FINANCIAL PROJECTIONS FOR FILM PROJECTS
By John W. Cones
Financial projections are estimates of the future economic performance of a proposed business or venture. Financial projections are not required for investor offerings for film projects regardless of whether the selected investment vehicle involves the sale of a security or not. However, investors seem to prefer that a presentation of financial projections accompany whatever documentation is used to approach such investors. Financial projections provide the prospective investor and the film producer seeking investor financing with an additional point of discussion and they serve as an excellent exercise for the producer in helping him or her to understand how film revenues might flow back to the financing vehicle, the producer group and the investors. In all likelihood, a producer seeking investor financing will be subjected to questions from investors about how they will get their money back and make a profit, thus, it behooves the producer to do some research about this aspect of the transaction, to understand it and to be able to explain it as clearly as possible.
If the sale of a security is involved, the SEC has a position on financial projections and offers some guidelines for their preparation and use. These SEC guidelines may be helpful in the preparation of financial projections for both non-securities and securities offerings.
Pursuant to the SEC’s Regulation S-B, Part 228 (Integrated Disclosure System for Small Business Issuers) Section 228, Item 10(d) or Section 228.10(d) the SEC encourages the use of management's projections of future economic performance that have a reasonable basis and are presented in an appropriate format.
From the SEC’s perspective, the following guidelines set forth the Commission's views on important factors to be considered in preparing and disclosing such projections.
Basis for projections. A film producer (i.e., management) has the option to present its good faith assessment of a small business issuer's future performance. Such a person or management, however, must have a reasonable basis for such an assessment. In other words, the calculations and numbers associated with financial projections must be based on assumptions, and those assumptions must be reasonable in light of current circumstances in the industry. Such assumptions cannot represent wild speculation on the part of the producer regarding the anticipated earnings of a proposed film.
Outside review. An outside review of the film producer’s (management's) projections may furnish additional support in this regard. If a film producer (management) decides to include a report of such a review, it should also disclose the qualifications of the reviewer, the extent of the review, the relationship between the reviewer and the issuer, and other material factors concerning the process by which any outside review was sought or obtained.
Format for projections. Traditionally, projections have been given for three financial items generally considered to be of primary importance to investors (revenues, net income (loss) and earnings (loss) per share or unit), however, projection information need not necessarily be limited to these three items. On the other hand, a producer (management) should take care to assure that the choice of items projected is not susceptible to misleading inferences through selective projection of only favorable items. It generally would be misleading to present sales or revenue projections without any of the foregoing measures of income.
Period covered. The period that appropriately may be covered by a projection depends to a large extent on the particular circumstances of the company involved. For certain companies in certain industries, a projection covering a two or three year period may be entirely reasonable. Other companies may not have a reasonable basis for projections beyond the current year. For a film project, attempting to annualize (project expenses and revenues for each year) may create an unnecessary quagmire of information that cannot be understood by either the prospective investors or the producer.
Investor understanding. Disclosures accompanying the projections should facilitate investor understanding of the basis for and limitations of projections. The SEC believes that investor understanding would be enhanced by disclosure of the assumptions which in management's opinion are most significant to the projections or are the key factors upon which the financial results of the enterprise depend and encourages disclosure of assumptions in a manner that will provide a frame-work for analysis of the projections. In other words, the assumptions on which the calculations and numbers are based not only should be reasonable, based on what is currently occurring in the industry, but they should be set forth in writing.
With the ideal of investor understanding in mind, and recognizing that it is impossible to predict with any accuracy how any independent feature or documentary film may perform in the marketplace, it would appear to be even more safe to offer several calculations (e.g., using a three-column format to show “Poor Performance”, “Good Performance” and “Excellent Performance”). That way, it is clear to prospective investors that the film producer, or whoever prepared the financial projections, is not attempting to predict the future performance of the film. Instead, they are simply illustrating how the film’s revenues may flow back to the investors and what deductions may be taken from the revenue stream at various stages along the way, while basing the projections on certain reasonable and written assumptions that accompany the actual numbers and calculations.
The amount of detail. Some film producers often make the mistake of trying to provide too much detail with respect to anticipated revenue streams when preparing financial projections associated with investor financing of a film project. In many such instances, neither the producer nor the prospective investors understand such complicated projections and the money paid for them is wasted. In any case, such elaborate projections do not come any closer to accurately projecting the financial results of a film project than the format recommended here. In addition, the film industry is notorious for failing to provide useful, relevant and accurate financial information regarding the prior performances of feature films, even more so for the markets and media beyond the theatrical marketplace and worse yet for the independent sector. For that reason, it may be a lost cause to attempt to find reliable information regarding anticipated revenues from each of the individual markets and media through which a film might generate income. Merely assuming a reasonable overall performance level for a film (as it is exploited in all markets and media throughout the world) and then deducting the expected (and reasonable) fees, expenses and percentage participations from the revenue stream as it flows back to the investor group may be a more rational approach.