As
filed with the Securities and Exchange Commission on April 14, 2009
File
No. 000-1408276
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM F-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
SEVEN ARTS PICTURES
PLC
(Exact name of registrant as
specified in its charter)
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England
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7812
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[Not
Applicable]
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||
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_________________________
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__________________________
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________________
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||
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(State
or other jurisdiction of
incorporation
or
organization)
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Primary
Standard Industrial
Classification
Code Number
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(I.R.S.
Employer
Identification
No.)
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38 Hertford
Street
London, UK W1J7SG
44 (203) 006-8222
(Address, including zip code, and
telephone number, including area code, of registrant’s principal executive
offices)
Sprecher Grier Halberstam
LLP
Attention:
John Bottomley
One America Square,
Crosswall
London, EC3N 2SG
Telephone:
+ 44 (207) 264 4444
Facsimile:
+44 (207) 264 4440
(Name, address, including zip code,
and telephone number, including area code, of agent for
service)
Copies
to:
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William
Rosenstadt
Sanders
Ortoli Vaughn-Flam
Rosenstadt
LLP
501
Madison Avenue
New
York, NY 10022
Telephone:
212-588-0022
Facsimile:
212-826-9307
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Mitchell
Nussbaum
Loeb
& Loeb LLP
345
Park Avenue
New
York, NY 10154
Telephone:
212-407-4000
Facsimile:
212-407-4990
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Approximate date of commencement of
proposed sale to the public: As soon as practicable after the effective
date of this Registration Statement.
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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, check the following box.
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x
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|||||||||||||||||||||
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If
this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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.
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¨
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|||||||||||||||||||||
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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.
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¨
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|||||||||||||||||||||
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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.
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¨
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|||||||||||||||||||||
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If
delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.
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¨
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1
CALCULATION OF REGISTRATION
FEE
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Title
of Each Class
of
Securities to Be Registered
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Amount
to be Registered
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Proposed
Mximum Offering Price per Share(1)
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Proposed
Maximum Aggregate Offering Price(1)
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Amount
of Registration Fee
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Ordinary
Shares
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3,000,000
(2)
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U.S.$6.90
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U.S.$20,700,000
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U.S.$1,156
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(1)
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Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457 under the Securities Act.
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(2)
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Includes
2,500,000 ordinary shares offered hereby, 375,000 ordinary shares related
to the over-allotment option granted to the underwriters’ representative
and 125,000 ordinary shares underlying warrants to be issued to the
underwriters’ representative. Pursuant to Rule 416, there
are also being registered such indeterminable number of additional
ordinary shares as may be issued under the warrants to the underwriters’
representative to prevent dilution resulting from stock splits, stock
dividends or similar
transactions.
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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 this registration statement shall become effective on such date
as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
2
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The
information in this prospectus is not complete and may be changed. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
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 or other jurisdiction where the offer or sale is not
permitted.
Subject
to completion,
dated __________.
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SEVEN ARTS PICTURES PLC
Our
ordinary shares are quoted on the NASDAQ Capital Market under the symbol “SAPX.”
On April 13, 2009, the last reported market price of our ordinary shares was
$6.75 per share.
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Public
offering price
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Underwriting
discount and
commissions (1)
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Proceeds to
us, before
expenses (2)
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||||||||||
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Per Share
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$ | $ | $ | |||||||||
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Total
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$ | $ | $ | |||||||||
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(1) Does not include a non-accountable
expense allowance equal to 1% of the gross proceeds of this offering
payable to Rodman & Renshaw, LLC, the underwriters’
representative.
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(2)
We estimate that the total expenses of this offering, excluding the
underwriters’ discount and non-accountable expense allowance, will be
approximately $________.
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The
shares issuable upon exercise of the underwriter over-allotment option and the
warrants are identical to those offered to the public by this prospectus,
and have been
registered under the registration statement of which this prospectus forms a
part.
The date
of this prospectus is
[ ],
2009
Investing in our securities involves
certain risks. See “Risk Factors” beginning on
page [--] of
this prospectus for a discussion of information that should be considered in
connection with an investment in our securities.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
underwriters expect to deliver our shares to purchasers in the offering on or
about ______, 2009.
3
TABLE OF
CONTENTS
You
should
rely only on the information contained or incorporated by reference to this
prospectus in deciding whether to purchase our shares. We have not authorized
anyone to provide you with information different from that contained or
incorporated by reference to this prospectus. Under no circumstances should the
delivery to you of this prospectus or any sale made pursuant to this prospectus
create any implication that the information contained in this prospectus is
correct as of any time after the date of this prospectus. To the extent that any
facts or events arising after the date of this prospectus, individually or in
the aggregate, represent a fundamental change in the information presented in
this prospectus, this prospectus will be updated to the extent required by
law.
We
obtained statistical data, market data and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the
information. Nevertheless, we are responsible for the accuracy and completeness
of the historical information presented in this prospectus, as of the date of
the prospectus.
4
PROSPECTUS
SUMMARY
This
summary highlights selected information from this prospectus but may not contain
all of the information that may be important to you. Accordingly, we encourage
you to read carefully this entire prospectus. In this prospectus, the words
“Seven Arts”, “Company”, “we”, “our”, “ours” and “us” refer to Seven Arts
Pictures PLC and its subsidiaries, unless otherwise stated or the context
requires. All references in this prospectus to the number of ordinary shares to
be issued by us in the offering exclude any ordinary shares acquired by
underwriters pursuant to their over-allotment option or underwriters’ warrants
included elsewhere in this prospectus.
Our Company
We are an
independent motion picture production company engaged in developing, financing,
producing and licensing theatrical motion pictures with budgets in the range of
$5 million to $15 million for exhibition in domestic (i.e. the United States and
Canada) and foreign theatrical markets and for subsequent post theatrical
worldwide release in other forms of media, including DVD, home video,
pay-per-view, and free television. We endeavor to release many of our motion
pictures into wide-theatrical exhibition initially, however, a portion of our
pictures will either receive only a limited theatrical release, or may even be
released directly to post theatrical markets, primarily DVD. Our
pictures that receive limited theatrical release or post theatrical release
typically benefit from lower prints and advertising (“P & A”) costs and, in
turn, improved gross profit margins.
Our
recent domestic theatrical releases include Deal (April 2008),
Noise (April
2008) and Autopsy (January
2009), all three of which received limited US theatrical releases. We have
completed the production of, and expect to release for domestic theatrical
exhibition three additional motion pictures by fiscal year 2009, notably The Pool Boys, Nine Miles Down and
Night of the
Demons. We currently have five motion pictures in development
that we anticipate will be released within the next two to three years Catwalk, Neuromancer, Mortal Armor: The Legend of
Galahad, Romeo
Spy, and The Winter Queen.
Catwalk is
expected to commence production later this Spring, and we have secured a SAG
waiver to assure us that production can continue without interruption even if a
SAG strike were to occur. We may supplement these motion pictures releases with
certain lower cost pictures not yet fully developed, as well as with selected
third party acquisitions.
5
Since
1996, we and our predecessors have produced 13 motion pictures and have acquired
rights to an additional 18 motion pictures. As a result, we currently have a
library of 31 completed motion pictures. A substantial portion of our
library revenues are derived from only a few of our library titles. Through a
combination of new productions and selected acquisitions, we plan to increase
our film library to 75 or 100 pictures over the next five years, depending on
the costs of such productions and acquisitions and our ability to assemble the
elements to produce such films and finance such activities.
Our
recent business model has focused on distribution in the post-theatrical markets
for lower-cost, "genre" motion pictures. These pictures have enjoyed only a very
limited theatrical release. However, as a result of both licensing of
distribution rights prior to completion as well as the use of tax-preferred
financing, they have generated substantial gross profit margins from
post-theatrical markets (i.e. video and television distribution). While we will
continue to make such pictures in the future, our goal is to obtain a wider
theatrical release for the majority of the pictures we intend to release over
the next two to three years.
We
recorded gross revenues of $17,748,000 and net income of $4,014,000 in the
fiscal period ended June 30, 2008, (15 months - audited) and gross revenues of
$11,758,000 and net income of $1,934,000 in our fiscal year ended March 31, 2007
(audited). For the most recent six month period ended December 31, 2008, we
earned net income of $1,501,000 on revenues of $5,846,000
(unaudited).
Our
Business Strategy
Our
current business strategy is:
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·
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To
finance, produce and distribute two to four motion pictures in-house per
year with budgets of between $5 million and $15 million each. As
previously stated, certain of these pictures will receive only a limited
theatrical release while others will be released more
widely.
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·
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To
supplement our core strategy by producing an occasional higher cost motion
picture (production budgets of $30 - $50 million). We will seek to
co-produce such projects with a major studio to guarantee a studio-wide
release and obtain a commitment to cover a portion or all of prints and
advertising (“P&A”)
costs.
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·
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To
opportunistically acquire distribution rights to an additional two to five
motion pictures produced by others, each year, for distribution in
theatrical, video and television markets, as an agent, for a 15%-20%
fee.
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·
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To
maximize our current use of tax preferred financing structures around the
world to fund our motion picture
productions.
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·
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To
continue to reduce our financial risk on motion pictures we produce
in-house by pre-selling certain rights to distributors prior to and during
production, although we recognize that, particularly in the last year, the
pre-sale market has become more difficult to access as a film financing
tool.
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6
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·
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To
increase our share of distribution revenues by entering into partnerships
with theatrical and video distributors, to gain more control over the
distribution of our motion pictures and to obtain a greater share of the
revenues from distribution of our motion
pictures.
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·
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To
scale our business over time by modestly increasing the number of pictures
we develop and produce in-house as well as by more aggressively seeking to
acquire for distribution motion pictures produced by third
parties.
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We
believe that this is a particularly opportune time to be producing and
distributing moderately priced motion pictures as, according to their public
announcements, the major studios plan on reducing the number of pictures that
they finance and distribute, preferring instead to concentrate resources on a
limited number of high-priced, “franchise” productions. In addition, we believe
that certain of the most successful independent motion picture companies have
either been acquired or are focusing on higher budget films. We believe
that these factors will attract exceptional levels of both talent and
projects for lower budget motion pictures and independent film companies such as
Seven Arts.
Our
Competitive Strength
We
believe our competitive strengths are:
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·
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The
experience of our management and our relationships with independent motion
picture distributors. Our management has participated in the
production and/or distribution of more than one hundred motion pictures
since 1986.
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·
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Our
relationships with “key talent” and with independent motion picture
distributors around the world.
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·
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Our
attractive profit margins which result from adherence to cost efficient
budgets, a low overhead structure, the use of pre-sales to license our
motion pictures for a fee to third-party distributors prior to completion
of production, and of tax preferred
financing.
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·
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Our
expertise in structuring non-overlapping tax preferred financings in
jurisdictions where such are made
available.
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Corporate
Information
Seven
Arts is a corporation organized under the laws of England and
Wales. Our principal executive offices are located at 38 Hertford
Street, London, UK W1J 7SG. Our telephone number is 44 (203) 006
8222. The US offices of our affiliate are located at 6121 Sunset Blvd., Los
Angeles, CA 90028. Our US telephone number is (323) 634 0990.
Corporate
Organization
7
8
THE OFFERING
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Securities
Offered
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2,500,000
ordinary shares (or 2,875,000 if the underwriters’ representative
exercises its over-allotment option in full)
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Ordinary
Shares
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||
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Number
of ordinary shares outstanding before this offering
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6,893,300
ordinary shares
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Number
of ordinary shares outstanding after this offering (1)
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7,693,300
ordinary shares (or 7,818,300 ordinary shares if the underwriters’
representative exercises its warrants in
full)
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Use
of Proceeds
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We
intend to use the net proceeds of this offering to repay indebtedness of
approximately $11,150,000. The remaining net proceeds will be
used for working capital and general corporate
purposes.
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NASDAQ
Capital Market
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SAPX
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Lock-Up
Agreements
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All
of our officers and directors have agreed that, for a period of six months
following completion of this offering, they will be subject to a lock-up
agreement prohibiting any sales or hedging transactions of our securities
owned by them. See “Lock-Up” on page
[--].
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Risk
Factors
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The
securities offered by this prospectus are speculative and involve a high
degree of risk, and investors purchasing securities should not purchase
the securities unless they can afford the loss of their entire investment.
See “Risk Factors” beginning on page
[--].
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(1)
Excludes a total of 1,700,000 ordinary shares comprised of (i) 1,000,000
ordinary shares to be returned to us in connection with an advance to the Seven
Arts Employee Benefit Trust and (ii) 700,000 shares to be returned to us in
connection with the repayment of a loan. See “Use of
Proceeds.”
9
SUMMARY
CONSOLIDATED FINANCIAL INFORMATION
The
following sets forth a summary of consolidated profit and loss
statement for the fiscal period ended June 30, 2008 (15
months) and each of the fiscal years ended March 31, 2007, and March 31, 2006
and March 31, 2005, and a summary of the consolidated balance sheet at the end
of these periods, all of which have been derived from our audited
consolidated financial statements and related notes included elsewhere in this
prospectus. The summary of profit and loss statements for
the six-month periods ended December 31, 2008 and September 30, 2007,
and a summary of the consolidated balance sheet at the end of these periods,
have been derived from our unaudited consolidated financial statements included
elsewhere in this prospectus. The summary consolidated historical financial and
operating information should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and the related notes thereto and the
other financial information included elsewhere in this prospectus.
The
historical results included below and elsewhere in this prospectus are not
indicative of our future performance.
10
Summary Financial
Data
(in $
000’s, except per share data)
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Summary
Profit and Loss Statements (1)
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Six
Months Ended
Dec
31, 2008 (unaudited)
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Six
Months Ended
Sept
30, 2007 (unaudited)
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Fiscal
Period Ended
June
30, 2008
(15
months)
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Fiscal
Year Ended March 31, 2007
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Fiscal
Year
Ended
March 31, 2006 (Restated)
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Fiscal
Year Ended March 31, 2005
(Restated)
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||||
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Under
UK GAAP
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||||||||||
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Revenues
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$6,610
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$1,889
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$17,767
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$11,208
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(2)
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$13,168
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$4,297
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|||
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Income/(Loss)
from Operations
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$2,568
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$1,101
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$2,035
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$3,616
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(2,3)
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$942
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($9,501)
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|||
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Net
Income/(Loss)
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$1,691
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$366
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$4,009
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$1,842
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(3)
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$181
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(3)
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($14,145)
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||
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Weighted
Average Primary Shares Outstanding (4)
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5,204.2
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4,480.7
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4,715.1
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2,694.9
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2,636.8
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1,793.0
|
||||
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Weighted
Average Fully Diluted Shares Outstanding (4)
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9,097.6
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8,320.7
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8,632.9
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7,454.1
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7,436.8
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4,239.0
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||||
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Net
Income/(Loss) Per Share (c) (4)
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32
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8.17
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85
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68
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7
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(789)
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||||
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Net
Income/(Loss) Per Fully Diluted
Share
(c) (4)
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19
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4
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46
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25
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2.43
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(789)
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||||
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Under
US GAAP
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||||||||||
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Revenues
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$6,610
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$1,889
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$17,767
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$9,585
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$13,168
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$4,297
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||||
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Income/(Loss)
from Operations
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$2,569
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$1,100
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$2,036
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$2,228
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$1,255
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(3)
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($9,501)
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|||
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Net
Income/(Loss)
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$1,691
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$366
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$4,009
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$2,077
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$495
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(3)
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($12,274)
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|||
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Earnings
Per Share (c) (4)
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32
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8
|
85
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77
|
19
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(685)
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||||
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Fully
Diluted Earnings Per Share (c)(4)
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19
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4
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46
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28
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7
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(685)
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||||
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Summary
Balance Sheet
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||||||||||
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Under
UK GAAP
|
||||||||||
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Short-Term
Debt
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$22,435
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(7)
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$ 7,069
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$253,095
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(7)
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$7,826
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$3,628
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$7,822
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||
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Long-Term
Debt
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$2,833
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$23,732
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$6,752
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$12,373
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$12,624
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$4,250
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||||
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Total
Assets
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$228,053
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(7)
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$49,423
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$424,971
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(7)
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$37,612
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$28,441
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$18,034
|
||
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Shareholders’
Funds (5)
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$8,342
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$10,353
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$13,795
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$8,936
|
$4,927
|
$5,081
|
||||
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Under
US GAAP
|
||||||||||
|
Short-Term
Debt
|
$22,435
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(7)
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$7,069
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$253,095
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(7)
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$7,826
|
$3,628
|
$7,822
|
||
|
Long-Term
Debt (5)
|
$5,349
|
$27,307
|
$10,252
|
$15,805
|
$17,828
|
$9,919
|
||||
|
Convertible
Redeemable Preference Shares (6)
|
$945
|
$5,669
|
$5,669
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$5,669
|
$5,669
|
$5,669
|
||||
|
Total
Assets
|
$228,053
|
(7)
|
$49,423
|
$424,972
|
(7)
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$37,847
|
$28,755
|
$18,034
|
||
|
Shareholders’
Equity (5,6)
|
$4,881
|
$1,110
|
$4,627
|
$70
|
($5,632)
|
($6,257)
|
11
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(1)
|
We
changed our fiscal year end from March 31 to June 30 for the fiscal period
ending June 30, 2008. The unaudited six-month results compare the first
six months of the fiscal year ending June 30, 2009 with the first six
months of the fiscal period ended June 30,
2008.
|
|
(2)
|
UK
GAAP records the $1,623,000 attributable in fiscal year 2007 from the
settlement of debt as revenue whereas under US GAAP it is a below the line
item. Other differences between revenue recognition under UK
GAAP and US GAAP arise from differing treatments of film
amortization.
|
|
(3)
|
Differences
in net income reflect certain adjustments in the treatment of film
amortization under UK GAAP and US GAAP for
fiscal 2006 and 2007. These differences are not recurring. (See
“Financial Statements - Appendix A – Reconciliation to US
GAAP”).
|
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(4)
|
The
attached financial statements, prepared under UK GAAP, show income per
share figures calculated using the weighted average number of shares
outstanding in each period. As a 5 for 1 reverse stock split occurred on
the last day of the December 31, 2008 financial period, the income per
share figures for the periods to March 31, 2005, 2006 and 2007 and the
period to June 30, 2008 do not reflect the 5 for 1 reverse stock split in
those statements. The income per share figures in the table above have
been adjusted from the figures shown in the financial statements to show
the effect of the 5 for 1 reverse stock split as if it had occurred on the
first day of the earliest period shown, being the period ended March 31,
2005.
|
|
(5)
|
Convertible
subordinated debentures owed to Langley Park Investment Trust PLC are
treated as Long-Term Debt under US GAAP and as Shareholders’ Funds under
UK GAAP. As of December 31, 2008, June 30, 2008, September 30, 2007, and
March 31, 2007, the amount of such debentures outstanding was
approximately $3,432,450. As of March 31, 2005 and March 31, 2006, the
outstanding amount was approximately
$5,203,800.
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(6)
|
Shareholders’
equity under US GAAP does not include either the Langley Park Investment
Trust PLC. Debentures (note (5)), or the Armadillo Investments PLC
redeemable preference shares (approximately $5,669,000 in all periods,
except for the six months ended December, 31 2008, when such amount was
approximately $945,000).
|
|
(7)
|
In
May 2008, we completed a transaction with Zeus Partners LLP that raised
capital for investment into the production and distribution costs of our
existing and future motion picture productions and acquisitions. The total
investment raised was approximately $268,000,000. Substantially all of the
net proceeds from that transaction received by us, which totaled
approximately $17,000,000, were accounted for as a reduction in the
carrying value of our film costs on the balance
sheet.
|
Accounting
for the Zeus investments has resulted in the recognition of substantial assets
and liabilities arising from the related financing arrangements. These assets
and liabilities are essentially offsetting. The impact of the Zeus investments
as of June 30, 2008 was to increase cash by approximately $113,000,000, to
increase current receivables by approximately $226,000,000, to increase deferred
income by approximately $113,000,000 and to increase short term debt by
approximately $226,000,000. The impact of the Zeus investments as of December
31, 2008 was to increase current receivables by approximately $170,000,000 and
to increase deferred income by approximately $170,000,000. The remaining amounts
relating to the Zeus investment will be entirely eliminated from our balance
sheet on or before May 31, 2009.
12
RISK FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
ordinary shares could decline, and you may lose all or part of your
investment.
Risks
Relating to Our Business
Our success depends on certain key
employees.
Our
success depends to a significant extent on the performance of a number of senior
management and other key employees, including production and creative personnel.
We particularly depend upon our Chief Executive Officer, Peter Hoffman, whose
employment agreement grants him the right, as long as he is employed by us, to
approve or control all artistic and business decisions regarding motion pictures
that we acquire, produce or distribute. As a result, our success depends to a
significant extent on Mr. Hoffman’s creative and business decisions regarding
the motion pictures we acquire, produce and distribute.
We do not
have any "key person" life insurance for any of our officers or
directors. We have entered into employment agreements with our top
executive officers. These agreements entitle us to possible
injunctive relief for breach of the agreements but do not include any
“non-compete” covenants. These agreements cannot assure us of the continued
services of such employees. In addition, competition for the limited number of
business, production and creative personnel necessary to create and distribute
our entertainment content is intense and may grow in the future. Our inability
to retain or successfully replace where necessary members of our senior
management and other key employees could have a material adverse effect on our
business, results of operations and financial condition.
Our
interests may conflict with those of our Chief Executive Officer.
We have
entered into a series of agreements with Mr. Hoffman and his affiliated
companies which may result in our interests differing from theirs (see “Certain
Related Transactions”). One of these agreements concerns a financing
arrangement that Seven Arts Pictures, Inc. (“SAP”), a company controlled by Mr.
Hoffman, entered into with Cheyne Specialty Finance Fund L.P. (“Cheyne”) for the
production of our movies which has been secured with (i) the motion picture
assets on six of our motion pictures and (ii) 1,607,000 of our ordinary shares
beneficially owned by Mr. Hoffman. We intend to use approximately
$1,000,000 from the proceeds of this offering to satisfy the obligations under
this financing arrangement, and as a result, we would retain our rights to the
motion picture assets that were used to secure the financing and SAP would
maintain its control position in our company. Satisfying the
obligations under this financing arrangement may provide divergent benefits to
us and to Mr. Hoffman. Other agreements that we have
entered into with Mr. Hoffman and his affiliates that may result in conflicts of
interest include his employment agreement which grants him rights to produce
certain “remakes“ and “sequels” to our motion pictures and an Intercompany
Agreement which provides that SAP will own limited liability companies in the
United States, with all distribution rights and profits thereof for our account
and provide other services for our account and by which has SAP assigned to us
any results and proceeds arising from services performed by SAP on our
behalf. See “Certain Related Transactions.”
13
Our
failure to repay obligations under the Arrowhead Loan and Cheyne Loan could
result in the loss of assets that we pledged and the loss of our Chief Executive
Officer’s beneficial interest in our ordinary shares.
Seven
Arts Future Flow I (“SFF”), a limited liability company owned by SAP, one of
our controlling shareholders and a company controlled by Mr. Hoffman,
obtained financing from the Arrowhead Target Fund, Ltd. (“Arrowhead”) of
approximately $8,300,000 (the “Arrowhead Loan”). We secured the
Arrowhead Loan with liens on twelve motion pictures that generated revenues of
over $3,700,000 in the fifteen month fiscal period ended June 30, 2008. The
Arrowhead Loan is recorded in our audited financial statements as a $8,300,000
liability as of December 31, 2008. Our only liability is to repay the
Arrowhead Loan from the proceeds of the film assets pledged against the
Arrowhead Loan. We are not required to repay the Arrowhead Loan from any of our
other assets or revenues.
SFF is
currently in payment default on the Arrowhead Loan. Since the Arrowhead Loan is
now due, Arrowhead may foreclose on the pledged film assets. Arrowhead sent SFF
a notice of default in February 2009 but has not yet sought to recover any of
the pledged film assets which we continue to distribute. Failure to repay or
refinance the Arrowhead Loan could result in a material disposition of assets
through the loss of our rights to twelve motion pictures and related loss of
revenues in amounts that are difficult to predict.
We also
obtained financing of an aggregate of approximately $7,500,000 from Arrowhead
Consulting Group LLC (“ACG”) for $1,000,000 and Cheyne for $6,500,000 ("Cheyne
Loan") at a rate of interest of 19% and 18% per annum,
respectively. SAP, one of our controlling shareholders and a company
controlled by Mr. Hoffman, our Chief Executive Officer, secured the ACG Loan and
the Cheyne Loan with 1,607,000 of our ordinary shares beneficially owned by Mr.
Hoffman (representing approximately 23% of our outstanding shares), and we
secured ACG Loan and the Cheyne Loan with liens on six motion pictures that
generated revenues of approximately $2,982,000 in the fifteen month fiscal
period ended June 30, 2008, plus a second position security interest in the
motion pictures pledged under the Arrowhead Loan. The Cheyne Loan matured on
September 30, 2007. We repaid all sums then due to Cheyne, a sum of
approximately $6,500,000, on or about April 2008, and received an assignment
from Cheyne of their senior secured position on the film assets, including
Cheyne’s subordination agreement with ACG.
ACG has
demanded payment of the ACG Loan. Failure to repay or refinance the ACG Loan
could result in the loss of our rights to six motion pictures and our Chief
Executive Officer, through his interest in SAP, could lose his equity position
in our company.
14
We
face substantial capital requirements and financial risks.
Our business requires a substantial
investment of capital. The production, acquisition and
distribution of motion pictures require a significant amount of capital. A
significant amount of time may elapse between our expenditure of funds and the
receipt of commercial revenues or tax credits derived from the production of our
motion pictures. This time lapse requires us to fund a significant portion of
our capital requirements from various financing sources. We cannot be certain
that we can continue to successfully implement these financing arrangements or
that we will not be subject to substantial financial risks relating to the
production, acquisition, completion and release of future motion pictures. We
currently employ a variety of structuring techniques, including debt or equity
financing, in an effort to achieve our investment objectives. We cannot be
certain that we will be able to negotiate structures which accomplish our
objectives. We intend to increase (through internal growth or acquisition) our
production slate or our production budgets, and if we do, we will be required to
increase overhead and/or make larger up-front payments to talent and,
consequently, bear greater financial risks. Any of the foregoing could have a
material adverse effect on our business, results of operations and financial
condition.
The costs of producing and marketing
feature films have steadily increased and may further increase in the future,
which may make it more difficult for a film to generate a profit or compete
against other films. The costs of producing and marketing
feature films have generally increased in recent years. These costs may continue
to increase in the future, which may make it more difficult for our films to
generate a profit or compete against other films. Historically, production costs
and marketing costs have risen at a higher rate than increases in either the
number of domestic admissions to movie theaters or admission ticket prices. A
continuation of this trend would leave us more dependent on other media, such as
home video, television, international markets and new media for revenue, and the
revenues from such sources may not be sufficient to offset an increase in the
cost of motion picture production. If we cannot successfully exploit these other
media, it could have a material adverse effect on our business, results of
operations and financial condition.
Budget overruns may adversely affect
our business. Our business model requires that we be efficient
in the production of our motion pictures. Actual motion picture production costs
often exceed their budgets, sometimes significantly. The production, completion
and distribution of motion pictures are subject to a number of uncertainties,
including delays and increased expenditures due to creative differences among
key cast members and other key creative personnel or other disruptions or events
beyond our control. Risks such as death or disability of star performers,
technical complications with special effects or other aspects of production,
shortages of necessary equipment, damage to film negatives, master tapes and
recordings or adverse weather conditions may cause cost overruns and delay or
frustrate completion of a production. If a motion picture incurs substantial
budget overruns, we may have to seek additional financing from outside sources
to complete production. We cannot assure you that such financing on terms
acceptable to us will be available, and the lack of such financing could have a
material adverse effect on our business, results of operations and financial
condition.
