Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
2/20/09
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Phone:(310) 317-9176 MARKET DATA
EFGU OTC PK $0.18 $0.48 Speculative Buy Outstanding fully diluted shares 102.6 Million Market Cap. $18.5 Million Average 3-m Volume N/A Symbol Exchanges Current Price Price Target Rating
Source: Pink Sheets and Analyst estimate
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Empire Film Group Inc. 24568 Piuma Road Malibu, CA 90265
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Dec
09
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Company Introduction Empire Film Group Inc. (EFGU), an independent, integrated film production company that acquires, finances, produces, and distributes feature films and television programming. The Company has identified a lucrative theatre market niche largely ignored by the major film studios: modestly budgeted, theatrical-quality films, which can be distributed in theatres, video and television quickly and efficiently. The number of independent films released each year is growing; independent studios have produced some of the most successful, critically acclaimed independent films in recent years, including “The Wrestler,” “Juno,” “My Big Fat Greek Wedding,” and “Slumdog Millionaire.” Initially, Empire plans to go to market with film titles it has licensed or acquired from third parties. This strategy provides the Company with a source of near-term revenues. Over the longer term, Empire plans to produce its own independent films. This will enable the Company to retain a greater percentage of film profits. Empire Film Group is led by entertainment industry veterans with more than 25 years experience in developing, producing, distributing, financing and marketing feature films, as well as television programming. Chairman and co-CEO Dean Hamilton-Bornstein has 20 years of industry experience, and has been an actor, writer, director and producer on numerous feature films, television programs, live concert events, documentaries, music videos and commercials. Mr. Hamilton has directed some of the industry’s top stars, including Martin Sheen, Roger Moore, Kris Kristofferson, Graham Greene, Danny Aiello, Pamela Anderson, Denise Richards, Ian McShane, Tyra Banks, Rebecca Romijn-Stamos, Corbin Bernsen and Mickey Rooney. Mr. Hamilton is currently producing several feature film and television projects around the world, and recently completed
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
the feature film “Blonde and Blonder,” starring Pamela Anderson, Denise Richards and the Farley Brothers. Co-CEO Eric Parkinson formerly served as president and CEO of Hemdale Communications, Inc., a NASDAQ listed independent film studio that handled many major films including “Terminator,” “Platoon,” “The Last Emperor,” and “Hoosiers.” From January 2002 until January 2008, Parkinson served as president and CEO of Hannover House, a prominent distributor of books and DVDs. In 2007, Empire acquired a majority stake in Truman Press, the parent company of film distributor/book publisher Hannover House. As a result of this acquisition, the Company is positioned as one of the independent film industry’s few vertically integrated production and distribution companies. In addition, the Company’s Canadian operations enable Empire to produce Canadian film and television content, and thus capitalize on government subsidies, tax incentives, rebates and financing that encourage Canadian film production. At present, Empire owns and/or controls more than 170 titles in its film library. This film library is a valuable asset that generates cash flow without requiring significant associated expense or capital expenditures for releasing or repackaging library films. The Company has about 40 new titles scheduled for 2009 release, the highestprofile of which is “The Imaginarium of Doctor Parnassus,” which stars Johnny Depp, Colin Farrell, Jude Law and the late Heath Ledger. The acquisition of this film is pending. Another major Empire film property, “Hounddog,” was released to theaters last September and played for 13 weeks across the United States in key cities such as New York, Los Angeles, Chicago, Philadelphia, San Francisco and San Diego. The film received strong support from major critics, including National Public Radio, New York Magazine and the Hollywood Reporter. Dakota Fanning received exceptional praise for her performance from the New York Times, Los Angeles Times and the Chicago Tribune. Empire’s first original productions should be ready for distribution in early 2009. Original productions are key to the Company’s long-term growth, since these allow Empire to retain a greater share of film profits (tied to ticket sales) as opposed to fixed distribution fees. An agreement with Gravitas Ventures to distribute Empire film titles via video-on-demand channels, and a strategic alliance with the My Family TV Network to supply 10 hours of weekly programming, extend the Company’s capabilities and add to the growing revenue stream.
Investment Highlights Company addresses a $ 136 billion U.S. entertainment market The U.S. market for film entertainment and TV distribution is estimated to exceed $136 billion. Demand for film entertainment is forecast to grow 4.6% annually through 2011, while the TV distribution market is projected to grow 5.9% annually over the same period. Domestic box office for films held steady at $9.63 billion in 2008, despite recession fears; box office for independent films improved 19% to $438.2 million. Consumer spending on DVDs has risen to $16 billion from $1.6 billion in 2003.
