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What is Reel Cinema? History
Reel Cinema was officially formed as a limited liability
corporation in July of 1999 by the law firm of Lang, Pauly, Gregerson and
Rosow, LTD (see LEGAL MATTERS). Formed
with three investing members, RCE produced peter, a ninety-minute
feature detailing the relationship between a mentally-handicapped young
man and an intern at a state-run hospital.
Written and directed by John Swon, the film finished principal
production in August of 1999 and completed post production in June of
2000. The film was accepted
to two renowned New York independent film festivals, the Independent
Feature Project Market and the New York International Independent
Film Festival. Additional
information pertaining to peter’s plot and characters can be
found at www.reelcinema.net, the corporation’s official website.
Profile of John Swon
Born with an avid passion for storytelling, John first became
interested in film at the tender age of twelve.
He immediately began working towards a lasting career in the field
as he wrote, produced, and directed two feature-length productions for the
Time Warner Cable cable-access channel.
His second production, Contact: Evolution, involved the
raising of over three-thousand dollars and the use of almost forty
different actors. The
production took over a year and a half to complete, but wrapped in
December of 1996. All this
without profit and for only a cable-access station.
John began work on his third feature, peter, in the summer
of 1999 from a script written and developed by him and lead actor, Marcus
Edward. Working on a paper-thin budget, John managed to shoot the
entire movie in eight days and see it through to its completion the
following June.
In the summer of 2000, John wrote and directed Jerome’s Razor,
filmed on location in the mountains of New Mexico.
Again working with a small budget and another grueling schedule,
John completed principle production in August of 2000.
Jerome’s Razor is current in post-production and seeking
completion funds.(see ATTACHMENT#1). Managers of RCE
Note: All managers were elected to their current positions
by RCE’s Board of Governors. Any
member wishing to become a Governor and directly determine the course of
the corporation may do so at a special meeting of the Governors.
Governors do not have to be members. (see OPERATION AND ARTICLES)
John Swon
- President/Chief
Manager
Born with an avid passion for storytelling, John first became
interested in film at the tender age of twelve.
He immediately began working towards a lasting career in the field
as he wrote, produced and directed two feature-length productions for the
Time Warner Cable cable-access channel.
His second production, Contact: Evolution, involved the
raising of over three-thousand dollars and the use of almost forty
different actors. The
production took over a year and a half to complete, but wrapped in
December of 1996. All this
without profit and for only a cable-access station.
John began work on his third feature, peter, in the summer
of 1999 from a script written and developed by himself and lead actor,
Marcus Edward. Working on a
paper-thin budget, John managed to shoot the entire movie in eight days
and see it through to its completion the following June.
In the summer of 2000, John wrote and directed Jerome’s Razor,
filmed on location in the mountains of New Mexico.
Again working with a small budget and another grueling schedule,
John completed principle production in August of 2000.
John has served as President and Chief Manager of RCE since June of
1999.
Lynn Swon
- Executive
Secretary
Lynn worked for Dain Rauscher Incorporated, the tenth largest stock
brokerage firm, for over thirty years.
She served as Vice President and Manager of Training.
Her career included teaching stock brokers, managers, and
supervisors. Lynn attended
the Securities Industry Institute (SII) and served on the SII Board of
Trustees at Wharton School of Business at the University of Pennsylvania.
She was one of the founders of the Securities Industry Association
Training Roundtable.
Lynn is an Honorary Lifetime Member of the Minneapolis Area Chapter
of the Red Cross and served six years on the American Red Cross Board of
Governors in Washington, DC. She
is the president of Hennepin Avenue United Methodist Church Foundation
Board, a member of the Executive Board of the Boys Scouts of
America/Viking Council, a member of the Board of Directors of Minneapolis
Rotary Club #9, the chair of the Greek Action Council at the University of
Minnesota, and the treasurer of the Third Congressional District
Republicans.
She graduated from Northwestern University in Evanston, Illinois
with a Bachelor of Science in Elementary Education.