In
addition, if a motion picture production incurs substantial budget overruns, we
cannot assure you that we will recoup these costs, which could have a material
adverse effect on our business, results of operations and financial condition.
Increased costs incurred with respect to a particular film may result in any
such film not being ready for release at the intended time and the postponement
to a potentially less favorable time, all of which could cause a decline in box
office performance, and, thus, the overall financial success of such film.
Budget overruns could also prevent a picture from being completed or released.
Although none of these events has occurred to us to date, any of the foregoing
could have a material adverse effect on our business, results of operations and
financial condition.
15
A
substantial number of our motion pictures did not generate enough revenue to
satisfy financing obligations secured by those motion pictures, and our future
motion pictures may not generate enough revenue to satisfy obligations entered
into to finance their production.
We have
obtained financing for most of our motion pictures and secured those financings
with the assets from those and other motion pictures. If we are unable to
generate sufficient revenues to repay those obligations under the terms of the
financings, we lose those motion picture assets and any future revenues that we
could derive from those assets. As noted, the revenues of the 12 and
6 motion pictures securing the Arrowhead Loan and the ACG Loan, respectively,
have not met our estimates, and as a result, we have not been able to repay
those loans in the periods set out in those loans. If we are unable
to amend the terms of those loans or satisfy them otherwise, we could lose those
motion picture assets. We cannot assure you that a failure to repay
these obligations will not make the terms of future financings more onerous or
prohibitive. We also cannot assure you that our estimates of revenues
from motion pictures securing any other current or future financings will be
accurate, and that we will be able to satisfy those financings with the revenues
from the motion pictures securing those financings. The loss of motion picture
assets as a result of any such default would adversely affect our
business.
Our revenues and results of
operations may fluctuate significantly.
Revenues and results of operations are difficult to
predict and depend on a variety of factors. Our revenues and
results of operations depend significantly upon the performance of the motion
pictures that we license for distribution, which we cannot predict with
certainty. Accordingly, our 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 periods. Furthermore, largely as a
result of these predictive difficulties, we may not be able to achieve analysts’
projected earnings. Revisions to projected earnings could cause investors to
lose confidence in us, which in turn could materially and adversely affect our
business, our financial condition and the market value of our
securities.
Accounting practices used in our
industry may accentuate fluctuations in operating results. In
addition to the cyclical nature of the entertainment industry, our accounting
practices (which are standard for the industry) may accentuate fluctuations in
our operating results. While such fluctuations have not occurred to date, we may
in the future experience such fluctuations due to industry-wide accounting
practices. In accordance with U.K. and U.S. generally accepted accounting
principles and industry practice, we amortize film and television programming
costs using the “individual-film-forecast” method. Under this accounting method,
we amortize film and television programming costs for each film or television
program based on the following ratio:
Revenue earned by title in
the current period
Estimated
total revenues by title
16
and
compare to amortization recorded to date. If the current calculation provides a
higher number than the amortization that we have recorded to date, we charge the
difference to the profit and loss account and vice versa if the calculation
provides a lower number. We review, and revise when necessary, our total
revenue estimates on a title-by-title basis at least every six months. This
review may result in a change in the rate of amortization and/or a write-down of
the film asset to its estimated fair value. Results of operations in future
years depend upon our amortization of our film costs. Periodic adjustments in
amortization rates may significantly affect these results. In addition, we are
required to expense film advertising costs as incurred, but are also required to
recognize the revenue from any motion picture over the entire revenue stream
expected to be generated by the individual picture.
We depend on a limited number of
projects, and the loss or failure of a major project could have a material
adverse effect on our business. Our revenue is generated from a limited
number of films. Films that we develop, finance, or license for
distribution vary due to the opportunities available to us and to targeted
audience response, both of which are unpredictable and subject to
change. The loss or failure of a major project could have a material
adverse effect on our results of operations and financial condition as well as
on the market price of our securities. We cannot assure you that any
project we undertake or participate in will be successful.
We
rely upon pre-sales, advances and guarantees.
We
attempt to minimize some of the financial risks normally associated with motion
picture production by obtaining, at various stages prior to release of our
motion pictures, advances and guarantees from distributors in exchange for
distribution rights to such pictures in particular
territories. Advances and guarantees paid by a distributor for
distribution rights to a film generally represent a minimum purchase price for
such rights. While guarantees from distributors reduce some of the financial
risk of our motion pictures by guaranteeing the receipt of certain revenues upon
delivery of these motion pictures for distribution, such advances and guarantees
do not assure the profitability of our motion pictures or our Company's
operations. While the licensing of distribution rights in exchange
for advances and guarantees reduces our risk with respect to unsuccessful films,
it may also result in our receiving lower revenues with respect to highly
successful films than if such licensing of distribution rights were made upon
different terms that, for example, might have provided lower or no advances and
guarantees to us but also a lower distribution fee (i.e. a lower percentage of
gross revenues) to the distributor. We believe the international “pre-sale”
market has become increasingly difficult to navigate resulting in fewer
“pre-sales” with lower minimum guarantees, and this situation may continue for
the indefinite future. As the international marketplace for motion pictures
demands increasingly costly motion pictures, we cannot be certain that the
amount of advances and guarantees which we anticipate generating on a given film
project will be greater than or equal to our cost of producing such motion
picture.
17
In
today's rapidly changing and competitive marketplace for motion pictures, it is
possible that the amount of such advances and guarantees alone, after payment of
our operating expenses, even if greater than our direct cost of producing a
specific film, will not be sufficient to provide us with a significant return on
our invested capital. Should we incur higher than expected overhead or
production expenses, that amount may not be sufficient to provide a return of
all or substantially all of our invested capital. To the extent that
we do not produce one or more films that generate overages for us, there may be
a material adverse effect upon our Company and the potential for returns on, and
even the return of, our capital.
Our
executive officers, directors and principal shareholders will continue to
control our company after the offering.
After
this offering, our directors, executive officers, entities affiliated with our
directors and our executive officers and our principal shareholders will
beneficially own in the aggregate approximately 52.3% of our outstanding
ordinary shares. Accordingly, these persons, acting together, will have the
ability to substantially influence all matters submitted to our shareholders for
approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. These persons
will also have the ability to control our management and affairs. Accordingly,
the concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, impeding a merger, consolidation, takeover or
other business combination involving us or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of our
business, even if that transaction would be beneficial to other
shareholders.
Additionally,
we have entered into an Intercompany Agreement with SAP, a company controlled by
our Chief Executive Officer, Peter Hoffman. Pursuant to the Intercompany
Agreement, we granted SAP the power and authority to enter into agreements on
our behalf. Although under the terms of the agreement, SAP is not to
take any actions on our behalf without our approval, in practice we have not
required SAP to receive our prior approval. If our board of directors
continues to allow SAP to take actions under this agreement without board
approval, SAP and, indirectly, Peter Hoffman will have a level of control over
our operations that exists outside of our management structure.
We
have a limited operating history.
Our
predecessor was formed in 1992, and later transferred all its motion picture
assets to SAP, one of our controlling shareholders and a company controlled by
Peter Hoffman, our Chief Executive Officer, in October, 2002. SAP acquired
control of our company in September 2004 by a transfer of all its motion picture
rights to Seven Arts Filmed Entertainment Limited, our wholly owned
subsidiary. Although our predecessors have a more extensive operating
history, our company began operations in its current form and business strategy
in September, 2004. As a result, investors will have only a limited period
of motion picture operations to evaluate our performance.
18
We
currently lack a credit facility.
We do not
have any credit facility with respect to financing production of our motion
pictures. We have primarily depended upon financing arrangements tied
to specific motion pictures for the funding of our productions. Given
the tightening of credit markets, we are seeking to establish a credit facility
to provide us with more flexibility in the funding of our productions or
operations. We cannot assure you that we can secure a credit facility or that,
if we secure a credit facility, the terms will be favorable to us.
We face risks from doing business
internationally.
We
distribute motion pictures outside the United States through third-party
licensees and derive revenues from these sources. As a result, our business is
subject to certain risks inherent in international business, many of which are
beyond our control. These risks include:
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laws
and policies affecting trade, investment and taxes, including laws and
policies relating to the repatriation of funds and withholding taxes, and
changes in these laws,
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changes
in local regulatory requirements, including restrictions on
content,
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differing
cultural tastes and attitudes,
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differing
degrees of protection for intellectual property,
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financial
instability and increased market concentration of buyers in foreign
television markets, including in European pay television
markets,
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the
instability of foreign economies and governments and
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war
and acts of terrorism.
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Events
or developments related to these and other risks associated with international
trade could adversely affect our revenues from non-U.S. sources, which
could have a material adverse effect on our business, financial condition and
results of operations.
19
Amendments
to current laws and regulations governing our operations could have a material
adverse impact on our business.
Our
operations are subject to substantial government regulation, particularly
regulations governing the use of tax credits granted during film production in
Louisiana, the United Kingdom, Canada and Hungary. We receive a substantial
portion of the financing for our motion picture production from tax credits and
other tax preferred financings. Amendments to current laws and regulations
governing these tax credits or other aspects of our business, including
intellectual property and censorship laws, could increase our costs of
operations, reduce our revenues, jeopardize the ownership of certain assets or
increase the cost of financing our motion pictures. Tax regulations,
intellectual property laws or other rules and regulations affecting our business
may be changed in a manner which may adversely affect us and our ability to
operate our business plan.
The
production of a larger budget motion picture may adversely affect our operating
results.
Historically,
we have primarily produced motion pictures with budgets of between $5 million
and $15 million. We may occasionally produce a motion picture with a
larger budget of between $30 million and $50 million. To produce such
a motion picture, we believe that we will need to co-produce such motion
pictures with major studios and ensure a studio-wide release and a commitment to
cover P&A costs or with one or more other independent production
companies. To date, we have not produced or co-produced a motion
picture with a budget in that range. We cannot assure you that we can
successfully produce and distribute motion pictures in that budgetary range,
that we can find a major studio to co-produce such motion pictures or that we
can secure a studio-wide release or a commitment from a studio to cover P&A
costs.
We
may not be able to execute our distribution strategy with CineWorks Media,
LLC.
We intend
to make an investment from our working capital of up to $3,000,000 of equity in
CineWorks Media, LLC, if it completes its current private placement offering,
representing less than 10% of CineWork’s equity. If CineWorks is formed as was
most recently described to us, it will be an independent distributor of rights
of motion pictures in the United States and Canada. We intend to have CineWorks
Media distribute some or all of our motion pictures in the United States and
Canada. CineWorks Media will be managed separately from us. We cannot guarantee
you that we will be able to successfully invest in CineWorks Media, that we will
be able to enter into a distribution arrangement on acceptable terms with
CineWorks Media or that CineWorks will successfully become a distributor of
motion picture rights and we will be able to recoup our investment. A failure of
any of the above may result in us being unable to execute our proposed change in
our distribution strategy in the United States and Canada and losing any
investment that we may make in CineWorks.
Risks
Relating to Our Industry
Our
success depends on external factors in the motion picture
industry.
Our success depends on the
commercial success of motion pictures, which is
unpredictable. Operating in the motion picture industry
involves a substantial degree of risk. Each motion picture is an individual
artistic work, and inherently unpredictable audience reactions primarily
determine commercial success. Generally, the popularity of our motion pictures
depends on many factors, including public reception, the format of their initial
release, for example, theatrical or direct-to-video, the actors and other key
talent, their genre and their specific subject matter. The commercial success of
our motion pictures also depends upon the quality and acceptance of motion
pictures that our competitors release into the marketplace at or near the same
time, critical reviews, the availability of alternative forms of entertainment
and leisure activities, general economic conditions and other tangible and
intangible factors, many of which we do not control and all of which may change.
We cannot predict the future effects of these factors with certainty, any of
which factors could have a material adverse effect on our business, results of
operations and financial condition.
20
In
addition, because a motion picture’s performance in ancillary markets, such as
home video and pay and free television, is often directly related to its box
office performance or television ratings, poor box office results or poor
television ratings may negatively affect future revenue streams. Our success
will depend on the experience and judgment of our management to select and
develop new investment and production opportunities. We cannot assure you that
our motion pictures will obtain favorable reviews or ratings, or that our motion
pictures will perform well at the box office or in ancillary markets. The
failure to achieve any of the foregoing could have a material adverse effect on
our business, results of operations and financial condition.
Changes in the United States, global
or regional economic conditions could adversely affect the profitability of our
business. The current severe decrease in economic activity in
the United States or in other regions of the world in which we do business
could adversely affect demand for our films, thus reducing our revenue and
earnings. A decline in economic conditions could reduce performance of our
theatrical, television and home entertainment releases. In addition, an increase
in consumer costs generally, or consumer costs in a particular sector of the
entertainment industry, could result in a shift in consumer demand away from the
entertainment we offer, which could also adversely affect our revenues and, at
the same time, increase our costs.
Distributors’ failure to promote our programs may
adversely affect our business. Licensed distributors’
decisions regarding the timing of release and promotional support of our motion
pictures and related products are important in determining the success of these
pictures and products. We do not control the timing and manner in which our
licensed distributors distribute our motion pictures. Any decision by those
distributors not to distribute or promote one of our motion pictures or
related products or to promote our competitors’ motion pictures or related
products to a greater extent than they promote ours could have a material
adverse effect on our business, results of operations and financial
condition.
We could be adversely affected by
strikes, potential
strikes or other union
job actions. We directly or indirectly depend upon highly
specialized union members who are essential to the production of motion
pictures. A strike by, or a lockout of, one or more of the unions that provide
personnel essential to the production of motion pictures could delay or halt our
ongoing production activities. In November 2007, the members of the Writer’s
Guild of America went on strike, and a new agreement was not approved until
February 2008. Additionally, the Directors Guild of America and Screen
Actors Guild (“SAG”) collective bargaining agreements expired in 2008, and while
an agreement has been reached with the Directors Guild, negotiations with SAG,
which agreement expired on June 30, 2008, are ongoing. A SAG or other union
strike or action, depending on the length of time, could cause a delay or
interruption in our production and release of new motion pictures, which could
have a material adverse effect on our business, results of operations and
financial condition.
21
Even if
SAG does not call a strike, the threat of a strike may delay
production. Starting in June 2008, SAG provided certain independent
production companies with guaranteed completion contracts, or waivers, that
would allow those companies to proceed with the production of specified motion
pictures in the event of a strike by SAG. In January 2009, SAG
announced that it would not provide any more waivers. Almost all
financing of the production of motion pictures by independent production
companies involves third parties providing film production completion bonds to
guarantee the repayment of the financings upon the abandonment of production if
certain conditions are met. Such film completion bonds do not provide
for the repayment of the financing if a production is abandoned due to a
strike. Without such waivers and in view of a potential strike, there
may be dramatically less financing of the production of motion pictures by
independent production companies as it will be difficult or impossible to obtain
a film production completion bond, and it may be too risky to start films where
production could be interrupted by a strike.
We face substantial
competition in all
aspects of our business.
We are smaller and less diversified
than many of our competitors. As an independent distributor
and producer, we constantly compete with major U.S. and international
studios and independent producers and distributors. Most of the major
U.S. studios are part of large diversified corporate groups with a variety
of other operations, including television networks and cable channels, that can
provide both the means of distributing their products and stable sources of
earnings that may allow them better to offset fluctuations in the financial
performance of their motion picture operations. In addition, the major studios
and larger independent producers and distributors have more resources with which
to compete for ideas, storylines and scripts created by third parties as well as
for actors, directors and other personnel required for production. The resources
of the major studios and larger independent producers and distributors may also
give them an advantage in acquiring other businesses or assets, including film
libraries, that we might also be interested in acquiring. Our inability to
compete successfully could have a material adverse effect on our business,
results of operations and financial condition.
The motion picture industry is highly competitive
and at times may create an oversupply of motion pictures in the
market. The number of motion pictures released by our
competitors may create an oversupply of product in the market, reduce our share
of box office receipts and make it more difficult for our films to succeed
commercially. Oversupply may become most pronounced during peak release times,
such as school holidays and national holidays, when theater attendance is
expected to be highest. For this reason, and because of our more limited
production and advertising budgets, generally provided by third party
distributors, we typically do not release our films during peak release times,
which may also reduce our potential revenues for a particular release. Moreover,
we cannot guarantee that we can release all of our films when they are otherwise
scheduled. In addition to production or other delays that might cause us to
alter our release schedule, a change in the schedule of a major studio may force
us to alter the release date of a film because we cannot always compete with a
major studio’s larger promotion campaign. Any such change could adversely impact
a film’s financial performance. In addition, if we cannot change our schedule
after such a change by a major studio because we are too close to the release
date, the major studio’s release and its typically larger promotion budget may
adversely impact the financial performance of our film. The foregoing could have
a material adverse effect on our business, results of operations and financial
condition.
22
The
limited supply of motion picture screens compounds this product oversupply
problem. Currently, a substantial majority of the motion picture screens in the
United States typically are committed at any one time to only ten to
fifteen films distributed nationally by major studio distributors. In addition,
as a result of changes in the theatrical exhibition industry, including
reorganizations and consolidations and the fact that major studio releases
occupy more screens, the number of screens available to us when we want to
release a picture may decrease. If the number of motion picture screens
decreases, box office receipts, and the correlating future revenue streams, such
as from home video and pay and free television, of our motion pictures may also
decrease, which could have a material adverse effect on our business, results of
operations and financial condition.
DVD sales have been declining, which
may adversely affect our growth prospects and results of
operations.
Several
factors, including weakening economic conditions, the deteriorating financial
condition of major retailers, the maturation of the DVD format, increasing
competition for consumer discretionary spending and leisure time, piracy and
increased competition for retailer shelf space, are contributing to an
industry-wide decline in DVD sales both domestically and internationally. The
high definition format war between the HD DVD and Blu-ray formats ended in
February 2008 with Toshiba Corporation’s announcement of its decision to
discontinue its HD DVD businesses; however, reduced consumer discretionary
spending in a challenging economic environment, may slow widespread adoption of
the Blu-ray format or lead consumers to forego adopting a high definition DVD
format altogether, which would adversely affect DVD sales. DVD sales also may be
negatively affected as consumers increasingly shift from consuming physical
entertainment products to digital forms of entertainment. The motion picture
industry faces a challenge in managing the transition from physical to
electronic formats in a manner that continues to support the current DVD
business and its relationships with large retail customers and yet meets the
growing consumer demand for delivery of motion pictures in a variety of
electronic formats. We cannot assure you that home video wholesale prices can be
maintained at current levels, due to aggressive retail pricing, digital
competition and other factors. In addition, in the event of a protracted
economic downturn, reduced consumer discretionary spending could lead to further
declines in DVD sales. A decline in DVD sales may have a disproportionate affect
on us and our results of operations as a number of our releases only have a
limited theatrical release or are released direct-to-DVD.
We must successfully respond to rapid
technological changes and alternative forms of delivery or storage to remain
competitive.
Advances
in technologies or alternative methods of product delivery or storage or certain
changes in consumer behavior driven by these or other technologies and methods
of delivery and storage could have a negative effect on our business. Examples
of such advances in technologies include video-on-demand, new video formats and
downloading and streaming from the internet. An increase in video-on-demand
could decrease home video rentals. Similarly, further increases in the use of
portable digital devices that allow users to view content of their own choosing
while avoiding traditional commercial advertisements could adversely affect our
revenues. Other larger entertainment distribution companies will have larger
budgets to exploit these growing trends. We cannot predict how we will
financially participate in the exploitation of our motion pictures
through these emerging technologies or whether we have the right to do so
for certain of our library titles. If we cannot successfully exploit these and
other emerging technologies, it could have a material adverse effect on our
business, results of operations and financial condition.
23
Protecting and defending against
intellectual property claims may have a material adverse effect on our
business.
Our
ability to compete depends, in part, upon successful protection of our
intellectual property. We do not have the financial resources to protect our
rights to the same extent as major studios. We are not a member of the Motion
Picture Association of America (“MPAA”) as are the major studios and as a result
we cannot rely on MPAA resources to prevent piracy and copyright infringements.
We attempt to protect proprietary and intellectual property rights to our
productions through available copyright and trademark laws and licensing and
distribution arrangements with reputable international companies in specific
territories and media for limited durations. Despite these precautions, existing
copyright and trademark laws afford only limited practical protection in certain
countries. We also distribute our products in other countries in which there is
no copyright or trademark protection. As a result, it may be possible for
unauthorized third parties to copy and distribute our productions or certain
portions or applications of our intended productions, which could have a
material adverse effect on our business, results of operations and financial
condition.
Litigation
may also be necessary in the future to enforce our intellectual property rights,
to protect our trade secrets, or to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Any such litigation could result in substantial costs and the
diversion of resources and could have a material adverse effect on our business,
results of operations and financial condition. We cannot assure you that
infringement or invalidity claims will not materially adversely affect our
business, results of operations and financial condition. Regardless of the
validity or the success of the assertion of these claims, we could incur
significant costs and diversion of resources in enforcing our intellectual
property rights or in defending against such claims, which could have a material
adverse effect on our business, results of operations and financial
condition.
Others may assert intellectual
property infringement claims against
us.
One of
the risks of the film production business is the possibility that others may
claim that our productions and production techniques misappropriate or infringe
the intellectual property rights of third parties with respect to their
previously developed films, stories, characters, other entertainment or
intellectual property. We may receive in the future claims of infringement or
misappropriation of other parties’ proprietary rights, although we have had
to date been served with only one such claim which was settled on favorable
terms. Any such assertions or claims may materially adversely affect our
business, financial condition or results of operations. Irrespective of the
validity or the successful assertion of such claims, we could incur significant
costs and diversion of resources in defending against them, which could have a
material adverse effect on our business, financial condition or results of
operations. If any claims or actions are asserted against us, we may seek to
settle such claim by obtaining a license from the plaintiff covering the
disputed intellectual property rights. We cannot assure you, however, that under
such circumstances a license, or any other form of settlement, would be
available on reasonable terms or at all.
Our business involves risks of
liability claims for media content, which could adversely affect our business,
results of operations and financial condition.
As a
licensor of media content, we may face potential liability
for:
|
•
|
defamation,
|
|
|
•
|
invasion
of privacy,
|
|
|
•
|
negligence,
|
|
|
•
|
copyright
or trademark infringement (as discussed
above), and
|
|
|
•
|
other
claims based on the nature and content of the materials
distributed.
|
These
types of claims have been brought, sometimes successfully, against producers and
licensors of media content. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a material adverse
effect on our business, results of operations, and financial
condition.
Piracy of motion pictures, including
digital and internet piracy, may reduce the gross receipts from the exploitation
of our films.
Motion
picture piracy is extensive in many parts of the world and is made easier by
technological advances and the conversion of motion pictures into digital
formats. This trend facilitates the creation, transmission and sharing of high
quality unauthorized copies of motion pictures in theatrical release, on
videotapes and DVDs, from pay-per-view through set top boxes and other devices
and through unlicensed broadcasts on free television and the internet. The
proliferation of unauthorized copies of these products has had and will likely
continue to have an adverse effect on our business, because these unauthorized
pirated copies reduce the revenue we receive from our products. Additionally, to
contain this problem, we may have to implement elaborate and costly security and
anti-piracy measures, which could result in significant expenses and losses of
revenue. We cannot assure you that even the highest levels of security and
anti-piracy measures will prevent piracy.
24
In
particular, unauthorized copying and piracy are prevalent in countries outside
of the United States, Canada and Western Europe, whose legal systems may make it
difficult for us to enforce our intellectual property rights. While the
U.S. government has publicly considered implementing trade sanctions
against specific countries that, in its opinion, do not make appropriate efforts
to prevent copyright infringements of U.S. produced motion pictures, we
cannot assure you that any such sanctions will be enacted or, if enacted, will
be effective. In addition, if enacted, such sanctions could impact the amount of
revenue that we realize from the international exploitation of motion pictures.
If no embargoes or sanctions are enacted, or if other measures are not taken, we
may lose revenue as a result of motion picture piracy.
There
is a potential for disputes and litigation in the motion picture
business.
The
motion picture business is more subject to disputes and litigation than
comparable businesses. There is a risk of disputes and litigation
with financiers, competitors, putative rights owners, unions, producers and
other talent, and with distributors. We cannot assure you that we
will prevail in the event of any disputes or litigation. We have
failed to prevail in an arbitration regarding 9 ½ Weeks II, which
could result in payment by us of as much as $650,000.
Risks
Relating to this Offering and Our Shares
We have
never paid dividends on our ordinary shares and presently intend to retain any
future earnings to finance the operations of our business. You may never receive
any dividends on our shares.
If
you purchase ordinary shares, you will incur immediate and substantial dilution
from the price you pay.
The
offering price of our ordinary shares will be substantially higher than the net
tangible book value per share of our outstanding ordinary shares immediately
after the offering. If you purchase ordinary shares in this offering, you will
incur immediate and substantial dilution in the net tangible book value per
ordinary share from the price you pay. At an offering price of $_____ per
ordinary share, you will experience a net asset value dilution per ordinary
share of $____ in comparison to our net asset value per share at December 31,
2008 of $1.38.
The
exercise of stock options, the conversion of redeemable debentures, or
preference shares or the later sales of our ordinary shares may further dilute
your ordinary shares.
We have
granted approximately 510,000 stock options, issued redeemable debentures
convertible into a maximum of 1,400,000 ordinary shares, issued preference
shares convertible into up to 400,000 ordinary shares and issued a debenture
convertible into 838,574 ordinary shares. The issuance of any ordinary shares
pursuant to exercise of such options, redemption of the debentures and
redemption of the preference shares would be at per share price below the
offering price in this prospectus would dilute the interest of persons acquiring
ordinary shares in this offering.
25
Our Board
of Directors is authorized to sell additional ordinary shares, or securities
convertible into ordinary shares, if in their discretion they determine that
such action would be beneficial to us. Any such issuance below the offering
price of the ordinary shares in this prospectus would dilute the interest of
persons acquiring ordinary shares in this offering.
Our
articles of association provide indemnification for officers, directors and
employees.
Our
governing instruments provide that officers, directors, employees and other
agents and their affiliates shall only be liable to our Company for losses,
judgments, liabilities and expenses that result from the negligence, misconduct,
fraud or other breach of fiduciary obligations. Thus certain alleged
errors or omissions might not be actionable by us. The governing
instruments also provide that, under the broadest circumstances allowed under
law, we must indemnify our officers, directors, employees and other agents and
their affiliates for losses, judgments, liabilities, expenses and amounts paid
in settlement of any claims sustained by them in connection with our Company,
including liabilities under applicable securities laws.
As
a "foreign private issuer,” you may not receive corporate and company
information and disclosure that you are accustomed to receiving or in a manner
in which you are accustomed to receiving it.
We are a
foreign private issuer, and the rules governing the information that we disclose
differ from those governing U.S. corporations pursuant to the Securities
Exchange Act of 1934. We are not required to file quarterly reports
on Form 10-Q or provide current reports on Form 8-K disclosing significant
events within four days of their occurrence. In addition, we are
exempt from the Section 14 proxy rules, and proxy statements that we distribute
will not be subject to review by the U.S. Securities and Exchange
Commission. Our exemption from Section 16 rules regarding sales of
ordinary shares by insiders means that you will have less data in this regard
than shareholders of U.S. companies that are subject to the Securities Exchange
Act. As a result, you may not have all the data that you are accustomed to
having when making investment decisions.
The stock
market in general, and the market for motion picture stocks in particular, has
experienced extreme price and volume fluctuations. These broad market and
industry fluctuations may adversely affect the market price of our ordinary
shares, irrespective of our actual operating performance. Additional factors
which could influence the market price of our ordinary shares include statements
and claims made by us and other participants in our industry and public
officials. The public offering price for the ordinary shares may not be above
that which will subsequently prevail in the market.
If
large amounts of our shares held by existing shareholders are sold in the
future, the market price of our ordinary shares could decline.
