephan
|
|
|
38
|
|
|
Chief Financial Officer
|
Daniel Stutz
|
|
|
38
|
|
|
Executive Vice President, Business and Legal Affairs
|
Bert Hayenga
|
|
|
45
|
|
|
Director
|
David Larcher
|
|
|
48
|
|
|
Director
|
Philip G. Hubbard
|
|
|
58
|
|
|
Director
|
Robert Semple
|
|
|
55
|
|
|
Director
|
Background
of Directors and Executive Officers
Mark Gill, Chief Executive Officer, Chairman and
Director. Mark Gill has been the Chief Executive
Officer of The Film Department from its inception, and currently
serves as Chairman and CEO of the Company. Prior to his tenure
at The Film Department, Gill was the founder and president of
Warner Independent Pictures (WIP) from 2003 to 2006.
In that position, he oversaw the development, production,
marketing and distribution of WIPs films including
March of the Penguins and Good Night, and Good
Luck. Gill has previously served as president of Stratus
Films from 2002 to 2003 (where he worked on such pictures as
The Painted Veil and Matador), President of
Miramax Films/LA (where he worked from 1994 to 2002 on such
films as The English Patient, Shakespeare in Love,
The Talented Mr. Ripley, In the Bedroom,
Frida and Amelie), Senior Vice President of
marketing at Columbia/Tri-Star Pictures (where he worked from
1988 to 1994), and as a reporter for the Los Angeles Times from
1983 to 1984 and Newsweek magazine
(1984-1985).
Neil Sacker, Chief Operating Officer, Vice Chairman and
Director. Neil Sacker served as the President and
Chief Operating Officer of The Film Department from its
inception until December 2, 2009, the date of the HWMP
Investment. Sacker currently serves as Vice Chairman and Chief
Operating Officer of the Company and will work closely with Gill
in all areas, with
day-to-day
responsibility for international, finance, production and
business and legal affairs. Prior to joining The Film
Department, Sacker was Chief Operating Officer of the
Yari Film Group 2003 to 2006), where he worked on such
films as Crash and The Illusionist. In his
four-year tenure at the Yari Film Group, Sacker was
responsible for that companys business and legal affairs,
finance and operations. Sacker previously served as head of the
business and legal affairs department of Miramax Films (from
1995 to 1998) and senior theatrical counsel for Warner
Bros. Pictures (from 1991 to 1994). Sacker is a graduate of Yale
Law School.
Robert Katz, President of Production. Robert
Katz is the President of Production for The Film Department, a
position he has held since the Companys inception. Before
joining The Film Department, Katz was Executive Vice President
of Production for the Yari Film Group from 2003 to 2006, in
which capacity he oversaw all greenlighting and production
operations. Prior to his tenure at the Yari Film Group, Katz
worked in senior production crew capacities on such hit films as
Academy Award nominee Seabiscuit and One Hour
Photo. During his career, Katz has served as a producer,
executive producer, co-producer, associate producer, production
manager and location manager on films throughout the world.
57
Bernd Stephan, Chief Financial Officer. Bernd
Stephan joined The Film Department at its inception as Chief
Financial Officer. He came to the Company from the Yari Film
Group, where he most recently held the position of Senior Vice
President and Controller (from 2004 to 2007). During his tenure
at the Yari Film Group, he developed an expertise in complex
financial structures by virtue of his involvement with such
films as The Illusionist, The Matador and The
Hoax. From 2002 to 2003, Stephan was Vice President of
Finance for Splendid Pictures (a subsidiary of a publicly traded
company). Prior to that, he worked in New York for the boutique
international tax consulting firm Augustin Partners (from 2000
to 2002).
Daniel Stutz, Executive Vice President, Business and Legal
Affairs. Dan Stutz joined The Film Department at
its inception as Executive Vice President of Business and Legal
Affairs. From 2003 to 2007, Stutz worked at the Yari Film
Group, most recently as Senior Vice President of Business and
Legal Affairs, handling such pictures as Crash, The
Illusionist, First Snow, The Matador and
Prime. Prior to that, he spent four years as an associate
at Weissmann, Wolff, Bergman, Coleman, Grodin & Evall
in Beverly Hills (from 1998 to 2003). Before that he clerked for
the Honorable Dickran Tevrizian, in the United States District
Court in Los Angeles. He is a graduate of UCLA and the
University of Michigan Law School.
Bert Hayenga, Director. Bert Hayenga is an
entrepreneur with 25 years of experience in strategic
planning, business development, project and production
management across a broad range of industries. He is currently
CEO of First Cup dba Dunkin Donuts (Arizona) and Principal
of Camelback Realty Group, which manages thousands of acres in
Arizona land. Since 1990, Mr. Hayenga has served as Founder
and Chief Operating Officer of Creative Leather Furniture. From
1987 to 2006, he served as Co-Founder of Creative Communications
with five Arizona offices. He serves on the board of directors
of the Phoenix Rescue Mission, Family Matters, Pinnacle Forum,
Vantage Mobility International and formerly served as chairman
of the board of directors of Grand Canyon University (a
NASDAQ-listed public reporting company).
Philip G. Hubbard, Director. Philip G. Hubbard
has served as the portfolio manager of Solidian Fund, L.P. since
its inception in 2001. He holds an MBA in Accounting from
Northwestern University, became a Certified Public Accountant in
1975 and began his career in public accounting with Touche
Ross & Co
(1974-1978).
He has since served as Senior Vice President of the New York
Futures Clearing Corporation, a subsidiary of the New York Stock
Exchange (1980 to 1981), as Senior Vice President of Donaldson,
Lufkin, Jenrette Futures, and as President of Chicago
Research & Trading Group from 1984 to 1995 (one of the
worlds largest proprietary options trading firms). Hubbard
has served on numerous industry and bank boards during his
career. He is currently on the board of directors of Harris
Bank-Winnetka and Wheaton College.
David Larcher, Director. David Larcher is a
founding principal and has been Executive Vice President of
Vestar since 1989. He has been responsible for some of the
largest retail and entertainment developments in the Southwest.
Vestars projects are open air destinations featuring
department stores, lifestyle retailers and multi-plex theatres.
Mr. Larcher is responsible for its development activities,
as well as acting as the primary contact for Vestars
retail relationships in Arizona and California. Vestar is one of
the largest privately held commercial development companies in
the United States, developing, owning and managing over
20 million square feet of shopping centers in the western
United States.
Robert Semple, Director. Robert Semple is a
certified public accountant licensed to practice in the state of
Arizona and is a member of the Arizona Society of Certified
Public Accountants and the American Institute of Certified
Public Accountants. Mr. Semple has approximately thirty
years of public and private industry accounting and auditing
experience. Mr. Semple joined with William Cooper in 1982
as a founding partner of Semple & Cooper, Certified
Public Accountants. He has been the managing partner of the
certified public accounting firm of Semple, Marchal &
Cooper, LLP for over twenty seven years. Semple,
Marchal & Cooper, LLP is registered with the Public
Company Accounting Oversight Board (PCAOB). Mr. Semple has
extensive experience in providing audit and accounting related
services to both private and public companies in a number of
industries.
58
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
|
|
Name and Principal
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Mark Gill
|
|
|
2009
|
|
|
|
858,622
|
|
|
|
|
|
|
|
215,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,073,814
|
|
Chief Executive Officer
|
|
|
2008
|
|
|
|
780,455
|
|
|
|
|
|
|
|
194,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,080
|
|
|
|
|
2007
|
|
|
|
384,375
|
|
|
|
|
|
|
|
194,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
579,000
|
|
Neil Sacker
|
|
|
2009
|
|
|
|
574,356
|
|
|
|
|
|
|
|
148,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722,514
|
|
President and Chief
|
|
|
2008
|
|
|
|
520,303
|
|
|
|
|
|
|
|
132,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
652,928
|
|
Operating Officer
|
|
|
2007
|
|
|
|
256,250
|
|
|
|
|
|
|
|
132,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388,875
|
|
Robert Katz
|
|
|
2009
|
|
|
|
463,669
|
|
|
|
|
|
|
|
109,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
573,552
|
|
President of Production
|
|
|
2008
|
|
|
|
416,242
|
|
|
|
|
|
|
|
132,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
548,992
|
|
|
|
|
2007
|
|
|
|
205,000
|
|
|
|
|
|
|
|
66,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,750
|
|
Bernd Stephan
|
|
|
2009
|
|
|
|
261,252
|
|
|
|
12,150
|
|
|
|
11,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284,802
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
|
232,937
|
|
|
|
11,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,187
|
|
|
|
|
2007
|
|
|
|
99,219
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,219
|
|
Daniel Stutz
|
|
|
2009
|
|
|
|
281,356
|
|
|
|
13,500
|
|
|
|
5,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,556
|
|
EVP, Business and Legal Affairs
|
|
|
2008
|
|
|
|
259,166
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,666
|
|
|
|
|
2007
|
|
|
|
113,085
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,085
|
|
Employment Agreements Gill, Sacker, and
Katz. On December 1, 2009, TFD entered into
written executive services agreements with Pain Cuit, Inc. to
engage the services of Mark Gill (Chief Executive Officer),
Sacker Consultants, Inc. to engage the services of Neil Sacker
(President and Chief Operating Officer) and Chateau Holdings,
Inc. to engage the services of Robert Katz, all as independent
contractors. The contracts for Mr. Gill and Mr. Sacker
continue in effect until June 25, 2013 or, if the Company
closes this Offering or a private offering meeting certain
requirements prior to April 1, 2010, until June 25,
2015. The contract for Mr. Katz continues in effect until
July 31, 2011 or, if the Company closes this Offering or a
private offering meeting certain requirements prior to
April 1, 2010, until July 31, 2013. Following the
expiration of their respective contract periods, any engagement
by TFD of Mr. Gills or Mr. Sackers
services will be at will.
Annual base compensation is $810,000 for Mr. Gill. Annual
base compensation for Mr. Sacker is $540,000. Annual base
compensation for Mr. Katz is $432,000, an amount which, if
the Company closes this Offering or a private offering meeting
certain requirements prior to April 1, 2010, is increased
to (i) $482,000 during the period commending August 1,
2011 and ending July 31, 2012 and (ii) $532,000 during
the period commencing August 1, 2012 and ending
July 31, 2013. Increases in the annual base compensation
for Mr. Gill and Mr. Sacker can be made in the sole
discretion of the compensation committee of the Board. Increases
in the annual base compensation for Mr. Katz can be made in
the sole discretion of Chief Executive Officer and
President & Chief Operating Officer. Mr. Gill and
Mr. Sacker are eligible for bonus compensation in the sole
discretion of the Board. Mr. Katz is eligible for bonus
compensation in the sole discretion of the compensation
committee of the Board.
On June 25, 2007, Mr. Gill and Mr. Sacker
received a grant of Class A and F-1 units in The Film
Department Holdings LLC, which units were subsequently redeemed
in anticipation of the Corporate Conversion. As consideration
for the redemption of the Class A and
Class F-1 units,
Mr. Gill and Mr. Sacker were awarded Class H
units, which will be converted to common stock pursuant to the
Corporate Conversion. Subsequent to the Corporate Conversion,
Gill, Sacker and Katz will be eligible to receive equity
incentive awards under the Equity Incentive Plan.
All three executives are eligible to participate in any group
life insurance, hospitalization, medical, health and accident,
dental, disability, or similar plan or program generally made
available by TFD to its most senior executives.
Messrs. Gill, Sacker and Katz are also eligible to
participate in all savings, retirement and similar plans
provided by the Company.
If TFD terminates any of these executives other than for cause,
TFD is obligated under the executive services agreements to pay
such executive a severance payment equal to the lesser of
twenty-four months salary or the remainder of the their
engagement term, to be paid pursuant to TFDs then-current
payroll practices. All benefits would continue during the
severance period.
59
All three agreements contain non-competition clauses in effect
during the periods of employment and any severance period, as
well as non-solicitation and non-interference provisions in
effect during the period of employment and the two years
following termination of employment. Both executives recognize
in the respective agreements that any intellectual property
created by them during the course of their employment is the
property of TFD.
Employment Agreements Stutz and
Stephan. In July 2007, TFD entered into a written
employment agreement (subsequently amended on four different
occasions, most recently September 1, 2009) with
Daniel Stutz (Executive Vice President of Business and Legal
Affairs). Also in July 2007, TFD entered into a written
employment agreement (subsequently amended on five different
occasions, most recently February 8, 2010) with Bernd
Stephan (Chief Financial Officer). Mr. Stutzs
contract continues in effect until July 16, 2011 and
Mr. Stephans contract continues in effect until
January 31, 2012.
Annual base compensation for Mr. Stutz is $270,000.
Increases in Mr. Stutzs annual compensation or bonus
payments can be made at the discretion of the Board.
Annual base compensation for Mr. Stephan is $243,000. In
the event that this Offering or other financing transaction
sufficient to enable the Company to launch and operate a
U.S. theatrical distribution company closes,
Mr. Stephans base compensation will increase to
$325,000 and he will receive guaranteed annual deferred
compensation of $50,000. Mr. Stephan is eligible for
bonuses as determined by the compensation committee of the Board.
Upon execution of their respective contracts, Mr. Stutz and
Mr. Stephan received grants of Class A phantom units
in The Film Department Holdings LLC, which units were
subsequently redeemed in anticipation of the Corporate
Conversion. As consideration for the redemption of the
Class A phantom units, Mr. Stutz and Mr. Stephan
were awarded Class H phantom units, which will be converted
to common stock pursuant to the Corporate Conversion. Subsequent
to the Corporate Conversion, Stutz and Stephan will be eligible
to receive equity incentive awards under the Equity Incentive
Plan.
Both executives are eligible to participate in any group life
insurance, hospitalization, medical, health and accident,
dental, disability, or similar plan or program generally made
available by TFD to its most senior executives.
Messrs. Stutz and Stephan are also eligible to participate
in all savings, retirement and similar plans provided by the
Company.
If TFD terminates either executive other than for cause, TFD is
obligated under the executive services agreements to pay such
executive a severance payment equal to the lesser of twelve
months salary or the remainder of the their engagement term, to
be paid pursuant to TFDs then-current payroll practices.
All benefits would continue during the severance period.
Both agreements contain non-competition clauses in effect during
the periods of employment and any severance period, as well as
non-solicitation and non-interference provisions in effect
during the period of employment and the two years following
termination of employment. Both executives recognize in their
respective employment agreements that any intellectual property
created by them during the course of their employment is the
property of TFD.
No employment or executive services agreements for the
Companys executive officers are affected by any change of
control arrangement.
EQUITY
COMPENSATION PLAN INFORMATION
Equity
Incentive Plan
In connection with the Corporate Conversion, we plan to have our
Board, Compensation Committee and stockholders approve The Film
Department Equity Incentive Plan (the Equity Incentive
Plan). We have authorized and reserved a total of
[ ] shares
of our common stock for issuance under the Equity Incentive
Plan, and subsequent to the Corporate Conversion our executive
officers will be eligible to receive grants of incentive awards
under the Equity Incentive Plan. We will make appropriate
adjustments in the number of authorized shares and other
numerical limits in the Equity Incentive Plan and in outstanding
awards to prevent dilution or enlargement of participants
rights in the event of a stock split or other change in our
capital structure.
60
Shares subject to awards that expire or are cancelled or
forfeited will again become available for issuance under the
Equity Incentive Plan. The shares available will not be reduced
by awards settled in cash or by shares withheld to satisfy tax
withholding obligations. Upon the exercise of stock appreciation
rights or options exercised by means of a net exercise or by
tender of previously owned shares, only the net number of shares
issued will be deducted from the shares available under the
Equity Incentive Plan.
We may grant awards under the Equity Incentive Plan to our
employees, officers, directors, or consultants, or those of any
future parent or subsidiary corporation or other affiliated
entity. While we may grant incentive stock options only to
employees, we may grant nonstatutory stock options, stock
appreciation rights, restricted stock awards, restricted stock
unit awards, performance shares, performance units, and
cash-based awards or other stock-based awards to any eligible
participant.
Only members of the Board of Directors who are not employees at
the time of grant will be eligible to participate in the
non-employee director awards component of the Equity Incentive
Plan. The Board of Directors or the compensation committee will
set the amount and type of non-employee director awards to be
awarded on a periodic, non-discriminatory basis. Non-employee
director awards may be granted in the form of nonstatutory stock
options, stock appreciation rights, restricted stock awards and
restricted stock unit awards.
In the event of a change in control, as described in the Equity
Incentive Plan, the acquiring or successor entity may assume or
continue all or any awards outstanding under the Equity
Incentive Plan or substitute substantially equivalent awards.
Any awards that are not assumed or continued in connection with
a change in control or are not exercised or settled prior to the
change in control will terminate effective as of the time of the
change in control. The compensation committee may provide for
the acceleration of vesting of any or all outstanding awards
upon such terms and to such extent as it determines, except that
the vesting of all non-employee director awards will
automatically be accelerated in full. The Equity Incentive Plan
also authorizes the compensation committee, in its discretion
and without the consent of any participant, to cancel each or
any outstanding award denominated in shares upon a change in
control in exchange for a payment to the participant with
respect to each share subject to the cancelled award of an
amount equal to the excess of the consideration to be paid per
share of common stock in the change in control transaction over
the exercise price per share, if any, under the award.
In conjunction with adoption of the Equity Incentive Plan, our
Board of Directors has approved a comprehensive policy relating
to the granting of stock options, restricted stock awards and
other equity-based awards. Under this policy:
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|
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|
|
all stock option grants, restricted stock awards, and other
equity based awards, which we collectively refer to as
stock-based grants, must be approved by the compensation
committee;
|
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|
|
all stock-based grants will be approved at formal meetings
(including telephonic) of the compensation committee;
|
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|
|
the date for determining the exercise price and similar
measurements will be the date of the meeting (or a date shortly
after the meeting) or, in the case of an employee, director, or
consultant not yet hired, appointed, or retained, respectively,
the subsequent date of hire, appointment, or retention, as the
case may be;
|
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|
if our Board of Directors implements an annual stock-based
grant, the grant will be approved at a regularly scheduled
meeting of the compensation committee during the first part of
the year, but after the annual earnings release, if any. We
believe that coordinating any annual award grant after our
annual earnings release, if any, will generally result in this
grant being made at a time when the public is in possession of
all material information about us;
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|
the annual grant to executive officers and directors, if any,
will occur at the same time as the annual grant to other
employees;
|
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|
we will not intentionally grant stock-based awards before the
anticipated announcement of materially favorable news or
intentionally delay the grant of stock-based awards until after
the announcement of materially unfavorable news; and
|
61
|
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|
|
the compensation committee will approve stock-based grants only
for persons specifically identified at the meeting by management.
|
In connection with the initial public offering, we plan to issue
[ ]
fully vested and
[ ]
unvested stock options with an exercise price equal to the
initial public offering price, and
[ ]
fully vested and
[ ]
unvested shares of restricted stock, to employees and directors
under the Equity Incentive Plan.
