<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997.
REGISTRATION NO. 333-35337.
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
NEW FRONTIER MEDIA, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 5190 84-1084061
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Identification
No.)
incorporation or organization) Classification Code Number)
1050 WALNUT STREET, SUITE 301
BOULDER, COLORADO 80302
(303) 444-0632
(Address, including zip code, and telephone number,
including area code, of registrant's principal place of business)
------------------------------
MICHAEL WEINER
1050 WALNUT STREET, SUITE 301
BOULDER, COLORADO 80302
(303) 444-0632
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
Copies of all communications to:
Issuer's Counsel: Underwriter's Counsel:
KENT D. KRAUSMAN, ESQ. DENNIS J. DOUCETTE, ESQ.
Krausman, L.L.C. Luce, Forward, Hamilton & Scripps, LLP
3200 Cherry Creek South Drive, Suite 600 West Broadway, Suite 2600
400
Denver, Colorado 80209 San Diego, California 92101
Telephone: (303) 777-6277 Telephone: (619) 236-1414
Facsimile: (303) 777-8277 Facsimile: (619) 232-8311
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITY AMOUNT BEING MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share..... 1,725,000 $5.50 $9,487,500 $3,162(3)
Common Stock, par value $.001 per share,
issuable upon exercise of the
Underwriter's Warrants(4)................. 150,000 $7.00 $1,050,000 $350
Totals...................................... $10,537,500 $3,512(3)
</TABLE>
(1) Includes 225,000 shares which the Underwriters have the option to purchase
to cover overallotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as
amended.
(3) $2,886 of registration fee was paid on initial filing; Company is submitting
$626 difference with this filing.
(4) The Company has agreed to sell the Managing Underwriter a Warrant (the
"Underwriter's Warrant") for $100 at closing of this offering. The
Underwriter's Warrant shall entitle the Managing Underwriter to purchase up
to 10 percent of the number of shares of Common Stock purchased by the
underwriters in this offering. The Underwriter's Warrant is exercisable at
130 percent of the offering price of the shares of Common Stock being
offered hereby, for a period of four years beginning one year from the date
of closing of this offering. See "UNDERWRITING."
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
NEW FRONTIER MEDIA, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM CAPTION LOCATION OR CAPTION IN PROSPECTUS
- ----------- ---------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Page of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors................ Prospectus Summary; Risk Factors
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Cover Page; Risk Factors; Underwriting
6. Dilution............................................ Dilution
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Underwriting
9. Legal Proceedings................................... Business--Legal Proceedings
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management; Principal Shareholders
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal Shareholders
12. Description of Securities........................... Description of Securities
13. Interest of Named Experts and Counsel............... Legal Matters
14. Disclosure of Commission Position on Indemnification
for Securities...................................... Part II: Item 24; Item 28
15. Organization Within Last Five Years................. Prospectus Summary; Certain Transactions
16. Description of Business............................. Risk Factors; Business
17. Management's Discussion and Analysis or Plan of
Operations.......................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property............................. Not Applicable
19. Certain Relationships and Related
Transactions........................................ Certain Transactions
20. Market for Common Equity and Related Shareholder
Matters............................................. Description of Securities
21. Executive Compensation.............................. Management--Executive Compensation
22. Financial Statements................................ Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. Not Applicable
</TABLE>
<PAGE>
DATED NOVEMBER 12, 1997
PROSPECTUS
[LOGO]
NEW FRONTIER MEDIA, INC.
1,500,000 SHARES OF COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by New
Frontier Media, Inc. (the "Company"). Prior to this Offering, a limited public
market for the Common Stock of the Company has existed. The Company's Common
Stock is currently traded on the Nasdaq "Bulletin Board" under the symbol
"NOOF." See "UNDERWRITING" for a discussion of the factors to be considered in
determining the public Offering price. The Company has applied to have its
Common Stock approved for quotation on the Nasdaq SmallCap market under the
symbol "NOOF."
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company intends to utilize approximately 64% of the net proceeds from
this offering to enter the satellite broadcasting business. See "USE OF
PROCEEDS." The Company has no prior experience in satellite broadcasting. See
"RISK FACTORS" and "BUSINESS."
THE COMPANY AND THE MANAGING UNDERWRITER MAY BE REQUIRED TO MAKE A RECISSION
OFFER TO INVESTORS IN THIS OFFERING IF THE COMPANY FAILS TO COMPLETE THE FIFTH
DIMENSION ASSETS ACQUISITION. SEE "BUSINESS." PROCEEDS FROM THIS OFFERING WILL
NOT BE PLACED IN ESCROW PENDING COMPLETION OF THE FIFTH DIMENSION ASSETS
ACQUISITION (AS DEFINED HEREIN). SEE "RISK FACTORS." THE FIFTH DIMENSION ASSETS
ACQUISITION INCLUDES SUBLEASING OF SATELLITE TRANSPONDERS BY THE COMPANY FROM
FIFTH DIMENSION. THE COMPANY HAS OBTAINED NEITHER AN OPINION FROM INDEPENDENT
COUNSEL NOR THE CONSENT OF THE TRANSPONDER LESSORS CONCERNING THE VALIDITY OF
THE SUBLEASES. SEE "RISK FACTORS."
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................. $5.25 $.525 $4.725
Total (3)............................................. $7,875,000 $787,500 $7,087,500
</TABLE>
(1) See "UNDERWRITING" for indemnification arrangements with the several
Underwriters. In addition to the underwriting discount, the Company has
agreed to pay the Managing Underwriter a 3% nonaccountable expense
allowance, and to sell the Managing Underwriter a warrant to purchase a
number of shares of Common Stock equal to 10% of the shares of Common Stock
sold in this Offering. See "UNDERWRITING."
(2) Before deducting expenses of the Offering payable by the Company, including
the Managing Underwriter's nonaccountable expense allowance estimated to be
$236,250 ($271,688 if the Underwriter's Overallotment Option is exercised in
full), estimated at $486,250.
(3) The Company has granted to the Underwriters a 30-day option (the
"Overallotment Option") to purchase up to 225,000 additional shares of
Common Stock on the same terms as the Common Stock offered hereby solely to
cover overallotments, if any. If the Overallotment Option is exercised in
full, the total Price to Public, Underwriting Discount, and Proceeds to
Company will be $9,056,250, $905,625, and $8,150,625, respectively. See
"UNDERWRITING."
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about November 15,
1997 against payment therefor at the offices of the Managing Underwriter, 1020
Prospect Street, Suite 200, La Jolla, California 92037.
CENTEX SECURITIES
INCORPORATED
The date of this Prospectus is November 12, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING, AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS FOUND ELSEWHERE IN THIS PROSPECTUS, AND THE
INFORMATION INCORPORATED HEREIN BY REFERENCE. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVERALLOTMENT OPTION.
SEE "UNDERWRITING." AS USED IN THIS PROSPECTUS, THE TERM "NEW FRONTIER MEDIA"
AND THE "COMPANY" REFER TO NEW FRONTIER MEDIA, INC. AND ITS SUBSIDIARIES, UNLESS
OTHERWISE STATED OR INDICATED BY THE CONTEXT. INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH IN "RISK FACTORS." EXCEPT WHERE OTHERWISE
INDICATED, ALL SHARE AND PER SHARE DATA IN THIS PROSPECTUS (INCLUDING DATA WITH
RESPECT TO OPTIONS AND WARRANTS TO PURCHASE SHARES OF COMMON STOCK) HAVE BEEN
ADJUSTED TO REFLECT THE FIFTH DIMENSION ASSETS ACQUISITION (AS DEFINED HEREIN).
SEE "BUSINESS." THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WHICH MAY INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
New Frontier Media, Inc. (the "Company") is a diversified holding company,
consisting of four subsidiaries: (1) Colorado Satellite Broadcasting, Inc.
("CSB"); (2) DaViD Entertainment, Inc. ("DaViD"); (3) Boulder Interactive Group,
Inc. d/b/a Inroads Interactive ("Inroads"); and (4) Fuzzy Entertainment, Inc.
d/b/a In-Sight Editions ("In-Sight"). The Company is engaged in three primary
business activities: (i) reference CD-ROM publishing; (ii) acquisition and
distribution of unrated and adult feature films in all video disc formats,
including 12" laserdisc and 5 1/4" digital versatile disc; and (iii) fine art
and decorative art poster publishing and distribution. The Company has suffered
losses in all but two quarters since its inception on July 26, 1995. See
"FINANCIAL STATEMENTS."
The Company intends to enter into a fourth business, satellite broadcasting
of adult entertainment, upon completion of the acquisition of certain assets
from Fifth Dimension Communications (Barbados), Inc., a Barbados corporation,
1043133 Ontario Inc., an Ontario (Canada) corporation, 1248663 Ontario Inc., an
Ontario (Canada) corporation, and Merlin Sierra, Inc., a California corporation
(hereinafter referred to collectively as "Fifth Dimension"). See
"BUSINESS--Fifth Dimension Assets Acquisition." The Company has entered into
agreements to acquire certain assets of Fifth Dimension, subject to successful
completion of a public offering by the Company of at least $7,000,000 (the
"Fifth Dimension Assets Acquisition"). See "USE OF PROCEEDS" and "BUSINESS." The
Company intends to utilize its wholly-owned subsidiary CSB to acquire certain
Fifth Dimension assets and operate the subscription-based and transaction-based
television networks acquired from Fifth Dimension. See "BUSINESS--Fifth
Dimension Assets Acquisition."
RECENT DEVELOPMENTS
The Company is currently engaged in disputes with Sands Brothers & Company
("Sands Brothers"), a New York investment banking concern, and with Quarto
Holdings, Inc. ("Quarto"), a wholly-owned subsidiary of Quarto Group, Inc., a
co-edition book publisher. Quarto owns 30 percent of Inroads. The Company
disputes the validity of and is vigorously contesting the Sands Brothers' and
Quarto claims. See "BUSINESS--Legal Proceedings."
Inroads and DaViD are in transition periods. Inroads' sales and marketing
focus has shifted to a more specialized "enthusiast and hobbyist" consumer
niche, as evidenced by Inroads' recent releases of CD-ROM titles GUNS and
CIGARS. DaViD has recently transitioned from being a licensor of adult films for
release exclusively on LaserDisc, to a licensor and distributor of such films on
Digital Versatile Disc. These transitions have negatively impacted the Company's
revenues and cash flow; accordingly, on October 24, 1997 the Company obtained an
unsecured, conditional, revocable $1,000,000 line of credit from one of the
Company's principal shareholders. The Company may draw against this line of
credit beginning January 1,
3
<PAGE>
1998, for a period of nine months. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity" and "FINANCIAL
STATEMENTS (Note 10)."
BUSINESS STRATEGY
The Company's business strategy is to create, license, and/or acquire
high-quality (professionally produced, directed, and/or filmed, with paid
actors) content that can be successfully placed into the Company's strong
distribution networks and exploited through analog and digital disc
technologies, satellite broadcasting, and print media. A substantial portion of
the net proceeds from this offering will be utilized to complete the Fifth
Dimension Assets Acquisition, which will result in the Company becoming a
provider of sexually explicit video programming. See "BUSINESS." The Fifth
Dimension assets to be acquired account for approximately 85.7% of the pro forma
adjusted revenues of the Company, set forth in "FINANCIAL STATEMENTS" and the
notes thereto. Each of the Company's subsidiaries or intended subsidiaries is
summarized below.
COLORADO SATELLITE BROADCASTING, INC. ("CSB")
CSB is the Company's wholly-owned subsidiary that will operate the
subscription-based and transaction-based television networks to be acquired from
Fifth Dimension. A substantial portion of the proceeds from this Offering will
be used to complete the Fifth Dimension transaction. See "USE OF PROCEEDS" and
"BUSINESS--Fifth Dimension Assets Acquisition."
Fifth Dimension is a leading provider of subscriber-based premium television
channels (hereinafter "premium channels" or "pay television") and
transaction-based television networks ("pay-per-view"). Fifth Dimension owns,
operates and distributes the three leading C-band adult programming networks,
and is a leading provider of explicit adult programming via direct to home
("DTH") C-band satellite. Pursuant to the terms of the Asset Purchase Agreements
between the Company and Fifth Dimension, the Company will acquire certain assets
from Fifth Dimension, including the satellite uplink facility equipment, call
center facility equipment, satellite transponder subleases, film inventories,
intangible assets (including trade names, trademarks, service marks, copyrights,
mask work rights, licenses, brand names, trade secrets, trade dress, technical
know-how, good will, and other intangibles), subscriber base and lists, vendor
lists, books and records, permits and licenses, and all other property of Fifth
Dimension used in connection with Fifth Dimension's adult programming business.
The Company will enter into an Uplink Management Services Agreement and a Call
Center Interim Services Agreement with Fifth Dimension, pursuant to which Fifth
Dimension will operate, maintain, manage, and sustain the satellite uplink
facility and will receive and process subscriber calls until the Call Center can
be relocated to the Denver, Colorado metropolitan area. See "BUSINESS."
The assets to be acquired from Fifth Dimension generated sales of
$15,044,139 and pre-tax income of $999,148 (pre-tax income, as adjusted for
non-recurring expenses and related party transactions, would have been
$2,755,297) for the year ended March 31, 1997. The Company has agreed to acquire
certain Fifth Dimension assets for a total purchase price of $8,700,000,
consisting of $3,500,000 in cash, Common Stock of the Company valued at
$4,200,000, and a promissory note for $1,000,000. The Company evaluated certain
non-recurring costs included in the operation of Fifth Dimension in arriving at
the purchase price for the assets. The Company believes approximately $1,800,000
of expenses incurred by Fifth Dimension for the year ended March 31, 1997 will
not recur in the future, including excess salaries and related-party payments of
approximately $850,000, loss on investment shares of $220,000, certain legal
fees of approximately $100,000, approximately $415,000 of costs for duplication
of existing facilities and operations that the Company already has in place, and
other non-recurring costs of approximately $215,000. Terms of the Asset Purchase
Agreements provide that the Company will issue 840,000 shares of Common Stock to
Fifth Dimension as part of the purchase price. The Company will also issue Fifth
Dimension or its assignees warrants to purchase up to an additional 400,000
shares of the Company's Common Stock at $5.00 per
4
<PAGE>
share, all pursuant to the terms of the Asset Purchase Agreements and the
Warrant Agreement. See "BUSINESS--Fifth Dimension Assets Acquisition." The
Company has also agreed to pay Fifth Dimension "formula profits" exceeding
$2,000,000 for the first 12 months after closing. "Formula Profits" is defined
in the Asset Purchase Agreements as the total revenue from operations minus
actual operating costs. Maximum operating costs under this provision are limited
to an amount not greater than 125% of the projected costs set forth in Schedule
2.1(f) to the Asset Purchase Agreements. Schedule 2.1(f) details projected costs
of $12,294,444, and maximum operating costs of $15,368,055.
The Company believes it can enhance shareholder value by:
- Integrating the Fifth Dimension Assets into the Company via CSB, which is
currently a shell corporation;
- Substantially reducing operating costs associated with the Fifth Dimension
assets by moving the Call Center to Denver, Colorado;
- Eliminating related-party leases and payments that were previously made by
Fifth Dimension;
- Reducing licensing fees by combining the purchasing power of DaViD and
CSB; and
- Utilizing personnel of Inroads to implement simultaneous "web casting" of
CSB programming via the Internet.
DAVID ENTERTAINMENT, INC. ("DAVID")
DaViD is in the business of acquiring content rights to existing unrated and
adult motion picture titles for distribution on laserdisc and digital versatile
disc ("DVD") by third-party distributors. DaViD is a leading content owner of
feature-length unrated and adult motion pictures for release on video disc.
DaViD currently owns certain content rights to approximately 350 unrated and
adult motion picture titles, and intends to acquire rights to approximately 500
more in the next 24 months. The Company has allocated $750,000 of the net
proceeds from this offering for acquisition of titles by DaViD. See "USE OF
PROCEEDS." There are currently no contracts to acquire additional titles in
effect. DaViD's titles are distributed in the 8" and 12" LaserDisc formats and
the 5 1/4" Digital Versatile Disc format. The distribution terms for these
titles range from seven years to perpetuity. DaViD has released over 140 titles
as of the date of this Prospectus, currently releases 4 to 8 titles per month
for distribution, and intends to release up to 20 titles per month, primarily on
DVD, by the end of 1998. See "BUSINESS--DaViD."
BOULDER INTERACTIVE GROUP, INC., D/B/A INROADS INTERACTIVE ("INROADS")
Inroads is a vertically-integrated CD-ROM software publishing company that
designs and develops CD-ROM titles and licenses third-party-developed titles.
Inroads is 70% owned by New Frontier Media, Inc., and 30% owned by Quarto
Holdings, Inc. ("Quarto"), a wholly-owned subsidiary of Quarto Group, Inc., a
co-edition book publisher. In September, 1996, Inroads acquired rights to
commercially exploit certain titles in Quarto's extensive reference library in
digital formats, providing Inroads with a significant source of material for
future titles. Inroads has recently completed development of IN FOCUS, THE GUIDE
TO BETTER PHOTOGRAPHY and CIGAR COMPANION, its first titles released under this
agreement with Quarto. The Company is currently engaged in a dispute with
Quarto. See "BUSINESS--Legal Proceedings."
Inroads' in-house developed titles are produced, designed, and developed by
the Company's twelve-person staff. Inroads' licensed titles (developed by
unaffiliated third parties) are localized, packaged, and, if necessary, enhanced
with new graphics or interface design/operating elements by Inroads. Inroads'
staff includes writers, software engineers, artists, and management. All of
Inroads' CD-ROM titles, whether developed in-house or licensed, contain video,
still photography, audio, music, and text. These elements are combined with
custom-designed interfaces and computer code to deliver high-quality,
easy-to-use CD-
5
<PAGE>
ROM titles. Utilizing state-of-the-art technology and approximately ten
workstations, Inroads has developed and released nine CD-ROM titles since its
inception in June, 1994. Other titles are under development.
FUZZY ENTERTAINMENT, INC., D/B/A IN-SIGHT EDITIONS ("IN-SIGHT")
In-Sight is a niche publisher and distributor of fine-art and decorative art
posters which are priced in the low to moderate price range. Based in Marina Del
Rey, California, In-Sight employs two full-time employees in the design and
production areas, and one employee in shipping/warehousing. In-Sight's
accounting, inventory control and accounts receivable/payable functions are
managed by the Company's Boulder, Colorado office. In-Sight is not currently a
significant factor in the Company's future business plans.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. This
Prospectus contains forward-looking statements, including those discussed under
"USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and "BUSINESS." These forward-looking statements
involve a number of risks and uncertainties including, but not limited to, those
discussed under "RISK FACTORS." The Company's actual results may differ
significantly from the results discussed in the forward-looking statements. See
"RISK FACTORS."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company......................... 1,500,000 shares(1)
Common Stock to be outstanding
after the Offering and Fifth
Dimension Assets Acquisition.... 6,547,511(2)
Use of Proceeds................... The net proceeds of the offering will be utilized to
complete the Fifth Dimension Assets Acquisition,
establish CSB operations, fund expansion of DaViD, and
for general corporate purposes, including marketing,
sales, and working capital. See "USE OF PROCEEDS" and
"BUSINESS."
Proposed Nasdaq SmallCap Market
Symbol.......................... NOOF
</TABLE>
- ------------------------
(1) Excluding the Underwriter's Overallotment Option. See "UNDERWRITING."
(2) Excludes 835,666 shares of Common Stock issuable upon exercise of warrants
outstanding as of June 30, 1997, and exercisable at various periods through
September, 2001. See "CERTAIN TRANSACTIONS." Also excludes the Underwriter's
Warrant to be issued in connection with this offering. See "UNDERWRITING."
Includes 840,000 shares of Common Stock to be issued to Fifth Dimension as
part of the assets purchase price. See "BUSINESS--Fifth Dimension Assets
Acquisition."
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 (AUDITED)
AND THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
--------------------------------- FIFTH DIMENSION(1)
YEAR ENDED MARCH 31, ---------------------------------------
YEAR ENDED MARCH 31,
-------------------- ------------------------
1997 1996 1997 1996
--------- --------- THREE ----------- ----------- THREE MONTHS
MONTHS ENDED JUNE
ENDED JUNE 30,
30, -------------
----------- 1997
1997 -------------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................... $ 2,516 $ 2,566 $ 479 $ 15,044 $ 12,224 $ 3,041
Net income (loss) from operations....... (451) 5 (226) 1,219 2,008 314
Net income (loss)....................... (386) (7) (204) 897 2,193 294
Net income (loss) per share............. (0.09) * (0.05) 3,299 8,061 1,081
Shares used in computing net income or
loss per share........................ 4,188,459 4,051,896 4,192,511 272(2) 272(2) 272(2)
BALANCE SHEET DATA:
Total current assets.................... 1,882 861 1,671 4,140 3,797 3,969
Total assets............................ 2,186 1,017 1,968 5,928 5,906 5,702
Current liabilities..................... 657 342 656 3,619 4,349 3,099
Long-term debt.......................... 13 0 11 0 0 0
Total liabilities....................... 670 342 667 3,619 4,349 3,099
Total stockholders' equity.............. 1,211 675 1,017 2,309 1,557 2,603
</TABLE>
- ------------------------------
(1) "Fifth Dimension" includes the combined financial statements for Fifth
Dimension Communications (Barbados), Inc., Merlin Sierra and 1043133
Ontario, Inc. for the years ended March 31, 1997 and 1996. See "FINANCIAL
STATEMENTS."
(2) Consists of 100 common shares of Fifth Dimension Communications (Barbados)
Inc., 100 common shares of Merlin Sierra, Inc., and 72 common shares of
1043133 Ontario, Inc. See Note 8 to "FINANCIAL STATEMENTS."
* Less than $.01 per share.
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS RELATING TO THE COMPANY AND THIS OFFERING SHOULD BE CONSIDERED
CAREFULLY WHEN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS INCLUDES CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL
STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THIS
PROSPECTUS THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY
EXPECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING SUCH
MATTERS AS FUTURE OPERATING RESULTS PERTAINING TO THE FIFTH DIMENSION ASSETS
ACQUISITION, BUSINESS STRATEGIES, EXPANSION AND GROWTH OF THE COMPANY'S
OPERATIONS AND OTHER SUCH MATTERS ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE BASED ON CERTAIN ASSUMPTIONS AND ANALYSES MADE BY THE COMPANY IN
LIGHT OF ITS EXPERIENCE AND ITS PERCEPTION OF HISTORICAL TRENDS, CURRENT
CONDITIONS, EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS IT BELIEVES ARE
APPROPRIATE IN THE CIRCUMSTANCES. SUCH STATEMENTS ARE SUBJECT TO A NUMBER OF
ASSUMPTIONS, RISKS AND UNCERTAINTIES, INCLUDING THE RISK FACTORS DISCUSSED
BELOW, GENERAL ECONOMIC AND BUSINESS CONDITIONS, THE BUSINESS OPPORTUNITIES (OR
LACK THEREOF) THAT MAY BE PRESENTED TO AND PURSUED BY THE COMPANY, CHANGES IN
LAWS OR REGULATIONS AND OTHER FACTORS, MANY OF WHICH ARE BEYOND THE CONTROL OF
THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND THAT ACTUAL RESULTS OR DEVELOPMENTS MAY
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
NEW FRONTIER MEDIA A RECENTLY ORGANIZED BUSINESS WITH LIMITED OPERATING HISTORY
The Company was organized in July, 1995 and has incurred losses from
inception. As of June 30, 1997 the Company had an accumulated deficit of
$763,793. See "FINANCIAL STATEMENTS." The ability of the Company to operate
profitably is dependent upon successful execution of the business plans of each
of its subsidiaries. In particular, Boulder Interactive Group, Inc. must
continue to develop commercially viable CD-ROM products for enthusiasts and
hobbyists, and finalize strategic partnerships. DaViD Entertainment, Inc. must
continue to acquire content rights, and implement its release strategy as
Digital Versatile Disc technology becomes commercially affordable and available.
Fuzzy Entertainment must continue to acquire fine art images, and begin to
produce and distribute those images commercially. Finally, the Company must
complete the acquisition of the Fifth Dimension assets and implement the CSB
business plan. See "BUSINESS." The Company is in the early operational stage,
has generated limited revenues from operations to date and there is no assurance
the Company's intended activities will be successful or result in significant
revenue or generate profits for the Company. The Company faces all risks which
are associated with any new business, such as under-capitalization, cash flow
problems, and personnel, financial and resource limitations, as well as special
risks associated with its proposed operations. Management cannot assure when or
if the Company may generate substantial revenues. The likelihood of the success
of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the formation of a new business. The Company has had a limited operating history
and has generated only limited revenues and earnings from operations. The
Company has no significant financial resources and limited assets. See
"BUSINESS" and "FINANCIAL STATEMENTS."
LOSSES FROM INCEPTION; SUBSTANTIAL ACCUMULATED EARNINGS DEFICIT
The Company was organized in July, 1995 and incurred a net loss of $386,030,
or $.09 per share, on revenues of $2,515,802 for the fiscal year ended March 31,
1997, and a net loss of $6,870, or less than $.01 per share, for the period from
July 17, 1995 (inception) to March 31, 1996. The Company incurred a net loss of
$203,985, or $.05 per share, on revenues of $479,330 for the three months ended
June 30, 1997. As of June 30, 1997 the Company had an accumulated deficit of
$763,793. See "FINANCIAL STATEMENTS."
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PURCHASE OF FIFTH DIMENSION ASSETS; NO EXPERIENCE IN SATELLITE BROADCASTING
BUSINESS
The Company and its subsidiary CSB have entered into agreements to acquire
certain assets of Fifth Dimension (the assets to be acquired are collectively
referred to as the "Fifth Dimension assets"). The Fifth Dimension assets to be
acquired include, but are not limited to: trademarks, proprietary rights and
other intellectual property rights associated with the adult movie programming
and broadcasting business ("Adult Movies Business"); equipment, software
technology, furniture, machinery, appliances and other tangible personal
property used in the satellite uplink and customer call center facilities; any
and all rights Fifth Dimension has in adult programming in any format; all
subscriptions for the Adult Movies Business owned by Fifth Dimension; and all
rights to any "1-800" numbers used by Fifth Dimension in the Adult Movies
Business. The Company has no prior experience in the satellite network
broadcasting business. The Company intends to integrate or phase in the much
larger business operations associated with the Fifth Dimension assets into the
Company's business via management agreements with Fifth Dimension. See
"BUSINESS--Fifth Dimension Assets Acquisition."
PROVISION OF SEXUALLY EXPLICIT CONTENT
The Company, through its subsidiary CSB, will be engaged in the business of
providing sexually explicit programming and other products to adult television
subscribers, once the Fifth Dimension Assets Acquisition is completed. Many
people may regard the Company's primary business as unwholesome and as purveying
pornography. The nature of the Company's primary business may negatively taint
the Company's other subsidiaries. Certain investors, investment banking
entities, market makers, lenders, and others in the investment community may
refuse to participate in the Company's public market, finance, or other
activities due to the nature of the Company's primary business. Such refusal may
negatively impact the value of the Company's stock, and its opportunities to
attract market support. See "BUSINESS."
RELIANCE ON FIFTH DIMENSION
As part of the Fifth Dimension Assets Acquisition, the Company and Fifth
Dimension will enter into an Uplink Management Services Agreement ("UMSA") and a
Call Center Interim Services Agreement ("CCISA"). Under the UMSA as currently
proposed, Fifth Dimension will operate, maintain, manage, and sustain an uplink
and playback facility capable of providing continual uninterrupted services for
the Adult Movies Business of a substantially similar nature and quality as those
services currently being provided by Fifth Dimension to its current subscribers.