She taught sixth grade in Forest Park, Illinois and fourth grade in
Berkeley Heights, New Jersey.
Anne Rutledge - Treasurer
Anne Rutledge is a member of the Board of Governors, Treasurer, and
an investor in Reel Cinema Entertainment, LLC. For the past 15 years, she
has provided financial counseling to individuals and small businesses
through her company, Money Counseling. She is the Chief Financial Officer
of Charity-Rutledge Enterprises, Inc. Among her volunteer activities are
20 years of service on finance and audit committees, and as Treasurer of
American Lung Association of Hennepin County. She graduated with a degree
in economics and business administration from Macalester College.
David Gregerson -
Legal
All legal matters of RCE are handled by David Gregerson of Lang,
Pauly, Gregerson & Rosow, Ltd, 1600 Park Building, 650 Third Avenue
South, Minneapolis, Minnesota 55402-4337.
Mr. Gregerson is also the sole organizer of Reel Cinema
Entertainment, LLC. Overview of the Motion Picture Industry
The motion picture industry is a highly complex and competitive
business involving both creative and commercial considerations with which
substantial risks are associated (see RISK FACTORS).
It consists of two principal activities: production, which involves
the development, financing, and production of motion pictures and
distribution, which involves the promotion and exploitation of completed
motion pictures in a variety of media.
Each entity involved in motion picture production and distribution
is a separate business venture, with its own management and personnel, its
own budgetary constraints, and its own method of producing or exploiting
motion pictures.
The motion picture industry has been and continues to be dominated
by the “major” motion picture studios: Paramount Pictures, Warner
Bros., Universal Pictures, Sony Pictures Entertainment (which includes
both Columbia Pictures and Tri-Star Pictures), MGM/UA, Twentieth
Century-Fox and the Walt Disney Company.
The majors are typically large, diversified entertainment concerns
or subsidiaries of diversified corporations which have strong
relationships with creative talent, exhibitors, and others involved in the
entertainment industry, and whose non-motion picture operations provide
stable sources of earnings that offset variations in the financial
performance of their motion picture operations.
The following general description is intended to provide a basic
overview of the industry to aid a potential investor in evaluating the
merits and risks of investing in Reel Cinema Entertainment LLC.
Production
The production of a motion picture traditionally takes place in
four stages: development and finance, pre-production, principal
photography, and post-production.
Development and Finance.
Typically in the development stage, a producer will acquire the
motion picture rights, or an option on such rights, to a literary
property. If that property is
not in script form, the producer will engage a writer to draft a
screenplay of sufficient detail to present to directors, actors, and
financiers who may be interested in participating in the picture.
In our case, the Producer, John Swon, is also the writer and
director, which streamlines this entire process.
At this point, if not already arranged, the producer must secure
financing for the film. Sources
of financing include the major film studios, private investors, publicly
or privately raised pools of film investment capital, pre-sales of
ancillary rights, as well as guarantees for United States theatrical
distribution rights.
Traditionally, most feature-length motion pictures have been
financed by the major motion picture distribution companies which advance
the entire cost of production of the picture and which recoup that cost,
if at all, out of the revenues generated by the same company’s
distribution of the picture in all media.
Although this traditional method of motion picture financing
through studio production continues to exist, an alternative for smaller
production companies is financing obtained either from private investors
or from “pre-sales” of distribution rights, or through some
combination of financing from both private investors and pre-sales.
A producer’s ability to enter into advantageous pre-sale
agreements depends upon many factors, including the quality of the
screenplay, the director of the picture, and the key actors.
Considering the high amount of risk and general uncertainty
involved with pre-sales, RCE has determined it not to be in its best
interest to pre-sale any distribution rights and prefers to seek
distribution through the film festival marketplace.
Pre-Production. If it is determined
that a screenplay has the potential for a commercial motion picture, the
pre-production phase will commence. Activities
during this phase include hiring key personnel, determining production
locations and shooting schedules, developing a detailed budget, and
completing the financing. While
producers generally undertake costly pre-production activities only if
they believe the project will become a motion picture, such activities do
not ensure that a motion picture will in fact be produced.
