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A. "FRANCHISE AWARDS"
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1) Up to £160 million (US$260 million) is available for franchise awards

2) Up to 4 franchises to be awarded

3) Franchise award is for total of 6 years, subject to mid-term review

4) Awards may be for up to £8 million (US$12.8 million) in each of first 3 years plus up to £5 million (US$8 million) in each of remaining years

5) Additional revenues in years 4-6 which are due to the Arts Council may be reinvested with franchise, enhancing the award

6) Lottery funding may constitute 33% to 50% of the budget of a film

7) The normal maximum contribution per film is £2 million (US$3.2 million)

B. "KEY DATES FOR FRANCHISE APPLICANTS"
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1) December 16, 1996: Applicants to give notice of their intention to apply

2) February 28, 1997: Completed applications to be received by the Arts Council

3) May 14, 1997: Arts Council decision on award of franchises

4) May 21, 1997: Announcement of Arts Council decisions

C. "WHO MAY APPLY"
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1) Any company intending to make British qualifying films for profit may apply

2) British Films are generally described under the 1985 Films Act as:

(a) made by a British Commonwealth or a European Union ("EU") resident or a company managed and controlled by a British Commonwealth or EU resident company;

(b) no more than 7.5% of all studio shooting can take place outside the UK;

(c) no more than 20% of the film's playing time can be shot outside the UK;

(d) at least 75% of the labor costs of the film (after deducting the payments to any one person) must be paid to British Commonwealth or EU resident or citizens; or NOTE: British Commonwealth citizens can be from Canada, Australia, New Zealand, Hong Kong, Malaysia, South Africa, Kenya, and a number of other countries previously included in the British Empire

(e) at least 80% of the labor costs of the film (after deducting the payments to any 2 persons, only one of whom can be an actor) must be paid to British Commonwealth or EU residents or citizens;

(f) under special circumstances the 75% and 80% referred to above may be reduced to 70% and 75% respectively; and

(g) NOTE: there are some complex exceptions to these conditions...so expert advise should be sought

3) Company must have an office in England

4) Company must have its central control and management in an EU member state

5) American companies, including production companies, distributors, broadcasters, investors, banks, and sales agents, presumably may participate, but not as majority shareholders

6) Arts Council encourages Applicants to form consortia of companies including producers, broadcasters, distributors, financial institutions, and investors

7) While broadcasters are encourage to participate, they are not favored by the Arts Council as controlling shareholders

8) Arts Council encourages creativity in structuring Applicant, but favors strong financial viability with special emphasis on new investment for British films

9) The Applicant must demonstrate its intent to produce theatrical films, not video or television films

D. "USE OF FUNDS"
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1) Primarily for principal photography and post-production.

2) May also be used for development, pre-production, and exploitation

3) Up to 10% of annual allocation may be spent on development

4) Funds may also be used for pre-production provided there is adequate evidence of Applicant's investment in pre-production

5) Funds may not be used for on-going overhead and related costs of operation of the franchise

E. "APPLICATION AND REVIEW PROCESS"
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The Applicant must provide the following information in the Application:

1) "APPLICATION INFORMATION REQUIRED"

(a) Organizations involved: (list of all organizations which will be actively involved in the franchise)

(b) Resume of their size, experience and track record in the film industry

(c) Description of the role each organization will play

(d) A statement of the Applicant's policy regarding working with other producers, distributors, and sales agents

2) "KEY INDIVIDUALS"

(a) An organization chart with the names of directors and staff members

(b) Resume for each individual in the organization chart and their qualifications and responsibilities

(c) Evidence including VHS tapes, film critics reviews, and awards showing that Applicant and its key participants are committed to creative quality

(d) Identification of the key individual responsible for complying with Arts Council requirements, including proposal for insuring compliance

3) "PRODUCTION PLAN"

(a) Description of production strategy including demonstration on how Applicant will increase the quality, range and number of British films made

(b) Detailed description of possible projects for first year of lottery funding

(c) Description of range, style, and nature of films Applicant might seek to fund in subsequent years

(d) A list of projects Applicant currently has in development

(e) Proposals for insuring maintenance of high quality of standards in Applicant's films

(f) Description of financing objectives, identifying probable source of finance, and the way different sources of finance might be used over time

(g) Details of any joint venture, supply, or overall agreements which Applicant has with writers, producers, directors

(h) Description of how Applicant would encourage the development of new talent

(i) Target figures for the number of films Applicant would produce and release each year during the six year period of the franchise and the following 2 years

(j) Description of the ways external (non-participating) producers can propose projects to the Applicant

4) "BUSINESS PLAN"

(a) Details of all resources (human, cash, and infrastructure) necessary to operate franchise

(b) Details of how resources to operate franchise would be provided and financed

(c) Statement of any financial support from investors

(d) Target revenues and profits from the exploitation of the various projects

(e) A projection showing how commitments to operate the franchise will change as level of production increases over time

(f) Details of how future level of activity and investment represent significant increase compared with Applicant's current performance

(g) Information about output deals with sales agents, distributors, or broadcasters