The Company does not own an uplink facility, and to the extent Fifth Dimension
fails to provide the services contracted for under the UMSA, the Company and its
shareholders are subject to significant risks. Failure to properly manage the
Uplink Facility could result in loss of customers, signal disruptions, and
quality problems that, if not immediately addressed, could negatively impact the
Company's subscriber base and revenues. In the event the Company and Fifth
Dimension fail to consummate the UMSA, or if Fifth Dimension failed to perform
as required under the UMSA, CSB's operations would in all likelihood terminate,
resulting in loss of substantial projected revenues to the Company. See
"BUSINESS--Fifth Dimension Assets Acquisition."
Under the terms of the CCISA as currently proposed, Fifth Dimension will
agree to receive and process subscriber calls on behalf of the Company from its
Ottawa (Canada) Call Center for a period of nine months from the asset
acquisition date, using the Call Center assets to be acquired. The Company
intends to relocate the call center to the Denver, Colorado metropolitan area
prior to expiration of the CCISA. The Company has no prior experience operating
a subscriber call center, and will rely on certain management of Fifth Dimension
for training personnel and management. To the extent there is any disruption in
Call Center operations, the Company may lose subscribers or miss opportunities
to capture calls, resulting in lost revenue to the Company. See "BUSINESS--Fifth
Dimension Assets Acquisition."
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SATELLITE SERVICE AGREEMENTS; REFUSAL OF SERVICE OR TERMINATION OF AGREEMENTS
Fifth Dimension currently provides its adult satellite programming to
subscribers via satellite transponder agreements with AT&T Corp. (the "AT&T
Agreement") and Loral SpaceCom Corporation d/b/a Loral Skynet (the "Loral
Agreement"). The AT&T Agreement runs through December 31, 1999. The Loral
Agreement runs for a period of five years from the date the Telstar 5 satellite
was placed in service (approximately June, 1997). Both of the transponder
agreements provide for a subsequent 5-year extension. The Company intends to
sublease these transponders from Fifth Dimension as part of the Fifth Dimension
Assets Acquisition. The AT&T Agreement and the Loral Agreement are collectively
referred to as the "transponder agreements."
The Company has not obtained opinions of counsel concerning sublease of the
transponders under the terms of the transponder agreements. In the event either
or both of the transponder agreements otherwise preclude the type of sublease
agreement entered into between the Company and Fifth Dimension, the Fifth
Dimension Assets Acquisition would, in all likelihood, be abandoned, to the
financial detriment of the Company and its shareholders.
The transponder agreements contain provisions that allow the respective
service providers to refuse to provide the service (defined as service on
preemptible transponders on Telstar 402R and Telstar 5, respectively) if the
material being transmitted by Fifth Dimension or the Company is harmful to the
service provider's name or business, or if Fifth Dimension or the Company is
indicted or is otherwise charged as a defendant in a criminal proceeding, or is
convicted under any obscenity law, or has been found by any governmental
authority to have violated such law. Fifth Dimension has operated its adult
content satellite programming under these terms for several years without
disruption or refusal of service; nonetheless, the Company, as subleasee of the
transponders under the transponder agreements, is subject to arbitrary refusal
of service by the the service provider if that service provider determines that
the content being transmitted by the Company is harmful to the service
provider's name or business. Any such service disruption would substantially and
adversely affect the financial condition of the Company. See "BUSINESS."
RELUCTANCE OF SMALL-DISH AND CABLE COMPANIES TO CARRY EXPLICIT ADULT PROGRAMMING
Cable television and Ku-Band (small dish) satellite are the fastest-growing
segments providing programming to homes in the United States. Fifth Dimension
has been unable to expand its base of distribution recently, for two principal
reasons: (1) C-Band (large dish) satellite system sales have plateaued, and
small dish systems are beginning to dominate the market; and (2) cable system
operators and small-dish system operators have, to date, been reluctant to carry
explicit adult programming on their systems. Most major cable and small-dish
systems carry "soft core" adult programming, such as the PLAYBOY CHANNEL and
SPICE. There is no assurance that the Company will be able to expand on the
current Fifth Dimension programming base by establishing a "soft-core" network
to compete with PLAYBOY CHANNEL and SPICE, or by convincing cable and small-dish
operators to carry one or more sexually explicit networks. See "BUSINESS."
GOVERNMENT REGULATION--GENERAL
The Company, through its wholly-owned subsidiary CSB, will be engaged in the
business of providing explicit adult movies and other programming to adult
subscribers, if and when the Fifth Dimension Assets Acquisition is completed. By
virtue of the Fifth Dimension Assets Acquisition, CSB will become a leading
provider of explicit or "X-rated" adult programming via direct-to-home C-band
satellite. CSB intends to expand its C-band subscriber base, market its
programming to multiple-system operators, and pursue launching a soft-core
network to compete with PLAYBOY CHANNEL and SPICE. Federal and state
governments, along with various religious and children's advocacy groups,
consistently propose and pass legislation aimed at restricting provision of,
access to, and content of "adult entertainment." These groups also often
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file lawsuits against providers of adult entertainment, encourage boycotts
against such providers, and mount negative publicity campaigns against companies
whose businesses involve adult entertainment. The Company and CSB may be
subjected to such adverse publicity, litigation, and legislation. See
"BUSINESS--Fifth Dimension Assets Acquisition."
The Company and CSB may incur substantial costs defending themselves against
such actions, which may negatively impact the Company's finances. Negative
publicity, boycotts, and litigation may discourage institutional and other
investors from investing in the Company, to the detriment of the Company's
shareholders and investors in this Offering. The Company may not be able to
attract as large a base of investors as a similarly situated company in a
business not involving "adult entertainment." Negative publicity concerning
programming provided by the Company through CSB may cause the service providers
to refuse to provide service under the terms of the transponder agreements. See
"BUSINESS--Fifth Dimension Assets Acquisition."
Recently, federal and state government officials have targeted "sin
industries," such as tobacco, alcohol, and adult entertainment for special tax
treatment and legislation. In 1996, Congress passed the Communications Decency
Act of 1996 (the "CDA"). Section 505 of the CDA required full audio and video
scrambling. If the multi-channel video program distributor (including cable
system operators) could not comply with the full scrambling requirement, it was
prohibited from carrying sexually explicit programming between the hours of 6:00
a.m. and 10:00 p.m. Recently, the U.S. Supreme Court, in ACLU v. Reno, held
certain substantive provisions of the CDA unconstitutional. Businesses in the
adult entertainment and programming industries expended millions of dollars in
legal and other fees in overturning the CDA. Investors in this Offering should
understand that the adult entertainment industry will continue to be a target
for legislation. In the event the Company must defend itself and/or join with
other companies in the adult programming business to protect its rights, the
Company may incur significant expenses that could have a material adverse effect
on the Company's business and operating results. See "BUSINESS--Fifth Dimension
Assets Acquisition."
GOVERNMENT REGULATION--"SOFT-CORE" ADULT PROGRAMMING
The Company is currently evaluating the possibility of establishing a
"soft-core" adult network to compete directly with the PLAYBOY CHANNEL and
SPICE. In 1996, the United States Congress passed the Telecommunications Act of
1996 (for this paragraph only, the "Act"), a comprehensive overhaul of the
Federal Communications Act of 1934. Section 641 of the Act requires full audio
and video scrambling of channels which are primarily dedicated to "sexually
explicit" programming. If a multi-channel video programming distributor,
including a cable television operator, cannot comply with the full scrambling
requirement, then the channel must be blocked during the hours when children are
likely to be watching television, i.e., from 6:00 a.m. to 10:00 p.m. Both
non-explicit programming providers (such as Playboy) and explicit programming
providers (such as Exxxtasy Networks) feature "sexually explicit" programming
within the contemplation of Section 641 of the Act. Although all adult
programming companies fully scramble their signals for security purposes,
several cable television multiple-system operators ("MSOs") lack the technical
capability to fully scramble the audio portion of the signal. These cable
systems would be required to block adult broadcasts between 6:00 a.m. and 10:00
p.m. Both Spice, Inc. (NASDAQ:SPZE) and Playboy, Inc. (NYSE:PLAA) predict that
revenues from cable television distribution sources could be negatively affected
by as much as 25% as a result of this provision, until new equipment can be
installed. Compliance with the Act could have a material adverse effect on the
Company's business and operating results. See "BUSINESS."
LOSS OF MARKET SHARE TO DIRECT BROADCAST SATELLITE ("DBS")
Although management believes C-Band "big dish" satellite systems provide
more stable delivery of programming and that new technologies will allow C-Band
systems to receive digital channels (See "BUSINESS--Satellite Transmission"),
the market for C-Band systems has plateaued, particularly with the
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introduction and rapid proliferation of Ku-Band Direct Broadcast Satellite
systems, such as Dish Network and Direct TV. Consequently, it will be difficult
to further develop sales revenue growth from this business, and the growth of
Ku-Band Direct Broadcast Satellite Systems may reduce future sales revenue from
this business, which could adversely affect the financial performance of the
Company. See "BUSINESS-- Satellite Transmission" and "--Competition."
RELIANCE ON FIFTH DIMENSION ASSETS ACQUISITION; POSSIBLE RECISSION OFFER IF NOT
COMPLETED
A significant portion of the proceeds of this Offering are allocated to the
Fifth Dimension Assets Acquisition. See "USE OF PROCEEDS." None of the net
proceeds from this Offering will be held in an escrow account, pending closing
of the Fifth Dimension Assets Acquisition. In the event the Fifth Dimension
assets acquisition is not completed, the Company and the Managing Underwriter
may be required to undertake a registered recission offer to investors in this
Offering. The effect of such a recission could result in a return of all
proceeds, to the extent available, of this Offering to investors.
NO ESCROW OF OFFERING PROCEEDS
The Company does not intend to escrow proceeds of this offering pending
completion of the Fifth Dimension Assets Acquisition. The Company intends to
utilize a portion of the net offering proceeds as working capital. There is no
assurance that all of the net proceeds of this offering would be available for
return to investors in the event the Company fails to consummate the Fifth
Dimension Assets Acquisition and a recission offer is undertaken by the Company.
ADDITIONAL FINANCING MAY BE REQUIRED
The Company will receive net proceeds of approximately $6,601,250 from this
Offering. The Company believes that the proceeds of this offering will be
sufficient to fund the Fifth Dimension Assets Acquisition, the ongoing
operations of the Company for the next twelve months, and to allow the Company
to expand the operations of its subsidiaries. The Company's success may be
dependent upon its ability to raise additional capital, or to have other parties
bear a portion of the required costs to further develop or exploit its business
objectives. There is no assurance that funds will be available from any source,
or on terms favorable to the Company, and if not available, the Company's
operations may be limited. See "USE OF PROCEEDS" and "BUSINESS."
COMPETITION
The domestic and international markets for the products developed, licensed,
and marketed by the Company's subsidiaries are highly competitive. Many of the
Company's competitors have longer operating histories, greater name recognition,
greater market acceptance of their products, and significantly greater
financial, technical, sales, marketing and other resources to devote to the
development, promotion, and sale of their products. Many large companies with
sophisticated product marketing and technical abilities and financial resources
that do not currently compete with the Company may enter the market and quickly
become significant competitors. To the extent such competitors establish a
performance, price or distribution advantage, the Company could be adversely
affected. See "BUSINESS--Competition."
COLORADO SATELLITE BROADCASTING, INC.
CSB faces competition in the area of explicit adult programming from several
companies, including Spice, Inc. The Company intends to pursue establishing a
non-explicit cable and satellite network. CSB will face competition in the
non-explicit arena from Playboy, Inc., the dominant non-explicit provider (NYSE:
PLAA), Spice, Inc., and from other well-funded sources. Management estimates
that establishing a non-explicit cable and satellite network will require $2
million or more and 12 to 24 months to fully implement. Only a small portion of
the net proceeds of this Offering will be allocated to this project, and will be
used
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to continue the Company's evaluation of the merits of pursuing such a direction.
There is no assurance that the Company will ultimately decide to fully pursue
launching of a soft-core network. In the event the Company does decide to pursue
such a venture, the Company would, in all likelihood, need to raise additional
capital. There is no assurance that the Company would be successful in raising
funding to establish a soft-core network.
DAVID.
The management of DaViD intends to complete the acquisition of content
rights to an additional approximately 500 unrated and adult motion picture
titles, and thereafter concentrate on releasing those titles gradually over
time, as the market dictates. Competition in the distribution of unrated and
adult motion pictures has become intense in the past five years.
INROADS.
The personal computer consumer software industry is intensely competitive.
The market for CD-ROM products has increased dramatically the past three years.
CD-ROM software is quickly replacing the floppy disc as the most popular
personal computer format for programs, games, and information. The fluid nature
of the consumer software industry and rapidly changing demand for products make
it difficult to predict the future success of the Company in the business of
producing packaged software products for the retail market. Numerous large,
well-funded software developing and publishing competitors exist. These
competitors have greater capital, marketing resources and brand recognition than
the Company. Inroads' success is dependent upon the ability of its staff to
continue to develop CD-ROM titles and products that are commercially viable.
Inroads will continue to face significant competition for the foreseeable
future.
IN-SIGHT.
In-Sight will face competition from publishers of fine art posters and
decorative art posters.
SIGNIFICANT GROWTH OF BUSINESS
Management anticipates that the Company will be entering a period of
significant growth upon the completion of this Offering. This growth, if
effected, will expose the Company to increased competition, greater overhead,
marketing and support costs and other risks associated with entry into new
markets and development of new products. To manage growth effectively, the
Company will need to continue to improve and expand its operational, financial
and management information systems and to expand, train, motivate and manage its
employees. Should the Company be unable to manage growth effectively, its
results of operations could be adversely affected. See "BUSINESS."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the contributions
of its executive officers and its other key technical personnel, and upon its
ability to continue to attract and retain highly talented personnel. Competition
for such personnel, particularly software development technical personnel (as
utilized and relied upon by Inroads) is intense. The Company currently has only
one employment agreement, with Andrew Brandt, in effect. The Company will
acquire key-man life insurance on the lives of Messrs. Kreloff and Bender, in
the amount of $1,000,000 each and naming the Company as beneficiary, on or
before the closing of this Offering. Only Mr. Brandt is subject to a
noncompetition agreement. The loss of the services of any of its executive
officers or other key personnel could have a material adverse effect on the
Company's business and operating results, and there can be no assurance that the
Company will be successful in attracting and retaining such personnel. See
"BUSINESS" and "MANAGEMENT."
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SANDS BROTHERS AND QUARTO LITIGATION
The Company has filed a complaint in state District Court, Boulder, Colorado
against Sands Brothers, seeking rescission of a financial advisory agreement
with and a return of all monies paid by the Company to Sands Brothers. As of the
date of this prospectus, Sands Brothers had not filed an Answer or
Counterclaim(s); however, management believes it is likely that Sands Brothers
will respond to the complaint. See "BUSINESS--Legal Proceedings." The Company
intends to vigorously pursue its claims against Sands Brothers. In the event
Sands Brothers assets one or more counterclaims against the Company, and in the
event Sands Brothers were to prevail at trial against the Company, the financial
condition of the Company, and as a consequence shareholder value, might be
adversely affected.
On October 23, 1997, Quarto filed an action, in the federal District Court
for the District of Colorado, against the Company and Inroads seeking, among
other things, rescission of certain agreements among the Company, Inroads, and
Quarto, and a return of all monies Quarto has invested in Inroads. On October
28, 1997, the Company and Quarto entered into a Stipulation for Entry of
Preliminary Injunction, whereby the Company agreed to not transfer, pledge, or
otherwise encumber any assets of Inroads for the benefit of the Company, without
the prior written consent of Quarto. Under the terms of the agreements between
the Company and Quarto, the parties are required to file an action in
arbitration to settle disputes arising under the agreements. As of the date of
this prospectus, Quarto had not filed an action in arbitration against the
Company or Inroads. See "BUSINESS--Legal Proceedings." In the event Quarto were
to file an action in arbitration against the Company and/or Inroads, and prevail
in that action or in the current action in federal court against the Company
and/or Inroads, Inroads' ability to utilize the Quarto library as a source of
material for new releases could be jeopardized.
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
A significant portion of the net proceeds from this Offering will be used
for working capital, and to expand the operations of the Company's subsidiaries.
As a consequence, the Company's management will have the discretion to allocate
a large percentage of the proceeds to uses which the shareholders may not deem
desirable, and there can be no assurance that the proceeds can or will yield a
significant return. See "USE OF PROCEEDS."
CONTROL BY PRINCIPALS OF THE COMPANY
The Company's executive officers, directors, and their affiliates
beneficially own 2,419,000 restricted Common Shares of the Company. This
represents approximately 42.4% of the 5,707,511 Common Shares that will be
issued and outstanding following this Offering, assuming the Underwriter does
not exercise its Overallotment Option and prior to exercise of any other
outstanding options or warrants, and prior to issuance of 840,000 shares of
Common Stock to Fifth Dimension. Following the Fifth Dimension transaction, but
prior to any warrant or option exercise and assuming no exercise of the
Underwriter's Overallotment Option, there will be 6,547,511 shares issued and
outstanding, of which executive officers, directors, and affiliates of the
Company will own 36.9%. As a result, the current shareholders will continue to
have significant influence over the affairs of the Company. Such concentration
of ownership may have the effect of delaying, deferring or preventing a change
in control of the Company.
In addition, the Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of such stock
without further shareholder approval. The rights of the holders of Common Stock
will be subjected to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. Issuance of
Preferred Stock could have the effect of delaying, deferring or preventing a
change in control of the Company. See "DESCRIPTION OF SECURITIES."
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CERTAIN PRIOR TRANSACTIONS NOT APPROVED BY DISINTERESTED BOARD MEMBERS
The Company has entered into certain non arms'-length transactions, prior to
the date of this prospectus, with affiliates of the Company and other
"interested" parties. No current ongoing transactions were approved by a
majority of the Company's independent directors who do not have an interest in
the transactions and who had access, at the Company's expense, to the Company's
or independent legal counsel. Current ongoing and past transactions were
approved by a majority of disinterested, but not independent, directors. Any
ongoing or future transactions between the Company and its officers, directors,
principal shareholders, or other affiliates will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties on an
arms-length basis and will be approved by a majority of the Company's
independent and disinterested directors. Any future loans to officers,
directors, principal shareholders, or affiliates will be made for a bonafide
business purpose, on terms no less favorable than could be obtained from
unaffiliated third parties and will be approved by a majority of the Company's
independent and disinterested directors. See "CERTAIN TRANSACTIONS."
OFFERING PRICE
The pricing of this offering of the Common Stock was determined by the
Company and the Managing Underwriter based on a discounted present value of
future projected earnings and the trading price of the Company's common stock on
the Nasdaq Electronic Bulletin Board. The Company's common stock currently is
"thinly traded," and the price of the Company's common stock as quoted on the
Nasdaq Electronic Bulletin Board may not be an accurate indication of the true
value of the stock. The discounted present value of future projected earnings
valuation method relies extensively on management's subjective belief of future
performance, and bears little relationship to the assets or any objective
criteria of value applicable to the Company. In making such valuation the risks
of the Company's proposed product and service lines, the business potential of
the Company, the Company's competitive position, the proceeds to be raised by
the offering, the percentage of ownership desired to be retained by current
shareholders, and conditions of the market for new securities offerings were all
considered.
EXERCISE OF WARRANTS AND OPTIONS
As of June 30, 1997, 146,666 shares of Common Stock were issuable upon
exercise of outstanding employee, officer, director or consultant stock options
at an average exercise price of $6.00 per share, and 609,000 shares of Common
Stock were issuable upon exercise of other outstanding warrants at prices of
$4.00 per share (20,000 warrants), $5.50 per share (189,000 warrants), and $6.00
per share (400,000 warrants). One of these warrants, for 400,000 shares, is held
by Quarto, and contains anti-dilution and exercise price provisions that require
the Company to issue additional warrant(s) to Quarto to purchase additional
shares of the Company's Common Stock, depending on the price of the shares of
Common Stock offered hereby and the value of the Company's Common Stock issued
to Fifth Dimension sellers as part of the Fifth Dimension Assets Acquisition.
See "--Quarto Warrant." An additional 400,000 shares of Common Stock have been
reserved for issuance upon exercise of the Fifth Dimension warrant, and 150,000
shares of Common Stock are issuable upon exercise of the Underwriter's Warrant.
See "BUSINESS--Fifth Dimension Assets Acquisition" and "UNDERWRITING." For the
life of such options and warrants, the holders thereof will have the opportunity
to profit from a rise in the market price of the Common Stock. Further, the
terms upon which the Company could obtain additional capital during the life of
such options and warrants may be adversely affected. The holders of such options
and warrants may be expected to exercise such options and warrants at a time
when the Company would, in all likelihood, be able to obtain any needed capital
by a new offering of its securities on more favorable terms than those provided
for by those options and warrants.
The existence of such warrants may adversely affect the terms on which the
Company may obtain additional financing, and may have a depressing affect on the
trading price of the Company's Common Stock. See "DESCRIPTION OF
SECURITIES--Shares Eligible for Future Sale."
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QUARTO WARRANT
On September 20, 1996, the Company issued a stock purchase warrant to Quarto
(the "Quarto Warrant") as part of the acquisition of 30% of Inroads by Quarto.
Pursuant to the terms of the Quarto Warrant, Quarto is entitled to purchase up
to 400,000 shares of the Company's common stock for $6.00 per share anytime
between September 20, 1996 and September 20, 2001. The Quarto Warrant contains
certain anti-dilution and price adjustment provisions which will result in
adjustment of the number of shares Quarto may purchase and the exercise price
per share upon exercise of the Quarto Warrant. Specifically, upon completion of
this Offering, but prior to consummation of the Fifth Dimension Assets
Acquisition, the Quarto Warrant will be adjusted to provide that Quarto may
purchase up to 457,143 shares of the Company for $5.25 per share. Upon
completion of the Fifth Dimension Assets Acquisition, the Quarto Warrant will
again be adjusted to provide that Quarto may purchase up to a total of 480,000
shares of the Company's common stock for $5.00 per share.
LIMITS ON SECONDARY TRADING; POSSIBLE ILLIQUIDITY OF TRADING MARKET;
UNDERWRITING CONDITION OF LISTING
The Company has applied to have its Common Stock listed on the Nasdaq
SmallCap Market, which is less liquid than the Nasdaq National Market and other
stock exchanges. There can be no assurance that this application will be
accepted and that the Common Stock will be listed on the Nasdaq SmallCap Market.
The underwriting agreement between the Managing Underwriter and the Company
requires the Company to obtain Nasdaq listing as a condition of closing this
Offering. If the Company is unable to maintain listing standards once listed,
then trading, if any, in the Common Stock would be conducted in the
over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq SmallCap or other exchange listing
requirements. As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Common Stock. In
addition, depending on several factors including the future market price of the
Common Stock, the Common Stock could become subject to the so-called "penny
stock" rules that impose additional sales practice and market making
requirements on broker-dealers who sell and/or make a market in such securities,
which could adversely affect the ability or willingness of the purchasers of
Common Stock to sell their shares in the secondary market.
POTENTIAL ADVERSE EFFECT ON THE MARKET FOR THE COMPANY'S SECURITIES
Effective August 11, 1993, the Securities and Exchange Commission adopted
Rule 15g-9, which established the definition of a "penny stock," for purposes
relevant to the Company, as any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rule requires: (i) that a broker or dealer approve a person's
account for transactions in penny stocks; and (ii) the broker or dealer receive
from the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be purchased. In order to approve a
person's account for transactions in penny stocks, the broker or dealer must:
(i) obtain financial information and investment experience and objectives of the
person; and (ii) make a reasonable determination that the transactions in penny
stocks are suitable for that person and that person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks. The broker or dealer must also deliver, prior to
any transaction in a penny stock, a disclosure schedule prepared by the
Commission relating to the penny stock market, which, in highlighted form: (i)
sets forth the basis on which the broker or dealer made the suitability
determination; and (ii) that the broker or dealer received a signed, written
agreement from the investor prior to the transaction. Disclosure also has to be
made about the risks of investing in penny stocks in both public offerings and
in secondary trading, and about commissions payable to both the broker-dealer
and the investor in cases of fraud in penny stock transactions. Finally, monthly
statements
16
<PAGE>
have to be sent disclosing recent price information for the penny stock held in
the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities in the event such securities are approved for listing on a
national stock exchange and have certain price and volume information provided
on a current and continuing basis. There can be no assurance that the Company's
securities will qualify for exemption from these restrictions if a market ever
develops for the Company's securities. If such a market does develop and the
Company's securities were subject to the rules on penny stocks, the market
liquidity for the Company's securities could be severely adversely affected.
UNDERWRITER'S WARRANT
At the closing of this Offering, the Company will sell to the Managing
Underwriter for nominal consideration a warrant to purchase up to 150,000 shares
of the Company's Common Stock. The Underwriter's Warrant will be exercisable for
a period of four years commencing twelve months after the date of this
Prospectus, at an exercise price equal to 130% of the Offering price per share.
As long as the Underwriter's Warrant or other outstanding warrants remain
unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Managing Underwriter or other holders of
outstanding warrants may be expected to exercise such warrants at a time when
the Company would, in all likelihood, be able to obtain any needed capital by a
new offering of its securities on terms more favorable than those provided by
the warrants. Holders of the Underwriter's Warrant and holders of other warrants
have certain registration rights with respect to shares of Common Stock
underlying those warrants. See "UNDERWRITING."
POTENTIAL RULE 144 SALES
3,739,000 of the 4,192,511 shares of common stock of the Company currently
outstanding are "restricted securities," as that term is defined in Rule 144 as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. As restricted shares, these 3,739,000 shares may be resold
only pursuant to an effective registration or under the requirements of Rule 144
or other applicable exemption from registration under the Act as required under
applicable state securities laws.
Rule 144 provides in essence that a person not affiliated with the issuer
who has held restricted securities for a period of one year, under certain
conditions, may sell every three months, in brokerage transactions, a number of
shares which does not exceed the greater of one percent of a company's
outstanding common stock or the average weekly trading volume during the four
calendar weeks prior to the sale. The shares held by the Company's founders
became available for trading in the open market, subject to volume and other
limitations imposed by Rule 144, between July, 1996 and September, 1997;
however, these shares are restricted from sale pursuant to the terms of lock up
agreements between the founders and the Underwriter. There is no limit on the
amount of restricted securities that may be sold by a non-affiliate after the
restricted securities have been held by the owner for a period of two years. A
sale under Rule 144 or any other exemptions from the Act, if available, or
subsequent registrations of common stock of the current shareholders, may have a
depressive effect upon the price of the common stock in any market that may
develop.
DILUTION TO SHAREHOLDERS BY ISSUANCE OF PREFERRED SHARES
The Company's Articles of Incorporation and First Amended and Restated
Bylaws provide that the Company may issue shares of Preferred Stock without
approval of the Company's shareholders. The terms and preferences of any class
of Preferred Stock, including conversion of Preferred Shares into shares of the
Company's common stock and preferred rights to the assets of the Company upon
liquidation, may be determined by the Company's Board of Directors. Such terms
and preferences may result in more shares of the Company's common stock being
issued, which would have a dilutive effect on any common shares or
17
<PAGE>
warrants not protected by anti-dilution provisions. Such terms and preferences
may otherwise adversely affect holders of the Company's common stock. See
"DESCRIPTION OF SECURITIES."