Principal Photography.
Principal photography consists of the actual filming of a motion
picture. During this phase, bad weather at locations, the illness of a
cast or crew member, the failure to capture on film all of the elements
suggested by the screenplay, disagreements with local authorities or labor
unions, and other problems may occur which may delay production and
increase costs. Even if
principal photography proceeds according to the schedule and budget, and
daily footage may reveal that, for artistic or commercial reasons, some
re-takes of scenes not provided for in the budget are desirable.
Although a picture’s budget typically has a reserve for
contingencies, this reserve may be insufficient and insurance coverage, if
any, may be inadequate to cover the additional costs or re-shooting.
While most pictures reaching this stage are completed, it is
nevertheless possible that funds in excess of the budgeted amount become
necessary but are not available. Even
if additional funds are available, a producer may decide to abandon a
project for commercial or other reasons during principal photography.
Post-Production. During
the post-production stage, the picture is edited, music and sound effects
are synchronized with the picture, special effects are added, and the
picture is brought to a completed form known as an “answer print.”
Problems may arise in the editing, it may become apparent that
additional photography is needed, or costs may be greater than
anticipated. Motion pictures reaching this stage, however, are generally
completed.
Motion Picture Distribution
After a picture is completed, it will be ready to be licensed for
domestic theatrical exhibition, domestic cable/pay television, network
television, syndicated television (i.e. local television stations),
foreign theatrical exhibition, foreign cable/pay, home video markets, and
other sources, such as music rights, airline and other nontheatrical
exhibition, and various merchandising rights.
Domestic Theatrical Distribution.
Theatrical distribution and marketing of motion pictures involves
licensing the right to exhibit motion pictures on a rental basis to
theaters, the creation and dissemination of advertising and publicity,
accounting, billing, credit and collection, the manufacture, inspection
and dissemination of prints and videos used in exhibition, and the
maintenance, delivery, storage, inspection, and repair of such prints.
Generally, distributors and exhibitors (the theater owners) will
enter into agreements whereby the exhibitor retains a portion of the
“gross box office receipts,” which are the admissions paid at the box
office. The balance (“gross film rentals”) is remitted to the
distributor. Frequently,
exhibitors and distributors must negotiate as to the appropriate
percentage to be remitted to the distributor, which may delay payment of
the gross film rental to the distributor.
The terms of agreements between producers and distributors vary
widely depending upon the perceived potential of a film and the relative
bargaining strength of the parties. Generally,
the distributor is at risk for its distribution expenses and any
guaranteed license payments. Deals
are generally structured so that the distributor retains a distribution
fee based on a percentage of gross film rentals and recoups the costs
incurred in distribution of the film.
The balance of the gross film rentals goes to the producer, who
divides it according to agreements with his financiers and others.
Under certain types of distribution agreements, the producer is
entitled to a percentage of gross film rentals at the same time as the
distributor is recovering its distribution fees and costs.
Foreign Theatrical Distribution.
Foreign theatrical distribution rights may be licensed along with
domestic theatrical rights or may be licensed on a territory-by-territory
basis. In the latter case,
the owner of the film usually receives an advance against a negotiated
percentage of gross film rentals from each territory.
The owner generally does not receive any share of the foreign gross
film rental until the foreign distributor’s fees and expenses are
recovered and the advance recouped.
Ancillary Markets. Due
to the increase in revenues from cable/pay television, home video, and
other ancillary markets, domestic theatrical exhibition has accounted for
a declining percentage of the income earned by the majority of films. Nevertheless, the box office performance of a picture is often
critical to its value and success in all other markets.
(i) Television. In
the United States, broadcast rights are granted to networks such as NBC,
ABC, CBS, Fox or Turner for exhibition by all the network’s affiliates.
Syndicated rights include rights granted to individual local
television stations or groups of stations.
