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» Film-Tech Forum   » Operations   » Ground Level   » Going from a for-profit to a co-op?

   
Author Topic: Going from a for-profit to a co-op?
Mike Frese
Master Film Handler

Posts: 465
From: Holts Summit, MO
Registered: Jun 2007


 - posted 02-22-2012 12:33 AM      Profile for Mike Frese   Author's Homepage   Email Mike Frese   Send New Private Message       Edit/Delete Post 
http://www.thecuart.com/coop.cfm

What is a co-op?
A cooperative (co-op) is a business that is owned by its customers. Its goal is to be financially self-sufficient entity that is run to meet the consumer and social goals of its owner-community. Co-ops are not dependent on donations or grants.

Why can’t Sanford continue operating the Art Theater?
Being a single screen movie theater is tough. Most of the ones that still exist have been taken over by cities, such as the Virginia and the Normal. So far, Sanford has shown that the Art can operate and make a small profit.
However, because movie distributors are transitioning from 35mm film to digital formats, the theater needs to purchase a new digital projection setup that will cost about $80,000 in order to continue operations. Without this new equipment, the theater cannot show new movies, and Sanford will close operations at the end of 2012, when his lease runs out.
Although the Art generates a profit now, it is not enough to take on $80,000 in new debt.

Why not turn the theater into a non-profit?
The key difference between a co-op and a non-profit is ownership. Nobody owns a non-profit, so community engagement is not focused. Similarly, the non-profit has no direct incentive for meeting the needs of the community, and can lose sight of what its patrons want.
The Art Theater Co-op will be owned by the people who benefit the most from the business: Cinema lovers!
Another aspect of ownership is democracy. Owners will elect the board and can serve as directors. This direct linkage keeps the Co-op thinking about what the owners want.
Another benefit of co-ops is that they have an entrepreneurial energy because they are run as a business. This discipline means that the Art Theater Co-op can only exist if it continues to be managed well and meets its patrons’ needs.
Finally, non-profits must subsist on donations and grants. In these uncertain economic times, with government at all levels cutting back on spending, the Art Theater Co-op would be competing with other downtown arts organizations for a dwindling amount of money.

How can I become an owner?
Shares cost $65. This is a one-time equity purhcase - you are not paying a fee or a due, but are actually buying an interest in The Art Theater’s business. Your shares in the Co-op can be sold back for a full refund if you are leaving town or no longer wish to be an owner.
Buying a single share for $65 makes you an owner and gives you all the associated privileges and allows you a single vote in board elections and other ballots. The by-laws allow you to buy up to eight additional shares, and while extra shares won’t give you additional benefits or votes -- a key distinction between a co-op and an investor-owned business -- by buying multiple shares you will help us reach our equity goal and know that you are playing a lead role in insuring the future of The Art Theater. If you have the means, you are encouraged to buy multiple shares.

When does the Art Theater Co-op take over?
The Art Theater Co-op needs to raise $100,000 in order to take over. Of that money, $80,000 will be spent on the new projector. The other $20,000 will be the initial operating cash for the business. Once the $100,000 is raised, a transition process will begin for the Art Theater Co-op to assume operations from Sanford.
The Art Theater Co-op must raise the $100,000 by October 2012. If it cannot raise the money, then the amounts paid will be returned (though without interest, and minus credit card fees).

What is the business plan of the Art Theater Co-op?
This is the short answer. There’s a 30-page version of the business plan at the Theater.
The Co-op will operate the Art Theater, running it as a movie theater as it is now. The Co-op will lease the theater; this is not about purchasing the building.
The theater will begin operations with $20,000 in cash and $115,000 in debt. The debt reflects the equipment that is in place now, which the Co-op will purchase from Sanford’s corporation. The equipment includes pretty much everything in the theater (35mm projectors, the screen, sound system, concessions equipment, computers, printers, etc...) but not the seats or marquee letters, which are part of the building.
The Co-op will pay off it’s debt over a six-year term with the money raised from new owners joining and with cash from operating profits. At the end of six years, the Co-op is projected to be debt-free and operating at a profit. At that point, the Co-op can consider different long-term options.