OUTSTANDING
EQUITY AWARDS
|
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Stock Awards as of December 31, 2009(1)
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|
|
Equity Incentive
|
|
|
|
|
|
|
Equity Incentive
|
|
Plan Awards:
|
|
|
|
|
|
|
Plan Awards:
|
|
Market or
|
|
|
|
|
Market Value
|
|
Number of
|
|
Payout Value
|
|
|
Number of
|
|
of Shares
|
|
Unearned Shares,
|
|
of Unearned
|
|
|
Shares or Units
|
|
or Units
|
|
Units or
|
|
Shares, Units
|
|
|
of Stock That
|
|
of Stock
|
|
Other Rights
|
|
or Other Rights
|
|
|
Have Not
|
|
That Have
|
|
That Have
|
|
That Have
|
|
|
Vested
|
|
Not Vested
|
|
Not Vested
|
|
Not Vested
|
Name
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
Mark Gill
|
|
|
|
|
|
|
|
|
|
|
398,677
|
|
|
|
5,182,800
|
|
Neil Sacker
|
|
|
|
|
|
|
|
|
|
|
301,108
|
|
|
|
3,914,400
|
|
Robert Katz
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|
|
|
|
|
|
|
|
|
|
178,985
|
|
|
|
2,326,800
|
|
Bernd Stephan
|
|
|
|
|
|
|
|
|
|
|
46,523
|
|
|
|
604,800
|
|
Daniel Stutz
|
|
|
|
|
|
|
|
|
|
|
23,262
|
|
|
|
302,400
|
|
|
|
|
(1) |
|
All equity awards fully vest upon the closing of this Offering. |
Board
Composition and Election of Directors
There are no family relationships among any of our directors or
executive officers. Our certificate of incorporation and bylaws
provide that the number of directors will be fixed from time to
time pursuant to a resolution of our Board, but must consist of
not less than seven or more than eleven directors. Our Board of
Directors currently consists of six members, and there is one
vacancy on our Board of Directors.
Director
Independence
Under Rule 5605(b)(1) of the NASDAQ Marketplace Rules,
independent directors must comprise a majority of a listed
companys board of directors within one year of listing. In
addition, NASDAQ Marketplace Rules require that, subject to
specified exceptions, each member of a listed companys
audit, compensation and nominating and governance committees be
independent. Audit committee members must also satisfy the
independence criteria set forth in
Rule 10A-3
under the Securities Exchange Act of 1934, as amended. Under
NASDAQ Marketplace Rule 5605(a)(2), a director will only
qualify as an independent director if, in the
opinion of that companys board of directors, that person
does not have a relationship that would interfere with the
exercise of independent judgment in carrying out the
responsibilities of a director. In order to be considered to be
independent for purposes of
Rule 10A-3,
a member of an audit committee of a public company may not,
other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee:
1) accept, directly or indirectly, any consulting,
advisory, or other compensatory fee from the public company or
any of its subsidiaries; or 2) be an affiliated person of
the listed company or any of its subsidiaries.
In November of 2009, our Board of Directors undertook a review
of its composition, the composition of its committees and the
independence of each director. Based upon information requested
from and provided by each director concerning his or her
background, employment and affiliations, including family
relationships, our Board of Directors has determined that none
of Messrs. Larcher, Hayenga, Hubbard and Semple,
representing four of our six current directors, has a
relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director and that each of these directors is
independent as that term is defined under NASDAQ
Marketplace Rule 5605(a)(2). Our Board of Directors also
determined that Messrs. Semple, Hubbard and Larcher, who
comprise our audit committee, satisfy the independence standards
for those committees
62
established by applicable SEC rules and the NASDAQ Marketplace
Rules. In making this determination, our Board of Directors
considered the relationships that each non-employee director has
with our Company and all other facts and circumstances our Board
of Directors deemed relevant in determining their independence.
Director
Compensation
To date, we have not paid our directors any compensation for
their services in that capacity. We do reimburse our
non-employee directors for all reasonable expenses incurred by
them to attend board and committee meetings.
Following the consummation of this Offering, our non-employee
directors will receive annual cash compensation in the amount of
$5,000. Chairs of each of the Audit, Compensation and Nominating
Committees will receive additional cash compensation of $5,000
annually. We will continue to reimburse our non-employee
directors for all reasonable expenses incurred by them to attend
board and committee meetings.
Board
Committees
Audit
Committee
Upon the completion of this Offering, we expect to have an audit
committee, consisting of Messrs. Semple (Chair), Hubbard
and Larcher. All three members of the audit committee qualify as
independent directors under the applicable NASDAQ corporate
governance standards and the independence requirements of
Rule 10A-3
of the Exchange Act. Following this Offering, our Board will
determine which member of our audit committee qualifies as an
audit committee financial expert as such term is
defined in Item 407(d)(5) of
Regulation S-K.
The purpose of the audit committee will be to assist our Board
in overseeing and monitoring (i) the quality and integrity
of our financial statements, (ii) our compliance with legal
and regulatory requirements, (iii) our independent
registered public accounting firms qualifications and
independence, (iv) the performance of our internal audit
function and (v) the performance of our independent
registered public accounting firm.
Our Board will adopt a written charter for the audit committee
which will be available on our website upon the completion of
this Offering.
Compensation
Committee
Upon the completion of this Offering, we expect to have a
compensation committee, consisting of Messrs. Hayenga
(Chair), Hubbard and Semple. The purpose of the compensation
committee will be to assist our Board in discharging its
responsibilities relating to (i) setting our compensation
program and compensation of our executive officers and
directors, (ii) monitoring our incentive and equity-based
compensation plans and (iii) preparing the compensation
committee report required to be included in our proxy statement
under the rules and regulations of the SEC.
Our Board will adopt a written charter for the compensation
committee which will be available on our website upon the
completion of this Offering.
Nominating
Committee
Upon the completion of this Offering, we expect to have a
nominating committee, consisting of Messrs. Larcher
(Chair), Hayenga and Gill. The purpose of our nominating commit
tee will be to assist our Board in discharging its
responsibilities relating to (i) developing and
recommending criteria for selecting new directors and
(ii) screening and recommending to the Board individuals
qualified to become executive officers.
Our Board will adopt a written charter for the nominating
committee which will be available on our website upon completion
of this Offering.
Compensation
Committee Interlocks and Insider Participation
We do not anticipate any interlocking relationships between any
member of our compensation committee and any of our executive
officers that would require disclosure under the applicable
rules promulgated under the federal securities laws.
63
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
The purpose of this compensation discussion and analysis is to
provide information about each material element of compensation
that we pay or award to, or that is earned by, our named
executive officers, who consist of our principal executive
officer, principal financial officer, and our three other most
highly compensated executive officers. For our 2008 fiscal year,
our named executive officers were:
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Mark Gill, our Chief Executive Officer;
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|
Neil Sacker, our Vice Chairman and Chief Operating Officer;
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Robert Katz, our President of Production;
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|
Bernd Stephan, our Chief Financial Officer; and
|
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|
|
Daniel Stutz, our Executive Vice President, Business and Legal
Affairs.
|
Philosophy
of Executive Compensation Programs
Our Board has historically been responsible for the
administration and oversight of our executive compensation
programs. Following this Offering, we will have a compensation
committee to whom this responsibility will be delegated.
Our overall executive compensation objective is to provide a
comprehensive plan that encourages our executive officers to
focus on our strategic business initiatives, financial
performance objectives and the creation and maintenance of
equity value. The following are the principal objectives of our
executive compensation program:
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attract, retain, and motivate superior management talent
critical to our long-term success with compensation that is
competitive within the marketplace;
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|
ensure compensation levels reflect our internal value and future
potential of each executive and the achievement of outstanding
individual results;
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|
link executive compensation to the creation and maintenance of
our long-term equity value;
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|
promote equity ownership by executives in order to align their
interests with the interests of our equity holders; and
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|
|
ensure that incentive compensation is linked to the achievement
of specific financial and strategic objectives, which are
established in advance and approved by the Board.
|
Compensation
Determination Process
Prior to this Offering, we have been a private company with a
relatively small number of stockholders, and we have not been
subject to exchange listing requirements requiring us to have a
majority independent board or to exchange or SEC rules relating
to the formation and functioning of board committees, including
audit, nominating, and compensation committees. As such, most,
if not all, of our compensation policies, and determinations
applicable to our named executive officers, have been the
product of negotiation between our named executive officers and
our Board. Following this Offering, we will have a compensation
committee that will be responsible for making all such
determinations.
In the past, our Board took into account a number of variables,
both quantitative and qualitative, in making its determinations
regarding the appropriate level of compensation. Generally, the
named executive officers compensation was determined based
on the Boards assessment of our overall performance and
the individual performance of the named executive officer, as
well as the Boards experience and general market knowledge
regarding the competitiveness of compensation and the employment
agreements of the executive officers. During 2008, the Board did
not retain the services of any external compensation consultant.
64
Mr. Gill, our Chairman, Chief Executive Officer and
Director, and Mr. Sacker, our Vice Chairman, Chief
Operating Officer and Director, participated in discussions and
deliberations of the Board regarding executive compensation. Our
Chief Financial Officer, Bernd Stephan, also attended the Board
meetings and participated as required. Any discussion by the
Board regarding specific compensation for Mr. Gill or
Mr. Sacker or other named executive officers was conducted
by the Board in executive session without such persons in
attendance.
Following the completion of this Offering, we intend to make
annual awards of equity-based incentives to our employees,
including our named executive officers, under the Equity
Incentive Plan. We have reserved an aggregate of
[ ] shares
of common stock under our Equity Incentive Plan of which an
aggregate of
[ ] shares
of common stock will remain available for future awards after
giving effect to the conversion of Class H units into
shares in connection with the Corporate Conversion. See
Equity Incentive Plan. We also intend to
review, and may engage a compensation consultant to assist us in
evaluating, the elements and levels of our executive
compensation, including base salaries, bonus payments and annual
equity-based incentives for our named executive officers.
Compensation
Elements
We provide different elements of compensation to our named
executive officers in a way that the Board believes best
promotes our compensation objectives. Consistent with the
philosophy that compensation to the executive officers should be
aligned closely with our short and long-term financial
performance, a portion of executive compensation is at
risk and is tied to the attainment of previously
established operational and financial goals. However, the Board
also believes that it is prudent to provide competitive base
salaries and other benefits to attract and retain the
appropriate management talent in order to achieve our strategic
objectives. Accordingly, we provide compensation to our named
executive officers through a combination of the following:
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|
|
base salary;
|
|
|
|
annual cash bonus opportunities;
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|
|
|
long-term equity based incentives; and
|
|
|
|
benefits and executive perquisites.
|
Additional detail regarding each of these elements is discussed
below.
Base
Salaries
Annual base salaries reflect the compensation for an
executives ongoing contribution to the performance of his
or her functional area of responsibility with us. We believe
that base salaries must be competitive based upon the executive
officers scope of responsibilities and market compensation
of similarly situated executives. Other factors such as internal
consistency and comparability are also considered when
establishing a base salary for a given executive. The Board
utilized the experience, market knowledge and insight of its
members in evaluating the competitiveness of current salary
levels.
Historically, executives were generally entitled to annual
raises and bonuses based on their ingoing contracts. Those
contracts have now been amended such that all raises and bonuses
are to be granted at the sole discretion of the Board, based
upon the Boards assessment of each executive
officers individual performance and our overall budgetary
guidelines. In addition, the Board may adjust base salaries in
connection with promotions or increased responsibilities or to
maintain competitiveness within the market. In 2009, the annual
base salaries of all of our named executive officers were
unchanged from 2008 annual base salary levels.
Annual
Cash Bonus Compensation
We provide cash bonuses, which are at-risk, to recognize and
reward our named executive officers with cash payments above
base salary based on our success in a given year. In the past,
we have awarded bonuses based on pre-negotiated amounts. Our
policy beginning in 2009 was to eliminate any specific
pre-negotiated bonus payment amounts and instead to award
bonuses on a discretionary basis. We currently do not follow a
formal bonus plan tied to specific financial and non-financial
objectives.
65
The determination of the bonus payment amounts is subject to the
discretion of our Board after considering the individual
executive officers individual performance (which may
include specific objectives), as well as our Boards and
senior managements assessment of our past and future
performance, including, but not limited to, subjective
assessments of our operational performance during the
performance year and the position of our Company for the
achievement of acceptable financial performance in the
subsequent year. To the extent that specific objectives have
been by management, they may vary from year to year and from one
executive officer to another, but they generally relate to
operational improvements that are within the individual
executive officers area of responsibility, our strategic
goals and enhancement of leadership and management skills. These
objectives are typically qualitative objectives, and the Board
applies its business judgment in assessing the extent to which
the individual executive officers have met their objectives. The
Board does not use any specific formulae in determining
discretionary bonus payments or assign any particular relative
weightings to the various factors it considers in determining
payment amounts but generally makes its determination by first
considering the extent of the executive officers
achievement of their individual objectives and then by taking
into account the various factors related to the assessment of
our performance described above.
Long Term
Incentive Compensation
In the past, the Board provided equity incentive awards to
executive officers from time to time in order to directly align
their interests with the long term interests of the equity
holders of TFD Holdings. Prior to giving effect to the Corporate
Conversion, our total equity comprised four classes of
membership units: Class B units, Class G units,
Class J units and Class H units. The Class H
units were management equity incentive units. The Class H
units generally vest 20% per year.
In connection with the Corporate Conversion, each outstanding
Class H unit will fully vest and then be automatically
converted into shares of our common stock. The shares of common
stock that will be issued in respect of any Class H units
that remain unvested at the time of the Corporate Conversion
will be restricted and, accordingly, will be subject to the same
vesting schedule that previously applied to the corresponding
Class H units. In addition, any unvested restricted shares
received in the Corporate Conversion will be generally forfeited
by a holder without consideration as a result of his or her
termination of employment; provided, however, unless the
holders employment is terminated for cause, the holder
will be entitled to reimbursement by us for any
U.S. federal or state income taxes paid by the holder with
respect to the fair market value of the corresponding
Class H units from which such forfeited shares were
converted in connection with the Corporate Conversion as of the
grant date of such corresponding Class H units as reported
by the holder pursuant to his or her election under
Section 83 of the Code.
In connection with the Corporate Conversion, we plan to have our
stockholders the Equity Incentive Plan, so that we can continue
to provide our named executive officers and other key service
providers with equity-based long-term incentives. See
Equity Incentive Plan.
Benefits
and Executive Perquisites
We also provide certain other benefits described below to our
employees, including the named executive officers, which are not
tied to any performance criteria and are intended to be part of
a competitive compensation program. These benefits are intended
to support our compensation objectives related to the attraction
and retention of superior management talent and to ensure that
our executives remain appropriately focused on their job
responsibilities without unnecessary distraction.
Retirement
Benefits
Substantially all of the salaried employees, including our named
executive officers, are eligible to participate in our 401(k)
savings plan. Employees are permitted to defer a portion of
their income under the 401(k) plan. At the discretion of the
Board, we may match employee contributions up to 3% of the
employees annual base salary, or $6,900, whichever is
lower, subject to annual limits established under the Internal
Revenue Code. The Board authorized such maximum discretionary
amount as a match on employees 401(k) Plan contributions
for 2008, including the named executive officers. Employee and
Company matching contributions are fully vested immediately.
Participants may receive distribution of their 401(k) accounts
any time after their service with us ceases.
66
Defined
Contribution Plan
All of the salaried employees, including our named executive
officers, are eligible to participate in our defined
contribution plan. The plan satisfies the requirements of 401(a)
Internal Revenue Code in order to provide retirement and other
incidental benefits to our employees. At the discretion of the
Board, we may make a contribution of $1,400 per qualifying
employee each year. Employee sponsored voluntary contributions
are not permitted for all employees other than the Chief
Executive Officer and Chief Operating Officer. The Board
authorized the first contribution of $1,400 for each qualifying
employee in 2008. No contribution has yet been made for 2009.
Company matching contributions are fully vested immediately.
Participants may receive distribution of their defined
contribution accounts any time after their service with us
ceases.
Other
Benefits
All executive officers, including the named executive officers,
are eligible for other benefits from us including: medical,
dental, and life insurance. The named executive officers are
also entitled to paid leave during the year at various amounts
based upon the executives position within the Company and
length of service.
Perquisites
The Company does not provide any auto allowance, health club
reimbursement, financial planning reimbursement, relocation
payments, or club dues.
Severance
Arrangements
The Board believes that severance arrangements are necessary to
attract and retain the talent necessary for our long-term
success. Accordingly, our named executive officers are entitled,
under their employment agreements with us, to cash and certain
other benefits in the event their employment is terminated under
certain circumstances. See the description of these arrangements
under Potential Payments Upon Termination or
Change-In-Control
Summary of Severance Arrangements.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The Film Department CEO Mark Gill is married to screenwriter
Hanna Weg. The Company has engaged her for writing services on
Orders to Kill for a combined total of $0.15 million
and The Peak for a combined total of $0.10 million.
The Company has also optioned from the producers (but not paid
Ms. Weg) a script written by Ms. Weg starring Keira
Knightley, The Beautiful and the Damned. Additional
contingent compensation may be payable on each of these projects
as part of the budget of each film should any of these pictures
be greenlit, financed and produced by The Film Department.