RAPID TECHNOLOGICAL CHANGE
DaViD and Inroads are engaged in businesses (digital versatile disc content
and CD-ROM publishing) that have experienced tremendous technological change
over the past two years. CSB will be engaged in the satellite programming
business shortly after completion of this Offering. The satellite broadcasting
business has also experienced rapid technological changes, as smaller satellite
dishes and services have been introduced over the past three years. The Company
and its investors face all risks inherent in businesses that are subject to
rapid technological advancement, such as the possibility that a technology that
the Company has invested heavily in may become obsolete. In that event, the
Company may be required to invest in new technology. The inability of the
Company to identify, fund the investment in, and commercially exploit such new
technology could have an adverse impact on the financial condition of the
Company. See "BUSINESS." The Company's ability to implement its business plan
and to achieve the results projected by management will be dependent, to some
extent, upon management's ability to predict technological advances and
implement strategies to take advantage of such changes.
PRICE REDUCTIONS IN PERSONAL COMPUTER SOFTWARE--INROADS
Major personal computer software publishers have begun to reduce the prices
of their products in an effort to gain market share. At least one company is
known to have recently distributed its product at no cost, in order to obtain
entry into the market. The retail prices of many of the Company's competitor's
products have declined. There can be no assurance that product price reductions
will abate; if anything, the growing number of competitors in the personal
computer software field suggests further retail price reductions in the future.
Such reductions may lead to a decrease in gross margins on discounted items, and
could result in lower cash flow and operating margins for the Company. See
"BUSINESS--Inroads."
INTELLECTUAL PROPERTY CLAIMS AND LITIGATION
The Company relies on a combination of copyright and trademark laws, trade
secrets, software security measures, license agreements and nondisclosure
agreements to protect its proprietary products. Despite the Company's
precautions, it may be possible for unauthorized third parties to copy aspects
of, or otherwise obtain and use, the Company's software products without
authorization, or to substantially use the Company's concepts and market them,
trading on the Company's established customer base. In addition, the Company
cannot be certain that others will not develop substantially equivalent or
superseding products, thereby substantially reducing the value of the Company's
proprietary rights. Furthermore, there can be no assurance that any
confidentiality agreements between the Company and its employees or any license
agreements with its customers will provide meaningful protection for the
Company's proprietary information in the event of any unauthorized use or
disclosure of such proprietary information. The Company is not aware that any of
its products infringes the proprietary rights of third parties, and is not
currently engaged in any intellectual property litigation or proceedings.
Nonetheless, there can be no assurance that the Company will not become the
subject of infringement claims or legal proceedings by third parties with
respect to current or future products. In addition, the Company may initiate
claims or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Any such claims could be time-consuming, result in costly litigation,
cause product shipment delays or lead the Company to enter into royalty or
licensing agreements rather than disputing the merits of such claims. Moreover,
an adverse outcome in litigation or similar adversarial proceedings could
subject the Company to significant liabilities to third parties, require
expenditure of significant resources to develop non-infringing technology,
require disputed rights to be licensed from others or require the Company to
cease the marketing or use of certain products, any of which could have a
material adverse effect on the Company's business and operating results. To the
extent
18
<PAGE>
the Company wishes or is required to obtain licenses to patents or proprietary
rights of others, there can be no assurance that any such licenses will be made
available on terms acceptable to the Company, if at all. See "BUSINESS."
PRODUCT ERRORS/PRODUCT LIABILITY--INROADS
Software products such as those developed by Inroads often contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that errors will not occur or be found after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, any of which could have a material adverse effect upon the Company's
business and operating results. Further, the Company's license agreements with
its customers contain provisions designed to limit the Company's exposure to
potential product liability claims. Although the Company has not experienced any
product liability claims, the sale and support of products by the Company
entails the risk of such claims. See "BUSINESS--Inroads."
IMMEDIATE AND SUBSTANTIAL DILUTION
This Offering involves an immediate and substantial dilution of $3.92 per
share of Common Stock, or a 74.6% reduction between the Offering price of $5.25
per share of Common Stock and the net tangible book value of $1.33 per share of
Common Stock upon completion of the Offering, assuming no exercise of the
Overallotment Option, the Managing Underwriter's Warrant or other outstanding
warrants and options, and excluding issuance of 840,000 shares of Common Stock
to Fifth Dimension as part of the Fifth Dimension Assets Acquisition. Upon
completion of the Fifth Dimension Assets Acquisition and the Offering, and
assuming no warrant or option exercise, the Company's Common Stock will have a
net tangible book value of $.67 per share. This represents total dilution of
$4.58 per share, or 87.2%, to investors in this Offering. See "DILUTION."
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends in the foreseeable future. See "DIVIDEND POLICY."
LIMITATIONS ON LIABILITY OF DIRECTORS
The Company's Bylaws substantially limit the liability of the Company's
directors to the Company and its shareholders for breach of fiduciary or other
duties. See "DESCRIPTION OF SECURITIES-- Limitation on Liabilities."
POSSIBLE VOLATILITY OF SECURITIES PRICES
The market price of the Common Stock following the Offering may be highly
volatile, as has been the case recently with the securities of other companies
completing public offerings. Factors such as the Company's operating results,
its ability to complete the Fifth Dimension Assets Acquisition in a timely
manner, and public announcements by the Company or its competitors may have a
significant effect on the market price of the securities. In addition, market
prices for the securities of many small capitalization companies have
experienced wide fluctuations due to variations in quarterly operating results,
general economic conditions and other factors beyond the Company's control.
19
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the sale of 1,500,000 shares of
Common Stock offered hereby are estimated to be $7,875,000 ($9,056,250 if the
Underwriter's Overallotment Option is exercised in full). The net proceeds to
the Company are estimated to be approximately $6,601,250 ($7,628,937 if the
Underwriter's Overallotment Option is exercised in full), after deducting
estimated underwriting discounts of $787,500 ($905,625 if the Underwriter's
Overallotment Option is exercised in full) and Offering expenses of
approximately $486,250 ($521,688 if the Underwriter's Overallotment Option is
exercised in full), including the Managing Underwriter's nonaccountable expense
allowance of $236,250 ($271,688 if the Underwriter's Overallotment Option is
exercised in full). The Company currently expects to use the estimated net
proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
DOLLAR PERCENTAGE OF
APPLICATION OF NET PROCEEDS AMOUNT NET PROCEEDS
- ---------------------------------------------------------------------------- ------------ --------------
<S> <C> <C>
Fifth Dimension Assets Acquisition(1)....................................... $ 3,500,000 53.0%
Tenant Improvement, Relocation and Equipment--Call Center................... 750,000 11.4
DaViD--Acquisition of Titles................................................ 750,000 11.4
Transponder Deposits........................................................ 500,000 7.6
New Equipment Purchases--Uplink Facility.................................... 500,000 7.6
Repayment of Line of Credit................................................. 250,000 3.7
Working Capital and Other General Corporate Purposes(2)..................... 351,250 5.3
------------ -----
Total..................................................................... $ 6,601,250 100.0%
------------ -----
------------ -----
</TABLE>
- ------------------------
(1) Including, but not limited to, acquisition of: trademarks, proprietary
rights and other intellectual property rights associated with the adult
movie programming and broadcasting business; equipment, software technology,
furniture, machinery, appliances and other tangible personal property used
in the satellite uplink and customer call center facilities; any and all
rights Fifth Dimension has in adult programming in any format; all
subscriptions for the Adult Movies Business owned by Fifth Dimension; and
all rights to any "1-800" numbers used by Fifth Dimension in the Adult
Movies Business.
(2) This sum shall be available to fund anticipated increases in accounts
receivable and inventories and for the payment of operational expenses
including salaries, rent and other similar items to the extent revenues from
operations are insufficient for such purposes. Additionally, these proceeds
may be used to acquire the assets or operations of other companies which
would supplement the growth of the Company.
The amounts set forth above are the Company's best estimates only, based
upon the Company's business plan and certain assumptions regarding general
economic and industry conditions and the Company's anticipated future revenue
and expenditures, and merely indicate the proposed use of proceeds. The
foregoing represent estimates only, and the actual amounts expended by the
Company for these purposes and the timing of such expenditures will depend on
numerous factors. The Company may use a portion of the net proceeds to acquire
businesses or companies complementary to the Company's business, although the
Company currently has no specific plans or commitments to acquire any business
or companies other than certain assets owned by Fifth Dimension. Pending use of
the net proceeds for the above purposes, the Company intends to invest such
funds in short-term, interest-bearing, investment-grade obligations and
federally insured certificates of deposit.
20
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend on, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company, general business conditions and contractual
restrictions on payment of dividends, if any.
DILUTION
The difference between the Offering price per share of Common Stock and the
adjusted pro forma net tangible book value per share after giving effect to this
Offering and the Fifth Dimension assets acquisition constitutes the dilution to
investors in this Offering. Adjusted net tangible book value per share is
determined by dividing the adjusted pro forma net tangible book value of the
Company (total tangible assets less total liabilities) by the number of shares
of Common Stock outstanding. All numbers included herein do not give effect to
the conversion or exercise of any convertible securities or options outstanding
or being sold hereby.
As of June 30, 1997, the net tangible book value of the Company was
$1,017,144, or $.24 per share of Common Stock (based on 4,207,511 shares
outstanding, including 15,000 shares of Preferred Stock converted to Common
Stock). After giving effect to the sale by the Company of the 1,500,000 shares
of Common Stock offered by it hereby and the receipt of estimated net proceeds
to the Company of $6,601,250 (after deducting underwriting discounts and
estimated expenses of this offering), the net tangible book value of the Company
will be $7,618,394, or $1.33 per share. This represents an immediate increase in
the net tangible book value of $1.09 (or 454%) per share to shareholders at June
30, 1997, and an immediate decrease in value of $3.92 per share (or 74.6%) to
investors in this Offering. After giving effect to the Fifth Dimension Assets
Acquisition, the net tangible book value of the Company will be $4,378,660, or
$.67 per share. The following table illustrates the foregoing dilution to the
investors on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Offering price per share............................................................... $ 5.25
Pro forma net tangible book value per share before Offering............................ $ .24
Increase per share attributable to new investors....................................... $ 1.09
---------
Pro forma net tangible book value per share after Offering............................. $ 1.33
---------
Dilution per share to new investors.................................................... $ 3.92
---------
---------
Pro forma net tangible value per share after Fifth Dimension assets acquisition........ $ .67
---------
Dilution per share to new investors following Fifth Dimension assets acquisition....... $ 4.58
---------
---------
</TABLE>
To the extent outstanding options and Warrants are exercised, further
dilution to new investors in this Offering may result.
21
<PAGE>
The following table sets forth, on an unaudited pro forma basis as of June
30, 1997, the differences in the total consideration and the average price per
share of Common Stock paid by the Company's existing shareholders, investors in
this Offering, and the Fifth Dimension sellers:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED ------------------------
------------------------------------------ AVERAGE
APPROX. APPROX. PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Preferred Conversion.................... 15,000 0.2% $ 85,000 0.6% $ 5.67
Existing Shareholders(1)................ 4,192,511 64.0 1,695,937 12.2 0.41
New Investors........................... 1,500,000(2) 23.0 7,875,000 56.9 5.25
Fifth Dimension Sellers................. 840,000 12.8 4,200,000 30.3 5.00
-------------- ----- ------------- ----- -----
Total................................. 6,547,511 100.0% $ 13,855,937 100.0% $ 2.12
-------------- ----- ------------- ----- -----
-------------- ----- ------------- ----- -----
</TABLE>
- ------------------------
(1) Excludes 835,666 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants; excludes 150,000 shares of Common Stock reserved
for issuance upon exercise of the Underwriter's Warrant. See "UNDERWRITING."
The Quarto warrant to purchase up to 400,000 shares of the Company's Common
Stock will be adjusted depending on the price of the shares offered hereby
and the value of the shares of Common Stock issued to Fifth Dimension
sellers as part of the Fifth Dimension Assets Acquisition. These adjustments
will result in Quarto owning a warrant to purchase 480,000 shares of the
Company's restricted common stock for $5.00 per share. See "RISK
FACTORS--Quarto Warrant" and "BUSINESS."
(2) Excludes up to 225,000 shares of Common Stock that may be sold by the
Managing Underwriter upon exercise of its Overallotment Option. See
"UNDERWRITING."
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis; (ii) on a pro forma basis as adjusted to give
effect to the sale of the 1,500,000 shares of Common Stock offered hereby at an
assumed price of $5.25 per share, and the application of the net proceeds
therefrom as described under "USE OF PROCEEDS," including completion of the
Fifth Dimension assets acquisition. This table should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
AS
1997 ADJUSTED(2)
------------ -------------
<S> <C> <C>
Long-term obligations, excluding current portion..................................... $ 10,848 $ 1,010,848
Shareholders' equity (deficit):
Common Stock, $.0001 par value, 50,000,000 shares authorized, 4,192,511 shares
issued and outstanding(1)........................................................ 419 --
Common Stock, $.0001 par value, 50,000,000 shares authorized, 6,547,511 shares
issued and outstanding........................................................... -- 655
Series A and B Preferred Stock, $.10 par value, 5,000,000 shares authorized, 15,000
shares issued and outstanding.................................................... 1,500 0
Additional paid-in capital(2)...................................................... 1,779,018 12,581,532
Accumulated deficit................................................................ (763,793) (763,793)
------------ -------------
Total shareholders' equity......................................................... 1,017,144 11,818,394
------------ -------------
Total capitalization............................................................... $ 1,027,992 $ 12,829,242
------------ -------------
------------ -------------
</TABLE>
- ------------------------
(1) Based upon shares issued and outstanding as of June 30, 1997. Does not
include 948,197 shares of Common Stock reserved for issuance upon exercise
of warrants, excluding the Underwriter's Warrant, or any adjustments
thereto.
(2) The "As Adjusted" calculations are net of underwriting discounts and other
expenses of this Offering estimated to total $1,273,750.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
New Frontier Media, Inc. ("NOOF" or the "Company") is a holding company with
three wholly-owned subsidiaries and one majority-owned subsidiary: Colorado
Satellite Broadcasting, Inc. ("CSB"); DaViD Entertainment, Inc. ("DaViD");
Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads"); and Fuzzy
Entertainment, Inc. d/b/a Insight Editions ("In-Sight").
Management has formed CSB to acquire certain assets of Fifth Dimension and,
if the assets acquisition is completed, CSB will operate the Company's
subscription-based and transaction-based television networks. Upon completion of
this Offering and the Fifth Dimension Assets Acquisition, CSB will own, operate
and distribute the leading three C-band adult programming networks: EXXXTASY,
TRUE BLUE, and EXOTICA, collectively referred to hereinafter as the Exxxtasy
Networks. DaViD is in the business of acquiring content rights to existing adult
and unrated motion picture titles for distribution on laserdisc and digital
versatile disc ("DVD"). DaViD currently owns content rights to approximately 500
unrated and adult motion picture titles. Inroads is a CD-ROM software publishing
company, designing and developing CD-ROM titles and licensing third
party-developed titles. In-Sight acquires, produces, and distributes fine art
images and decorative posters.
RESULTS OF OPERATIONS
NEW FRONTIER MEDIA, INC.
The following table sets forth selected operating data for the periods and
upon the basis indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE
YEAR ENDED MARCH 31, 30,
-------------------------- ------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Sales, net....................................... $ 2,515,802 $ 2,565,671 $ 479,330 $ 625,094
Cost of Sales.................................... $ 2,217,812 $ 1,843,765 $ 451,783 $ 521,525
------------ ------------ ----------- -----------
Gross Profit..................................... $ 297,990 $ 721,906 $ 27,547 $ 103,569
Total Operating Expenses......................... $ 931,342 $ 807,661 $ 277,112 $ 165,286
Other Income (Expense)........................... $ 182,516 $ 91,032 $ 23,772 $ 50,720
------------ ------------ ----------- -----------
Net Income (Loss) Before Income Taxes and
Minority Interest.............................. $ (450,836) $ 5,277 $ (225,793) $ (10,997)
Income Taxes..................................... -- $ (12,147) -- $ (2,454)
Minority Interest in Loss of Subsidiary.......... $ 64,806 -- $ 21,808 --
------------ ------------ ----------- -----------
Net Income (Loss)................................ $ (386,030) $ (6,870) $ (203,985) $ (13,451)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
IMPENDING ACCOUNTING CHANGES
The Financial Accounting Standards Board released statement #128, "Earnings
per share," which will be effective for all financial reporting periods
subsequent to December 15, 1997. This statement establishes standards for
computing and presenting earnings per share (EPS) and replaces the current
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution from common stock equivalents (potential common
stock) while diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock.
24
<PAGE>
In addition, the Financial Accounting Standards Board released statement
#131 "Disclosures about Segments of an Enterprise and Related Information" which
will be effective for all financial reporting periods subsequent to December 15,
1997. This statement requires the reporting of certain information about
operating segments. The following table reflects certain information as
promulgated by the statement:
<TABLE>
<CAPTION>
ELIMINATIONS
DAVID BOULDER FUZZY OF
NEW FRONTIER ENTERTAINMENT, INTERACTIVE ENTERTAINMENT, INTERCOMPANY
MEDIA, INC. INC. GROUP, INC. INC. AMOUNTS TOTALS
------------ -------------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............... $ 400 $ 2,211,388 $ 290,994 $ 13,020 $ -- $ 2,515,802
Other Income (loss)..... (5,882) 800 187,598 -- -- 182,516
Net Income (loss)....... (245,779) 141,736 (212,905) (69,802) -- (386,030)
Segment assets.......... 497,766 535,132 1,432,541 166,069 (445,037) 2,186,471
------------ -------------- ------------ -------------- ------------- ------------
Segment liabilities..... 381,947 178,945 321,744 232,757 (445,037) 670,256
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996
NEW FRONTIER MEDIA, INC. (THE "COMPANY")
The Company functions as a holding company for its subsidiaries, and as such
generates no independent income. The Company incurs administrative expenses
relating to operation of its subsidiaries, particularly concerning market
making, public relations, and investment banking activities. The Company incurs
expenses related to operation of the Company and its subsidiaries as a public
entity, such as legal, accounting, and public relations costs.
For the three-month period ended June 30, 1997, the Company reported no
income, and total operating expenses of $121,904, compared with total operating
expenses of $62,355 for the same period the prior year. This increase of $59,549
for the period was directly attributable to increases in legal fees (from $2,494
for the period in 1996 to $27,401 for the same period in 1997), public/investor
relations ($0 in 1996 compared to $33,055 in 1997), and travel and lodging
expenses ($2,587 in 1996 compared to $17,361 in 1997). These expenses increased
primarily due to the Fifth Dimension transaction, and the undertaking of the
Offering by the Company.
DAVID ENTERTAINMENT, INC. ("DAVID")
DaViD reported sales of $390,794 for the three-month period ended June 30,
1997, compared with $634,879 for the same period the prior year. Management
attributes this decrease to DaViD's move from exclusively LaserDisc content and
distribution to a primary emphasis on the DVD market. Total operating expenses
remained constant ($123,835 for the three-month period in 1997 compared to
$116,817 for the same period the prior year). DaViD reported a net loss of
$14,050 for the period, compared to a net profit of $93,650 for the same period
the prior year.
BOULDER INTERACTIVE GROUP, INC. D/B/A INROADS INTERACTIVE ("INROADS")
Inroads reported sales of $99,250 for the three-month period ended June 30,
1997, up from $53,764 for the same period the prior year. Management attributes
this sales growth to the introduction of new titles to the market, as a result
of the strategic alliance with Quarto. Inroads' total operating expenses for the
period increased to $145,777, up from $108,434 for the same period the prior
year, as Inroads hired more personnel and incurred development expenses relating
to commercial exploitation of the Quarto titles. Inroads' net loss for the
period, $50,855, was slightly larger than the net loss of $42,372 for the same
period the prior year.
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FUZZY ENTERTAINMENT, INC. D/B/A IN-SIGHT EDITIONS ("IN-SIGHT")
In-Sight reported total revenue of $1,987 for the quarter ended June 30,
1997, along with operating expenses of $10,661 and a net loss of $9,828. The
Company is not currently allocating significant resources to In-Sight.
COMPARISON OF YEARS ENDED MARCH 31, 1997 AND 1996
NEW FRONTIER MEDIA, INC.
The Company's total revenue for 1997 was $2,515,802, down $49,869 (1.9%)
from 1996. Cost of sales increased to $2,217,812 from $1,843,765 the prior year,
resulting in a $423,916 (58.7%) decrease in gross profit for the fiscal year
ended March 31, 1997 from the same period the prior year. The small decrease in
total revenue for 1997, as compared with 1996, is directly attributable to the
normal new product development and introduction timeline experienced by Inroads
as it develops and commercially exploits new titles under the agreement with
Quarto. Total operating expenses increased $148,997 (19.0%), from $782,345 for
the year ended March 31, 1996 to $931,342 for the year ended March 31, 1997,
resulting in a net loss from operations of $450,836 for the fiscal year ended
March 31, 1997. This increase was also due to Inroads beginning to develop and
commercially exploit Quarto-based titles. In particular, Inroads dedicated
significant resources to developing the IN FOCUS and CIGAR COMPANION titles,
both of which were released after the end of the fiscal year. Operating expenses
for NOOF and Inroads remained relatively constant for the year ($277,600 and
$510,715, respectively), while operating expenses for DaViD increased to
$71,216, from $6,801 for the same period the prior year (see Management's
discussion concerning Inroads and DaViD, below). NOOF performs many
administrative functions for Inroads, DaViD, and Fuzzy, and generates little or
no revenue separately. As a result, NOOF reported total revenue of $400, total
operating expenses of $277,600, and a net loss from operations of $277,200 for
the fiscal year ended March 31, 1997, compared with a net loss from operations
of $206,858 for the same period the prior year. Management attributes the higher
net loss for the year ended March 31, 1997 to increased travel and lodging
expenses, office expenses, employee benefits (health plan), and rent expense.
NOOF will continue to show net operating losses in the future, as it continues
to function as the administrative holding company for its subsidiaries.
DAVID
DaViD is a wholly-owned subsidiary of the Company. DaViD reported a $618,532
(38.8%) increase in revenue for the fiscal year ended March 31, 1997, to
$2,211,388 from $1,592,856 for the same period the prior year; however, revenue
and other financial results for DaviD for the fiscal year ended March 31, 1996
represent only six months' of operations for that year. DaViD reported total
cost of sales of $1,961,933, operating expenses of $71,216, and pre-tax earnings
of $179,039 for the year ended March 31, 1997, compared with total cost of sales
of $1,215,543, operating expenses of $6,801, and pre-tax profit of $353,895 for
the same period the prior year. Management attributes the higher operating
expenses for the year ended March 31, 1997 to increased legal costs, printing
costs, and distribution expenses being allocated away from cost of sales to
operating expense. Management anticipates revenue growth from DaViD, as Digital
Versatile Disc technology advances in 1997 and 1998.
INROADS
In September, 1996, the Company sold 30 percent of its interest in Inroads
to Quarto Holdings, Inc. ("Quarto") for $1,250,000 in cash and $525,000 worth of
digital material. For accounting purposes, the digital material is valued at $0.
Inroads also acquired the rights to develop and commercially exploit Quarto
materials in digital formats as a result of this transaction. Since the date of
the Quarto transaction, Inroads has allocated significant corporate resources to
identifying, developing, and commercially exploiting its first Quarto-based
products. Inroads reported total revenue of $290,994 for the fiscal year ended
March 31, 1997, compared with $971,370 for the same period the prior year.
Management attributes this
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70 percent revenue decline to several factors, including diversion of the
Inroads resources to the Ralston Purina project, normal delays in developing
products under the Quarto agreement, and Inroad's evolving market focus from
"edutainment" products to alternative and specialty products. See "BUSINESS." In
addition, management attributes lower revenue figures to the underperformance of
its distributors, and the transition of Inroads distribution strategy away from
software retail outlets and toward direct sales.
Inroad's latest CD-ROM products are targeted at enthusiasts and hobbyists,
primarily as a result of the titles that Inroads is developing and commercially
exploiting under the Quarto agreement. The Company is currently engaged in a
dispute with Quarto. See "BUSINESS--Legal Proceedings." Inroads dedicated a
major portion of its resources over the past several months to development of
its CIGAR COMPANION interactive CD-ROM, which was released to the market on July
1, 1997. Management believes that Inroads and the Company will realize revenues
from CIGAR COMPANION, based upon the surging popularity of cigars and
cigar-related products in the United States. Cigar Afficianado magazine reports
that in the first quarter of 1997, consumers in the United States purchased over
500 million cigars, a 96 percent increase over 1996 and a 300 percent increase
over 1995.
In addition to CIGAR COMPANION, Inroads has developed and recently released
a photography CD-ROM, IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY, utilizing the
material acquired from Quarto. Inroads recently signed agreements for
distribution of IN FOCUS in Spain and Italy. IN FOCUS is co-branded by Olympus
America, which includes a free roll of film from Kodak for every person who
registers the IN FOCUS software with Inroads.
Inroad's MULTIMEDIA GUNS CD-ROM title was listed as the 17th-highest selling
software title on PC DATA's top-selling software list for April, 1997.
MULTIMEDIA GUNS reached number 15 on the PC DATA list for June, 1997. Currently,
Inroads only sells the MULTIMEDIA GUNS title through Wal-Mart at full retail.
Due to the success of MULTIMEDIA GUNS in this limited distribution channel,
CompUSA has agreed to carry the title. Management of Inroads anticipates sales
of MULTIMEDIA GUNS by CompUSA to meet or exceed sales of the title at Wal-Mart.
The Company is currently engaged in a dispute with Quarto. See
"BUSINESS--Legal Proceedings."
IN-SIGHT
The Company capitalized In-Sight in November and December, 1996. In-Sight
reported total revenue of $13,020, cost of goods of $10,290, operating expenses
of $71,812, and a net loss of $69,082 for the fiscal year ended March 31, 1997.
In-Sight has not yet transitioned into the fully-operational stage. Most of In-
Sight's operating expenses were attributable to consulting expense of $40,187.
Management does not believe In-Sight will be a significant part of the Company's
business in the future.
COLORADO SATELLITE BROADCASTING, INC. ("CSB")
CSB is a wholly-owned subsidiary of the Company, formed to acquire the Fifth
Dimension assets and to operate and distribute the programming networks to be
acquired. Results of operations from the Fifth Dimension assets to be acquired
is discussed at Fifth Dimension Assets, below.
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FIFTH DIMENSION ASSETS
The combined statements of income and retained earnings for Fifth Dimension
(Barbados) Inc., 1043133 Ontario Inc., and Merlin Sierra Inc. for the fiscal
year ended March 31, 1997 and 1996, and for the three-month period ended June
30, 1997 and 1996 follow (in U.S. dollars):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED JUNE ENDED JUNE YEAR ENDED YEAR ENDED
30, 30, MARCH 31, MARCH 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (AUDITED)
Sales................................................ $ 3,041,068 $ 3,573,571 $ 15,044,139 $ 12,223,731
Cost of Sales........................................ 1,904,646 2,236,915 9,560,847 6,317,438
------------- ------------- ------------- -------------
Gross Profit......................................... 1,136,422 1,336,656 5,483,292 5,906,293
Expenses............................................. 822,327 1,103,317 4,264,144 3,898,653
------------- ------------- ------------- -------------
Net income from operations........................... 314,095 233,339 1,219,148 2,007,640
Loss on investment in Shares......................... -- 220,000 220,000 --
------------- ------------- ------------- -------------
314,095 13,339 999,148 2,007,640
------------- ------------- ------------- -------------
Provision for (recovery of) income taxes
Current............................................ 20,000 -- 30,350 (113,563)
Deferred........................................... -- (574,980) 71,500 (71,500)
------------- ------------- ------------- -------------
20,000 (574,980) 101,850 (185,063)
------------- ------------- ------------- -------------
Net Income for the period............................ 294,095 588,319 897,298 2,192,703
Retained Earnings (Deficit) beginning of period...... 2,308,758 1,556,388 1,556,388 (636,315)
------------- ------------- ------------- -------------
2,602,853 2,144,707 2,453,686 1,556,388
Dividends paid....................................... -- -- 144,928 --
------------- ------------- ------------- -------------
Retained Earnings end of period...................... $ 2,602,853 $ 2,144,707 $ 2,308,758 $ 1,556,388
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
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Management of the Company did not direct the operations of Fifth Dimension
or its subsidiaries during the periods reported upon, and have prepared this
discussion of financial condition based upon extensive interviews with
management of those companies and review of the audited and unaudited financial
statements for those companies. "Fifth Dimension," as used herein, refers to
Fifth Dimension (Barbados) Inc., 1043133 Ontario Inc., and Merlin Sierra Inc.