Who will run the Co-op?
The owners will elect a Board of Directors from its ranks. This Board will have ultimate responsibility for setting direction for the business and reviewing its operations. Its primary employee will be the General Manager who will hire staff and run the day-to-day operation of the theater.
The General Manager will operate the business so that it is sustainable. Any profits that are generated will either be used for community work that relates to our mission, held for future expansion or unexpected expenses, or given back to the owners in the form of patronage dividends.
Elections for the first Board will occur once 200 owners are signed up.

Will non-owners be able to watch movies at the co-op?
Yes! The Art will operate as a normal movie theater.

What benefits of ownership will there be?
The General Manager will determine owner benefits, but they will likely include exclusive events and screenings, and the opportunity to work at the theater as a hands-on owner.
In addition, owners will have the satisfaction of investing in a business model that supports community building and independent cinema. Owner equity in the business will help keep the Co-op financially healthy and ensure a space for the community to see fine cinema for many years to come.
Most importantly, the Art Theater Co-op will be a democracy. Owners will be able to run for seats at the board of directors and get involved in the governance of the theater.

How do I join?
Come to the theater any time that movies are showing and you can join. You will fill out a simple form and you can pay for your shares with cash, check, or charge. You can pay your shares in full or finance them with $10 per share down and payments of $5 a month (per share) for the next 11 months.
You can also join right now, with PayPal. Just choose the number of shares you want and click on the Paypal link to sign up. We'll mail you your Co-op ownership card as a confirmation.

http://mobile.businessweek.com/magazine/for-small-theaters-the-digital-future-is-dark-02162012.html?section=small-business