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Competitive advantage associated with vertically integrated operations Through its acquisition of Truman Press, Empire owns and operates a free-standing distribution division for books, DVDs, Blu-Ray HD videos, CDs and television titles. As a result, the Company has a fully integrated, selfcontained vehicle for producing and distributing its films and other entertainment properties. Empire has identified a lucrative niche for modestly budgeted films of theatre quality for release in a limited number of key markets. Because fewer prints are required (i.e. 1,000 prints versus 2,500 prints for a major studio release), Empire can reach every key U.S. market at about one-third of the cost of a major studio release. Film acquisitions will focus on specific genres such as dramas, comedies and thrillers that have historically provided above average returns. By mid-2009, the Company expects to have one or two of its own originally produced films ready for distribution. Strategic agreements boost distribution The Company plans to grow organically and through acquisitions. In late 2007, Empire acquired Hannover House, a distributor of books, DVDs, Blu-Ray HD videos, CDs and television titles, thereby enhancing Company-owned distribution channels. Key retailers carrying Empire DVD, Blu-Ray, books or audio products include Amazon. com, Best Buy, Blockbuster, Borders Group, Hastings, Hollywood Video, Movie Gallery, Netflix, SAMS Clubs and the Company’s primary account, Wal-Mart Stores, Inc. Empire has also signed an agreement with My Family TV Network to supply 10 hours of weekly programming beginning in the third quarter of 2009. In addition, the Company has a video-on-demand agreement with Gravitas Ventures LLC for the digital streaming of EFGU film titles via major cable and satellite outlets, including Time-Warner Cable, Comcast, Direct TV and Cox Communications. The Company plans to expand its production and distribution capabilities by acquiring production operations and production and post-production facilities in the United States and Canada. Empire Film Group was profitable last year According to management, the Company generated revenues of $3.3 million and operating profits of nearly $1.5 million in 2008. We anticipate significant 2009 revenue gains will result from the release of 40 new titles this year. Empire targets exponential revenue growth over the next five years. In addition, the Company’s operating margins on its theatrical film production and distribution business should improve as the revenue mix shifts in favor of an increased percentage of films produced in-house. Experienced management team Empire’s senior executives have more than 25 years experience in the entertainment industry. Chairman and co-CEO Dean Hamilton-Bornstein has 20 years experience as an actor, director, writer and producer for feature films and television. Co-CEO Eric Parkinson helped build Hannover House’s film and DVD catalog to more than 170 titles in five years.
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Entertainment Industry Outlook The U.S. entertainment and media industry is valued at $136 billion. Industry analysts project 4.6% annual growth for the film entertainment segment, and 5.9% annual growth for the TV distribution segment through 2011. The average American consistently spends around $800 per year on entertainment, which includes theatre tickets, video rentals, television and other forms of entertainment.
Exhibit 1 U.S. Entertainment and Media Market
Source: Global Entertainment and Media Outlook: 2007-11, PWC Report
Exhibit 2: Consumer Spending per Person per Year on Entertainment
Source: Entertainment Industry Market Statistics, MPAA Report 2007
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Box office collections up 5.4% in 2007 U.S. box office collections for movie tickets increased 5.4% in 2007 to $9.6 billion. According to the Motion Picture Association of America (MPAA), the number of moviegoers (about 1.4 billion) continues to far exceed the number of people who visit theme parks (341 million) or attend major sports events (186 million). A reason for this may be the cost factor. The average admission price for a theater ticket at around $7 is much more affordable than tickets for a sporting event (typically $24 to $65) or theme parks tickets ($35 or higher). Exhibit 3 : U.S. Box Office
Exhibit 4 : Feature Films Released in the U.S.
Source: Entertainment Industry Market Statistics, MPAA Report 2007
The total number of feature films released in the United States increased 6.5% annually between 2003 and 2007 and totaled 590 films in 2007. Independent films represent a small but growing number of theatrical releases. Box office receipts for independent films rose 19% from $368.1 million in 2006 to $438.2 million in 2007. Exhibit 5 : Average ticket price in the U.S.