For the three-month period ended June 30, 1997, Fifth Dimension reported
sales of $3,041,068, compared with $3,573,571 for the same period the prior
year. Cost of sales remained constant as a percentage of sales at 62.6%;
however, Fifth Dimension reduced expenses to $822,327 (27.0% of sales) for the
three-month period ended June 30, 1997, compared with $1,103,317 (30.9% of
sales) for the same period in 1996. This resulted in an increase in net income
from operations of $80,756 (34.6%) for the quarter ended June 30, 1997
($314,095) compared with the same quarter the prior year ($233,339). Fifth
Dimension's net income for the quarter ended June 30, 1997 was $294,095, down
from $588,319 for the same period the prior year; however, $574,980 of the net
income for the quarter ended June 30, 1996 was attributable to recovery of
income taxes. Without provision for recovery of income taxes, Fifth Dimension's
net income for the quarter ended June 30, 1996 was $13,339, compared to $314,095
(an increase of $300,756) for the same period in 1997.
Fifth Dimension's sales increased $2,810,408 (23.0%) to $15,044,139 for the
fiscal year ended March 31, 1997, from $12,223,731 for the prior year. This
increase was due to continued expansion of Fifth Dimension's subscriber-based
adult network programming. There was a significant increase in cost of sales for
the year ended March 31, 1997, up $3,243,409 (51.3%) to $9,560,847 from
$6,317,438 the prior year. Management of the Company attributes a majority of
this increase in cost of sales to related party transactions, set forth in Note
6 to the Financial Statements. Management believes that it can reduce or
eliminate future related party transactions, resulting in cost of sales
approximating 55 percent of sales. Because of the large increase in cost of
sales, and the smaller increase in expenses also associated with related party
transactions, Fifth Dimension's net income from operations fell to $1,219,148
for the fiscal year ended March 31, 1997, a $788,492 (39.3%) drop from the same
period the prior year. Fifth Dimension also suffered a one-time loss on
investment shares of $220,000 for the fiscal year ended March 31, 1997. Fifth
Dimension's net income for the year ended March 31, 1997 was $897,298, compared
with $2,192,703 for the same period the prior year. Management of the Company
attributes this decline in net income primarily to the related party
transactions discussed in Note 6 to the Fifth Dimension Financial Statements,
and the loss on investment shares. Fifth Dimension provided adjusted combined
financial statements to reflect, among other things, reasonable adjustments to
related party transactions and expenses that are not anticipated to reoccur in
the future. Fifth Dimension reported adjusted pre-tax income of $2,755,297 for
March 31, 1997. The Company evaluated certain non-recurring costs included in
the operation of Fifth Dimension in arriving at the purchase price for the
assets. The Company believes approximately $1,800,000 of expenses incurred by
Fifth Dimension for the year ended March 31, 1997 will not recur in the future,
including excess salaries and related-party payments of approximately $850,000,
loss on investment shares of $220,000, certain legal fees of approximately
$100,000, approximately $415,000 of costs for duplication of existing facilities
and operations that the Company already has in place, and other non-recurring
costs of approximately $215,000. Management of the Company relied on the
adjusted pre-tax income in determining the purchase price for the Fifth
Dimension assets. See "FINANCIAL STATEMENTS."
LIQUIDITY AND CAPITAL RESOURCES
The Company's net increase in cash and certificates of deposit for the
fiscal year ended March 31, 1997 was $810,864 (1,671.1%), up from $48,523 to
$859,387. This increase was primarily the result of the Company's sale of 30
percent of Inroads to Quarto for $1,250,000 cash, and digital material which for
accounting purposes has been valued at $0. $841,568 of the Company's cash and
cash equivalents are held in Inroad's bank accounts, and are restricted from
transfer to or use by the Company or its other subsidiaries by the terms of the
Quarto agreements. The Company had cash and cash equivalents of $1,384
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at March 31, 1997. DaViD had cash and cash equivalents of $18,441 at March 31,
1997. Fuzzy had cash and cash equivalents of $(622) at March 31, 1997. The
Company retains some operating revenue from its share of the net income of
DaViD, and by assessing operating costs to its subsidiaries on a pro rata basis.
Inroads and DaViD have recently suffered decreases in revenues and cash flow
as they transition to different consumer markets and products. Since March 31,
1997, the Company's total current liabilities have increased approximately
$575,000 (87%), primarily due to an increase in notes payable and accounts
payable. During that same period, the Company reduced its bank credit line by
approximately $170,000. On October 24, 1997, the Company obtained a $1 million
unsecured, conditional (if the Company fails to obtain at least $1 million in
alternate funding on or before December 31, 1997), revocable line of credit from
a principal shareholder of the Company. The Company can draw against this line
of credit under certain conditions beginning January 1, 1998, and for nine
months thereafter. Completion of this offering and the subsequent completion of
the Fifth Dimension asset acquisition will provide the Company with sufficient
liquidity and capital to operate for the next 12 months.
BUSINESS DEVELOPMENT AND OUTLOOK
CSB intends to continue to expand the subscription base of Fifth Dimension
through advertising, marketing, and expansion of services to traditional cable
television providers, while streamlining operations and cutting administrative
and other costs. In addition, CSB is exploring the possibility of launching a
soft-core adult network to compete with PLAYBOY CHANNEL and SPICE.
Digital Versatile Disc ("DVD") Players are quickly becoming part of the
consumer electronic landscape in the United States and abroad. Paul Kagan
Associates, Inc. estimates that approximately 800,000 DVD players will be sold
in the United States by the end of December, 1997 and that this figure will grow
to 10 million by the year 2000. Management believes that the low replication
price of DVD (and the correspondingly low retail price of titles on DVD) will
result in a software to hardware purchase ratio of 5:1. Management expects that
approximately 5 percent of the total forecasted 10 million units of DVD software
sold in 1997, or 500,000 units, will be in the adult entertainment category.
DaViD continues to acquire content rights to unrated and adult motion pictures,
and to release an increasing number of titles per month, primarily on DVD.
Management believes DaViD revenues and net income will continue to grow as DVD
technology is introduced to the consumer market.
Inroads continues to develop new CD-ROM products, and Management believes it
has secured a source of future titles by virtue of the Quarto agreements.
Although CD-ROM software publishing remains a highly competitive business,
Management believes Inroads has begun to demonstrate an ability to create demand
for its products through conventional (e.g., Wal-Mart and CompUSA) and
alternative (e.g., Ralston Purina and Time Warner licensing agreements) retail
channels.
In-Sight is in the early development stages, and Management anticipates
reaching break-even by March 31, 1998.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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BUSINESS
HISTORY OF THE COMPANY
New Frontier Media, Inc. was originally incorporated as Strategic
Acquisitions, Inc. ("Strategic"), a "blank check" company, on February 23, 1988
in the State of Colorado.
On September 7, 1989, Strategic completed a reverse acquisition of National
Securities Network, Inc. ("NSN"), a privately-held Colorado corporation and
registered securities broker-dealer. Strategic issued 470,016,000 restricted
common shares to NSN shareholders, in exchange for all of the issued and
outstanding NSN common stock. Shareholders also approved a change of Strategic's
name to National Securities Holding Corporation ("NSHC"). NSHC continued in
operation as a broker-dealer until October 8, 1990, when it ceased operations
and sold its remaining broker-dealer business to Tamarron Investments, Inc., a
Colorado broker-dealer. NSHC had no operations between October 8, 1990 and
September 15, 1995.
On September 15, 1995, NSHC consummated the acquisition of New Frontier
Media, Inc. in a stock-for-stock exchange. NSHC first effected a 2,034.66:1
reverse split of all 569,706,000 NSHC Common Shares issued and outstanding,
resulting in 280,000 NSHC Common Shares issued and outstanding prior to the New
Frontier acquisition. NSHC shareholders also approved a change of the Company's
name to New Frontier Media, Inc. Currently, the Company has 4,207,511 Common
Shares and 0 Preferred Shares issued and outstanding. The Company is authorized
to issue a total of 50,000,000 Common Shares, par value $.0001 per share, and
5,000,000 Preferred Shares, par value $.10 per share.
All of the Company's current revenues are derived through its subsidiaries:
Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads"); DaViD
Entertainment, Inc. ("DaViD"); and Fuzzy Entertainment, Inc. d/b/a Insight
Editions ("In-Sight"). The Company anticipates deriving significant revenue from
its fourth subsidiary, Colorado Satellite Broadcasting, Inc. ("CSB") upon
completion of the Fifth Dimension Assets Acquisition. There can be no assurance
that the Company will be able to derive significant, or any, revenues from CSB.
The Company's offices are located at 1050 Walnut Street, Suite 301, Boulder,
Colorado 80302. The telephone number is (303) 444-0632.
OVERVIEW
New Frontier Media, Inc. (the "Company") is a diversified publishing holding
company, doing business through its subsidiaries: CSB, DaVid, Inroads, and
In-Sight. The Company is currently engaged in three primary businesses: (i)
reference CD-ROM publishing; (ii) acquisition and distribution of unrated and
adult feature films in video disc formats; and, (iii) fine art and decorative
art poster publishing and distribution. Assuming successful completion of the
Fifth Dimension Assets Acquisition, the Company (through CSB) will be involved
in subscription-based and transaction-based television programming, particularly
the provision of adult entertainment programming to C-band satellite markets.
The Company's focus is to acquire high-quality content which can be distributed
by the Company and exploited through a wide variety of media. A portion of the
Company's CD-ROM sales are handled through Broderbund Software, Inc.
FIFTH DIMENSION ASSETS ACQUISITION
The Company has entered into agreements to acquire certain assets relating
to the subscription-based and transaction-based adult television networks of
Fifth Dimension.
The assets to be acquired from Fifth Dimension include but are not limited
to:
(a) any and all trademarks, proprietary rights and other intellectual
property rights owned by Fifth Dimension and associated with the Adult
Movies Business. These include but are not necessarily limited to trade
names, trademarks and/or service marks and any goodwill associated with
such trade names, trademarks and/or service marks;
(b) any and all rights Fifth Dimension may have in adult programming in any
format (including master tapes) of feature length films and other films
and programming, interstitial or otherwise, that contain motion picture
material that is nonrated or X-rated and whose main theme
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embodies nudity and/or sexually explicit material between consenting
adults, and all promotional materials and programming related thereto;
(c) all subscriptions for the Adult Movies Business services as of the date
of closing, including all subscriber lists, past and present, and any
other marketing data related thereto, in the possession of Fifth
Dimension;
(d) a complete list of all advertisers, marketing partners and vendors used
by Fifth Dimension in relation to the Adult Movies business and related
services, with contact names, mailing addresses, and phone and fax
numbers;
(e) all rights, title and interest Fifth Dimension may have in 1-800 phone
numbers used for the Adult Movies Business and related services and in
any World Wide Web address and websites used in the Adult Movies
Business;
(f) all rights, title and interests in any permits, licenses, franchises,
consents or authorizations issued by, and all registrations and filings
with, any government agency solely in connection with the Adult Movies
Business of Fifth Dimension, whenever issued or filed, (including but
not limited to any permits or licenses from the Canadian
Radio-Television and Telecommunications Commission and any permits or
licenses from the Federal Communications Commission) excepting only
those which by law are non-transferable or those which have expired.
CSB is the Company's wholly-owned subsidiary that will operate the
subscription-based and transaction-based television networks to be acquired from
Fifth Dimension. A substantial portion of the proceeds from this Offering will
be used to complete the Fifth Dimension transaction. See "USE OF PROCEEDS" and
"BUSINESS--Fifth Dimension Assets Acquisition."
Fifth Dimension is a leading provider of subscriber-based premium television
channels (hereinafter "premium channels" or "pay television") and
transaction-based television networks ("pay-per-view"). Fifth Dimension owns,
operates and distributes the three leading C-band adult programming networks,
and is a leading provider of explicit adult programming via direct to home
("DTH") C-band satellite. Pursuant to the terms of the Asset Purchase Agreements
between the Company and Fifth Dimension, the Company will acquire certain assets
from Fifth Dimension, including the satellite uplink facility equipment, call
center facility equipment, satellite transponder subleases, film inventories,
intangible assets (including trade names, trademarks, service marks, copyrights,
mask work rights, licenses, brand names, trade secrets, trade dress, technical
know-how, good will, and other intangibles), subscriber base and lists, vendor
lists, books and records, permits and licenses, and all other property of Fifth
Dimension used in connection with Fifth Dimension's adult programming business.
The Company will enter into an Uplink Management Services Agreement and a Call
Center Interim Services Agreement with Fifth Dimension, pursuant to which Fifth
Dimension will operate, maintain, manage, and sustain the satellite uplink
facility and will receive and process subscriber calls until the Call Center can
be relocated to the Denver, Colorado metropolitan area. See "BUSINESS."
The assets to be acquired from Fifth Dimension generated sales of
$15,044,139 and pre-tax income of $999,148 (pre-tax income, as adjusted for
non-recurring expenses and related party transactions, would have been
$2,755,297) for the year ended March 31, 1997. The Company has agreed to acquire
certain Fifth Dimension assets for a total purchase price of $8,700,000,
consisting of $3,500,000 in cash, Common Stock of the Company valued at
$4,200,000, and a promissory note for $1,000,000. The Company evaluated certain
non-recurring costs included in the operation of Fifth Dimension in arriving at
the purchase price for the assets. The Company believes approximately $1,800,000
of expenses incurred by Fifth Dimension for the year ended March 31, 1997 will
not recur in the future, including excess salaries and related-party payments of
approximately $850,000, loss on investment shares of $220,000, certain legal
fees of approximately $100,000, approximately $415,000 of costs for duplication
of existing facilities and operations that the Company already has in place, and
other non-recurring costs of approximately $215,000. Terms of the Asset Purchase
Agreements provide that the Company will issue 840,000 shares of Common Stock to
Fifth Dimension as part of the purchase price. The Company will also issue Fifth
Dimension or its assignees warrants to purchase up to an additional 400,000
shares of the Company's Common Stock at $5.00 per
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share, all pursuant to the terms of the Asset Purchase Agreements and the
Warrant Agreement. See "BUSINESS--Fifth Dimension Assets Acquisition." The
Company has also agreed to pay Fifth Dimension "formula profits" exceeding
$2,000,000 for the first 12 months after closing. "Formula Profits" is defined
in the Asset Purchase Agreements as the total revenue from operations minus
actual operating costs. Maximum operating costs under this provision are limited
to an amount not greater than 125% of the projected costs set forth in Schedule
2.1(f) to the Asset Purchase Agreements. Schedule 2.1(f) details projected costs
of $12,294,444, and maximum operating costs of $15,368,055.
The Company believes it can enhance shareholder value by:
- Integrating the Fifth Dimension Assets into the Company via CSB, which is
currently a shell corporation;
- Substantially reducing operating costs associated with the Fifth Dimension
assets by moving the Call Center to Denver, Colorado;
- Eliminating related-party leases and payments that were previously made by
Fifth Dimension;
- Reducing licensing fees by combining the purchasing power of DaViD and
CSB; and
- Utilizing personnel of Inroads to implement simultaneous "web casting" of
CSB programming via the Internet.
In the asset purchase agreements, Fifth Dimension has agreed to indemnify,
defend, and hold harmless the Company against claims and losses that "arise,
result from or relate to any breach of, or failure by [Fifth Dimension] to
perform, any of [its] representations, warranties, covenants or agreements..."
under the agreements. The asset purchase agreements do not contain standard
cross-indemnification language particularly relating to claims, losses, costs,
damages, and liabilities that may arise after closing as a result of acts that
occurred prior to closing. The Company intends to acquire the Fifth Dimension
assets and operate the adult satellite network business through its wholly-owned
subsidiary CSB. A significant portion of the net proceeds from this offering are
allocated to this transaction. See "USE OF PROCEEDS." The Company, through CSB,
intends to operate its television network business in much the same way that
Fifth Dimension is currently operating its network business.
OVERVIEW--ADULT ENTERTAINMENT INDUSTRY
Despite nearly two decades of intense political campaigning against adult
entertainment, consumer purchases of adult entertainment have increased
dramatically. Adult Video News, an adult entertainment industry trade
publication, estimated the number of explicit adult video rentals rose from 75
million in 1985, to 490 million in 1992, and finally to an all-time high 665
million in 1996. Adult Video News reported that Americans spent more than $8
billion in 1996 on all forms of sexually explicit materials.
During the 1980s, the availability of adult movies on videocassette and on
cable television helped to legitimize the consumption of explicit material by
putting it in the home setting. The result, in the opinion of Management, has
been the legitimization of industry products by other businesses not
traditionally associated with the adult entertainment industry. Video stores
(video rentals), long distance telephone carriers (adult conversation lines,
internet adult services), satellite providers (transponder leases, adult
networks), cable companies (adult channels and networks), hotel chains
(soft-porn movies), and even mutual funds (investments in publicly-traded adult
entertainment companies) earn significant returns by supplying or investing in
adult entertainment either directly or indirectly.
The distribution of sexually explicit material is intensely competitive.
Hundreds of companies now produce and distribute films to wholesalers and
retailers, as well as directly to the consumer. The low cost of videotape and
the introduction of low cost video tape recorders, along with the minimal
production budgets of many adult films, has resulted in much lower barriers to
entry in the adult entertainment industry. The availability of adult films on
videocassette has virtually destroyed the adult theatre business.
The inclusion of "soft core" material routinely available on a variety of
cable television networks reinforces consumer demand. Americans spent over $150
million on adult pay-per-view in 1996, according to a recent article in U.S.
NEWS AND WORLD REPORT magazine (February 10, 1997). Cable companies such as Time
Warner, TeleCommunications, Inc., and Continental Cablevision offer non-explicit
services like the
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PLAYBOY CHANNEL and SPICE. According to public documents, the PLAYBOY and SPICE
channels generate as much as $200 million in revenue from cable and DTH
satellite services. Both companies have launched overseas services.
The adult entertainment industry continues to grow as technological advances
allow easier and more private access to products. Most major hotel chains,
including Marriott, Hyatt, and Hilton, offer in-room non-explicit adult
programming through services such as SPECTRAVISION and ON COMMAND. The
tremendous growth of the Internet, including chat rooms and web sites dedicated
to adult entertainment, has resulted in millions of potential customers
accessing these sites from the relative privacy of their personal computers. In
a recent ruling, ACLU v. Reno, the Supreme Court struck down portions of the
Communications Decency Act. Finally, telephone sex services continue to report
record sales. Industry sources estimate that total revenues generated in the
telephone sex business in 1996 exceeded $1 billion. Management believes that the
adult entertainment industry in general, and the private viewing segment of that
industry in particular, will continue to experience significant growth in the
coming years, particularly as advances in technology allow more private and
secure adult access to adult themed material.
OVERVIEW--FIFTH DIMENSION
Fifth Dimension is a leading provider of subscriber-based premium television
channels ("premium channels" or "pay television") and transaction-based
television networks ("pay-per-view"). Fifth Dimension currently owns, operates,
and distributes the three leading C-band adult programming networks: EXXXTASY,
TRUE BLUE, and EXOTICA (collectively referred to hereinafter as the "Exxxtasy
Networks"). Fifth Dimension, through the Exxxtasy Networks, is a leading
provider of explicit adult programming via direct to home ("DTH") C-band
satellite. To a lesser extent, Fifth Dimension provides its services through
cable television and wireless cable television multiple system operators
("MSOs"). Fifth Dimension does not currently provide Ku-band (small dish or
digital satellite) services. Fifth Dimension sells its network programming on a
subscription basis and on a pay-per-view basis. Premium channel subscribers and
pay-per-view subscribers have television set-top decoder boxes. They purchase
block programming (e.g., one day, one month, one year), or single movies or
events for a flat fee. As of March 31, 1997, the Exxxtasy Networks are available
to an estimated 2.35 million C-band DTH subscribers, and approximately 20,000
MSO subscribers. The Exxxtasy Networks have distribution agreements with nearly
every major distributor of C-band satellite programming in the United States.
Fifth Dimension has been unable to significantly expand its Exxxtasy
Networks distribution base primarily due to the refusal of MSOs and digital
satellite companies to carry explicit adult programming. CSB intends to launch a
branded, non-explicit service to compete with PLAYBOY CHANNEL and SPICE, the two
leading MSO and digital satellite adult networks. The Company has allocated a
small portion of the net proceeds from this Offering to continue evaluation of
the costs and timing of launching such a service. Management estimates a cost of
over $2 million and a timeframe of 12 to 24 months to launch a branded soft-core
adult network. In all likelihood, the Company would be required to seek
additional financing to fund this project. Fifth Dimension aggressively promotes
its networks' brand names with bold logotypes and high-quality interstitial
programming between feature films and special programming. The Exxxtasy Networks
also offer home shopping programming between feature film and special
programming, featuring adult theme products. The Exxxtasy Networks sell air time
to third parties who provide adult-oriented entertainment and information
through pay-per-call telephone lines.
EXXXTASY, TRUE BLUE, and EXOTICA each features approximately 36 movie titles
per week, or 100 to 150 movies each month, with at least 15 first-time
exhibitions per month. There is no cross-over programming between channels. All
channels are available 24 hours per day, featuring a mix of standard industry
format 90 minute feature films and special 30- and 60-minute features and
interviews. Staggered movie start times occur three times daily, allowing for
maximum viewing flexibility. Currently, the Exxxtasy Networks deliver explicit
adult programming exclusively.
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EXXXTASY (TELSTAR T-405, CHANNEL 19)
EXXXTASY is the premium channel of the three channels that make up the
Exxxtasy Networks. As of April 3, 1997, EXXXTASY had 43,355 subscribers.
EXXXTASY offers a diverse programming mix within the adult genre, consisting of
movies and specials that appeal to a wide variety of sexual preferences. Each
day of the broadcast week is specially constructed to deliver the widest variety
of sexually explicit programming in addition to special thematic segments and
features. EXXXTASY is available on an all-day pay-per-view basis ($6.95), as
well as periodic 1-month ($21.95), 3-month ($53.95), 6-month ($89.95), and
1-year ($149.95) subscriptions. Exxxtasy Networks does not allow refunds, and
services may be exchanged on an equal basis only. CSB does not intend to alter
the name, format or subscription structure of EXXXTASY, following completion of
the Fifth Dimension assets acquisition.
TRUE BLUE (TELSTAR T-405, CHANNEL 05)
TRUE BLUE is the budget service in the Exxxtasy Networks family. As of April
3, 1997, TRUE BLUE had 45,289 subscribers. TRUE BLUE is a leader in "classic"
adult programming (professional titles more than 5 years old), and features a
mix of amateur adult movies and classic adult feature films. "Amateur" movies
are those typically produced by unpaid producers and actors, utilizing
consumer-grade film, equipment, sets, etc. TRUE BLUE is available on an all-day
pay-per-view basis ($6.95), as well as periodic 1-month ($15.95), 3-month
($39.95), 6-month ($67.95), and 1-year ($109.95) subscriptions. Exxxtasy
Networks does not allow refunds, and services may be exchanged on an equal basis
only. CSB does not intend to alter the name, format or subscription structure of
TRUE BLUE, following completion of the Fifth Dimension assets acquisition.
EXOTICA (TELSTAR T-405, CHANNEL 22)
EXOTICA features a new movie every 90 minutes. As of April 3, 1997, EXOTICA
had 38,442 subscribers. EXOTICA offers a mix of recent adult feature film hits,
new adult features, European adult films, and classic adult features. EXOTICA is
available on an all-day pay-per-view basis ($6.95), as well as periodic 1-month
($18.95), 3-month ($46.95), 6-month ($89.95), and 1-year ($139.95)
subscriptions. Exxxtasy Networks does not allow refunds, and services may be
exchanged on an equal basis only. CSB does not intend to alter the name, format
or subscription structure of EXOTICA, following completion of the Fifth
Dimension asset acquisition.
GOVERNMENT REGULATION
In 1996, the United States Congress passed the Telecommunications Act of
1996 (for this paragraph only, the "Act"), a comprehensive overhaul of the
Federal Communications Act of 1934. Section 641 of the Act requires full audio
and video scrambling of channels which are primarily dedicated to "sexually
explicit" programming. If a multi-channel video programming distributor,
including a cable television operator, cannot comply with the full scrambling
requirement, then the channel must be blocked during the hours when children are
likely to be watching television, i.e., from 6:00 a.m. to 10:00 p.m. Both non-
explicit programming providers (such as Playboy, Inc.) and explicit programming
providers (such as Exxxtasy Networks) feature "sexually explicit" programming
within the contemplation of Section 641 of the Act. Although all adult
programming companies fully scramble their signals for security purposes,
several cable television MSOs lack the technical capability to fully scramble
the audio portion of the signal. These cable systems would be required to block
adult broadcasts between 6:00 a.m. and 10:00 p.m. Both Spice, Inc. and Playboy,
Inc. predict that revenues from cable television distribution sources could be
negatively affected by as much as 25% as a result of this provision, until new
equipment can be installed. The Company should not be impacted by this
provision, until and unless it decides to launch a non-explicit service to
compete with SPICE and the PLAYBOY CHANNEL.
The vast majority of Fifth Dimension's customers receive their broadcast
signals from a fully secure, fully-scrambled distribution source. Section 641 of
the Act should only affect the Company if it decides to pursue cable television
MSOs as a source of distribution for its programming.
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NETWORK PROGRAMMING
All of the Exxxtasy Networks' broadcast programming is acquired from third
party adult content studios. In most cases, Fifth Dimension pays a flat rate
ranging from $200 to $2,000 for unlimited broadcast rights to a feature film for
a specified period of time (usually one to three years). Fifth Dimension has
established relationships with nearly all of the major adult movie studios, and
purchases a wide variety of programming from each on a monthly basis. These
studios send Betacam SP, 1" or 3/4" master tapes to a dubbing facility in Los
Angeles, California. Dubbed copies of the programming are then forwarded to the
uplink facility, where they are screened and edited, if necessary, for quality
control purposes and to comply with running time requirements. CSB intends to
enter into an agreement with a U.S.-based company to create interstitial
programming (promotional segments, Network IDs, and movie trailers) for the
Exxxtasy Networks, following completion of the Fifth Dimension assets
acquisition.
NETWORK DELIVERY
THE C-BAND SATELLITE BUSINESS
There are currently approximately 2,300,000 C-band "big dish" satellite
systems in place in the United States. These systems feature the larger diameter
receivers. C-band systems, with their ability to scan different satellites,
offer owners an enormous variety of programming, significantly more than any
other service or delivery system (such as cable or digital satellite, which
locks on only one satellite). C-band satellite owners incur no cable charges,
premium channel costs (although this is changing, as premium providers have
begun to scramble their signals), or program supplier fees. In the past several
years, the market for C-band satellites has declined significantly, as small
digital satellite services (Ku-band) have flourished. These 18-inch digital
satellite dishes are much less expensive than the large C-band satellite
hardware ($200 versus approximately $3,000 for C-band), are relatively easy to
mount in unobtrusive locations, and offer digital channels. C-band satellite
equipment is also negatively affected by stricter zoning regulations and
covenant restrictions.