When Sanford Hess started running a century-old movie theater two years ago, he knew Hollywood was replacing celluloid with digital files. But since the 250-seat venue in downtown Champaign, Ill., had already endured Betamax, VHS, Netflix, and a 15-year stretch showing porn, he figured it would survive this latest transition. Now he’s not so sure.
The 12-employee business, which had just over $300,000 in revenue in 2011, can’t afford the pricey new projector and other equipment major studios want him to buy. Unless he raises the money to pay for it by October, Hess says he’ll close the theater. Studios are saying, “Small business, you have to spend $70,000 in order to continue to make exactly the same money you do now,” Hess says. “There’s not really going to be any significant efficiency improvements or extra revenue that I can get; it just allows me to stay in business.”
For the past decade, Hollywood’s biggest studios have been working on a new standard for digital movies that could save them $1 billion annually in printmaking fees and shipping costs. The movies in the new format are shipped on hard drives that hold hundreds of gigabytes of data and are connected to a super-high-definition projector. To unlock a movie, the distributor sends the theater a code that controls where, when, and how long it can be played.
To induce exhibitors to purchase the equipment, celluloid prints of new movies from the majors will no longer be available in the U.S. by the end of 2013, according to John Fithian, president of the National Association of Theater Owners. The studios haven’t announced any deadline, but Howard Gantman, a spokesman for the Motion Picture Association of America, says the shift to digital will streamline film distribution. “This could only mean more and higher-quality motion picture entertainment,” he says. About 26,000 of the 40,000 screens in the U.S. have already converted.
The biggest chains—Regal Entertainment, AMC Entertainment, and Cinemark Theatres, which account for just over half the $10.2 billion annual U.S. box office—expect to complete the conversion early next year. But “for lower-grossing theaters, it’s just not affordable,” says Fithian. “I predict we’ll lose several thousand screens in the U.S.”
Bill Campbell, the second-generation owner of the six-screen Centennial Theater in Sheridan, Wyo., spent about $65,000 per screen to install digital projectors in November 2010. He’s worried the new technology will become obsolete more quickly than celluloid projectors, which cost $25,000-$35,000 and have a lifespan of 25 years or more. “Now that we’ve stepped up to computers, we don’t know long they’ll last. Think how long a laptop lasts.”
To help offset the cost, Hollywood is working with a handful of middlemen known as integrators. These companies typically buy the necessary gear and lease it to theaters. They also collect a fee from studios and distributors for each showing, and they can limit which movies can be played. To spur exhibitors to commit to the financing programs, major studios have indicated that they won’t pay fees to integrators for any theaters that don’t sign up by this fall. The deals put smaller cinemas “in a position of very high financial stress,” says Chapin Cutler, co-founder of Boston Light & Sound, which has installed projection equipment in movie houses for 35 years.
This toll-road model could spell trouble for theaters that show few Hollywood blockbusters, acknowledges Gary Johns, senior vice president at Sony Electronics’ Digital Cinema Solutions, a large integrator that has installed 9,000 new systems across the country. “It’s probably more of a challenge for those guys,” says Johns. Chris McGurk, chief executive officer of Cinedigm, another big integrator, agrees the financing programs work best “when there’s more turnover.”
The fee structure is changing the economics of the distribution business, too. Neal Block, head of distribution at Magnolia Pictures, which handles about 30 films annually, says the deals “basically disenfranchise” companies such as his. He says they will need to pay the same amount large studios do for every movie they show on an integrator’s equipment, even smaller films unlikely to become hits. “We have to evaluate profitability in a way that we never had to before,” says Block. “We have to look at every engagement to determine if it’s going to make money [to cover the fee] before we play it.”
To pay for the gear without a financing deal, Hess aims to convert his for-profit theater into a co-op, selling shares for $65 apiece to local film buffs. In two months he’s raised nearly $40,000 from 380 individuals. Hess, who spends around 20 hours a week designing software for a consulting firm on top of his 40 hours at the theater, is fielding phone calls from curious cinema owners interested in the idea. “This industry is stacked against the little guy in so many ways,” says Hess. “It’s kind of like going up against Wal-Mart. Yeah, you can exist if you build up a local audience who purposely drive past Wal-Mart to go to your store. But it’s very difficult.”

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Melanie Loggins
Expert Film Handler

Posts: 153
From: Wayne, NE, USA
Registered: Aug 2011


 - posted 02-22-2012 08:56 AM      Profile for Melanie Loggins   Author's Homepage   Email Melanie Loggins   Send New Private Message       Edit/Delete Post 
Wow. My theatre is a non-profit with a Board of Directors, who are, thank god, very hands off. They worry about fundraising and leave all the details of running the theatre to me. I've already realized that some day I may have a Board member who feels they need to give me "guidance" about what movies to show, and that will be the day I let them find a new manager.

To have a co-op? Where you could have literally hundreds of people who own part of the theatre? Sounds like a nightmare! If someone got offended by a movie they could do more than just write you a nasty note; they could pull some rank as an "owner". And I could even see the possibility of some group decided what would be appropriate to show. And the last thing I would want is my programming being decided by a group of people who have nothing better to do during the day than decide what is and is not appropriate. If that was the case, I never would have shown Black Swan, The Fighter, Immortals, Girl With the Dragon Tattoo.... Not saying all of these are art or were worth showing. Just saying I wouldn't have wanted a group telling me not to show them. I can't imagine many people being willing to run a theatre under that threat; they really would just be the person who sold the popcorn.

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Martin McCaffery
Film God

Posts: 2458
From: Montgomery, AL
Registered: Jun 99


 - posted 02-22-2012 10:50 AM      Profile for Martin McCaffery   Author's Homepage   Email Martin McCaffery   Send New Private Message       Edit/Delete Post 
Melanie, I feel your pain. It should be spelled out explicitly in your bylaws and or job description that you are in charge of programming and day to day operations. The board can suggest all it wants (as can anyone), but when it comes down to it, you are the professional in charge.

