WELCOME… And thank you for your interest in New Mexico's new Financial Investment Program! * * * Important Disclaimer * * * The policies and procedures in the following document are the only official policies adopted by the State of New Mexico pertaining to the Film Investment Program. There are NO other persons, agents, organizations, financial institutions or businesses who in any way represent the policies of the State of New Mexico or its' State Investment Council regarding the details of the film investment program. If, after reviewing this policy you have any questions regarding the policy or possible financial structures acceptable to the New Mexico State Investment Council, we strongly recommend that you speak to or e-mail one of the official representatives listed below. They look forward to hearing from you. 1) New Mexico State Investment Council • Greg Kulka, Alternative Investments Portfolio Manager, State Investment Council 505-424-2550 or Greg.Kulka@state.nm.us 2) New Mexico Film Advisor • You may also wish to email your questions to New Mexico's film advisor, who is under contract with the State Investment Council, at filmadvisor@state.nm.us. The New Mexico Film Office acts in an advisory capacity for the administration of the program as well as provides other tax incentive and production information. Contact Frank Zuniga, the Director, at 800-545-9871, 505-827-9810 or at film@nmfilm.com. NM Film Investment Program Guidelines and Policies Page -1-PRIVATE EQUITY INVESTMENT ADVISORY COMMITTEE NEW MEXICO FILM INVESTMENT PROGRAM INVESTMENT GUIDELINES AND POLICIES March 2002 I. DEFINITIONS As used in the New Mexico Film Investment Program – Investment Guidelines and Policies: 1) “State” refers to the New Mexico Film Office, New Mexico Film Investment Advisor, Private Equity Investment Advisory Committee and the State Investment Council and its staff both individually and collectively. 2) “State Investment Council staff” or “SIC staff” refers to the staff of the State Investment Council and the New Mexico Film Investment Advisor both individually and collectively. II. OBJECTIVES The first objective of the Film Investment Program shall be to invest in/lend to film projects in New Mexico that offer the potential for generating returns to the Severance Tax Permanent Fund that are proportional to the risk assumed in each investment. Projects that pose substantial risk of loss of principal shall not be entertained regardless of any small chance of large profitability if success is achieved. A second objective of the Program shall be to encourage a healthy film production industry in New Mexico that will contribute to the economic growth of the State, without compromising the return of principal or expected returns to the State. The New Mexico Film Office (NMFO) will work with the Private Equity Investment Advisory Committee (PEIAC) to source and recommend investments in films that could be expected to result in the greatest increase in employment opportunity and economic growth in the State. III. INVESTMENT RISKS Financing the production of filmed entertainment poses significant risks that must be understood prior to committing the State’s assets. The primary risks are repayment risk and delivery risk. A. REPAYMENT RISK Where the State’s investment takes the form of a loan in which the principal repayment to the State is guaranteed by a viable entity as described below, obviously the repayment risk to the State is substantially mitigated. Otherwise, film investments are repaid from the generation of realizable proceeds via the exploitation of the subject film through the licensing of available rights in available territories. Therefore it is paramount that the structure is sound and that the distributors and distribution system are of the highest quality. Losses on investments typically occur when: NM Film Investment Program Guidelines and Policies Page -2-1) Sales agents are not able to sell the film into the available territories. 2) The State’s recoupment position in the repayment stream is weak (i.e.: overburdened by priority payments ahead of the State). 3) A distributor defaults on its payment obligation. 4) The film budget is overloaded with unnecessary items. For example, where international sales are the essence of the financing structure, the State must, under then-current market conditions, satisfy itself that the film in question either has generated sufficient sales or that such sales are a virtual certainty based on clear and convincing supporting information. B. DELIVERY RISK The completion bond guarantees the completion of a film on a timely basis in accordance with the criteria (terms of delivery) dictated in the distribution agreement. However, it is very important to note that while the Bond Company insures delivery, it does not insure against the counterparty risk associated with the distributors, or eliminate the risk that delivery disputes may arise. The investor takes the financial risk associated with the obligor. Should an obligor argue that the terms of delivery have not been met and prevail in such a dispute, the investor would then rely on the Completion Guarantor for repayment. However, some distributors use this tactic to delay their eventual payment and cause significant delays to the investors. Notwithstanding the foregoing, in productions where bonding is not industry custom and practice (e.g., the production of television projects or commercials), where the