The
market price of our ordinary shares could fall substantially if our existing
shareholders sell large amounts of our ordinary shares in the public market
following this offering. These sales, or the possibility that these sales may
occur, could also make it more difficult for us to sell equity or equity-related
securities if we need to do so in the future to address then-existing financing
needs. U.S. federal securities laws requiring the registration or exemption from
registration in connection with the sale of securities limit the number of
ordinary shares available for sale in the public market. In addition, lock-up
agreements that restrict us, our directors and officers and certain of our
existing shareholders from selling or otherwise disposing of any ordinary shares
for a period of 180 days after the date of this prospectus without the prior
written consent of the underwriters’ representative also restrict sales of our
ordinary shares. The underwriters’ representative may, however, in its sole
discretion and without notice, release all or any portion of the ordinary shares
from the restrictions in the lock-up agreements.
26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains
forward-looking statements. These forward-looking statements
include information about possible or assumed future results of our operations
or our performance. Words such as “expects,” “intends,” “plans,” “believes,” “anticipates,” “estimates,” and variations of such words and
similar expressions are
intended to identify the forward-looking statements. Although we believe that
the expectations reflected in such forward-looking statements are reasonable,
we cannot assure you
that such expectations
will prove to have been correct. These statements involve known and unknown
risks and are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond our control. Actual results may differ materially from those expressed or implied by such
forward-looking statements. Although we have attempted to identify important
factors that could cause actual results to differ materially from expected
results, such forward-looking statements involve known and unknown
risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or other future events, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking
statements. We
undertake no obligation to publicly update or revise any forward-looking
statements contained in this prospectus, or the documents to which we refer you
in this prospectus, to reflect any change in our expectations with respect to
such statements or any
change in events, conditions or circumstances on which any statement is
based.
We
estimate the gross proceeds from the offering, prior to deducting underwriting
discounts and commissions and the estimated offering expenses payable by us,
will be approximately $___ million (approximately $ _______ if the
representative’s warrants are exercised in full). This estimate is
based on an assumed offering price of $____ per share. A $1.00
increase or decrease in the assumed offering price of $___ per share would
increase or decrease the gross proceeds to us from this offering by $2.5
million.
Based on
an assumed offering price of $____ per share, we estimate that we will receive
net proceeds of $_____ million from the sale of 2,500,000 shares being
offered at an assumed public offering price of $___ per share, after deducting
$________ for underwriting discounts and commissions and our underwriters’
non-accountable expense allowance and estimated expenses of approximately
$_________, which includes legal, accounting, printing costs and various fees
associated with the registration and listing of our shares. If the underwriters
exercise their right to purchase an additional 375,000 ordinary shares from the
selling shareholder to cover over-allotments, we will not receive any additional
proceeds, and if the underwriters’ representative exercises its warrants to
purchase 125,000 ordinary shares, we will receive an additional $ _______ after
deducting estimated expenses.
Assuming
no exercise of the representative’s warrants, we intend to use the net proceeds
of the offering as follows:
27
|
Application of
|
Percentage of
|
||||
|
Net Proceeds
|
Net Proceeds
|
||||
|
Reduction
of Indebtedness
|
$11,150,000
|
|
%
|
||
|
Working
capital
|
$
|
%
|
|||
|
Total
|
$
|
100
|
%
|
||
The
amounts actually spent by us for any specific purpose may vary significantly.
Accordingly, our management has broad discretion to allocate the net proceeds.
Pending the uses described above, we intend to invest the net proceeds of this
offering in short-term, interest-bearing, investment-grade
securities.
We intend
to use $11,150,000 of the proceeds to reduce our indebtedness by:
|
•
|
$1,500,000
to advance funds to the Seven Arts Employee Benefit Trust (“EBT”) (see
“Management – Compensation – Seven Arts Employee Benefit Trust” for a
description of the EBT) for repayment of indebtedness due by the EBT to a
third party that we have guaranteed. In exchange for the advance and the
forgiveness of other obligations owed by EBT to us, EBT will return to us
1,000,000 of our ordinary shares as well as the remaining 500,000
convertible preference shares held by
EBT.
|
|
|
•
|
$1,650,000
to pay a settlement amount to ApolloMedia which will also result in the
return to us of an additional 700,000 of our ordinary shares. (See
“Certain Related Transactions” for a discussion of the settlement with
ApolloMedia).
|
|
|
•
|
$1,500,000
through the repayment of the Trafalgar Capital Special Investment Fund
Term Loan used in part as advances by us to the Seven Arts Employee
Benefit Trust for the acquisition of all preference shares owned by
Armadillo Investments plc. (See “Certain Related Transactions” for a
discussion of the Employee Benefit
Trust).
|
|
•
|
$5,500,000
through the repayment of our loan due to A-Mark Pictures in connection
with the financings of American Summer
(aka The Pool
Boys) and Autopsy.
|
|
|
•
|
$1,000,000
through the repayment of our loan due to ACG in connection with the
financings of Noise and Deal which will
release the lien on those motion picture assets as well as our Chief
Executive Officer’s ordinary shares of our company securing the ACG
Loan.
|
The
following table sets forth our capitalization as of December 31, 2008 both on a
current basis and on a pro forma as adjusted basis to give effect to the sale of
2,500,000 ordinary shares in this offering at an assumed initial public offering
price of $____ per share, which is the midpoint of our expected offering range,
after deducting the estimated underwriting discount and commissions and
estimated offering expenses payable by us and application of net
proceeds.
28
You
should read this table together with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and the related notes appearing elsewhere in this
prospectus.
As of December 31,
2008
|
Indebtedness:
|
Current - $
|
As Adjusted - $
(1)
|
||||||
|
Bank
and other production loans current
|
$ | 18,435,471 | $ | 11,935,471 | ||||
|
Bank
and other production loans long term
|
$ | 4,000,000 | $ | 4,000,000 | ||||
|
Trafalgar
Capital Special Investment Fund
|
$ | 1,500,000 | $ | 0 | ||||
|
Langley
Convertible Subordinated Debenture
|
$ | 2,516,150 | $ | 2, 516,150 | ||||
|
Shareholder Funds (UK
GAAP) (2)
|
$ | 8,342,056 | ||||||
|
Ordinary
Shares
|
||||||||
|
Total
Shares Issued and Outstanding (3)
|
6,893,300 | 7,693,300 | ||||||
|
Total
Shares Authorized
|
102,636,800 | 102,636,800 | ||||||
|
(1)
|
The
as adjusted column does not assume the exercise of any of the
representative’s warrants. $1.00 increase (decrease) in the assumed
offering price of $____ per share would increase (decrease) by
approximately $____ million the as adjusted shareholder funds, assuming
that 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 payable to the underwriters and the estimated
offering expenses payable by us.
|
|
(2)
|
Shareholder
Funds include the Langley Convertible Subordinated Debenture which has no
maturity date. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operation – Liquidity and Capital Resources” for
a discussion of the Langley Convertible Secured
Debentures.
|
|
(3)
|
This
“as adjusted” data assumes the return to us of 1,000,000 ordinary shares
from the Employee Benefit Trust as discussed in the section entitled
“Certain Related Transactions,” and the return to us of 700,000 ordinary
shares issued to SAP and thereafter pledged to ApolloMedia upon repayment
of indebtedness.
|
29
As of
December 31, 2008, we had a net tangible book value of $3,133,733 or $0.45 per
share. Net tangible book value represents our total tangible
assets (including investment in film rights and materials as per note 2 below),
less all liabilities, and goodwill, and net tangible book value per ordinary
share represents the net tangible book value divided by the number of shares of
ordinary shares outstanding. Without taking into account any changes in such net
tangible book value after December 31, 2008, other than to give effect to our
sale of 2,500,000 ordinary shares offered hereby, the pro forma net tangible
book value per share at December 31, 2008 would have been $____. This amount
represents an immediate increase in tangible net book value of $___ per share to
our current shareholders and an immediate dilution in net book value of $____
per share to new investors purchasing shares in this offering as illustrated in
the following table:
|
Public
offering price per share (1)
|
$
|
____
|
||
|
Net
tangible book value per ordinary share before the offering
(2)
|
$
|
0.45
|
||
|
Increase
in tangible net book value per ordinary share attributable to new
investors (after deduction of the estimated underwriting discount and
other offering expenses)
|
$
|
____
|
||
|
Pro
forma net tangible book value per ordinary share after the offering
(3)
|
$
|
____
|
||
|
Dilution
per share to new investors (determined by subtracting the adjusted net
tangible book value after the offering from the amount of cash paid by a
new investor for one ordinary share)
|
$
|
____
|
|
(1)
|
We
use an offering price of $___ per share, which is the high point of our
offering range, to give the most dilutive effect to the
transaction.
|
|
(2)
|
Although
investment in film rights and materials are considered intangible assets
for accounting purposes in the United Kingdom, our directors believe that
these rights can be sold separately from our business and that the
recovery of the book value of these assets is not subject to significant
uncertainty or illiquidity. As a result, the investment in film rights and
materials are considered tangible assets for dilution purposes which is
consistent with US GAAP.
|
|
(3)
|
Does
not include 125,000 ordinary shares issuable upon the exercise of the
representative’s warrants.
|
30
The
following table sets forth, on a pro forma basis as of December 31, 2008, the
number of ordinary shares we have issued, the total consideration paid and the
average price per share paid by the existing shareholders and by the new
investors, assuming in the case of new investors a public offering price of
$____, before deductions of the underwriting and other offering
expenses:31
|
Shares
Purchased
|
Percent
|
Total
Consideration
Amount
(in
000’s)
|
Percent
|
Average Price
Per Share
(1)
|
|||||||||||||||
|
Existing
Shareholders
|
______
|
__ % | $ |
______
|
__ % | $ |
___
|
||||||||||||
|
New
Investors (2)
|
________
|
__ % | $ |
_____
|
__ % | $ |
____
|
||||||||||||
|
Total
|
______
|
100 | % | $ |
_____
|
100 | % | $ | |||||||||||
(1) We
use an offering price of $___ per share in order give the most dilutive effect
to the transaction.
(2) Does
not include 125,000 ordinary shares issuable upon the exercise of the
representative’s warrants.
The
following sets forth a summary of consolidated profit and loss statement for the
fiscal period ended June 30, 2008 (15 months) and each of the fiscal years ended
March 31, 2007, and March 31, 2006 and March 31, 2005, all of which have been
derived from our audited consolidated financial statements and related notes
included elsewhere in this prospectus. The summary of profit and loss statements
for the six-month periods ended December 31, 2008 and September 30 2007 have
been derived from our unaudited consolidated financial statements included
elsewhere in this prospectus. The summary consolidated historical financial and
operating information should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and the related notes thereto and the
other financial information included elsewhere in this prospectus.
While
operating under the name Cabouchon plc, we acquired all the business assets of
Seven Arts Pictures Inc. ("SAP"), a company controlled by Peter Hoffman, our
Chief Executive Officer, in an Asset Transfer Agreement dated September 2, 2004
through a newly formed subsidiary, Seven Arts Filmed Entertainment Limited, for
more than 80% of our ordinary shares. After the asset transfer, we
changed our name from Cabouchon plc to Seven Arts Pictures plc and all of our
then existing jewelry business assets were transferred to Ms. Julie Wing for her
assumption of all indebtedness associated with that business. For purposes of US
GAAP in the adjustments to US GAAP below, SAP is treated as the acquiring
corporation in a reverse acquisition of Cabouchon plc. However, we do
not have available to us the financial information of SAP and its subsidiaries
for the fiscal years ended March 31, 2003 and March 31, 2004 or for the short
period from April 1, 2004 to September 4, 2004 and therefore this information
has not been included in this prospectus or the financial statements included
herein.
The
selected financial data for the fiscal year ended March 31, 2005 reflects the
jewelry business of Cabouchon plc for the period of April 1, 2004 to September
30, 2004. For the balance of that fiscal year to March 31, 2005, the
selected financial data for this fiscal year reflects the results of SAP's
business assets recorded under the purchase method of accounting.
The
historical results included below and elsewhere in this prospectus are not
indicative of our future performance.
32
Selected Financial
Data
(in $
000’s, except per share data)
|
Summary
Profit and Loss Statements (1)
|
Six
Months Ended
Dec
31, 2008 (unaudited)
|
Six
Months Ended
Sept
30, 2007 (unaudited)
|
Fifteen
Month Fiscal Period Ended
June
30, 2008
|
Fiscal
Year Ended March 31, 2007
|
Fiscal
Year
Ended
March 31, 2006 (Restated)
|
Fiscal
Year Ended March 31, 2005
|
||||
|
Under
UK GAAP
|
||||||||||
|
Revenues
|
$6,610
|
$1,889
|
$17,767
|
$11,208
|
(2)
|
$13,168
|
$4,297
|
|||
|
Cost
of Sales
|
($1,940)
|
$818
|
($13,364)
|
($5,269)
|
($10,504)
|
($10,261)
|
||||
|
Other
operating expenses
|
($2,101)
|
($1,606)
|
($2,367)
|
($2,323)
|
($1,723)
|
($3,537)
|
||||
|
Income
from Associate
|
$177
|
-
|
$2,105
|
-
|
-
|
-
|
||||
|
Net
interest expense income
|
($1,054)
|
($577)
|
($634)
|
($675)
|
($128)
|
($174)
|
||||
|
Loss
on sale of investments
|
-
|
-
|
-
|
-
|
-
|
($5,737)
|
||||
|
Taxation
|
-
|
($157)
|
$502
|
($1,099)
|
($632)
|
$1,267
|
||||
|
Net
Income
|
$1,691
|
$366
|
$4,009
|
$1,842
|
$181
|
($14,145)
|
||||
|
Weighted
Average Primary Shares Outstanding (3)
|
5,204.2
|
4,480.7
|
4,715.1
|
2,694.9
|
2,636.8
|
1,793.0
|
||||
|
Weighted
Average Fully Diluted Shares Outstanding
|
9,097.6
|
8,320.7
|
8,632.9
|
7,454.1
|
7,436.8
|
4,239.0
|
||||
|
Net
Income Per Share (c) (3)
|
32
|
8
|
85
|
68
|
7
|
(789)
|
||||
|
Net
Income Per Fully Diluted Share (c) (3)
|
19
|
4
|
46
|
25
|
2
|
(789)
|
||||
|
Under
US GAAP
|
||||||||||
|
Revenues
|
$6,610
|
$1,889
|
$17,767
|
$9,585
|
(2)
|
$13,168
|
$4,297
|
|||
|
Cost
of Sales
|
($1,940)
|
$818
|
($13,364)
|
($5,034)
|
($10,190)
|
($10,261)
|
||||
|
Other
operating expenses
|
($2,101)
|
($1,607)
|
($2,367)
|
($2,323)
|
($1,723)
|
($3,537)
|
||||
|
Income
from Associate
|
$177
|
-
|
$2,105
|
-
|
-
|
-
|
||||
|
Net
interest expense
|
($1,055)
|
($577)
|
($634)
|
($675)
|
(2)
|
($128)
|
($174)
|
|||
|
Gain
on settlement of debt
|
-
|
-
|
-
|
1,623
|
||||||
|
Loss
on sale of investment
|
-
|
-
|
-
|
-
|
-
|
($5,737)
|
||||
|
Taxation
|
-
|
($157)
|
$502
|
($1,099)
|
($632)
|
$1,267
|
||||
|
Goodwill
written off under reverse takeover accounting
|
-
|
-
|
-
|
-
|
-
|
1,902
|
||||
|
Net
Income
|
$1,691
|
$366
|
$4,009
|
$2,077
|
(4)
|
$495
|
(4)
|
($12,274)
|
||
|
Weighted
Average Earnings Per Share (c) (3)
|
32
|
8
|
85
|
77
|
19
|
(685)
|
||||
|
Weighted
Average Fully Diluted Earnings Per Share (c) (3)
|
19
|
4
|
46
|
28
|
7
|
(685)
|
||||
|
Summary
Balance Sheet
|
||||||||||
|
Under
UK GAAP
|
||||||||||
|
Short-Term
Debt
|
$22,435
|
(7)
|
$7,069
|
$253,095
|
(7)
|
$7,826
|
$3,628
|
$7,822
|
||
|
Long-Term
Debt
|
$2,833
|
$23,732
|
$6,752
|
$12,372
|
$12,625
|
$4,250
|
||||
|
Total
Assets
|
$228,053
|
(7)
|
$49,423
|
$424,971
|
(7)
|
$37,612
|
$28,441
|
$18,034
|
||
|
Shareholders’
Funds (5)
|
$8,342
|
$10,353
|
$13,795
|
$8,936
|
$4,927
|
$5,081
|
||||
|
Under
US GAAP
|
||||||||||
|
Short-Term
Debt
|
$ 22,435
|
(7)
|
$ 7,069
|
$253,095
|
(7)
|
$7,826
|
$3,628
|
$7,822
|
||
|
Long-Term
Debt (5)
|
$5,349
|
$27,307
|
$10,252
|
$15,805
|
$17,828
|
$9,919
|
||||
|
Convertible
Redeemable Preference Shares (6)
|
$945
|
$5,669
|
$5,669
|
$5,669
|
$5,669
|
$5,669
|
||||
|
Total
Assets
|
$228,053
|
$49,423
|
$424,972
|
$37,847
|
$28,755
|
$18,034
|
||||
|
Shareholders’
Equity (5, 6)
|
$4,881
|
$1,110
|
$4,627
|
$70
|
($5,632)
|
($6,257)
|
33
|
(1)
|
We
changed our fiscal year end from March 31 to June 30 for the fiscal period
ending June 30, 2008. The unaudited six-month results compare the first
six months of the fiscal year ending June 30, 2009 with the first six
months of the fiscal period ended June 30,
2008.
|
|
(2)
|
UK
GAAP records the $1,623,000 attributable in fiscal year 2007 from the
settlement of debt as revenue whereas under US GAAP it is a below the line
item. Other differences between revenue recognition under UK
GAAP and US GAAP arise from differing treatments of film
amortization.
|
|
(3)
|
The
attached financial statements, prepared under UK GAAP, show income per
share figures calculated using the weighted average number of shares
outstanding in each period. As a 5 for 1 reverse stock split occurred on
the last day of the December 31, 2008 financial period, the income per
share figures for the periods to March 31, 2005, 2006 and 2007 and the
period to June 30, 2008 do not reflect the 5 for 1 reverse stock split in
those statements. The income per share figures in the table above have
been adjusted from the figures shown in the financial statements to show
the effect of the 5 for 1 reverse stock split as if it had occurred on the
first day of the earliest period shown , being the period ended March 31,
2005.
|
|
(4)
|
Differences
in net income reflect certain adjustments in the treatment of film
amortization under UK GAAP and US GAAP for
fiscal 2006 and 2007. These differences are not recurring. (See
“Financial Statements - Appendix A – Reconciliation to US
GAAP”).
|
|
(5)
|
Convertible
subordinated debentures owed to Langley Park Investment Trust PLC are
treated as Long-Term Debt under US GAAP and as Shareholders’ Funds under
UK GAAP. As of December 31, 2008, the value of such debentures outstanding
was approximately $2,516,000 (September 30, 2007: approximately
$3,575,000, March 31, 2008: approximately $3,500,000, March 31, 2007:
approximately $3,432,000, March 31, 2006: approximately $5,204,000, March
31, 2005: approximately
$5,669,000).
|
|
(6)
|
Shareholders’
equity under US GAAP does not include either the Langley Park Investment
Trust PLC. Debentures (note (5)), or the Armadillo Investments PLC
redeemable preference shares ($5,669,000 in all periods, except for the
six months ended December, 31 2008, when such amount was
$945,000)
|
|
(7)
|
In
May 2008, we completed a transaction with Zeus Partners LLP that raised
capital for investment into the production and distribution costs of our
existing and future motion picture productions and acquisitions. The total
investment raised was approximately $268,000,000. Substantially all of the
net proceeds from that transaction received by us, which totaled
approximately $17,000,000, were accounted for as a reduction in the
carrying value of our film costs on the balance
sheet.
|
Accounting
for the Zeus investments has resulted in the recognition of substantial assets
and liabilities arising from the related financing arrangements. These assets
and liabilities are essentially offsetting. The impact of the Zeus investments
as of June 30, 2008 was to increase cash by approximately $113,000,000, to
increase current receivables by approximately $226,000,000, to increase deferred
income by approximately $113,000,000 and to increase short term debt by
approximately $226,000,000. The impact of the Zeus investments as of December
31, 2008 was to increase current receivables by approximately $170,000,000 and
to increase deferred income by approximately $170,000,000. The remaining amounts
relating to the Zeus investment will be entirely eliminated from our balance
sheet on or before May 31, 2009.
34
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be
read in conjunction with our financial statements and footnotes thereto
contained in this prospectus. This discussion contains forward-looking statements, which are
based on our assumptions about the future of our business. Our actual
results may differ materially from those
contained in the forward-looking statements. Please read “Special Note Regarding Forward-Looking
Statements” for additional information regarding
forward-looking statements used in this prospectus.
Overview
We are an
independent motion picture production company engaged in developing, financing,
producing and licensing theatrical motion pictures with budgets in the range of
$5 million to $15 million for exhibition in domestic (i.e. the United States and
Canada) and foreign theatrical markets and for subsequent post theatrical
worldwide release in other forms of media, including DVD, home video,
pay-per-view, and free television. We endeavor to release many of our motion
pictures into wide-theatrical exhibition initially, however, a portion of our
pictures will either receive only a limited theatrical release, or may even be
released directly to post theatrical markets, primarily DVD. Our
pictures that receive limited theatrical release or post theatrical release
typically benefit from lower prints and advertising (“P & A”) cost and, in
turn, improved gross profit margins.
No one
picture had a principal or controlling share of gross revenues or operating
profits in these periods.
Results
of Operations
The
principal factors that affected our results of operations have been the number
of motion pictures delivered in a fiscal period, the distribution rights of
motion pictures produced by others acquired in a fiscal period, the choice of
motion pictures produced or acquired by us, our and talents' execution of the
screenplay and production plan for each picture, the distribution and market
reactions to the motion pictures once completed, management's ability to
obtain financing and to re-negotiate financing on beneficial terms, the
performance of our third-party distributors and our ability to take advantage of
tax-incentivized financing. These factors will continue to be, in our
opinion, the principal factors affecting future results of operation and our
future financial condition. No particular factor has had a primary or
principal affect on our operations and financial condition in the periods
discussed below.
Our
revenues are principally the result of the sale and distribution of our motion
pictures, which are license fees we receive from third-party distributors of
motion pictures. We recognize revenue from license fees as and when a motion
picture is delivered to the territory to which the license relates. A
motion picture is “delivered” when we have completed all aspects of production
and may make playable copies of the motion picture for exhibition in a medium of
exhibition such as theatrical, video, or television distribution.
35
We also
generate revenue beyond an initial license fee from our share of gross receipts
on motion pictures. We recognize revenue that equates to a share of
gross receipts of motion pictures as income when we are notified of the amounts
that are due to us. In some of our fiscal periods, a significant portion of our
revenue derived from sources other than motion picture distribution, including
the cancellation of debt and interest income on a financing transaction, but we
have not derived any such income in the successive comparative financial periods
described below.
Pursuant
to UK GAAP, we state our motion pictures produced for exploitation or
distribution in the balance sheet at cost less amortization and impairment to
date. Amortization is charged to write down the cost of such assets
over their useful lives. For US GAAP purposes, these costs are treated as
taxable assets and are amortized under the “individual-film-forecast”
method.
Six Months Ended December
31, 2008 Compared to Six Months Ended September 30, 2007(1)
Revenues
increased from $1,888,000 to $6,610,000 reflecting the delivery of Nine Miles Down and
Drunkboat as
well as the DVD releases of Noise and Deal in the period
ended December 31, 2008. Results for the six month period ended
December 31, 2008 also included $3,662,000 of revenues from previously released
or acquired motion pictures and other income. All of the revenues
recorded in the period ended September 30, 2007 derived from films produced or
distribution rights acquired in prior periods.
Cost of
sales, which is made up of amortization of film costs, distribution costs and
producers fees, increased from a negative ($818,000) in the period ended
September 30, 2007 (which was due to the reversal of excess provisions relating
to producers’ fees of $1,114,000 previously booked) to
$1,940,000 in the most recent six month period, reflecting amortization of films
delivered in the period, distribution costs associated with the DVD release of
Noise and Deal and accruals of
producers’ fees.
Operating
expenses increased from $1,606,000 to $2,101,000 reflecting an increased level
of production and distribution activities. Virtually all of these expenses are
comprised of general overhead and selling expenses for employees, consultants,
sales conventions, professional fees, marketing materials and other
costs.
Net
interest expenses increased from $577,000 in the period ended September 30, 2007
to $1,054,000 in the period ended December 31, 2008 reflecting a higher level of
bank and other production loans outstanding on previously released films in the
most recent period.
Net
income increased from $366,000 in the period ended September 30, 2007 to
$1,691,000 in the most recent period.
Fiscal Period Ended June 30,
2008 (Fifteen Months) Compared to Fiscal Year Ended March 31,
2007
Gross
revenues, which consist of motion picture revenues plus other revenues,
increased to $17,767,000 in the Fiscal Period 2008 from $11,208,000 for Fiscal
Year 2007.
36
Motion
picture revenues increased to $13,344,000 from $6,612,000, partially due to
recorded revenues of $6,570,000 associated with the delivery of four motion
pictures (Autopsy, American Summer,
Knife Edge, and
A Broken Life)
in the fifteen month Fiscal Period 2008, as compared to recorded revenues of
$3,137,000 associated with the delivery of two motion pictures (Noise and Deal) in Fiscal Year
2007. In addition, revenues derived from motion pictures delivered prior to the
recorded period were $6,774,000 in the Fiscal Period 2008 compared to $3,459,000
for Fiscal Year 2007.
Other
revenues for Fiscal Period 2008 of $4,406,000 in the Fiscal Period 2008 derived
from interest income earned on the Cinematic Finance Ltd. Film
investment/financing transaction. Other revenue for Fiscal Year 2007 of
4,618,000 arose, in large part, from the cancellation of the indebtedness
related to two motion pictures previously produced by us (Stander and Pool Hall Prophets)
and, to a lesser extent, from commission income earned during the
period.
Cost of
sales for the Fiscal Period 2008 increased to $13,364,000 (which includes
$2,106,000 of an intercompany distribution fee to our associate company that is
consolidated back into the accounts as associate income) from $5,269,000 for
Fiscal Year 2007.
Approximately
$3,702,000 of cost of sales incurred in the Fiscal Period 2008 reflected
financing costs associated with Cinematic Finance Ltd.
Amortization
of film costs for the Fiscal Period 2008 compared to Fiscal Year 2007 actually
decreased to $1,929,282 from $3,262,821 in spite of the greater number of
pictures released and the higher associated revenues recorded in the Fiscal
Period 2008. This was due to the impact of the Cinematic Finance Ltd
film financing deal, which effectively created negative amortization of
$3,932,000 as a result of reducing previously stated film costs and reversing
excess amortization previously recorded.
Distribution
costs for the Fiscal Period 2008 increased to $3,452,000 from $365,000 for
Fiscal Year 2007, while producers’ fees and other costs decreased from
$1,636,000 to $230,000 over the same period.
Other
operating expenses increased from $2,316,000 to $4,288,000 reflecting our
increased level of production and distribution activities, as well as the fact
that the Fiscal Period 2008 included fifteen months of
operations. Virtually all these expenses were comprised of general
overhead and selling expenses for employees, consultants, sales conventions,
professional fees, marketing materials and office costs.
Net
interest expense for the Fiscal Period 2008 was $634,000 compared to $675,000 in
the prior Fiscal Year. In both periods net interest expense primarily consisted
of interest due on bank and other production loans. No tax provision was
recorded in Fiscal Period 2008 as three of the motion pictures released in the
period generated substantial tax losses so that, in fact we were able to reverse
$502,000 of excess tax charges accrued in fiscal year 2007.