One of the managing members of H&W Movie Partners, LLC,
Michael J. Witherill, has a direct material financial interest
in IPO Solutions, Inc. (IPO Solutions). By virtue of
his position in H&W Movie Partners, LLC, Witherill
exercised shared voting control over approximately
[67.13]% of our membership units prior to the
closing of this Offering. IPO Solutions is providing certain
services to the underwriters in connection with this Offering,
for which IPO Solutions will receive approximately
$[ ] million upon
closing of the Offering.
Related
Person Transaction Approval Policy
Prior to the completion of this Offering, our Board will adopt a
written statement of policy for the review, approval and
monitoring of transactions involving us and related
persons. For the purposes of the policy, related
persons will include executive officers, directors and
director nominees or their immediate family members, or
stockholders owning five percent (5%) or more of our outstanding
common stock.
Our related person transaction approval policy will require:
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that any transaction in which a related person has a material
direct or indirect interest and which exceeds $120,000, such
transaction referred to as a related person
transaction, and any material amendment or modification to
a related person transaction, be reviewed and approved or
ratified by any committee of the
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67
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Board composed solely of independent directors who are
disinterested or by the disinterested members of the
Board; and
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that any employment relationship or transaction involving an
executive officer and any related person must be approved by the
compensation committee of the Board or recommended by the
compensation committee to the Board for its approval.
|
In connection with the review and approval or ratification of a
related person transaction:
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management must disclose to the committee or disinterested
directors, as applicable, the material terms of the related
person transaction, including the approximate dollar value of
the amount involved in the transaction, and all the material
facts as to the related persons direct or indirect
interest in, or relationship to, the related person transaction;
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management must advise the committee or disinterested directors,
as applicable, as to whether the related person transaction
complies with the terms of our agreements governing our material
outstanding indebtedness that limit or restrict our ability to
enter into a related person transaction;
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management must advise the committee or disinterested directors,
as applicable, as to whether the related person transaction will
be required to be disclosed in our SEC filings. To the extent it
is required to be disclosed, management must ensure that the
related person transaction is disclosed in accordance with SEC
rules; and
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management must advise the committee or disinterested directors,
as applicable, as to whether the related person transaction
constitutes a personal loan for purposes of
Section 402 of the Sarbanes-Oxley Act.
|
In addition, the related person transaction policy provides that
the Committee, in connection with any approval or ratification
of a related person transaction involving a non-employee
director or director nominee, should consider whether such
transaction would compromise the director or director
nominees status as an independent,
outside, or non-employee director, as
applicable, under the rules and regulations of the SEC, NASDAQ
and the Internal Revenue Code.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership is determined in accordance with the rules
and regulations of the SEC. These rules generally provide that a
person is the beneficial owner of securities if such person has
or shares the power to vote or direct the voting thereof, or to
dispose or direct the disposition thereof or has the right to
acquire such powers within 60 days. Percentage of
beneficial ownership is based on 6,923,077 shares of common
stock outstanding after giving effect to our conversion from a
limited liability company to a corporation, and
11,538,462 shares of common stock to be outstanding after
the completion of this Offering, assuming no exercise of the
option to purchase additional shares, or 12,230,769 assuming
full exercise of the option to purchase additional shares.
Except as disclosed in the footnotes to this table and subject
to applicable community property laws, we believe that each
stockholder identified in the table possesses sole voting and
investment power over all shares of common stock shown as
beneficially owned by the stockholder.
68
The following table sets forth information regarding the
beneficial ownership of our common stock by each person, or
group of affiliated persons, whom we know beneficially owns more
than five percent of our outstanding common stock securities
immediately prior to the completion of this Offering, but after
giving effect to our conversion from a limited liability company
to a corporation, upon completion of this Offering without
exercise of the underwriters over-allotment option, and
upon completion of this Offering with exercise of the
underwriters over-allotment option.
For further information regarding material transactions between
us and certain of our stockholders, see Certain
Relationships and Related Party Transactions.
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Common Stock
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Common Stock
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Beneficially
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|
Beneficially
|
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Common Stock
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Owned after this
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Owned after this
|
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Beneficially Owned
|
|
Offering without
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Offering with
|
Name and Address
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before this Offering
|
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Exercise of Option
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Exercise of Option
|
of Beneficial Owner
|
|
Number
|
|
Percent
|
|
Number
|
|
Percent
|
|
Number
|
|
Percent
|
|
H&W Movie Partners, LLC
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4,647,288
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67.13
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%
|
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4,647,288
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|
40.28
|
%
|
|
|
4,647,288
|
|
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38.00
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%
|
2701 Camelback Road, Suite 180
Phoenix, AZ 85016
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Sandeman, Ltd.
|
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658,731
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|
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9.52
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%
|
|
|
658,731
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|
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|
5.71
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%
|
|
|
658,731
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|
5.39
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%
|
MBC Building No. 3
P.O. Box 72627
Dubai Media City
Dubai, United Arab Emirates
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The following table sets forth information regarding the
beneficial ownership of our common stock by each of our
directors and each of the executive officers identified in the
Summary Compensation Table set forth under Executive
Compensation and our directors and executive officers as a
group immediately prior to the completion of this Offering, but
after giving effect to our conversion from a limited liability
company to a corporation, upon completion of this Offering
without exercise of the underwriters over-allotment
option, and upon completion of this Offering with exercise of
the underwriters over-allotment option.
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Common Stock
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|
Common Stock
|
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|
|
|
|
|
|
|
Beneficially
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|
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Beneficially
|
|
|
|
Common Stock
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Owned after this
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|
|
Owned after this
|
|
|
|
Beneficially Owned
|
|
|
Offering without
|
|
|
Offering with
|
|
Name and Address of
|
|
Before this Offering
|
|
|
Exercise of Option
|
|
|
Exercise of Option
|
|
of Beneficial Owner.
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
Mark Gill
|
|
|
28,477
|
|
|
|
6.17
|
%
|
|
|
427,154
|
|
|
|
3.70
|
%
|
|
|
427,154
|
|
|
|
3.49
|
%
|
Neil Sacker
|
|
|
21,508
|
|
|
|
4.66
|
%
|
|
|
322,615
|
|
|
|
2.80
|
%
|
|
|
322,615
|
|
|
|
2.64
|
%
|
Robert Katz
|
|
|
12,785
|
|
|
|
2.77
|
%
|
|
|
191,769
|
|
|
|
1.66
|
%
|
|
|
191,769
|
|
|
|
1.57
|
%
|
Bernd Stephan
|
|
|
3,323
|
|
|
|
*
|
|
|
|
49,846
|
|
|
|
*
|
|
|
|
49,846
|
|
|
|
*
|
|
Daniel Stutz
|
|
|
1,662
|
|
|
|
*
|
|
|
|
24,923
|
|
|
|
*
|
|
|
|
24,923
|
|
|
|
*
|
|
Bert Hayenga
|
|
|
848
|
|
|
|
*
|
|
|
|
12,725
|
|
|
|
*
|
|
|
|
12,725
|
|
|
|
*
|
|
David Larcher
|
|
|
12,868
|
|
|
|
2.79
|
%
|
|
|
193,027
|
|
|
|
1.67
|
%
|
|
|
193,027
|
|
|
|
1.58
|
%
|
Philip G. Hubbard
|
|
|
2,404
|
|
|
|
*
|
|
|
|
36,060
|
|
|
|
*
|
|
|
|
36,060
|
|
|
|
*
|
|
Robert Semple
|
|
|
24,040
|
|
|
|
5.21
|
%
|
|
|
360,604
|
|
|
|
3.13
|
%
|
|
|
360,604
|
|
|
|
2.95
|
%
|
All executive officers and directors as a group
|
|
|
107,915
|
|
|
|
23.38
|
%
|
|
|
1,618,724
|
|
|
|
14.03
|
%
|
|
|
1,618,724
|
|
|
|
13.23
|
%
|
|
|
|
* |
|
Denotes less than 1% ownership. |
69
DESCRIPTION
OF CAPITAL STOCK
AND RELATED SHAREHOLDER MATTERS
The following is a description of the material provisions of our
capital stock, as well as other material terms of our articles
of incorporation and bylaws as they will be in effect as of the
consummation of the Offering. This description is only a
summary. You should read it together with our articles of
incorporation and bylaws, which are incorporated as exhibits to
the registration statement of which this prospectus is part.
General
As of [Date], 2010, our total authorized capital stock consisted
of
[ ] shares
of common stock, par value $[ ]
per share and
[ ] shares
of preferred stock. As of
[ ],
2010,
[ ] shares
of common stock were issued and outstanding and no shares of
preferred stock were issued and outstanding. As of [Date], 2010,
options to purchase
[ ] shares
of common stock were outstanding.
Common
Stock
Voting Rights. Holders of common stock are
entitled to one vote per share on all matters to be voted upon
by the stockholders. The holders of common stock do not have
cumulative voting rights in the election of directors.
Dividend Rights. Holders of common stock are
entitled to receive dividends ratably if, as and when dividends
are declared from time to time by our Board out of funds legally
available for that purpose, after payment of dividends required
to be paid on outstanding preferred stock, as described below,
if any. The amounts available to us to pay cash dividends may be
restricted by our subsidiaries debt agreements. Our credit
facilities may impose restrictions on our ability to declare
dividends with respect to our common stock. Any decision to
declare and pay dividends in the future will be made at the
discretion of our Board and will depend on, among other things,
our results of operations, cash requirements, financial
condition, contractual restrictions and other factors that our
Board may deem relevant.
Liquidation Rights. Upon liquidation,
dissolution or winding up, the holders of common stock are
entitled to receive ratably the assets available for
distribution to the stockholders after payment of liabilities
and liquidation preferences on any outstanding preferred stock.
Other Matters. The common stock has no
preemptive or conversion rights and is not subject to further
calls or assessment by us. There are no redemption or sinking
fund provisions applicable to the common stock.
Preferred
Stock
Our certificate of incorporation authorizes our Board to
establish one or more series of preferred stock and to
determine, with respect to any series of preferred stock, the
terms and rights of that series, including:
|
|
|
|
|
the designation of the series;
|
|
|
|
the number of shares of the series, which our Board may, except
where otherwise provided in the preferred stock designation,
increase (but not above the total number of authorized shares of
the class) or decrease (but not below the number of shares then
outstanding);
|
|
|
|
whether dividends, if any, will be cumulative or non-cumulative
and the dividend rate of the series;
|
|
|
|
the dates at which dividends, if any, will be payable;
|
|
|
|
the redemption rights and price or prices, if any, for shares of
the series;
|
|
|
|
the terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series;
|
|
|
|
the amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or
winding-up
of the affairs of our Company;
|
|
|
|
whether the shares of the series will be convertible into shares
of any other class or series, or any other security, of our
Company or any other corporation, and, if so, the specification
of the other class or series or
|
70
|
|
|
|
|
other security, the conversion price or prices or rate or rates,
any rate adjustments, the date or dates as of which the shares
will be convertible and all other terms and conditions upon
which the conversion may be made;
|
|
|
|
|
|
restrictions on the issuance of shares of the same series or of
any other class or series; and
|
|
|
|
the voting rights, if any, of the holders of the series.
|
Anti-Takeover
Effects of Certain Provisions of Our Certificate of
Incorporation and Bylaws
Certain provisions of our certificate of incorporation and
bylaws, which are summarized in the following paragraphs, may
have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might
consider in its best interest, including those attempts that
might result in a premium over the market price for the shares
held by stockholders.
Staggered
Board
Our certificate of incorporation provides that our Board
elections will be staggered, such that approximately one-third
of our Board will be elected each year. The staggering will have
the effect of making it more difficult for stockholders to
change the composition of our Board. Our certificate of
incorporation and the bylaws provide that the number of
directors will be fixed from time to time pursuant to a
resolution adopted by the Board, but must consist of not less
than seven or more than eleven directors.
Business
Combinations
We have opted out of Section 203 of the DGCL; however, our
certificate of incorporation contains similar provisions
providing that we may not engage in certain business
combinations with any interested stockholder
for a three-year period following the time that the stockholder
became an interested stockholder, unless:
|
|
|
|
|
prior to such time, our Board approved either the business
combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
|
|
|
|
upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding
at the time the transaction commenced, excluding certain
shares; or
|
|
|
|
at or subsequent to that time, the business combination is
approved by our Board and by the affirmative vote of holders of
at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
|
Generally, a business combination includes a merger,
asset or stock sale or other transaction resulting in a
financial benefit to the interested stockholder. Subject to
certain exceptions, an interested stockholder is a
person who, together with that persons affiliates and
associates, owns, or within the previous three years owned, 15%
or more of our voting stock.
Under certain circumstances, this provision will make it more
difficult for a person who would be an interested
stockholder to effect various business combinations with a
corporation for a three-year period. This provision may
encourage companies interested in acquiring our Company to
negotiate in advance with our Board because the stockholder
approval requirement would be avoided if our Board approves
either the business combination or the transaction which results
in the stockholder becoming an interested stockholder. These
provisions also may have the effect of preventing changes in our
Board and may make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best
interests.
Conflicts
of Interest
Under the corporate opportunity doctrine, in certain
circumstances our directors, officers and stockholders may have
a duty to present to us matters that come before them that are
within our line of business or would be deemed of interest to
us. Pursuant to our restated certificate of incorporation, we
have renounced any such duty with respect to our non-employee
directors except where such matters are presented to them solely
in their capacities as our directors. Under
71
the Delaware General Corporation Law, a company is permitted to
renounce or waive its right to corporate opportunities. An
example of when the corporate opportunity waiver could be
applicable is in the event that a non-employee director was
approached by a company that would like to be acquired, and
which is engaged in a line of business that relates to our
business. Under Delaware law, a director may, under certain
circumstances, be obligated to present this kind of opportunity
to the corporation for which they serve as a director. With the
waiver set forth in our restated certificate of incorporation,
we have eliminated uncertainty about this kind of question, and
our non-employee directors would not have any obligation to
present any such opportunities to us. Our non-employee directors
would be free to pursue any such opportunities themselves, or to
present them to another company, without notifying us or giving
us any ability to participate. We chose to waive these rights in
order to attract and retain highly qualified individuals to our
Board of Directors who might be affiliated with venture funds or
other investment entities that are likely to invest in other
companies that may be presented with opportunities similar to
those that might be deemed of interest to us. Since all of our
non-employee directors are active investors or serve on the
boards of directors of other companies, our Board of Directors
desired to avoid any uncertainty as to their duties to the
company with respect to corporate opportunities. In addition,
our Board of Directors considered the effect of not having the
waiver in place on recruiting new directors and concluded that
it would be more difficult to recruit new directors without the
waiver
Removal
of Directors; Vacancies
Our certificate of incorporation and bylaws provide that
directors may be removed only for cause as defined in the
Companys bylaws upon the affirmative vote of holders of at
least 50% of the voting power of all the then outstanding shares
of stock entitled to vote generally in the election of
directors, voting together as a single class. In addition, our
bylaws also provide that, except as set forth in the
stockholders agreement, any vacancies on our Board will be
filled only by the affirmative vote of a majority of the
remaining directors, although less than a quorum.
No
Cumulative Voting
The DGCL provides that stockholders are not entitled to the
right to cumulate votes in the election of directors unless our
certificate of incorporation provides otherwise. Our certificate
of incorporation does not provide for cumulative voting.
Calling
of Special Meetings of Stockholders
Our certificate of incorporation provides that special meetings
of our stockholders may be called at any time by the Chairman of
the Board, the Board or a committee of the Board which has been
designated by the Board or by a majority of the stockholders.
Stockholder
Action by Written Consent
The DGCL permits stockholder action by written consent unless
otherwise provided by our certificate of incorporation. Our
certificate of incorporation precludes stockholder action by
written consent.
Advance
Notice Requirements for Stockholder Proposals and Director
Nominations
Our bylaws provide that stockholders seeking to nominate
candidates for election as directors or to bring business before
an annual meeting of stockholders must provide timely notice of
their proposal in writing to the corporate secretary.
Generally, to be timely, a stockholders notice must be
received at our principal executive offices not less than
90 days nor more than 120 days prior to the date on
which we first mailed our proxy materials for the preceding
years annual meeting. Our bylaws also specify requirements
as to the form and content of a stockholders notice. These
provisions may impede stockholders ability to bring
matters before an annual meeting of stockholders or make
nominations for directors at an annual meeting of stockholders.
72
Supermajority
Provisions
The DGCL provides generally that the affirmative vote of a
majority of the outstanding shares entitled to vote is required
to amend a corporations certificate of incorporation or
bylaws, unless the certificate of incorporation requires a
greater percentage. Our certificate of incorporation provides
that the following provisions in the certificate of
incorporation and bylaws may be amended only by a vote of at
least 75% of the voting power of all of the outstanding shares
of our common stock entitled to vote in the election of
directors, voting together as a single class:
|
|
|
|
|
staggered board (the election and term of our directors);
|
|
|
|
the provisions regarding entering into business combinations
with interested stockholders;
|
|
|
|
the ability to call a special meeting of stockholders being
vested solely in our Board, a committee of our Board (if duly
authorized to call special meetings), and the Chairman of our
Board;
|
|
|
|
the advance notice requirements for stockholder proposals and
director nominations; and
|
|
|
|
the amendment provision requiring that the above provisions be
amended only with a 75% supermajority vote.
|
In addition, our certificate of incorporation grants our Board
the authority to amend and repeal our bylaws without a
stockholder vote in any manner not inconsistent with the laws of
the State of Delaware or our certificate of incorporation.
Limitations
on Liability and Indemnification of Officers and
Directors
The DGCL authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their
stockholders for monetary damages for breaches of
directors fiduciary duties. Our certificate of
incorporation includes a provision that eliminates the personal
liability of directors for monetary damages for actions taken as
a director, except for liability:
|
|
|
|
|
for breach of the duty of loyalty;
|
|
|
|
for acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law;
|
|
|
|
under Section 174 of the DGCL (unlawful dividends or stock
repurchases); or
|
|
|
|
for transactions from which the director derived improper
personal benefit.
|
Our certificate of incorporation and bylaws provide that we must
indemnify our directors and officers to the fullest extent
authorized by the DGCL. We are also expressly obligated to
advance certain expenses (including attorneys fees and
disbursements and court costs) and carry directors and
officers insurance providing indemnification for our
directors, officers and certain employees for some liabilities.