State is satisfied that sufficient completion funds are available and the producer (the company or management team) has had a long and clearly established track-record of on or under-budget completion, the State may entertain transactions where such bonding is not present. Further, where there is a Loan Guarantor or a borrower (see the discussion below) guaranteeing the entire principal amount without the requirement of completion, then a completion bond may not, in the discretion of the State, be required. IV. THE DECISION-MAKING PROCESS The following decision-making process for film project investments is designed to mitigate the above-mentioned risks as much as possible. A. UNDERLYING PRINCIPLES -EQUITY The decision-making process for approving a film (which term shall also include commercial and television production) equity investment will follow four sequential steps. Each step must be satisfied before the next step can begin. • Step One will review each proposal for compliance with the New Mexico statute (Section 7-27-5.26 NMSA 1978) that governs equity investments in films. • Step Two will review each proposal for compliance with the policies in this document. • Step Three will review the financial viability and structure of each proposal for acceptable risk and return parameters. This will be the most critical step of the evaluation. NM Film Investment Program Guidelines and Policies Page -3-• Step Four will consider preferences for New Mexico-based above-the-line talent, including, without limitation, writers, directors, composers, musicians, producers and actors if the first three Steps are satisfied. The following Initial Package materials must be submitted to the New Mexico Film Office to begin the review process. The NMFO will review the Initial Package for completeness and will forward it to the State Investment Council (SIC) staff for financial analysis if it is found to be in proper order. If incomplete, the NMFO will return the Initial Package to the applicant along with a list detailing the missing items. The applicant will then have ten (10) business days to resubmit a revised Initial Package containing the requested information. No resubmissions after this time period will be accepted. The Initial Package (equity): 1) The Script (including a synopsis) and Principal Creative Elements List (principal cast, writer, producer & director); 2) The Budget; 3) The Distribution Plan (see Appendix A.), including a) Domestic Distribution, b) International Distribution, and c) Sales Estimates; 4) The Completion Bond (see Appendix B.), where required (NOTE: not required where the type of production contemplated does not customarily use the bonding process and there is submitted and substantiated evidence of both an experienced production unit and reasonable cash available to complete); 5) The Financing Sources (see Appendix C.); 6) Above the-line and Talent Attachments (if required for State approval); 7) The Preliminary Production Schedule; and 8) The Cash Flow Schedule. B. REVIEW OF THE INITIAL PACKAGE (EQUITY): Guidance for the review of the Initial Package is as follows: The Script: When investors read scripts it should not be with the intent to critique or re-write the screenplay. If investor input is needed, then the State is probably working with the wrong producing team. Instead the focus will be on the economic nature of the film. The State must look for the type of audience that is targeted, and to make sure that the scenes described in the script can be made under the proposed budget restrictions and are likely to meet the rating guidelines. Not every film is made for a wide audience. A film with little commercial appeal will probably require a tighter budget to reduce the investment risk. In evaluating the script versus budget considerations, the State will rely on the Bond Company, or Completion Guarantor, where required. The Budget: Review of the budget will focus primarily on the "above the line costs", given the role of the Bond Company, which reviews the ability to shoot the script as intended under the proposed budget considerations. In the review, the State must look for line items that could be deferred until after the investment is recouped, such as producer fees. In reviewing "below the NM Film Investment Program Guidelines and Policies Page -4-line costs" the State will also look to make sure that funds have been reserved for delivery of materials. The Distribution Plan: A domestic distribution contract is necessary for many films to recover their costs, but not every film will have domestic distribution in place. In fact, some films may not even need to secure domestic distribution to effect its repayment, instead relying solely on foreign sales (this strategy requires a very strong sales company and a tight budget, and is highly unlikely). Another option is a film that is intended to go direct to cable or video, and thus will not have other distribution contracts. In the review of the distribution plan, the first step is to make sure that a plan does indeed exist. Where presales are the basis for the recovery of principal at a minimum, clear and convincing evidence, under then-current market conditions, must be provided and substantiated to the satisfaction of the State as to the viability of both the presales and potential presales. So-called “gap” financing shall be permitted only under the highest standards applied by conservative banks that typically make such