Exhibit 6 : Average price per DVD title
Source: Entertainment Industry Market Statistics, MPAA Report 2007
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Home video market on the rise The home entertainment market, which includes VHS/UMD, DVD, and Blu-Ray Disc rentals and sales, has shown steady growth in recent years, though the slowdown in the U.S. economy caused a marginal drop in revenues to $22.4 billion in 2008 from $23.3 billion in 2007. According to Digital Entertainment Group (DEG), consumer spending on home entertainment media has surpassed spending on music, video games and box office returns in the last few years. Within the home video segment, total spending on VHS/UMD has declined steadily due to growth in the DVD format. Although buying a DVD is costlier than going to a movie theatre, renting DVDs is a more affordable option. Also, while ticket prices for movie theatres have increased, DVD rental costs have gone down. Exhibit 7 : DVD sell-through consumer spending in the U.S.
Exhibit 8 : DVD rental consumer spending in the U.S.
Source: Entertainment Industry Market Statistics, MPAA Report 2007; Digital Entertainment
A new bright spot in the home entertainment category is the Blu-Ray Disc format, which was launched in late 2006. The number of shipped Blu-Ray Discs rose 250% in 2008. Also, consumer spending on Blu-Ray Discs tripled from $270 million in 2007 to $750 million in 2008. U.S. DVD household penetration doubles in five years Exhibit 9 : DVD penetration in the U.S.
Exhibit 10 : Average DVD player price in the U.S.
Source: Entertainment Industry Market Statistics, MPAA Report 2007
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
The number of television households owning a DVD player doubled between 2003 and 2007, from 43.1% to 86.9%. According to DEG, an estimated 25 million DVD players were sold in 2008, bringing the total number of DVD households to approximately 92 million (adjusting for households with more than one player). About 63.5% of DVD owners have more than one player. The declining price of DVD players has acted as a catalyst for sales growth, with the average price declining from $123 in 2003 to $72 in 2007.
Business Strategy Empire Film Group has identified a promising market niche that has not been pursued by the major film studios. The Company believes there exists a largely unaddressed market opportunity for independent companies such as itself to produce and/or acquire modestly budgeted, theatrical-quality films, and distribute these to theatres, video and television in the U.S. market at a level of release that ensures predictable results and maximum ROI (return on investment). The Company focuses on films released with less than 1,000 prints per film. This is far fewer than major studios, which typically release 2,500 or more prints per film. Because fewer prints are required, Empire will be able to reach all of the key U.S. markets at a cost of about one-third the expenditures of a major studio release. While the reduced breadth of release limits total upside box office potential, Empire’s model generates a stronger bottom-line profit and higher ROI. In the first half of 2009, most of the films released by Empire will be films it licensed or acquired (completed or nearly completed) from third-party production companies. This strategy enables the Company to immediately commence distribution operations and generate revenues without waiting the 12 to 14 months typically required to produce an independent film. By the second half of 2009, the Company expects to be releasing films it produced in-house and funded by off-balance sheet arrangements. These films will generate net revenues from equity participation, as well as distribution fees. Through its Canadian operations, Empire will take advantage of subsidies, tax rebates, financing and other incentives offered by the Canadian government to encourage Canadian film and television projects. Exhibit 11: Business strategy components Production • An integrated film production, distribution and finance company • Focus on unaddressed mid level projects • Distribution of licensed or acquired productions currently with own productions to make foray from mid- 2009 onward
Distribution • Acquisition of Truman Press Inc., resulting in a distribution division for books, DVDs, Blu-Ray HD videos, CDs and television titles • Media agreement with Gravitas Ventures LLC will allow the digital streaming of Empire titles through a number of major cable and satellite outlets including Time-Warner Cable, Comcast, Direct TV and Cox Communications.