Pay television rights include rights granted to cable, direct
broadcast satellite, microwave, and other services paid for by
subscribers. The right to
license a picture to the television markets may be granted to the domestic
or foreign theatrical distributors. Television rights are generally licensed first to pay
television, such as HBO, Cinemax, and Showtime, for an exclusive
exhibition period approximately 12 to 18 months after their initial
theatrical release; thereafter to broadcast network television for a
specified number of runs during an exclusive exhibition period, usually 24
to 36 months after the initial theatrical release of the motion picture;
then to pay television again; and finally syndicated to independent
stations (approximately 42 to 84 months after the initial theatrical
release). Not all films are
suitable for network television exhibition due to subject matter, editing
requirements and other factors, and with the increasing market role of pay
television, the number of films licensed for and fees generated from
network television have decreased significantly in the last few years.
Pay television revenues, in many cases, have more than made up for
this decline, with substantial license fees based either on a fixed fee or
per-subscriber basis. The
number of television broadcasters in Europe is currently expanding.
(ii) Home Video. The
market for video cassettes and videodiscs for home use continues to expand
globally, and this expansion is likely to continue as the ownership of
video playback units becomes more widespread.
A motion picture typically becomes available on home video for
purchase or rental by consumers approximately six months after its initial
theatrical release. The home
video market in the United States is still growing and, due in part to the
relative lack of diversified television programming, certain foreign
territories, particularly Europe, are also seeing a significant increase
in the number of home video units. Consequently,
the prices paid for the right to market video cassettes and video discs in
all markets have been increasing in recent years.
Most film industry analysts predict continued growth in the home
video market in both the United States and foreign territories in the
immediate future. In the most
distant future, High Definition video may create an additional home video
market.
(iii) Ancillary Rights.
In addition to the distribution media and markets described above,
the owner of a film usually licenses the right to non-theatrical uses to
distributors who in turn make the film available to airlines, hotels,
schools, oil rigs, public libraries, prisons, community groups, the armed
forces, ships at sea, and others, as well as the right to license the
performance of musical works and sound recordings embodied in a motion
picture, including public performance and sheet music publication.
Rights may be licensed to merchandisers for the manufacture of
products such as video games, toys, T-shirts, posters, and other
merchandise. Rights may also
be licensed for novelization of the screenplay and other related book
publications.
(iv) Internet Rights & Sales.
A relatively new market for independent films and a totally ignored
market for the “major” studios. While
the practice of selling copies of a production is standard among
production companies of all sizes, the possibility of selling the rights
to an Internet distributor is an option RCE wishes to keep open.
The average return and profit margin in dealing with Internet
distributors in quite lower than in any the above mentioned options,
therefore RCE considers the sale of any or all rights to an Internet
distributor as a last-resort measure.
In the case of RCE, all productions will be put on the film
festival circuit with the intention of attracting a distributor.
All the distribution rights to the said production will be sold for
a price determined between the distributor and RCE’s Board of Governors.
Any profits made by the sale of distribution rights will be divided
among the members by the percentage of their shares in the corporation.
Profits will only be divided after any and all deferred payments
have been met.
Competition
The entertainment business in general and the motion picture
industry in particular are undergoing significant changes.
Alternative forms of filmed entertainment have become available,
including expanded pay and basic cable television, pay-per-view
programming, and home entertainment equipment.
Given technological developments and shifting consumer tastes, it
is not possible to predict what effect these changes will have on the
potential overall revenue for feature-length motion pictures.
The motion pictures industry is extremely competitive.
RCE will compete with many other motion picture concerns, including
the “major” motion picture studios, which are larger and have
financial resources which are substantially greater than those of RCE. The majors are typically large, diversified entertainment
concerns or subsidiaries of diversified corporations which have strong
relationships with creative talent, exhibitors, and others involved in the
entertainment industry, and whose non-motion picture operations provide
stable sources of earnings that offset variations in the financial
performance of their motion picture operations.
RCE’s ability to compete successfully depends upon the continued
availability of independent motion picture projects (domestic and foreign)
which RCE can produce or acquire and distribute successfully (see RISK
FACTORS).