There are hints in the above description that the Co-op has planned for this, it seems to give the GM lots of power. But I would not want to belong or work there without a whole lot more information (which may be in the business plan).

As for losing sight of what the community wants, there isn't, especially with art houses, a single community. There are multitudes. Art houses aren't shooting for the middle, they are going for the fringes. It takes someone who is aware of the communities to keep up and book other than Hollywood blockbusters.

As we say in the Art House Convergence: Community Based, Mission Driven.

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Mike Frese
Master Film Handler

Posts: 465
From: Holts Summit, MO
Registered: Jun 2007


 - posted 02-22-2012 07:21 PM      Profile for Mike Frese   Author's Homepage   Email Mike Frese   Send New Private Message       Edit/Delete Post 
quote: Mike Frese
The theater will begin operations with $20,000 in cash and $115,000 in debt. The debt reflects the equipment that is in place now, which the Co-op will purchase from Sanford’s corporation. The equipment includes pretty much everything in the theater (35mm projectors, the screen, sound system, concessions equipment, computers, printers, etc...)
I find this to be an interesting part of the deal. I would love to see a schedule of asset for this.

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Mitchell Dvoskin
Phenomenal Film Handler

Posts: 1855
From: West Milford, NJ, USA
Registered: Jan 2001


 - posted 02-26-2012 06:14 PM      Profile for Mitchell Dvoskin   Email Mitchell Dvoskin   Send New Private Message       Edit/Delete Post 
> The debt reflects the equipment that is in place now, which the Co-op will purchase from Sanford’s corporation. The equipment includes...35mm projectors, the screen, sound system, concessions equipment, computers, printers.

I find it hard to believe that the contents are worth $115K since the building is not included. The 35mm projectors are near worthless, and unless the seats are in recent vintage in excellent condition, they too are near worthless. As too the rest, there is a glut of used equipment on the market these days.

I don't know, this may turn out to be a good thing, but the way I read it, the only person who is coming out ahead is the current owner who is selling the contents at an inflated price, and who may also be collecting rent on the building. These new "owners" are not even getting into their theatre for free.

Finally, who is responsible for major expenses issues such as a new roof, furnace/Air Conditioning, etc. I know if this was a co-op apartment building, every member of the co-op would be legally responsible for their share of the expense. Would that be the case here?

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Mike Frese
Master Film Handler

Posts: 465
From: Holts Summit, MO
Registered: Jun 2007


 - posted 02-26-2012 10:08 PM      Profile for Mike Frese   Author's Homepage   Email Mike Frese   Send New Private Message       Edit/Delete Post 
quote: Mitchell Dvoskin
I find it hard to believe that the contents are worth $115K since the building is not included. The 35mm projectors are near worthless, and unless the seats are in recent vintage in excellent condition, they too are near worthless. As too the rest, there is a glut of used equipment on the market these days.

I don't know, this may turn out to be a good thing, but the way I read it, the only person who is coming out ahead is the current owner who is selling the contents at an inflated price, and who may also be collecting rent on the building. These new "owners" are not even getting into their theatre for free.

Finally, who is responsible for major expenses issues such as a new roof, furnace/Air Conditioning, etc. I know if this was a co-op apartment building, every member of the co-op would be legally responsible for their share of the expense. Would that be the case here?

The seats are not included as I am sure they are attached to the building. I agree the only one really coming out of this well is the current owner. I would say he is charging at least 3 if not 4x what that equipment is worth.

Most major repairs to the building should be born by the building owner.

It would almost be worth it to let the guy close up and start from scratch. Something does not smell right to me.

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Monte L Fullmer
Film God

Posts: 8367
From: Nampa, Idaho, USA
Registered: Nov 2004


 - posted 02-27-2012 03:50 AM      Profile for Monte L Fullmer   Email Monte L Fullmer   Send New Private Message       Edit/Delete Post 
(not to bounce off-topic some, but this one got me asking a question...)

quote: Mike Frese
But “for lower-grossing theaters, it’s just not affordable,” says Fithian. “I predict we’ll lose several thousand screens in the U.S.”