loans. In evaluating what to look for in the plan, the State will focus on the quality of the sales agent and distributors attached to the film, and the track record of the producers, and, as indicated above, the basis for any projections of presales. Currently acceptable sales agents and distributors are listed in Appendix A (which is subject to change at any time). All proposals submitted for evaluation must have a contract with at least one firm on this list. The State must also factor in the strengths or weaknesses that a project may have in different territories based upon its inherent characteristics (genre, talent, etc.) and the probative value of evidentiary sales in key markets. The size of the budget also plays an important role in analyzing the distribution prospects. For example, the larger the budget the more important it is for a solid distribution plan to be in place in order to mitigate investment risk. The Completion Bond or Completion Guarantor (each referred to as the “Completion Guarantor”): The primary role of the Completion Guarantor is to insure completion of the film in a timely manner as in accordance with the distribution contract(s) and to effect delivery to the distributors. Prior to the financing, the Completion Guarantor is the one who reviews the production schedule and verifies that the budget will be adequate to fund the production of the film. During the production, the Completion Guarantor serves as a "watchdog" by acting as a signer on the production account, verifying the flow of cash, and monitoring the progress of the production. Care must be made in selecting a Completion Guarantor to insure that it is capable of servicing all aspects of its role from vetting the production schedule to effecting delivery. Completion Bonds will be accepted from Completion Guarantors listed in Appendix B. The Financing Sources: How will the film be financed? In addition to the State investment, what are the other sources that will be used to finance the picture? The common sources are equity investments, bank loans, and direct cash flows from the distributors. Usually a bank loan exists if there are pre-sales contracts that have been made. The bank provides a bridge loan to expedite the cash flow from such contracts. In essence, the production cannot collect the pre-sales payments until the film has been delivered, but needs the cash in order to complete the film. To provide the bridge financing, the bank will take a first position security interest in the existing distribution contracts. NM Film Investment Program Guidelines and Policies Page -5-When structuring the investment it will always be the State’s desire to be in first position. The only exception will be when a bank investor co-exists and its role vis-à-vis the State is clearly defined. Under this structure, the State will inherit the first position after the bank is paid off. These issues should not arise with other equity investors, who would all be subordinate to the State. Acceptable financing structures are listed in Appendix C. Talent Attachments: Having stars attached to the film does not in itself answer the question of whether or not to invest in any particular project. Instead, attachments help to gauge the commercial impact of a film and weigh budget considerations. The Production Schedule: The production schedule, in addition to verifying how much time will be spent in New Mexico, will provide timetables to measure the production cycle of a film and to justify budgetary assumptions made by the production team. C. UNDERLYING PRINCIPLES – DEBT/LOANS The decision-making process for approving a film (which term shall also include commercial and television production) debt investment will follow four sequential steps. Each step must be satisfied before the next step can begin. • Step One will review each proposal for compliance with the New Mexico statute (Section 7-27-5.26 NMSA 1978) that governs debt investments in films. • Step Two will review each proposal for compliance with the policies in this document. • Step Three will review the financial viability and structure of each proposal for acceptable risk and return parameters. Since the guaranteed repayment of the relevant loan by a viable entity, as required by the statute and the regulations, is the essence of this type of transaction, particular attention will be focused on the borrowing/guaranteeing entity and the nature of the guarantee (i.e., conditions and limitations). This will be the most critical step of the evaluation. Additionally, the probabilities/possibilities to generate eventual profitability, which is the substitute for interest, will also be examined. • Step Four will consider preferences for New Mexico-based above-the-line talent, including, without limitation, writers, directors, composers, musicians, producers and actors if the first three Steps are satisfied. The following Initial Package materials must be submitted to the New Mexico Film Office to begin the review process. The NMFO will review the Initial Package for completeness and will forward it to the SIC staff for financial analysis if it is found to be in proper order. If incomplete, the NMFO will return the Initial Package to the applicant along with a list detailing the missing items. The applicant will then have ten (10) business days to resubmit a revised Initial Package containing the requested information. No resubmissions after this time period will be accepted. The Initial