We believe that these indemnification provisions and insurance
are useful to attract and retain qualified directors and
executive officers.
The limitation of liability and indemnification provisions in
our certificate of incorporation and bylaws may discourage
stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty. These provisions may also have
the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders. In
addition, your investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers pursuant to these indemnification
provisions.
There is currently no pending material litigation or proceeding
involving any of our directors, officers or employees for which
indemnification is sought.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
Corporate Stock Transfer, Inc.
We intend to apply for listing on the NASDAQ Global Market under
the symbol TFDI.
73
UNDERWRITING
We and the representatives, on behalf of the underwriters,
Girard Securities, Inc., d/b/a IPO Solutions, have entered into
an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, the underwriters have
agreed to purchase the number of shares indicated in the
following table.
Subject to the terms and conditions set forth in the
underwriting agreement, the underwriters have agreed to purchase
all of the shares of common stock sold under the underwriting
agreement if any of these shares are purchased. If an
underwriter defaults, the underwriting agreement provides that
the purchase commitments of the nondefaulting underwriters may
be increased or the underwriting agreement may be terminated.
We have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
Commissions
and Discounts
The representatives have advised us that the underwriters
propose initially to offer the shares of common stock to the
public at the public offering price set forth on the cover page
of this prospectus and to dealers at that price less a
concession not in excess of
$[ ] per share. The
underwriters may allow, and the dealers may re-allow, a discount
not in excess of $[ ]
per share to other dealers. After the initial offering, the
public offering price, concession or any other term of the
Offering may be changed.
The following table shows the per share and total underwriting
discounts and commissions we and the selling shareholder will
pay to the underwriters. Such amounts are shown assuming both no
exercise and full exercise of the underwriters option to
purchase
[ ]
additional shares. The underwriting fee is the difference
between the initial price to the public and the amount the
underwriters pay to us for the shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Over-
|
|
|
With Over-
|
|
|
|
Per Share
|
|
|
allotment Option
|
|
|
allotment Option
|
|
|
Public offering price
|
|
$
|
[13.00]
|
|
|
$
|
60,000,000
|
|
|
$
|
69,000,000
|
|
Underwriting discounts and commissions(1)
|
|
$
|
[.91]
|
|
|
$
|
4,200,000
|
|
|
$
|
4,830,000
|
|
Non-accountable expense allowance(2)
|
|
$
|
[.26]
|
|
|
$
|
1,200,000
|
|
|
$
|
1,380,000
|
|
Proceeds to us, before expenses(3)
|
|
$
|
[11.83]
|
|
|
$
|
54,600,000
|
|
|
$
|
62,790,000
|
|
|
|
|
(1) |
|
The underwriting discount is $[.91] per share (7% of the price
of the shares sold in the Offering). |
|
(2) |
|
The non-accountable expense allowance is payable with respect to
shares purchased by underwriters other than the representatives
in an amount to be mutually agreed upon between the Company and
the representatives but not to exceed, with respect to any such
underwriter, 2% of the gross proceeds of the shares purchased by
such underwriter. |
|
|
|
(3) |
|
We estimate that the total expenses of this Offering, excluding
underwriting discounts and commissions and the non-accountable
expense allowance, will be approximately
$[ ]. |
Over-allotment
Option to Purchase Additional Shares; Underwriters
Warrants
We have granted an over-allotment option to the underwriters to
purchase up to [980,769] additional shares at the public
offering price, less underwriting discounts and commissions. The
underwriters may exercise this option for 30 days from the
date of this prospectus. If the underwriters exercise this
option, each will be obligated, subject to certain conditions,
to purchase a number of additional shares proportionate to that
underwriters initial amount reflected in the table above.
Upon the closing of this Offering, we have agreed to sell to the
Underwriters warrants to purchase up to [457,692] shares of
our common stock. The warrants will be exercisable at a per
share exercise price equal to 110% of the public offering price,
subject to standard anti-dilution adjustments for stock splits
and similar transactions, and will expire five years from the
date of this prospectus. The warrants and underlying shares are
deemed by FINRA to be underwriting compensation in connection
with this Offering. In addition, unless an exemption is
available, these securities will be subject to
lock-up
restrictions. The
lock-up
restrictions provide that the warrants and underlying shares
shall not be sold during this Offering or sold or transferred
(except to the selling group members and executive officers of
the underwriters and selling group members) nor can they be
assigned, pledged
74
or hypothecated, or be the subject of any hedging, short sale,
derivative, put or call transaction that would result in the
effective economic disposition of the warrants or underlying
shares by any person for a period of 180 days immediately
following the date of effectiveness or commencement of sales of
this Offering.
No Sales
of Similar Securities
We, all of our directors and executive officers, and all holders
of more than 5% of our outstanding stock have agreed that,
without the prior written consent of each of the representatives
on behalf of the underwriters, we and they will not directly or
indirectly, offer, pledge, announce the intention to sell, sell,
contract to sell, sell an option or contract to purchase,
purchase any option or contract to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of any
common stock or any securities that may be converted into or
exchanged for any common stock, enter into any swap or other
agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the common stock, make any
demand for or exercise any right or file or cause to be filed a
registration statement with respect to the registration of any
shares of common stock or securities convertible, exercisable or
exchangeable into common stock or any of our other securities or
publicly disclose the intention to do any of the foregoing for a
period of 180 days from the closing date of this Offering
other than permitted transfers.
Offering
Price Determination
Prior to this Offering, there has been no public market for our
common stock. The initial public offering price will be
negotiated between the representatives and us. In determining
the initial public offering price of our common stock, the
representatives will consider:
|
|
|
|
|
the history and prospects for the industry in which we compete;
|
|
|
|
our financial information;
|
|
|
|
the ability of our management and our business potential and
earning prospects;
|
|
|
|
the prevailing securities markets at the time of this
Offering; and
|
|
|
|
the recent market prices of, and the demand for, publicly traded
shares of generally comparable companies.
|
Discretionary
Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them.
Price
Stabilization, Short Positions and Penalty Bids
In connection with the Offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the Offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares from the selling shareholder in the Offering.
The underwriters may close out any covered short position by
either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase additional shares pursuant
to the option granted to them. Naked short sales are
any sales in excess of such option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase
in the Offering. Stabilizing transactions consist of various
bids for or purchases of common stock made by the underwriters
in the open market prior to the completion of the Offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
75
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the Companys
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters represent that the representatives will engage in
these stabilizing transactions or that any transaction, once
commenced will not be discontinued without notice.
Electronic
Distribution
In connection with the Offering, certain of the underwriters or
securities dealers may distribute prospectuses by electronic
means, such as
e-mail. In
addition, certain of the underwriters may facilitate Internet
distribution for this Offering to certain of its Internet
subscription customers. These underwriters may allocate a
limited number of shares for sale to its online brokerage
customers. An electronic prospectus supplement may be made
available on the Internet web site maintained by certain
underwriters. Other than any prospectus in electronic format,
the information on an underwriters Internet website is not
part of this prospectus.
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this Offering, there has been no market for our common
stock, and a liquid trading market for our common stock may not
develop or be sustained after this Offering. Future sales of
substantial amounts of our common stock in the public market,
including shares issued upon exercise of outstanding options or
in the public market after this Offering, or the anticipation of
these sales, could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital
through sales of equity securities.
Upon the closing of this Offering, we will have outstanding an
aggregate of 11,538,462 shares of common stock, after
giving effect to the issuance of an aggregate of
4,615,385 shares of common stock in this Offering and
assuming no exercise by the underwriters of their over-allotment
option and no exercise of the Underwriters Warrants.
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person who is not our affiliate
and has not been our affiliate at any time during the preceding
three months will be entitled to sell any shares of our common
stock that such person has beneficially owned for at least six
months, including the holding period of any prior owner other
than one of our affiliates, without regard to volume
limitations. Sales of our common stock by any such person would
be subject to the availability of current public information
about us if the shares to be sold were beneficially owned by
such person for less than one year.
Under Rule 144, a person generally may sell shares of our
common stock acquired from us immediately upon the closing of
this Offering, without regard to volume limitations or the
availability of public information about us, if:
|
|
|
|
|
the person is not our affiliate and has not been our affiliate
at any time during the preceding three months; and
|
|
|
|
the person has beneficially owned the shares to be sold for at
least one year, including the holding period of any prior owner
other than one of our affiliates.
|
Approximately
[ ] shares
of our common stock that are not subject to the
lock-up
agreements described below will be eligible for sale immediately
upon the closing of this Offering.
Beginning 90 days after the date of this prospectus, our
affiliates who have beneficially owned shares of our common
stock for at least six months, including the holding period of
any prior owner other than one of our affiliates, would be
entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
|
|
|
|
|
1% of the number of shares of our common stock then outstanding,
which will equal approximately 96,154 shares immediately
after this Offering; and
|
76
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|
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|
|
the average weekly trading volume in our common stock on The
NASDAQ Global Market during the four calendar weeks preceding
the date of filing of a Notice of Proposed Sale of Securities
Pursuant to Rule 144 with respect to the sale.
|
Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Upon expiration of the
180-day
lock-up
period described below,
[ ]
additional shares of our common stock will be eligible for
sale under Rule 144, including shares eligible for resale
immediately upon the closing of this Offering as described
above. We cannot estimate the number of shares of our common
stock that our existing stockholders will elect to sell under
Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act, any of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement entered into before the effective date
of this Offering is eligible to resell these shares 90 days
after the date of this prospectus in reliance on Rule 144.
Lock-up
Agreements
We, all of our directors and executive officers and existing
holders of substantially all of our outstanding stock have
agreed that, without the prior written consent of the
representatives of the underwriters, we and they will not
directly or indirectly, (1) offer for sale, sell, pledge,
or otherwise dispose of (or enter into any transaction or device
that is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any
shares of our common stock (including, without limitation,
shares of common stock that may be deemed to be beneficially
owned in accordance with the rules and regulations of the SEC
and shares of common stock that may be issued upon exercise of
any options or warrants) or securities convertible into or
exercisable or exchangeable for our common stock, (2) enter
into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or
risks of ownership of shares of common stock, whether any such
transaction described in clause (1) or (2) above is to
be settled by delivery of common stock or other securities, in
cash or otherwise, (3) make any demand for or exercise any
right or cause to be filed a registration statement, including
any amendments thereto, with respect to the registration of any
shares of common stock or securities convertible into or
exercisable or exchangeable for common stock or any other
securities or (4) publicly disclose the intention to do any
of the foregoing, for a period of 180 days after the
closing date of this Offering.
Each of the
lock-up
agreements contain certain exceptions, including the disposition
of shares of common stock purchased in open market transactions
after the consummation of this Offering and the adoption of a
Rule 10b5-1
sales plan; provided, in each case, that no filing shall be
required under the Exchange Act in connection with the transfer
or disposition during the
180-day
lock-up
period.
Registration
Statement on
Form S-8
We intend to file one or more registration statements on
Form S-8
under the Securities Act covering up to
[ ] shares
of common stock reserved for issuance under our Equity Incentive
Plan. These registration statements are expected to be filed
soon after the date of this prospectus and will automatically
become effective upon filing. Accordingly, shares registered
under such registration statements will be available for sale in
the open market, unless such shares are subject to vesting
restrictions with us or are otherwise subject to the
lock-up
agreements and manner of sale and notice requirements that apply
to affiliates under Rule 144 described above.
VALIDITY
OF COMMON STOCK
The validity of the shares of common stock offered hereby has
been passed upon for us by Squire, Sanders & Dempsey
L.L.P., Phoenix, Arizona. The Law Office of Gary A. Agron,
Englewood, Colorado, has acted as counsel for the underwriters
in connection with certain legal matters relating to the shares
of common stock offered hereby.
77
EXPERTS
The consolidated financial statements of The Film Department as
of December 31, 2009, 2008 and 2007, and for the years
ended December 31, 2009 and 2008 and the period from
inception May 22, 2007 to December 31, 2007, appearing
in this prospectus and Registration Statement have been audited
by BDO Seidman, LLP, independent registered accounting firm, as
set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly, current and special reports, proxy
statements and other information with the Securities and
Exchange Commission, or SEC, under the Securities Exchange Act
of 1934, as amended. You may read and copy this information at
the following location of the SEC:
Public Reference Room
100 F Street, NE
Washington, D.C. 20549
You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet web site that contains
reports, proxy and information statements and other information
about issuers that file electronically with the SEC. The address
of that site is www.sec.gov.
We have filed a registration statement on
Form S-1
with the SEC that covers the sale of the common stock offered by
this prospectus. This prospectus is a part of the registration
statement, but the prospectus does not include all of the
information included in the registration statement. You should
refer to the registration statement for additional information
about us and the common stock being offered in this prospectus.
Statements that we make in this prospectus relating to any
documents filed as an exhibit to the registration statement may
not be complete and you should review the referenced document
itself for a complete understanding of its terms.
Important
Notice About the Information Presented in this
Prospectus
You should rely only on the information provided in this
prospectus. We have not authorized anyone to provide you with
different information. The Film Department is not offering to
sell, or seeking offers to buy, the shares in any state where
offers or sales are not permitted. We do not claim the accuracy
of the information in this prospectus as of any date other than
the date stated on the cover.
This prospectus contains market data and industry forecasts that
were obtained from industry publications, third-party market
research and publicly available information. These publications
generally state that the information contained therein has been
obtained from sources believed to be reliable, but the accuracy
and completeness of such information is not guaranteed. While we
believe that the information from these publications is
reliable, we have not independently verified and make no
representation as to the accuracy of such information.
78
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Contents
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F-2
|
|
Consolidated Financial Statements
|
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F-3
|
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F-4
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F-5
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F-6
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F-7
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F-1
INDEPENDENT
AUDITORS REPORT
Board of Directors
The Film Department Holdings, LLC
West Hollywood, California
We have audited the accompanying consolidated balance sheets of
The Film Department Holdings, LLC (the Company) as
of December 31, 2009 and 2008 and the related consolidated
statements of operations and comprehensive loss, members
deficit, and cash flows for the years ended December 31,
2009 and 2008 and for the period from May 22, 2007
(Inception) through December 31, 2007. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of The Film Department Holdings, LLC at
December 31, 2009 and 2008 and the results of its
operations and its cash flows for the years ended
December 31, 2009 and 2008 and for the period from
May 22, 2007 (Inception) through December 31, 2007 in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 12 to the consolidated
financial statements, the Company had a members deficit of
$30,065,000 and $19,929,000 as of December 31, 2009 and
2008, and has suffered recurring losses from operations. The
Company was unable to pay a scheduled quarterly interest payment
on June 30, 2009 under the Second Lien Notes, and in
addition, the Company was unable to fully fund a required
reserve account by the August 28, 2009 deadline required
under the terms of the Senior Credit Facility resulting in the
occurrence of Events of Default under the Senior Credit Facility
and Securities Purchase Agreement. These matters, among others,
raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regard
to this matter are also described in Note 12. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Los Angeles, California
March 2, 2010
F-2
The Film
Department Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
204
|
|
|
$
|
13,730
|
|
Restricted cash
|
|
|
1,418
|
|
|
|
3,891
|
|
Short-term investments
|
|
|
|
|
|
|
10,350
|
|
Accounts receivable, net
|
|
|
5,548
|
|
|
|
3,560
|
|
Property and equipment, net
|
|
|
130
|
|
|
|
320
|
|
Development costs
|
|
|
1,689
|
|
|
|
1,688
|
|
Capitalized film costs, net
|
|
|
28,820
|
|
|
|
24,399
|
|
Other assets
|
|
|
7,862
|
|
|
|
975
|
|
Debt issuance costs, net
|
|
|
447
|
|
|
|
5,717
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
46,118
|
|
|
$
|
64,630
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE MEMBER UNITS AND MEMBERS
DEFICIT
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,251
|
|
|
$
|
1,208
|
|
Accrued residuals and participations
|
|
|
827
|
|
|
|
|
|
Deferred revenue
|
|
|
613
|
|
|
|
3,373
|
|
Warrant liability
|
|
|
|
|
|
|
2,435
|
|
Senior Revolving Borrowing Base Credit Facility
|
|
|
|
|
|
|
10,373
|
|
Second Secured Lien Notes, net of discount
|
|
|
36,486
|
|
|
|
34,428
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
39,177
|
|
|
|
51,817
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Redeemable member units
|
|
|
37,006
|
|
|
|
32,742
|
|
Members deficit
|
|
|
(30,065
|
)
|
|
|
(19,929
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable member units and members
deficit
|
|
$
|
46,118
|
|
|
$
|
64,630
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
The Film
Department Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007*
|
|
|
|
(Amounts in thousands)
|
|
|
Revenues
|
|
$
|
40,317
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expense
|
|
|
30,028
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
168
|
|
Distribution and marketing expense
|
|
|
1,222
|
|
|
|
|
|
|
|
615
|
|
|
|
|
|
|
|
240
|
|
General and administration expense
|
|
|
9,636
|
|
|
|
|
|
|
|
7,230
|
|
|
|
|
|
|
|
3,125
|
|
Depreciation and amortization expense
|
|
|
191
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
41,077
|
|
|
|
|
|
|
|
8,042
|
|
|
|
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(760
|
)
|
|
|
|
|
|
|
(8,042
|
)
|
|
|
|
|
|
|
(3,594
|
)
|
Other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest expense
|
|
|
5,741
|
|
|
|
|
|
|
|
5,110
|
|
|
|
|
|
|
|
2,387
|
|
Amortization of debt discount
|
|
|
475
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
91
|
|
Amortization of debt issuance costs
|
|
|
5,270
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
683
|
|
Amortization of debt administration fees
|
|
|
188
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
11,674
|
|
|
|
|
|
|
|
6,563
|
|
|
|
|
|
|
|
3,161
|
|
Other expense
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Interest and other income
|
|
|
(2,461
|
)
|
|
|
|
|
|
|
(954
|
)
|
|
|
|
|
|
|
(1,125
|
)
|
Investment loss
|
|
|
|
|
|
|
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
9,216
|
|
|
|
|
|
|
|
6,061
|
|
|
|
|
|
|
|
2,043
|
|
Loss before income taxes
|
|
|
(9,976
|
)
|
|
|
|
|
|
|
(14,103
|
)
|
|
|
|
|
|
|
(5,637
|
)
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,976
|
)
|
|
|
|
|
|
|
(14,103
|
)
|
|
|
|
|
|
|
(5,637
|
)
|
Unrealized investment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(9,976
|
)
|
|
|
|
|
|
$
|
(14,103
|
)
|
|
|
|
|
|
$
|
(5,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Period from inception, May 22, 2007 to December 31,
2007 |
See accompanying notes to consolidated financial statements.