What is interesting is this statement by the NATO guru Fithian, since it doesn't make any sense is, why would the studios want to lose the revenue from these 'several thousand screens' in the first place? It's money coming in no matter how much it is..

Something just ain't right, nor is it fair.

Either, keep striking prints for these locations so they can keep 35mm, or work out VPF deals for these locations to afford the changeouts so not to lose the income from these 'several thousand screens'.

Studios needs to help out the little guy since the big ones have already taken the dive.

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Mike Frese
Master Film Handler

Posts: 465
From: Holts Summit, MO
Registered: Jun 2007


 - posted 02-27-2012 09:47 AM      Profile for Mike Frese   Author's Homepage   Email Mike Frese   Send New Private Message       Edit/Delete Post 
quote: Monte L Fullmer
What is interesting is this statement by the NATO guru Fithian, since it doesn't make any sense is, why would the studios want to lose the revenue from these 'several thousand screens' in the first place? It's money coming in no matter how much it is..
There are many theaters that do such little business that it may not be worth it.

This is what we know. The cost for a film print on move-over it next to nothing. A print has already been struck. The cost to ship it by UPS to and from the depot is born by the exhibitor. It might take an extra 10 mins of studio staff to do the administration work but they are probably not at 100% capacity.

On a digital move-over, the cost to the studio can be as much as $300-$400 (VPF + digital key administration). Studios just are not going to book these locations.

To make a film print for a theater for first run, the cost for that print has been speculated to cost between $750-1250 dollars. At an average film rental of 55%, a location has to gross as much as $2275 in order to pay for their print.

First run digital with VPF is approx. $800-900.

Monte, it is very common for a couple hundred locations to gross less than that on many movies throughout the year. I have said this before and I will say it again, the bottom 20% of a movie's locations gross less than 10%. Why would any company chase a gross margin of as little of 5%? The move to digital has made the studios re-evaluate their booking practices of the past.

There should have been a VPF deal in place where the 3000+ grossing locations would have a hybrid model. They would get a VPF on the major tentpole titles and VPFs would not be paid on the 3200 or less location movies. But the exhibitor would still be allowed to play those titles. So the small theater could get about 50% of the movies paying them a VPF.

Unfortunately, the current deals are all or nothing regarding VPFs.

Monte, would you spend $1000 with a 50/50 chance to make only $100?

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Bill Enos
Film God

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From: Richmond, Virginia, USA
Registered: Apr 2000


 - posted 02-27-2012 10:11 AM      Profile for Bill Enos   Email Bill Enos   Send New Private Message       Edit/Delete Post 
In this co-op group, who is going to sign the financial agreements with the studios? It requires individuals with considerable resources and a willingness to pay up when the whole thing goes belly up.

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Martin McCaffery
Film God

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From: Montgomery, AL
Registered: Jun 99


 - posted 02-27-2012 11:06 AM      Profile for Martin McCaffery   Author's Homepage   Email Martin McCaffery   Send New Private Message       Edit/Delete Post 
I can tell you from experience it doesn't take anyone with lots of resources. As long as they pay their guarantee's and percentages in a timely manner (ie: weekly), the studios will have no claim on them for anything.

That said, they look like they are headed for trouble.

Mike: if the VPF's really do disappear at the end of this year, then the move over cost for DCP also drops to near zero.

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Mike Blakesley
Film God

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From: Forsyth, Montana
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 - posted 02-28-2012 10:56 AM      Profile for Mike Blakesley   Author's Homepage   Email Mike Blakesley   Send New Private Message       Edit/Delete Post 
Once a movie is past opening date, why even bother with KDMs? Sure you might have a rogue theatre every once in a while that would play a movie past its closing date, but I'd think it would be fairly easy to root out such places. If they did away with KDMs for sub-run situations then they would REALLY save money with the smaller places.

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