Package (debt): 1) The Script (including a synopsis) and Principal Creative Elements List (principal cast, writer, producer & director); 2) The Budget; 3) The Distribution Plan (see Appendix A.), including a) Domestic Distribution, b) International Distribution, and NM Film Investment Program Guidelines and Policies Page -6-c) Sales Estimates; 4) The Completion Bond (see Appendix B.), where required by the entity guaranteeing repayment to the State (NOTE: not required if the loan guarantee is absolute or where the type of production contemplated does not customarily use the bonding process and there is submitted and substantiated evidence of both an experienced production unit and reasonable cash available to complete); 5) Detailed Identification of the Borrowing and Guarantor Sources with sufficient documentation of financial bona fides (i.e., compliance with statutory and regulatory requirements or sufficient and properly certified financial information for the State to determine that such entities are otherwise fully qualified within the meaning of said statutes and regulations); 6) All Lending/Guarantee Agreements (including side agreements, if any) setting forth the actual guarantee of repayment to the State; 7) The Preliminary Production Schedule; and 8) The Cash Flow Schedule. D. REVIEW OF THE INITIAL PACKAGE (DEBT): Guidance for the review of the Initial Package is as follows: The Script: The lending review will be similar to the one applicable to equity, but the economic value review will be less stringent since recoupment is guaranteed, and the State is only looking to upside as a substitute for interest. The Budget: Again, the depth of the State’s review of the budget will necessarily be less than that of an equity investment, with the State’s primary emphasis to be on the borrowing /lending entity (see below) and the contractual limitations of the relevant agreements. A budgetary review is also necessary for lending purposes to ascertain potential for upside (the substitute for interest). The Distribution Plan: The State’s inquiry into the structure of distribution or potential distribution shall simply be to ascertain the potential for profitability with the understanding that in such circumstances, the non-existence of firm distribution agreements may not be fatal to the application. Where actual distribution has not been secured, the applicant must at least describe to the State the strategy which the applicant intends to pursue, what efforts have already been made to ascertain the film’s commercial viability, and where the film, in its current stage of development, has been rejected for distribution or other exploitation. Note that the State will get repaid its loan upon the earlier to occur of actual earn-out under the distribution agreements or the outside date agreed-upon for the guarantee to the State. The Completion Bond or Completion Guarantor (each referred to as the “Completion Guarantor”): Unless otherwise exempted hereunder, where a completion bond is required by the guarantor of repayment to the State as a precondition to the guarantee, then a qualified bond from a qualified Completion Guarantor is required. The primary role of the Completion Guarantor is to insure completion of the film in a timely manner as in accordance with the distribution contract(s) and to effect delivery to the distributors. Prior to the financing, the Completion Guarantor is the one who reviews the production schedule and verifies that the budget will be adequate to fund the production of the film. During the production, the Completion Guarantor serves as a "watchdog" by acting as a signer on the production account, verifying the flow of cash, and monitoring the progress of the production. NM Film Investment Program Guidelines and Policies Page -7-Care must be made in selecting a Completion Guarantor to insure that it is capable of servicing all aspects of its role from vetting the production schedule to effecting delivery. Completion Bonds will be accepted from Completion Guarantors listed in Appendix B. The Borrowing and Guaranteeing Sources: Where the nature of the requested State investment is a loan where upside is substituted for interest, the State is required only to accept borrowers or Loan Guarantors with extremely measurable financial solidity. The State statute and implementing regulations have set forth minimum debt rating criteria or other clear identifiability of corporate entities and rating criteria for banks that would be the guarantors of repayment of the principal amount to the State. In these circumstances, the borrowing entity must be or provide a Loan Guarantor that is either a United States incorporated A-rated bank (which would require a letter of credit or equivalent from said bank), a company that is traded on a national U.S. exchange and rated by Standard & Poors or Moodys at a rating of at least BBB or Baa respectively, or such other company or entity which meets the criteria described below. The State will also accept such companies and such Loan Guarantors with certified and audited financials (by any of the top five U.S.