EDS Interview with FMLY President

In the face of all of life's trials and tribulations, it's always been a mental refuge to run away to the flickers and feed off the sensationalistic tidbits of Tinseltown's latest offering.

As the movies have indeed bestowed much upon its audiences, we have dutifully given back playfully taking on years of persona, however real or imagined. Is the motion picture industry poster child the starry-eyed youngster boarding the westbound train to discovery, the magic of watching ET soar through the moonlight, or is it more apt to the industry-relevant, greed infested rant of Oliver Stone's Wall Street, arch-capitalist Gordon Gekko proclaiming of his empire, "the illusion has become real"?

Hooray for Hollywood…and all the Goodship Lollipops and Homer Simpson Lands of Chocolate you can eat.

All celluloid fantasies and connotations aside, there's a real and wonderful machine behind the façade: a living, breathing entity that craves attention and detail and that ever desired personal touch. And with independently produced movies accounting for over 60% of the entire filmed entertainment produced annually, it's further, and by extension, undoubtedly a stage ripe for the well situated and managed indie set.

Family Room Entertainment (FMLY - otcbb; www.fmlyroom.com has developed a business model that can profitably manufacture moderate cost movies, generally for $5 to $25 million, while casting acting talent that has high caliber, but affordable, name recognition. A business model as this minimizes investment risk and provides for the potential of breaking even early in the product life cycle and, soon after, the sweet taste of profitability. A core group of industry veterans and associates sourcing winning material, up-scale talent and sound financing is the key to this company's success and to making certain that their productions are smartly 'in the can'. An Interview with George Furla, Family Room Entertainment's President, conducted by Eric David & Sons, Inc. October 17, 2003, follows:

Eric David & Sons, Inc (EDS): Family Room Entertainment is a multi-faceted entertainment entity, staging on several levels. What is your business mandate and individual modus operandi for industry and financial success?

George Furla (GF): For the five years we've been in business, our mandate has always been, and will remain, to make successful feature films as per our low cost, high talent formulation. We use a hedge fund approach whereby we have outside, off balance sheet, funding and profit participation in each of our projects. And, instead of a management fee, we take a producer's fee. It's an undivided and pure play in the motion picture trade in that we have no other business interests or diversifications besides making movies. Our focus and such exclusivity is paving the road to success and self-reliance, which, realistically, is the end goal of any business.

EDS: Taking all of the areas you're tapping into consideration - theatrical, pay cable, video and other ancillary markets - what is your ideal production platform?

GF: We take on every movie project with the intention of it going theatrical. That's the ideal and most desirous manifesto for us. Nothing less. Being pragmatic, though, we still look at the project on a worse case scenario stage - a bit of a misnomer as any success isn't really anything 'worse' - and anticipate at least hitting a single with having a production go to either video or direct to pay cable. The biggest upside is in the theatrical release. And that's our most intended sector.

EDS: Would you consider yourself conceptually falling into either the typical 'indie' or 'art house' category, despite the caliber of some of your featured Hollywood personalities?

GF: Absolutely not. Our professional directive is to try and obtain franchise status with a well-received production, much like that of the major studios.

In spite of the fact that there are still those that regard us as a smaller type 'indie house' coupled with the fact that we do one art house-esque film per year (for both creative and prestige reasons), we concentrate on, and our forte is, action thriller type movies as well as now the horror genre. And it's that structure with those vehicles in place that will see us shed that label. We've already started to do so.

EDS: Why the concentration on action thriller and horror?

GF: Those two genres really do provide the best opportunity for us to hit that all-important franchise. In this business, one of the only ways to hit a home run is to have a successful release that you can franchise out, i.e. do sequels # 2, #3 & #4. If the unmitigated strength of your audience is established in the initial feature, you have an automatic following for each successive continuation. That's where the smart money is.

And demographically speaking, action and horror have always dictating a winning formula amongst some of the biggest moviegoers. This year alone, there have been 12 horror movie releases for a box office aggregate of $400M.

EDS: What's the formula for choosing the best content?

GF: We read approximately 25 scripts a week, ferreting through the submissions, choosing internally those we think are the best candidates for logical and profitable production forward. We then look to attach a director and cast.