37
As a
result of the above, net income for the Fiscal Period 2008 more than doubled to
$4,009,000 compared to $1,842,000 in Fiscal Year 2007.
Fiscal Year Ended March 31,
2007 Compared to Fiscal Year Ended March 31, 2006
Revenues
decreased from $13,168,000 in Fiscal Year 2006 to $11,208,000 in Fiscal Year
2007 principally because the two motion pictures that we produced and delivered
in 2007 (Deal
and Noise)
generated only approximately $2,962,000 of revenues in that year as compared to
approximately $8,900,000 of revenues generated by the two motion pictures that
we acquired for distribution in the prior year (Captivity and Supercross). Revenues
generated from pictures released in prior years amounted to $4,271,000 in Fiscal
2007 and $2,485,000 in Fiscal 2006. All revenues in both periods
derived from license fees from the distribution of our motion pictures except
for $1,623,000 recorded as income in Fiscal Year 2007 that derived from the
cancellation of indebtedness related to two motion pictures previously produced
by us (Stander
and Pool Hall
Prophets).
Cost of
sales decreased from $10,504,000 to $5,269,000 as a result of
|
|
●
|
the
reduced level of revenues in Fiscal Year 2007 compared to in Fiscal Year
2006,
|
|
|
●
|
the
lower amortization rates on the two motion pictures produced in-house in
Fiscal Year 2007 as compared to the two motion pictures that we released
on behalf of third-party producers in Fiscal Year 2006,
and
|
|
|
●
|
the
fact that there was no cost of sales associated with the revenues realized
in Fiscal Year 2007 from the cancellation of
indebtedness.
|
Other
operating expenses increased from $1,723,000 in Fiscal Year 2006 to $2,323,000
in Fiscal Year 2007 as a result of our increased level of production and
distribution activities.
Net
interest expense also increased from $128,000 in Fiscal Year 2006 to $675,000 in
Fiscal Year 2007 as a result of a higher level of borrowings.
As a
result of the above, net income for the year increased from $181,000 in Fiscal
Year 2006 to $1,842,000 in Fiscal Year 2007.
38
During
the year ended March 31 2005, we issued (A) $5,669,000 of convertible debt to
Langley Park Investment Trust PLC (“Langley”) in return for 3,000,000 ordinary
shares in Langley valued at approximately $5,669,000, and (B) approximately
$5,669,000 of convertible redeemable preference shares to Armadillo Investments
plc (“Armadillo”) in return for 3,000,000 ordinary shares from Armadillo, also
valued at a like amount. We received in Fiscal Year 2005 approximately
$2,232,000 in cash through the sale of ordinary shares of Armadillo Investments
plc (approximately $1,302,000) and Langley Park Investment Trust PLC,
(approximately $930,000). The amounts that we received from the sale of a
portion of our Armadillo shares and all of our Langley shares were substantially
less than the stated value of the debenture and preference shares. Our
convertible redeemable preference shares held by Armadillo were subsequently
acquired by the Seven Arts Employee Benefit Trust (‘Trust”) on October 30, 2008
and 2,500,000 preferred shares were converted on November 2, 2008 into 2,000,000
of our ordinary shares.
During
the fifteen month period ended June 30, 2008, we sold 500,000 ordinary shares to
Unique Fidelity Engineering Limited for $287,000.
Seven
Arts Future Flow I (“SFF”), a limited liability company owned by SAP, one of our
controlling shareholders and a company that is owned by Peter Hoffman, or Chief
Executive Officer, borrowed $8,300,000 (the "Arrowhead Loan") from Arrowhead
Target Fund Ltd. ("Arrowhead") in February 2006, at an interest rate
of 15% per annum. We secured the Arrowhead Loan with liens on twelve motion
pictures. Our only liability is to repay the Arrowhead Loan from the
proceeds of the film assets securing the Arrowhead Loan. The specific film
assets which secure the Arrowhead Loan are our distribution rights in the
following motion pictures: Asylum, Stander, I’ll Sleep When I’m
Dead, No Good
Dead, Supercross, Popstar, Red Riding Hood,
Johnny
Mnemonic, Shattered Image,
Never Talk to
Strangers, The
Hustle, and Shot at Glory. We are
not required to repay the Arrowhead Loan from any other of our assets or
revenues. Our estimates of the amount of time it would take to repay the
Arrowhead Loan from the proceeds of the film assets securing the loan have not
been met. The Arrowhead Loan matured on February 15, 2009, and is now due in
full. SFF has received a default notice from Arrowhead to that effect, and we
are currently negotiating with Arrowhead the extension of the Arrowhead Loan. We
have made certain covenants with Arrowhead for which we might have on-going
liability beyond the value of the film assets, such as the obligation to provide
audited financial statements, guarantee of ownership of film rights and other
similar matters.
39
We
borrowed an aggregate of $7,500,000 from ACG for $1,000,000 and Cheyne for
$6,500,000 in December 2006, secured by certain of our motion picture assets.
The Cheyne Loan and ACG Loan bear interest at 19% and 18% per annum,
respectively. The Cheyne Loan matured on September 30, 2007, and we repaid
$6,500,000 of the Cheyne Loan plus interest thereon, and obtained an assignment
of their senior position and subordination agreement with Arrowhead. The
remaining ACG Loan is now due and is secured with a pledge of 1,607,000 of our
ordinary shares owned by SAP, one of our controlling shareholders and a company
controlled by Peter Hoffman, our Chief Executive Officer. Our estimates of the
amount of time it would take to repay the ACG Loan from the proceeds of the film
assets securing the loan have not been met. In October 2008, we received a
notice of default from ACG in connection with this loan. We expect to
repay the ACG Loan from the proceeds of this offering, at which time the shares
pledged as security will be returned to Seven Arts Pictures Inc. The ACG Loan is
secured by Noise, Deal, Pool Hall Prophets,
Boo, A Broken Life, and
Mirror Wars and
a second position security interest in the motion pictures listed above which
are pledged to Arrowhead.
Management
believes that, as a result of the proceeds derived from this offering and based
on historical revenues generated from the licensing of the distribution rights
on our motion pictures, our working capital will be sufficient for the next
twelve months.
We
currently borrow funds for the financing of each of our motion pictures from
several banks and other production lenders. We are currently seeking a revolving
credit facility for the financing of our future motion picture productions. Our
cash flow is derived from license fees earned from the delivery and distribution
of our motion pictures in the United States and territories around the
world.
40
Contractual
Obligations (as of
12/31/08)
|
Payments
Due By
|
Period
|
||||||||||
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
3-5
Years
|
More
Than 5 Years
|
|||||||
| 1. |
Bank
and Other Production Loans (1)
|
$22,435,471
|
$18,117,350
|
$4,000,000
|
|||||||
| 2. |
Post
Production Facility Line of Credit (2)
|
$2,300,000
|
$2,300,000
|
||||||||
| 3. |
Armadillo
Investments plc (3)
|
$1,500,000
|
$1,500,000
|
||||||||
| 4. |
Langley
Debenture (3)
|
$2,625,000
|
$2,625,000
|
||||||||
| 5. |
Trafalgar
Capital Special Investment Fund (3) (4)
|
$1,500,000
|
$1,500,000
|
||||||||
| 6. |
Sums
Due To Producers (5)
|
$997,792
|
$997,792
|
||||||||
|
Total
|
$31,358,263
|
$22,115,142
|
$4,000,000
|
$2,300,000
|
$2,625,000
|
||||||
|
(1)
|
The
current and long-term bank and production loans include (i) $8,300,000 of
the limited recourse Arrowhead Loan and approximately $1,000,000 of the
ACG Loan both described in “Liquidity and Capital Resources” above and
(ii) approximately $12,500,000 in special purpose financing arranged for
six motion pictures produced by us.
|
|
(2)
|
Seven
Arts Pictures Louisiana LLC, a subsidiary of SAP (one of our controlling
shareholders and a company controlled by Peter Hoffman, our Chief
Executive Officer), entered into a Credit Agreement with Advantage Capital
Community Development Fund, L.L.C. dated October 11, 2007 for the
acquisition and improvement of a production and post production facility
located at 807 Esplanade Avenue in New Orleans, Louisiana. The aggregate
borrowing amount under this facility is $3,700,000, of which $2,300,000
was drawn down as of December 31, 2008. We have guaranteed this
indebtedness and have not included it in our total
indebtedness.
|
|
(3)
|
Converted
into US dollars at the UK pound/dollar exchange rate as of December 31,
2008 (1:1.5) (see “Management’s Discussion and Analysis of Financial
Condition and Results of Operation – Liquidity and Capital Resources” for
a description of the Langley convertible
debentures.
|
|
(4)
|
Approximately
$1,500,000 in special purpose funding due to Trafalgar Capital Special
Investment Fund was used in part as advances by us to the Seven Arts
Employee Benefit Trust (“EBT”) for the acquisition of all preference
shares owned by Armadillo Investments plc (“Armadillo”). We have
guaranteed an additional $1,500,000 due from EBT to Armadillo, which
guarantee is not included in bank and other production loan, but will be
retired from the proceeds of the offering. See “Use of
Proceeds”.
|
|
(5)
|
Estimated
amounts due to producers of motion
pictures.
|
Legal
Proceedings
Together
with our subsidiary, Seven Arts Filmed Entertainment Limited ("SAFE") and SAP,
one of our controlling shareholders and a company controlled by Peter Hoffman,
our Chief Executive Officer, we were the subject of an arbitration award of
approximately $650,000 against us for legal fees (and interest thereon) relating
to a dispute regarding a participation in the motion picture entitled 9 ½ Weeks II, even
though the arbitration found no additional sums due to the complaining party.
This award also terminated our distribution rights in this motion picture. The
award was affirmed by the Ninth Circuit Court of Appeals. We have requested
rehearing and en banc review of this decision and are consulting with counsel
regarding our rights under English law to avoid this arbitration award. Our
potential liability under this award is recorded in “Contractual Obligations”
above under the line “Sums Due to Producers.”
41
Together
with SAFE and SAP, we are plaintiffs in an action against Fireworks
Entertainment and certain of its affiliates ("Fireworks"), as well as
ContentFilm plc, for copyright infringement (“Copyright Action”) relating to the
following motion pictures: Rules of Engagement,
Onegin, The Believer, Who Is Cletis Tout
and American
Rhapsody. We believe that we are the assignee of copyright interests in
each of these motion pictures. Fireworks and ContentFilm have
repudiated any and all agreements with our predecessors regarding these motion
pictures. The Copyright Action was stayed by the United States
District Court in Los Angeles, California by reason of a prior action filed by
CineVisions and its successor (themselves predecessors of the Company) for
breach of contract against Fireworks in the courts of Ontario, Canada,
(“Canadian Action”) with respect to the motion pictures listed above (plus Interstate
60, Rat Race, and Hardball) that were produced,
acquired, or funded by SAPL. The Federal District Court later dismissed the
Copyright Action, which dismissal is currently on appeal to the Ninth Circuit
Court of Appeals. CineVisions is currently pursuing the Canadian
Action on our behalf. We believe that whether based on
copyright infringement or contract, Fireworks has substantial liability to us or
our predecessors with respect to Fireworks' conversion of our and our
predecessors' interest in the Fireworks Pictures which were all produced or
acquired by our predecessors. We record no value in our financial
statements for our interests in the Fireworks Pictures, other than immaterial
amounts of legal fees. Should we not prevail, we may have a liability
for our own or Fireworks’ legal fees and would lose the interest we claim in the
Fireworks Pictures. We may not prevail in the Fireworks
litigation. Loss of this litigation where we are a plaintiff will
cause no liability to us other than possible payment of up to $200,000 in legal
fees to defendants.
We and
certain of our affiliates are plaintiffs in two legal actions in Europe which
are part of our ordinary trade or business. One action is to recover
approximately $300,000 converted by a Hungarian co-producer on the motion
picture Nine Miles
Down and the other action is to recover certain sums due to us on several
motion pictures from an Italian sub-distributor which defaulted on payments due
to us and our affiliates.
We and
SAP have been named as defendants in an action before the Superior Court of
California, County of Los Angeles by Kismet Entertainment Inc. (“Kismet”) with
respect to amounts it claims are due from SAP with regard to the distribution of
the motion pictures Boo and Cemetery Gates, an
alleged sum of approximately $347,000. This action has not yet been served on us
and we believe the court has no jurisdiction over us. The amounts claimed by
Kismet are recorded above in Contractual Obligations – Sums Due to Producers,
but we believe that we and SAP have valid defenses to this action.
42
Critical
Accounting Policies
Management
is required to make judgments, estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On a regular basis, management evaluates our
estimates and assumptions and bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Basis of accounting:
The financial statements included herewith are prepared under the historical
cost convention, in accordance with applicable accounting standards in the
United Kingdom, and on the going concern basis, with reconciliations to
generally accepted accounting principles in the United States and explanations
of the reconciling items included within the notes to those financial
statements.
Basis of
consolidation: The group financial statements consolidate the financial
statements of Seven Arts Pictures plc and its subsidiary undertakings. The
results of subsidiaries acquired and sold are included in the profit and loss
account from, or up to, the date control passes on the acquisition basis. Intra
group sales and profits are eliminated on consolidation.
No
company profit and loss account is presented in accordance with the exemptions
provided by S230 of the Companies Act 1985 and 2006. The individual
company profit and loss for "the Company" as shown on the financial statements
is consolidated into the group's consolidated financial statements.
Turnover (Revenue):
Turnover (Revenue) represents the invoiced value, net of value added tax, of
goods sold and services provided to customers.
License
fee revenue is recognized as and when the film in question is delivered to the
respective territories.
Revenue
that equates to a share of gross receipts of films is recognized as income as
and when the group is notified of the amounts that are due to them.
Goodwill: Purchased
goodwill is capitalized in the year in which it arises.
In the
opinion of management, the useful economic life of the purchased goodwill, which
relates to a film library that was purchased, exceeds 20 years and cannot be
specifically defined to be a set length of time. This is based on
experience of how film revenues are earned and the knowledge that films often
continue to earn revenue for a period of time that far exceeds 20
years. Therefore, goodwill is not amortized and is, instead, subject
to an annual impairment review. This accounting policy represents a
departure from the requirements of Companies Act 1985 and 2006, which requires
goodwill to be amortized over a finite period, but management believes this
departure is justified as being required for the over-riding purpose of
providing a true and fair view.
43
Intangible film
assets: Films produced for exploitation or distribution are stated in the
balance sheet at cost less amortization and impairment to
date. Amortization is charged to write down the cost of such assets
over their useful lives. For US GAAP purposes, these costs are treated as
taxable assets and are amortized under the “individual-film-forecast”
method.
Tangible fixed
assets: Tangible fixed assets are stated at historical cost.
Depreciation
is provided on all tangible fixed assets at rates calculated to write each asset
down to its estimated residual value evenly over its expected useful life, as
straight line over four years
Fixed asset
investments: Fixed asset investments are stated at cost, less provision
for diminution in value.
Deferred taxation:
Deferred tax is provided in respect of the tax effect of all timing differences
that have originated but not reversed at the balance sheet date.
A
deferred tax asset is regarded as recoverable and therefore recognized only
when, on the basis of all available evidence, it can be regarded as more likely
than not that there will be suitable taxable profits from which the future
reversal of the underlying timing differences can be deducted.
Deferred
tax is measured on a non-discounted basis at the average tax rates that are
expected to apply in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that have been enacted or substantively
enacted by the balance sheet date.
Where a
subsidiary undertaking has undertaken transactions in a currency other than the
US dollar, these have been recorded in the accounting records at the rate ruling
at the date of the transaction. All such differences on translation are taken to
the profit and loss account.
Interest capitalized:
Directly attributable interest is capitalized as part of intangible fixed assets
and is based on interest charged as a result of obtaining bank and other
borrowings to finance these assets.
Financial
instruments: When appropriate, the group uses financial instruments to
manage exposure to fluctuations in interest rates.
Financial
assets are recognized in the balance sheet at the lower of cost and net
realizable value. Provision is made for diminution in value when appropriate.
Interest receivable is accrued and credited to the profit and loss account in
the period to which it relates.
Financial
liabilities that represent bank and other production loans are, upon issue,
recognized in the balance sheet at the amount of net proceeds. The finance costs
of the debt are charged to the profit and loss account at a constant rate on the
carrying amount.
Asset Retirement
Obligations: As of June 30, 2008, we had determined that we do not have
material obligations for asset retirement obligations. Accordingly, adoption of
HB 3110 had no impact on our consolidated financial statements.
Inflation
We
believe that inflation has not had a material effect on our operations to
date.
Related
Party Transactions
For a
description of our related party transactions see the section of this prospectus
entitled “Certain Related Transactions.”
44
The
United States motion picture industry encompasses the production and theatrical
exhibition of feature-length motion pictures and the subsequent distribution of
such pictures in home video, digital media, television and other ancillary
markets.
The
industry is dominated by the major film studios, including Paramount Pictures,
Universal Pictures, Warner Bros., Twentieth Century Fox, Sony Pictures
Entertainment (including Columbia Pictures), and The Walt Disney
Company. These studios have historically produced and distributed the
majority of theatrical motion pictures released annually in the United
States. The six “majors” generally self-finance some or all of their
film production and have domestic or worldwide distribution organizations. Major
studios typically release films with direct production costs ranging from $10
million to $100 million or more, and provide a continual source of motion
pictures to the domestic theatrical exhibitors.
For over
a decade, “independent” motion picture production companies such as Summit
Entertainment, LLC, The Weinstein Company and many smaller production companies,
like ours, have played an important role in the production and distribution of
motion pictures for the worldwide feature film market. While
the independents may generally have more flexibility and less corporate
restraints than the major studios, they also operate at a certain disadvantage
to major studios in that independents generally:
|
|
●
|
do
not self-finance their productions and must spend time and resources
securing financing and incur interest and other expense in connection with
such financings,
|
|
|
●
|
have
far more limited distribution capabilities than the major studios making a
wider release in any format more
difficult,
|
|
|
●
|
do
not self-distribute and, as a result, must share revenues derived from
their motion pictures with
distributors,
|
|
|
●
|
face
greater competition from other independents due to an increase in the
production of independent motion
pictures,
|
|
|
●
|
annually
produce less films and, as a result, are not able to spread the risk of
any of their films underperforming among a larger pool of releases,
and
|
|
|
●
|
produce
fewer motion pictures at substantially lower average production costs than
major studios and generate significantly lower per-film revenue and
profits.
|
Many
independent motion picture companies have failed and ceased operations in recent
years. Recent examples of failed independent motion companies include
Carolco Pictures, Orion Pictures, Weintraub Entertainment, DeLaurentiis
Entertainment Group, Hemdale, IRS Media, IRS Releasing and Prism
Entertainment. Other independent motion picture companies have
recently substantially curtailed their motion picture production activities due
to poor results, including Savoy Pictures, The Samuel Goldwyn Company and
Cinergi Pictures. Numerous smaller independent film production and/or
distribution companies have failed to achieve their business
objectives.
45
Motion
Picture Development
Motion
picture production begins with the development of a screenplay derived from an
original idea conceived or acquired by the producer or with the adaptation of a
popular novel or other type of media acquired by a writer or a
producer.
During
the development phase, the studio engages writers to draft and revise the
screenplay and begins to obtain tentative commitments from a director and
principal cast. A proposed production schedule and budget may also be
prepared during this phase.
Upon
completing the screenplay, if deemed good enough to produce, agreements with
principal talent are negotiated and the film is “green lit” based on a viable
production budget and estimate of ultimate profitability. At this
stage, the film enters the pre-production phase. During
pre-production, the production company: (i) employs creative personnel as
needed; (ii) creates scene plans and the filming schedule; (iii) finalizes a
detailed production budget; (iv) establishes filming locations, secures
necessary studio facilities, completes required set design and construction; and
(v) prepares for the start of principal photography.
Principal
photography is the actual filming of the screenplay and may take from four to
twelve weeks or more, depending upon such factors as budget, location, and the
complexities in the screenplay. Following completion of principal
photography, post-production work begins. The film is edited, visual
effects are added, and voice and music soundtracks are synchronized with the
picture. This results in the completion of the film negative that is
duplicated to create the release prints for shipment to theatrical exhibitors.
Since independent production companies are not able to absorb the costs of
abandoned productions to the same extent as studios can, they are less likely to
abandon green lit motion pictures. The consequence of abandoning a production
has a greater negative effect on that independent’s results of
operations.
Production
Costs, Financing, Co-Financing and Participations
In 2007,
the production cost
of a motion picture produced by a major studio for worldwide distribution
averaged approximately $71 million (MPAA 2007 Theatrical Market Statistics) as
compared to the production costs of a motion picture produced by us in the range
of $5 million to $15 million. Direct production costs,
sometimes referred to as “negative costs,” consist of acquiring and/or
developing the screenplay, film studio rental, cinematography, post-production
costs and the compensation of creative talent and other production
personnel. Distribution expenses, which consist primarily of the
costs of advertising and release prints, or P&A, are not included in direct
production costs.
The major
studios generally fund production costs from cash flow from their motion picture
and related activities or, in some cases, from unrelated businesses, and through
co-financing activities. Substantial overhead costs, consisting
largely of salaries and related costs of the development, production,
distribution and marketing staff and physical facilities maintained by the major
studios, also must be funded.
The
independent production company normally finances production of the motion
picture pursuant to financing arrangements with banks or other lenders in which
the lender is granted a security interest in both the film and the independent
production company’s rights under its arrangement with the studio or independent
distribution. In today's rapidly changing and competitive marketplace for motion
pictures and with the current tightening of the credit markets, independent
production companies have been utilizing additional forms of funding to finance
their motion pictures, including "tax-preferred" financing (e.g., tax credits,
sale/lease back transactions and direct subsidies), "mezzanine" or "gap" funds
(which are senior to equity), government subsidies and the sale of equity. To
minimize some of the financial risks normally associated with financing motion
picture production, independent production companies often obtain, at various
stages prior to the release of a motion picture, advances and guarantees from
distributors in exchange for distribution rights to such pictures in particular
territories. We believe the international “pre-sale” market has
become increasingly difficult to navigate resulting in fewer “pre-sales” with
lower minimum guarantees, and this situation may continue for the indefinite
future.
In recent
years, studios have established co-production relationships on selected
films. Under this arrangement, two studios agree to co-fund,
co-produce and co-distribute a specific film, dividing film profit (or losses)
earned from their respective distribution
responsibilities. Co-productions typically reflect a studio’s desire
to mitigate risk on high cost films or to access specific material or talent. We
intend to produce occasional larger budget motion pictures and will seek to
co-produce any such motion pictures either with a major studio or with one or
more other independents.
Both
major studios and independents generally incur various third-party
participations in connection with the distribution of a motion
picture. These participations are contractual rights of actors,
directors, screenwriters, or producers, entitling them to share in net revenue
or profits from a particular motion picture. Each participation is different and
terms are defined in the agreements governing the participation. Except for the
most sought-after talent, participations are generally payable only after
revenue collected exceeds all distribution and marketing fees and expenses,
direct production costs and financing costs.
46
Motion
Picture Distribution and Acquisition
Motion
picture distribution encompasses the exploitation of films in theaters and in
post-theatrical markets such as home video, pay-per-view, pay television,
broadcast television and other markets.
Motion
pictures are generally made available for distribution in markets subsequent to
domestic theatrical release as follows:
|
Months
after Initial
U.S.
Theatrical Release
|
Approximate
Release
Period
|
|
|
International
Theatrical
|
0-6
months
|
0-12
months
|
|
Domestic
home
video
|
4-6
months
|
---
|
|
Domestic
pay-per-view/video-on-demand
|
4-6
months
|
3
months
|
|
International
home
video
|
6-12
months
|
---
|
|
Domestic
pay
TV
|
10-18
months
|
12-21
months
|
|
International
television
|
18-24
months
|
3-12
years
|
|
Domestic
network or basic
cable
|
30-36
months
|
24-36
months
|
|
Domestic
syndication
|
48-70
months
|
3-15
years
|
Our
motion pictures which receive a theatrical release are generally released in the
DVD market four to six months after their theatrical release. We are
aware that given the rapidly changing nature of the entertainment industry,
these time frames for subsequent releases may soon change. Some in
the industry believe that increased piracy, demand for pay-for-view, and changes
in international markets are creating pressure to reduce these time
frames. If these time frames shrink, there will be less time to
generate revenues from motion pictures in each of those markets.
47
Forms
of Distribution
Theatrical
Distribution
Theatrical
distribution of a motion picture involves the licensing of the motion picture to
theaters, the manufacture and transportation of release prints or digital hard
drives to theaters, and the promotion of the picture through advertising and
publicity campaigns. The size and success of the promotional
advertising campaign can materially affect the revenues realized from the
theatrical release of a motion picture. The costs incurred in
connection with the distribution of a motion picture can vary significantly,
depending on the number of screens on which the motion picture is to be
exhibited and the competition among distributors for theaters during certain
seasons.
The
distributor and theatrical exhibitor generally enter into an arrangement
providing for the exhibitor’s payment to the distributor of a percentage of the
box office receipts for the exhibition period. The distributor’s
percentage of box office receipts generally ranges from an effective rate of 35%
to over 50%, depending upon the success of the motion picture at the box
office. The distributor’s percentage of box office receipts generally
decreases the longer a film plays in a theater. Distributors
carefully monitor theater gross receipts to ensure that the exhibitor promptly
pays all amounts due. As most of our motion pictures are released on a limited
theatrical basis, monitoring such gross receipts for our motion pictures is not
always possible.
Many
independent production companies will enter into “rent-a-system” arrangements
under which a major studio will provide them with distribution services for a
percentage distribution fee. These types of arrangements may be entered into
before, during or after production of a particular motion picture. While
rent-a-system arrangements can allow for a greater release, the costs of such an
arrangement can be greater and the margins smaller than in the absence of such
an arrangement. Under rent-a-system arrangements, the independent
film company generally is responsible for half to all of P&A costs and the
effective rate of the distributor’s percentage of box office receipts is
generally less than in the absence of such an arrangement. Although
we prefer to handle our arrangements directly with distributors so that we
negotiate terms directly and avoid sharing revenues from these motion pictures
with a studio, we entered into a rent-a-system arrangement for the first time
with our motion pictures Noise and Deal and may continue
to do so with future motion pictures.
Historically,
films have typically been released theatrically in international territories
between one and three months after initial domestic release. In
recent years, studios have begun to capitalize on global media saturation and
are releasing films in many of the larger international territories within the
first month following domestic release. International release
patterns depend on local holidays and school schedules as well as the timing of
competitive releases. Generally, our motion pictures have had an
earlier release into international markets.
48
The
majority of international theatrical revenue is earned from Japan, Germany,
United Kingdom, France, Spain and Australia. Live action films are
generally dubbed in French, German, Spanish and Italian and subtitled for the
smaller territories. Animated films are dubbed in as many as 25
or more languages.
Home
Entertainment
The home
entertainment distribution business involves the promotion and sale and/or license of
DVDs. Traditionally, such sales or rentals for private viewing
occurred at local, regional and national video retailers (e.g., video specialty
stores, convenience stores, record stores and other outlets). More
recent forms of motion picture sales and rentals for private viewing, provided
by companies like Netflix and Blockbusters, allow subscribers to rent or
purchase motion pictures by mail or by direct download onto their computers or
televisions.
In order
to leverage the advertising and publicity costs associated with theatrical
distribution, feature films are generally released in the home video market four
to six months after their initial theatrical release. Our motion pictures that
receive a theatrical release are generally released in the DVD market within
this time frame.