Marketing • Carlyle Media to serve as the advertising agency for all of Empire’s television, billboard, magazine and radio advertising • Strategic alliance with My Family TV Network, for supply of 10 hours of programming per week from the third quarter of 2009 till 2010
Funding strategy • Original productions are financed with off-balance sheet sources, reducing risks and improving returns • Canadian subsidies, tax incentives, rebates and financing • Plans to shift to a bigger exchange to further aid fund raising
• Concentration on specific high profit genres such as dramas, comedies and thrillers
Source: Company Reports
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
New productions and acquisitions drive 2009 release slate With a combined slate of more than 40 new releases, Empire anticipates joining the ranks of top-tier independent studios in 2009. The Company’s new releases will include eight theatrical films, 30 direct-to-video titles, and six new-release books from the Company’s Hannover House publishing division. Empire anticipates 2009 revenues that will rank the Company third among domestic independent distributors, behind Lionsgate and Summit Releasing for total market share. Following the completion of the 2008 year-end audit, Empire plans to become a fully reporting company. The Company plans to move off the Pink Sheets in 2009 to Bulletin-Board status, and possibly move to a NASDAQ or AMEX listing. Specific titles in Empire’s release slate will be announced over a 90-day timeframe, commencing January 26 at the NATPE Conference in Las Vegas. In addition to the 40 new titles for 2009, the Company owns or controls a library of more than 170 titles, more than half of which are currently in release. Its top-selling current DVD titles include ``Hounddog,’’ starring Dakota Fanning, ``The Last Brickmaker in America,’’ starring Sidney Poitier, “Grand Champion,’’ starring Bruce Willis and Emma Roberts, and ``Teen Yoga,’’ starring Miss Teen USA (2005) Allie LaForce. In April, 2009, Empire will release the critically praised drama “Local Color,” starring Armin Mueller-Stahl, Ray Liotta, Ron Perlman and Trevor Morgan. Current DVD releases for EFGU include the Sidney Poitier family feature, “The Last Brickmaker in America” and “The Superstars of Country Comedy,” starring Bill Engvall, Jeff Foxworthy and Larry the Cable Guy. In 2009, Hannover Books will be releasing “Made in the USA,” the highly anticipated book on economic analysis from best-selling author Barr McClellan. Advantages of vertical integration Through its acquisition of Truman Press, Empire acquired Hannover House, a distributor of books, DVDs, BluRay HD videos, CDs and television titles. Hannover House provides an integrated and self-contained vehicle for the production and distribution of films and other entertainment properties. The Company’s growing film library should help generate significant additional video sales for Hannover House in 2009. In addition to video distribution through Hannover House, the Company has secured a video-on-demand media arrangement with Gravitas Ventures, and an agreement to supply 10 hours of weekly viewing content for My Family TV Network. Exhibit 12: Company products & services Company offerings Theatrical Market • Box Office Collection
Home Entertainment • DVD/VHS Sales • Renting DVD • Online Film Subscription • Television Programming • Book retail
Financing • Film Financing
source: Company Reports
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Concentration on specific genres Empire plans to focus on specific genres such as dramas, comedies and thrillers that have historically provided above average returns. Agreement with Carlyle Media The Company has hired Carlyle Media to serve as its advertising agency. Tradewell Media is responsible for all of Empire’s television, billboard, magazine and radio advertising. Risk diversification The Company plans to minimize the risk associated with any specific film property by diversifying its project portfolio and allocating production funding across a range of films. Empire also understands the risks and benefits associated with filming in different geographic markets. The Company has filmed in the U.S., Canada, France, Spain, Romania, the Czech Republic, Austria, Israel, Central America, South America, Australia and other locations.
Competitive Analysis The Company expects to emerge in 2009 as a leading independent film producer and distributor. Empire competes with major studios, so-called mini-majors, which are often partially or wholly owned by a major, as well as with other independent distributors and producers. These companies must also compete for consumer entertainment dollars with other forms of leisure entertainment such as video games, concerts and sporting events. A few of the Company’s competitors are profiled below: Lions Gate Entertainment Corp. (NYSE:LGF) Lions Gate Entertainment Corp. is an independent filmed entertainment studio with operations in film, television programming, home entertainment, family entertainment, video-on-demand and digital distribution of content. It releases approximately 18 to 20 films theatrically each year, which include films it develops and produces inhouse, as well as films acquired from third parties. The company has a library of approximately 8,000 movie titles and 4,000 television episodes and programs, which it distributes directly to retailers, video rental stores, and television channels in the United States, Canada, the United Kingdom and Ireland. Peace Arch Entertainment Group Inc. (AMEX:PAE) Peace Arch Entertainment Group Inc. is an integrated media company operating in six locations (two in Toronto, one in Vancouver, two in Los Angeles and one in New York). It finances, produces, acquires, and distributes film and television programming for global markets. The company operates through three business segments: Television (focuses its activities on the acquisition, production and worldwide exploitation of television content); Home Entertainment (markets and licenses videos, digital versatile disc and ancillary merchandise to retail outlets in Canada and the United States); and Motion Picture (acquires and distributes films worldwide). In 2007, the company acquired Castle Hill Productions, Dream LLC, Trinity Home Entertainment LLC and Dufferin Gate Holdings Inc. Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