F-4
The Film
Department Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Members
|
|
|
|
Loss
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
(Amounts in thousands)
|
|
|
Balance, May 22, 2007 (date of inception)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Realized loss on available-for-sale securities
|
|
|
(260
|
)
|
|
|
|
|
|
|
(260
|
)
|
Deemed dividend Accretion of Class B redeemable
units
|
|
|
|
|
|
|
(58
|
)
|
|
|
(58
|
)
|
Net Loss for the period ended December 31, 2007
|
|
|
|
|
|
|
(5,637
|
)
|
|
|
(5,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
(260
|
)
|
|
|
(5,695
|
)
|
|
|
(5,955
|
)
|
Realized loss on available-for-sale securities
|
|
|
260
|
|
|
|
|
|
|
|
260
|
|
Deemed dividend accretion of Class B redeemable
units
|
|
|
|
|
|
|
(131
|
)
|
|
|
(131
|
)
|
Net loss for the year ended December 31, 2008
|
|
|
|
|
|
|
(14,103
|
)
|
|
|
(14,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
|
(19,929
|
)
|
|
|
(19,929
|
)
|
Deemed dividend accretion of Class B redeemable
units
|
|
|
|
|
|
|
(160
|
)
|
|
|
(160
|
)
|
Net loss for the year ended December 31, 2009
|
|
|
|
|
|
|
(9,976
|
)
|
|
|
(9,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
|
|
|
$
|
(30,065
|
)
|
|
$
|
(30,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
The Film
Department Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007*
|
|
|
|
(Amounts in thousands)
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,976
|
)
|
|
$
|
(14,103
|
)
|
|
$
|
(5,637
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of film cost
|
|
|
27,446
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
191
|
|
|
|
171
|
|
|
|
61
|
|
Expense for abandoned development costs
|
|
|
1,051
|
|
|
|
26
|
|
|
|
168
|
|
Unit-based compensation
|
|
|
492
|
|
|
|
460
|
|
|
|
394
|
|
Amortization of debt discount and debt issuance costs
|
|
|
5,744
|
|
|
|
1,390
|
|
|
|
691
|
|
Change in fair value of warrants
|
|
|
(2,435
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
2,473
|
|
|
|
2,412
|
|
|
|
(6,303
|
)
|
(Increase) in accounts receivable
|
|
|
(1,988
|
)
|
|
|
(3,431
|
)
|
|
|
|
|
(Increase) in prepaid expenses and other current assets
|
|
|
(7,424
|
)
|
|
|
(286
|
)
|
|
|
(218
|
)
|
(Increase) in development costs
|
|
|
(1,052
|
)
|
|
|
(1,421
|
)
|
|
|
(461
|
)
|
(Increase) in film costs
|
|
|
(31,867
|
)
|
|
|
(24,399
|
)
|
|
|
|
|
Decrease (increase) in deposits and other assets
|
|
|
538
|
|
|
|
(489
|
)
|
|
|
(112
|
)
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
43
|
|
|
|
(68
|
)
|
|
|
68
|
|
Increase in accrued residuals and participations
|
|
|
827
|
|
|
|
128
|
|
|
|
1,080
|
|
(Decrease) increase in deferred revenue
|
|
|
(2,760
|
)
|
|
|
3,373
|
|
|
|
|
|
Increase in accrued interest on notes payable
|
|
|
5,090
|
|
|
|
3,349
|
|
|
|
2,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(13,607
|
)
|
|
|
(32,888
|
)
|
|
|
(8,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Sale (Purchases) of short-term investments
|
|
|
10,350
|
|
|
|
21,768
|
|
|
|
(32,118
|
)
|
Purchases of property and equipment
|
|
|
(1
|
)
|
|
|
(49
|
)
|
|
|
(502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
10,349
|
|
|
|
21,719
|
|
|
|
(32,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayment) borrowing from Second Secured Lien Notes
|
|
|
(3,507
|
)
|
|
|
|
|
|
|
30,000
|
|
(Repayment) proceeds from Senior Credit Facility
|
|
|
(10,373
|
)
|
|
|
10,373
|
|
|
|
|
|
Proceeds from Issuance of Membership Units
|
|
|
3,612
|
|
|
|
7,644
|
|
|
|
17,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(10,268
|
)
|
|
|
18,017
|
|
|
|
47,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(13,526
|
)
|
|
|
6,848
|
|
|
|
6,882
|
|
Cash and cash equivalents, beginning of period
|
|
|
13,730
|
|
|
|
6,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
204
|
|
|
$
|
13,730
|
|
|
$
|
6,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
401
|
|
|
$
|
1,761
|
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash financing activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Units and warrants issued for financing services rendered
|
|
$
|
175
|
|
|
$
|
250
|
|
|
$
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Period from inception, May 22, 2007 to December 31,
2007 |
See accompanying notes to consolidated financial statements.
F-6
The Film
Department Holdings LLC
Notes To
Consolidated Financial Statements
|
|
1.
|
Description
of Business
|
Company
Overview
The Film Department Holdings, LLC (Holdings) was
formed as a Delaware limited liability company on May 22,
2007. Holdings is the parent of a wholly-owned subsidiary, The
Film Department, LLC (LLC), a Delaware limited
liability company that was formed on July 27, 2006
(collectively the Company). The Company commenced
its operations on June 27, 2007, in accordance with its
Amended and Restated Limited Liability Company Agreement (the
Operating Agreement) executed on June 8, 2007.
At the initial closing on June 27, 2007, the Company was
capitalized with $25 million in equity through the issuance
of 25,000 Class B Units with a par value of $1,000 per Unit
to various investors.
Additionally, the Company raised $30 million in operating
capital through the issuance of Secured Second Lien Notes
(Second Lien Notes) (see Note 7) and
implemented a Senior Revolving Borrowing Base Credit Facility
(Senior Credit Facility) for $140 million (see
Note 8) with a senior lender group (Senior
Lenders).
In December 2008, the Company raised an additional
$7.64 million from certain of its existing members (see
Note 10).
Due to the occurrence of four unfavorable macro-economic events
(a Writers Guild strike; the threat of a Screen Actors Guild
strike; the severe worldwide economic downturn; and most
recently the dramatic cutback in release slates and marketing
expenditures by the major studios) the Company was unable to
execute on its business plan as initially contemplated.
Therefore, the Company entered a period of limited liquidity and
capital resources during the first quarter of 2009 and in early
September 2009 the Company defaulted on the Second Lien Notes
and the Senior Credit Facility.
The Company was successful in negotiating forbearance agreements
with the lenders under the Senior Credit Facility and Note
Holders of the Second Lien Notes (see Note 7 and
Note 8). This enabled the Company to recapitalize by
entering into an agreement with H&W Movie Partners, LLC
(HWMP) on December 2, 2009 pursuant to which
HWMP agreed to make equity investments in the Company in
exchange for the issuance to HWMP of Class G units (see
Note 10). As part of the recapitalization the Company
amended its operating agreement and is currently governed by the
Second Amended and Restated Limited Liability Company Agreement,
dated November 25, 2009.
As part of the recapitalization, the Company entered into a
buyout agreement on November 23, 2009 with the Note Holders
of the Second Lien Notes (see Note 7). The buyout agreement will
allow the Company to repay the Second Lien Notes upon the
occurrence of a recapitalization event.
As of December 31, 2009, 2008, and 2007 the Company had
incurred a net loss of $9.98 million, $14.10 million
and $5.64 million, respectively, and an accumulated deficit
of $30.07 million, $19.93 million and
$5.96 million, respectively. For the years ended
December 31, 2009 and 2008, cash flows from operating
activities were not sufficient to support its operations. Also,
the Company had Events of Default under the Senior Credit
Facility and Securities Purchase Agreement. These matters, among
others, raise substantial doubt about the Companys ability
to continue as a going concern
While the Company continues to produce new film assets, adverse
changes in market conditions or limits on the Companys
ability to obtain financing could limit the Companys
production of new films. The impact of such eventualities could
influence future operations of the Company. See Note 12 for
Going Concern matters.
F-7
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the consolidated
accounts of The Film Department Holdings, LLC and its wholly
owned subsidiary, The Film Department, LLC and LLCs wholly
owned subsidiaries, The Film Department Literary Acquisitions,
LLC, The Film Department International, LLC, Rebound
Distribution, LLC, LAC Films, LLC, BD Productions, LLC, TFD
Music, LLC and The Film Department Music, LLC. All intercompany
balances and transactions have been eliminated in consolidation.
Revenue
Recognition
Revenue from the sales or licensing of films is recognized upon
meeting all recognition requirements of Accounting Standard
Codification 926, Entertainment Films (ASC
926) (formerly Statement of Position
00-2.) These
requirements are a) persuasive evidence of a sale or
licensing arrangement with a customer exists, b) the film
is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate
and unconditional delivery, c) the license period of the
arrangement has begun and the customer can begin its
exploitation, exhibition, or sale, d) the arrangement fee
is fixed or determinable, and e) collection of the
arrangement fee is reasonably assured. For the year ended
December 31, 2009 the Company had produced and theatrically
released two films that would meet all of the above-stated
requirements and recognized $40.32 million in revenues.
Cash payments received in advance are recorded as deferred
revenue until all the conditions of revenue recognition have
been met. As of December 31, 2009 and 2008, the Company
recorded deferred revenue totaling $0.61 million and
$3.37 million, respectively.
Cash
and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk
from fluctuations in interest rates. As a result, the carrying
amount of cash and cash equivalents approximates fair value.
The Company places its cash and cash equivalents with major
financial institutions. At times, cash balances may be in excess
of the amounts insured by the Federal Deposit Insurance
Corporation (FDIC). At December 31, 2009 and
2008, the Company had cash balances on deposit with banks, which
exceeded the balance insured by the FDIC in the amount of
$0.38 million and $2.89 million, respectively.
Restricted
Cash and Cash Equivalents
The Companys Senior Credit Facility required the
establishment of an Overhead Reserve Account, an
Interest Reserve Account, and a Collection
Account, which are reflected as restricted cash and cash
equivalents in the accompanying consolidated balance sheet.
Restricted cash and cash equivalents include cash on deposit
with financial institutions in demand accounts, savings accounts
and short-term certificates of deposits.
Upon the initial closing on June 27, 2007, approximately
$7.5 million was deposited into the Overhead Reserve
account. During the first year after the initial closing, the
Company was able to draw down funds from the Overhead Reserve
account until the balance in the Overhead Reserve account
reached approximately $3 million. Pursuant to the Credit
Agreement, which governed the Senior Credit Facility, the
Company was required to keep a minimum balance of
$3 million in the Overhead Reserve account up to
June 27, 2012 (one year prior to the scheduled maturity
date of the Senior Credit Facility).
As part of the forbearance agreements, which the Company entered
into with the lenders of the Senior Credit Facility as well as
the Note Holders of the Second Lien Notes, the Company was
allowed to draw down funds from
F-8
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
the Overhead Reserve account pursuant to a pre-approved budget
to fund its operations. The balance in the Overhead Reserve
account as of December 31, 2009 and 2008 was
$0.58 million and $3.03 million, respectively.
Additionally, the Company was required to maintain a balance of
approximately $4.20 million in the Interest Reserve
Account, representing an estimated twelve months of interest due
on the Second Lien Notes. As part of the forbearance agreement,
the Senior Lenders and the Note Holders required that the
balance in the Interest Reserve account on September 2,
2009 of approximately $4.29 million be applied against the
outstanding balance of the Senior Credit Facility and the
requirement for the Interest Reserve account was eliminated. The
balance for the Interest Reserve account as of December 31,
2009 and December 31, 2008 was $0.
Short-Term
Investments
Short-term investments and securities held for sale consist of
corporate, state and municipal securities with readily
determinable fair market values and original maturities of
twelve months, or less. Investments with maturities beyond one
year may be classified as short-term based on their liquid
nature and because such marketable securities represent the
investment of cash that is available for current operations.
Accounts
Receivable
Accounts receivable represent customer obligations due under
contractual obligations where the conditions stated above in
respect of revenue recognition have been fulfilled and where the
customer has been invoiced for the amount payable.
The carrying amount of accounts receivable is reduced by an
allowance that reflects managements best estimate of the
amounts that will not be collected. Management individually
reviews all delinquent accounts receivable balances.
The Company evaluates accounts receivable where it believes that
there may be a possibility that the license agreement concerned
may be at risk of being cancelled in the future. In these cases,
the Company uses its judgment, based on the available facts and
circumstances, and records a specific reserve for that customer
against amounts due to reduce the receivable to the amount that
is expected to be collected. These specific reserves are
re-evaluated and adjusted as additional information is received
that impacts the amount reserved.
If circumstances change (for example, the Company experiences
higher than expected defaults or an unexpected material adverse
change in a major customers ability to meet its financial
obligation to the Company), estimates of the recoverability of
amounts due to the Company could be reduced by a material
amount. The allowance for doubtful accounts at December 31,
2009 and 2008 totaled $0.
Fair
Value Accounting
Effective January 1, 2008, the Company adopted Accounting
Standard Codification 820, Fair Value Measurements
(ASC 820). ASC 820 does not require any new fair
value measurements; rather, it defines fair value, establishes a
framework for measuring fair value in accordance with existing
generally accepted accounting principles and expands disclosures
about fair value measurements.
The adoption of ASC 820 for the Companys financial assets
and liabilities did not have a material impact on the financial
position or operating results for the years ended
December 31, 2009 and 2008.
F-9
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
Beginning January 1, 2008, financial assets and liabilities
recorded at fair value in the consolidated balance sheets are
categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Level inputs, as
defined by ASC 820, are as follows:
|
|
|
Level Input
|
|
Input Definition
|
|
Level I
|
|
Inputs are unadjusted, quoted prices for identical assets or
liabilities in active markets at the measurement date.
|
Level II
|
|
Inputs, other than quoted prices included in Level I, that
are observable for the asset or liability through corroboration
with market data at the measurement date.
|
Level III
|
|
Unobservable inputs that reflect managements best estimate
of what market participants would use in pricing the asset or
liability at the measurement date.
|
The following table summarizes fair value measurements by level
at December 31, 2009 for assets and liabilities measured at
fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
1,622
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,622
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,622
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes fair value measurements by level
at December 31, 2008 for assets and liabilities measured at
fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
13,730
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,730
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
|
|
|
|
10,350
|
|
|
|
|
|
|
|
10,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,730
|
|
|
$
|
10,350
|
|
|
$
|
|
|
|
$
|
24,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,435
|
|
|
$
|
2,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,435
|
|
|
$
|
2,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 3 Short-Term Investments for
additional information on the Companys auction rate
securities, including a description of the securities and
underlying collateral.
F-10
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
The following table summarizes our fair value measurements using
significant Level III inputs, and changes therein, for the
year ended December 31, 2009:
|
|
|
|
|
|
|
Level III
|
|
|
(Amounts in thousands)
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
(2,435
|
)
|
Transfer in/out of Level III
|
|
|
|
|
Net unrealized gains (losses)
|
|
|
|
|
Net realized gains (losses)
|
|
|
2,435
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
|
|
|
|
|
|
|
The warrant liabilities are marked to fair value each reporting
date until they are settled. The warrants are valued based on
the price paid for the Class B redeemable units (see
Notes 9 and 10) and adjusted for the order of expected
future distributions of the Company. Effective September 2,
2009, as discussed in Notes 7 and 8, the Company entered
into a forbearance agreement that modified the expected future
cash distributions of the Company. On November 23, 2009 as
part of the recapitalization the Company redeemed all
outstanding C, D and E class warrants for an aggregate of $1.
Property
and Equipment
Property and equipment is recorded at historical cost.
Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets of three years. When
property and equipment is sold or otherwise disposed of, the
cost and related accumulated depreciation or amortization is
removed from the accounts and any resulting gain or loss is
included in income. The costs of normal maintenance and repairs
are charged to expense when incurred.
In the event that facts and circumstances indicate that the cost
of an asset may be impaired, an evaluation of recoverability
would be performed. There was no impairment recorded for the
years ended December 31, 2009 and 2008.
Film
Costs
Film costs are capitalized in accordance with ASC 926. Film
costs represent capitalized costs for the production of films
and other entertainment projects. These costs will be amortized
when the films that the Company is producing meet all the
requirements listed in ASC 926 and the Company is recognizing
revenues for the Films.
Film costs are amortized in the same proportion that the current
revenue bears to the estimated remaining unrecognized revenue as
of the beginning of the current year. Revenue and cost forecasts
are periodically reviewed by management and revised when
warranted.
The Company has completed two feature films, The Rebound
and Law Abiding Citizen. The Rebound was released in
September of 2009 and in accordance with ASC 926, film costs of
$5.85 million were amortized in the same proportion that
the current revenues bears to the estimated remaining
unrecognized revenues as of the beginning of the current year.
Law Abiding Citizen was released both in the United
States and in certain international territories on
October 16, 2009. Film costs of $21.60 million were
amortized in accordance with ASC 926, in the same proportion
that the current revenues bear to the estimated remaining
unrecognized revenues as of the beginning of the current year.
The carrying value of the film costs are periodically reviewed
for impairment. If events or changes in circumstance indicate
that the fair value of the capitalized costs on a specific film
are less than their carrying value, an impairment charge is
recognized in the amount by which the unamortized costs exceed
the projects fair value.
F-11
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
No impairment charge was recognized for the years ended
December 31, 2009 and 2008, and the period ended
December 31, 2007, respectively.