It's on the potency of that process that we then take it to our financiers for consideration. The inherent strength of the storyline and its players must be there to have the funding dollars vested in.

EDS: What makes you stand out in a crowd of your closest competition…content, pricing power, industry affiliations?

GF: I think that because we've completed 24 films in the past five years, we've established a good name for ourselves and have built up tremendous and reputable good will. That's extremely important in this industry and a desired place to be.

The old adage is true…hard work and persistence does pay off.

EDS: How many productions do you typically put out in a 12-month period? Is this a pace to be continued?

GF: Our goal is to do 5 - 6 films a year. That goal number has been pretty much the same since our inception. What we've been successful at accomplishing over the past 3 - 5 years is to increase the budget per film, ultimately increasing your caliber of cast and, of course, improving your chance of hitting that franchise target.

At a minimum, we do want to keep the yearly number of productions at that quantity, but up the profile level.

EDS: What does it take to obtain financing for a production in these economic times? Is there a healthy stream of funding out there to capitalize ventures like yours?

GF: It's true that despite the economy seemingly in a bit of positive upswing, Hollywood can be a fickle business and some of our industry compadres haven't been able to find the funding necessary to feed their projects.

We've teamed up with a Los Angeles-based foreign distribution company for a 15-picture deal. They have a significant line of credit and are our primary source of capitalization. But, more importantly, they've demonstrated a belief in the strength and profit potential of our product.

EDS: Is the rate of return or satisfaction level greater on a smaller film than that of a larger, more 'blockbuster' type, production?

GF: Ours is a different world altogether from the venue of the larger production. We like to make movies for wholesale, looking to retail them out versus making a movie solely for retail reasons and crossing our fingers, hoping to hit the mark appealing to a mixed, global audience. Our preference is to have an industry model going in where we're stopped out, and financed as such, on the low side, with either a break-even situation or a single (a production direct to video or pay cable). With this scenario and attitude, we know we're not going to be losing money.

EDS: Let's single out one of your productions: 'Narc', starring Ray Liotta, one of your latest, was produced in conjunction with (Tom) Cruise/Wagner Productions, among others. With collaboration on that scale, how does it bode for a return for Emmett/Furla Films (subsidiary of Family Room Entertainment)?

GF: Regardless of the industry weight of the production names attached to the project, unless a film does US $40M or more at the box office, it's a rare occurrence that anyone will see a backend profit. That's the model we work with. On 'Narc', we had a flat fee and didn't see anything on the backend, as it did only approx $12M box office. It was, however, a widely held critical success.

We know going in that, at minimum, we'll be getting a producer fee - that goes to the Company to cover overhead - the real windfall comes with productions grossing over that magic $40M mark; then you start seeing significant returns.

There's no real fixed percentage as to what we take if levels are successfully attained, but I can say that we would get anywhere between 10 - 50% of the profits. But do keep in mind that profits come after the studio makes good on money spent on acquiring the film, manufacturing prints and advertising costs. It's only after that that you start sharing in the spoils. There's a lot in the way of recoupment, hence a film needing to reach that level of $40M before we see any profit above and beyond our regular production fees.

None of our projects to date have hit that marker, but we're confident that we soon will.

EDS: What influence, if any, does a major studio have over any of your productions?

GF: As of this point, they haven't had any real influence on us, as we make our films independently. After we finish production, it's our financiers and distribution team that go to the studios, hungry for content as ours, looking to sell the product.

That in mind, we do anticipate a bit of a change as we've recently partnered up with Gale Anne Hurd of Valhalla Productions, known for producing the Terminator series, Armageddon, and The Hulk. We've teamed up and allied with her for three projects that will have us setting up the productions as studio fare from the get-go, that versus an independent stance and financing. It's a longer and more involved process, but, despite the timing, we believe to be an extremely lucrative opportunity for Family Room.

We'll, of course, maintain our independent features, but with the venturing into the studio world with a reputable, creative and successful collaborator like Ms. Hurd, we'll now have a great one-two-punch of product to offer our audiences.