Cash Flow
In making a film, cash outflows occur well in advance of returns. This is due to the significant costs of producing and
distributing a film and the fact that such costs are usually incurred at
the initial phase of film production.
Typically, investors cannot expect to receive a return on their
investment prior to the elapse of approximately one year after the
completion of the principal photography.
Cash revenues are derived separately from each market in which the
film has been released. The
revenues from release of the film in the domestic theatrical market
typically begin when the distribution contract is closed and typically
continue for approximately eighteen months after the theatrical release of
the film. Approximately
eighty percent (80%) of the revenues are received within the first twelve
months of release. For the
home video market revenues begin about six months after the theatrical
release of the film and continue for up to twenty-four months.
The pay television market opens up approximately eighteen months
after domestic theatrical release and lasts about six months, with all
cash revenues from this market occurring in that time period.
The network television market follows the pay television market. Inflows from network television can last from the
twenty-fifth month to the sixtieth month.
Approximately eighty percent (80%) of the revenues are received
between months twenty-five and forty-eight, with the remaining twenty
percent (20%) being collected over the last year.
Traditionally, the final market to be exploited is worldwide
television syndication which commences after the network television
market. This market typically
lasts between sixty-one and ninety-six months, with most, approximately
seventy percent (70%), of the revenues occurring between months sixty-one
and eighty-four.
Low Budget Films
Independently produced, low-budget films continue to rise in
popularity with audiences as well as with professionals in the film
industry. It is the Manager’s belief that in recent years the large
studios have turned away from producing films based on unconventional
scripts. This perceived trend
has allowed independent companies to produce and distribute such films. Low-budget films can be a lucrative investment, especially
when they achieve theatrical and ancillary market success. Operation and Articles
Note: The following is a summary of the Operating Agreement
and the Articles therein for potential members.
Any potential members wishing to better understand RCE’s
operation and articles should read ATTACHMENT#2: OPERATING AGREEMENT.
Members
While RCE members meet annually at the members’ discretion, and
members can direct the course of RCE’s business affairs, the general
management of RCE is directed by its Board of Governors.
Any member who wishes to become a Governor can do by special
notification of a meeting to nominate new Governors.
Governors do not have to be members.
The number of Governors that constitute the Board of Governors can
be set and changed by the Members. Members
elect or re-elect Governors at each meeting who shall hold their office
until the next meeting of the members.
At this time, the Members have fixed the number of Governors at
five, per Article 3, Section 2. There
are currently four Governors on the Board with one vacancy.
This vacancy can be filled by a resolution by the Members.
Governors can be removed from office with or without cause by a
special meeting of the Governors duly called for that purpose.
Managers
Managers are appointed by the Board of Governors, and their duties
are structured by the Board. Managers
need not be Governors. Any
number of Manager positions may be held by the same person.
The Manager positions are as follows:
Chief Manager. The
Chief Manager runs the general active management of the business and in
the absence of the Chairperson of the Board or if the office of the
Chairperson of the Board is vacant, shall preside over meetings of the
Members and Governors. The
position is occupied by John Swon.
Chief Financial Manager.
Will keep accurate financial records for RCE.
Will otherwise be known as Treasurer.
Occupied by Anne Rutledge.
Chairperson of the Board.
Will preside over all meetings of the Members and Governors and
will perform other duties prescribed by the Board.
President. Unless
otherwise determined by the Board, the President shall be the Chief
Manager. Occupied by John
Swon.
Vice Presidents. Shall
perform duties of the President in the President’s absence and any other
duties prescribed by the Board.
Secretary. Will
attend all meeting of Members and Governors and maintain records and
certify all proceedings. Occupied
by Lynn Swon.
Membership Interests
Membership interests in RCE are represented as Membership Units. These Units are deemed to be personal property, and at the
request of the Members, RCE shall state in writing the particular
Membership Units. The
statement describes the Member’s voting rights, share in profits and
losses and distributions. Any
Member may transfer his or her Membership Units to another with or without
the consent of the other Members. Membership
Units are that individual’s percentage of the total amount of money
spent by RCE. A single
investment guarantees a continued percentage, but that percentage is
subject to change by further investments in RCE by the individual or other
Members in RCE. A Member may
invest in only one RCE Production, but must be aware his/her percentage
will lessen will each production in which he/she does not invest.