Development
Costs
Development costs are capitalized costs related to projects not
in production. If the project is greenlit, the costs are
reclassified as Film Costs. The Company evaluates on a monthly
basis, all projects in development. If the Company decides to
abandon any project, an expense for the costs incurred to date
will be included in the Companys consolidated statements
of operations and comprehensive loss.
Debt
Issuance Costs
Debt issuance costs are amortized using the effective interest
method, over the expected term of the underlying debt
instruments. On September 2, 2009 the Company entered into
a forbearance agreement with the Senior Lenders regarding the
Senior Credit Facility. As part of this forbearance agreement ,
the Senior Credit Facility was terminated and the Company was
only allowed to draw down additional funds related to the
completion and delivery of the picture Law Abiding
Citizen.
This reduction resulted in an accelerated amortization of the
Debt Issuance Costs. As of November 24, 2009 the Senior
Credit Facility was paid in full and terminated, therefore all
debt issuance costs previously capitalized, which were related
to the establishment of the Senior Credit Facility in 2007 were
expensed.
As part of the forbearance agreement with the Note Holders of
the Second Lien Notes, the scheduled maturity date for the
Second Lien Notes was amended from June 27, 2014 to
June 27, 2011. The debt issuance costs associated with the
Second Lien Notes continue to be amortized at an accelerated
rate using the effective interest method over the remaining term
through June 27, 2011.
Amortization expense for the years ended December 31, 2009
and 2008, and the period ended December 31, 2007 totaled
$5.27 million, $1.21 million, and $0.60 million,
respectively, and such expense is included in interest expense
in the accompanying statements of operations and comprehensive
loss. As a result of the forbearance agreements, during the year
ended December 31, 2009 the Company expensed
$4.79 million of debt issuance costs related to the closing
of the Senior Credit Facility.
|
|
|
|
|
|
|
|
|
|
|
Senior Credit
|
|
|
Second Lien
|
|
|
|
Facility
|
|
|
Notes
|
|
|
|
(Amounts in thousands)
|
|
|
Balance at May 22, 2007
|
|
$
|
|
|
|
|
|
|
Additions
|
|
|
6,429
|
|
|
|
1,178
|
|
Expensed
|
|
|
(600
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
5,829
|
|
|
|
1,095
|
|
Additions
|
|
|
|
|
|
|
|
|
Expensed
|
|
|
(1,041
|
)
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
4,788
|
|
|
|
929
|
|
Additions
|
|
|
|
|
|
|
|
|
Expensed
|
|
|
(4,788
|
)
|
|
|
(482
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
F-12
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
Marketing
Costs
The Company expenses marketing and distribution costs as
incurred. Marketing and distribution costs for the years ended
December 31, 2009 and 2008, and the period ended
December 31, 2007 totaled $1.22 million,
$0.62 million, and $0.24 million, respectively.
Income
Taxes
The Company is not a taxpaying entity for federal income tax
purposes. The various members of the Company include their
respective share of the Companys Income in their
respective income tax returns.
Comprehensive
Income or Loss
Comprehensive income or loss is the change in equity of a
business enterprise during a period from transactions and all
other events and circumstances from non-owner sources. Other
comprehensive income or loss includes changes in the fair-value
of
available-for-sale
investments.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the financial
statement date and the reported amount of revenues and expenses
during the reporting year. Actual results may differ from those
estimates.
|
|
3.
|
Short-Term
Investments
|
Short-term investments comprise investments
available-for-sale.
Investments
available-for-sale
are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
members equity.
The Company periodically analyzes its short-term investments for
impairments considered other than temporary. In performing this
analysis, the Company evaluates whether general market
conditions that reflect prospects for the economy as a whole or
information pertaining to the specific investments indicates
that an other than temporary decline in value has occurred.
The Company considers specific factors, including the financial
condition and near-term prospect of each investment and the
intent and ability of the Company to retain the investment for a
period of time sufficient to allow for any anticipated recovery
in market value. As a result of these reviews, the Company
recognized no impairment charges for the years ended
December 31, 2009 and 2008.
Short-term investments consist of the following as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
December 31, 2009
|
|
Cost
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
December 31, 2008
|
|
Cost
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities
|
|
$
|
10,350
|
|
|
$
|
|
|
|
$
|
10,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
10,350
|
|
|
$
|
|
|
|
$
|
10,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, the Company held $0 and
$10.35 million, respectively, of
available-for-sale
securities with a
28-day
auction reset feature (auction rate securities).
These securities are collateralized by corporations and higher
education funded student loans which are substantially
guaranteed by the federal government as part of the Federal
Family Education Loan Program (FFELP) or by the underlying
municipalities or state agencies. A Dutch auction process resets
the applicable interest rate at predetermined intervals is
intended to provide liquidity to the holder of auction rate
securities by matching buyers and sellers within a market
context enabling the holder to gain immediate liquidity by
selling such interests at par or rolling over their investment.
If there is an imbalance between buyers and sellers, the risk of
a failed auction exists.
The Company experienced various failed auctions for securities
with a par value of $5.56 million as of December 31,
2007. The Company sold these securities in February 2008 at
$0.45 million below par value.
Additionally, the Company had several issues fail at auction
during 2008, with a total par value of $10.35 million. At
December 31, 2008, these short-term investments were still
illiquid due to failed auctions.
On January 2, 2009, Merrill Lynch redeemed all outstanding
illiquid auction rate securities held by the Company at par.
|
|
4.
|
Property
and Equipment
|
Property and equipment are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
|
2009
|
|
|
2008
|
|
|
(in years)
|
|
|
|
(Amounts in thousands)
|
|
|
Technical equipment and computers
|
|
$
|
172
|
|
|
$
|
172
|
|
|
|
3
|
|
Furniture, fixtures and equipment
|
|
|
186
|
|
|
|
185
|
|
|
|
3
|
|
Computer software
|
|
|
72
|
|
|
|
72
|
|
|
|
3
|
|
Leasehold improvements
|
|
|
122
|
|
|
|
122
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
552
|
|
|
|
551
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(422
|
)
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
130
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and
equipment was $0.19 million, $0.17 million, and
$0.06 million for the years ended December 31, 2009
and 2008, and the period ended December 31, 2007
respectively.
F-14
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
Development costs at December 31, 2009 and 2008 consist
entirely of costs for projects in development. The movement in
development costs for the years ended December 31, 2009 and
2008 is as follows:
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
Balance at May 22, 2007
|
|
$
|
|
|
Additions
|
|
|
461
|
|
Transferred to film costs
|
|
|
|
|
Expensed
|
|
|
(168
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
293
|
|
Additions
|
|
|
1,421
|
|
Transferred to film costs
|
|
|
|
|
Expensed
|
|
|
(26
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,688
|
|
Additions
|
|
|
1,052
|
|
Transferred to film costs
|
|
|
|
|
Expensed
|
|
|
(1,051
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,689
|
|
|
|
|
|
|
The Company expensed $1.05 million , $0.03 million,
and $0.17 million for the years ended December 31,
2009 and 2008, and the period ended December 31, 2007,
respectively, related to abandoned projects.
The Company has completed two feature films, The Rebound
and Law Abiding Citizen. The Rebound was released in
September of 2009 and Law Abiding Citizen was released on
October 16, 2009 and in accordance with ASC 926, film costs
of $5.85 million and $21.60 million, respectively were
amortized in the same proportion that the current revenues bears
to the estimated remaining unrecognized revenues as of the
beginning of the current year in accordance with ASC 926.
Film costs at December 31, 2009 and 2008 consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Films in release
|
|
$
|
56,266
|
|
|
$
|
|
|
Films not yet available for release:
|
|
|
|
|
|
|
|
|
In process
|
|
|
|
|
|
|
24,399
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(27,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film costs, net
|
|
$
|
28,820
|
|
|
$
|
24,399
|
|
|
|
|
|
|
|
|
|
|
Based on the Companys estimates of projected gross
revenues as of December 31, 2009, the Company expects
approximately 77% of completed films, net of accumulated
amortization, will be amortized during the one year period
ending December 31, 2010, and approximately 100% of
unamortized film costs applicable to films in release are
expected to be amortized during the next three years.
F-15
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
|
|
7.
|
Second
Secured Lien Notes
|
On June 27, 2007, the Company entered into a Securities
Purchase Agreement for a total committed funding of
$30 million through the issuance of Second Lien Notes. At
the date of issuance, the purchasers of the Second Lien Notes
(Note Holders) were granted a second lien security
interest in all of the Companys property and interests in
property and proceeds thereof. The second lien security interest
is subordinated to the first lien security interest, granted to
the Senior Lenders of the Senior Credit Facility under the
Credit Agreement (see Note 8).
The first and second liens are currently held by Union Bank,
N.A. Union Bank, N.A. was the administrative and collateral
agent for the Senior Lenders and the collateral agent for the
Note Holders.
The Second Lien Notes, as originally issued, included a payment
in kind (PIK) feature that permitted the Company to
capitalize and add to the aggregate outstanding principal amount
of the Second Lien Notes each quarterly interest payment due
thereunder and defer payment thereof to the scheduled maturity
date of June 27, 2014 (although as originally issued the
Second Lien Notes also permitted the Company in its discretion
to pay quarterly interest in cash subject to satisfaction of
certain conditions). At the request of General Electric Capital
Corporation (GECM), the initial Note Holder of all Second Lien
Notes, and in order to assist GECM in its post-closing
syndication efforts, the Company entered into an amendment to
the Securities Purchase Agreement on August 7, 2007,
pursuant to which, among other things, the Second Lien Notes
were amended and restated to eliminate the PIK feature for, and
require the cash payment of, all quarterly interest payments, at
an annual rate of 12%, required to be made by the Company after
September 30, 2008, subject to the ability of the Company
to elect to defer the payment of interest due on any quarterly
interest payment date to the next succeeding quarterly interest
payment date (on which date all accrued and unpaid interest for
the preceding two quarterly periods would be required to be paid
in cash). Following this amendment, GECM syndicated the Second
Lien Notes in a series of transactions to R6 Capital and its
successor company, Eton Park.
Due to liquidity and capital resource issues resulting in part
from the aforementioned amendments to the Second Lien Notes, the
Company was unable to pay scheduled quarterly interest payments
totaling $2.16 million due on June 30, 2009 under the
Second Lien Notes.
Despite the occurrence of the above Event of Default, the
Company was successful in negotiating forbearance agreements on
September 2, 2009 with its Note Holders under the
Securities Purchase Agreement and Senior Credit Facility
pursuant to which such holders agreed to forbear from exercising
any rights and remedies under the Securities Purchase Agreement
and the Senior Credit Facility (absent the occurrence of any
additional events of default thereunder) until June 30,
2010, and December 31, 2009, respectively.
As part of the forbearance agreements, the Senior Lenders
allowed the Company to draw funds from the Overhead Reserve
account pursuant to a pre-approved budget to fund its
operations. Additionally, the Note Holders and the Senior
Lenders required that the balance in the Interest Reserve
account on September 2, 2009 of approximately
$4.2 million be applied against the outstanding balance of
the Senior Credit Facility.
Additionally, the forbearance agreement included a provision
that amended the scheduled maturity date on the Second Lien
Notes from June 27, 2014 to June 27, 2011.
The Second Lien Notes initially accrued interest at 13.5% per
annum through September 30, 2008 (the initial PIK period).
All interest through September 30, 2008 was capitalized and
added to the aggregate outstanding principal amount of the
Second Lien Notes. Since October 1, 2008, the Second Lien
Notes bear interest at 12.0% per annum. The Second Lien Notes
currently accrue interest at the default rate of 16% per annum.
As of December 31, 2009 and 2008, the amount of the Second
Lien Notes totaled $37.04 million and $35.45 million,
respectively, of which $26.49 million and
$30.0 million, respectively, represents the original
principal amount and $10.54 million and $5.45 million,
respectively, represents the amount of accrued but unpaid
interest that was capitalized and added to the principal amount
of the Second Lien Notes. The aggregate principal amount of the
Second Lien Notes, including all capitalized interest, shall be
paid in full on June 27, 2011.
F-16
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
In connection with the Securities Purchase Agreement, the
Company granted to the Purchasers of its Second Lien Notes,
warrants to acquire an aggregate of 1,538 Class C Units of
the Company, at a purchase price of $0.01 per Class C Unit.
The value of the warrants at issuance of $1.30 million was
treated as a discount to the debt and amortized over the life of
the Second Lien Notes using the effective interest rate method.
As of part of a buyout agreement (as outlined below), which the
Company entered into on November 23, 2009 with the Note
Holders, all Class C warrants were redeemed for an
aggregate of $1 (see Note 9.)
For the years ended December 31, 2009 and 2008, and the
period ended December 31, 2007 the amount of discount
amortized to interest expense in the accompanying statements of
operations and comprehensive loss totaled $0.47 million and
$0.18 million, and $0.09 million, respectively.
Second Lien Notes payable are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Original principal amount
|
|
$
|
26,493
|
|
|
$
|
30,000
|
|
Accrued interest
|
|
|
10,545
|
|
|
|
5,455
|
|
Less: unamortized discount
|
|
|
(552
|
)
|
|
|
(1,027
|
)
|
|
|
|
|
|
|
|
|
|
Second Lien Notes payable, net of interest and unamortized
discount
|
|
$
|
36,486
|
|
|
$
|
34,428
|
|
|
|
|
|
|
|
|
|
|
On November 23, 2009, the Company entered into a Buyout
Agreement (the Buyout Agreement) with H &
W Movie Partners, LLC (HWMP), a company related
through common ownership, and the Note Holders of the Second
Lien Notes, Eton Park CLO Management 1, Eton Park CLO Management
2, Eton Park Master Fund, Ltd., and Eton Park Fund, L.P.
(collectively Eton Park). Under the terms of the
Buyout Agreement, should the Company consummate an Equity
Transaction, as defined therein, either through an initial
public offering (the Offering) or through a private
equity investment (the Private Investment), the
Company agrees to pay Eton Park a portion of the proceeds
received to repay the Second Lien Notes. Upon an Offering, the
Company will pay to Eton Park the lesser of
(a) $37.5 million or (b) the outstanding
obligations owing to Eton Park under the Second Lien Notes less
$1.5 million, and, in addition thereto, will issue and
deliver to Eton Park the number of shares of common stock having
a value of $1.5 million. If the Offering is not consummated
and a Private Investment is completed, the Company will pay the
lesser of (i) $39 million or (ii) the outstanding
obligations owing to Eton Park under the Second Lien Notes as of
the date of the receipt of such funds. Effective immediately
upon receipt by Eton Park of the applicable initial cash paydown
described above upon consummation of an Equity Transaction, the
Companys obligations to Eton Park under the Second Lien
Notes will be terminated, and all liens securing those
obligations will be extinguished. In conjunction with the Buyout
Agreement, EP Holding (Film), Corp., Eton Parks designated
holder of the Class C warrants of the Company, entered into
a Redemption Agreement on November 23, 2009, pursuant
to which the Company redeemed all outstanding Class C
warrants held by such Eton Park designee for an aggregate
purchase price of $1.
In addition to the initial cash paydown to be paid by the
Company to Eton Park upon consummation of an Equity Transaction
as described above, to the extent that the aggregate outstanding
obligations owing to Eton Park under the Second Lien Notes at
the time of such initial cash paydown exceeds $39 million
(such excess, the Short Fall Amount), the Company
will also pay to Eton Park an amount equal to all cash receipts
actually received by the Company from Overture Films, LLC
(Overture) under the Companys distribution
agreement with Overture in respect of the film Law Abiding
Citizen until the Short Fall Amount is paid in full, together
with any accrued and unpaid interest thereon at a rate of 16%
per annum.
F-17
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
As part of the Buyout Agreement, HWMP agrees to make certain
equity investments in the Company as specified therein in
exchange for the issuance to HWMP of Class G units. The
Buyout Agreement also provides for the consent by Eton Park to
the sale by the Company and the purchase by HWMP of all right,
title and interest of the Company in and to that certain film
currently entitled Earthbound (the Purchased
Film) for a cash purchase price of $0.15 million and
otherwise on the terms and conditions set forth in the
Earthbound Acquisition Agreement (as defined therein). As
additional consideration for Eton Parks consent to the
sale by the Company of the Purchased Film, Eton Park is also
entitled to a participation in an amount equal to 8.6% of the
adjusted gross receipts of the Purchased Film and any other
films or entertainment products made based upon the Purchased
Film, commencing at Cash Breakeven as defined in the Earthbound
Participation Agreement referred to in the Buyout Agreement.
However, in the event that an Equity Transaction is consummated
on or before April 1, 2010 and Eton Park receives the
applicable cash paydown, then Eton Parks right to receive
the participation shall terminate.
|
|
8.
|
Senior
Revolving Borrowing Base Credit Facility
|
On June 27, 2007, the Company entered into a Credit
Agreement for a Senior Credit Facility that provided for
borrowings under a line of credit up to a maximum of
$140 million. The Company had the option to draw from the
Credit Facility via Base Rate Loans or Eurodollar Rate Loans.
Borrowings made as Base Rate Loans bear interest at the Base
Rate, defined as the higher of (a) the rate last quoted by
The Wall Street Journal as the base rate on corporate
loans posted by at least 75% of the nations largest
banks in the United States (commonly known as the Prime
rate) or the sum of 0.5% per annum and the Federal Funds Rate;
plus a margin of 1.25%. The applicable Base Rate as of
December 31, 2008 was 3.25%, resulting in an interest rate
of 4.5% for all outstanding base rate loans at December 31,
2009.
As of December 31, 2009, the outstanding Base Rate Loans
were $0. As of December 31, 2008, the outstanding Base Rate
Loans were $0.87 million bearing interest at a rate of 4.5%.
Borrowings made as Eurodollar Rate Loans bear Interest at the
Eurodollar Rate, defined as the rate offered for deposits in
Dollars for the applicable Interest Period appearing on Reuters
Screen LIBOR01; plus a margin of 2.25%. The Company can select
to fix the applicable Libor Rate for the Eurodollar Rate Loans
at one, two, three or six month options.
The Credit Facility also incurred an unused commitment fee equal
to 0.50% per annum, payable quarterly. The Company incurred
$0.40 million, $0.70 million, and $0.37 million
of unused commitment fee for the years ended December 31,
2009 and 2008, and the period ended December 31, 2007,
respectively.