RHI Entertainment Inc. (NASDAQ:RHIE) RHI Entertainment develops, produces and distributes made-for-television movies, mini-series and other television programming worldwide. The Company has offices in New York, Los Angeles, London and Sydney. RHI provides long-form television content in the United States, and owns the rights to approximately 1,000 titles representing more than 3,500 broadcast hours of long-form television programming, the majority of which have been developed and produced in-house. It licenses its content to broadcast and cable networks such as ABC, CBS, the Hallmark Channel, Lifetime, Antena-3, M6, PROSIEBEN-SAT1, TF1, Seven Network and Sky. Image Entertainment Inc. (NASDAQ:DISK) Image Entertainment Inc., founded in 1981, is an independent home entertainment company that acquires, licenses, finances and produces exclusive content for worldwide video distribution through its direct relationships with major North American retailers and foreign sub-licensees such as Sony/BMG and Warner Music. The company has more than 2,500 exclusive DVD titles and approximately 200 exclusive audio titles in release. Image Entertainment releases, on average, 30 new exclusive DVDs and four new exclusive audio titles each month across a wide range of programming with more than 90% of the company’s production done in-house. In addition to its core business of domestic DVD distribution, the company acquires exclusive audio rights and broadcast rights including video-on-demand, broadband streaming and digital download, pay-per-view, in-flight, radio, satellite, cable and broadcast television. The Company’s Egami Media subsidiary focuses on the aggregation and wholesale exploitation of digital rights to a wide array of video content while Image Entertainment U.K. acts as an acquisition agent for Image in Europe. Genius Products Inc. (OTC: GNPI) Genius Products acquires, produces and licenses a library of motion pictures, television programming, and other entertainment sold on DVD and digital downloads across the United States. The company operates through a 30% owned subsidiary, Genius Products LLC, which works with major retailers to distribute widely recognized home entertainment brands to a diversified customer base. The remaining 70% of the business is owned by The Weinstein Company LLC. Genius Products provides distribution, marketing and sales support to a number of companies, which include Asia Extreme™, Baby Genius®, Dragon Dynasty™, ESPN, NBC News, Sundance Channel Home Entertainment, Wellspring™ and The Weinstein Company. Empire Co-CEO Eric Parkinson watches as the press flocks to stars Dakota Fanning and Robin Wright-Penn at the theatrical premiere of “Hounddog
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Financial Analysis Financial Record Management indicates that Empire Film Group generated revenues of $3.3 million in 2008 primarily from the sale of DVDs to Wal-Mart, a major customer. Going forward, the Company expects to diversify its revenue stream by expanding its film library and producing its own original content. Although the Company has not filed audited full-year 2008 financial statements, Empire officers said the Company generated 2008 gross profits of $2.3 million, 2008 operating profits of nearly $1.5 million, and 2008 net income of $690,500 on sales of $3.3 million. Gross profits of 69.6% last year reflect strong cash flows generated from the film library with only modest related expenditures. Going forward, the Company anticipates 2009 gross margins will decline to a 20% range as theatrical revenues increase and the revenue mix shifts to increased theatrical revenues as opposed to mainly book and DVD sales last year. Operating margins were high at 44.9% in 2008. In 2009, the Company plans to significantly ramp up its sales and marketing expense in support of new releases. Empire has budgeted 2009 general and administrative expense in a $1.5 million range, and indicates it could spend as much as $30 million on sales and marketing activities this year. Exhibit 13: Selected income statement data Year ended December 31, 2008 $3,315,000 $2,333,000 $1,488,000 $690,500
Revenue Gross Profit (Loss) Operating Income (Loss) Net Income (Loss) Source: Company Data, Pink Sheets
Liquidity and capital requirements At December 31, 2008, the Company had cash of $50,000 and long-term liabilities of $1.7 million. Empire has raised $3.5 million since its inception. The Company will need to raise additional funding to implement its 2009 business plan, and targets raising at least $10 million in debt financing and $10 million through equity sales in 2009. There is no guarantee that the Company will be able to raise the desired financing on favorable terms, if at all. Exhibit 14: Selected balance sheet data December 31, 2008 Cash Working Capital Long Term Liabilities Stock holders’ Equity
$50,000 $200,000 $1,700,000 $9,377,141 Source: Company Data
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Financial outlook Empire currently has 12 films slated for theatrical release in 2009, including “The Imaginarium of Doctor Parnassus,” starring Johnny Depp, Colin Farrell, Jude Law and the late Heath Ledger. The acquisition of this film is pending. Management estimates box office receipts from this one film alone could approach $25 million. The Company also expects exponential growth in revenues from its Hannover House book and DVD distribution division resulting from more offerings its in book and film title catalog. The Company must raise additional capital to secure the rights to all of the films it has slated for 2009 release. Management estimates new funding of at least $10 million will be required, including $5 million for film title acquisitions and $5 million for prints and advertising. Assuming this financing is obtained, Empire believes it could generate as much as $46 million in theatrical revenues, $56 million from book and DVD sales this year, and record pre-tax profits in a $24 million range. If financing is not obtained, Empire will not be able to release all of the films in its 2009 schedule. In that scenario, management believes the Company may still be able to generate 2009 revenues in a $20 million range, and pre-tax profits ranging around $4.0 million. In either scenario, the Company anticipates a revenue contribution of 56% from DVD and book sales and 46% from theatrical revenues. Exhibit 15: Peer group valuation Company Name Lions Gate Entertainment Corp. Peace Arch Entertainment Group Inc. RHI Entertainment Inc. Genius Products Inc. Image Entertainment Inc. Peer Avg Empire Film Group Inc.