Approximately 90,000 C-band system owners replaced their big dishes with the
smaller Direct Broadcast Satellite ("DBS") dish systems in the last year,
according to General Instruments Access Control Center. Management believes the
C-band equipment base will remain in the 2,300,000 to 2,500,000 units range for
the next several years.
The introduction and rapid growth of the number of digital channels, due to
introduction of DBS and reduced transponder costs, affects C-band satellite,
which is broadcast in analog format. Management believes digital and analog
formats will co-exist for several years, and that new technologies will allow
C-band systems to receive digital channels. For example, General Instruments'
new 4DTV technology enables C-band users to watch programming transmitted via
DigiCipher II format. C-band continues to be the "work horse" of the satellite
entertainment industry. Every major cable system in the United States is C-band
based, delivering dozens of C-band channels to more than 65 million subscribers.
Hundreds of government, corporate, education, and network broadcasters use
C-band. C-band is also the preferred method of transmitting sports backhauls,
satellite news gathering, international broadcasts, and syndicated program and
wild feeds.
Management believes that C-band also offers a more stable delivery source,
particularly concerning satellite lifespan. Most satellites have a service life
of approximately 15 years; however, when cosmic accidents occur, as in the case
of the Telstar 401 in January, 1997, all channel occupants on that satellite
must find immediate replacement residency. In the case of the Telstar 401, all
channels were switched to other satellites that C-band customers could access
within a matter of hours. DBS customers, who are locked on one satellite, could
suffer significant delays in service if their satellite experienced a problem
similar to the Telstar 401 accident. It is unlikely the DBS provider would be
able to find an empty, viable "spare" satellite already in orbit to switch to.
Such a switch would involve re-programming every DBS dish to the new satellite
location. A more likely scenario would involve launch of a replacement
satellite, which could take weeks or months.
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The future of C-band is, in the opinion of management, far less volatile.
The gradual changeover from analog to digital satellites will proceed as the
market dictates. This slow, deliberate change could take as long as 15 years to
fully implement. In the meantime, the introduction of digital receivers in the
C-band market can be expected.
SATELLITE TRANSMISSION
Fifth Dimension delivers its video programming to its C-band customers (and
to a lesser extent to cable television customers) via satellite transmission.
CSB intends to continue to deliver the Exxxtasy Networks via satellite, as the
most efficient means of delivery available for point to multi-point
distribution. Satellite delivery of video programming is accomplished as
follows:
Video programming is played directly from the uplink facility. The program
signal is then scrambled (encrypted) so that the signal is unintelligible unless
it is passed through the proper decoding devices. The signal is then transmitted
(uplinked) by the earth station to a designated transponder on a communications
satellite. The transponder receives the program signal uplinked by the earth
station, amplifies the program signal and broadcasts (downlinks) it to satellite
dishes located within the satellite's area of signal coverage. The signal
coverage of the domestic satellite currently utilized by Fifth Dimension, and to
be utilized by CSB, is the continental United States, Hawaii, portions of the
Caribbean, Mexico, and Canada. Each transponder can retransmit one complete
analog color television signal, together with associated audio and data
sidebands.
For cable systems, the scrambled signal received by the cable system's
satellite dish is then descrambled. The cable system then rescrambles the signal
using rescrambling technology that is compatible with the addressable set top
decoders deployed in its system, and then distributes the signal throughout its
cable system. The satellite receivers of DTH and Digital Satellite customers
contain descrambling equipment. To offer pay-per-view services, the set top
boxes or satellite receivers must have an electronic "address" and the cable
system or satellite service provider must be able to remotely control each
customer's set-top box or satellite receiver, and cause it to descramble the
television signal for a specific period of time after the customer has made a
purchase of a premium service or pay-per-view movie or event. The ability to
control the scrambling and descrambling of a signal from a cable system's
facilities is essential for marketing and delivery of pay-per-view programming
services.
TRANSPONDER AGREEMENTS
In 1992, Fifth Dimension entered into contracts with AT&T's satellite
division to lease four channels on Telstar 401. Fifth Dimension delivered
Exxxtasy Network broadcasts utilizing Telstar 401 until January 11, 1997, when
Telstar 401 experienced an irreversible equipment failure. Fifth Dimension
immediately moved its transponders to AnikE2 (2) and Telstar 402R (2), and has
delivered its Exxxtasy Networks programming since January, 1997 via these two
satellites. Fifth Dimension has entered into an agreement to lease three
transponders on Telstar 405, a new AT&T satellite that was placed in service in
June, 1997. CSB will immediately benefit from the non-cancelable sublease
agreement on the three transponder slots on the new Telstar 405 satellite. CSB
plans to provide the three Exxxtasy Networks channels on the Telstar 405.
Initially, the 24-hour "barker" or promotional channel will be available on GE1,
a popular satellite with a broad-based entertainment and information programming
lineup. Within 90 to 120 days after the Fifth Dimension Assets Acquisition, CSB
intends to exchange its GE1 slot for a third slot on Telstar 405, and move the
barker to Telstar 402R. This will enable CSB to promote the Exxxtasy Networks on
the same satellite (Telstar 402R) where most competitors' services are offered.
UPLINK FACILITY
Fifth Dimension maintains a fully operational uplink facility in Ottawa,
Canada, dedicated exclusively to the Exxxtasy Networks. An uplink facility is
the means by which a video signal can be sent to a designated satellite
transponder so that it can be broadcast back to the earth to reach a large
geographic territory. The Ottawa uplink facility is equipped with the necessary
satellite equipment, editing equipment, power supplies and other equipment
necessary to provide 24-hour programming for its three networks,
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plus a barker channel. CSB intends to enter into a contract with Fifth
Dimension, whereby Fifth Dimension will operate the uplink facility for a period
of at least one year from the date of the Fifth Dimension assets acquisition.
CALL SERVICE CENTER
Fifth Dimension currently maintains a call service center in Ottawa, Canada.
CSB intends to relocate the call service center to the Denver, Colorado
metropolitan area. The call service center will employ approximately 30
part-time operators and 2 full-time managers. The call service center receives
incoming calls from customers wishing to order network programming, or having
questions about service or billing. The call service center is accessed from
anywhere in the U.S. or Canada via a toll-free "800" number. It is equipped with
approximately 30 work stations, each of which contains a networked computer work
station, proprietary order processing software, and telephone equipment. These
components are tied into a master switch which routes incoming calls and enables
orders to be processed and subscriber information to be updated "on-line."
The call service center is operational 24 hours each day, and staffed
according to call traffic patterns which take into account time of day, day of
the week, seasonal variances, holidays, and special promotions. Customers pay
for their orders with credit cards, which are authorized and charged before the
order is sent electronically to General Instrument's satellite operations
facility in San Diego, California for processing. General Instrument receives
the subscriber order and the subscriber's identification information, and sends
a signal up to the appropriate satellite, which "unlocks" the service ordered
for the applicable period of time.
COMPETITION
The market for adult premium channel and pay-per-view programming is divided
into two separate and distinct types of programming: explicit adult programming
networks, and non-explicit programming networks. Explicit adult programming,
like that offered by Exxxtasy Networks, consists of movies and other programming
that contains sexually explicit film and video, and which is generally referred
to as "X-rated" adult material. Non-explicit material is edited so as to be
acceptable under the self-imposed guidelines of the cable television and digital
satellite industries. Non-explicit programming, while generally not rated by the
Motion Picture Association of America, would receive an "R" rating if submitted
for review. The following table illustrates the Company's competitors in the
explicit adult network industry:
<TABLE>
<CAPTION>
PRICE
NAME OF SERVICE SUBSCRIBERS (PPV ALL DAY; ANNUAL) DISTRIBUTION DESCRIPTION OF SERVICE
- ---------------- ----------- --------------------- -------------- --------------------------------------------
<S> <C> <C> <C> <C>
Eurotica 30,000 $8.99;$129.99 C-band only Emerald Media, Inc.'s explicit channel.
XXXCite 5,000 n/a; $59.95 C-band only Emerald Media, Inc.'s second explicit
channel. Plays programming already aired on
Eurotica.
X! Channel 24,000 $8.99/$59.95 C-band only Owned by Emerald Media, Inc. Budget
programming.
XXXPlore 40,000 $8.99/$59.95 C-band only Emerald Media, Inc. Same programming as X!
Channel.
Exxxtasy 43,355 $6.95/$149.95 C-band only Premium Channel. High quality programming,
high price.
True Blue 45,289 $6.95/$109.95 C-band only Classic and Amateur programming. Budget
priced.
Exotica 38,422 $6.95/$139.95 C-band only Complementary high-quality film and video
programming for Exxxtasy subs.
</TABLE>
EUROTICA/XXXCITE
These are premium channels owned by Emerald Media, Inc. Spice licenses
content for use by Emerald Media, Inc., sub-leases transponder slots to Emerald
Media, Inc., and provides playback services
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for Emerald Media, Inc. Management believes Eurotica/XXXcite offer fewer movies
per month than the Exxxtasy Networks.
X! CHANNEL/XXXPLORE
These channels are also owned by Emerald Media, Inc. This competitor offsets
lower-quality programming by offering a low annual subscription rate ($59.95).
The Company will face general competition from other forms of non-adult
entertainment, including sporting and cultural events, television, feature
films, and non-explicit programming. In addition the Company will face
competition in the adult entertainment arena from other providers of explicit
programming, adult video rentals and sales, adult film theaters, newspapers and
magazines aimed at adult consumers, telephone talk lines ("telephone sex"
services), and adult-oriented Internet services.
MARKETING
Fifth Dimension markets its services primarily through a free, 24-hour
satellite channel which promotes the programming featured on the Exxxtasy
Networks. This channel, known as a "barker" channel, uses non-explicit movie
clips and interstitial programming to entice viewers who are "channel surfing"
to subscribe to one of the Exxxtasy Networks channels (periodic subscription),
or the purchase a "block" of programming (a single pay-per-view movie or event,
or an all-day purchase). To a lesser extent, Fifth Dimension advertises in print
publications such as satellite channel guides or adult themed magazines. Fifth
Dimension also aggressively markets its Exxxtasy Network programming directly to
satellite program packagers or distributors, through direct marketing campaigns,
face-to-face meetings, trade show exhibits and industry gatherings. The
distributors represent an important source of advertising and marketing
materials for the Exxxtasy Networks. Fifth Dimension's marketing department has
developed numerous programs and promotions to support the Exxxtasy Networks.
These have included the development of detailed monthly program guides, glossy
promotional pieces, and celebrity appearances at industry trade shows. CSB plans
to continue to market the Exxxtasy Networks in the same manner as Fifth
Dimension.
BUSINESS DEVELOPMENT STRATEGY
Together, the Exxxtasy Networks currently have the largest number of
explicit adult programming customers in the industry. CSB intends to continue to
acquire high-quality adult movie titles and features, and to market the Exxxtasy
Networks as they have been previously marketed by Fifth Dimension.
Management believes that numerous synergies exist between the Company and
the assets to be acquired from Fifth Dimension. The Company is already involved
in the adult entertainment video business through its subsidiary DaViD, the
largest publisher and distributor of adult video discs (LaserDisc and Digital
Versatile Disc) in the world. DaViD acquires video programming from every major
adult movie studio and many independents. Management believes DaViD and CSB can
achieve significant savings in licensing fees by combining their content
acquisitions and expertise.
The Company is also engaged in the software publishing business through its
subsidiary Inroads. Inroads' personnel are highly-skilled software engineers
with strong video compression and Internet-based capabilities. CSB plans to
construct an Internet link via fiber optic cable from its uplink facility, to
enable simultaneous "web-casting" of its programming.
As part of the Fifth Dimension Assets Acquisition, the Company will acquire
Fifth Dimension's internet site and customer base. After the acquisition, CSB
intends to upgrade the website www.Exxxtasy.com to include live one-on-one adult
video feeds, through the Company's www.sexsee.com site, and to add a variety of
other adult products and services.
Mark H. Kreloff, the Company's Chief Executive Officer and president, as
well as several of the Company's largest shareholders, have been involved in the
cable television industry to a significant extent
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over the last 20 years. Management believes that it can utilize this experience
to its advantage, particularly as CSB approaches MSOs as a distribution source
of explicit and non-explicit programming.
LAUNCH OF NON-EXPLICIT, BRANDED NETWORK
Two companies, Playboy, Inc. and Spice, Inc., currently dominate the
non-explicit adult programming arena, a $259 million retail revenue industry
segment. Playboy offers the PLAYBOY CHANNEL and ADULTVISION, and Spice offers
SPICE/ADAM & EVE NETWORKS. Playboy is the dominant participant in the
non-explicit adult programming television network business, with 1996 revenues
of $44 million and strong brand name recognition. Playboy's programming consists
of high-quality specials and edited or "cable version" adult films. Spice
generated $33 million in revenues for the year ended December, 1996. Spice has
experienced unfavorable financial results in the past two years due to
unsuccessful attempts to diversify out of the adult movie business and poor
returns on international and non-core business investments. As a result, Spice
has limited resources to expand its business. Spice does not have strong brand
name recognition, and its programming is considered to be inferior to that
offered by Playboy.
Fifth Dimension has been successful in significantly impacting Spice's
revenue from the C-band market over the past three years. Management of the
Company believes it may attempt to enter the non-explicit adult programming
business by forming a joint venture with a branded adult magazine or other
highly-recognizable name brand. Management has begun discussions with companies
that meet the criteria of offering high-quality adult products combined with
superior name recognition from the buying public. A portion of the net proceeds
of this offering may be utilized to undertake entry into the non-explicit adult
programming business.
INTERNATIONAL OPPORTUNITIES
Fifth Dimension has begun discussions with numerous parties in Europe, Asia,
and South America to launch explicit and non-explicit services in these
geographic areas. Management of the Company intends to continue these
discussions. These discussions are in the preliminary stages, and there can be
no assurance that any of these discussions will result in completed deals for
the Company in the future.
MARKETING THE EXXXTASY NETWORKS TO CABLE TELEVISION MULTIPLE SYSTEM
OPERATORS
Cable television multiple system operators are facing increasing competitive
pressure from digital satellite providers. Many of these MSOs are seeking ways
to differentiate their services. Recently, Fifth Dimension successfully secured
distribution for its explicit programming on two cable television systems. Based
on this success, CSB intends to focus its efforts on the bottom to middle tier
cable television MSOs, and launch a major marketing effort to increase awareness
of the Company's alternative programming. Management hopes to gradually persuade
smaller MSOs to carry the Exxxtasy Networks.
DAVID
DaViD is a leading content owner of feature-length adult and unrated motion
pictures for the video disc markets.
LASERDISC CONTENT LICENSING
DaViD is primarily engaged in the licensing of existing feature-length adult
and unrated motion picture content for periods ranging from seven years to
perpetuity, for distribution on all formats of video disc media (e.g., LaserDisc
and Digital Versatile Disc, or "DVD"). DaViD licenses its motion picture
programming from approximately ten motion picture studios and/or licensors.
DaViD has purchased approximately 90% of its titles for single licensing fees,
ranging from $2,000 to $5,000 per title. Over 50% of DaViD's exclusive licensing
agreements are for "all formats of laser video disc whether now known or
hereafter devised." Current formats exploited by DaViD, or which DaViD intends
to exploit, include 8"and 12" LaserDisc, CD-ROM (QuickTime-TM- Compression),
VideoCD (MPEG1 Video Compression), and Digital Versatile Disc (MPEG2 Video
Compression), collectively referred to as "Video Discs."
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DaViD's typical exclusive distribution term ranges from seven years to
perpetuity. Exclusive distribution territory ranges from North America
(approximately 40% of DaViD's titles) to worldwide (approximately 60% of DaViD's
titles). For a few, high-quality titles in DaViD's library (approximately five
percent of total library titles), DaViD pays royalties ranging from ten to
twenty percent of collected wholesale revenues.
DaViD has reached a definitive agreement to acquire a library of
approximately 350 adult feature film rights for distribution on 8" and 12"
LaserDisc and DVD, for $2,000 to $5,000 per title. The distribution term for
these titles ranges from seven years to perpetuity. These titles range in
content from Japanese animation to foreign films to adult entertainment. DaViD
sells its 8" and 12" LaserDisc titles on a worldwide basis under the LASERDISC
ENTERTAINMENT label, and plans to sell its 5 1/4" Digital Versatile Disc titles
under the DAVID ENTERTAINMENT label. DaViD is currently negotiating to acquire
Digital Versatile Disc rights to approximately 500 additional adult and unrated
feature films, and expects to begin exploiting these rights in late 1997 and
1998, when the projected installed base of Digital Versatile Disc hardware is
expected to be a minimum of 2 million households.
DaViD's contracted acquisition library includes classic and new release
adult features such as CALIGULA, INSATIABLE, LES FEMMES EROTIQUE, and HIDDEN
OBSESSIONS, foreign feature films such as the award-winning Japanese film IN THE
REALM OF THE SENSES, and Japanese animation titles such as UROTSUKIDOJI: THE
LEGEND OF THE OVERFIEND.
DaViD acquires video disc rights to approximately 100 feature films each
year, and historically has released five to six new titles per month in the
LaserDisc format only. In March, 1997, DaViD began the transition to release of
titles on DVD. Release of titles on LaserDisc, and revenues associated with
those releases, have declined. DaViD intends to release most of its titles on
the DVD format in the future. As DVD hardware penetration grows, DaViD expects
to release up to 20 titles per month.
JACKET PRINTING
DaViD maintains an in-house art department which designs and produces the
electronic art necessary to print LaserDisc jackets and DVD jewel case inserts.
Jewel case inserts are printed by the replication company, while jackets for
LaserDiscs are printed by third-party printers and shipped to the replication
company for disc insertion.
DISC REPLICATION
DaViD contracts out the replication for LaserDisc and Digital Versatile Disc
to third-party manufacturers, including Pioneer Video Manufacturing, Inc., a
wholly-owned subsidiary of Japan-based Pioneer Electronics. The replication
companies receive masters from DaViD in the form of D-2 master tapes (LaserDisc)
or digital "one- off" discs (DVD). Glass masters and stampers are created from
the D-2 or one-off masters. Disc assembly (insertion into a jacket or jewel
case) is handled by the replication company.
DISTRIBUTION
DaViD currently distributes its titles in the 8" and 12" LaserDisc and DVD
formats.........................................................................
DaViD
began to distribute its titles in the 5 1/4" VideoCD format in February, 1997.
DaViD currently releases five to six feature-length motion picture titles per
month in the 12" LaserDisc format. DaViD intends to release eight to ten
feature-length motion picture titles per month in the DVD format in the first
quarter of 1998, ten to fifteen titles per month in the DVD format in the second
and third quarters of 1998, and up to 20 titles per month beginning in the
fourth quarter of 1998.
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INROADS
Inroads is a leading, vertically-integrated CD-ROM software publishing
company. The Company owns seventy percent (70%) of Inroads; thirty percent (30%)
of Inroads is owned by Quarto Holdings, Inc. ("Quarto"), a subsidiary of the
Quarto Group, Inc., the largest co-edition book publisher in the world. Quarto
also owns an adjustable Warrant to purchase up to 400,000 shares of the Company,
at an exercise price of $6.00 per share. Assuming completion of this Offering
and the Fifth Dimension Assets Acquisition, Quarto's warrant will be adjusted to
entitle Quarto to purchase up to 480,000 shares of the Company's restricted
common stock for $5.00 per share. See "RISK FACTORS--Quarto Warrant."
CD-ROM DEVELOPMENT
Inroads' in-house developed titles are produced, designed, and developed
directly by the Inroads' twelve-person staff. Inroads' licensed titles
(developed outside of the Company's offices) are localized, packaged, and, if
necessary, enhanced with new graphics or interface design/operating elements by
Inroads. Inroads' staff consists of producers, writers, software engineers,
artists, and management personnel. All of Inroads' CD-ROM titles, whether
developed in-house or licensed, contain video, still photography, audio,
original music, and text. These elements are combined with custom-designed
interfaces and computer code to deliver high-quality, easy-to-use, original
CD-ROM titles. Utilizing state-of-the-art technology, Inroads has developed and
released nine titles since its inception in June, 1994: (1) MULTIMEDIA DOGS: THE
COMPLETE INTERACTIVE GUIDE TO DOGS; (2) MULTIMEDIA DOGS VERSION 2.0; (3)
MULTIMEDIA CATS: THE COMPLETE INTERACTIVE GUIDE TO CATS; (4) MULTIMEDIA EXOTIC
PETS: HORSES, BIRDS, AQUATICS & POCKET PETS; (5) MULTIMEDIA BUGS: THE COMPLETE
INTERACTIVE GUIDE TO INSECTS; (6) MULTIMEDIA GUNS: THE ENTHUSIAST'S GUIDE TO
FIREARMS; (7) MULTIMEDIA HORSES: THE COMPLETE INTERACTIVE GUIDE TO HORSES; (8)
CIGAR COMPANION INTERACTIVE; and, (9) IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY.
Other titles are under development. In addition, Inroads is developing a line of
children's "MY FIRST" which will be based on MULTIMEDIA DOGS, MULTIMEDIA CATS,
MULTIMEDIA HORSES, AND MULTIMEDIA EXOTIC PETS. Inroads releases one to two
CD-ROM titles per quarter.
CD-ROM CONTENT LICENSING AND CREATION
Inroads licenses most of the still photography contained in its titles from
third party photographers and stock photography companies. Most of the video
contained in Inroads' titles is shot with Inroads' equipment and by Inroads'
personnel. All text is either licensed from Quarto's library of books or written
by Inroads' in-house staff. All voices (narrative) and music used in Inroads'
titles are developed and owned by Inroads. Royalty arrangements for licensed
video and photography are negotiated on a title by title basis and range from 2%
to 5% of collected wholesale dollars.
CD-ROM TITLE LICENSING
Inroads' strong distribution network and expertise in product packaging
provides a framework for numerous opportunities to acquire and/or license
existing software products developed and produced by other companies, at a
fraction of the cost of developing titles in-house. In September 1996, the
Company completed agreements with Quarto whereby Quarto acquired 30 percent of
Inroads for $1,250,000 in cash and digital material valued by the Company at
$-0-, and valued at $525,000 by Quarto. The Quarto agreement grants the Company
the right to commercially exploit Quarto titles. Inroads has completed and
released two Quarto-based titles to date: CIGAR COMPANION INTERACTIVE, based on
the best-selling Quarto title THE COMPLETE CIGAR COMPANION, and IN FOCUS, THE
GUIDE TO BETTER PHOTOGRAPHY, based on best-selling Quarto books by Michael
Freeman.
CD-ROM MASTERING
CD-ROM titles are programmed, designed, developed, and tested by Inroads.
Once an optical disc master ("Gold Master") has been approved for release, the
Gold Master is then submitted to a replication company for manufacture. Box and
jewel case art is developed simultaneously with the development of the software,
and submitted for printing approximately three to four weeks prior to disc
replication.
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CD-ROM JEWEL CASE INSERT AND BOX DESIGN AND PRINTING
New Frontier Media, Inc. maintains an in-house art department which designs
and produces the electronic art necessary to print boxes and jewel case inserts.
Jewel case inserts are printed by the replication company, while boxes are
printed by third-party printers and shipped to the replication company for jewel
case insertion.
CD-ROM DISC REPLICATION
Inroads contracts out all CD-ROM replication to third-party manufacturers,
including Pioneer Video Manufacturing, Inc., a wholly-owned subsidiary of
Japan-based Pioneer Electronics. The replication companies receive masters from
Inroads in the form of a digital disc "one-off" master. Glass masters and
stampers are then created from the "one-off" master. CD-ROM replication,
jewel-case insert printing and insertion, and jewel-case boxing are all handled
in-house by the replication company. Inroads receives finished CD-ROM goods from
its manufacturers in boxes containing 200 units each.
CD-ROM SOFTWARE DISTRIBUTION
In 1995, Inroads entered into an exclusive software distribution agreement
with Broderbund Software, Inc. ("Broderbund"), a publicly-traded company with
revenues exceeding $140 million annually. Broderbund is considered one of the
premier CD-ROM software publishers in the industry. As an affiliated label of
Broderbund, a small portion of Inroads' products are sold directly by
Broderbund's seventeen-person direct sales force, and marketed by Broderbund's
marketing staff. Under the terms of Inroads' contract with Broderbund, a minimum
of 76% of all collected wholesale revenue is allocated to Inroads, and 24% to
Broderbund. Unlike many affiliated label contracts, which base payments on
collected accounts receivable, Broderbund pays Inroads at the end of each
calendar month based on units shipped the previous month. Inroads is responsible
for all costs associated with software development, package design and printing,
disc replication, and marketing.
RALSTON PURINA PROJECT.
On August 14, 1996, Inroads entered into a Promotion Agreement and a License
Agreement with the Ralston Purina Company, St. Louis, Missouri ("Purina"). Under
the terms of the License Agreement, Inroads granted Purina a non-exclusive,
worldwide, corporate license to copy and use specified content contained on and
in two of Inroads' CD-ROM titles: MULTIMEDIA DOGS, and MULTIMEDIA CATS. Purina
may, under the License Agreement, use the MULTIMEDIA DOGS and/or MULTIMEDIA CATS
content to develop, publish, advertise and promote one or more Internet web
sites, all within the "purina.com" Internet domain, and in the development,
publication, advertisement and promotion of private-label versions of Inroads
CD-ROM titles to be made available by Purina to the general public. The License
Agreement runs from August 14, 1996 through December 31, 1999.
Under the terms of the Promotion Agreement, Inroads has agreed to develop
and provide Purina a version of Inroads' CD-ROM title MULTIMEDIA DOGS,
customized to include Purina's names, logos, brand names, trademarks, designs,
commercials, videos and other information requested by Purina, and to provide
consulting and programming services to Purina, and produce customized CD-ROMs
and CD-ROM packages. Purina has agreed, among other things, to develop and
implement a Promotion Test whereby the customized Inroads MULTIMEDIA DOGS
CD-ROMs shall be offered to the general consuming public nationwide through
various scheduled Purina pet products Brand or Group promotional venues during
the period July 1, 1996 through December 31, 1997, including over 50 million
offers via Sunday free-standing inserts. Purina has guaranteed that a minimum of
ten thousand (10,000) customized MULTIMEDIA DOGS CD-ROMs will be redeemed during
this promotion. Inroads has also granted Ralston Purina an exclusive option to
utilize MULTIMEDIA CATS as a private label promotion.
The Promotion Agreement further provides that the customized MULTIMEDIA DOGS
CD-ROMs will be offered to consumers for $9.95 per CD-ROM, plus shipping and
handling. The consumer will be directed
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to send the $9.95 to Inroads, of which $1.00 will be rebated back to Purina.
Inroads estimates that the Company will net approximately $7.00 per unit sold
under this project. Inroads will provide the fulfillment supplier for the
Promotion Test. The Promotion Agreement runs from July 1, 1996 through December
31, 1997. Through September 30, 1997, the Company had realized revenues of
$118,900 from the Ralston Purina Project.
OTHER PROJECTS.
P.F. MAGIC. America Online and P.F. Magic included demonstration segments
of Multimedia Dogs, Multimedia Cats, and Multimedia Exotic Pets on the disc they
shipped to approximately 180,000 retail outlets, offering 50 free hours of
American Online access. INROADS AND THE COMPANY REALIZED NO REVENUES FROM P.F.
MAGIC, AND HAVE ABANDONED THIS PROJECT.
In addition to the "MY FIRST" SERIES and RINGLING BROS./BARNUM & BAILEY
projects currently under development and referenced above, Inroads is also in
various stages of development or negotiation on the following projects:
INTERNATIONAL LICENSING. MULTIMEDIA HORSES has already been signed by three
foreign affiliates. Inroads has taken a booth at Milia (Cannes, France), the
largest multimedia show in the world, in February, 1998. At Milia, Inroads
intends to showcase prototypes of its other new releases.