As previously mentioned in Note 7, on September 2, 2009 the
Company entered into a forbearance agreement with the Senior
Lenders under the Senior Credit Facility and the Securities
Purchase Agreement. The forbearance agreement effectively
resulted in the termination of the Senior Credit Facility, and
reduced the credit commitment to $0. At December 31, 2009
and 2008, $0 and $10.37 million was outstanding under the
Credit Facility, respectively. The forbearance agreement with
the Senior Lenders also stipulates that the borrowing base
facility cannot be utilized with respect to any future films.
The default under the Credit Facility was based on a provision
included in a waiver, consent and amendment agreement, dated
February 27, 2009. The provision stipulated that the
Company was required to utilize any additional borrowing base
availability to establish a cash reserve account of up to
$5 million no later than July 31, 2009 in order to
enable the Company to be able to service an obligation it had
entered into pursuant to the license agreement for the film
Law Abiding Citizen with the U.S. distributor,
Overture Films.
The Company was able to extend the deadline from July 31,
2009 to August 28, 2009, however the Company was not able
to establish the required reserve of $5 million, hence an
Event of Default occurred on such date under the Credit
Agreement and Securities Purchase Agreement.
F-18
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
The balance in the above stated cash reserve account as of
August 29, 2009 was $1.22 million. As part of the
forbearance agreement with the Note Holders, it was agreed that
the Note Holders would provide additional funding of
$3.78 million in order to provide the Company with the
ability to fulfill its contractual obligation it had with
Overture Films.
As part of the forbearance agreement, the Senior Lenders and the
Note Holders required that the balance in the Interest Reserve
account on September 2, 2009 of approximately
$4.29 million be applied against the outstanding balance of
the Senior Credit Facility and the requirement for the Interest
Reserve account was eliminated.
At December 31, 2009 and 2008, the balances in the Overhead
Reserve Account, the Interest Reserve Account and the Collection
Account were $1.35 million and $3.49 million,
respectively. The Credit Facility also has various covenants
which were met at December 31, 2009 and 2008 with the
exception of the funding of the Interest Reserve Account (see
Note 2).
As of December 31, 2009 and 2008, the following Financial
Institutions were members of the Lender Group under the Credit
Facility with the following commitment amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
General Electric Capital Corporation
|
|
$
|
|
|
|
$
|
30,000
|
|
CIT Lending Services Corporation
|
|
|
|
|
|
|
30,000
|
|
Comerica Bank
|
|
|
|
|
|
|
22,500
|
|
Union Bank, N.A.
|
|
|
|
|
|
|
25,000
|
|
City National Bank
|
|
|
|
|
|
|
12,500
|
|
Bank Leumi USA
|
|
|
|
|
|
|
10,000
|
|
California Bank and Trust
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Total available Senior Revolving Borrowing Base Credit Facility
|
|
$
|
|
|
|
$
|
140,000
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the Credit Agreement the lender group had appointed
Union Bank, N.A. as the Administrative Agent and Collateral
Agent to facilitate the Credit Facility.
On June 27, 2007, in connection with the terms of the
Securities Purchase Agreement, the Company issued warrants to
the Note Holders of the Second Secured Lien Notes to acquire an
aggregate of 1,538 Class C Units of the Company, at a
purchase price of $0.01 per Class C Unit. At issuance, the
warrants had a fair value of $1.30 million in the
aggregate, resulting in a discount to the Second Lien Notes (see
Note 7). The warrants were exercisable at any time after
the Class B members (Note 10) have received
distributions equal to the amounts contributed by the
Class B members and their preferred return, as defined in
the Operating Agreement, until June 27, 2017.
On June 27, 2007, the Company issued 1,282 Class D
warrants and 641 Class E warrants, with an exercise price
of $0.01 per Unit, to certain consultants of the Company. The
warrants were exercisable at any time after the Class B
members (Note 10) have received distributions equal to
the amounts contributed by the Class B members and their
preferred return, as defined in the Operating Agreement, until
June 27, 2017.
The Class C, D and E Warrants were exercisable into
Class C, D and E member units, respectively, as discussed
in Note 10. Previously, the warrants had been classified as
liabilities in the accompanying consolidated balance sheet due
to the redeemable feature of the related member units.
F-19
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
As part of the recapitalization agreement the Company entered
into with HWMP on December 2, 2009, the Class D and
Class E warrants were redeemed by the Company for $1 each
(see Note 10). Additionally, as part of the Eton Park
buyout agreement (see Note 7) the Class C units
were redeemed for $1.00 in December 2009.
Based on the redemption of the Class C, D, and E warrants
the Company recognized $2.44 million as Other Income for
the year ended December 31, 2009.
The warrants outstanding as of December 31, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Fair
|
|
Warrants
|
|
of Units
|
|
|
Value
|
|
|
|
(Amounts in thousands)
|
|
|
Class C Units
|
|
|
|
|
|
$
|
|
|
Class D Units
|
|
|
|
|
|
|
|
|
Class E Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The warrants outstanding as of December 31, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Fair
|
|
Warrants
|
|
of Units
|
|
|
Value
|
|
|
|
(Amounts in thousands)
|
|
|
Class C Units
|
|
|
1,538
|
|
|
$
|
1,300
|
|
Class D Units
|
|
|
1,282
|
|
|
|
907
|
|
Class E Units
|
|
|
641
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
3,461
|
|
|
$
|
2,435
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Redeemable
Member Units
|
On June 8, 2007, the Company executed the Operating
Agreement, and issued an aggregate of 25,000 units of
Class B redeemable units at a value of $1,000 per unit, and
received net proceeds of $23.80 million (net of allocated
underwriting fees, commissions, and other issuance costs in
aggregate of $1.20 million) on the closing date of the
Credit Facility, as well as the Securities Purchase Agreement.
As part of the recapitalization and the HWMP agreement, the
Companys operating agreement was revised on
December 2, 2009 and the initial Class B units were
converted to
Class B-1 units.
On November 13, 2008, the Company issued an additional
7,644 units of Class B redeemable units at a value of
$1,000 per unit and received proceeds of $7.64 million. As
part of the amended and restated Operating agreement on
December 2, 2009, these Class B units were converted
to
Class B-2 units.
On December 2, 2009, the Company entered into an agreement
with HWMP pursuant to which HWMP agreed to make equity
investments in the Company in exchange for the issuance to HWMP
of Class G units. HWMP also agreed to make equity
investments in Earthbound Films, LLC and Earthbound Productions,
LLC (collectively, the Earthbound Films Entities),
8439 Holdings, LLC (8439) and 8440 Holdings, LLC
(8440), and the Company and HWMP entered into a
put/call agreement pursuant to which the parties agreed that
HWMP would transfer to the Company 100% of the equity of
Earthbound Films, 8439 and 8440 in exchange for the issuance by
the Company to HWMP of Class G units. The primary purpose
of this transaction was to facilitate the financing by HWMP of
certain production expenses of Earthbound incurred by the
Earthbound Films Entities as well as the acquisition of new
motion picture development projects, but to allow the Company to
subsequently acquire all rights to Earthbound and other assets
then held by the Earthbound Films Entities, 8439 and 8440 by
acquiring 100% of the equity of each such entity in
consideration for the issuance to HWMP of Class G units.
Upon exercise of the put/call agreement, Class G membership
units will constitute a majority of the equity of TFD.
F-20
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
As consideration for the purchase by the Company of such equity
interests pursuant to the Put Notice or the Call Notice, the
Company shall issue such number of Class G Units to HWMP so
that HWMP shall receive an additional percentage in the Company
equal to a fraction, the numerator of which is the aggregate
amount of cash that HWMP actually contributed to the capital of
its subsidiaries, and the denominator of which is
$0.18 million, subject to certain limitations set forth in
the Operating Agreement. The rights under the Put Notice and the
Call Notice expire if the Company or its
successor-in-interest
does not consummate an Equity Transaction on or before the later
of (i) April 1, 2010, or (ii) such later date as
Eton Park may agree the Company or its
successor-in-interest
may consummate an Equity Transaction pursuant to the Buyout
Agreement, provided that such date shall not be later than
April 30, 2010.
As part of the HWMP agreement Class D and E units were
redeemed for $1.00 respectively. The former holders of the
Class D units were issued Class J units representing
1%.
The aggregate investment commitment of HWMP through
December 31, 2009 was a minimum of $8.33 million. Of
this amount, $3.83 million was committed for investment in
or for the benefit of the Company, while $4.5 million was
committed for investment in the Earthbound Films Entities, 8439
and 8440.
Additionally, HWMP committed an additional $6.5 million if
the Equity Transaction is delayed past January 10, 2010.
Such investment may be funded either in a lump sum on
January 10, 2010 or on a monthly basis in accordance with
the Budget funding requirements. The Company will issue
additional Class G units, which will dilute existing
Class B Units and Class J units until they reach a
dilution floor of 15.00% and 0.25% respectively.
Under the Operating Agreement, at any time after the
10th anniversary of the Closing Date, Class B Members
holding at least 25% of the Class B Units and Class G
Members holding at least 25% of the Class G units will have
the right to deliver a Put Option Notice to the Company,
requiring the Company to purchase for an amount equal to the
fair market value, all of the Class B Units or Class G
units.
Following the delivery of the Put Option Notice, the applicable
Class B Members, Class G Members and the Company shall
negotiate in good faith to attempt to determine the Put Option
Price for the Put Interests and the other Interests based on the
Company being sold for its fair market value with the net
proceeds remaining after payment of any indebtedness being
distributed.
The Class B and Class G redeemable units contain
certain provisions that allow the holder to redeem the units for
cash after a certain date. As redemption under these
circumstances is not solely within the Companys control,
the Class B and Class G redeemable units are
classified outside of members equity.
The Company accretes changes in the redemption value of the
redeemable units as a deemed dividend on the Class B and
Class G Units over the period from the date of issuance to
the earliest redemption date using the effective interest method.
In connection with the Executive Services Agreement entered
between the Company and certain Executives, the Company issued
640 Class A Units with a fair market value of $900 per Unit
and 1,000
Class F-1
Units with a fair market value of $1,000 per unit on the
effective date of each Agreement. These Units had a vesting term
of three years, of which 25% shall vested on the Effective Date
and 25% on each anniversary thereafter, provided, however, that
vesting should cease if the Executives employment
terminates for any reason.
For the years ended December 31, 2009 and 2008, and the
period ended December 31, 2007, 25% of the Class A and
F-1 Units issued have vested each period, respectively, and the
Company has recorded unit-based compensation expense of
$0.25 million and $0.14 million for the Class A
Units and
Class F-1
Units, respectively, for each year ended December 31, 2009
and 2008, and the period ended December 31, 2007.
F-21
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
As part of the amendment to the Operating Agreement on
November 25, 2009, the Company redeemed all outstanding
Class A and F-1 units for $1.00 per Class of units. In
exchange the Company issued Class H units to the unit
holders. Class H units vest over a period of 5 years
and the Company recorded compensation expense for the
Class H units for the year ended December 31, 2009 of
$0.02 million.
The Class H units shall vest in full upon the occurrence of
the initial public offering.
As of December 31, 2008, the Company had issued 74
Management Incentive Shares (MIS Units) at $900 per
MIS Unit for a total value of $0.07 million, leaving 273.5
MIS Units outstanding. The MIS Units vest 20% per year beginning
either on the date of issuance, or upon the second anniversary
of issuance.
As part of the amendment to the Operating Agreement on
November 25, 2009, the Company cancelled all outstanding
MIS Units. In exchange the Company issued Phantom Class H
units to the units holders. Phantom Class H units vest over
a period of 5 years and the Company recorded compensation
expense for the Phantom Class H units for the year ended
December 31, 2009 of $0.03 million.
The Phantom Class H units will vest in full upon the
occurrence of the public offering.
The Company also issued 1,000
Class F-2
Units to two of the Companys investors. These Units vested
in the same manner as the Class A and F-1 Units described
above. For the year ended December 31, 2008, 25% of the
Class F-2
Units issued had vested, and were recorded as issuance costs for
the Class B redeemable Units.
As part of the amendment to the Operating Agreement on
November 25, 2009, the Company redeemed all outstanding F-2
Units for $1.00. No units were issued in exchange for the
redemption.
Unit Based Compensation activity during 2009, 2008, and 2007 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Units
|
|
|
Exercise Price
|
|
|
|
(Units and per unit prices not in thousands)
|
|
|
Outstanding at May 22, 2007
|
|
|
|
|
|
$
|
|
|
Granted (MIS)
|
|
|
1,971
|
|
|
|
951
|
|
Forfeited (MIS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
1,971
|
|
|
|
951
|
|
Granted (MIS)
|
|
|
|
|
|
|
|
|
Forfeited (MIS)
|
|
|
(57.5
|
)
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,913.5
|
|
|
|
952
|
|
Granted (Phantom H units)
|
|
|
2,103
|
|
|
|
13
|
|
Granted (MIS)
|
|
|
|
|
|
|
|
|
Forfeited (MIS)
|
|
|
(9
|
)
|
|
|
900
|
|
Redeemed (MIS)
|
|
|
(1,904.5
|
)
|
|
|
952
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
2,103
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
F-22
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
A summary of the activity for nonvested unit based compensation
as of December 31, 2009, 2008, and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
|
of
|
|
|
Average Grant
|
|
|
|
Units
|
|
|
Date Fair Value
|
|
|
|
(Units and per unit prices not in thousands)
|
|
|
Nonvested at May 22, 2007
|
|
|
|
|
|
$
|
|
|
Grants (MIS)
|
|
|
1,971
|
|
|
|
951
|
|
Forfeited (MIS)
|
|
|
|
|
|
|
|
|
Vested (MIS)
|
|
|
(447
|
)
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
1,524
|
|
|
|
949
|
|
Grants (MIS)
|
|
|
|
|
|
|
|
|
Forfeited (MIS)
|
|
|
(57.5
|
)
|
|
|
900
|
|
Vested (MIS)
|
|
|
(447
|
)
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
1,019.5
|
|
|
|
949
|
|
Granted (Phantom H units)
|
|
|
2,103
|
|
|
|
13
|
|
Grants (MIS)
|
|
|
|
|
|
|
|
|
Forfeited (MIS)
|
|
|
(9
|
)
|
|
|
954
|
|
Vested (MIS)
|
|
|
(464.7
|
)
|
|
|
954
|
|
Redeemed (MIS)
|
|
|
(545.8
|
)
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009
|
|
|
2,103
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
Information relating to the stock based compensation at
December 31, 2009, 2008, and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Based Compensation Outstanding
|
|
|
Stock Based Compensation Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Exercise
|
|
|
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Price
|
|
|
Number
|
|
|
(Years)
|
|
|
Price
|
|
|
Number
|
|
|
Price
|
|
|
|
(Amounts not in thousands)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13
|
|
|
|
2,103
|
|
|
|
5.00
|
|
|
$
|
13
|
|
|
|
35
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13
|
|
|
|
2,103
|
|
|
|
5.00
|
|
|
$
|
13
|
|
|
|
35
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
|
|
1,000
|
|
|
|
2.00
|
|
|
$
|
1,000
|
|
|
|
500
|
|
|
$
|
1,000
|
|
|
|
$
|
900
|
|
|
|
913.5
|
|
|
|
2.48
|
|
|
$
|
900
|
|
|
|
394
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
900 $1,000
|
|
|
|
1,913.5
|
|
|
|
2.18
|
|
|
$
|
951
|
|
|
|
894
|
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
|
|
1,000
|
|
|
|
3.00
|
|
|
$
|
1,000
|
|
|
|
250
|
|
|
$
|
1,000
|
|
|
|
$
|
900
|
|
|
|
971
|
|
|
|
3.49
|
|
|
$
|
900
|
|
|
|
197
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
900 $1,000
|
|
|
|
1,971
|
|
|
|
3.24
|
|
|
$
|
951
|
|
|
|
447
|
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
The Class H, Phantom H and J units have certain Tag-Along
Rights as defined in the Operating Agreement, which allow the
members to redeem the units for cash, if and when such rights
are exercised by the Class B members and Class G
members. As redemption under these circumstances is not solely
within the Companys control, these units were classified
outside of members equity.
On December 2, 2009, the Company signed an agreement
whereby the A and F-1 units were converted into H Units and
the Class D units were redeemed and Class J units
issued in return, therefore these were considered members equity
as of December 31, 2009.
In the event that either (i) Members holding at least 50%
of the Class G Units and at least 50% of the Class B
Units, or (ii) Members holding at least 50% of the
Class G Units (in each case, the Electing
Members) has indicated the desire to effect a sale of 100%
of its Units at any time after June 8, 2012, with respect
to a determination by Class G and Class B Members, or
after June 8, 2017 with respect to determination by the
Class G Members, the Electing Members may request by
delivery of a Drag-Along notice setting forth the price in cash
to be paid by the proposed purchaser for all of such
Members Interests. Other Members shall have the obligation
to sell all of their interests.
Each Member shall own the number and type of Interest as set
forth in the Operating Agreement. The Profits or Losses of the
Company shall be allocated to the Capital Accounts of the
Members such that the Capital Accounts of the Members are as
nearly as possible equal (proportionately) to the amounts that
would be distributed to the Members if all assets of the Company
were sold as of the end of such period for cash equal to their
book values, all liabilities of the Company were satisfied to
the extent required by their terms and the net proceeds were
distributed (Hypothetical Liquidation).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Units and
|
|
|
Class B
|
|
|
Class B-1
|
|
|
Class B-2
|
|
|
Class F-1
|
|
|
Class F-2
|
|
|
Class G
|
|
|
Class H
|
|
|
Class J
|
|
|
Redeemable
|
|
(Amounts in thousands)
|
|
MIS
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Balance, December 31, 2007
|
|
$
|
144
|
|
|
$
|
23,862
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
250
|
|
|
$
|
250
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,506
|
|
Issuance of Class B
|
|
|
|
|
|
|
7,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,644
|
|
Class B issuance costs
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Class B
|
|
|
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Unit-based compensation (Class A/MIS Units)
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
354
|
|
|
|
31,388
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,742
|
|
Issuance of Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,437
|
|
|
|
|
|
|
|
|
|
|
|
3,437
|
|
Class B issuance costs
|
|
|
|
|
|
|
|
|
|
|
(191
|
)
|
|
|
(59
|
)
|
|
|
250
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Deemed dividend on Class B
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
Unit-based compensation (Class A/MIS Units)
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
Recapitalization
|
|
|
(596
|
)
|
|
|
(31,548
|
)
|
|
|
24,161
|
|
|
|
7,387
|
|
|
|
(750
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
2,096
|
|
|
|
175
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,970
|
|
|
$
|
7,328
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,437
|
|
|
$
|
2,096
|
|
|
$
|
175
|
|
|
$
|
37,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Commitments
and Contingencies
|
The Company leases office space under a non-cancelable operating
lease, which expires June 2010. The future minimum rental
payments under the lease agreement at December 31, 2009 are
as follows:
|
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
|
(Amounts in thousands)
|
|
2010
|
|
$
|
171
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
171
|
|
|
|
|
|
|
F-24
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
Expense incurred under the lease agreement was
$0.37 million for each of the years ended December 31,
2009 and 2008 and $0.16 million for the period ended
December 31, 2007.