DVD's of
feature films may be sold or licensed to domestic wholesalers and retailers for
either a sales price or a percentage share of the rental revenue (“revenue
sharing”). Selected titles, including certain direct-to-video
programs, are priced significantly lower to encourage direct purchase by
consumers. Direct sale to consumers is referred to as the
“priced-for-sale” or “sell-through” market. Generally, after the
rental market, DVD's are re-released on the sell-through market at reduced
“sell-through pricing.” Weakening economic conditions, the deteriorating
financial condition of major retailers, the maturation of the DVD format,
increasing competition for consumer discretionary spending and leisure time,
piracy and increased competition for retailer shelf space, are contributing to
an industry-wide decline in DVD sales both domestically and
internationally.
While
traditional retail, particularly the big box stores such as Wal-Mart, Target,
Best Buy and Costco dominate the "sell through" market, Netflix and other
non-traditional forms of video distribution are increasing their market share,
and represent an increasing and important source of revenue.
In
January 2008, Toshiba withdrew from the HD-DVD player manufacturing business,
thus ending its format competition in high definition video with
Blu-Ray. With consumer uncertainty over formats eliminated,
management believes that Blu-Ray players will achieve substantial market
penetration, although DVD sales are nonetheless expected to decline due to
on-demand and computer availability. Although management believes
that Blu-ray sales will substantially increase with greater market penetration,
many industry analysts had predicted that market penetration would have been
higher at this point.
49
Pay-Per-View,
Video-On-Demand
Pay-per-view
(“PPV”) television allows cable and satellite television subscribers to purchase
individual programs, including recently released motion pictures and live
sporting, music or other events, on a “per use” basis. The subscriber
fees are typically divided among the program distributor, the pay-per-view
operator and the cable system operator.
An
evolved form of PPV technology is video-on-demand (“VOD”). This
method of content delivery allows consumers to view a film or television program
whenever they choose, “on demand”. VOD use and revenue is expected to
increase due to increased VOD subscriber penetration and the availability of
more programming. We typically tie any PPV or VOD distribution
arrangements into distribution arrangements that we make for pay
television.
Pay TV
Pay
Television allows subscribers to view premium channels such as HBO, Showtime,
and Starz/Encore that are offered by cable and satellite system operators for a
monthly subscription fee. The pay television networks acquire a
substantial portion of their programming from the major studios. Most
studios have negotiated output agreements with the major subscription pay
services whereby the service provider must license for distribution all
qualifying film product from the studio for a guaranteed fee typically dependent
on domestic theatrical performance. Unless a major studio distributes its motion
pictures and decides to include that motion picture in its output arrangements,
most independents directly negotiate with pay television networks by individual
title, a process that often leads to deal terms that are not as appealing as
those offered to major studios with output deals. The initial pay television
window for theatrical product generally follows home video availability and
precedes broadcast (free) television. We believe that our motion
pictures are well suited for pay television.
Broadcast and Basic Cable
Television
Broadcast
television allows viewers to receive, without charge, programming broadcast over
the air by major networks (ABC, CBS, NBC and Fox), more recently formed
networks (CW Network), independent television stations and cable and satellite
networks. In certain areas, viewers may receive the same programming
via cable transmission for which subscribers pay a basic cable television
fee. Broadcasters or cable systems pay fees to distributors for the
right to air programming a specified number of times.
Television
networks, television stations, and cable and satellite networks generally
license films and film packages (consisting of theatrically released
feature films and made-for-television movies) pursuant to agreements with
distributors or syndicators that allow a fixed number of telecasts over a
prescribed period of time for a specified cash license fee or for barter of
advertising time.
Pay and
cable television services usually license pictures for initial exhibition
commencing approximately 10 to 18 months after initial domestic theatrical
release or six months after domestic home video release. Although many of our
motion pictures are better suited for pay television, we have reached
distribution with basic cable television for some of our recent
releases.
50
New
Media
While
internet and new media have been slow to develop, there are increasing
indications that the delivery of motion pictures via the Internet and other
non-traditional distribution systems will begin to generate meaningful
revenues. Netflix currently represents a non-trivial portion of total
DVD revenues. Verizon’s FIOS and AT&T’s U-Verse fiber optic
distribution offerings have completed their test market phase and are being
introduced across the country, with aggressive marketing in major metropolitan
areas.
New
distribution platforms and business models are being explored in the motion
picture and other industries. Major cellular operators are exploring
the delivery of content to cell-phones. Apple is expanding its iTouch
and iPhone platforms to deliver movies via iTunes. Consumers can now
order movies through their Playstations and Xbox’s. Cinema Now, Dell
and HP are introducing programs which allow consumers to preload movies on their
new computers. Amazon.com’s digital service delivers movies,
purchased on their Unbox website, directly to the Now Playing list on TIVO
players. Similar services are being introduced by DirecTV and major
cable operators. Hulu – a joint venture of Fox and NBC – is exploring
ad-supported revenue models for the delivery of television programs and feature
films.
Other
Markets
There are
multiple sources of revenues from non-theatrical distribution of motion
pictures. The most common are distribution to hotels, airlines,
schools, libraries, hospitals and the military. Soundtrack albums and
licensing of rights to perform musical works from film music can be an
additional source of ancillary income. Other revenues may be
generated from the licensing of rights to manufacture and distribute games, toys
and action figures, clothing and similar commercial articles derived from
characters or other elements of a motion picture. To date, our motion
pictures have not generated any significant revenue from these
markets.
General
Market Information
The
principal motion picture industry association, the Motion Picture Association of
America or MPAA, collects statistics on the size and composition of the
theatrical, video, digital and television markets for the motion pictures
distributed by its members, which are generally the six "major studio"
distributors. Accordingly, the information compiled by the MPAA does
not reflect information that includes motion pictures similar to those that we
have produced if they were not distributed by a major studio and might not be
relevant for the purposes of understanding the independent production company
industry. Some of these statistics ("MPAA Data") may be found at
www.MPAA.org. We did not compile the MPAA Data and take no
responsibility for its accuracy, or the applicability of this MPAA Data to our
business.
51
Theatrical
|
●
|
Domestic
(i.e., US and Canadian) theatrical box office in dollars increased by 5.4%
over 2006 to $9.629 billion and domestic theatrical admissions increased
by .3% over 2006 to 1.4 billion.
|
|
●
|
New
MPAA film releases decreased to 179 from 203 in
2006.
|
|
●
|
Average
P&A expenditures by MPAA members increased to an average of $35.9
million per release from $34.5 million in 2006. MPAA recorded a
substantial increase in internet/online advertising expenditures, and its
surveys showed that 73% of moviegoers use the internet to conduct research
before going to the theater, second only to traditional electronic media
(TV/radio) at 75%.
|
|
●
|
The
number of screens in the United States increased to 40,077 from 39,668 in
2006, with a substantial increase to 4,632 (from 2,003) in screens
projecting digital copies of film.
|
Home
Video/DVD
|
●
|
The
number of United States households owning a television which also own a
DVD or video player in 2007 increased to 98 million (86.9% of television
households) from 93.3 million (83.8% of television households) in
2006.
|
|
●
|
Total
DVD unit sales (including units shipped to rental outlets) in the United
States decreased to 1.256 billion from 1.309 billion in 2006, principally
in management's opinion due to a decrease in "catalog" or previously
released motion pictures and a decrease in the number of new DVD releases
(12,050) from 2006 (13,604), a percentage decrease greater than the
percentage decrease in revenue.
|
|
●
|
The
average retail price per DVD title sold in a survey of 84,000 DVDs
decreased to $22.11 from $22.29 in a comparable survey for
2006. The MPAA does not issue statistics on the total size of
the DVD market in the United States either for rental revenue from
consumers, sales to consumers or revenues to distributors from rental and
sales outlets. Management believes that the average wholesale
price received by distributors is approximately 60% of retail
revenues.
|
Television
|
●
|
Basic
and pay cable television connections to all United States households with
televisions (112.8 million) decreased to 34.4 million (basic cable) and
34.8 million (pay cable) from, respectively, 35.8 million and 35.6 million
in 2006. However, satellite subscribers increased to 29.6
million households (2007) from 27.4 million households
(2006).
|
Digital
|
●
|
Personal
computer, internet and broadband connections to all United States
households (114.9 million) increased to 86.9 million households (PC), 75
million households (Internet) and 60.8 million households (broadband) from
84.3 million, 71.9 million and 51.7 million households respectively in
2006.
|
52
Corporate
History and Current Corporate Structure
In
September 2004, one of our predecessor companies and a current controlling
shareholder, SAP, a company owned by Peter Hoffman, our Chief Executive Officer,
transferred to us all of its interests in certain motion picture
assets, which included (i) 12 completed films, eight of which were
co-produced through a joint venture between Seven Arts Pictures Ltd., a UK
corporation (“SAPL”) and Fireworks Pictures Inc., and four of which were
produced by CineVisions, and (ii) the rights to certain development projects
then owned by SAP. SAP, its predecessor CineVisions, and SAPL were founded
by our Chief Executive Officer and Director, Peter Hoffman, to produce and
license for distribution independent motion pictures, as well as to
provide consulting and financing services within the motion picture
industry.
Films Produced and
Distributed from 1996-1998
Between
1996 and 1998, our predecessor CineVisions produced and licensed the
distribution rights for Johnny Mnemonic,
Never Talk To
Strangers, 9 ½
Weeks II, and Shattered Image,
which were transferred to us by SAP. CineVisions transferred the rights to
distribute these films to SAP, which in turn transferred them to us.
Subsequently, all rights to 9 ½ Weeks II were
transferred by court order to a third-party, and we are currently appealing this
court order. We own the copyright to the other motion pictures either
directly or through grants of all rights in perpetuity.
Films Produced and Acquired
by SAPL and Fireworks
In 1998,
SAPL entered into a joint venture agreement for the production and distribution
of motion pictures with Fireworks. Fireworks is a subsidiary of CanWest Global
Entertainment, Inc., a large diversified Canadian media
company. Pursuant to that joint venture, Fireworks and SAPL
produced, acquired and distributed 11 motion pictures (the "Fireworks
Pictures"), eight of which are set forth below, one of which was returned to the
owner and two of which are among the motion pictures now controlled by the
Company. The interest in the Fireworks Pictures (but no liability), were also
transferred to us in 2004 by SAP.
Through
SAPL, Mr. Hoffman produced and acquired Fireworks Rules of Engagement,
Onegin, The Believer, Who Is Cletis Tout
and American
Rhapsody. These motion pictures are the subject of copyright
infringement and contract claims that we, together with SAP and SAFE, have
brought against Fireworks and Content Film, as described
below.
Films Co-Financed by
SAPL
Through
SAPL, Mr. Hoffman co-financed three motion pictures in conjunction with
Fireworks and Paramount. Of these motion pictures, we claim that one
of them, Rules of
Engagement, was transferred to us by SAP in 2004. As set out below, this
motion picture is the subject of copyright infringement and contract claims that
we, together with SAP and SAFE, have brought against Fireworks and Content
Film.
53
Our
Business Strategy
Our
current business strategy is:
|
·
|
To
finance, produce and distribute two to four motion pictures in-house per
year with budgets of between $5 million and $15 million each. As
previously stated, certain of these pictures will receive only a limited
theatrical release while others will be released more
widely.
|
|
·
|
To
supplement our core strategy by producing an occasional higher cost motion
picture (production budgets of $30 - $50 million). We will seek to
co-produce such projects with a major studio to guarantee a studio-wide
release and obtain a commitment to cover a portion or all of prints and
advertising (“P&A”)
costs.
|
|
·
|
To
opportunistically acquire distribution rights to an additional two to five
motion pictures produced by others, each year, for distribution in
theatrical, video and television markets, as an agent, for a 15%-20%
fee.
|
|
·
|
To
maximize our current use of tax preferred financing structures around the
world to fund our motion picture
productions.
|
|
·
|
To
continue to reduce our financial risk on motion pictures we produce
in-house by pre-selling certain rights to distributors prior to and during
production, although we recognize that, particularly in the last year, the
pre-sale market has become more difficult to access as a film financing
tool.
|
|
·
|
To
increase our share of distribution revenues by entering into partnerships
with theatrical and video distributors, to gain more control over the
distribution of our motion pictures and to obtain a greater share of the
revenues from distribution of our motion
pictures.
|
|
·
|
To
scale our business over time by modestly increasing the number of pictures
we develop and produce in-house as well as by more aggressively seeking to
acquire for distribution motion pictures produced by third
parties.
|
We
believe that this is a particularly opportune time to be producing and
distributing moderately priced motion pictures as, according to their public
announcements, the major studios plan on reducing the number of pictures that
they finance and distribute, preferring instead to concentrate resources on a
limited number of high-priced, “franchise” productions. In addition, we believe
that certain of the most successful independent motion picture companies have
either been acquired or are focusing on higher budget films. We believe
that these factors will attract exceptional levels of both talent and
projects for lower budget motion pictures and independent film companies such as
Seven Arts.
We are
discussing distribution partnership possibilities in the United Kingdom and
Scandinavian territories (Sweden, Denmark, Norway, and Finland) and intend to
explore similar distribution opportunities in other territories including the
United States. We intend to invest in the sale of $50,000,000 of units in
CineWorks Media, LLC. CineWorks was formed in January, 2009 to become an
independent distributor of rights in motion pictures in the United States and
Canada. We intend to acquire between $1,000,000 and $3,000,000 worth of units in
CineWorks Media, which would represent less than a 10% ownership. Although
we anticipate that one of our affiliates will become a managing member in this
limited liability company, and one of our directors is anticipated to be a
member of the Board, CineWorks Media will be managed separately from
us. It is our goal to have some or all of our motion pictures that
are distributed in the United States and Canada be distributed through CineWorks
Media, other than motion pictures committed to other distributors prior to the
formation of CineWorks Media.
54
Our
Competitive Strength
Our
competitive strengths include:
|
·
|
The
experience of our management and our relationships with independent motion
picture distributors. Our management has participated in the
production and/or distribution of more than one hundred motion pictures
since 1986.
|
|
·
|
Our
relationships with “key talent” and with independent motion picture
distributors around the world.
|
|
·
|
Our
attractive profit margins which result from adherence to cost efficient
budgets, a low overhead structure, the use of pre-sales to license our
motion pictures for a fee to third-party distributors prior to completion
of production, and of tax preferred
financing.
|
|
·
|
Our
expertise in structuring non-overlapping tax preferred financings in
jurisdictions where such are made
available.
|
Production
Since
1996, we and our predecessors have developed, financed, produced, and licensed
13 motion pictures, primarily with budgets in range of $5 million to $15
million, for domestic and international markets. While most of our
pictures have either received only limited theatrical releases or were released
directly to post-theatrical markets, primarily DVD, we believe these pictures
have substantial DVD, home video, pay-per-view, and free television
potential. We may produce the occasional higher cost motion
picture (production budgets of $30 - $50 million), and if we do so, we will most
likely choose to co-produce any such project with a major studio if they
guarantee a studio-wide release and provide a commitment to cover a portion or
all of P&A costs or with one or more other independent production
companies. The number of pictures that we are able to produce and the
size of the budget of those films depend upon the funds available to
us.
We
receive between 50 and 100 submissions of potential film projects or completed
films every year, which generally include a "package" of a screenplay and
certain talent elements (e.g. producer, director and cast). In
certain limited cases, we will arrange for the creation of a screenplay and the
"packaging" of creative elements. We commission independent
production budgets of certain projects to evaluate the project's suitability for
production or distribution. The pictures we produce are selected
according to several key criteria formulated to maximize the profit potential of
our films, including the potential to license the worldwide distribution rights
to the film for an amount greater than the projected production budget (e.g. a
minimum profit margin of at least 20%), the potential for the film to be widely
accepted as a “quality” or “good” film, whether the key creative talent,
including directors and two most prominent cast members, are likely to be both
responsible and artistically gifted in creating the motion
picture. There are no "rules" or specific strategic limitations on
our choice of motion pictures to produce. The decision to move
forward with a project is our Chief Executive Officer’s decision based on highly
subjective factors. However, we believe that the vast experience of
our management team is critical to this decision-making process. We
will, however, only consider a motion picture with a production cost in excess
of $15,000,000 if we are able to manage the risks of production through
“pre-sales” or equity contribution to production of that picture.
55
In 2007,
Seven Arts Pictures Louisiana LLC (“SAP LA”), a subsidiary of SAP (one of our
controlling shareholders and a company controlled by Peter Hoffman, our Chief
Executive Officer), acquired real property in New Orleans, Louisiana, which they
are in the process of developing as a production and post production facility
for motion pictures in Louisiana. Over the past five years, Louisiana has become
a popular destination for the production of motion pictures due to very
favorable tax incentives. Since 2005, we have produced or acquired the
distribution rights to six motion pictures produced under the Louisiana Motion
Picture Incentive Act (the “Louisiana Incentives”), which provides substantial
transferable tax credits for film production activities in Louisiana accredited
to us whether we produce or acquire a motion picture. The Louisiana Incentives
provide generally that the producer will receive both a 25% transferable
investment tax credit on all film expenditures on Louisiana vendors and a 10%
transferable labor tax credit on all expenditures for labor performed in
Louisiana by Louisiana residents. We generally obtain loans during
production of a motion picture in Louisiana secured by these tax credits after a
“pre-certification” by the Louisiana Film Office that the applicable motion
picture qualifies for the Louisiana Incentives. We are then able to
transfer these tax credits at a discount to third parties upon completion of the
motion picture, audit by independent accountants of the applicable expenditures
and “certification” by the Louisiana Film Office of tax credits payable based on
the audited expenditures. We use the proceeds from the transfer of
the tax credits to third parties to repay the loan secured by the tax credits,
at which time the lender releases its security interest in the tax
credits. We take advantage of similar refundable (but not
transferable) tax credits available for film production expenditures in the
United Kingdom, Canada and Hungary.
We expect
the post production facility in Louisiana will open for operation by June 30,
2009 and be fully completed by December 31, 2009. When completed, this facility
will be leased to our motion picture productions in Louisiana and to other
motion picture productions by unrelated parties. SAP LA secured a
credit facility in the aggregate principal amount of $3,700,000, which has been
used to acquire and begin the improvements on the property. We have
guaranteed the amounts that SAP LA borrows under this facility. We do
not anticipate the use of any material amount of our working capital to complete
and operate this facility, and we expect to realize substantial film production,
film infrastructure, historic rehabilitation and other state and federal tax
credits and other tax incentives from the acquisition, renovation, and operation
of this property as a post production facility.
Licensing
of Distribution Rights
We
license distribution rights in our motion pictures in the United States and in
most foreign territories prior to and during the production or upon the
acquisition of rights to distribute a picture. We share in the commissions
generated by the sales of the pictures. Sale of a license to
distribute a motion picture prior to its delivery is termed a “pre-sale” and may
occur at any time during the development and production process. In a
typical license agreement, we license a picture to a distributor before it is
produced or completed for an advance from the licensee, which advance is
recoverable by the distributor from our share of the revenues generated by the
distribution of the picture in the licensee’s territory, after deduction of the
distributor’s expenses and distributor fee. The advance usually is in
the form of a cash deposit plus a letter of credit or “bank letter” for the
balance payable 10-20% on execution (i.e., the cash deposit) and the balance on
delivery (i.e., the letter of credit or “bank letter”). The license
grants the distributor the right to the post-theatrical release of the picture
in all or certain media in their territory for a predetermined time
period. After this time, the distribution rights revert back to us
and we are then free to re-license the picture. The license specifies
that the distributor is entitled to recoup its advance from the revenue
generated by the release of the picture in all markets in its territory, as well
as its release costs and distribution fees. After the distributor has
recouped its advance, costs, and fees, any remaining revenue is shared with us
according to a predetermined formula. This is known as an “overage” and can
be a significant source of revenue for us from successful films. However, a
film’s poor reception in one market does not preclude it from achieving success
in another market and generating significant additional revenue for us in the
form of an “overage” in that territory. In all of our licensing
arrangements, we retain ownership of our films and maintain our control of each
copyright. We intend to continue the practice of retaining underlying
rights to our film projects in order to continue to build our motion picture
library to license or sell in the future.
Finance
We create
a separate finance plan for each motion picture we
produce. Accordingly, the sources of the funds for production of each
motion picture vary according to each finance plan. We utilize
"tax-preferred" financing (e.g., tax credits, sale/lease back transactions and
direct subsidies), "mezzanine" or "gap" funds, which are senior to our equity
and tax preferred funds, and senior secured financing with commercial banks
(e.g. Comerica Bank and First California Bank) or private lenders (e.g., Blue
Rider Pictures, A-Mark Entertainment, Parallel Pictures), together in certain
cases with a limited investment from us, which is customarily less than 10% of
the production budget. Since each finance plan is unique to each motion
picture, we cannot generalize as to the amount we will utilize any of these
sources of funds for a particular motion picture. We generally obtain
some advances or guarantees prior to commitment to production of a motion
picture project, but those amounts may not be substantial on smaller budgeted
motion picture (e.g., under $10,000,000), and in certain cases we have committed
to production with an insubstantial amount of advances and
guarantees. Unless we can manage the risks of production through the use of
these financing techniques, we will not likely commit to production of larger
budget motion pictures (e.g., over $15,000,000), and we have never in the past
committed to such productions, without substantial advances or guarantees from
third-party distributors, or the equivalent in "non-recourse"
financings.
56
Motion
Picture Library
In total
we and our predecessors have produced or acquired interests in the following 31
motion pictures to date described below in the table. We own
(directly or through grants of all rights in perpetuity or at least theatrical,
video, and television rights) the copyright to each picture designated as "CR"
in the table below, which are the pictures produced or co-produced by us, and
for all other pictures in table below we own all material and distribution
rights in the markets in which we operate for at least all territories outside
the United States and Canada for no less than 15 years, which generally are the
motion pictures we acquire for distribution only. Historically, in
any financial period a small number of motion pictures have accounted for the
vast majority of our revenues generated from our motion picture
library.
|
Title
|
Talent
|
Delivery
Date
|
1st U.S.
Release
|
Date
Distribution Rights Terminate
|
||||||
|
American
Summer aka
The
Pool Boys (CR)
|
Director:
Cast:
|
J.B.
Rogers
Matthew
Lillard
|
06/08
|
scheduled
8/09
|
n/a
|
|||||
|
Asylum
(CR)
|
Writer:
|
Patrick
Marber
|
05/04
|
08/05
|
n/a
|
|||||
|
Director:
|
David
MacKenzie
|
|||||||||
|
Ian
McKellan
|
||||||||||
|
Cast:
|
Natasha
Richardson
|
|||||||||
|
Autopsy
(CR)
|
Director:
|
Adam
Gierasch
|
06/08
|
1/09
|
n/a
|
|||||
|
Cast:
|
Robert
Patrick
|
|||||||||
|
Back
In The Day
|
Writer:
|
Michael
Raffanello
|
03/05
|
05/05
|
11/11/2019
|
|||||
|
Director:
|
James
Hunter
|
|||||||||
|
Cast:
|
Ving
Rhames
|
|||||||||
|
Ja
Rule
|
||||||||||
|
Boo
(1)
|
Writer/Director:
|
Anthony
C. Ferrante
|
03/05
|
10/05
|
5/14/2008
|
|||||
|
Cast:
|
Trish
Cohen
|
|||||||||
|
Happy
Mahaney
|
||||||||||
|
A
Broken Life
|
Writers:
|
Neil
Coombs, Anna Lee
|
06/08
|
09/08
|
10/26/2026
|
|||||
|
&
Grace Kosaka
|
||||||||||
|
Directors:
|
Neil
Coombs
|
|||||||||
|
Cast:
|
Tom
Sizemore
|
|||||||||
|
Ving
Rhames
|
||||||||||
|
Grace
Kosaka
|
||||||||||
|
Saul
Rubinek
|
||||||||||
|
Captivity
|
Writer:
|
Larry
Cohen
|
03/06
|
07/07
|
5/10/2008
|
|||||
|
Director:
|
Roland
Joffe
|
|||||||||
|
Cast:
|
Elisha
Cuthbert
|
|||||||||
|
Cemetery
Gates (1)
|
Writer:
|
Brian
Patrick O’Tolle
|
03/05
|
05/06
|
4/4/2020
|
|||||
|
Director:
|
Roy
Knyrim
|
|||||||||
|
Cast:
|
Reggie
Bannister
|
|||||||||
57
|
Title
|
Talent
|
Delivery
Date
|
1st U.S.