ADVERTISING. Inroads has taken full-page, four-color ads in three major
magazines to sell its CD-ROM products direct via a toll-free number, at full
retail. The ads run for one year (12 issues) and are paid for through a barter
arrangement which provides a rebate to the publisher on each unit sold. The
magazines are SHOOTING TIMES and HANDGUNNING (MULTIMEDIA GUNS), DOG WORLD
(MULTIMEDIA DOGS), and EQUUS (MULTIMEDIA HORSES). Inroads' most recent titles
are marketed to hobbyists and enthusiasts. Inroads intends to advertise in
specialty catalogues and magazines targeted at these potential customers.
FUZZY ENTERTAINMENT, INC. D/B/A IN-SIGHT EDITIONS ("IN-SIGHT")
In-Sight is a niche publisher and distributor of fine-art and decorative art
posters, which are priced in the low to moderate price range. In addition,
In-Sight merchandises and licenses its images for other retail and commercial
uses and purposes. Based in Marina Del Rey, California, In-Sight employs two
full-time employees in the design and production areas, and one employee in
shipping/warehousing. All accounting, inventory control, and accounts
receivable/payable functions are managed at the Company's Boulder, Colorado
office.
FINE ART AND DECORATIVE ART POSTER DESIGN AND PRE-PRESS
In-Sight begins the poster publishing design process by licensing existing
original art, or commissioning an artist to create a new design upon which a
poster concept is ultimately based. Poster design concepts are selected based on
a combination of aesthetic appeal, commercial potential, and the ability of
In-Sight's contracted printer to execute the final design. The existing or
commissioned art is ultimately modified several times through a series of
carefully art-directed element changes. All art direction is overseen by In-
Sight.
LIMITED EDITIONS
For each poster that is developed and released by In-Sight, a special,
limited-edition version is designed and printed. Limited editions are printed on
100 pound stock (far heavier paper than standard poster paper), and are
hand-signed and numbered in editions of no more than 1,000. Although the
incremental cost to create a limited edition is approximately $.25 to $.50 per
unit, the wholesale price for each limited edition poster is two to three times
the standard poster price.
FINE ART AND DECORATIVE ART PRINTING
In-Sight sources its printing from several high-end U.S. printing companies,
including Gore Graphics.
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FINE ART AND DECORATIVE ART DISTRIBUTION
In-Sight distributes its posters directly from its facility in Marina Del
Rey, California to all major U.S. retail accounts, including certain upscale
framing companies.
SALES, MARKETING AND DISTRIBUTION
DOMESTIC SALES, MARKETING & DISTRIBUTION
All Video Disc sales are handled directly by DaVid. Inroads handles most
CD-ROM product sales; however, a small percentage of Inroads' CD-ROM product
sales are handled directly through Novato, California-based Broderbund Software,
Inc., as part of Inroads' affiliated label program agreement with Broderbund.
All major decorative art retailers (such as Deck the Walls, Prints Plus, and
Wal-Mart) are sold direct by In-Sight's in-house sales staff.
PRICING
The Company's subsidiaries price their products competitively. LaserDiscs
sell for a weighted average price of $30.50 per unit, which translates to a
"retail street price" of $50.00 to $60.00 per unit. CD-ROM products sell for a
weighted average price of $14.00 per unit, which translates to a "retail street
price" of $19.95 per unit. Fine art and decorative art posters sell for a
weighted average price of $6.00 to $8.00 per unit, which translates to a retail
unframed street price of $10.95 to $14.95 per unit. Hand-signed and individually
numbered limited editions sell for a weighted average of $20.00 per unit, and
carry a suggested retail price of $35.00 to $40.00. It is anticipated that DVD
titles will sell for a weighted average price of $10.00 per unit, which
translates to a "retail street price" of $19.95.
PRIVATE LABEL/PREMIUM DEALS
Inroads has been successful in creating and securing distribution for
private label versions of its consumer CD-ROM products for a number of large
corporate customers, including Time Warner New Media, Ralston Purina and The
Wisconsin Humane Society. Under the terms of the private-label agreement with
Purina, Inroads will receive approximately $7.00 per unit from each CD-ROM unit
sold through Purina's advertising and specially-marked dog and cat food
packaging. A total of over 50 million impressions has been guaranteed by Purina
in the form of special newspaper inserts, specially-marked packages of Purina
products, and bounce-back coupons.
INTERNATIONAL SALES, MARKETING & DISTRIBUTION
Approximately 10% of all Video Disc sales, 25% of all CD-ROM sales, and 10%
of all fine art and decorative art sales are made in markets other than the
United States.
CD-ROM INTERNATIONAL SALES, MARKETING AND DISTRIBUTION. Inroads' CD-ROM
titles are sold internationally primarily through re-publishing agreements with
a variety of foreign software publishing companies, such as Markt &
Technik/Viacom (Germany), PersonalSoft/Softkey (France), Jackson Libri (Italy),
and Multimedia Industries, Ltd. (Japan). In most cases, Inroads' international
re-publishing arrangements provide for a $4.00 per unit royalty payable to
Inroads. In a typical re-publishing transaction, all translation work related to
the re-published title is performed by the local re-publisher, and all
engineering related to the re-published title is performed by Inroads. Advances
against royalties received from re-publishers range from $5,000 to $7,500 per
title. To a much lesser extent, Inroads sells finished CD-ROM products to
English-speaking countries other than the United States, such as Australia, New
Zealand, South Africa, and the Caribbean Islands.
VIDEO DISC INTERNATIONAL SALES, MARKETING AND DISTRIBUTION. DaViD's
12"LaserDiscs and 5 1/4" Digital Versatile Discs are sold internationally as
finished goods directly by DaViD.
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FINE ART AND DECORATIVE ART POSTER SALES, MARKETING AND
DISTRIBUTION. In-Sight's fine art and decorative art posters are sold
internationally either through direct sales of finished goods, or through
licensing arrangements with re-publishers in each foreign market.
CUSTOMERS
The Company's subsidiaries sell their CD-ROMs, Video Discs, fine art and
decorative art posters, and other products (the "Products") to approximately
1,000 wholesale and retail accounts, with no final retail account representing
more than 10% of total Company sales. The Products are then resold or rented on
a worldwide basis to consumers of the CD-ROM software, Video Discs, and fine-art
and decorative art posters. The Company's target consumer ranges in age from
pre-school to adult.
MARKETS FOR PRODUCTS
LASERDISC MARKETS
According to the LaserDisc Association, as of January, 1997, approximately
2.2 million U.S. households owned a LaserDisc player. The worldwide LaserDisc
household figure is estimated to be 12.0 million with the heaviest
concentrations in Japan, Taiwan, Hong Kong, Singapore, Malaysia and Indonesia.
The LaserDisc Association estimates that the installed base of LaserDisc
households will grow domestically at a rate of 25% per year for the next three
years and then see little or no growth as the next Video Disc technology takes
hold (see Digital Versatile Disc Markets). LaserDisc is primarily a sell-through
business (not much rental activity) and caters to upper-income households with
home-theater installations. LaserDisc employs an analog video technology along
with a digital sound technology to deliver twice the resolution of ordinary home
video cassette tape. LaserDisc's popularity has grown over the past ten years
among movie enthusiasts for its "instant access" capabilities (similar to audio
CD) and its durability as a movie playback medium. LaserDisc's disadvantages
include its size (12 inches in diameter), high retail price, and the limited
amount of information that can be placed on a single side of a disc (60 minutes
maximum).
For the calendar year ending 1996, the LaserDisc Association reported that
the average U.S. LaserDisc household purchased twelve LaserDiscs. The LaserDisc
Association further estimated that between five percent (5%) and ten percent
(10%) of all LaserDisc purchases had strong sexual content and themes.
DIGITAL VERSATILE DISC MARKETS
The market for Digital Versatile Disc ("DVD") is expected to grow
dramatically beginning in the fourth quarter of 1997. Up until September, 1995,
two competing technologies existed for DVD video playback: Time Warner/Toshiba's
technology and SONY/Philips' technology. In September, 1995 these companies
agreed upon a unified format for DVD. In October, 1996 a unified, single
standard was finalized for the mastering (with copy protection) and replication
of DVDs. It is widely believed that this unified DVD format will make serious
inroads into the market shares currently held by LaserDisc and, to a much
greater extent, the Video Cassette Recorder ("VCR"). DVD has several major
advantages over competing home video delivery technologies: 1) A single 5 1/4"
DVD can hold up to 135 minutes per side of high resolution digital full-motion
video and audio. DVD discs contain information on both sides; 2) Instant access
is available to a favorite scene; 3) DVD contains significantly higher image and
audio quality than LaserDisc and Video Tape; 4) Multiple language tracks can be
incorporated on one disc; 5) Since DVD is 100% digital (video and sound), the
cost of replication will be comparable to CD-ROM or audio CD at under $1.00 per
unit in small press runs; and, 6) A relatively low replication cost will
translate to a retail price for a motion picture of under $20.00, giving this
medium tremendous mass-market potential.
Experts at Toshiba estimate that the market for DVD software could exceed
$20 billion by the year 2005. Domestic hardware sales estimates made by
Panasonic range from 800,000 to 1 million DVD
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households by the calendar year ending 1997, and 5 million to 10 million
domestic DVD households by the calendar year ending 1999.
The earliest hardware segment to adapt to DVD will most likely be the
computer hardware industry. The next evolution of the CD-ROM drive, now standard
equipment for all multimedia computer systems, will be the DVD-ROM. Similar to a
CD-ROM in most respects, the DVD-ROM will be capable of holding more than ten
times more information than a CD-ROM. Management believes that the market for
feature-film software on DVD will initially consist of computer users with
DVD-ROM drives. Dataquest estimates that nearly five million multimedia computer
households will be equipped with a DVD-ROM drive by the year 2000.
CD-ROM MARKET
The Software Publisher's Association estimates that the number of CD-ROM
households is currently 23 million domestic and 35 million worldwide. By the end
of calendar 1997, the Software Publisher's Association estimates that these
numbers will grow to 30 million domestic and 45 million worldwide. This growth
will be primarily fueled by the availability of multimedia computer systems
which are shipped with bundled interactive encyclopedias on CD-ROM for the same
price as a complete bound set of encyclopedias (approximately $1,500). In
addition, 60% of all new computers purchased are being shipped with built-in
CD-ROM drives. Over 10,000 CD-ROM titles currently exist, ranging from pure
education to pure entertainment to hybrids, or "edutainment." It is estimated
that only 1,000 of these titles are of a quality level acceptable to the largest
retailers. Of these 1,000 high-quality titles, fewer than 50 cover reference
subjects such as those CD-ROMs produced by Inroads.
There are three types of software available on the Home Software market
segment: Games, Home Education and Productivity. Games clearly dominate software
sales, with approximately 60% of the market. Home education titles, such as
those published by Inroads Interactive, represent 11% of the total market for
software. According to the Software Publisher's Association, the Home Education
market segment generated $958 million of the $9 billion in retail software sales
in 1996.
The Company's products compete with similar titles from Microsoft, Inc.
(MICROSOFT DOGS), Macmillian Digital, a Viacom company (BEST OF BREED), and
Dorling Kindersley (ULTIMATE CAT). In head-to-head comparisons of the products
to Inroads' MULTIMEDIA DOGS: THE COMPLETE INTERACTIVE GUIDE TO DOGS and
MULTIMEDIA CATS: THE COMPLETE INTERACTIVE GUIDE TO CATS, Inroads' titles have
consistently been ranked higher by software magazines than those titles
developed by competitors. This fact, coupled with Inroads' average development
budget of less than $70,000 per title, as compared to an average of $1 million
per title for the competition, explains why Inroads is able to sell its CD-ROM
products profitably at far lower prices than its competitors.
FINE ART AND DECORATIVE ART PUBLISHING MARKETS
The fine art and decorative art market is comprised of several segments:
sports celebrity and Hollywood celebrity posters; novelty posters; museum
posters; and fine art and decorative posters. The fine art and decorative
posters segment, which In-Sight currently focuses on, is "hit driven" and highly
fragmented, with no single company dominating the market segment. Products range
from the very low end in terms of price and quality, to the expensive limited
edition poster market. Management's philosophy is to lead the industry in terms
of subject matter, design, execution, printing quality, and value. Management
has already demonstrated its ability to set trends in the industry with the
success of its first six releases.
EMPLOYEES AND OFFICE SPACE
As of the date of this Prospectus, the Company had 10 full-time and three
part-time employees. Four full-time employees are employed in executive
positions; three part-time employees are employed in administrative and clerical
positions; the remainder of the Company's employees are employed in software
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development and sales. The Company's employees are not members of a union, and
the Company has never suffered a work stoppage. New Frontier leases
approximately 3,500 square feet of office space at 1050 Walnut Street, Suite
301, Boulder, Colorado 80302. The Company's lease on this office space runs
through January, 1998, at a rate of approximately $3,100 per month. The Company
also sub-leases approximately 6,000 square feet of space in Marina Del Rey,
California. Assuming completion of the Fifth Dimension assets acquisition, the
Company intends to establish a Call Center in the Denver, Colorado metropolitan
area within nine months of the acquisition. Management anticipates the need to
lease up to 4,000 additional square feet to house up to 30 Call Center
employees.
LEGAL PROCEEDINGS
SANDS BROTHERS
On November 11, 1996, the Company entered into a financial consulting
agreement (the "Sands Agreement"), with Sands Brothers & Co., Ltd. ("Sands
Brothers"), an investment banking concern headquartered in New York City. Under
the terms of the two-year Sands Agreement, Sands Brothers agreed to provide
financial advisory services to the Company. The Sands Agreement contains a
provision granting Sands Brothers the exclusive right to underwrite or place any
private or public financing undertaken by the Company during the term of the
Sands Agreement.
On May 20, 1997, the Company terminated the Sands Agreement. On September
26, 1997, counsel for Sands Brothers sent a letter to Mark Kreloff, the
Company's president, alleging breach of the Sands Agreement by the Company, and
demanding that the Company comply with the terms of the Sands Agreement.
On October 3, 1997, the Company filed a Complaint in District Court in
Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers, alleging breach
of the terms of the Sands Agreement by Sands Brothers. The Company also alleged
fraud in the inducement, and is seeking return of its initial payment of $25,000
to Sands Brothers and recission of the Sands Agreement. As of the date of this
prospectus, Sands Brothers has not filed an Answer to the Company's Complaint.
The Company has no reason to believe that Sands Brothers will not file an
Answer.
QUARTO
On October 7, 1997, Quarto's counsel notified the Company of Quarto's claim
that the Company had breached the Quarto Stockholder Agreement dated September
20, 1996. Counsel for Quarto demanded rescission of the Purchase Agreement
between the Company and Quarto dated September 20, 1996, and a return of all
amounts Quarto paid for its 30 percent interest in Inroads. Counsel for Quarto
generally alleged fraud in the inducement, misrepresentation, violation of
federal and state securities laws, and failure of consideration as basis for its
demand for rescission and return of all amounts paid. The Company has obtained
an opinion from J. John Combs III, its litigation counsel, stating that there is
no basis for rescission of the Quarto agreements under the facts or under
Colorado law, that any breach alleged by Quarto is not "material," and that
Quarto has suffered no damages as the result of any alleged breach of the Quarto
Purchase Agreement by the Company.
On October 16, 1997, Quarto's counsel demanded that the Board of Directors
of Inroads take all actions necessary to restore certain Inroads' certificates
of deposit that had been encumbered by or for the benefit of the Company, and to
obtain repayment of any funds loaned to the Company for the benefit of the
Company. Counsel for Quarto also demanded that the Board of Directors of Inroads
institute an action for misappropriation of assets, mismanagement, and breach of
fiduciary duties against those members of Inroads' management who participated
in the acts that Quarto's counsel alleges constituted a misappropriation of
Inroads' assets. Counsel for Quarto has notified the Board of Directors of
Inroads of Quarto's intent to institute a derivative action on behalf of Inroads
against certain managers and directors of Inroads who allegedly participated in
the claimed misappropriation of Inroads' assets, should Inroads' Board of
Directors fail or refuse to initiate such an action on its own.
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On October 23, 1997, Quarto filed an action in the United States District
Court for the District of Colorado (Civil Action No. 97-WM-2290) seeking, among
other things, rescission of the purchase agreement, a temporary restraining
order and preliminary injunction against Inroads and the Company, preventing
them from transferring or encumbering the assets of Inroads. On October 28,
1997, the Company and Quarto entered into a Stipulation for Entry of Preliminary
Injunction (the "Stipulation"). Pursuant to the terms of the Stipulation,
Inroads and the Company agreed to not make any draws on any line or lines of
credit extended to them from the Bank of Boulder, Boulder, Colorado, in which
any assets of Inroads, including any certificates of deposit, are used as
security, without the prior written consent of Quarto. Inroads and the Company
further agreed to not encumber any additional assets of Inroads or any assets
transferred by Inroads to the Company or used by Inroads for the benefit of the
Company as part of any loan transaction, without the written consent of Quarto,
and pending further order of the Court. Inroads also agreed to not transfer any
assets or monies to or for the benefit of the Company for any purpose
whatsoever, pending further order of the Court. The Court denied Quarto's motion
for entry of a temporary restraining order and preliminary injunction which
would have frozen Inroads' assets or imposed a constructive trust over those
assets and the operations of Inroads. As of the date of this prospectus, Quarto
had not instituted an action in arbitration against the Company.
The Company is vigorously contesting the foregoing claims. This Offering,
and the Company's future operations, could be negatively affected if either
Sands Brothers or Quarto, or both, were successful in their claims against the
Company.
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the name, age and position with the Company
of each officer and director of the Company as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
Mark H. Kreloff................. 35 Chairman of the Board, President and Chief Executive Officer, New
Frontier Media, Inc.; Director, Inroads; Vice President and Director,
DaViD; Director, In-Sight; President and Director, CSB.
Andrew V. Brandt................ 28 Senior Vice President, New Frontier; President and Director, Inroads.
Michael Weiner.................. 55 Executive Vice President, Secretary-Treasurer and Director, New Frontier
Media, Inc.; Director, Inroads; President, Secretary-Treasurer and
Director, DaViD; President, Secretary-Treasurer and Director, In-Sight;
Vice President, Secretary-Treasurer and Director, CSB.
Daniel Bender................... 51 Senior Vice President and Director, CSB.
Scott D. Wussow................. 41 Chief Financial Officer, New Frontier Media, Inc.
Clive Ng........................ 36 Director, New Frontier Media, Inc.
Koung Y. Wong................... 45 Director, New Frontier Media, Inc.
</TABLE>
MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief
Executive Officer of New Frontier Media, Inc. since the Company's inception in
September, 1995. Mr. Kreloff has been actively involved in the cable television,
entertainment and computer software industries since 1977. Prior to founding the
Company and during the four years immediately preceding his employment with the
Company, he was the President and Chairman of the Board for LEI Partners, L.P.,
a LaserDisc publishing company; Elmfield IV, Inc., an entertainment production
and distribution company, and California Software Partners, L.P., a computer
software development and publishing company. Previously, Mr. Kreloff held the
title Vice President, Mergers and Acquisitions, with Kidder Peabody & Co. and
Drexel Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by
Butcher & Singer, Inc., a Philadelphia-based investment bank, in the Cable
Television and Broadcast Media Group. From 1977 through 1983, Mr. Kreloff held a
variety of positions, including Marketing Director, in his family's cable
television system based in New Jersey. Mr. Kreloff is an honors graduate of
Syracuse University and holds B.S. degrees in Finance and Public Communications.
ANDREW V. BRANDT. Mr. Brandt has held the title of President of Boulder
Interactive Group, Inc. since Inroads' inception in June, 1994. Mr. Brandt has
extensive experience in software company management, 3-D computer graphics, user
interface design, and software engineering. Prior to joining New Frontier Media,
Inc., Mr. Brandt spent two years developing numerous 3-D graphics libraries and
graphical user interfaces for a variety of platforms. Mr. Brandt developed a
system for medical applications utilizing real-time, three-dimensional
ultrasound acquisition and a video see-through head-mounted display. He also
helped prototype the first digital video interactive system and led the port of
Pixar's RenderMan to a supercomputer. Mr. Brandt graduated Magna Cum Laude from
the University of California, San Diego with a B.S. in Computer Engineering and
holds an M.S. in Computer Science from the University of North Carolina at
Chapel Hill.
MICHAEL WEINER. Mr. Weiner has been the Executive Vice President and a
director of New Frontier Media, Inc. since the Company's inception. Prior to
founding the Company, Mr. Weiner was actively involved as a principal and
director in a variety of publishing businesses, including a fine art poster
50
<PAGE>
company. Mr. Weiner has been actively involved in creative businesses for the
past 25 years. His background includes 15 years in real estate development and
syndication as well as ownership in various publishing companies. Mr. Weiner is
a partner in the investment firm Maxim Financial Corporation, a private
portfolio management company based in Boulder, Colorado. From June, 1995 to the
present, Mr. Weiner has been Executive Vice President of the Company. For the 15
years prior to June, 1995, Mr. Weiner was self-employed as a real estate and
business consultant.
DANIEL BENDER. Mr. Bender will become President and a director of Colorado
Satellite Broadcasting, Inc. upon completion of the Fifth Dimension assets
acquisition. Mr. Bender has been actively involved in the satellite broadcasting
industry for the past eleven years. In 1989, Mr. Bender founded Satellite Source
Programming, Inc. ("SSP"). SSP was responsible for the sale and activation of 5
million C-band subscriber accounts through on-line service marketing. In 1993,
Mr. Bender launched T.V. Erotica, an adult satellite subscription and
pay-per-view service. Mr. Bender negotiated all key contracts with AT&T, General
Instrument, and Denver Uplink as part of his responsibilities as CEO of T.V.
Erotica. In 1995, T.V. Erotica's name was changed to XXXotica, and the service
was expanded to several European markets. In 1996, Mr. Bender merged XXXotica
with XTC Group to create Fifth Dimension, the largest C-band satellite adult
network in the world.
SCOTT D. WUSSOW. Mr. Wussow has eighteen years of accounting and finance
experience, and is a Certified Public Accountant. He joined the Company as Chief
Financial Officer on April 1, 1996. For the past five years before joining the
Company, Mr. Wussow was Chief Financial Officer for Hart Bornhoft Group, an
investment firm. He was responsible for financial reporting, systems
development, operations, compliance, and risk management. Previous to that, Mr.
Wussow was Controller at Neodata Services, a publisher services company, and was
Accounting Manager for a division of MCI Communications. While at MCI, Mr.
Wussow was department head for general accounting and special projects for the
Western Division start-up. Among his responsibilities was fixed asset accounting
for the network system and the establishment of the customer service call
center. Mr. Wussow graduated Magna Cum Laude from the University of Wisconsin at
Eau Claire with a B.A. degree in Accounting.
CLIVE C.N. NG. Mr. Ng is Deputy Chairman of Pacific Media PLC, a
publicly-listed UK company. Pacific Media PLC owns the United Artists Theaters
Asia with United Artists Theaters of the US and with TVB of Hongkong, the
Chinese Channel in Europe. Mr. Ng co-founded UIH Asia Holdings, a regional
partnership to develop Asian cable television markets, as well as Spectradyne
Asia, then the leader in the TV settop box business for hotels. In 1995 he led
Pacific Media's purchase of a key share in one of Hongkong's leading ISP's,
Hongkong Supernet. Mr. Ng earned a Bachelor of Arts degree from Syracuse
University's School of Management in 1983, and earned a Master's Degree in
Business Administration from New York University in 1985.
KOUNG Y. WONG. Mr. Wong was born in Canton, China in 1952 and immigrated to
the United States in 1969 with his family. He earned a Bachelor of Arts degree
from City College of San Francisco in 1975, and studied Architecture at the
University of California at Berkeley for one year. In 1976, Mr. Wong opened a
stereo store, Wong's Hi-Fi, in San Francisco. For the last 21 years, Mr. Wong
has been the president and sole shareholder of Wong's Audio-Visual, Inc. a
leading commerce electronics hardware and software distribution company based in
South San Francisco, California. Wong's Audio-Visual, Inc. includes a 20,000
square-foot corporate headquarters and distribution center and an 8,500
square-foot retail superstore in San Francisco.
No director or executive officer of the Company is related to any other
director or executive officer. None of the Company's officers or directors hold
any directorships in any other public company. There are currently two outside
directors on the Company's Board of Directors. The Company's compensation
committee is comprised of Messrs. Kreloff, Weiner, and Wong. The Company's audit
committee is comprised of Messrs. Kreloff, Weiner, and Wussow. Fifth Dimension
will be entitled to name one nominee to the Company's Board of Directors, upon
completion of the Fifth Dimension Assets Acquisition.
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<PAGE>
DIRECTOR COMPENSATION
None of the Company's directors received any compensation during the most
recent fiscal year for serving in his position as a director. No plans have been
adopted to compensate directors in the future; however, it is likely that during
fiscal 1998 the Board of Directors will adopt an employee stock option plan
which includes provision for stock options to be issued to directors.
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid to executive
officers of the Company for the fiscal year ended March 31, 1997. No executive
officer received annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL RESTRICTED STOCK
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION AWARDS OPTIONS/ SARS
- ------------------------- --------- ----------- ----------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mark H. Kreloff, CEO,
COO, Pres., and
Chairman............... 1997 0 15,000 0 0 0
Michael Weiner, Sr. V.P.,
Sec.-Treas. and
Director............... 1997 0 15,828 0 0
Andrew V. Brandt,
President, BIG......... 1997 75,695 3,125 0 0 0
Scott D. Wussow, CFO..... 1997 46,333 2,083 0 0 0
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION LTIP PAYOUTS COMPENSATION
- ------------------------- ------------- ---------------
<S> <C> <C>
Mark H. Kreloff, CEO,
COO, Pres., and
Chairman............... 0 36,028
Michael Weiner, Sr. V.P.,
Sec.-Treas. and
Director............... 0 0
Andrew V. Brandt,
President, BIG......... 0 5,053
Scott D. Wussow, CFO..... 0 0
</TABLE>
Management anticipates adopting bonus and stock option plans during fiscal
1998. The current annual salaries of the executive officers of the Company are:
Mark H. Kreloff, Chief Executive Officer, $0; Andrew Brandt, Senior Vice
President, $75,695; Michael Weiner, Executive Vice President, Secretary and
Treasurer, $0; Scott Wussow, Chief Financial Officer, $50,000. Mr. Bender, who
will become President of CSB upon completion of the Fifth Dimension assets
acquisition, will be paid an annual salary of $100,000.
Upon completion of the Fifth Dimension Assets Acquisitions, the Company
intends to pay Messrs. Kreloff and Weiner salaries of $100,000 each per year.
The Company's Board of Directors may, at its discretion, award discretionary
bonuses in the future. It is anticipated that an independent compensation
committee will be established during 1998. The compensation committee will
establish salaries, incentives and other forms of compensation for directors,
officers and other employees of the Company, and establish and administer the
Company's benefit plans and recommend policies relating to such plans. Upon
completion of the Fifth Dimension transaction, Fifth Dimension will be entitled
to have one nominee sit on the Company's Board of Directors.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Brandt. Such agreement will
continue through December, 1999, unless earlier terminated for cause, and
provides for annual compensation of $75,695. Mr. Brandt also has agreed not to
compete with the Company or Inroads during his employment term and for a period
of 3 years thereafter; however, courts frequently find noncompetition clauses in
employment agreements to be unenforceable, or restrict the duration or
geographic scope of such agreements. Accordingly, there can be no assurance that
Mr. Brandt's agreement not to compete would be enforced by a court if
challenged.