Ticker Symbol
Share Market Cap. Price $ million
LGF PAE RHIE GNPI DISK
$4.31 $0.06 $3.94 $0.03 $2.15
$499.2 $2.9 $53.2 $2.0 $47.0
EFGU
$0.26
$22.0
2007
PE 2008E
NM 2.3 NA 0.4 NA 1.4
NM NA NM NA NA NA
2009E 2007 22 NA 4 NA NA 12
0.4 0.1 NA NA NA 0.2
P/S 2008E 0.3 NA 0.2 NA NA 0.3
2009E 0.3 NA 0.2 NA NA 0.3
Source: Reuter, Feb 16, 2009 share prices
Valuation Forward Price/Earnings multiples for the movie industry peer group ranged from 22 times earnings for Lions Gate Entertainment to 4.0 times earnings for RHI Entertainment. We value Empire Film Group in the middle of the range, or at a 12 times forward Price/Earnings multiple. To obtain a price target for the Company’s shares, we multiplied a 12 times forward Price/Earnings multiple by estimated 2009 EPS of $0.04. We derived the EPS estimate by taking a weighted average of management’s high and low operating profit forecasts, applying a 25% effective tax rate, and dividing the resulting amount by 118 million shares outstanding. We expect the share count to increase in 2009 as a result of equity sales to raise capital. We are initiating coverage of Empire Film Group with a Speculative Buy rating and a $0.48 price target. While we think the Company’s experienced management team as put together a sound business plan, we advise prospective investors to consider the risk factors discussed below before purchasing these shares. Empire Film Group faces many challenges in implementing its 2009 business plan. The Company must obtain additional financing and secure the rights to additional films from third parties to achieve its revenue and profit targets. Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Risk Factors Uncertainly of sales estimates The Company’s revenues are determined by the success of the films and television programming it acquires and/ or produces and distributes. Film box office receipts are extremely difficult to forecast, and many films fail to make a profit in theatrical release and/or video release. There is no guarantee that the Company’s estimates of future box office receipts and/or DVD sales are accurate. Financing requirements The Company will need to raise significant additional capital to fund its 2009 business plan. Management hopes to raise at least $20 million through a combination of debt and equity financing. However, there is no guarantee the Company will be able to raise the needed capital. Off-balance sheet financing Empire Film Group utilizes a number of off-balance sheet financing options for its film, television and DVD productions. As a result, financial risk may be understated on the Company’s balance sheet. Lack of audited financial statements The Company has not filed 10-Qs for the June or September quarter, or a 10-K outlining its full-year 2008 results. In addition, its 2008 financial statements have not been audited. Intense competition Film and television production and distribution is a highly competitive business. Empire must compete with major film studios and large independents for consumer entertainment dollars, as well as providers of alternative forms of entertainment such as video game marketer, amusement park operators and others. Video piracy threat Piracy is the bane of the motion picture industry, eroding a major chunk of film revenues and profits. Aided by technology advances, piracy has reached unprecedented levels. Films are easily converted to digital downloads, and large number of bootleg copies can be created at virtually no cost. The Company and others in its industry must invest heavily in anti-piracy measures that increase their business costs.