EDS: In all economic practicality it's impossible to ignore the burgeoning and profitable state of international distribution. What's the feel with respect to international versus domestic dollars and Chinese and the famed Bollywood audiences?

GF: We believe that the foreign markets like to see American movie stars. And, in working with people like Steven Segal, Val Kilmer, Ray Liotta and Willem DaFoe, we feel extremely confident in our industry positioning both here and internationally, even though our product is primarily of an independent nature.

Our targeted genres, the action thrillers in particular, should do well in those overseas market as, historically, the SE Asian audiences have always been great fans. When you sell a film to the foreign markets, you have built in bonuses and bumps if the movie also sees release in the US and hits certain numbers.

EDS: Somewhat of an ethical question…is it your opinion that some in this industry find it trying to maintain a good balance between business acumen and artistic integrity?

GF: As in any other industry, business or commerce, I'm sure that is the case for some - there have been notorious and well documented cases in the past - but I can proudly and unequivocally say that that is certainly not the case at Family Room. Speaking personally, we like action, high testosterone films. That's our desire and we pursue the appropriate business avenues to see them to fruition.

EDS: Ever thought of fostering a mentor program? They're very popular in Hollywood and give the younger generation a leg up.

GF: From time to time, we'll attend panel discussions and classes to speak of our experiences in the industry, to pass along some of our expertise and insights.

We've also had, for the past year and a half, an intern program here in the office, where students from various Universities come in and work alongside us. It's been a rewarding experience for all of us, and allows us the opportunity to give something back to the community.

EDS: Of the productions that you've done, what's been your favorite?

GF: 'Narc' was a brilliant film and a critical success. 'Wonderland', filmed more recently, is a tremendous production. 'Half Past Dead' was a fun action film. All are favorites of mine and follow our business directive and mandate to the letter.

'Wonderland' was taken on more for the love of the project, prestige reasons and relationship building prospects than for the profit expectations. We really don't expect any residual income from it, but, as it works in our favor regarding cachet positioning, we were happy to participate its production. EDS: There's no doubt that there is a future to entertainment digitization. What's your thought regarding a company like Netflix and their foreseeable move to Internet downloadable movies? How would that impact your sector?

GF: The Internet is indeed a powerhouse of a marketing tool, and it stands to reason that movie distribution will inevitably be part its stable of consumer, download offerings. Netflix seems a perfect candidate to move into that space as they have an established and dedicated audience true to their patronage.

Family Room getting involved in such an arena? Ultimately, that would be a decision of our distributors and, truthfully, would really have nothing to do with us, as we simply make the films, not market them.

Aside from any financial upside, Internet distribution of our productions would certainly positively impact our audience recognition.

EDS: In light of such movements as the 2001 proposed legislation by Sen. Lincoln from Arkansas, protecting low budget and independent film producers in this country and Arnold Schwarzenhager's platform policy of bringing back film production to California (and away from countries like Canada), how do you see production tax incentives offered fairing in the years to come?

GF: Tax incentives are very attractive to the filmmaker. It keeps the bottom line reasonable and, in our case being a public company, translates into positive shareholder value. And if the US can do more in that capacity, whether it be state-by-state or on a united national front, to deter filming outside of the country for financial reasons, we're all for that and applaud the efforts. Let's support domestic employment and keep the dollars here.

We're very reactive in the arena. Case in point: New Mexico recently set up a tax incentive plan for movie productions and we filmed a movie called Blind Horizons with Val Kilmer and Neve Campbell there.

EDS: A few fundamental questions for you…ETA for the Company's profitability?

GF: Conservatively evaluating all projections, early Q2 2004 is a pretty solid estimation.

EDS: Is there any brokerage house/institutional involvement in your Company stock?

GF: Not to my best of my knowledge at this point. Once we have a clearer definition of the current slate of projects on the horizon we intend to embark on a campaign to enlighten the broader investment community. Target time for that looks to be early next year. We want to have all of the ducks in a row and be able to rightly show genuine deliverables before we open the floodgates.

EDS: Please give us a rundown on the financing history behind Family Room to date, commenting specifically on past and potential further debentures, or other such funding vehicles, planned in the next 18 - 24 months. What kind of dilution are we looking at?