Records
RCE keeps the following records on hand:
*A current list of the full legal name and last known business
address of each member.
*A copy of the Articles of Organization and any applicable Member
control agreements.
*Copies of the Company’s federal, state, and local income tax
returns and reports, if any, for the three most recent years.
*Copies of any financial statements of RCE for the three most
recent years.
*A document setting out the contributions made and agreed to be
made by each Member.
Dissolution
*Expiration of the term set forth in the Articles of Organization
(30 years from 1999).
*Any order of a court of competent jurisdiction requiring
dissolution.
*The actions of the Members to dissolve RCE.
*The unanimous written consent of all Members holding
Membership Units to dissolve.
*Any event that terminates the continued membership of a Member in
RCE, including:
-Death of any Member
-Retirement of any Member
-Resignation of any Member
-Redemption of a Member’s complete Membership Units
-Assignment of a Member’s financial or governing
rights
which leaves the Member with no governing
rights.
-Purchase of a Member’s Membership Units.
-To the extent that Members may be expelled pursuant
to
the Articles of Organization.
*A merger or exchange in which RCE is not the surviving or
acquiring company.
*When terminated by the Secretary of State according to Minnesota
Statutes Section 322B.960. Risk Factors
Note: The purchase of Units involves a high degree of risk
and, therefore, should not be purchased by anyone who cannot afford the
loss of his/her entire investment. Prospective
investors should carefully review and consider the following risks (listed
below in no particular order) as well as the other information set forth
before and herein.
1. Dependence on, and Need for, Additional Financing. RCE has limited resources and is dependent upon outside
financing in the form of investors to finance the production of the films
presented in Attachment #1. RCE
anticipates it will be able to complete all necessary phases of the films
if the total amount shown in Attachment #1 is raised.
2. Dependence on Management.
RCE’s success will be largely dependent upon the continued
employment and personal efforts of John Swon, the Chief Manager of RCE.
John may not currently devote all of his time to RCE’s business
and may become involved in other film and entertainment-related ventures.
The loss of the services of John would have a materially adverse
effect on RCE’s business and prospects for the future.
Should John become incapacitated or otherwise unavailable, a
qualified successor would have to be employed and there can be no
assurance that RCE would be able to employ personnel having the same
degree of talent and/or experience. The
success of RCE will also be dependent upon its ability to hire and retain
additional qualified personnel with experience in the industry.
The competition for such personnel is intense.
In the interest of managerial stability, John has signed a Letter
of Intent, in which he is pledged to RCE for a period of five years to
produce and release three film productions under the RCE label.
3. Competition.
All aspects of the motion picture industry are highly competitive.
RCE faces competition from “major” studios and other
independent motion picture companies and television production companies
not only in attracting creative, business and technical personnel for the
production of films, but also in distribution.
Many of these competitors have greater experience, assets, and
financial and other resources than RCE and have worldwide distribution
organizations in place.
4. Deferred Payments Blocking Profits.
So far in its operating practices, RCE has employed deferred
payments as a means of competing with other studios and companies for the
services of actors. In short,
the actors of a given film produced by RCE will be paid their salaries
from the profits of the same film before Members in RCE see their shares
of profit. Actors from a different RCE production cannot be paid from
the profits of a different production.
The total amount of deferred payments per film (which are
considered individually as to each individual film, not as a total from
all possible deferred payments in all films) is relatively light and may,
as a practice of RCE, be discontinued either by the wishes of the Members
or the Governors.
5. Immediate Lack of Distributor.
Investors must be aware of the long-term nature of their investment
and be able to bear the economic risks of their investment for an
indefinite period of time. No
distributor for RCE products exists at this moment, and given the inherent
risk of the industry, one may not materialize for some time, if ever.
Prospective investors should be able to afford the entire loss of
their investment in RCE. |
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