-based accounting firms or such other accounting firms as are approved by the State) showing a net worth of at least $500 million that are not in or likely to be in material default of any of their significant financial obligations and will consider obvious and larger commercial borrowers and/or Loan Guarantors with significant national brand identity, which may be larger, privately held companies, or subsidiaries of larger, publicly traded companies. Provisions have also been made to allow the State to consider guarantors who might not fall within the above clearly established parameters. The State will entertain accepting other such borrowing entities or Loan Guarantors which have audited financial statements evidencing substantial net worth and that have significant operating experience so as to accord the State virtual certainty that the loan issued will be repaid on a timely basis. Note that the State is seeking absolute assurances that the guaranteeing entity is not only commercially viable, in the broadest sense, but able to meet its repayment obligation to the State and withstand the vagaries of its own business operations and a fluctuating economy. This requires not only a longer-term track record and a strong balance sheet, but also clear and instant access to all necessary liquidity that the guaranteeing entity might require in connection with the foregoing. Financial information from such an entity must be submitted to the State and must be certified by an outside auditor approved by the State (as indicated, the so-called “big five” U.S.-based accounting firms are pre-approved). Note that the State is unlikely to approve smaller companies that almost by definition cannot meet these criteria. Talent Attachments: Having stars attached to the film does not in itself answer the question of whether or not to lend in any particular project. Instead, attachments help to gauge the commercial impact of a film and weigh budget considerations. The Production Schedule: The production schedule, in addition to verifying how much time will be spent in New Mexico, will provide timetables to measure the production cycle of a film and to justify budgetary assumptions made by the production team. NM Film Investment Program Guidelines and Policies Page -8-E. EVALUATION OF THE REQUEST (GENERAL): In the evaluation of the request, the primary question in the decision making process is the strength of the repayment prospects, which can be answered by focusing on the following: 1) How does the State get repaid? 2) Where a loan is the State investment: a) who is the ultimate guarantor to the State for the repayment of the loan principal? b) what is the quality of the guarantor and the agreement making the guarantee? 3) Where equity is the State investment: a) what are the quality of the other financiers and the nature of the financing? 4) What is the quality of the relevant completion guarantors, talent and production team, as appropriate? 5) Does the project otherwise comply with all statutory and regulatory requirements? 6) Is the distribution plan sound or, where actual distribution is not required (as in the case of loans), is the strategy viable? 7) Does the budget work or is it inflated? 8) What is the prospect for profitability? 9) What are the benefits of the production to the New Mexico economy? F. DEVELOPMENT OF THE PROPOSED INVESTMENT STRUCTURE: The structure of the investment incorporates the mechanisms for effecting the repayment of all financing, and as a result the structure is expected to mitigate the weaknesses associated with any given project. In fact, the investment structure for each project will be more of a determining factor towards the investment’s repayment than the film's critical reviews and/or financial returns. The key consideration points in the development of the investment structure are: 1) Form of the Structure: 2) The Repayment Position; 3) Distress Options, including: a) Foreclosure, or b) The Power of Sale; 4) Level of Investment. In debt structures, the ultimately responsible guarantor of the repayment of principal to the State shall enter into a set of documentary agreements which shall follow normal and customary loan guarantee structures required by prudent banks under similar circumstances and shall be subject to full and complete legal review by the State to assure compliance with such standards. V. APPROVALS AND NEGOTIATIONS Approval of film investments and the concomitant deal negotiations will depend on the type of investment. The process is as follows: A. EQUITY (OR EQUITY PLUS LOAN) Applicants presenting a preliminarily qualified film that fits all of the above criteria shall inform the SIC staff by means of an abstract (The Initial Package (Equity), Section III. A.) as to all of the NM Film Investment Program Guidelines and Policies Page -9-material terms and conditions of the distribution of the subject film, and shall, upon request, furnish the SIC staff with copies of all agreements of distribution supporting the abstract. When the applicant certifies that all required agreements that have been entered into prior to production of the subject film reflecting distribution, invested equity, completion bond (or a binder for such bond) and required presales and other such mandated agreements (the applicant should maximize the presentation for an equity investment, in effect putting the “best possible case forward”) have been provided to the State, the SIC staff will have thirty (30) business days thereafter to respond with an invitation to negotiate, request additional information or reject the application as being a non-conforming application or that engenders excessive risk or provides insufficient opportunity for upside. The applicant will then have five business days in which to respond if additional