The Company has employment contracts with certain of its key
employees. The contracts will terminate upon a termination event
as defined in the contracts, normally requiring notice by the
Company or the employee. Future minimum payments under the
employment contracts at December 31, 2009 are as follows:
|
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
|
(Amounts in thousands)
|
|
2010
|
|
$
|
3.0
|
|
2011
|
|
|
4.0
|
|
2012
|
|
|
0.7
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.7
|
|
|
|
|
|
|
Legal
Matters
The Company may, from time to time, be involved in legal
proceedings, regulatory actions, claims and litigation arising
in the ordinary course of business. These matters are not
expected to have a material adverse effect upon the
Companys financial statements.
Indemnification
Under its Operating Agreement, the Company has agreed to
indemnify its Directors, Officers, Members and Affiliates of a
Member, and any Representative of a Member and its Affiliates,
and any employee of the Company and its Affiliates (collectively
Covered Persons) for certain events or occurrences
arising as a result of the Covered Persons serving in such
capacity, that require the Company, subject to certain
exceptions, to indemnify the Covered Persons to the fullest
extent authorized or permitted by its Operating Agreement. The
maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is
unlimited. The Company believes the estimated fair value of
these indemnification agreements is de minimis and has no
liabilities recorded for these agreements as of
December 31, 2009 and 2008.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. For the years ended December 31, 2009 and 2008,
cash flows from operating activities were not sufficient to
support its operations. As of December 31, 2009, 2008, and
2007 the Company had incurred a net loss of $9.98 million,
$14.10 million, and $5.63 million, respectively, and
an accumulated deficit of $30.07 million,
$19.93 million, and $5.90 million, respectively.
The Company was unable to pay a scheduled quarterly interest
payment on June 30, 2009 under the Second Lien Notes, and
in addition, the Company was unable to fully fund a required
reserve account by the August 28, 2009 deadline required
under the terms of the Senior Credit Facility resulting in the
occurrence of Events of Default under the Senior Credit Facility
and Securities Purchase Agreement. These matters, among others,
raise substantial doubt about the Companys ability to
continue as a going concern.
Managements plans to ensure the Company continues as a
going concern include the paydown of outstanding debt of the
Company using proceeds from the revenues generated from the film
title Law Abiding Citizen which was released on
October 16, 2009 and through a Buyout Agreement (the
Buyout Agreement) the Company entered into on
November 23, 2009 with H & W Movie Partners, LLC
(HWMP), a company related through common ownership,
and the Note Holders of the Second Lien Notes, Eton Park CLO
Management 1, Eton Park CLO Management 2, Eton Park Master Fund,
Ltd., and Eton Park Fund, L.P. (collectively Eton
Park). Under the terms
F-25
The Film
Department Holdings LLC
Notes To
Consolidated Financial
Statements (Continued)
of the Buyout Agreement, should the Company consummate an Equity
Transaction, as defined therein, either through an initial
public offering (the Offering) or through a private
equity investment (the Private Investment), the
Company agrees to pay Eton Park a portion of the proceeds
received to repay the Second Lien Notes. Upon an Offering, the
Company will pay to Eton Park the lesser of
(a) $37.5 million or (b) the outstanding
obligations owing to Eton Park under the Second Lien Notes less
$1.5 million, and, in addition thereto, will issue and
deliver to Eton Park the number of shares of common stock having
a value of $1.5 million. If the Offering is not consummated
and a Private Investment is completed, the Company will pay the
lesser of (i) $39 million or (ii) the outstanding
obligations owing to Eton Park under the Second Lien Notes as of
the date of the receipt of such funds.
Effective immediately upon receipt by Eton Park of the
applicable initial cash paydown described above upon
consummation of an Equity Transaction, the Companys
obligations to Eton Park under the Second Lien Notes will be
terminated, and all liens securing those obligations will be
extinguished.
In addition to the initial cash paydown to be paid by the
Company to Eton Park upon consummation of an Equity Transaction
as described above, to the extent that the aggregate outstanding
obligations owing to Eton Park under the Second Lien Notes at
the time of such initial cash paydown exceeds $39 million
(such excess, the Short Fall Amount), the Company
will also pay to Eton Park an amount equal to all cash receipts
actually received by the Company from Overture Films, LLC
(Overture) under the Companys distribution
agreement with Overture in respect of the film Law Abiding
Citizen until the Short Fall Amount is paid in full,
together with any accrued and unpaid interest thereon at a rate
of 16% per annum.
As part of the Buyout Agreement, HWMP agrees to make certain
equity investments in the Company as specified therein in
exchange for the issuance to HWMP of Class G units. These
equity investments will be used to fund operations of the
Company until the consummation of the Offering. (see
Note 10)
While the Company continues to produce new film assets, adverse
changes in market conditions or limits on the Companys
ability to obtain financing could limit the Companys
production of new films. The impact of such eventualities could
influence future operations of the Company.
As of March 2, 2010, the Company received an additional
$9.36 million from HWMP pursuant to the recapitalization
agreement reached with HWMP (see Note 10).
$2.75 million of the HWMP investment was made by a third
party investor. In February 2009, the Company entered into an
agreement with such investor, whereby the investor has the
option to either convert the $2.75 million investment to
common shares of TFD upon the occurrence of an initial public
offering or receive $2.75 million in cash from the proceeds
of the public offering.
F-26
The Film Department Holdings,
Inc.
Shares of Common
Stock
PROSPECTUS
Dealer Prospectus Delivery
Obligation
Until (25 days after the date of this Offering), all
dealers that effect transactions in these securities, whether or
not participating in this Offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
[ ],
2010
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION.
|
The following table sets forth all expenses payable by us in
connection with the offering of the common stock being
registered, other than discounts and commissions, if any. All of
the amounts shown are estimates except the Securities and
Exchange Commission Registration Fee.
|
|
|
|
|
SEC Registration Fee
|
|
$
|
3,615.41
|
|
NASD Fee
|
|
|
*
|
|
NASDAQ Listing Fee
|
|
$
|
5,000.00
|
|
Legal Fees and Expenses
|
|
$
|
750,000
|
|
Accounting Fees and Expenses
|
|
|
*
|
|
Printing Fees and Expenses
|
|
$
|
175,000
|
|
Transfer Agent and Registrar Fees
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be filed by amendment. |
|
|
ITEM 14.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
|
Section 102 of the DGCL, as amended, allows a corporation
to eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the
director breached his duty of loyalty, failed to act in good
faith, engaged in intentional misconduct or knowingly violated a
law, authorized the payment of a dividend or approved a stock
repurchase in violation of Delaware law or obtained an improper
personal benefit. Our certificate of incorporation and our
by-laws provide for such limitations.
Section 145 of the DGCL provides, among other things, that
a corporation may indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that the
person is or was a director, officer, agent or employee of the
corporation or is or was serving at the corporations
request as a director, officer, agent or employee of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees)
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such
action, suit or proceeding. The power to indemnify applies if
such person acted in good faith and in a manner he reasonably
believed to be in the best interests, or not opposed to the best
interests, of the corporation, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The power to indemnify applies to actions
brought by or in the right of the corporation as well, but only
to the extent of defense expenses (including attorneys
fees but excluding amounts paid in settlement) actually and
reasonably incurred and not to any satisfaction of judgment or
settlement of the claim itself, and with the further limitation
that in such actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the
performance of duties to the corporation, unless the Delaware
Court of Chancery or the court in which such action was brought
believes that in light of all the circumstances indemnification
should apply. Our certificate of incorporation and our by-laws
provide for such limitations.
Section 174 of the DGCL provides, among other things, that
a director, who willfully or negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or
redemption, may be held liable for such actions. A director who
was either absent when the unlawful actions were approved or
dissented at the time may avoid liability by causing his or her
dissent to such actions to be entered in the books containing
the minutes of the meetings of the Board of Directors at the
time such action occurred or immediately after such absent
director receives notice of the unlawful acts.
II-1
The underwriting agreement provides for indemnification by the
underwriters of us and our officers and directors, and by us of
the underwriters, for certain liabilities arising under the
Securities Act or otherwise in connection with this Offering.
|
|
ITEM 15.
|
RECENT
SALES OF UNREGISTERED SECURITIES.
|
Between June 8 and June 27, 2007, we issued various equity
and debt securities in conjunction with the formation and
initial capitalization of the Company. In preparation for the
Corporate Conversion, we also issued equity securities in the
fourth quarter of 2009. All securities issued were exempt from
registration with the Securities and Exchange Commission under
Section 4(2) of the 1933 Act and the rules and
regulations promulgated thereunder. Since formation, we have
issued the following securities:
Membership
Interests
Class D. On June 8, 2007, we issued
a warrant for the purchase of 1,282 Class D units to The
Salter Group, LLC as partial consideration for financial
advisory services. In preparation for the Corporate Conversion,
these warrants were redeemed for nominal consideration on
December 2, 2009.
Class E. On June 8, 2007, we issued
a warrant for the purchase of 641 Class E units to
Allen & Company, LLC as partial consideration for
investment banking and securities placement services. In
preparation for the Corporate Conversion, these warrants were
redeemed for nominal consideration on December 2, 2009.
Class B. On June 15 and 16, 2007, we sold
25,000 Class B units to approximately 17 accredited
investors, as such term is defined in Rule 501 of
Regulation D of the Securities Act of 1933, as amended, for
an aggregate price of $25.0 million. On December 2,
2009, in preparation for the Corporate Conversion, the
Class B units were reclassified into 17,356
Class B-1 units
and 7,644
Class B-2 units.
Class A. On June 25, 2007, we issued
an aggregate of 640 Class A units to Mark Gill and Neil
Sacker as consideration for the execution of their respective
Executive Services Agreements. All Class A units were
exchanged for Class H units on December 2, 2009, in
preparation for the Corporate Conversion.
Class F-1. On
June 25, 2007, we issued an aggregate of 1000
Class F-1 units
to Mark Gill, Neil Sacker, and Robert Katz as consideration for
the execution of their respective Executive Services Agreements.
All
Class F-1
were exchanged for Class H units on December 2, 2009,
in preparation for the Corporate Conversion.
Class F-2. On
June 15, 2007, as partial consideration for an aggregate
investment of $4,250,000 in TFD, we issued an aggregate of 1000
Class F-2 units
to 1) Michael Singer as trustee for the Singer 1995 Family
Trust, and 2) Jeff Singer as trustee for the Singer
Childrens 2002 Irrevocable Trust. All
Class F-2 units
were redeemed for nominal consideration on December 2,
2009, in preparation for the Corporate Conversion.
Class C. On June 27, 2007, we issued
a warrant for the purchase of 1,538 Class C units to GE
Capital Markets, Inc. as partial consideration for GE Capital
Markets purchase of the Secured Second Lien Notes. These
warrants were redeemed for nominal consideration on
December 2, 2009, in preparation for the Corporate
Conversion.
Class G. On December 2, 2009, we
issued 500 Class G units to Sandeman, Ltd. for a prior
investment of $500,000. On December 2, 2009, we sold 3825
Class G units to H&W Movie Partners, LLC in partial
consideration for an aggregate investment of $8.325 million
in TFD, the Earthbound Films Entities, 8439 and 8440 (as such
investment is more fully described at Corporate
Conversion HWMP Investment).
Class H. On December 2, 2009, we
issued an aggregate of 2625 Class H units to Pain Cuit,
Inc., Sacker Consultants, Inc., and Chateau Holdings, Inc., in
exchange for all Class A and F-1 units.
Class J. On December 2, 2009, we
issued an aggregate of 175 Class J units to certain
principals of The Salter Group, LLC (Salter). Salter
has provided and currently provides financial advisory and
consulting services to the Company, and it receives cash fees
for all such services. The Class J Units described above
were issued to Salter as additional compensation in recognition
of the services provided by Salter since the Companys
formation in 2007. The Company anticipates continuing to engage
Salter following closing of the Offering.
II-2
Common
Stock
Pursuant to the Eton Park Buyout Agreement as described at
Corporate Conversion-Eton Park Refinancing, we have
agreed to issue to Eton Park, at the closing date of this
Offering, [115,385] shares of our common stock, based on
the mid-point of the estimated range set forth on the cover page
of this prospectus.
Debt
Issuances
On June 27, 2007, we issued the Second Lien Notes to GE
Capital Markets, Inc. for $30,000,000.
Conversion
of Membership Interests
Immediately prior to the closing of the public offering
described in this
Form S-1,
the Company will convert outstanding Class G, B, H and J
units into common stock pursuant to the conversion formula
described more fully in the section titled
Capitalization.
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ITEM 16.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
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The following exhibits are filed herewith, will be filed by
amendment or are incorporated by reference:
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Exhibit
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No.
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Description
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1
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.1
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Form of Underwriting Agreement**
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3
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.1
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Certificate of Incorporation of The Film Department Holdings,
Inc.**
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3
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.2
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By-laws of The Film Department Holdings, Inc.**
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4
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.1
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Form of certificate of The Film Department Holdings, Inc. common
stock**
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5
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.1
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Opinion of Squire, Sanders & Dempsey L.L.P.***
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10
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.1
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The Film Department Holdings, Inc. Equity Incentive Plan**
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10
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.2
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Agreement dated December 24, 2009 between The Weinstein
Company, LLC and The Film Department LLC***
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10
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.3
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Second Amended and Restated Letter Agreement dated
October 20, 2008 between Alliance Films Inc. and The Film
Department LLC*
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10
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.4
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Sublease Agreement dated June 22, 2007 by and between
Miramax Film Corp. and The Film Department**
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10
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.5
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Second Amended and Restated Executive Services Agreement by and
among The Film Department Holdings LLC, Pain Cuit, Inc. and Mark
Gill, dated December 1, 2009**
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10
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.6
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Second Amended and Restated Executive Services Agreement by and
among The Film Department Holdings LLC, Sacker Consultants, Inc.
and Neil Sacker, dated December 1, 2009**
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10
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.7
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Amended and Restated Executive Services Agreement between The
Film Department Holdings LLC, Chateau Holdings, Inc. and Robert
Katz, dated December 1, 2009**
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10
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.8
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Employment Agreement between The Film Department Holdings LLC
and Bernd Stephan, dated July 10, 2007**
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10
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.9
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First Amendment to the Employment Agreement by and between Bernd
Stephan and The Film Department Holdings LLC, dated
January 16, 2009**
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10
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.10
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Second Amendment to the Employment Agreement by and between
Bernd Stephan and The Film Department Holdings LLC, dated
July 16, 2009**
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10
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.11
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Third Amendment to the Employment Agreement by and between Bernd
Stephan and The Film Department Holdings LLC, dated
July 16, 2009**
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10
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.12
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Fourth Amendment to the Employment Agreement by and between
Bernd Stephan and The Film Department Holdings LLC, dated
September 1, 2009**
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10
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.13
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Fifth Amendment to Employment Agreement by and between Bernd
Stephan and The Film Department Holdings LLC, dated
February 8, 2010*
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10
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.14
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Employment Agreement between The Film Department Holdings LLC
and Daniel Stutz, dated June, 2007**
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II-3
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Exhibit
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No.
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Description
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10
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.15
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First Amendment to the Employment Agreement by and between
Daniel Stutz and The Film Department Holdings LLC, dated
January 16, 2009**
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10
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.16
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Second Amendment to the Employment Agreement by and between
Daniel Stutz and The Film Department Holdings LLC, dated
July 16, 2009**
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10
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.17
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Third Amendment to the Employment Agreement by and between
Daniel Stutz and The Film Department Holdings LLC, dated
July 16, 2009**
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10
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.18
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Fourth Amendment to the Employment Agreement by and between
Daniel Stutz and The Film Department Holdings LLC, dated
September 1, 2009**
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21
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.1
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List of Subsidiaries**
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23
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.1
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Consent of BDO Seidman, LLP*
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23
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.2
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Consent of Squire, Sanders & Dempsey L.L.P. (included
in Exhibit 5.1)***
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*** |
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To be filed by amendment. |
(a) The undersigned Registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-1
and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 5, 2010
THE FILM DEPARTMENT HOLDINGS LLC*
Mark Gill
Chief Executive Officer
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* |
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To be converted to The Film Department Holdings, Inc. prior to
the closing of this Offering. |
Pursuant to the requirements of the Securities Exchange Act of
1934, this
Form S-1
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
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/s/ Mark
Gill
Mark
Gill
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Chairman, Chief Executive Officer (Principal Executive Officer),
and Director
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March 5, 2010
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/s/ Neil
Sacker
Neil
Sacker
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Vice Chairman, Chief Operating Officer, and Director
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March 5, 2010
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/s/ Bernd
Stephan
Bernd
Stephan
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Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
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March 5, 2010
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/s/ Bert
Hayenga
Bert
Hayenga
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Director
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March 5, 2010
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/s/ Phillip
Hubbard
Phillip
Hubbard
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Director
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March 5, 2010
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/s/ David
Larcher
David
Larcher
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Director
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March 5, 2010
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/s/ Robert
Semple
Robert
Semple
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Director
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March 5, 2010
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II-5