(h) Cash flow, profit/loss projections, and balance sheet forecasts

5) "OWNERSHIP STRUCTURE"

(a) Description of ownership structure of the franchise

(b) Country of which ultimate ownership of all participating companies is held

(c) Demonstration of all participants' solvency and state of affairs

(d) Audited accounts for all companies, equity owners, or providers of finance participating in the franchise

6) "TRAINING AND EMPLOYMENT"

(a) Applicant's training policy

(b) Applicant's policy on equal opportunities

F. "KEY ASSESSMENT CRITERIA FOR AWARDING FRANCHISES"
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The following factors and information will be considered in awarding the franchises:

1) Financial viability: Applicant must show that Applicant has funds to finance its ongoing running costs and to complete its proposed film projects

2) Applicant must demonstrate an ability to raise private sector partnership funding and present a clear picture of the origin and size of such funding

3) Projects must have good commercial prospects

4) Applicant should demonstrate track record of commercially successful films

5) Marketing and distribution expertise: the Applicant must have a plan for exploitation, recoupment, and its own growth within the film business

6) How well Applicant contributes to enhancing the quality, range, and number of British films made

7) Applicant's proposals for and history of developing new talent

8) Evidence of the commitment to creative quality and diversity in Applicant's past and proposed production activities

9) Applicant's plans for achieving theatrical distribution

10) Whether the composition of the franchise makes it likely that Applicant would reach the target set for distribution in the UK and internationally

11) Whether the Applicant has the financial competence and resources to manage the franchise and insure best use of lottery funds

12) Evidence that lottery money will not simply substitute for existing sources of film finance

G. "CONDITIONS OF THE FRANCHISE AWARD"
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The franchise award will be subject to a formal franchise agreement which will include among others the following provisions:

1) The objectives of the franchise

2) The amount of lottery funding awarded

3) The duration of the franchise

4) Allocation to the franchisee of the revenues or proportion of revenues otherwise payable to the Arts Council

5) Provisions for the protection of the Arts Council's financial interest in the franchise

6) The target number of British films to be produced annually and over the period of the franchise

7) Application procedure for individual projects (including development projects and pre-production funding)

8) Funding conditions relating to individual projects (including development and projects and pre-production funding)

9) Standard deal terms

10) Draw down arrangements including use of independent certification

11) Monitoring information

12) Timing of review of franchise

H. "CONDITIONS FOR FUNDING INDIVIDUAL FILM PROJECTS"
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1) The Arts Council will approve all funding arrangements

2) The Arts Council will approve all material changes to the project including budget, producer, director, principal cast, director of photography, editor, and composer

3) A copy of the bylaws and the articles of incorporation of any company set up to produce a project must be furnished

4) An offer of funding will remain open for up to 1 year

5) Funding will only be released when full production financing arrangements and contracts including suitable distribution plans are approved

6) A completion guarantee must also must be in place prior to funding

I. "ARTS COUNCIL RECOUPMENT AND OTHER CONDITIONS FOR FUNDING INDIVIDUAL FILM PROJECTS"
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1) Arts Council expects to recoup on a essentially a pro-rata, pari passu basis with all other equity financiers

2) Arts Council recognizes that distribution advances and lenders may recoup in first position

3) The Arts Council recoupment may, but may not be, allocated back to the franchisee for future production

4) The Franchisee's access to the Arts Council recoupment share will be subject to the same approval and draw down procedures as the original award

5) The Arts Council may expect a corridor of recoupment of not less than 15 % from first revenues accruing to financiers (after payment of approved commissions, distribution expenses, and loans secured on distribution advances)

6) Only in special circumstances ( i.e.: a prestigious film, the encouragement of innovation or new talent) will the Arts Council accept a less favorable recoupment position

7) The Arts Council will also expect a share of the net profits to be agreed upon as one of the conditions of funding

8) An independent collection agent with no interest in the transaction will be required to collect and secure film revenues (the National Film Trustee Company and Mees Pierson are pre-approved)

9) Regular production, income, and expenditure reports will be required by the Arts Council

10) In the event that the film is underbudget a pro-rata of refund to the Arts Council will be required

11) In the event that the film goes over budget no additional funding will be funded by the Arts Council

12) A contribution to the independent production training fund is required

13) Trainees recruited from a recognized training body should be employed on the film and should be paid and receive credit

14) Disabled people wherever possible should be hired as both trainees and full crew and cast members

15) An Arts Council representative may visit each production during shooting

16) The Arts Council will receive a credit jointly with the other principal equity financiers

17) The Arts Council reserves the right to approve all credits

18) Pre-approved credits include: "Supported by the National Lottery Through the Arts Council of England" or "In Association with the Arts Council of England"

19) Such credits should also be included in all promotional material respecting the film

J. "ELIGIBILITY OF INDIVIDUAL PROJECTS"
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1) Project must qualify as a British film under the terms of the Films Act of 1985

2) Normally the Arts Council expects filming to take place in England although they recognize that some projects may call for location shooting overseas

3) The lottery contribution to the budget must actually be spent in the UK

4) Film projects made together with a foreign producer may be eligible for funding if they are made under the terms of an official co-production agreement

5) There are currently seven bilateral UK agreements (with Australia, Canada, Germany, France, Italy, New Zealand, and Norway)

6) There is no bilateral UK agreement with the U.S.