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Management Dean Hamilton-Bornstein Chairman and Co-CEO
Dean Hamilton- Bornstein, Empire Film Group’s founder, has more than 20 years experience creating, financing, marketing, producing, directing and performing in feature films, television specials and documentaries. He is currently involved in the production of several feature films and television projects worldwide, and has directed some of the industry’s top stars, including Martin Sheen, Roger Moore, Kris Kristofferson, Graham Greene, Danny Aiello, Pamela Anderson, Denise Richards, Ian McShane, Tyra Banks, Rebecca Romijn-Stamos, Corbin Bernsen and Mickey Rooney. He recently completed the feature film “Blonde and Blonder” starring Pamela Anderson, Denise Richards and the Farley Brothers. “Blonde & Blonder” premiered at the 2007 Cannes Film Festival and was released in early 2008. “Blonde & Blonder II” is presently in pre-production. Also in 2008, he produced and directed “Havana Heat,” an action adventure thriller filmed in Colombia. Mr. Hamilton created and was the executive producer of “THE D.R.E.A.M. TEAM” television series. He directed the pilot starring Martin Sheen prior to the broadcast of the television series. “THE D.R.E.A.M. TEAM” starred Roger Moore, Angie Everhart, Traci Bingham and Jeff Kaake, and was filmed in Puerto Rico. Mr. Hamilton created, executive produced and directed the “Supermodels in the Rainforest” series filmed in Costa Rica and The Amazon, as well as several locations in Venezuela. “Supermodels in the Rainforest” won “Best Documentary” in the Film and Video Division at the prestigious 1994 WorldFest-Houston International Film Festival, and won “Best Independent Video” at the Charleston Film Festival. Mr. Hamilton also produced and directed the feature film entitled “The Road Home,” released in May 1996. The film screened at the Chicago International Children’s Film Festival (winner of “Most Popular Film”), the Santa Clarita Valley International Film Festival (winner of Directors “Gold Medal Award” for excellence), the Atlantic International Film Festival (Gala Screening), and the Cinemagic ‘95 which is part of the prestigious Northern Ireland Film Festival. The film was presented at The Palm Springs International Film Festival in January 1996, with a special tribute paid to Mickey Rooney. The cast included Danny Aiello, Kris Kristofferson, Robert Prosky, Charles Martin Smith and Mickey Rooney. Mr. Hamilton’s first feature film, “Savage Land,” was nominated for “Best Song” at the “15TH Annual 1994 Genie Awards,” which recognizes outstanding achievement in Canadian films, and also received “The Dove Foundation Family Seal of Approval Award.” More than 1 million video units of the film were shipped, making it one of the best selling independent titles in 1994.
Eric Parkinson co-Chief Executive Officer
Eric Parkinson currently serves as co-CEO of Empire Home Entertainment /Hannover House. Prior to joining the Company, he served as president and CEO of Truman Press Inc., extending that company’s product scope from book publishing to DVD production and distribution. He built Hannover House’s film and DVD catalog to 170 titles over a five-year period. Parkinson majored in radio, television-film at Wichita State University and University of Kansas. Prior to Empire/Hannover, he founded and managed Hemdale Communications Inc. and Hemdale Home Video Inc., a NASDAQ-traded, independent video and film distribution studio. He grew this business to more than $150-million in revenues through the release of 90 feature films. Mr. Parkinson has more than 24 years experience as a president or CEO of film distribution companies, handling all aspects of acquisition, production, campaign design, publicity, advertising and marketing implementation, as well as the administration and management of support staff of more than 100 employees. As a motion picture marketing executive, Mr. Parkinson has had more No. 1 best selling titles than any other independent distributor in North America, and has more R.I.A.A. Gold or Platinum certified hits than any other marketer. Mr. Parkinson has also produced 20 feature films, more than 30 made-for-video programs, and released more than 800 titles to the U.S. video marketplace. Former No. 1 best-selling titles for Mr. Parkinson include “Terminator,” “Little Nemo” (both BILLBOARD No. 1 titles), “Savage Land,” “Magic Voyage,” and “Highlander: The Gathering” (all Video Business Magazine No. 1 titles).