GF: The great news is that our overhead, at approximately $55K a month / $660K a year, is a 'worse case scenario', meaning that is if none of our projects is completed; and that burn is pretty moderate as Hollywood production standards go. As our need for capital isn't that outrageous, until we reach a profitability level that we feel confident we can do early next year, we will only have the need to do smaller debenture offerings, keeping the dilution on the lower end and resultant treasury shares easily absorbed into the marketplace.

The last debenture that we did has near enough all been converted and the difference with any upcoming financings will be that they'll have a set floor. That's our game plan and one we feel benefits not only our Company but the shareholder as well. Our long-term debt of approximately $230K is being paid down monthly. Family Room has a copyrighted library of 4 films, and as we see residual income from those issues, we'll be applying the proceeds directly to that debt. I can't see it being out there for another 12 months. It'll most likely be cleared up in a six month time frame.

EDS: According to Reuters' Motion Picture sector measure, the industry's 3 year growth history has been either minimal or on the negative side (EPS was an increase of less than 1%; Sales Growth rate, a decease of 5%). What's your forecast for the next 3 - 5 years success in your trade, and what targets is Family Room looking to meet?

GF: Our growth pattern has been pretty substantial as far as the magnitude of the films that we're involved with. When we started, we were doing films in the $1M - $3M range, and now they're in the $8 - $25M range, so, although we're doing the same number of films per year, they're of more substance and credibility. We expect that to continue. Case in point: We just completed films with Williem DaFoe, Michelle Rodriquez and Ray Liotta (Control) and Val Kilmer, Neve Campbell and Sam Sheppard (Blind Horizon), as well as just acquired the rights to Amityville to do a horror franchise, based on the original storyline from George Lutz…all three ventures truly do not only represent a tremendous momentum forward for us, they also are a great departure from projects we were involved in even a couple of years ago.

Another illustration of the expansion we're looking to in the years to come is exemplified in our acquisition of the rights to the name 'Abdominal Snowman'. We'll be creating the monster with Crash McCrery, one of the most well known and industry respected monster creators and special effects artists in the business. Our partnerships with Gail Anne Hurd/Valhalla and Ilya Salkind, producer for Superman 1, 2 & 3, to create the Snowman, will give way to another extraordinary franchise opportunity for us.

The attainment of the rights make a feature film based on the Micronauts, a Marvel comic and a toy line in the 1970's, is one we hope to collaborate on with Valhalla as well in terms of a franchise.

All prospects considered, we're quite optimistic about meeting our self-set target of 2 - 4 years of profitability during the next 3 - 5 year period. The motion picture studio was built on franchises. New Line was built on the Mutant Ninja Turtles. Artisan was built on the Blair Witch Project…our mandate is to follow a similar high profile franchise path. Our business model has gone from making movies like 'Speedway Junkie,' 'Held for Ransom,' and 'Grizzly Mountain' in our first year of operation, to working on productions with top caliber actors and securing partnerships that will open doors to franchise potentials, and have done so in the course of five short years. I think we've done well not only in terms of progress but also in developing that all-important industry conscientiousness, goodwill and credibility.

Giving it a public market twist, betting on the anticipation of the profits from our upcoming projects and banking on the reputation we've established is analogous to betting on the success of a R&D stage biotech company. A proprietary drug may only in the trial testing periods and still a year or two away from obtaining FDA approval, still you wager and stake a solid bet on the strength of those trials and future success of the drug within the target demographic, and invest accordingly. A lot of smart investors understand that and have prospered.

We've tested the waters, found the formula that works and are diving headlong into what we firmly believe will be a true winner…for our targeted audience, our sense of creative integrity and our valued shareholders.

Jennifer Gardiner, an Investor Relations veteran and a freelance business writer, is presently consulting with Eric, David and Sons, Inc. Working primarily with micro and small cap Companies, she has assembled and actively maintains international relationships in her roles as Marketing/Communications Strategist, and Investor/Public Relations Managerial consultant

Please view the EDS disclaimer/disclosure on Family Room Entertainment.

2003 © Eric, David & Sons, Inc. All Rights Reserved.

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