LIMITS ON LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation eliminate the personal liability of
its directors to the Company and its shareholders for monetary damages for
breach of the directors' fiduciary duties in certain circumstances. The Articles
of Incorporation further provide that the Company will indemnify its officers
52
<PAGE>
and directors to the fullest extent permitted by law. The Company believes that
such indemnification covers at least negligence and gross negligence on the part
of the indemnified parties. Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
The Company purchased $65,000 of adult laserdisc format titles from Elmfield
IV, L.P. a related entity controlled by Mr. Kreloff, through the issuance of
preferred stock (see Notes 3 and 4 to the financial statements filed herewith).
During the year ended March 31, 1997 and 1996, Disc Replication International, a
distributor owned in part by Mark H. Kreloff, the Company's President and CEO,
withheld from sales of $2,236,143 and $1,592,856 replicating costs of $1,646,364
and $939,622 and management fees of $470,000 and $262,500, respectively, all
pursuant to the terms of a management agreement between the Company and Disc
Replication International. Included in accounts receivable at March 31, 1997 and
1996 were $141,585 and $222,276, respectively, from the related entity.
In June, 1995, the Company issued a three year note receivable in the amount
of $38,000 to Mr. Brandt, an officer of the Company. The note requires quarterly
interest only payments at a rate of 6.1 percent per annum. The principal is due
on August 31, 1998.
The Company leases certain equipment and office space from Elmfield IV,
L.P., an entity controlled by Mr. Kreloff, on a month to month basis. During the
years ended March 31, 1997 and 1996 the Company paid $116,549 and $98,212,
respectively, to this entity relating to these leases. Management believes the
terms of these leases are commensurate with terms that would be obtained from an
unrelated third party lessor.
Certain of the Company's principals, or entities that the principals own
and/or control, have made loans to the Company and/or its subsidiaries. These
loans, totalling $139,573 are unsecured demand notes bearing interest at 8.5%
per annum and due on demand anytime after December 31, 1996. See "FINANCIAL
STATEMENTS." In addition, the Company lent Mr. Brandt $38,000 on June 1, 1995.
This loan is a below-market 6.1% quarterly interest-only loan, with the
principal due on August 31, 1998. The loan to Mr. Brandt was an isolated
transaction. On June 15, 1997, the Company's Board of Directors adopted a policy
prohibiting related party and below-market loans by the Company at any time
after June 15, 1997. In the future, the Company will not enter into transactions
and loans on terms that are no less favorable to the Company than those that can
be obtained from unaffiliated third parties. Forgiveness of loans must be
approved by a majority of the Company's independent directors who do not have an
interest in the transactions and who have access, at the Company's expense, to
the Company's or independent counsel.
On October 24, 1997, the Company obtained a $1 million unsecured conditional
(if the Company fails to obtain at least $1 million in alternate funding on or
before December 31, 1997), revocable line of credit from an entity controlled by
Stephen Cherner, a principal shareholder of the Company. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity" and "FINANCIAL STATEMENTS (Note 10)." The Company may
draw against this line of credit, subject to certain conditions, beginning
January 1, 1998 and continuing for nine months thereafter. Any drawn funds
accrue interest at the rate of 9 percent per annum.
No current ongoing transactions were approved by a majority of the Company's
independent directors who do not have an interest in the transactions and who
had access, at the Company's expense, to the Company's or independent legal
counsel. Current ongoing and past transactions were approved by a majority of
disinterested, but not independent, directors.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to give effect to the sale of the 1,500,000 shares of Common Stock
offered by the Prospectus, the number and percentage of shares of outstanding
Common Stock owned by each person owning at least 5% of the Company's Common
Stock, each officer and director owning stock, and all officers and directors as
a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
NAME OF -------------------------- --------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mark H. Kreloff(2)(3)....................................... 1,014,000 24.2% 1,014,000 17.8%
101 Pine Needle Road
Boulder, CO 80304
Michael Weiner(2)(3)........................................ 615,000 14.7 615,000 10.8
1002 Rose Hill
Boulder, CO 80302
Andrew V. Brandt(2)......................................... 279,500 6.7 279,500 4.9
2193 Sunshine Canyon
Boulder, CO 80302
Stephen P. Cherner.......................................... 475,000(4) 11.3 475,000(4) 8.3
165 Green Rock Drive
Boulder, CO 80302
------------ --- ------------ ---
Total..................................................... 2,383,500 56.9% 2,383,500 41.8%
------------ --- ------------ ---
------------ --- ------------ ---
</TABLE>
- --------------------------
(1) Excludes exercise of warrants and options, including the Underwriter's
Warrant, and assumes the Underwriter does not exercise its Overallotment
Option. Also excludes a minimum of 840,000 shares of Common Stock and a
warrant to purchase up to 400,000 shares of the Company's Common Stock, to
be issued to Fifth Dimension as part of the Fifth Dimension assets
acquisition.
(2) Officer of the Company or of Company subsidiary. See "MANAGEMENT."
(3) Director of the Company or of Company subsidiary. See "MANAGEMENT."
(4) 195,000 Common Shares owned by Stephen P. Cherner; 80,000 Common Shares
owned by Maxim Profit Sharing Plan; 200,000 Common Shares owned by Maxim
Corporation. Mr. Cherner is the owner of Maxim Corporation.
54
<PAGE>
DESCRIPTION OF SECURITIES
Prior to this Offering there were approximately 300 holders of record of the
Company's Common Stock. The Company is currently authorized to issue 50,000,000
shares of its Common Stock, par value $.0001 per share, and 5,000,000 shares of
its Preferred Stock, par value $.10 per share. As of the date of this
Prospectus, and prior to issuance of any shares of Common Stock to investors,
the Company has 4,207,511 shares of its Common Stock, and 0 shares of its
Preferred Stock, issued and outstanding. There are also warrants to purchase an
additional 835,666 shares of the Company's common stock issued and outstanding.
COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote per share on
all matters to be voted on by shareholders. The holders of Common Stock are
entitled to receive dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor and, in the event
of liquidation, dissolution or winding-up of the Company, to share ratably in
all assets available for distribution, subject to the rights of the holders of
any Preferred Stock as described below.
Upon the liquidation, dissolution or winding up of the Company, the holders
of shares of Common Stock would be entitled to share PRO RATA in the
distribution of all of the Company's assets remaining available for distribution
after satisfaction of all its liabilities and the payment of the liquidation
preference of any outstanding Preferred Stock. The holders of Common Stock have
no preemptive or conversion rights. All shares of Common Stock outstanding
immediately following the Offering will be fully paid and are not subject to
further calls or assessments by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Company's Articles of Incorporation, as amended, authorize the issuance
of up to 5,000,000 shares of Preferred Stock. The Board of Directors is
authorized, without further shareholder action, to issue such shares in one or
more series, and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, amounts payable upon liquidation and the number
of shares constituting any series or the designation of such series. If such
Preferred Stock is issued, it will rank senior to the Company's Common Stock in
respect of rights to receive dividends and to participate in distributions or
payments in the event of any liquidation, dissolution or winding up of the
Company. The issuance of Preferred Stock may have the effect of delaying,
deferring, discouraging or preventing a third party from acquiring a majority of
the outstanding voting stock of the Company or other change in control of the
Company without further action by the shareholders, and may adversely affect the
voting and other rights of the holders of the common Stock, including the loss
of voting control to others. The Board of Directors does not at present intend
to seek shareholder approval prior to issuing any such Preferred Stock, unless
required to do so by law.
SERIES A PREFERRED STOCK
On September 20, 1995, the Company's Board of Directors adopted a Statement
of Series Shares, defining a class of Preferred Stock to be issued as "Series
A." On September 20, 1995, the Company issued 10,000 shares of its Series A
Preferred Stock to Banco Financial, Inc., as payment in full of a promissory
note between DaViD and Banco Financial, Inc. The Series A Preferred shares were
convertible into 10,000 shares of the Company's common stock; on July 15, 1997,
Banco Financial, Inc. exercised its right to convert the Series A Preferred
shares into 10,000 shares of Common Stock.
SERIES B PREFERRED STOCK
On December 31, 1996, the Company's Board of Directors adopted a Statement
of Series Shares, defining a class of Preferred Stock to be issued as "Series
B." The Series B Preferred carries an 8% annual premium, payable annually, and
is convertible into shares of the Company's common stock pursuant to the
55
<PAGE>
terms of the Statement of Series Shares. There are no shares of Series B
Preferred stock issued and outstanding as of the date of this Prospectus.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, assuming the Underwriter does not exercise
its Overallotment Option, the Company will have 5,707,511 Common Shares, and 0
Preferred Shares, outstanding. The Company will also have warrants issued and
outstanding which, if exercised in full, would require the Company to issue an
additional 835,666 shares of its common stock, excluding the Underwriter's
Warrant and the warrant to be issued to Fifth Dimension. Completion of the Fifth
Dimension Assets Acquisition (840,000 shares of restricted Common Stock plus a
warrant to purchase 400,000 shares) and subsequent conversion of all warrants
issued and outstanding would result in the Company having 7,933,177 shares of
its Common Stock issued and outstanding, assuming the Underwriter does not
exercise its Overallotment Option. All of the shares issued upon exercise of
warrants or options will initially be "restricted" from sale and public
transfer.
In general, Rule 144 promulgated under the Securities Act provides that a
person (or persons whose shares are aggregated) who has beneficially owned
"restricted" shares for at least one year, including persons who may be deemed
affiliates of the Company, is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of one percent
(1%) of the then-outstanding shares of Common Stock of the Company, or the
average weekly trading volume of the Common Stock during the four calender weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and the availability of current public information about the
Company. A person who is not an affiliate of the Company at any time during the
90 days preceding a sale, and who has beneficially owned shares for at least two
years, would be entitled to sell such shares immediately following the Offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144.
All of the Company's officers and directors have agreed to enter into
lock-up agreements with the Underwriter, precluding Rule 144 sales for a minimum
of 12 months from the date of this Prospectus.
LIMITATION OF LIABILITY; INDEMNIFICATION MATTERS AND DIRECTORS' AND OFFICERS'
INSURANCE
The Company's Bylaws require the Company, to the fullest extent permitted or
required by Colorado law, to (i) indemnify its directors against any and all
liabilities and (ii) advance any and all reasonable expenses, incurred in any
proceeding to which any such director is a party or in which such director is
deposed or called to testify as a witness because he or she is or was a director
of the Company. Generally, Colorado statutory law permits indemnification of a
director upon a determination that he or she acted in good faith and in a manner
he or she reasonabley believed to be in, or not opposed to, the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The right to
indemnification granted in the Company's Bylaws is not exclusive of any other
rights to indemnification against liabilities or the advancement of expenses
which a director may be entitled to under any written agreement, Board
resolution, vote of stockholders, Colorado law or otherwise.
At present, the Company is not aware of any pending or threatened litigation
or proceeding involving a director, officer, employee or agent of the Company in
which indemnification would be required or permitted under the Company's Bylaws,
any indemnification agreement, or Colorado law.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the Warrant Agent for the
warrants is Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350,
Denver, Colorado 80202, telephone (303) 595-3300.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters named below (the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters named below has severally agreed to purchase from the Company,
the respective number of shares of Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Centex Securities, Inc.....................................................
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase and pay for all of the shares of Common
Stock offered hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the offering price set forth on the cover page of this
Prospectus, and in part to certain securities dealers at such price less a
concession of $.50 per share. The Underwriters may allow, and such dealers may
allow, a concession not in excess of $ per share to certain brokers and
dealers. After the shares of Common Stock are released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the Underwriters. In addition, the Company has agreed to pay the Managing
Underwriter a 3% nonaccountable expense allowance on the aggregate initial
public offering price of the shares of Common Stock, including shares subject to
the Overallotment Option, of which $70,000 has been paid.
The Company has granted the Underwriters an Overallotment Option exercisable
for 30 days after the date of this Prospectus to purchase up to an aggregate of
225,000 additional shares of Common Stock solely to cover overallotments, if
any. If the Underwriters exercise their Overallotment Option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of shares of Common Stock to be
purchased by each of them, as shown in the table above, bears to the 1,500,000
shares of Common Stock offered hereby.
The Company has agreed in the Underwriting Agreement not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, subject to certain limited exceptions, for a
period of 12 months after the date of this Prospectus without the prior written
consent of the Underwriters. In addition, the Company's directors and executive
officers have agreed not to sell, contract to sell, grant any option to purchase
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, other than as gifts,
pledges, and certain other transfers to persons who agree to the same
restrictions for a period of 12 months after the date of this Prospectus without
the prior written consent of the Underwriters.
The Company has agreed to sell to Centex Securities, Inc., the Managing
Underwriter, for nominal consideration, warrants to purchase 150,000 shares of
Common Stock on the closing date of this offering. The warrants will have an
exercise price equal to 130% of the offering price, will be exercisable
beginning on the first anniversary of the date of this Prospectus and for a
period of four years thereafter, and will contain certain anti-dilution,
registration rights, net issuance and exercise provisions. Until the first
anniversary date of this Prospectus, the warrants may not be sold, transferred,
assigned or hypothecated, except to the Underwriters or their officers,
directors or partners, subject to certain conditions and by will or operation of
law.
57
<PAGE>
At any time the Underwriter's warrants are likely to be exercised, the
Company would probably be able to obtain additional equity capital on more
favorable terms. The Company has registered the Common Stock underlying the
Underwriter's Warrants under the 1933 Act. If the Company files a registration
statement relating to an equity offering under the provisions of the 1933 Act at
any time during the five-year period following the date of this Prospectus, the
holders of the Underwriter's Warrants or underlying Common Stock will have the
right, subject to certain conditions, to include in such registration statement,
at the Company's expense, all or part of the underlying Common Stock at the
request of the holders. Additionally, the Company has agreed, for a period of
five years commencing on the date of this Prospectus, on demand of the holders
of a majority of the Underwriter's Warrants or the Common Stock issued or
issuable thereunder, to register the Common Stock underlying the Underwriter's
Warrants one time at the Company's expense. The registration of securities
pursuant to the Underwriter's Warrants may result in substantial expense to the
Company at a time when it may not be able to afford such expense, and may impede
future financing. The Company may find that the terms on which it could obtain
additional capital may be adversely affected while the Underwriter's Warrants
are outstanding. The number of shares of Common Stock covered by the
Underwriter's Warrants and the exercise price are subject to adjustment under
certain events to prevent dilution.
In connection with the Offering, the Underwriters and their respective
affiliates may, in accordance with Regulation M under the Securities Exchange
Act of 1934 (the "Exchange Act"), engage in overallotment, stabilizing
transaction, syndicate covering transactions, penalty bids and other
transactions that stabilize, maintain or otherwise affect the market price for
the Common Stock. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position, in which case the
Underwriter may engage in a syndicate covering transaction or may exercise the
Underwriters' over-allotment option described above. Syndicate covering
transactions involve the purchase of Common Stock in the open market following
completion of the offering to cover all or a portion of a syndicate short
position. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when Common Stock originally sold by such syndicate
member is purchased in a syndicate covering transaction to cover syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified minimum. Any
of the transactions described in this paragraph may cause the price of Common
Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the Nasdaq SmallCap Market
or otherwise and, if commenced, may be discontinued at any time.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments the Underwriters may be required to make in respect of such
liabilities.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration Statement
of which this Prospectus forms a part. See "Additional Information."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will passed upon
for the Company by Krausman, L.L.C., Denver, Colorado. Certain legal matters
will be passed upon for the Underwriters by Luce, Forward, Hamilton & Scripps
LLP, San Diego, California.
EXPERTS
The financial statements of the Company for the fiscal years ended March 31,
1997 and 1996 included in this Prospectus have been included in reliance on the
report of Spicer, Jeffries & Co., Denver, Colorado, independent accountants,
given on the authority of that firm as experts in accounting and auditing. The
financial statements of Fifth Dimension for the fiscal years ended March 31,
1997 and 1996 and
58
<PAGE>
incorporated by reference in this Prospectus have been included in and
incorporated herein in reliance on the report of Ernst & Young, Chartered
Accountants, given on the authority of that firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock offered hereby. This Prospectus omits
certain information contained in the Registration Statement and the exhibits and
schedules thereto. Statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661; 7 World Trade Center, New York, NY 10048; and 5670 Wilshire
Boulevard, Los Angeles, CA 90036. Copies of such materials may be obtained from
the public reference section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 upon payment of the prescribed fees.
The Commission maintains a web site that contains such reports and other
information regarding the Company at http://www.sec.gov.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA FINANCIAL STATEMENTS WITH RESPECT TO NFMI TRANSACTION
Introduction................................................................... F-2
Pro Forma Combined Balance Sheet, June 30, 1997................................ F-3
Notes to Pro Forma Combined Balance Sheet, June 30, 1997....................... F-4
Pro Forma Combined Statement of Operations for the three months ended June 30,
1997......................................................................... F-5
Notes to Pro Forma Combined Statement of Operations for the three months ended
June 30, 1997................................................................ F-6
Pro Forma Combined Statement of Operations for the year ended March 31, 1997... F-7
Notes to Pro Forma Combined Statement of Operations for the year ended March
31, 1997..................................................................... F-8
NEW FRONTIER MEDIA, INC.
Independent Auditors' Report of Spicer, Jeffries & Co. dated July 3, 1997...... F-9
Consolidated Balance Sheets, June 30, 1997 (unaudited), March 31, 1997 and F-10 -
1996......................................................................... F-11
Consolidated Statements of Operations, for the three months ended June 30, 1997
and 1996 (unaudited) and the years ended March 31, 1997 and 1996............. F-12
Consolidated Statements of Changes in Shareholders' Equity for the three months
ended June 30, 1997 (unaudited) and the years ended March 31, 1997 and
1996......................................................................... F-13
Consolidated Statements of Cash Flows for the three months ended June 30, 1997 F-14 -
and 1996 (unaudited) and the years ended March 31, 1997 and 1996............. F-15
F-16 -
Notes to the Consolidated Financial Statements................................. F-24
FIFTH DIMENSION COMMUNICATION (BARBADOS) INC., 1043133 ONTARIO INC. AND
MERLIN SIERRA INC.
Auditors' Report of Ernst & Young dated June 27, 1997.......................... F-25
Combined Balance Sheets, June 30, 1997 (unaudited), March 31, 1997 and 1996
(audited).................................................................... F-26
Combined Statements of Income and Retained Earnings, for the three months ended
June 30, 1997 and 1996 (unaudited) and the years ended March 31, 1997 and
1996 (audited)............................................................... F-27
Combined Statements of Cash Flows for the three months ended June 30, 1997 and
1996 (unaudited) and the years ended March 31, 1997 and 1996 (audited)....... F-28
F-29 -
Notes to the Unaudited and Audited Financial Statements........................ F-40
</TABLE>
F-1
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
INTRODUCTION TO PROFORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined balance sheet reflects (1) the
shares issued and proceeds received in connection with the public offering on
Form SB-2 registration statement as if it had occurred on June 30, 1997 (2) the
acquisition of certain assets of Fifth Dimension Communications (Barbados) Inc.,
1043133 Ontario Inc. and Merlin Sierra Inc. ("Fifth Dimension") and the
acquisition of videoplayback and broadcast uplink equipment from Fifth Dimension
Communications (1996) Corporation and 841161 Ontario Limited (two entities
related through common ownership by Fifth Dimension's shareholders) by Colorado
Satellite Broadcasting, Inc. ("CSB") a newly formed wholly owned subsidiary of
New Frontier Media, Inc. ("NFMI") through the issuance of NFMI's unissued common
stock, cash and debt, as if it had occurred on June 30, 1997.
The following unaudited pro forma combined statements of operations reflect
for the purposes of computing earnings per share the shares issued in connection
with the public offering on Form SB-2 registration statement and the issuance of
shares to Fifth Dimension for certain assets of Fifth Dimension, Fifth Dimension
Communication (1996) Corporation and 841161 Ontario Limited by NFMI as if it had
occurred on April 1, 1996. All shares issued are considered issued and
outstanding for all periods presented.
The public offering on Form SB-2 registration statement will add 1,500,000
shares of NFMI's common stock and $7,875,000 of proceeds received, less offering
expenses.
The acquisition of assets of Fifth Dimension will be accomplished through
the issuance of 840,000 shares, valued at $5.00 per share, of NFMI's unissued
common stock, 400,000 warrants for NFMI's common stock, $3,500,000 in cash and
debt of $1,000,000.
The acquisition of Fifth Dimension will be accounted for under the purchase
method of accounting. Under the purchase method of accounting, assets acquired
are recorded at their fair values. No adjustments have been made in the pro
forma balance sheet to the carrying values of the Fifth Dimension assets
acquired; final determination of the fair values of such assets will be made at
the date of acquisition. Accordingly, the purchase price in excess of recorded
asset amounts acquired from Fifth Dimension will be allocated to intangible
assets. Management believes that the fair market value of the equipment and film
inventories approximate book value. Certain intangible assets purchased from
Fifth Dimension are considered to have an indefinite future value such as
tradenames, trademarks, etc. In addition the subscriber base and lists, which
generate the revenue, have a limited life of approximately six months to one
year. Fifth dimension has been providing services to the owners of C-band
satellite dishes for the past three years. Fifth Dimension generated
approximately $12,000,000 of revenue for the year ended March 31, 1996 and
approximately $15,000,000 of revenue for the year ended March 31, 1997. Goodwill
is derived from the name recognition of their various channels, being a limited
provider of sexually explicit programming and having transponder leases in place
and related uplink facilities. The satellite transponder leases are for a period
of five years with an option to renew the leases for an additional five years.
An important part of the operations of Fifth Dimension is maintaining the
transponder leases. The benefits of the transponder leases are inuring to NFMI
in connection with the acquisition. Accordingly, the goodwill amortization
period will relate to the discounted estimated cash flows generated by Fifth
Dimension over a certain period of time and the length of the transponder
leases. The Company determined an adequate rate of return given the risk. Thus,
using the expected cash flows after taxes and a 17% discount rate, the payback
period was calculated to be 128 months. In addition, the satellite transponder
leases are for a period of five years with an option to renew for an additional
five years. Therefore, since the cash flow analysis dictates a life of 10.6
years and the transponder leases, with option, have a life of ten years, it is
appropriate in this circumstance to use 120 months as a proper amortization
period. In future years, this analysis will be updated to determine if the
original selected amortization period was adequate, with the amortization period
being adjusted downward if necessary. In Management's opinion the allocation of
the purchase price and estimated transaction costs incurred in the purchase will
not differ materiality from the preliminary allocation used in these pro forma
financial statements.
F-2
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENT, PRO FORMA AFTER
NEW FRONTIER PUBLIC OFFERING PUBLIC OFFERING
MEDIA, INC. AND ACQUISITION AND ACQUISITION
AND OF FIFTH OF FIFTH
SUBSIDIARIES FIFTH DIMENSION DIMENSION DIMENSION
------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and certificates of deposit.............. $ 655,281 $ 524,376 $(3,560,000)(b) $ 3,696,531
6,601,250(a)
(524,376)(c)
Accounts receivable, net...................... 84,514 2,953,093 (2,953,093)(c) 84,514
Inventories................................... 753,211 -- -- 753,211
Other current assets.......................... 177,869 491,657 (291,657)(c) 377,869
------------ --------------- --------------- ---------------
Total current assets........................ 1,670,875 3,969,126 (727,876) 4,912,125
------------ --------------- --------------- ---------------
FURNITURE AND EQUIPMENT,
at cost--net.................................. 55,667 406,286 713,980(d) 1,175,933
------------ --------------- --------------- ---------------
OTHER ASSETS
Film exhibition rights........................ -- 653,546 -- 653,546
Notes receivable--officer (Note 3)............ 38,000 -- -- 38,000
Other assets--net............................. 203,444 672,775 (672,775)(c) 203,444
Goodwill and intangible assets................ -- -- 6,786,188(b) 6,786,188
------------ --------------- --------------- ---------------
Total other assets.......................... 241,444 1,326,321 6,113,413 7,681,178
------------ --------------- --------------- ---------------
TOTAL ASSETS................................ $1,967,986 $ 5,701,733 $ 6,099,517 $ 13,769,236
------------ --------------- --------------- ---------------
------------ --------------- --------------- ---------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable.............................. $ 114,155 $ 902,425 $ (902,425)(c) $ 114,155
Lines of credit............................... 348,616 -- -- 348,616
Deferred revenue.............................. -- 1,794,101 (1,794,101)(c) --
Income tax payable............................ -- 402,082 (402,082)(c) --
Other liabilities............................. 193,588 -- -- 193,588
------------ --------------- --------------- ---------------
Total current liabilities................... 656,359 3,098,608 (3,098,608) 656,359
------------ --------------- --------------- ---------------
LONG-TERM DEBT.................................. 10,848 -- 1,000,000(b) 1,010,848
------------ --------------- --------------- ---------------
MINORITY INTEREST IN SUBSIDIARY................. 283,635 -- -- 283,635
------------ --------------- --------------- ---------------
SHAREHOLDERS' EQUITY
Common stock.................................. 419 272 84(b) 653
(272)(c)
150(a)
Preferred stock............................... 1,500 -- -- 1,500
Additional paid-in capital.................... 1,779,018 -- 4,199,916(b) 12,580,034
6,601,100(a)
Retained earnings (deficit)................... (763,793) 2,602,853 (2,602,853)(c) (763,793)
------------ --------------- --------------- ---------------
TOTAL SHAREHOLDERS' EQUITY.................. 1,017,144 2,603,125 8,198,125 11,818,394
------------ --------------- --------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................... $1,967,986 $ 5,701,733 $ 6,099,517 $ 13,769,236
------------ --------------- --------------- ---------------
------------ --------------- --------------- ---------------
</TABLE>
See Notes to Pro Forma Combined Balance Sheets.
F-3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(a) Adjustment to record common stock issued in public offering of securities on
Form SB-2 registration statement. (1,500,000 shares of common stock and net
proceeds of $6,601,250)
(b) Adjustment to record issuance of 840,000 shares of common stock valued at
$4,200,000, $3,500,000 in cash and $1,000,000 in debt for certain assets of
Fifth Dimension, Fifth Dimension Communications (1996) Corporation and
841161 Ontario Limited. In addition, NFMI will incur approximately $60,000
in direct acquisition costs relating to the purchase of Fifth Dimension
resulting in $6,786,188 of goodwill and intangible assets.
(c) Adjustment to remove certain assets and liabilities not purchased or assumed
by NFMI from Fifth Dimension relating to (b) above.
(d) Adjustment to record acquisition of videoplayback and broadcast uplink
equipment from Fifth Dimension Communications (1996) Corporation and 841161
Ontario Limited relating to (b) above.