Release
|
Date
Distribution Rights Terminate
|
|
Deal
(CR)
|
Writer:
|
Gil
Cates, Jr.
|
03/07
|
04/08
|
n/a
|
||||
|
&
Marc Weinstock
|
|||||||||
|
Director:
|
Gil
Cates, Jr.
|
||||||||
|
Cast:
|
Burt
Reynolds
|
||||||||
|
Bret
Harrison
|
|||||||||
|
Shannon
Elizabeth
|
|||||||||
|
Jennifer
Tilly
|
|||||||||
|
Drunkboat
|
Writer:
|
Bob
Meyer & Randy Buescher
|
12/08
|
not
yet scheduled
|
4/28/2011
|
||||
|
Director:
|
Bob
Meyer
|
||||||||
|
Cast:
|
John
Malkovich
|
||||||||
|
John
Goodman
|
|||||||||
|
Dana
Delaney
|
|||||||||
|
Gettin’
It
|
Writer/Director:
|
Nick
Gaitatjis
|
12/06
|
08/07
|
4/4/2017
|
||||
|
Cast:
|
Jessica
Canseco
|
||||||||
|
Patrick
Censoplano
|
|||||||||
|
Cheryl
Dent
|
|||||||||
|
Sandra
Staggs
|
|||||||||
|
Hades
aka
The
Black Waters of Echo
|
Director:
Cast:
|
Gabriel
Bologna
Robert
Patrick
|
not
yet delivered
|
not
yet scheduled
|
10/26/2027
|
||||
|
Pond
|
Danielle
Harris
|
||||||||
|
The
Hustle
|
Writers:
|
David
Howard
|
10/02
|
12/02
|
n/a
|
||||
|
(CR)
|
&
Michael Capellupo
|
||||||||
|
Director:
|
Stuart
Cooper
|
||||||||
|
Cast:
|
Bobbie
Phillips
|
||||||||
|
Robert
Wagner
|
|||||||||
|
I’ll
Sleep When
|
Writer:
|
Trevor
Preston
|
06/04
|
06/04
|
n/a
|
||||
|
I’m
Dead (CR) (1)
|
Director:
|
Mike
Hodges
|
|||||||
|
Cast:
|
Clive
Owen
|
||||||||
|
Malcolm
McDowell
|
|||||||||
|
Jonathan
Rhys Meyers
|
|||||||||
|
Johnny
Mnemonic
|
Writer:
|
William
Gibson
|
12/94
|
05/95
|
n/a
|
||||
|
(CR)
|
Director:
|
Robert
Longo
|
|||||||
|
Cast:
|
Keanu
Reeves
|
||||||||
|
Dolph
Lundgren
|
|||||||||
58
|
Knife
Edge
|
Director:
Cast:
|
Anthony
Hickox
Joan
Plowright
|
06/08
|
not
yet scheduled
|
3/23/2031
|
||||||||||
|
Natalie
Press
|
|||||||||||||||
|
The
Mesmerist
|
Writers:
|
Ron
Marasco
|
06/02
|
09/02
|
n/a
|
||||||||||
|
&
Michael Goorjian
|
|||||||||||||||
|
Director:
|
Gil
Cates, Jr.
|
||||||||||||||
|
Cast:
|
Neil
Patrick Harris
|
||||||||||||||
|
Jessica
Capshaw
|
|||||||||||||||
|
Mirror
Wars
|
Writers:
|
Alex
Kustanovich
|
11/06
|
07/07
|
2/3/2011
|
||||||||||
|
&
Oleg Kapanets
|
|||||||||||||||
|
Director:
|
Vasily
Chiginsky
|
||||||||||||||
|
Cast:
|
Armand
Assante
|
||||||||||||||
|
Malcolm
McDowell
|
|||||||||||||||
|
Rutger
Hauer
|
|||||||||||||||
|
Never
Talk To Strangers
|
Writers:
|
Lewis
A. Green
|
09/95
|
10/95
|
n/a
|
||||||||||
|
(CR)
(1)
|
&
Jordan Rush
|
||||||||||||||
|
Director:
|
Peter
Hall
|
||||||||||||||
|
Cast:
|
Antonio
Banderas
|
||||||||||||||
|
Rebecca
DeMornay
|
|||||||||||||||
|
Night
of the Demons (CR)
|
Director:
Cast:
|
Adam
Gierasch
Shannon
Elizabeth
|
not
yet delivered
|
not
yet scheduled
|
n/a
|
||||||||||
|
Edward
Furlong
|
|||||||||||||||
|
Diora
Baird
|
|||||||||||||||
|
Nine
Miles Down (CR)
|
Director:
Cast:
|
Anthony
Waller
Adrian
Paul
|
not
yet delivered
|
not
yet scheduled
|
n/a
|
||||||||||
|
Kate
Nauta
|
|||||||||||||||
|
No
Good Deed (CR)
|
Writer:
|
Christopher
Canaan
|
05/02
|
09/03
|
n/a
|
||||||||||
|
&
Steve Banancik
|
|||||||||||||||
|
Director:
|
Bob
Rafelson
|
||||||||||||||
|
Cast:
|
Samuel
L. Jackson
|
||||||||||||||
|
Milla
Jovovich
|
|||||||||||||||
|
Noise
aka
|
Writer/Director:
|
Henry
Bean
|
03/07
|
05/08
|
n/a
|
||||||||||
|
The
Rectifier
|
Cast:
|
Tim
Robbins
|
|||||||||||||
|
(CR)
|
William
Hurt
|
||||||||||||||
|
Bridget
Moynahan
|
|||||||||||||||
|
William
Baldwin
|
|||||||||||||||
|
Pool
Hall Prophets aka
Shooting
Gallery
|
Writer/Director:
|
Keoni
Waxman
|
09/05
|
12/05
|
n/a
|
||||||||||
|
(CR)
|
Cast:
|
Freddie
Prinze, Jr.
|
|||||||||||||
|
Ving
Rhames
|
|||||||||||||||
|
Popstar
|
Writer:
|
Timothy
Barton
|
03/05
|
11/05
|
10/19/2014
|
||||||||||
|
Director:
|
Richard
Gabai
|
||||||||||||||
|
Cast:
|
Aaron
Carter
|
||||||||||||||
|
Alana
Austin
|
|||||||||||||||
|
Red
Riding Hood
|
Writer:
|
Timothy
Dolan
|
03/06
|
06/06
|
5/2/2015
|
||||||||||
|
Director:
|
Randall
Kleiser
|
||||||||||||||
|
Cast:
|
Lanie
Kazan
|
||||||||||||||
|
Morgan
Thompson
|
|||||||||||||||
|
Shattered
Image
|
Writer:
|
Duane
Poole
|
06/98
|
12/98
|
n/a
|
||||||||||
|
(CR)
(1)
|
Director:
|
Raul
Ruiz
|
|||||||||||||
|
Cast:
|
William
Baldwin
|
||||||||||||||
|
Anne
Parillaud
|
|||||||||||||||
|
A
Shot At Glory
|
Writer:
|
Denis
O’Neill
|
01/02
|
05/02
|
9/30/2016
|
||||||||||
|
Director:
|
Michael
Corrente
|
||||||||||||||
|
Cast:
|
Robert
Duvall
|
||||||||||||||
|
Michael
Keaton
|
|||||||||||||||
|
Stander
(CR)
|
Writer:
|
Bima
Stagg
|
10/03
|
08/04
|
n/a
|
||||||||||
|
Director:
|
Bronwen
Hughes
|
||||||||||||||
|
Cast:
|
Thomas
Jane
|
||||||||||||||
|
Deborah
Unger
|
|||||||||||||||
|
Supercross
|
Writer:
|
Ken
Solarz
|
08/05
|
08/05
|
5/25/2019
|
||||||||||
|
Director:
|
Steve
Boyum
|
||||||||||||||
|
Cast:
|
Sophia
Bush
|
||||||||||||||
|
Steve
Howey
|
|||||||||||||||
|
Cameron
Richardson
|
|||||||||||||||
|
The
Wedding Chest
|
Writer:
|
Ekaterina
Tirdatova
|
3/08
|
not
yet scheduled
|
10/4/2021
|
||||||||||
|
Director:
|
Nurbek
Egen
|
||||||||||||||
|
Cast:
|
Natasha
Regnier
|
||||||||||||||
|
Bolot
Tentimyshov
|
|||||||||||||||
(1) Indicates
a motion picture for which we do not own the distribution rights in the United
States and Canada.
59
The
following sets forth the name and position of each of our directors and
executive officers:
|
Name
|
Position
|
Age
|
Date
First Elected
or
Appointed
|
Date
of Expiration of Current Term (1)
|
|
Peter
Hoffman
|
CEO,
Director
|
59
|
September
2, 2004
|
November
15, 2011
|
|
Michael
Garstin
|
President,
Director
|
60
|
July
1 2008
|
November
15, 2010
|
|
Philip
Kendall
|
Chairman,
Director
|
61
|
September
1, 2008
|
November
15, 2010
|
|
Julia
Verdin
|
Director
|
46
|
January
3, 2007
|
November
15, 2009
|
|
Anthony
Hickox
|
Director
|
44
|
January
3, 2007
|
November
15, 2009
|
|
Elaine
New
|
CFO,
Director
|
49
|
January
11, 2007
|
November
15, 2009
|
|
Kate
Hoffman
|
COO,
Director
|
31
|
February
26, 2008
|
November
15, 2010
|
|
Reiko
Bradley
|
President,
Seven Arts International
|
48
|
October
15, 2008
|
NA
|
(1) Directors
serve for three years.
The
Directors served in their respective capacities since their election and/or
appointment and will serve until the next Annual General Meeting or until a
successor is duly elected, unless the office is vacated in accordance with the
Articles of Association.
The
senior management serves at the pleasure of the Board of Directors.
No
director and/or senior management had been the subject of any order, judgment,
or decree of any governmental agency or administrator or of any court or
competent jurisdiction, revoking or suspending for cause any license, permit or
other authority of such person or of any corporation of which he is a director
and/or senior management, to engage in the securities business or in the sale of
a particular security or temporarily or permanently restraining or enjoining any
such person or any corporation of which he is an officer or director from
engaging in or continuing any conduct/practice/employment in connection with the
purchase or sale of securities, or convicting such person of any felony or
misdemeanor involving a security or any aspect of the securities business or of
theft or of any felony.
The
experience and qualifications of the directors and senior management for at a
minimum the last five years are as follows:
Peter Hoffman has been our
Chief Executive Officer and one of our directors since September 2004 and is
also our founder. Under his direction, we and our predecessors
have produced and or distributed over thirty features since our inception
including: Johnny
Mnemonic, Never
Talk To Strangers, 9 ½ Weeks II and
Shattered
Image. As our CEO, his responsibilities include, among
others, the selection and production of motion pictures, strategic planning,
business development, operations, financial administration, accounting, and
reporting to the Board of Directors. Mr. Hoffman was previously President and
CEO of Carolco Pictures. He was directly involved at Carolco in the
production of a large slate of independent motion pictures, including Terminator 2, Basic Instinct, Total Recall, and
Rambo III. Mr.
Hoffman is a graduate of the Yale Law School and has participated as a lawyer
and executive in numerous financial and tax preferred financings for more than
twenty-five years. Mr. Hoffman is the father of Kate Hoffman, our
Chief Operating Officer and our Executive Director.
60
Michael Garstin has been our
President and one of our directors since June 2008. As our president,
his responsibilities include strategic planning, business development, financial
administration and fundraising. He began his career as a Lending Officer at
Chase Manhattan Bank, then joined Filmways Corp., later renamed Orion Pictures,
as a Board Director and Chief Financial Officer. Subsequently, he
returned to Wall Street and worked as a Senior Managing Director and Head of the
Media & Entertainment Group at Bear Stearns & Co., during which time he
provided advice to and helped raised capital for a number of independent film
companies, including Carolco Pictures, on whose Board of Directors he served for
a number of years. He later ran the New York Investment Banking departments for
both Daniels & Associates and CEA and worked as a Managing Director at
Gleacher & Co., and at SMH Capital.
Philip Kendall has been the
Chairman of our Board of Directors since September 2008. He is a
graduate of Oxford University and Manchester Business School and began his
investment banking career in Corporate Finance and Capital Markets at Baring
Brothers in New York and London. Later he became a main board Director and Head
of Corporate Finance Origination at Samuel Montagu & Co, and then he became
Partner and Head of Lead Advisory, Corporate Finance, for PricewaterhouseCoopers
in London. He is currently Senior Advisor to investment bankers Hawkpoint
Partners Ltd, and a non-executive director of several listed UK
companies.
Julia Verdin has been a
director since January 2007. She is an independent film producer. Ms. Verdin
produced Stander, directed by
Bronwen Hughes, was an Executive Producer on Merchant of Venice,
directed by Michael Radford and starring Al Pacino, Jeremy Irons and Joseph
Fiennes and a co-producer on Riding the Bullet,
based on a Steven King story which was directed by Mick Garris and stars David
Arquette, Jonathan Jackson, Erika Christensen and Barbara Hershey.
Anthony Hickox has been a
director since January 2007. He is a film director, writer and
producer. Mr. Hickox wrote and directed his first film, Waxworks at
the age of 21. Mr. Hickox was involved in the production of or
direction of Sundown, Warlock: Armageddon; Children of the Corn,
Turn of the
Screw; Carnival
of Souls, and Hellraiser 3: Hell on
Earth.
Elaine New has been our Chief
Financial Officer and a director since January 2007. As our Finance
Director, her responsibilities include overseeing financial administration,
preparing accounting and financial statements, liaising with auditors,
accountants, and financial community/shareholders; and preparing, paying and
organizing our expenses, taxes, and activities, and ensuring our compliance with
all financial statutory and regulatory requirements. She is Cambridge University
educated and is a Price Waterhouse (London) qualified Chartered
Accountant. Elaine has been in the media industry for the last eight
years as Finance Director of Metrodome Group plc, a UK film
distributor. Ms. New was previously engaged as Financial Controller
of Harrods International, helping to establish an airport retailing arm, and as
Commercial Director of Outfit, a new division of Sears Womenswear Ltd that she
helped to create in the latter part of the 1990s. Ms. New has been on
the Executive Committee of The Quoted Companies Alliance for almost three years
helping represent small to mid-cap companies listed both on AIM and the main
list of The London Stock Exchange.
Kate Hoffman has been our
Chief Operating Officer and a director since February 2008. As our
COO, her responsibilities include supervising the production of motion pictures
and licensing and delivering our motion pictures to third parties. She began her
career at the age of 17 as an intern for Hollywood casting directors, Mary
Vernieu and Risa Gramon-Garcia. Ms. Hoffman then worked for film
agent Mort Viner at International Creative Management until his retirement when
she joined our predecessors in 1998. She has managed the development,
production and delivery of films including The Believer, No Good Deed, Stander, and Asylum. In
addition to her production responsibilities, Ms. Hoffman is responsible for
international distribution, acquisitions and film financing. Ms. Hoffman is the
daughter of Peter Hoffman, our Chief Executive Officer and a
director.
Reiko Bradley has been the
President of Seven Arts International, since October 2008. As
president of Seven Arts International, her responsibilities include arranging
for the licensing of rights to our motion pictures and collecting revenues for
distribution. After being based in Los Angeles, Ms. Bradley
re-located to Australia in July of 2003 to launch Becker Films International
where she worked until April 2006. Prior to launching BFI, Ms.
Bradley was Executive Vice President of Worldwide Distribution for MDP Worldwide
for 6 years handling over 150 films, ranging from then action star Jean Claude
Van Damme films to mainstream films such as Johnny Mnemonic. A
graduate of the University of Michigan, Reiko Bradley speaks English and
Japanese and is conversational in French. She was born and raised in
Japan.
61
Compensation
Since
February 15, 2009, our compensation policies with respect to our directors and
executive officers are established, administered, and the subject of periodic
review by our independent directors in accordance with the NASDAQ Marketplace
Rules. Total compensation accrued and/or paid (directly and/or indirectly) to
the directors and senior management during the fiscal period ended June 30, 2008
was $2,077,728. We have a Remuneration Committee, consisting of Mr. Kendall and
Ms. Verdin, that reviews and approves all employee compensation and
bonuses.
|
Annual
Compensation
|
Long-Term
Compensation
|
|||||||
|
Awards
|
Payouts
|
|||||||
|
Name
|
Fifteen
Month Fiscal Period
Ended
June
30,
|
Salary
($)
|
Bonus
($)
|
Other
Annual
Compen sation
($)
|
Securities
Under
Option/
SAR’s
Granted
(#)
|
Shares/
Units
Subject
to
Resale
Restrictions
($)
|
LTIP
Pay outs ($)
|
All
Other
Compensation
($)
|
|
Peter
Hoffman
|
2008
|
625,000
|
500,000
|
-
|
-
|
-
|
-
|
-
|
|
Elaine
New
|
2008
|
375,000
|
300,000
|
-
|
-
|
-
|
-
|
-
|
|
Kate
Hoffman
|
2008
|
66,600
|
106,000
|
-
|
-
|
-
|
-
|
-
|
|
Michael
Garstin (1)
|
2008
|
16,667
|
0
|
-
|
-
|
-
|
-
|
-
|
|
Other
Directors as a Group
|
2008
|
88,461
|
0
|
-
|
-
|
-
|
-
|
-
|
(1) We
appointed Michael Garstin as President as of June 1, 2008. As such, annual
compensation for Mr. Garstin for the fifteen month fiscal period ending June 30,
2008 reflects only one month of salary compensation.
62
Stock
Options
Stock
Option Grants from Inception to December 31, 2008
|
Name
|
Number
of Options Granted
|
%
Of Total Options Granted on Grant Date
|
Exercise
Price per Share
|
Grant
Date
|
Expiration
Date
|
Mkt.
Value of Securities Underlying Options on Date of Grant
|
|
Michael
Garstin
|
100,000
|
100%
|
$1.54
|
6/1/2008
|
5/31/2011
|
$1.54
|
|
Tony
Hickox
|
10,000
|
100%
|
$2.29
|
1/3/2007
|
1/3/2010
|
$2.29
|
|
Julia
Verdin
|
10,000
|
100%
|
$2.29
|
1/3/2007
|
1/3/2010
|
$2.29
|
|
Elaine
New
|
10,000
|
100%
|
$2.29
|
1/3/2007
|
1/3/2010
|
$2.29
|
|
Philip
Kendall
|
20,000
|
100%
|
$1.46
|
9/30/2008
|
9/29/2011
|
$1.46
|
|
Other
Employees
|
90,000
|
100%
|
$1.55
|
11/7/08
|
11/7/08
|
$1.55
|
In
addition, we have granted stock options in the following amounts to the
following persons in connection with financing services provided by
them:
|
Name
|
Number
of
Options
Granted
|
Exercise
Price
Per
Share
|
Market
Value of Securities
on
Date of Grant
|
Grant
Date
|
Expiration
Date
|
|
|
Blue
Rider Finance/Robert Oppenheim
|
50,000
|
$1.125
|
$1.463
|
Jan.
22, 2008
|
Jan.
23, 2011
|
|
|
Trafalgar
Capital
Specialized
Investment Fund
|
160,000
60,000
|
$1.013
$1.013
|
$1.463
$1.988
|
Jan.
31, 2008
Oct.
30, 2008
|
Jan.
30, 2013
Oct.
30, 2013
|
|
63
Change
of Control Remuneration
In our
2008 fiscal year and to date, we have no plans or arrangements in respect of
remuneration received, or that may be received, by our executive officers to
compensate such officers in the event of termination of employment (as a result
of resignation, retirement, change of control) or a change of responsibilities
following a change of control, where the value of such compensation exceeds
US$60,000 per senior manager other than those set out in Peter Hoffman’s
Employment Agreement. Pursuant to the Employment Agreement, if we
terminate Peter Hoffman without cause, we shall be entitled to pay SAP, one of
our controlling shareholders and a company controlled by Mr. Hoffman, a lump sum
of approximately $1,500,000 and assign to Mr. Hoffman all projects in
development during the term of his employment.
Other
Compensation
No senior
management director received “other compensation” in excess of the lesser of
US$25,000 or 10% of such officer's cash compensation, and senior management and
Directors as a group did not receive other compensation which exceeded US$25,000
times the number of persons in the group or 10% of the
compensation.
Bonus/Profit
Sharing/Non-Cash Compensation
Except
for the stock options discussed above, we have no material bonus or profit
sharing plans pursuant to which cash or non-cash compensation is or may be paid
to some of our directors or senior management, except that our Board has adopted
a bonus plan substantially in the following form:
|
1.
|
Remuneration
Committee will recommend amount of bonus pool each year, which will be 10%
of pre-tax profits for the prior fiscal year. The CEO and the
Remuneration Committee will decide recipients of project-related awards
and amounts.
|
|
2.
|
In
future years, comparisons will be made to peer groups in the motion
picture industry.
|
|
3.
|
There
will be two types of annual
bonuses:
|
(a)
Those related to the overall management of our company
(b)
Those related to performance on specific projects
|
4.
|
Managers
in bonus pool:
|
(a) Peter
Hoffman (CEO)
(b) Michael
Garstin (President)
(c) Elaine
New (CFO)
(d) Kate
Hoffman (COO)
(e) Reiko
Bradley
64
|
5.
|
Management
bonuses as follows:
|
|||
|
CEO
|
Management
|
Project
Related
|
||
|
Company
Results
|
40%
|
25%
|
15%
|
|
|
Individual
Objectives
|
10%
|
30%
|
50%
|
|
|
Subjective
|
20%
|
20%
|
25%
|
|
|
Share
Performance
|
30%
|
25%
|
10%
|
|
|
6.
|
Individual
objects for Management will be agreed by the
Board.
|
|
7.
|
Criteria
include individual contributions to our overall
profits.
|
Seven
Arts Employee Benefit Trust
We
established the Seven Arts Employee Benefit Trust (“EBT”) to acquire 3,000,000
of our preference shares from Armadillo Investments plc in a transaction
described in “Certain Related Transactions” below. After completion of this
offering and the transaction described in Certain Related Transactions, EBT will
own approximately 1,000,000 of our ordinary shares less approximately 140,000 of
our ordinary shares which will be sold by EBT to our President, Michael Garstin.
EBT has granted an option to a third-party investment adviser to acquire 50,000
ordinary shares.
EBT is
governed by a Trust Deed that we entered into with the trustee. Under
the Trust Deed, we have the power to remove the trustee and to replace it with
one or more trustees of our choosing. The Trust Deed also restricts
the trustee from voting our ordinary shares held by EBT without our
approval. All cash and ordinary shares owned by EBT are held by EBT
for the benefit of our current UK employees (including Mr. Kendall, Ms. New and
Ms. Hoffman), which group may be expanded in the future to all our employees.
Any distributions by EBT will be approved by the trustees and are expected to be
made to our executive management as part of our bonus plan described
above.
65
Pension/Retirement
Benefits
No funds
were set aside or accrued by us during fiscal 2008 to provide pension,
retirement or similar benefits for directors or senior management.
Executive
Employment Agreements
SAP has
an employment agreement with Peter Hoffman pursuant to which he will act as our
CEO until December 31, 2013. Upon acquisition of control of our company, we
entered into a contract with the SAP to secure Mr. Hoffman's services solely to
us and our subsidiaries as our CEO. In connection with that
employment agreement, we have granted Mr. Hoffman
|
|
•
|
the
right to sole responsibility for creative and business decisions regarding
motion pictures we develop and
produce,
|
|
|
•
|
a
right of first refusal to produce remakes, sequels or prequels of motion
pictures produced by Mr. Hoffman and acquired by us or any motion picture
produced by us during his
employment,
|
|
|
•
|
an
annual salary of $500,000 per year plus bonuses, expenses and a signing
option and
|
|
|
•
|
a
right upon termination without cause to a lump sum payment of
approximately $1,500,000, an assignment of all projects in development
during the term of his employment and any amounts due upon such
compensation as an excise tax.
|
We have
an employment agreement with Michael Garstin pursuant to which he will serve as
our President until December 31, 2013 at a salary of $200,000 per year plus
bonuses and expenses.
Both of
the employment agreements grant us a right to injunctive relief if the
respective employee breaches the agreement. The employment agreements
do not contain “non-compete” clauses.
Director
Compensation
We have
entered into an agreement with Philip Kendall, our Chairman, terminable on sixth
months’ notice by either party, at a rate of approximately $37,500 (£25,000) per
annum plus options to acquire 20,000 of our ordinary shares. Any other Director
who is not part of the executive management will receive approximately $2,250
(£1,500) per meeting attended.
66
Board
of Directors Committees
We have
an Audit Committee, which recommends to the Board of Directors the engagement of
our independent auditors and reviews with the independent auditors the scope and
results of our audits, our internal accounting controls, and the professional
services furnished by our independent auditors. The current members of the
Audit Committee are Mr. Garstin and Mr. Kendall. The Audit Committee
did not meet separately in the fiscal period ended June 30, 2008.
We have a
Remuneration Committee (Mr. Kendall and Ms. Verdin) and a Nomination Committee
(Mr. Hoffman and Ms. Verdin).
All
Committees of the Board are organized pursuant to our Board of Directors
Memorandum and resolutions of the Board of Directors. The terms of reference of
each committee are based on the subject matter jurisdiction of each Committee.
The Remuneration Committee reviews and approves all employee compensation and
bonuses. The Nomination Committee proposes candidates for election to our Board
of Directors.
All
meetings of each Committee are on an ad hoc basis, decisions are made by
majority vote and all decisions are reported to the full Board of Directors for
approval.
Employees
As of
December 31, 2008, Seven Arts had 14 employees and independent contractors,
providing full time services. Our affiliates
employ many part time employees for production of our motion pictures, but we do
not engage temporary employees on any regular or material basis. We are not
signatory to any labor union collective bargaining agreements, but our
affiliates in the United States are signatory to the current Writer’s Guild of
America, Directors Guild of America and IATSE Low Budget Agreements and have in
the past been signatory to the Screen Actors Guild Agreement (which has now
expired). Our employees have ranged from a low of six to a high of fourteen over
the last three fiscal years.
67
PRINCIPAL
SHAREHOLDERS AND
SELLING SHAREHOLDER
The
following table sets forth, as of December 31, 2008 certain information
regarding the beneficial ownership of our ordinary shares and preference shares
by each person or entity known by us to be the beneficial owner of more than 5%
of our outstanding ordinary shares, each of our directors and executive
officers, and all of our directors and executive officers as a group.
|
Prior
to the
Offering
|
After
the Offering(2)
|
After
the Over-Allotment Option (2)
|
|||||||||||||||
|
Name
of Beneficial Owner
|
Address
of Beneficial Owner
|
Amount
of Beneficial Ownership (1)
|
Percent
of Class
|
Amount
of Beneficial Ownership
(1)
|
Percent
of Class
|
Amount
of Beneficial Ownership
(1)
|
Percent
of Class
|
||||||||||
|
Seven
Arts Pictures Inc.(3)
|
6121
Sunset Blvd, Hollywood, CA 90028
|
1,607,000
|
23.3%
|
1,607,000
|
20.9%
|
1,607,000
|
20.9%
|
||||||||||
|
Seven
Arts Employee Benefit Trust(4)
|
38
Hertford Street, London, W1J 7SG
|
2,400,000
|
32.9%
|
1,000,000
|
13.0%
|
625,000
|
9.1%
|
||||||||||
|
Langley
Park Investment Trust PLC (7)
|
30
Finsbury Square, London, EC2P 2YU
|
1,657,627
|
21.8%
|
1,657,627
|
19.7%
|
1,657,627
|
19.7%
|
||||||||||
|
ApolloMedia
GmbH & Co. Filmproduktion KG (8)
|
Candidplatz
11, 81543 Munich, Germany
|
700,000
|
10.2%
|
0
|
0%
|
0
|
0%
|
||||||||||
|
Michael
Garstin (4) (6)
|
6121
Sunset Blvd, Hollywood, CA 90028
|
100,000
|
1.4%
|
100,000
|
1.3%
|
100,000
|
1.3%
|
||||||||||
|
Elaine
New (6)
|
38
Hertford Street, London, W1J 7SG
|
10,000
|
(5)
|
10,000
|
(5)
|
10,000
|
(5)
|
||||||||||
|
Anthony
Hickox (6)
|
6121
Sunset Blvd, Hollywood, CA 90028
|
10,000
|
(5)
|
10,000
|
(5)
|
10,000
|
(5)
|
||||||||||
|
Julia
Verdin (6)
|
6121
Sunset Blvd, Hollywood, CA 90028
|
10,000
|
(5)
|
10,000
|
(5)
|
10,000
|
(5)
|
||||||||||
|
Trafalgar
Capital Investment Fund (9)
|
8-10
Rue Mathias Hardt, BP 3023, Luxembourg L-1030
|
426,110
|
5.8%
|
0
|
0%
|
0
|
0%
|
||||||||||
|
Philip
Kendall (6)
|
41
Lothbury, London
EC2R
7AE
|
20,000
|
(5)
|
20,000
|
(5)
|
20,000
|
(5)
|
||||||||||
|
Other
Employees (6)
|
50,000
|
(5)
|
50,000
|
(5)
|
50,000
|
(5)
|
|||||||||||
|
All
Officers and Directors as a Group
|
2,047,000
|
29.1%
|
2,047,000
|
26.2%
|
2,047,000
|
26.2%
|
|||||||||||
|
Total
5% Holders
|
6,364,627
|
79.6%
|
4,264,627
|
50.8%
|
3,889,627
|
46.3%
|
|||||||||||
|
(1)
|
Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the
Exchange Act and generally includes voting or investment power with
respect to securities and includes shares underlying convertible
debentures, warrants and options that have been issued, granted and have
vested and not been exercised and shares underlying options that will vest
within the next 60 days only in respect to any person listed in the table.
Except as subject to community property laws, where applicable, the person
named above has sole voting and investment power with respect to all
ordinary shares shown as beneficially owned by him/her.
|
|
(2)
|
Assumes
(i) a total of 1,700,000 ordinary shares are returned to us immediately
upon completion of the offering for the repayment of indebtedness, (ii)
500,000 preference shares convertible into 400,000 ordinary shares are
returned to us, and (iii) the underwriters’ representative does not
exercise warrants to purchase up 125,000 of our ordinary
shares.
|
|
(3)
|
Peter
Hoffman controls approximately 70% of the voting stock of SAP, and is a
beneficial owner of our ordinary shares held by Seven Arts Pictures
Inc. This total does not include 700,000 ordinary shares
pledged to ApolloMedia and over which ApolloMedia has dispositive
control. We intend to use the proceeds from the offering to pay
a settlement amount with ApolloMedia upon the occurrence of which these
700,000 shares will be returned to us (see “Use of
Proceeds”).
|
|
(4)
|
Under
the terms of the Trust Deed establishing the Seven Arts Employee Benefit
Trust, EBT is to abstain from voting any of our shares that it holds
unless we determine otherwise.
Includes
400,000 ordinary shares underlying our preference shares. The Seven Arts
Employee Benefit Trust has agreed to (i) sell 140,000 of our ordinary
shares to our President, Michael Garstin and (ii) to return 1,000,000 of
our ordinary shares on completion of this offering, as indicated in
Certain Related Transactions. If Mr. Garstin acquires these 140,000 of our
ordinary shares prior to the offering, the following information regarding
Mr. Garstin and Seven Arts Employee Benefit Trust will replace the
corresponding data above, taking into account Mr. Garstin’s option
disclosed above:
|
68
|
Prior
to the Offering
|
After
the Offering(2)
|
After
the Over-Allotment Option (2)
|
||||||
|
Title
of Class
|
Name
of Beneficial Owner
|
Address of Beneficial
Owner
|
Amount
of Beneficial Ownership
|
Percent
of Class
|
Amount
of Beneficial Ownership
|
Percent
of Class
|
Amount
of Beneficial Ownership
|
Percent
of Class
|
|
Michael
Garstin
|
6121
Sunset Blvd, Hollywood, CA 90028
|
240,000
|
3.48%
|
240,000
|
3.12%
|
240,000
|
3.07%
|
|
|
Seven
Arts Employee Benefit Trust
|
38
Hertford Street, London, W1J 7SG
|
2,260,000
|
31.0%
|
860,000
|
11.2%
|
485,000
|
6.3%
|
|
(5) Less
than one percent.