information is required or to designate applicant’s negotiator to establish an agreement if the SIC issues an invitation to negotiate. Negotiations, if authorized per the above, shall commence within ten (10) business days of the SIC’s receipt of the contact information for the applicant’s designated negotiator. The SIC shall not be required to negotiate for a period exceeding thirty (30) days from the expiration of the aforesaid ten (10) day period and shall, in any event, be subject to the reasonable schedule of availability as designated by the SIC-appointed negotiators. Once an offer is made and accepted, the parties agree to proceed as expeditiously as possible to prepare final documents, with the understanding that the applicant shall be responsible for the SIC’s outside legal and accounting fees incurred in connection therewith. If for any reason other than the SIC’s failure to provide the requisite funds or failure to provide the required documents within 45 days of approval, the loan agreements are not finalized, the applicant shall still be responsible for the cost of the SIC’s legal and accounting fees incurred to date in connection with said investment. Once final documentation has been prepared, both the Private Equity Investment Advisory Committee and the State Investment Council must formally approve said documents at the next regularly scheduled meeting of each body. After such approval, the agreed upon funds shall be available as specified in the investment agreements. NOTE: Once an application for an equity investment for a specific project has been rejected, unless the reason for such rejection is the unavailability of funds, the SIC shall not be required to review any further applications for the same project even if new material elements have been added. Therefore, applicants are encouraged to submit projects for approval in a best-case scenario in their initial application. B. LOANS The applicants presenting a preliminarily qualified film with a loan guarantor/borrower company that fits the above, required criteria, shall inform the SIC staff by means of an abstract (The Initial Package (debt), Section III. C.) as to all of the material terms and conditions of the distribution of the subject film, and shall, upon request, furnish the SIC staff with copies of all agreements of distribution supporting the abstract. Applicants may request a loan outside repayment date of up to four years on films intended for initial exploitation on television and up to five years on films intended for initial exploitation in theaters, with the understanding that the longer the requested outside payback date, the greater will be the State’s participation in post-breakeven revenues in the subject fund. NM Film Investment Program Guidelines and Policies Page -10-When the applicant certifies that all agreements that have been entered into prior to production of the subject film have been provided to the State, the SIC staff will have thirty (30) business days thereafter to propose a specific participation in lieu of interest, request additional information or reject the application as being a non-conforming application or not providing sufficient opportunity for upside. The applicant will then have five business days in which to respond if additional information is required or accept if an offer is made. Once an offer is made and accepted, the parties agree to proceed as expeditiously as possible to prepare final documents, with the understanding that the applicant shall be responsible for the SIC’s outside legal and accounting fees incurred in connection therewith. If for any reason other than the SIC’s failure to provide the requisite funds or failure to provide the required documents within 45 days of approval, the loan agreements are not finalized, the applicant shall still be responsible for the cost of the SIC’s legal and accounting fees incurred to date in connection with said loan. Once final documentation has been prepared, both the Private Equity Investment Advisory Committee and the State Investment Council must formally approve said documents at the next regularly scheduled meeting of each body. After such approval, the agreed upon funds shall be available as specified in the loan agreements. The State recognizes that film and television production is not a perfect orderly and linear process, and that knowledge that the loan is available may be required as a condition to the closing of the guarantee as required above. Therefore, subject to the availability of funds, the State is prepared to entertain applications in which the primary guarantor is identified and expresses in writing a willingness to provide the required guarantee pending loan approval even if that guarantee is not given until closing. Additionally, the State is prepared to entertain films where the guarantor is secured even if the ultimate distribution of the film may occur at a later time. C. AVAILABILITY OF FUNDS Applicants for the loan can monitor the SIC’s Website at www.state.nm.us/nmsic to ascertain the availability of unused funds for film and television (collectively “film”) investing/lending purposes under the enabling legislation. The Severance Fund cannot lend/invest beyond the amounts authorized by the Legislature, and the Website has been established to present current information, especially since the fund is a revolving structure where repaid monies on previous films will be placed back into the available