7) There is also a multilateral convention drawn up under the aegis of the Council of Europe (the European Convention on Cinematographic Co-Production)

8) When deciding whether or not to finance an international co-production the Arts Council will consider the amount of filming and level expenditure intended for England

K. "FUNDING AWARDS FOR INDIVIDUAL PROJECTS"
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1. APPLICATION PROCESS

The Franchisee will be required to submit the following for each individual project:

(a) A short synopsis of the film

(b) The directors intentions for the film

(c) Two independent script assessments

(I). Franchisee will make arrangements for independent script assessments (selecting a reader from an approved list)

(II). The report, however, will sent directly to the Arts Council

(d) Production budget

(e) Summary financing plan

(f) Details of the principal cast, individual producer, line producer, director, director of photography, and editor

(g) Cash flow requirements

(h) Summary of the key conditions of the partnership funding

2) "ASSESSMENT CRITERIA FOR INDIVIDUAL PROJECTS"

(a) "BENEFIT TO THE PUBLIC"

(I) Arts Council will look at the project's potential for promotion of quality and diversity, as well as how the project will reach audiences

(II) Arts Council will look at creative quality to the project and its subject matter, originality in screen writing, and the director's vision

(III)Arts Council will consider marketing strategy for the film and evidence of interest from sales agents and distributors

(b) "FINANCIAL VIABILITY"

(I) Arts Council will consider relationship of budget to potential earnings of film and likelihood of recouping its costs

(c) "LEVEL OF PARTNERSHIP FUNDING"

(I) All lottery funded projects must be co-financed

(II) Franchisee must demonstrate where they expect the financing to come from and be able to raise it in six months

(III)Arts Council will normally not contribute more than £2 million (US$3.2 million) toward the cost of any single film

(IV)No deferred fees may count as partnership funding but projects which include deferments in overall financing structure are not barred

(V) The amount of real cash in the film must be at least equal to the amount of lottery funding applied for

(VI)The amount of deferred fees, cash, and size of overall budget are factors in determining the amount of the award

3) "AWARD PROCESS"

(a) Lottery Film Panel will consider application and make recommendation within four weeks

(b) Lottery Film Panel will give conditional approval or rejection

(c) If project is approved, before funds can be released, the following must be provided:

(d) The final budget (approved by completion guarantor)

(e) The final cashflow (approved by completion guarantor)

(f) Collection agreement offer letter

(g) Offer letters for balance of finance

(h) Copies of the financing agreements, including recoupment schedule

(i) Completion bond offer letter

(j) Underlying rights documentation

(k) Production insurance offer letter ( including Errors and Omissions insurance application)

(l) Laboratory letter

(m) Completion guarantor agreement

(n) Inducement letter from individual producer

(o) Production treaty status (if applicable)

(p) Final script assessment

(q) Once funding is approved and formal agreement between Arts Council and franchisee is in place, draw down of funds will require certification of an independent assessor

L. "DEVELOPMENT FUNDING FOR INDIVIDUAL PROJECTS"
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1) "ELIGIBILITY"

(a) The project must qualify as a "British Film"

2) "FUNDING"

(a) Funding may be provided for script writing and other aspects of project development

3) "CONDITIONS"

(a) The lottery contribution toward development is normally up to 1/3 of the total development cost including script writing

(b) In any event the lottery funding will not be more than 50% of the budgeted cost of development

(c) The franchisee must provide the following items:

(d) Details of the script writer

(e) Details of any other personnel attached to the project

(f) A synopsis

(g) A treatment

(h) Sample dialogue or the latest draft of the screenplay if drafting has begun

(i) An indication of where the film will be made

(j) Copies of chain of title documentation and underlying rights

(k) Evidence of at least a 2 year option on the underlying rights

(l) Development time table and accompanied cash flow statement

(m) Development budget (including cost of developing the project, corporate, legal, accounting fees, office or other overhead costs to be incurred by the producer and related to the specific project)

(n) Additional costs and development budget should include rights or option payments, research, location scouting, casting, budgeting and other practical preparation as appropriate

4) "ASSESSMENT AND DECISION"

(a) Synopsis treatment and screenplay will be assessed by expert development consultants

(b) Lottery Film Panel will consider quality and originality of the concept of the project and the likely appeal of the project to audiences

5) "RECOUPMENT"

(a) The Arts Council will expect to recoup its development cost from distribution revenues if the balance of the film is financed by a lottery contribution

(b) If production is not funded by lottery financing, the development costs will be repayable on first day of photography

M. "WHO WILL PARTICIPATE?" *********************************************************************************
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Producers, financiers, distributors, sales companies, and other financial institutions who

(a) understand the guidelines,

(b) are interested in creative finance,

(c) have an appreciation for British films,

(d) have proven track records,

(e) are willing to take the necessary financial risks, and

(f) are in a position form strategic alliances on a timely basis with British filmmakers and plan for the future