(6)
Represents ordinary shares underlying vested options.
(7)
Includes 700,000 ordinary shares underlying convertible redeemable
debentures.
(8)
Represents 700,000 ordinary shares pledged by SAP and over which ApolloMedia has
dispositive control. We intend to use proceeds from this offering to pay a
settlement amount to ApolloMedia upon which time SAP and ApolloMedia have agreed
that such ordinary shares would be returned to us.
(9)
Represents 220,000 ordinary shares representing warrants and represents 206,110
ordinary shares underlying a term loan (or 838,574 ordinary shares if the Note
were deemed to be in default within the next 60 days). We intend to
retire this term loan using the proceeds from this offering.
69
We have
entered into several agreements and arrangements with Seven Arts Pictures Inc.,
an entity that holds approximately 23.3% of our stock and whose majority
beneficial shareholder is our Chief Executive Officer, Peter
Hoffman. These transactions include:
|
|
●
|
Upon
acquisition of control of our company by SAP in September 2004, we entered
into an agreement with SAP under which SAP provided the services of Peter
Hoffman for the amount of his contracted salary and the Los Angeles office
and staff of SAP to us for the direct costs thereof. Pursuant
to an intercompany agreement, SAP also from time-to-time will own limited
liability companies in the United States, with all distribution rights and
profits thereof for our account and provide other services for our account
at no fee other than Mr. Hoffman’s salary and the direct third-party costs
of SAP’s Los Angeles office, all of which are reflected in our financial
statements. These other services will be for any reasonable
requests of our management including accounting services, audits of
distribution statements, collection of accounts receivable, supervision of
production of motion pictures and similar day-to-day aspects of our
business. SAP assigned to us any results and proceeds
arising from services performed by SAP on our behalf. We granted SAP
the power and authority to enter into agreements on our
behalf. Although under the terms of the agreement, SAP is not
to take any actions on our behalf without our approval, in practice we
have not required SAP to receive our prior
approval.
|
|
|
●
|
SAP
has from time-to-time made non-interest bearing advances to us or our
subsidiaries, when we have not collected our receivables because we do not
have a working capital line of credit, all as judged appropriate by
management. All advances are for customary working capital
purposes and total approximately $450,000 as of December 31,
2008.
|
|
●
|
Together
with SAP, we entered into a settlement agreement, dated September 30,
2006, with ApolloMedia GmbH & Co. Filmproduktion KG (“ApolloMedia”)
related to a dispute regarding amounts ultimately payable to ApolloMedia
from distribution of the motion picture Stander and one
of our subsidiaries assumption of indebtedness of approximately $2,000,000
related to Stander upon
acquisition of control of our company by SAP. The
Settlement Agreement fully releases us and our subsidiaries from any
liability to ApolloMedia in exchange for a payment of $1,650,000 to be
made by SAP. In connection with the SAP’s payment obligation of the
settlement amount to ApolloMedia, we issued 700,000 ordinary shares to SAP
which SAP immediately pledged to ApolloMedia to secure SAP’s obligations
under the settlement agreement. SAP has agreed that it will (1) return to
us all ordinary shares in excess of 400,000 not necessary to satisfy SAP’s
obligations to ApolloMedia and (2) deliver to us from SAP’s ordinary
shares, any ordinary shares in excess of 400,000 in fact sold by SAP to
satisfy the indebtedness to ApolloMedia under the settlement
agreement. The shares pledged to ApolloMedia will be sold by
it as necessary for ApolloMedia to derive net proceeds of $1,640,000, and
any pledged shares remaining after such sale (if any) will be returned to
us.
|
We have
entered into several agreements and arrangements with Seven Arts Pictures
Louisiana LLC (“SAP LA”), an entity that is 60% beneficially owned by SAP, one
of our controlling shareholders and a company Chief Executive Officer, Peter
Hoffman. These transactions include:
70
|
●
|
A
guarantee that we provided to SAP LA to cover its indebtedness under a
Credit Agreement that SAP LA entered into with Advantage Capital Community
Development Fund, L.L.C., dated October 11, 2007, for the acquisition and
improvement of a production and post production facility located at 807
Esplanade Avenue in New Orleans, Louisiana. The aggregate borrowing amount
under this facility is $3,700,000, of which $2,300,000 was drawn down as
of December 31, 2008.
|
|
●
|
A
distribution agreement that we entered into with SAP LA pursuant to which
we granted SAP LA the right to distribute our motion pictures in return
for a fee of 20% of the revenues generated from these films and pursuant
to which SAP LA would provide us with an amount of no less than what SAP
LA received from us under this
agreement.
|
We have
secured an $8,300,000 loan (the "Arrowhead Loan") owed by Seven Arts Future Flow
I (“SFF”), an entity that is 60% beneficially owned by SAP (one of our
controlling shareholders and a company controlled by our Chief Executive
Officer, Peter Hoffman), with liens on twelve motion pictures. SFF
borrowed these funds from Arrowhead Target Fund Ltd. ("Arrowhead") in February
2006, at an interest rate of 15% per annum. Our only liability is to repay the
Arrowhead Loan from the proceeds of the film assets securing the Arrowhead Loan,
and we are not required to repay the Arrowhead Loan from any other of our assets
or revenues. This loan is currently in default and we and SFF are negotiating
with Arrowhead on the extension of the loan (see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources” for a description of the Arrowhead Loan).
The Seven
Arts Employee Benefit Trust (“EBT”) currently owns approximately 29% of our
outstanding ordinary shares (see “Management – Compensation – Seven Arts
Employee Benefit Trust” for a description of EBT). We advanced a loan at a
nominal rate of interest totaling approximately $3,300,000 to EBT
consisting of approximately $2,150,000 cash and 1,600,000 ordinary shares
of Armadillo Investments plc (“Armadillo”) carried by us at a value of
approximately $1,150,000. On October 30, 2008, the Seven Arts Employee
Benefit Trust acquired 3,000,000 of our convertible preference shares from
Armadillo for approximately $2,145,000, payable $715,000 on execution,
$715,000 six months thereafter, and $715,000 twelve months thereafter, and for a
return to Armadillo of 1,600,000 ordinary shares of Armadillo. We have
guaranteed the remaining approximately $1,430,000 due to Armadillo, which we
expect to pay from the proceeds of this offering as an additional advance to
EBT, potentially increasing our total advance to approximately $3,289,000
(“Trust Loan”). On November 20, 2008, EBT converted 2,500,000 of these
preference shares into 2,000,000 of our ordinary shares.
We have
agreed with EBT that it will satisfy the Trust Loan after this offering by
returning to us 1,000,000 of our ordinary shares and the remaining 500,000
convertible preference shares owned by EBT. EBT has pledged approximately
1,300,000 ordinary shares to Armadillo to secure the sum due to Armadillo, which
pledge will be terminated upon payment by us of approximately $1,430,000 to
Armadillo from the proceeds of this offering.
Together
with Seven Arts Pictures, Inc., we have guaranteed a $4,000,000 loan of December
17, 2007 between Palm Finance Corporation and Gone To Hell Ltd., a company
controlled by our Chief Operating Officer and Director Kate
Hoffman. The loan was made exclusively to finance our motion picture
Nine Miles Down and is secured by the distribution rights to that motion
picture. The loan carries an annual rate of interest of 15% and
becomes due on June 17, 2009.
We engage
as employees, Kate Hoffman, who is the daughter of Peter Hoffman, our Chief
Executive Officer, and Patrick Garstin, who is the son of Michael Garstin, our
President.
Our
ordinary shares have traded in the past five years on several different
markets. Starting in February of 2009, our shares have been quoted on
the NASDAQ Capital Market under the symbol “SAPX”. Starting in March
of 2008 and continuing until February 12, 2009, our shares have been quoted on
the Over-the-Counter Bulletin Board under the symbol “SAPxf”. Our ordinary
shares traded on the Alternative Investment Market in London, England from
September 2004 until February 2007 under the symbol “SAPP”. Our ordinary shares
were listed on the PLUS Market in London, England starting in April 2007 under
the symbol “SAPP”. We notified our shareholders of our decision to
de-list our ordinary shares on the PLUS Market on February 25, 2009 and this
de-listing was approved by the shareholders at an extraordinary general meeting
on March 16, 2009 and the de-listing was effective on March 24,
2009.
The
following tables set out the high, low and closing sales prices on the AIM, on
the PLUS Market, on the Over-The-Counter Bulletin Board and on the NASDAQ
Capital Market for the periods indicated in those tables.
NASDAQ
Capital Market
Ordinary
Shares Trading Activity
|
Period
|
High
(dollars)
|
Low
(dollars)
|
Price
at
Period
End
(dollars)
|
|
Month
Ended
|
|||
|
March
2009
|
$7.60
|
$5.25
|
$6.90
|
|
February
2009 (1)
|
$6.75
|
$5.05
|
$5.60
|
(1) We
began trading on the Nasdaq Capital Market on February 13, 2009.
Over-the-Counter
Bulletin Board Market
Ordinary
Shares Trading Activity
|
Period
|
High
(dollars)
|
Low
(dollars)
|
Price
at
Period
End
(dollars)
|
|
Month
Ended
|
|||
|
February
2009 (through February 11, 2009) (1)
|
$6.75
|
$5.25
|
$6.25
|
|
January
31, 2009
|
$12.50
|
$4.00
|
$6.50
|
|
December
31, 2008
|
$9.35
|
$7.25
|
$8.00
|
|
November
30, 2008
|
$9.60
|
$5.50
|
$9.60
|
|
October
31, 2008
|
$9.25
|
$5.80
|
$8.98
|
|
September
30, 2008
|
$5.75
|
$2.25
|
$5.75
|
|
August
31, 2008
|
$1.50
|
$0.55
|
$2.50
|
|
Fiscal
Quarter Ended
|
|||
|
December
31, 2008
|
$9.60
|
$5.40
|
$8
|
|
September
30, 2008
|
$5.75
|
$0.55
|
$5.75
|
|
June
30, 2008
|
$2.50
|
$1.80
|
$2.30
|
|
March
31, 2008
|
$2.10
|
$2.00
|
$2.10
|
|
June
30, 2008 (2)
|
$2.50
|
$1.80
|
$2.30
|
(1) We
ceased trading on the Over-the-Counter Bulletin Board on February 11,
2009.
(2) The
information for the 2008 fiscal year only includes data from March 2008 through
June 2008 as our ordinary shares only began trading on the Over-the-Counter
Bulletin Board in March of 2008.
72
The
following represents historic trading on the Alternative Investment Market (AIM)
(through February 2007) and the PLUS Market (through March 2009). We have
de-listed our ordinary shares from both markets and do not believe that historic
trading on these two exchanges are indicative of current or future trading on
NASDAQ Capital Market, our sole current exchange.
PLUS
Market
Ordinary
Shares Trading Activity
|
Period
|
High
(pence)
(1)
|
Low
(pence)
(1)
|
Price
at
Period
End
(pence)
(1)
|
|
Month
Ended
|
|||
|
March
2009 (to March 24, 2009) (2)
|
145
|
95
|
145
|
|
February
28, 2009
|
105
|
105
|
105
|
|
January
31, 2009
|
107.5
|
105
|
105
|
|
December
31, 2008
|
117.5
|
107.5
|
107.5
|
|
November
30, 2008
|
132.5
|
117.5
|
117.5
|
|
October
31, 2008
|
142.5
|
122.5
|
132.5
|
|
September
30, 2008
|
142.5
|
97.5
|
129.3
|
|
August
31, 2008
|
97.5
|
57.5
|
67.25
|
|
Fiscal
Quarter Ended
|
|||
|
December
31, 2008
|
142.5
|
107.5
|
107.5
|
|
September
30, 2008
|
142.5
|
57.5
|
142.5
|
|
Ended
June 30, 2008
|
107.5
|
102.5
|
102.5
|
|
Ended
March 31, 2008
|
97.5
|
92.5
|
92.5
|
|
Ended
December 31, 2007
|
127.5
|
102.5
|
102.5
|
|
Ended
September 30, 2007
|
122.5
|
112.5
|
122.5
|
|
Ended
June 30, 2007
|
127.5
|
147.5
|
147.5
|
|
Fiscal
Period Ended
|
|||
|
June
30, 2008
|
127.5
|
57.5
|
67.25
|
(1) The
approximate UK pound/dollar exchange rate as of December 31, 2008 was
1:1.5.
(2) We
ceased trading on the PLUS Market on March 24, 2009.
Alternative
Investment Market
Ordinary
Shares Trading Activity
|
Period
|
High
(pence)
|
Low
(pence)
|
Price
at
Period
End
(pence)
|
|
Fiscal
Year Ended
|
Fiscal
Year Ended
|
Fiscal
Year Ended
|
Fiscal
Year Ended
|
|
March
31, 2007 (1)
|
247.5
|
50
|
147.5
|
|
March
31, 2006
|
100
|
62.5
|
62.5
|
|
March
31, 2005
|
175
|
95
|
95
|
|
March
31, 2004
|
337.5
|
87.5
|
175
|
(1) The
information for the 2007 fiscal year only includes data from April 1, 2006 to
February 19, 2007 as our ordinary shares ceased trading on the AIM Market on
February 19, 2007.
73
DESCRIPTION
OF SECURITIES
General
Our
authorized share capital consists of 114,636,800 ordinary shares, par value
of £0.25, 3,000,000 £1 convertible preference shares, and 13,184,000
deferred shares, par value of £0.45 each.
As of the
date of this prospectus, 6,870,000 ordinary shares are issued and outstanding,
500,000 preference shares are issued and outstanding and no deferred shares are
issued and outstanding.
Trades
of Ordinary Shares
The
ordinary shares traded on the Alternative Investment Market in London, England
until February 16, 2007 and were listed on the PLUS Market in London, England
until March 24, 2009. The Company's ordinary shares were admitted for
trading on the Over The Counter Bulletin Board market on March 4, 2008 under the
symbol SAPxf; and as of February 12, 2009 are now listed for trading on the
NASDAQ Capital Market under the symbol SAPX.
Redeemable
Debentures
Langley
Park Investment Trust PLC (“Langley”) has converted as of December 31, 2008,
1,250,000 of its convertible redeemable debentures (“Debentures”) into 1,000,000
ordinary shares, which are included in the ordinary shares outstanding as of
December 31, 2008. Langley’s remaining Debentures (approximately
$2,516,000) are convertible into ordinary shares on a 2- to-1 basis (i.e. 0.4
ordinary shares for each £1.00 of Debenture). There is no due date or required
due date on our Debentures. Debentures rank junior to all our indebtedness and
senior only to our ordinary or preference shares
Redeemable
Preference Shares
Our
convertible redeemable preference shares and their terms of issuance are
discussed above in Management’s Discussion and Analysis of Financial Condition
and Results of Operation. All the convertible redeemed preference shares
formerly owned by Armadillo Investment plc, were sold to the Seven Arts Employee
Benefit Trust on October 30, 2008 as indicated in Certain Related Transactions.
On November 20, 2008, EBT converted 2,500,000 of these preference shares into
2,000,000 ordinary shares and 500,000 preference shares remain outstanding,
which will be returned to us for cancellation on consummation of this offering.
These preference shares may be convertible into 200,000 ordinary shares based on
the same formula applicable to the Debentures described above.
74
Description
of Ordinary Shares
The
following is a description of our ordinary shares, including their material
terms and provisions and as such terms and provisions are applied to
our Articles of Association, as amended, and the applicable corporate laws
of the United Kingdom.
All of
our ordinary shares are of the same class and, once issued, rank equally as to
dividends, voting powers, and participation in assets. Holders of ordinary
shares are entitled to one vote for each share held of record on all matters to
be acted upon by the shareholders. Holders of ordinary shares are entitled
to receive such dividends as may be declared from time to time by the Board of
Directors, in its discretion, out of funds legally available
therefore.
Upon our
liquidation, dissolution or winding up, holders of ordinary shares are entitled
to receive pro rata our assets, if any, remaining after payments of all debts
and liabilities and the satisfaction of preferred shareholders, if any. No
shares have been issued subject to call or assessment. There are no
pre-emptive or conversion rights and no provisions for redemption or purchase
for cancellation, surrender, or sinking or purchase funds.
There are
no limitations upon the rights to own securities.
There are
no provisions that would have the effect of delaying, deferring, or preventing a
change in control of our company.
Annual
Meeting
An Annual
General Meeting shall be held once every calendar year at such time (not being
more than 15 months after holding the last preceding Annual Meeting) and place
as may be determined by the Directors. The Directors may, as they see fit,
convene an extraordinary general meeting. An extraordinary general meeting, if
requisitioned in accordance with the Companies Act of 1985 and 2006, shall be
convened by the Directors or, if not convened by the Directors, may be convened
by the requisitionists as provided in the Companies Act of 1985 and
2006.
Transfer
Agent
Capita
Registrars, PO Box 25, Beckenham, Kent BR3 4BR is the registrar and transfer
agent for the ordinary shares.
75
UNDERWRITING AND
PLAN
OF DISTRIBUTION
Subject
to the terms and conditions of an underwriting agreement, dated February__,
2009, we have agreed to sell to each of the underwriters named below, and each
of the underwriters, for which Rodman & Renshaw, LLC is acting as
representative, have severally, and not jointly, agreed to purchase on a firm
commitment basis the number of shares offered in this offering set forth
opposite their respective names below, at the public offering price, less the
underwriting discount set forth on the cover page of this
prospectus.
|
Name
|
Number of Shares
|
|||
|
Rodman
& Renshaw, LLC
|
|
|||
|
|
|
|||
|
Total
|
||||
Nature
of Underwriting Commitment
The
underwriting agreement provides that the underwriters are committed to purchase
on a several but not joint basis all shares offered in this offering, other
than those covered by the over-allotment option described below, if the
underwriters purchase any of these securities. The underwriting agreement
provides that the obligations of the underwriters to purchase the shares offered
hereby are conditional and may be terminated at their discretion based on their
assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other events
specified in the underwriting agreement. Furthermore, pursuant to the
underwriting agreement, the underwriters’ obligations are subject to continued
quotation on the NASDAQ Capital Market and to various other customary
conditions, representations and warranties contained in the underwriting
agreement, such as receipt by the underwriters of officers’ certificates and
legal opinions of our counsel.
Over-Allotment
Option
The
selling shareholder has granted to the underwriters’ representative an option,
exercisable during the 45-day period after the date of this prospectus, to
purchase up to 375,000 additional shares of common stock to cover
over-allotments, if any, at the same price per share as we will receive for the
shares that the underwriters have agreed to purchase. If the underwriters’
representative exercises this option, each of the underwriters will have a firm
commitment, subject to limited conditions, to purchase approximately the same
percentage of these additional shares that the number of shares of common stock
to be purchased by it shown in the above table represents as a percentage of the
total shares offered in this offering. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the shares
offered in this offering are being sold. The selling shareholder will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering.
76
Pricing
of Securities
The
underwriters have advised us that they propose to offer the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers that are members of the Financial Industry
Regulatory Authority (FINRA), at such price less a concession not in excess of
$______ per share. The underwriters may allow, and the selected dealers may
re-allow, a concession not in excess of $______ per share to certain brokers and
dealers. After this offering, the offering price and concessions and discounts
to brokers and dealers and other selling terms may from time to time be changed
by the underwriters. These prices should not be considered an indication of the
actual value of our shares and are subject to change as a result of market
conditions and other factors. No variation in those terms will change the amount
of proceeds to be received by us as set forth on the cover page of this
prospectus.
Our
ordinary shares are quoted on the NASDAQ Capital Market under the symbol “SAPX”.
On April 13, 2009, the last reported sales price of our ordinary shares was
$6.75. The public offering price for the shares was determined by negotiations
between us and the underwriters at a price no greater than the mid-point between
the bid and ask prices of our ordinary shares on the day prior to closing of the
offering based on the function described below in Determination of Offering
Price.
We cannot
be certain that the public offering price will correspond to the price at which
our shares will trade in the public market following this offering or that an
active trading market for our shares will continue after this
offering.
Commissions
and Discounts
The
following table summarizes the compensation to be paid to the underwriters by us
and the proceeds, before expenses, payable to us, assuming a $_______ offering
price. The information assumes either no exercise or full exercise by the
underwriters’ representative of its warrants.
|
|
Total
|
|||||||||
|
|
Per
Share
|
Without
Over-
Allotment
|
With
Full
Over-
Allotment
|
|||||||
|
Public
offering price
|
$
|
|
$
|
|
$
|
|||||
|
Underwriting
discount (1)
|
$
|
|
$
|
$
|
||||||
|
Non-accountable
expense allowance (2)
|
$
|
|
$
|
|
$
|
|||||
|
Proceeds,
before expenses, to us (3)
|
$
|
$
|
|
$
|
||||||
|
(1)
|
Underwriting
discount is 7% or $______ per share.
|
|
(2)
|
The
non-accountable expense allowance of 1% is not payable with respect to the
shares sold upon exercise of the underwriters’ over-allotment
option.
|
|
(3)
|
We
estimate that our total expenses for this offering, excluding the
underwriters’ discount and the non-accountable expense allowance, will be
approximately $______.
|
|
(4)
|
We
estimate that the selling shareholder’s total expenses of this offering,
excluding the underwriters’ discount and the non-accountable expense
allowance, will be approximately $______.
|
77
Over-allotment
Option
Our
affiliate, Seven Arts Employee Benefit Trust has granted the underwriters an
option, exercisable for 45 days after the date of this prospectus, to purchase
up to 375,000 ordinary shares solely to cover over-allotments, if any, at the
same price as the initial shares of shares offered. If the
underwriters fully exercise the over-allotment option, the total public offering
price, underwriting discounts and proceeds (before expenses) to the selling
shareholder will be $______, $______, and $______, respectively.
Underwriter’s
Warrant
We have
agreed to issue to the underwriters’ representative warrants to purchase 125,000
shares at an exercise price of $____ (125% of the offering price of the shares
being sold hereunder). The warrant is exercisable at any time, from time to
time, in whole or in part during the four year period commencing one year from
the consummation of this offering. The warrant and the 125,000 shares underlying
the warrant, are deemed to be compensation by FINRA and are therefore subject to
a 180-day lock-up pursuant to Rue 5110(g)(1) of the FINRA Rules. Additionally,
the warrant may not be sold, transferred, assigned, pledged or hypothecated for
a one-year period (including the foregoing 180-day period) following the date of
this prospectus. However, the warrant may be transferred to any underwriter or
selected dealer participating in the offering and their bona fide officers or
partners. Although the shares underlying the warrants have been registered under
the registration statement of which the prospectus forms a part, the warrant
grants to holders demand and “piggy-back” rights for periods of five and seven
years respectively, from the date of this prospectus with respect to the
registration of the securities under the Securities Act. We will bear all fees
and expenses attendant to registering the securities. The exercise price and
number of shares issuable upon exercise of the warrant may be adjusted in
certain circumstances, including in the event of a stock dividend, or our
recapitalization, reorganization, merger or consolidation. In no event will any
holder of the warrant be entitled to receive a net-cash settlement, securities
or other consideration in lieu of physical settlement in shares. If the
underwriters’ representative fully exercises the warrants, the public offering
price and proceeds (before expenses) to us will increase by $______ and $______,
respectively.
Lock-Up
All of
our officers and directors have agreed that, for a period of six months from the
effective date of the registration statement of which this prospectus forms a
part, they will not sell, contract to sell, grant any option for the sale or
otherwise dispose of any of our equity securities, or any securities convertible
into or exercisable or exchangeable for our equity securities, without the
consent of the representative except for exercise or conversion of currently
outstanding warrants, options and convertible debentures, as applicable, and
exercise of options under an acceptable stock incentive plan. The
underwriter’s representative may consent to an early release from the lock-up
period if, in its opinion, the market for the ordinary shares would not be
adversely impacted by sales and in cases of a financial emergency of an officer,
director or other shareholder. We are unaware of any officer or director who
intends to ask for consent to dispose of any of our equity securities during the
lock-up period.
78
Other Terms
In
connection with this offering, the underwriters or certain of the securities
dealers may distribute prospectuses electronically. No forms of prospectus other
than printed prospectuses, free writing prospectuses, and electronically
distributed prospectuses that are printable in Adobe PDF format will be used in
connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of shares
offered by this prospectus to accounts over which they exercise discretionary
authority without obtaining the specific approval of the account
holder.
We have
granted to the representative of the underwriters, Rodman & Renshaw, for a
period of 12 months from the consummation of this offering, the right of first
refusal to act on our behalf (or on behalf of our successor or subsidiary) as
lead underwriter or minimally as co-manager with at least 50% of the economics;
or, in the case of a three handed deal 33% of the economics, for each and every
future public and private equity and public debt offerings, but excluding any
debt production financing associated with the financing of a particular motion
picture during such 12 month period.
Determination
of Offering Price
Our
ordinary shares are quoted on the NASDAQ Capital Market under the symbol “SAPX”.
On January __, 2009, the last reported sales price of our ordinary shares
was $____. The public offering price for the shares was determined by
negotiation between us and the underwriters at a price no greater than the
mid-point between the bid and ask prices of our ordinary shares on the day prior
to closing of the offering.
The
public offering price for the shares was determined by negotiation between us
and the underwriters. The principal factors considered in determining the
public offering price of the shares included:
•
the information in this prospectus and otherwise available to the
underwriters;
•
the history and the prospects for the industry in which we will
compete;
•
our current financial condition and the prospects for our future cash flows and
earnings;
•
the general condition of the economy and the securities markets at the time of
this offering;
•
the recent market prices of, and the demand for, publicly-traded securities of
generally comparable companies; and
•
the public demand for our securities in this offering.
We cannot
be sure that the public offering price will correspond to the price at which our
shares will trade in the public market following this offering or that an active
trading market for our shares will develop and continue after this
offering.
79
Stabilization
Until the
distribution of the shares offered by this prospectus is completed, rules
of the SEC may limit the ability of the underwriters to bid for and to purchase
our securities. As an exception to these rules, the underwriters may engage in
transactions effected in accordance with Regulation M under the Securities
Exchange Act of 1934 that are intended to stabilize, maintain or otherwise
affect the price of our ordinary shares. The underwriters may engage in
over-allotment sales, syndicate covering transactions, stabilizing transactions
and penalty bids in accordance with Regulation M.
|
·
|
Stabilizing Transactions.
Stabilizing transactions permit bids or purchases for the purpose
of pegging, fixing or maintaining the price of our ordinary shares, so
long as stabilizing bids do not exceed a specified
maximum.
|
|
|
|
·
|
Over-Allotments.
Over-allotment involves sales by the underwriters of shares of
ordinary shares in excess of the number of shares of ordinary shares the
underwriters are obligated to purchase, which creates a short position.