lending structure. Projects will be considered on a first-come, first-served basis. If two or more projects are submitted at the same time and these requests for funds exceed the amount available under the film investment program, the financial characteristics of the project and its impact on the New Mexico economy will be used as selection criteria. VI. INVESTMENT POLICIES To provide a reasonable probability of recouping the State’s investments, the following policies will be followed: A. DEBT AND/OR EQUITY INVESTMENTS NM Film Investment Program Guidelines and Policies Page -11-1) The Film must have a no more restrictive rating than “PG 13” from the MPAA, unless a rating of “R” is acceptable to the NMFO, the PEIAC, and the SIC. If the State’s ratings requirement is not met before delivery, the contract will require that the sales agent and/or distributor have editing rights once the film is delivered and do whatever is necessary to comply with the ratings requirement. 2) All financing sources used to determine the STPF investment must be payable in U.S. dollars and not exceed 100% of the approved production costs (the strike price) covered by the completion bond. Only approved development or acquisition costs will be part of the budget. 3) A loan from the Severance Tax Permanent Fund may be up to $7,500,000 and can account for 100% of the cash financing for each film. 4) A completion bond, except as exempted above, is required under the following policies: a) Pre-approved bond companies are listed in Appendix B.; b) The State must be named as the loss payee under the bond; c) The bond must guarantee delivery to all distributors; and d) The State may request at its option to be copied on all reports to the Completion Guarantor. 5) The State must be named as an additional insured party under the Errors & Omissions insurance policy and all other liability insurance policies, and each film is required to secure and maintain all forms of customary (industry standard) insurance. All insurance coverages must meet normal industry standards as to policy limits and deductibles. 6) The State will require audit rights and full reimbursement for its legal and accounting fees incurred in reviewing and documenting its transactions. 7) Any film project that obtains financing from the State of New Mexico must agree to hire a minimum of 60% of the below-the-line (as that term is understood within the film industry) crew (to be measured by dollars expended as opposed to numbers of personnel) from New Mexico residents (having lived in and with their principal residence in New Mexico and having filed New Mexico income tax returns for at least the period including the full tax year preceding the year of application up to and including the present), then the subject film shall be deemed “preliminarily qualified”. 8) The State will have the right to review and approve the percentage of the budget to be spent in the State. At a minimum, all of the State’s equity investment will be spent in the State. 9) The investment must comply with New Mexico law. B. EQUITY ONLY INVESTMENTS 1) First-time producers will not be acceptable, unless they are affiliated with seasoned producers who are clearly responsible and fully active. 2) The State must be in first position in regards to its investment, unless it agrees to be behind specific collateral that is not intended to be part of the repayment stream for the State. 3) The Severance Tax Permanent Fund may invest equity up to $7,500,000 per film and will account for no more than 50% of the cash financing for each film, 4) Financing sources, the distribution plan, the sales agent, and all distributors must be recommended to the SIC by a Professional Advisor, who carries sufficient industry knowledge to conform to the Prudent Investor Act. 5) At least one acceptable, fully executed distribution contract is required under the following policies: a) Distribution contracts will only be accepted from distributors approved by the Advisor and by the State, with the payment and distribution terms included in such NM Film Investment Program Guidelines and Policies Page -12-contracts to be in a form and manner satisfactory to the Advisor and to the State. Payments of minimum guarantees due under such contracts must be paid on or prior to delivery; b) All distribution contracts must be bankable, unless collateralized by an irrevocable Letter of Credit in favor of the SIC through a U. S. bank acceptable to the SIC, and guarantee payment when the film is available for delivery; c) Guaranteed distribution contracts must cover a minimum of 75% of the total production costs, and sales estimates on the available and unsold rights must be approved by the Advisor and by the State and demonstrate satisfactory coverage (as determined by the Advisor and State in its sole discretion) of the uncovered portion of the State's investment (if any). At least one distribution contract must be in place under State law; d) An agreement with a sales agent does not constitute a distribution contract; e) For straight theatrical distribution films, domestic theatrical distribution contracts with established companies will be preferred; f) If the film’s total production budget is greater than $3,500,000, then domestic distribution contracts must be in place with the distribution terms and conditions to be approved by the Professional Advisor; g) Distribution contracts for straight theatrical distribution films must contain a theatrical release clause that guarantees a release appropriate with the size of the film’s production budget; and h) Non-theatrical films (straight to cable or video) must have a distribution contract with an acceptable distributor. 