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
Jim Townsend Production Executive
During his 15-year career as a film executive and producer, Jim Townsend has supervised the production of film and television projects around the world, including Los Angeles, Vancouver, Calgary, Costa Rica, Venezuela, Puerto Rico, the French Rivera and various islands in the Caribbean. As president of production at Empire Film Group, Mr. Townsend oversees each project’s progress during pre-production, production and post-production. His job includes analyzing each project’s risk in terms of personnel, budget and production schedule. During production, he oversees the budgeting and cash flow on the productions, implements payroll services, accesses insurance needs, arranges for completion bonds, cast negotiations, union contract negotiations, closing negative pick-up contracts, production travel and location coordination. He has negotiated and worked with unions worldwide, including International Alliance of Theatrical Stage Employees (I.A.T.S.E.), Directors Guild of America, Directors Guild of Canada, Teamsters, Screen Actors of Guild America, Writers Guild of America, Writers Guild of Canada, Alliance of Canadian Cinema, Television & Radio Artist, and Union of British Columbia Performers. Prior to joining the Company, he served as senior vice president at Canadian Global Media. His responsibilities included overseeing the physical production of all of its projects. These included the award-winning “Supermodels in the Rainforest” documentary series, feature films “Savage Land” and “The Road Home,” the television series “Dream Team,” and most recently, a documentary series filmed in the Caribbean. Mr. Townsend was responsible for all of the production activities on the feature film “Blonde & Blonder.” His responsibilities included all of the films pre-production, production and post-production activities, along with overseeing and approving all of the personnel and distribution contracts. Townsend received his B.A. in theatre arts from St. Lawrence University. In 1984, Mr. Townsend moved to California to pursue a career in the film industry. He has appeared as an actor in numerous television shows, including “Days of Our Lives,” “Knot’s Landing,” “Scarecrow and Mrs. King,” “Falcon Crest,” “Quantum Leap,” and “The Wonder Years.” In 1987, he became the senior operations president at Go Between Inc., the film industry’s leading production service and information company. Its clients included major studios, television networks, talent agencies and management companies in Hollywood.
Herman Valerius President Latin Entertainment Division
Herman Valerius has 40 years experience in the communications and entertainment industries. In 1971, he became international editor for Gabriela Mistral, the largest publishing company in Latin America, with publications such as Omni, Parents, Playboy, Readers Digest, Estadio, Bravo and many other internationally known titles. In 1981, Mr. Valerius was appointed international editor for Playboy under a publishing license agreement with Gabriela Mistral. In 1986, he participated in the initiation the satellite teleconferences for the Miami Children’s Hospital as international director. The conferences grew to be the largest televised teaching medical conferences in the world. In 1987, Mr. Valerius founded Development & Production Services in Miami, Fla., and established contacts with more than 160 television networks worldwide, who became partners in the co-production of successful television specials and series. That same year, he successfully produced the first “Latin Models of the World” show in Miami, and continued producing the worldwide television special for more than 20 years. In 1992, while associated with Ford Models of New York, Mr. Valerius closed the largest international contract ever signed by the modeling agency to represent and air their program “Supermodels of the Universe” with Televisa of Mexico. In 1995, as president and CEO of Network Consultants, he undertook a major program to develop the film industry in Puerto Rico. This program became a major marketing plan for developing movie, entertainment and print industry projects. Network Consultants was the principal consultant to the Puerto Rico government in this field from 1994 to 2000, during which time the Puerto Rico Film Commission attained record production investment levels every year. Mr. Valerius helped bring the following productions to the island: “Assassins,” “Contact,” “The Dream Team,” ”Sunstorm,” “New Swiss Family Robinson,” “Amistad,” “James Bond’s Golden Eye,” and “Executive Decisions.” In 2004, he founded CitiTrust Corp., an import - export manufacturing company. CitiTrust has manufacturing plants in Latin America and operates a worldwide sales office in Miami.
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
D. Frederick Shefte President and CFO, Empire Home Entertainment
Fred Shefte brings a wide range of management skills and experience to the Company. Licensed as an attorney, he practiced law in California for more than 20 years before moving into business entrepreneurship and becoming a supplier-vendor to Wal-Mart Stores, Inc. Shefte’s extensive financial background made him an ideal manager for the Bank of Fayetteville, where he served as senior vice-president and trust officer for eight years before joining forces with Eric Parkinson in Hannover House. Shefte is also a part-time, adjunct professor at the University of Arkansas in the Sam Walton School of Business.
Empire Film Group Inc. (OTCPK: EFGU)
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Analyst: Lisa Springer, CFA Initial Report February 23th, 2009
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In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report. Lisa Springer, MBA, CFA - Senior Analyst Lisa serves Beacon Research Partners as a research analyst. She brings to the company over 15 years experience in equity research and investment marketing. Prior to joining Beacon, Lisa worked as an equity analyst for an independent research provider. She has also held positions as investor relations officer for a NYSE-listed company and director of financial analysis for a large consulting firm. Lisa earned an MBA from the University of Chicago and is a Chartered Financial Analyst (CFA).
Empire Film Group Inc. (OTCPK: EFGU)
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