The short position may be either a covered short position or a naked short
position. In a covered short position, the number of shares of ordinary
shares over-allotted by the underwriters is not greater than the number of
ordinary shares that they may purchase in the over-allotment option. In a
naked short position, the number of ordinary shares involved is greater
than the number of shares in the over-allotment option. The underwriters
may close out any covered short position by either exercising their
over-allotment option or purchasing ordinary shares stock in the open
market.
|
|
|
·
|
Syndicate Coverage
Transactions. Covering transactions involve the purchase of
securities in the open market after the distribution has been completed in
order to cover short positions. In determining the source of securities to
close out the short position, the underwriters will consider, among other
things, the price of securities available for purchase in the open market
as compared to the price at which they may purchase securities through the
over-allotment option. If the underwriters sell more ordinary shares than
could be covered by the over-allotment option, creating a naked short
position, the position can only be closed out by buying securities in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there could be downward pressure on the
price of the securities in the open market after pricing that could
adversely affect investors who purchase in this
offering.
|
|
|
·
|
Penalty Bids. Penalty
bids permit the underwriters to reclaim a selling concession from a
selected dealer when the ordinary shares originally sold by the selected
dealer are purchased in a stabilizing or syndicate covering
transaction.
|
These
stabilizing transactions, covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our ordinary shares or
preventing or retarding a decline in the market price of our ordinary shares. As
a result, the price of our ordinary shares may be higher than the price that
might otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of our securities.
These transactions may occur on NASDAQ or on any other trading market. If any of
these transactions are commenced, they may be discontinued without notice at any
time.
80
Foreign
Regulatory Restrictions on Purchase of Ordinary Shares
We have
not taken any action to permit a public offering of the shares outside the
United States or to permit the possession or distribution of this prospectus
outside the United States. Persons outside the United States who come into
possession of this prospectus must inform themselves about and observe any
restrictions relating to this offering of ordinary shares and the distribution
of the prospectus outside the United States. In addition to the public offering
of the shares in the United States, the underwriters may, subject to the
applicable foreign laws, also offer the shares to certain institutions or
accredited persons in the following countries:
Italy. This offering of the
shares has not been cleared by Consob, the Italian Stock Exchange’s regulatory
agency of public companies, pursuant to Italian securities legislation and,
accordingly, no ordinary shares may be offered, sold or delivered, nor may
copies of this prospectus or of any other document relating to the ordinary
shares be distributed in Italy, except (1) to professional investors (operatori qualificati); or
(2) in circumstances which are exempted from the rules on solicitation of
investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob
Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of
the ordinary shares or distribution of copies of this prospectus or any other
document relating to the ordinary shares in Italy under (1) or (2) above must be
(i) made by an investment firm, bank or financial intermediary permitted to
conduct such activities in Italy in accordance with the Decree No. 58 and
Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in
compliance with Article 129 of the Banking Act and the implementing guidelines
of the Bank of Italy, as amended from time to time, pursuant to which the issue
or the offer of securities in Italy may need to be preceded and followed by an
appropriate notice to be filed with the Bank of Italy depending, inter alia, on the aggregate
value of the securities issued or offered in Italy and their characteristics;
and (iii) in compliance with any other applicable laws and
regulations.
Germany. The offering of the
shares is not a public offering in the Federal Republic of Germany. The shares
may only be acquired in accordance with the provisions of the Securities Sales
Prospectus Act (Wertpapier-Verkaudfspropsektgestz), as amended, and any other
applicable German law. No application has been made under German law to publicly
market the shares in or out of the Federal Republic of Germany. The shares are
not registered or authorized for distribution under the Securities Sales
Prospectus Act and accordingly may not be, and are not being, offered or
advertised publicly or by public promotion. Therefore, this prospectus is
strictly for private use and the offering is only being made to recipients to
whom the document is personally addressed and does not constitute an offer or
advertisement to the public. The shares will only be available to persons who,
by profession, trade or business, buy or sell shares for their own or a third
party’s account.
France. The shares offered by
this prospectus may not be offered or sold, directly or indirectly, to the
public in France. This prospectus has not been or will not be submitted to the
clearance procedure of the Autorité des Marchés Financiers, or the AMF, and may
not be released or distributed to the public in France. Investors in France may
only purchase the shares offered by this prospectus for their own account and in
accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Monétaire
et Financier and decree no. 98-880 dated October 1, 1998, provided they are
“qualified investors” within the meaning of said decree. Each French investor
must represent in writing that it is a qualified investor within the meaning of
the aforesaid decree. Any resale, directly or indirectly, to the public of the
shares offered by this prospectus may be effected only in compliance with the
above mentioned regulations.
“Les
actions offertes par ce document d’information ne peuvent pas être, directement
ou indirectement, offertes ou vendues au public en France. Ce document
d’information n’a pas été ou ne sera pas soumis au visa de l’Autorité des
Marchés Financiers et ne peut être diffusé ou distribué au public en France. Les
investisseurs en France ne peuvent acheter les actions offertes par ce document
d’information que pour leur compte propre et conformément aux articles L. 411-1,
L. 441-2 et L. 412-1 du Code Monétaire et Financier et du décret no. 98-880 du 1
octobre 1998, sous réserve qu’ils soient des investisseurs qualifiés au sens du
décret susvisé. Chaque investisseur doit déclarer par écrit qu’il est un
investisseur qualifié au sens du décret susvisé. Toute revente, directe ou
indirecte, des actions offertes par ce document d’information au public ne peut
être effectuée que conformément à la réglementation susmentionnée.”
81
Switzerland. This prospectus may only be used
by those persons to whom it has been directly handed out by the offeror or its
designated distributors in connection with the offer described therein. The
shares are only offered to those persons and/or entities directly solicited by
the offeror or its designated distributors and are not offered to the public in
Switzerland. This prospectus constitutes neither a public offer in Switzerland
nor an issue prospectus in accordance with the respective Swiss legislation, in
particular but not limited to Article 652A Swiss Code Obligations. Accordingly,
this prospectus may not be used in connection with any other offer, whether
private or public and shall in particular not be distributed to the public in
Switzerland.
United Kingdom. In the United
Kingdom, the shares offered by this prospectus are directed to and will only be
available for purchase to a person who is an exempt person as referred to at
paragraph (c) below and who warrants, represents and agrees that: (a) it has not
offered or sold, will not offer or sell, any shares offered by this prospectus
to any person in the United Kingdom except in circumstances which do not
constitute an offer to the public in the United Kingdom for the purposes of the
section 85 of the Financial Services and Markets Act 2000 (as amended) (“FSMA”);
and (b) it has complied and will comply with all applicable provisions of FSMA
and the regulations made thereunder in respect of anything done by it in
relation to the shares offered by this prospectus in, from or otherwise
involving the United Kingdom; and (c) it is a person who falls within the
exemptions to Section 21 of the FSMA as set out in The Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 (“the Order”), being either an
investment professional as described under Article 19 or any body corporate
(which itself has or a group undertaking has a called up share capital or net
assets of not less than £500,000 (if more than 20 members) or otherwise £5
million) or an unincorporated association or partnership (with net assets of not
less than £5 million) or is a trustee of a high value trust or any person acting
in the capacity of director, officer or employee of such entities as defined
under Article 49(2)(a) to (d) of the Order, or a person to whom the invitation
or inducement may otherwise lawfully be communicated or cause to be
communicated. The investment activity to which this document relates will only
be available to and engaged in only with exempt persons referred to above.
Persons who are not investment professionals and do not have professional
experience in matters relating to investments or are not an exempt person as
described above, should not review nor rely or act upon this document and should
return this document immediately. It should be noted that this document is not a
prospectus in the United Kingdom as defined in the Prospectus Regulations 2005
and has not been approved by the Financial Services Authority or any competent
authority in the United Kingdom.
Israel. The shares offered by
this prospectus have not been approved or disapproved by the Israeli Securities
Authority (ISA). The ordinary shares may not be offered or sold, directly or
indirectly, to the public in Israel. The ISA has not issued permits, approvals
or licenses in connection with the offering of the shares or publishing the
prospectus; nor has it authenticated the details included herein, confirmed
their reliability or completeness, or rendered an opinion as to the quality of
the shares being offered. Any resale, directly or indirectly, to the public of
the shares offered by this prospectus is subject to restrictions on
transferability and must be effected only in compliance with the Israeli
securities laws and regulations.
Sweden. Neither this
prospectus nor the shares offered hereunder have been registered with or
approved by the Swedish Financial Supervisory Authority under the Swedish
Financial Instruments Trading Act (1991:980) (as amended), nor will such
registration or approval be sought. Accordingly, this prospectus may not be made
available nor may the shares offered hereunder be marketed or offered for sale
in Sweden other than in circumstances which are deemed not to be an offer to the
public in Sweden under the Financial Instruments Trading Act. This prospectus
may not be distributed to the public in Sweden and a Swedish recipient of the
prospectus may not in any way forward the prospectus to the public in
Sweden.
Norway. This prospectus has
not been produced in accordance with the prospectus requirements laid down in
the Norwegian Securities Trading Act 1997, as amended. This prospectus has not
been approved or disapproved by, or registered with, either the Oslo Stock
Exchange or the Norwegian Registry of Business Enterprises. This prospectus may
not, either directly or indirectly be distributed to Norwegian potential
investors.
Denmark. This prospectus has
not been prepared in the context of a public offering of securities in Denmark
within the meaning of the Danish Securities Trading Act No. 171 of 17 March
2005, as amended from time to time, or any Executive Orders issued on the basis
thereof and has not been and will not be filed with or approved by the Danish
Financial Supervisory Authority or any other public authority in Denmark. The
offering of ordinary shares will only be made to persons pursuant to one or more
of the exemptions set out in Executive Order No. 306 of 28 April 2005 on
Prospectuses for Securities Admitted for Listing or Trade on a Regulated Market
and on the First Public Offer of Securities exceeding EUR 2,500,000 or Executive
Order No. 307 of 28 April 2005 on Prospectuses for the First Public Offer of
Certain Securities between EUR 100,000 and EUR 2,500,000, as
applicable.
The Netherlands. Underwriters
may not offer, distribute, sell, transfer or deliver any of our securities,
directly or indirectly, in The Netherlands, as a part of their initial
distribution or at any time thereafter, to any person other than our employees
or employees of our subsidiaries, individuals who or legal entities which trade
or invest in securities in the conduct of their profession or business within
the meaning of article 2 of the Exemption Regulation issued under the Securities
Transactions Supervision Act 1995 (Vrijstellingsregeling Wet toezich
teffectenverkeer1995), which includes banks, brokers, pension funds,
insurance companies, securities institutions, investment institutions, and other
institutional investors, including, among others, treasuries of large
enterprises who or which regularly trade or invest in securities in a
professional capacity.
82
Indemnification
The
underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the SEC, indemnification for liabilities under
the Securities Act is against public policy as expressed in the Securities Act,
and is therefore, unenforceable.
The
financial statements as of and for the fiscal period ended June 30, 2008
(fifteen months), March 31, 2007, and March 31, 2006 included in this prospectus
have been audited by Mazars LLP, independent certified public accountants, to
the extent and for the periods set forth in their report appearing elsewhere
herein and are included in reliance upon such report given upon the authority of
that firm as experts in auditing and accounting.
The
validity of the shares sold by us under this prospectus will be passed upon for
us by Sprecher Grier Halberstam LLP in London, United Kingdom. Loeb
& Loeb LLP has acted as counsel for the underwriters.
Article
161 of the Company’s Articles of Association provides for the mandatory
indemnification of directors, senior officers, former directors, as well as
their respective heirs and personal or other legal representatives, or any other
person, to the greatest extent permitted by the New Act. The indemnification
includes the mandatory payment of expenses. The directors may cause the Company
to purchase and maintain insurance for the benefit of eligible
parties.
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities
Act.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. No pending material litigation
or proceeding involving our directors, executive officers, employees or other
agents as to which indemnification is being sought exists, and we are not aware
of any pending or threatened material litigation that may result in claims for
indemnification by any of our directors or executive officers.
WHERE YOU CAN FIND
ADDITIONAL INFORMATION
We have
filed a registration statement on Form F-1 to register with the SEC the
sale of our shares. This prospectus is a part of that registration statement and
constitutes a prospectus of Seven Arts. As allowed by SEC rules, this prospectus
does not contain all of the information that you can find in the registration
statement or the exhibits to the registration statement. You should refer to the
registration statement and its exhibits for additional information that is not
contained in this prospectus. We have included additional information on our
company in our Form 20-FR/A fillings currently available at
http://www.sec.gov/edgar.html.
We have
not authorized anyone to provide you with information that differs from that
contained in this prospectus. You should not assume that the information
contained in this prospectus is accurate as on any date other than the date of
the prospectus.
This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any securities, in any jurisdiction to or from any person to whom it is
not lawful to make any such offer or solicitation in such
jurisdiction.
83
INDEX TO FINANCIAL STATEMENTS
|
Index
to the financial information
|
Page
|
|
Report
of the Independent Registered Public Audit Firm
|
F-2
|
|
Consolidated
profit and loss account for the fifteen month period ended 30 June 2008
and each of the three years ended 31March 2007
|
F-4
|
|
Consolidated
statement of total recognized gains and losses for the fifteen month
period ended 30 June 2008 and each of the three years ended 31March
2007
|
F-4
|
|
Consolidated
balance sheets as at 30 June 2008 and 31 March 2007, 2006 and
2005
|
F-6
|
|
Consolidated
cash flow statement for the fifteen month period ended 30 June 2008 and
each of the three years ended 31March 2007
|
F-8
|
|
Notes
to the financial statements
|
F-12
|
|
Appendix
A - Reconciliation to US GAAP
|
F-34
|
|
Unaudited
consolidated profit and loss account for the six month period ended
December 31, 2008 and the six month period ended September 30,
2007
|
F-40
|
|
Unaudited
consolidated statement of total recognised gains and losses for the six
months ended 31 December 2008
|
F-41
|
|
Unaudited
consolidated balance sheets as at December 31, 2008 and September 30,
2007
|
F-42
|
|
Unaudited
consolidated cash flow statement for the six month period ended December
31, 2008 and the six month period ended September 30, 2007
|
F-43
|
|
Unaudited
consolidated statement of changes in equity for the six months ended 31
December 2008
|
F-44
|
|
Notes
to the unaudited consolidated interim financial
information
|
F-45
|
84
Until ,
2009, 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
underwriters and with respect to their unsold allotments or subscriptions. No
dealer, salesperson or any other person is authorized to give any information or
make any representations in connection with this offering other than those
contained in this prospectus and, if given or made, the information or
representations must not be relied upon as having been authorized by us. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this prospectus, or an
offer to sell or a solicitation of an offer to buy any securities by anyone in
any jurisdiction in which the offer or solicitation is not authorized or is
unlawful.
INFORMATION NOT REQUIRED IN
PROSPECTUS
|
Item 6. Indemnification of Directors
and Officers.
Article
161 of the Company’s Articles of Association provides for the mandatory
indemnification of directors, senior officers, former directors, and
alternates, as well as their respective heirs and personal or other legal
representatives, or any other person, to the greatest extent permitted by
the New Act. The indemnification includes the mandatory payment of
expenses. The directors may cause the Company to purchase and maintain
insurance for the benefit of eligible parties.
|
|
|
Item 7.
|
Recent
Sales of Unregistered Securities
|
During
the past three years, we have issued the following securities (including options
to acquire our ordinary shares and debt convertible into our ordinary shares).
No underwriters were involved in these issuances. We believe that each of the
following issuances was exempt from registration under the Securities Act in
reliance on Regulation S under the Securities Act or pursuant to
Section 4(2) of the Securities Act regarding transactions not involving a
public offering.
|
Purchaser
|
Date of Issuance
|
Number of Securities
|
Title of Securities
|
Consideration
|
|
|
Seven
Arts Employee Benefit Trust
|
2-Nov-08
|
2,000,000
|
Ordinary
Shares
|
(1)
|
|
|
Langley
Park Investment Trust PLC
|
15-Mar-07
|
1,000,000
|
Ordinary
Shares
|
(2)
|
|
|
Seven
Arts Pictures Inc.
|
4-Sep-04
|
700,000
|
Ordinary
Shares
|
(3)
|
|
|
Unique
Fidelity Engineering Ltd.
|
June
28 2007
|
34,000
|
Ordinary
Shares
|
$100,000
|
|
|
August
15 2007
|
500,000
|
Ordinary
Shares
|
$287,000
|
||
|
Michael
Garstin
|
1-Jun-08
|
100,000
|
Options
|
(4)
|
|
|
Tony
Hickox
|
3-Jan-07
|
10,000
|
Options
|
(4)
|
|
|
Julia
Verdin
|
3-Jan-07
|
10,000
|
Options
|
(4)
|
|
|
Elaine
New
|
3-Jan-07
|
10,000
|
Options
|
(4)
|
|
|
Chris
Bialek
|
3-Jan-07
|
10,000
|
Options
|
(4)
|
|
|
Philip
Kendall
|
30-Sep-08
|
20,000
|
Options
|
(4)
|
|
|
Michael
Arata
|
1-Jun-08
|
20,000
|
Options
|
(4)
|
|
|
Blue
Rider Finance/Robert Oppenheim
|
22-Jan-08
|
50,000
|
Options
|
(5)
|
|
|
21-Oct-08
|
12,500
|
Ordinary
Shares
|
(7)
|
||
|
Trafalgar
Capital Special Investment Fund
|
15-Oct-08
|
838,574
|
Convertible
Note
|
(6)
|
|
|
31-Jan-08
|
160,000
|
Options
|
(5)
|
||
|
30-Oct-08
|
60,000
|
Options
|
(5)
|
||
86
(1) We
issued 2,000,000 ordinary shares to Seven Arts Employee Benefit Trust upon the
conversion of our 2,500,000 preference shares that they held.
(2) We
issued 1,000,000 shares to Langley Park Investment Trust PLC in exchange for the
conversion of £1,250,000 of a convertible debenture that they
held.
(3) We
issued 700,000 ordinary shares to Seven Arts Pictures Inc. (“SAP”) so that SAP
could pledge those shares to settle an indebtedness that we and SAP had to
ApolloMedia with regard to the motion picture Stander.
(4) We
issued these options to employees and consultants as part of a compensation and
incentive program.
(5) We
issued these options in connection with financing services provided by these
persons.
(6) We
issued a £1,000,000 Note with a one-year term at 9% annual interest convertible
into our ordinary shares at a conversion price of £ 1.19, as adjusted by
any decrease in the exchange rate from the date of issuance by the date of
conversion. Unless we default under the Note, the Note holder may not convert
the Note in any 60 day period into more than 2.99% of our outstanding ordinary
shares.
(7) We
issued 12,500 of our ordinary shares to Robert Oppenhein pursuant to the
exercise of options he had to purchase our ordinary shares for £0.15 per
share.
87
|
Item 8.
|
Exhibits
and Financial Statement Schedules.
|
a. Exhibits
|
3.1
|
Articles
of Association (incorporated by reference to Exhibit 3.1 to Amendment No.
10 to our Registration Statement on Form 20-F filed on May 8,
2008)
|
|
3.2
|
By-Laws
and Board Memorandum of Seven Arts (incorporated by reference to Exhibit 2
to Amendment No. 12 to our Registration Statement on Form 20-F filed on
December 12, 2008)
|
|
4.1
|
Specimen
Ordinary Share Certificate
|
|
5.1
|
Opinion
of Sprecher Grier Halberstam LLP, special UK counsel to the Registrant, as
to the validity of the ordinary
shares*
|
|
10.1
|
Form
of Lock-Up Agreement*
|
|
10.2
|
Form
of Underwriting Agreement*
|
|
10.3
|
Employment
Agreement for Peter Hoffman (incorporated by reference to Exhibit 3 to
Amendment No. 12 to our Registration Statement on Form 20-F filed on
December 12, 2008)
|
|
10.4
|
Employment
Agreement for Michael Garstin (incorporated by reference to Exhibit 17 to
Amendment No. 11 to our Registration Statement on Form 20-F filed on
August 15, 2008)
|
|
10.5
|
Subscription
Agreement, dated 2004, between Seven Arts Pictures plc and Langley Park
Investments plc (incorporated by reference to Exhibit 4 to Amendment No. 2
to our Registration Statement on Form 20-F filed on December 31,
2007)
|
|
10.6
|
Subscription
Agreement, dated August 2004, between Cabouchon plc and Armadillo
Investments plc (incorporated by reference to Exhibit 5 to Amendment No. 2
to our Registration Statement on Form 20-F filed on December 31,
2007)
|
|
10.7
|
Loan
And Security Agreement, dated as of February 15, 2006, among
Arrowhead Target Fund Ltd. Seven Arts Future Flows I, LLC, Seven Arts
Filmed Entertainment Limited, and Seven Arts Pictures Inc. (incorporated
by reference to Exhibit 6 to Amendment No. 2 to our Registration Statement
on Form 20-F filed on December 31,
2007)
|
|
10.8
|
Master
Agreement, dated December 2006, among Cheyne Specialty Finance Fund L.P.
and Arrowhead
Consulting Group LLC and Seven Arts Pictures PLC, Seven Arts Filmed
Entertainment, Ltd., Seven Arts Pictures, Inc., Seven Arts Future
Flows I and affiliates (incorporated by reference to Exhibit 7 to
Amendment No. 2 to our Registration Statement on Form 20-F filed on
December 31, 2007)
|
|
10.9
|
Subscription
Agreement, dated March 6, 2007, between Seven Arts Pictures plc and Unique
Fidelity Engineering Limited (incorporated by reference to Exhibit 11 to
Amendment No. 3 to our Registration Statement on Form 20-F filed on
December 31, 2007)
|
|
10.10
|
Credit
Agreement, dated October 11, 2007, between Seven Arts Louisiana, LLC and
Advantage Capital Community Development Fund, L.L.C. (incorporated by
reference to Exhibit 13 to Amendment No. 7 to our Registration Statement
on Form 20-F filed on January 16,
2008)
|
|
10.13
|
Assignment
Agreement, dated April 22, 2008, among Cheyne Specialty Finance Fund L.P.,
Seven Arts Filmed Entertainment Limited, Peter Hoffman, Seven Arts
Pictures plc, Seven Arts Future Flows I LLCand other parties affiliated
with Seven Arts Pictures plc. (incorporated by reference to Exhibit 16 to
Amendment No. 10 to our Registration Statement on Form 20-F filed on May
8, 2008)
|
|
10.14
|
Stock
Sale Agreement, dated October 2008, between Seven Arts Pictures plc, Smith
& Williamson Trustees (Jersey) Limited and Armadillo Investments Ltd.
(incorporated by reference to Exhibit 18 to Amendment No. 12 to our
Registration Statement on Form 20-F filed on December 12,
2008)
|
|
10.15
|
Convertible
Loan Agreement, dated October 15, 2008, between Seven Arts Pictures plc
and Trafalgar Capital Specialized Investment (incorporated by reference to
Exhibit 19 to Amendment No. 12 to our Registration Statement on Form 20-F
filed on December 12, 2008)
|
|
10.16
|
Bridging
Loan Agreement, dated January 31, 2008, between Seven Arts Pictures plc
and Trafalgar Capital Specialized Investment (incorporated by reference to
Exhibit 15 to Amendment No. 10 to our Registration Statement on Form 20-F
filed on May 8, 2008)
|
|
10.17
|
Guarantee
and Debenture, dated January 31, 2008, from Seven Arts Pictures plc and
Seven Arts Filmed Entertainment Limited to Trafalgar Capital Specialized
Investment (incorporated by reference to Exhibit 15 to Amendment No. 10 to
our Registration Statement on Form 20-F filed on May 8,
2008)
|
|
10.18
|
Intercompany
Agreement, dated November 1, 2004, between Seven Arts Pictures plc and
Seven Arts Pictures, Inc.
|
|
10.19
|
Letter
Agreement, dated September 2, 2004, Regarding the Intercompany Agreement
between Seven Arts Pictures plc and Seven Arts Filmed Entertainment
Limited
|
|
10.20
|
Letter
Agreement, dated September 2, 2004, Regarding the Intercompany Agreement
between Seven Arts Pictures plc, Seven Arts Pictures, Inc. and Seven Arts
Pictures Limited
|
|
10.21
|
Distribution
Agreement, between Seven Arts Filmed Entertainment Limited and Seven Arts
Louisiana LLC
|
|
10.22
|
Trust
Deed, dated October 21, 2008, establishing The Seven Arts Pictures
Employee Benefit Trust between Seven Arts Pictures plc and Smith &
Williamson Trustees (Jersey)
Limited
|
|
10.23
|
Loan
Agreement, dated October 2008, relating to between The Seven Arts Pictures
Employee Benefit Trust between Seven Arts Pictures plc and Smith &
Williamson Trustees (Jersey)
Limited
|
|
10.24
|
Operating
Agreement, dated November 21, 2008, relating to The Seven Arts Pictures
Employee Benefit Trust between Seven Arts Pictures plc and Smith &
Williamson Trustees (Jersey)
Limited
|
|
10.25
|
Loan
Agreement, dated December 17, 2007, between Palm Finance Corporation and
Gone to Hell Limited
|
|
10.26
|
Loan
Agreement, dated May 7, 2007 among Palm Finance Corporation and affiliates
of Seven Arts Pictures plc
|
|
21.1
|
List
of Subsidiaries (incorporated by reference to the organizational chart of
Seven Arts Pictures plc included in this registration statement on page
8
|
|
23.1
|
Consent
of Mazars LLP
|
|
23.2
|
Consent
of Sprecher Grier Halberstam LLP (included in exhibit
5.1)*
|
|
24.1
|
Powers
of Attorney (included on the signature page to this Registration
Statement)
|
|
*
|
To
be filed at a future date.
|
b. Financial Statement
Schedules
None.
88
|
Item 9.
|
Undertakings.
|
The undersigned Registrant hereby undertakes:
|
(1)
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
|
|
(a)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended;
|
|
|
(b)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; and
|
|
|
(c)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment 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.
|
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
|
|
|
(4)
|
To
file a post-effective amendment to the registration statement to include
any financial statements required by §210.3-19 of Regulation S-X at
the start of any delayed offering or throughout a continuous
offering.
|
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 SEC 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.
The
undersigned registrant hereby undertakes:
|
i.
|
to
respond to requests for information that is incorporated by reference into
the prospectus, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally
prompt means; and
|
|
|
ii.
|
to
arrange or provide for a facility in the United States for the purpose of
responding to such requests. The undertaking in subparagraph (i)
above includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
|
The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
89
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 F-1 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles, State of California, United States of America on April __,
2009.
|
SEVEN
ARTS PICTURES PLC
|
|
By:
|
/s/
Peter Hoffman
|
|
Name: Peter
Hoffman
|
|
Title:
|
Chief
Executive Officer
|
90
POWER
OF ATTORNEY
Each
person whose signature appears below constitutes and appoints Peter Hoffman,
Michael Garstin, or any one of them, as his or her true and lawful
attorneys-in-fact and agents with full power of substitution and re-substitution
for him or her and in his or her name, place and stead in any and all capacities
to execute in the name of each such person who is then an officer or director of
the Registrant any and all amendments (including post-effective amendments) to
this Registration Statement, and any registration statement relating to the
offering hereunder pursuant to Rule 462 under the Securities Act of 1933
and to file the same with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them full power and authority to do and
perform each and every act and thing required or necessary to be done in and
about the premises as fully as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the date
indicated.
|
Name
|
Title
|
Date
|
||
|
/s/Peter Hoffman
Peter Hoffman
|
Chief
Executive Officer, Director and
Authorized
Representative in the United States
|
April
09, 2009
|
||
|
(Principal
Executive Officer)
|
||||
|
/s/Elaine
New
Elaine
New
|
Chief
Financial Officer and Director
|
April
13, 2009
|
||
|
(Principal Financial and Accounting Officer)
|
||||
|
/s/
Michael Garstin
Michael Garstin
|
President
and Director
|
April
13, 2009
|
||
|
/s/
Kate Hoffman
Kate Hoffman
|
Chief
Operating Officer and Director
|
April
13, 2009
|
||
|
/s/ Philip Kendall
Philip Kendall
|
Director
|
April
13, 2009
|
||
|
/s/
Julia
Verdin
Julia Verdin
|
Director
|
April
13, 2009
|
||
|
/s/
Anthony Hickox
Anthony Hickox
|
Director
|
April
13, 2009
|
||
91