6) At a minimum, all of the State’s equity investment will be spent in the State. 7) No development fees other than the writer’s fees will be part of the budget, and the State will require control of the reimbursement of overhead costs. 8) Exceptions to any of these policies will be made only upon the recommendation of the Advisor, and with the concurrence of the NMFO, the PEIAC and the SIC. Any exceptions must be based upon compelling evidence of additional financial value that justifies the exception, and fully documented. VII. ADVISORY ROLE The film investment process requires sufficient industry knowledge from start to finish to review, approve and structure investments. The State Investment Officer will retain a full time professional advisor to assist with establishing policies, reviewing packages, recommending and financially structuring film investments for approval by the PEIAC and the State Investment Council. * * * * * NM Film Investment Program Guidelines and Policies Page -13-Appendix A Pre-approved Distribution Companies and Sales Agents Studios Other Labels Disney Buena Vista DreamWorks Fox Fox Searchlight, Fox 2000 MGM United Artists Sony Sony Pictures Classics, Screen Gems, Columbia TriStarUniversal Universal Focus Warner Other Major Domestic Distributors Relationship Artisan Lions Gate Miramax Owned by Disney New Line Owned by TimeWarner AOL USA Films Owned by Barry Diller and Vivendi Productions Companies with Studio Ties Relationship Beacon Distribution through Universal Castle Rock Owned by TimeWarner AOL Hyde Park Distribution through MGM/Disney plus Epsilon Lakeshore Distribution through Paramount Mandalay Pictures Distribution through Paramount Morgan Creek Distribution through Warner Radar Pictures Distribution through Sony plus Good Machine Regency Distribution through Fox Revolution [merger with Spyglass] Distribution through Sony Spyglass Distribution through Disney Working Title Distribution through Universal Worldwide Sales Companies (top tier) Relationship Good Machine First Look with Miramax, sales agent for USA, Radar Icon Owned by Mel Gibson Intermedia Senator International Sales Agent for, Senator Summit Sales Agent for Artisan Other Sales Companies Relationship Fireworks Owned by CanWest Kathy Morgan International Major International Distributors Relationship Canal Plus (StudioCanal, Wild Bunch) Owned by Vivendi Universal TF1 Village Roadshow Domestic Distribution through Warner NM Film Investment Program Guidelines and Policies Page -14-Appendix B Pre-approved Bonding Companies A completion bond is required on all proposals. Completion Bonds will be accepted from the Bond Companies listed below: 1. Film Finances; 2. International Film Guarantors (IFG); 3. Cinema Completions International (CCI). And others approved by the Advisor NM Film Investment Program Guidelines and Policies Page -15-Appendix C Pre-approved Financing Structures Each investment made by the STPF will be structured independently, with each structure designed to maximize the repayment potential of each particular investment and to mitigate any inherent weaknesses or risks associated with each film project. In the first two structures below, the counterparties will be sales companies and very established producers that have a visible and successful track record of garnering distribution for their films. Under the third structure, the production partner would be a domestic distributor. All counterparties must be from the pre-approved list (Appendix A.). Structure 1 2 3 Percentage of Investment Up to $7.5MM but not to exceed 50% of the approved budget. Same. Same. Recoupment Position First Position. Sales and distribution fees to be deferred until the STPF is repaid in full. Second Position, junior solely to senior lender. All sales and distribution fees to be deferred until the STPF is repaid in full. First position unless senior lender is involved in the structure. A reasonable level of fees and P&A may be allowed for the domestic distributor prior to STPF’s repayment with such amount to be capped. If a third party sales agent handles international distribution, then all international sales fees will be deferred until minimum international sales target is reached. Completion Bond Yes – from pre-approved list in Appendix B. Yes – from pre-approved list in Appendix B. Yes – from pre-approved list in Appendix B. Pricing Capitalized Interest and Fees. Must have an equity corridor in the gross profits. Capitalized Interest and Fees with Equity Participation. Capitalized Interest and Fees. The amount of the equity corridor in the gross profits will be based on the risk profile of the transaction. Collateral First position security interest in all rights in and to the film asset including distribution rights. Named loss payee on the insurance package and beneficiary on the completion bond Second lien on the film assets and rights, junior solely to the senior lender and position accelerates to first upon payoff of the senior loan. First position security interest in all rights in and to the film asset including distribution rights. Named loss payee on the insurance package and beneficiary on the completion bond NM Film Investment Program Guidelines and Policies Page -16-