F-4
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NEW PRO FORMA PRO FORMA
FRONTIER ADJUSTMENTS AFTER
MEDIA, INC. ACQUISITION ACQUISITION
AND FIFTH OF FIFTH OF FIFTH
SUBSIDIARIES DIMENSION DIMENSION DIMENSION
---------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
SALES, net..................................... $ 479,330 $ 3,041,068 $ -- $ 3,520,398
COST OF SALES.................................. 451,783 1,904,646 -- 2,356,429
---------------- ------------ --------------- ----------------
GROSS PROFIT................................... 27,547 1,136,422 -- 1,163,969
---------------- ------------ --------------- ----------------
OPERATING EXPENSES
Occupancy and equipment...................... 36,030 87,776 (42,826)(e) 107,567
26,587(f)
Legal and professional....................... 30,264 59,362 -- 89,626
Advertising and promotion.................... 67,676 149,369 (19,387)(c) 197,658
Salaries, wages and benefits................. 68,812 322,719 (45,282)(d) 346,249
Communications............................... 7,785 47,068 -- 54,853
General and administrative................... 41,241 152,051 -- 193,292
Research and development..................... 7,048 -- -- 7,048
Consulting................................... 18,256 1,323 -- 19,579
Amortization of goodwill and intangible
assets..................................... -- -- 169,655(h) 169,655
---------------- ------------ --------------- ----------------
Total operating expenses................... 277,112 819,668 88,747 1,185,527(i)
---------------- ------------ --------------- ----------------
OTHER INCOME (EXPENSE)
Licensing fees and royalties, net............ 22,582 -- -- 22,582
Interest, net................................ 1,190 (2,659) -- (1,469)
---------------- ------------ --------------- ----------------
Total other income......................... 23,772 (2,659) -- 21,113
---------------- ------------ --------------- ----------------
Net income (loss) before minority interest
and income taxes........................... (225,793) 314,095 (88,747) (445)
Minority interest in loss of subsidiary........ 21,808 -- -- 21,808
Income taxes................................... -- (20,000) (5,312)(g) (25,312)
---------------- ------------ --------------- ----------------
NET INCOME (LOSS).............................. $ (203,985) $ 294,095 $ (94,059) $ (3,949)
---------------- ------------ --------------- ----------------
---------------- ------------ --------------- ----------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK.... $ (.05) $ *
---------------- ----------------
---------------- ----------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING.................................. 4,192,511(a) 6,547,511(b)
---------------- ----------------
---------------- ----------------
</TABLE>
- ------------------------
* less than $.01 per share
See Notes to Pro Forma Combined Statement of Operations.
F-5
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(a) The weighted average number of shares outstanding of NFMI represents the
original shares outstanding at June 30, 1997.
(b) The weighted average number of shares outstanding after the acquisition
represents 1,500,000 common shares of NFMI issued in the public offering on
Form SB-2 registration statement and 840,000 shares issued to Fifth
Dimension in connection with the acquisition of certain assets from Fifth
Dimension, Fifth Dimension Communications (1996) Corporation and 841161
Ontario Limited and the 15,000 preferred shares which are treated as if
converted to common stock. All shares issued are considered issued and
outstanding for the entire period.
(c) Entertainment expense related to stadium skybox that is discontinued.
(d) Marketing office closed and to be operated from existing Boulder, Colorado
office of NFMI.
(e) To remove rental expense on videoplayback and broadcast uplink equipment
paid to Fifth Dimension Communications (1996) Corporation and 841161 Ontario
Limited.
(f) To add actual depreciation recorded by Fifth Dimension Communications (1996)
Corporation and 841161 Ontario Limited on videoplayback and broadcast uplink
equipment.
(g) To increase income taxes to United States tax rates on adjusted pro forma
net income.
(h) Amortization of goodwill and intangible assets ($6,786,188/10 years x 3
months).
(i) Should Fifth Dimension not realize the benefit of the registrant incurring
expenses on its behalf, but instead operating on a stand alone basis, total
expenses would be $1,247,048.
F-6
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
NEW FRONTIER ADJUSTMENTS PRO FORMA AFTER
MEDIA, INC. AND FIFTH ACQUISITION OF ACQUISITION OF
SUBSIDIARIES DIMENSION FIFTH DIMENSION FIFTH DIMENSION
---------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
SALES, net.................................. $ 2,515,802 $ 15,044,139 $ -- $ 17,559,941
COST OF SALES............................... 2,217,812 9,560,847 -- 11,778,659
---------------- ------------- --------------- -----------------
GROSS PROFIT................................ 297,990 5,483,292 -- 5,781,282
---------------- ------------- --------------- -----------------
OPERATING EXPENSES
Occupancy and equipment................... 190,675 357,356 (138,696)(g) 522,633
113,298(h)
Legal and professional.................... 67,625 213,889 -- 281,514
Advertising and promotion................. 199,238 530,301 (78,980)(d) 650,559
Salaries, wages and benefits.............. 236,017 1,650,714 (415,727)(e) 1,471,004
Commissions............................... -- 363,457 (305,982)(f) 57,475
Communications............................ 32,137 254,398 -- 286,535
General and administrative................ 129,615 735,280 -- 864,895
Consulting................................ 76,035 -- -- 76,035
Amortization of goodwill and intangible
assets.................................. -- -- 678,619(j) 678,619
---------------- ------------- --------------- -----------------
Total operating expenses................ 931,342 4,105,395 (147,468) 4,889,269(k)
---------------- ------------- --------------- -----------------
OTHER INCOME (EXPENSE)
Licensing fees and royalties, net......... 164,802 -- -- 164,802
Interest, net............................. 17,714 (158,749) -- (141,035)
Loss on investment shares................. -- (220,000) 220,000(c) --
---------------- ------------- --------------- -----------------
Total other income (expense)............ 182,516 (378,749) 220,000 23,767
---------------- ------------- --------------- -----------------
Net income (loss) before minority interest
and income taxes........................ (450,836) 999,148 367,468 915,780
Minority interest in loss of subsidiary..... 64,806 -- -- 64,806
Income taxes................................ -- (101,850) (406,597)(i) (508,447)
---------------- ------------- --------------- -----------------
NET INCOME (LOSS)........................... $ (386,030) $ 897,298 $ (39,129) $ 472,139
---------------- ------------- --------------- -----------------
---------------- ------------- --------------- -----------------
NET INCOME (LOSS) PER SHARE OF COMMON
STOCK..................................... $ (0.09) $ 0.07
---------------- -----------------
---------------- -----------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING............................... 4,188,459(a) 6,543,459(b)
---------------- -----------------
---------------- -----------------
</TABLE>
See Notes to Pro Forma Combined Statement of Operations.
F-7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
(a) The weighted average number of shares outstanding of NFMI represents the
original weighted average shares outstanding for the year ended March 31,
1997.
(b) The weighted average number of shares outstanding after the acquisition
represents the 1,500,000 common shares of NFMI issued in the public offering
on Form SB-2 registration statement, and 840,000 shares issued to Fifth
Dimension in connection with the acquisition of certain assets from Fifth
Dimension and the conversion of 15,000 preferred shares to common shares.
All shares issued are considered issued and outstanding for the entire year.
(c) Loss on investment shares not related to Satellite operations.
(d) Entertainment expense related to stadium skybox that is discontinued.
(e) Marketing office closed and to be operated from existing Boulder, Colorado
office of NFMI.
(f) Consulting payments paid to third party which will no longer be used in
Satellite operations.
(g) To remove rental expense on videoplayback and broadcast uplink equipment
paid to Fifth Dimension Communications (1996) Corporation and 841161 Ontario
Limited.
(h) To add actual depreciation recorded by Fifth Dimension Communications (1996)
Corporation and 841161 Ontario Limited on videoplayback and broadcast uplink
equipment.
(i) To increase income taxes to United States tax rates on adjusted pro forma
net income.
(j) Amortization of goodwill and intangible assets (6,786,188 / 10 years).
(k) Should Fifth Dimension not realize the benefit of the registrant incurring
expenses on its behalf, but instead operating on a stand alone basis, total
expenses would be $5,330,394.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
New Frontier Media, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of New Frontier
Media, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New Frontier
Media, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, a substantial claim has
been asserted against the Company. The ultimate outcome of this matter cannot
presently be determined.
SPICER, JEFFRIES & CO.
Denver, Colorado
July 3, 1997, except for Note 10
as to which the date is October 28, 1997
F-9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, MARCH 31,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS
Cash--restricted (Note 4)............................................. $ 104,386 $ 109,387 $ 48,523
Investment in certificates of deposit--restricted
(Notes 4 and 7)..................................................... 550,895 750,000 --
Accounts receivable (Notes 1 and 3)................................... 84,514 212,370 222,276
Inventories (Note 1).................................................. 753,211 659,503 354,089
Prepaid distribution rights (Note 1).................................. 69,000 82,250 94 500
Common stock subscribed............................................... -- -- 20,000
Income tax receivable................................................. -- -- 72,500
Other................................................................. 108,869 68,225 48,990
------------ ------------ ------------
Total current assets................................................ 1,670,875 1,881,735 860,878
------------ ------------ ------------
FURNITURE AND EQUIPMENT, at cost (Note 1)............................... 81,931 65,552 39,314
Less: accumulated depreciation and amortization....................... (26,264) (22,661) (10,479)
------------ ------------ ------------
Net furniture and equipment......................................... 55,667 42,891 28,835
------------ ------------ ------------
OTHER ASSETS
Notes receivable--officer (Note 3).................................... 38,000 38,000 38,000
Accounts receivable--retainage (Note 1)............................... 95,235 88,844 77,053
Other................................................................. 108,209 135,001 12,583
------------ ------------ ------------
Total other assets.................................................. 241,444 261,845 127,636
------------ ------------ ------------
$ 1,967,986 $ 2,186,471 $ 1,017,349
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
JUNE 30, ------------ ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable...................................................... $ 114,155 $ 125,928 $ 186,742
Current portion of long-term debt (Note 2)............................ 139,573 139,573 139,573
Current portion of obligations under capital lease (Note 6)........... 5,856 5,139 --
Lines of credit (Note 7).............................................. 348,616 341,274 --
Other accrued liabilities............................................. 48,159 45,416 15,562
------------ ------------ ------------
Total current liabilities........................................... 656,359 657,330 341,877
LONG-TERM DEBT
Obligations under capital leases (Note 6)............................. 10,848 12,926 --
------------ ------------ ------------
Total liabilities................................................... 667,207 670,256 341,877
------------ ------------ ------------
MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4)......................... 283,635 305,443 --
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
SHAREHOLDERS' EQUITY (Notes 1 and 4)
Common stock, $.0001 par value, 50,000,000 shares authorized,
4,192,511, 4,189,000 and 4,175,250, shares issued and outstanding,
respectively........................................................ 419 419 418
Preferred stock, $.10 par value, 5,000,000 shares authorized:
Class A, 10,000 shares issued and outstanding....................... 1,000 1,000 1,000
Class B, 5,000 shares issued and outstanding........................ 500 500 --
Additional paid-in capital............................................ 1,779,018 1,768,661 847,832
Deficit............................................................... (763,793) (559,808) (173,778)
------------ ------------ ------------
Total shareholders' equity.......................................... 1,017,144 1,210,772 675,472
------------ ------------ ------------
$ 1,967,986 $ 2,186,471 $ 1,017,349
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEAR ENDED MARCH 31,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
SALES, net............................................... $ 479,330 $ 625,094 $ 2,515,802 $ 2,565,671
COST OF SALES............................................ 451,783 521,525 2,217,812 1,843,765
------------ ------------ ------------ ------------
GROSS PROFIT............................................. 27,547 103,569 297,990 721,906
------------ ------------ ------------ ------------
OPERATING EXPENSES
Occupancy and equipment................................ 36,030 40,092 190,675 118,960
Legal and professional................................. 30,264 7,287 67,625 96,101
Advertising and promotion.............................. 67,676 23,601 199,238 225,319
Salaries, wages and benefits........................... 68,812 44,696 236,017 184,282
Communications......................................... 7,785 8,058 32,137 22,609
General and administrative............................. 41,241 27,686 129,615 60,942
Research and development............................... 7,048 -- -- 8,851
Consulting............................................. 18,256 13,866 76,035 65,281
Abandoned project costs................................ -- -- -- 25,316
------------ ------------ ------------ ------------
Total operating expenses............................. 277,112 165,286 931,342 807,661
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Licensing fees and royalties........................... 27,537 62,571 191,995 157,106
Licensing commissions.................................. (4,955) (12,312) (27,193) (54,665)
Interest income........................................ 12,068 640 37,736 4,152
Interest expense....................................... (10,878) (179) (20,022) (15,561)
------------ ------------ ------------ ------------
Total other income................................... 23,772 50,720 182,516 91,032
------------ ------------ ------------ ------------
Net income (loss) before income taxes and minority
interest........................................... (225,793) (10,997) (450,836) 5,277
INCOME TAXES (Notes 1 and 5)............................. -- (2,454) -- (12,147)
------------ ------------ ------------ ------------
Net loss before minority interest (225,793) (13,451) (450,836) (6,870)
Minority interest in loss of subsidiary.................. 21,808 -- 64,806 --
------------ ------------ ------------ ------------
NET LOSS................................................. $ (203,985) $ (13,451) $ (386,030) $ (6,870)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET LOSS PER COMMON SHARE (Note 1)....................... $ (.05) $ * $ (.09) $ *
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1)............. 4,192,511 4,181,917 4,188,459 4,051,896
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
* less than $.01 per share
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
MARCH 31, 1997 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS B
PREFERRED
STOCK
COMMON STOCK CLASS A PREFERRED STOCK -----------
----------------------------------------------- ------------------------
$0.10 PAR
NO PAR VALUE $0.0001 PAR VALUE $0.10 PAR VALUE VALUE
---------------------- ----------------------- ------------------------ -----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- --------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, March 31, 1995................ 4,000 $ 80,000 -- $ -- -- $ -- --
Contribution of capital............... -- 3,250 -- -- -- -- --
Reverse acquisition of National
Securities Holding Corporation (Note
1).................................. (4,000) (83,250) 4,000,000 400 -- -- --
Issuance of Class A preferred stock... -- -- -- -- 10,000 1,000 --
Issuance of common stock.............. -- -- 175,250 18 -- -- --
Net Loss.............................. -- -- -- -- -- -- --
----------- --------- ---------- ----- ----------- ----------- -----
BALANCES, March 31, 1996................ -- -- 4,175,250 418 10,000 1,000 --
Issuance of subsidiary's common stock,
less offering costs of $11,085...... -- -- -- -- -- -- --
Issuance of Class B preferred stock,
less offering costs of $6,663....... -- -- -- -- -- -- 5,000
Issuance of common stock, less
offering costs of $10,922........... -- -- 20,000 2 -- -- --
Retirement of common stock............ -- -- (6,250) (1) -- -- --
Net loss.............................. -- -- -- -- -- -- --
----------- --------- ---------- ----- ----------- ----------- -----
BALANCES, March 31, 1997................ -- -- 4,189,000 419 10,000 1,000 5,000
Issuance of common stock.............. -- -- 10,511 1 -- -- --
Retirement of common stock............ -- -- (7,000) (1) -- -- --
Net loss.............................. -- -- -- -- -- -- --
----------- --------- ---------- ----- ----------- ----------- -----
BALANCES, June 30, 1997................. $ -- $ -- 4,192,511 $ 419 10,000 $ 1,000 5,000
----------- --------- ---------- ----- ----------- ----------- -----
----------- --------- ---------- ----- ----------- ----------- -----
<CAPTION>
ADDITIONAL
PAID-IN
AMOUNT CAPITAL DEFICIT
----------- ----------- ----------
<S> <C> <C> <C>
BALANCES, March 31, 1995................ $ -- $ -- $ (166,908)
Contribution of capital............... -- -- --
Reverse acquisition of National
Securities Holding Corporation (Note
1).................................. -- 82,850 --
Issuance of Class A preferred stock... -- 64,000 --
Issuance of common stock.............. -- 700,982 --
Net Loss.............................. -- -- (6,870)
----- ----------- ----------
BALANCES, March 31, 1996................ -- 847,832 (173,778)
Issuance of subsidiary's common stock,
less offering costs of $11,085...... -- 863,915 --
Issuance of Class B preferred stock,
less offering costs of $6,663....... 500 12,837 --
Issuance of common stock, less
offering costs of $10,922........... -- 69,076 --
Retirement of common stock............ -- (24,999) --
Net loss.............................. -- -- (386,030)
----- ----------- ----------
BALANCES, March 31, 1997................ 500 1,768,661 (559,808)
Issuance of common stock.............. -- 47,533 --
Retirement of common stock............ -- (37,176) --
Net loss.............................. -- -- (203,985)
----- ----------- ----------
BALANCES, June 30, 1997................. $ 500 $ 1,779,018 $ (763,793)
----- ----------- ----------
----- ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE
30, YEARS ENDED MARCH 31,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (203,985) $ (13,451) $ (386,030) $ (6,870)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 3,603 -- 12,244 7,807
Issuance of common stock for services..................... 15,000 -- -- --
Increase (decrease) in accounts payable................... (11,773) (68,171) (60,814) 170,491
(Increase) decrease in accounts receivable................ 121,465 51,317 (1,885) (233,997)
Increase in inventories................................... (93,708) (99,962) (305,414) (326,929)
(Increase) decrease in prepaid distribution rights........ 13,250 9,830 12,250 (94,500)
(Increase) decrease in other assets....................... 11,148 624 (141,715) (59,309)
(Increase) decrease in income tax receivable.............. -- -- 72,500 (72,500)
Increase in other accrued liabilities..................... 2,743 -- 29,854 15,562
Minority interest in loss of subsidiary................... (21,808) -- (64 806) --
----------- ----------- ------------ ----------
Net cash used in operating activities................... (164,065) (119,813) (833,816) (600,245)
----------- ----------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture......................... (16,379) (4,470) (6,928) (17,732)
Increase in notes receivable--officer....................... -- -- -- (38,000)
(Purchase) redemption of certificates of deposit............ 199,105 -- (750,000) --
----------- ----------- ------------ ----------
Net cash used in investing activities................... 182,726 (4,470) (756,928) (55,732)
----------- ----------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation........................ (1,361) -- (1,245) --
Proceeds from line of credit................................ 7,342 -- 341,274 --
Payments of notes payable................................... -- -- -- (45,427)
Issuance of common stock, net of offering costs............. 7,534 100,000 89,078 681,000
Retirement of common stock.................................. (37,177) -- (25,000) --
Issuance of preferred stock, net of offering costs.......... -- -- 13,337 65,000
Contribution of capital..................................... -- -- -- 3,250
Issuance of subsidiary's common stock, net of offering
costs..................................................... -- -- 863,915 --
Increase in minority interest, net of offering costs of
$4,751.................................................... -- -- 370,249 --
----------- ----------- ------------ ----------
Net cash provided by financing activities............... (23,662) 100,000 1,651,608 703,823
----------- ----------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE
30, YEARS ENDED MARCH 31,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH............................... $ (5,001) $ (24,283) $ 60,864 $ 47,846
CASH, BEGINNING OF PERIOD..................................... 109,387 48,523 48,523 677
----------- ----------- ------------ ----------
CASH, END OF PERIOD........................................... $ 104,386 $ 24,240 $ 109,387 $ 48,523
----------- ----------- ------------ ----------
----------- ----------- ------------ ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ -- $ -- $ 5,487 $ --
----------- ----------- ------------ ----------
----------- ----------- ------------ ----------
Income taxes paid........................................... $ -- $ -- $ -- $ 12,147
----------- ----------- ------------ ----------
----------- ----------- ------------ ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock subscribed..................................... $ -- $ (20,000) $ -- $ 20,000
Purchase of equipment via capital lease obligation.......... $ -- $ -- $ 19,310 $ --
----------- ----------- ------------ ----------
----------- ----------- ------------ ----------
Common stock issued for services............................ $ 40,000 $ -- $ -- $ --
----------- ----------- ------------ ----------
----------- ----------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS, AND CONSOLIDATION
The Company was incorporated on July 26, 1995 as New Frontier Media, Inc.
and subsequently changed its name to Old Frontier Media, Inc. ("OFMI"). On July
31, 1995, OFMI acquired 100% of the outstanding common stock of Boulder
Interactive Group, Inc. ("BIG") (a developer and publisher of entertainment and
educational computer software on CD-ROM), incorporated on June 3, 1994, for 100%
of OFMI's outstanding common stock. In addition, on July 31, 1995 OFMI
capitalized two subsidiaries, David Entertainment, Inc. ("DVD") (distributor of
adult laserdisc and digital video disc format titles) and FUZZY Entertainment,
Inc. ("FUZZY") (developer and distributor of fine art posters and decorative art
posters).
On September 15, 1995, the shareholders of National Securities Holding
Corporation ("NSHC") approved an exchange of common stock of NSHC for the
outstanding common stock of Old Frontier Media, Inc. ("OFMI") and a name change
from NSHC to New Frontier Media, Inc. ("NFMI"). As a result of this transaction,
NFMI owns OFMI as a wholly owned subsidiary. OFMI is presently the only
operating subsidiary (through its subsidiaries BIG, DVD and FUZZY) of NFMI. The
stock exchange between NSHC and OFMI has been considered a reverse acquisition.
Under reverse acquisition accounting, OFMI was considered the acquiror for
accounting and financial reporting purposes, and acquired the assets and assumed
the liabilities of NSHC. The acquisition was accomplished through the exchange
of all the outstanding common stock of OFMI for 3,720,000 shares of common stock
and 40,000 shares of preferred stock (after giving effect to the conversion of
the preferred stock to common stock and then giving effect to a 1-for 2,034.66
reverse stock split of NSHC's common stock) representing a controlling interest
in NSHC. On September 20, 1996, Quarto Holdings, Inc. ("Quarto") purchased 1,714
newly issued common shares of BIG for a 30% minority interest (see Note 4).
The accompanying consolidated financial statements include the historical
accounts of BIG for all periods and the accounts of NFMI since September 15,
1995 and OFMI, DVD and FUZZY since inception. As a result of the issuance of the
common stock of BIG, as mentioned above, the accompanying financial statements
include 100% of the operations of BIG through September 20, 1996, and the
minority interest in net loss of subsidiary represents 30% of the operations of
BIG after that date. All intercompany accounts and transactions have been
eliminated in consolidation. The June 30, 1997 and 1996 amounts included herein
are unaudited. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations, cash flows and changes in shareholders' equity
at June 30, 1997 and 1996 have been made.
ACCOUNTS RECEIVABLE
In connection with BIG's sales and distribution of its products, BIG's major
distributor withholds 10% of its sales for returns from retailers. Per the
agreement dated December 23, 1994 with the distributor, these funds will be
retained until the agreement is terminated, but at no time shall the reserve
exceed the lesser of $150,000, or 10% of the total net receipts for the previous
twelve months. The agreement automatically renews after its three year term on a
year to year basis unless terminated by either party upon 180 days written
notice. At June 30, 1997, March 31, 1997 and 1996, retention amounts were
F-16
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$95,235, $88,844 and $77,053, respectively. In addition, included in accounts
receivable at June 30, 1997 and March 31, 1997 is $11,962 and $17,141 from this
distributor.
INVENTORIES
Inventories consist of CD-ROM and laserdisc products which are acquired or
internally developed. These costs include acquisition, production, duplication
and the physical packaging of the products and are charged to cost of sales as
sales are made over the number of units estimated to be sold. It is the
Company's policy to evaluate these products for net realizable value on a
product-by-product basis.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. The cost of maintenance and
repairs is charged to operations as incurred; significant additions and
betterments are capitalized. Depreciation is computed using accelerated and
straight-line methods over the estimated useful lives of three to five years.
INCOME TAXES
Concurrent with the stock exchange discussed above, BIG terminated its
subchapter S election effective July 31, 1995. The Company files a consolidated
income tax return with its subsidiaries in which the Company has an 80% or
greater interest.
CASH FLOWS
For purposes of reporting cash flows, cash includes those investments which
are short-term in nature (three months or less to original maturity), are
readily convertible to cash, and represent insignificant risk of changes in
value.
PREPAID DISTRIBUTION RIGHTS
Prepaid distribution rights include laserdisc and digital disc format title
rights purchased under agreements with related (see Note 3) and non-related
entities for replication and distribution. As these format titles are placed in
production, included in inventory, they will be charged to cost of sales as
sales are made over the number of units estimated to be sold.
RESEARCH AND DEVELOPMENT COSTS
All costs incurred to establish technological feasibility of the Company's
CD-ROM products are expensed as incurred. The majority of these costs are
contract services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, certificates of deposits, accounts receivable,
accounts payable and notes receivable and payable approximates fair value.
F-17
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK WARRANTS
The Company follows the intrinsic value based method of accounting as
prescribed by APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for its
stock-based compensation. Under the Company's stock warrant issuances, the
exercise price is in excess of the fair value of the warrants at the grant date
and no compensation cost is recognized.
NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock is based on the weighted average number
of shares of common stock outstanding, giving effect to the reverse acquisition
and reverse stock split of NFMI discussed above. Common stock equivalents are
not included in the weighted average calculation since their effect would be
anti-dilutive. Preferred dividends of $1,213, $813, $3,417 and $1,718 have been
added back to the net loss to arrive at net loss per common share for the three
months ended June 30, 1997 and 1996 and years ended March 31, 1997 and 1996,
respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2--LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ------------------------
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Notes payable to officers and shareholders bearing interest at 8.5%,
unsecured and due on demand anytime after December 31, 1996.............. $ 85,000 $ 85,000 $ 85,000
Notes payable to entities, controlled by officers and shareholders, bearing
interest at 8.5%, unsecured and due on demand anytime after December 31,
1996..................................................................... 54,573 54,573 54,573
----------- ----------- -----------
139,573 139,573 139,573
Less current portion................................................... (139,573) (139,573) (139,573)
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-18
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 2--LONG-TERM DEBT (CONCLUDED)
Included in other liabilities at June 30, 1997, March 31, 1997 and 1996 are
$29,320, $11,012 and $15,562 of accrued interest relating to the above notes,
respectively.
NOTE 3--RELATED PARTY TRANSACTIONS
The Company purchased $65,000 of adult laserdisc format titles from a
related entity through the issuance of preferred stock (see Note 4). In
addition, the Company has an agreement with another related entity to sell,
package, handle, replicate and ship these adult laserdisc format titles at the
Company's expense for a management fee of $35,000 per month through May 31, 1996
and $40,000 per month thereafter. During the three months ended June 30, 1997
and 1996 and the years ended March 31, 1997 and 1996 this related entity
withheld from sales of $378,049, $631,742, $2,236,143 and $1,592,856,
replicating costs of $324,887, $451,035, $1,646,364 and $939,622 and management
fees of $120,000, $110,000, $470,000 and $262,500, respectively. Included in
accounts receivable at June 30, 1997, March 31,
1997 and 1996 was $25,173, $141,585 and $222,276 due from the related entity,
respectively.
In June 1995, the Company issued a three year note receivable to one of its
officers in the amount of $38,000. The note requires interest only payments at a
rate of 6.1%, payable on a quarterly basis with the principal due on August 31,
1998. Interest earned on this note for the three months ended June 30, 1997 and
1996 and the years ended March 31, 1997 and 1996 was $578, $578, $2,318 and
$1,346, respectively.
The Company leases certain equipment and office space via entities
controlled by an officer and shareholder on a month to month basis (see Note 6).
During the three months ended June 30, 1997 and 1996 and the years ended March
31, 1997 and 1996 the Company paid $18,339, $21,080, $116,549 and $98,212 to
these entities relating to these leases, respectively.
NOTE 4--SHAREHOLDERS' EQUITY
COMMON STOCK
The Company issued 195,250 units (one share of common stock and one Class A
warrant to purchase one share of common stock at an exercise price of $5.50
expiring December 13, 1997) through a private placement memorandum at a price of
$4.00 per unit. In December, 1996, 6,250 units were retired at the original
subscription price. For the three months ended June 30, 1997 the Company issued
10,511 shares of common stock in prepayment of services to be rendered and for
services rendered. In addition, the Company purchased and retired 7,000 shares
of common stock during the three months ended June 30, 1997.
PREFERRED STOCK
On September 20, 1995, the Company issued 10,000 shares of Class A
preferred, 5% cumulative stock in exchange for adult laserdisc format content
titles from a related entity (see Note 3).
In February, 1997 the Company issued 5,000 shares of Series B, 8%
cumulative, convertible preferred stock at $4.00 per share. Each Series B
preferred share is convertible into one share of the Company's common stock
subject to certain conditions.
F-19
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 4--SHAREHOLDERS' EQUITY (CONCLUDED)
As of June 30, 1997, cumulative dividends in arrears on Class A and B
preferred stock totalled $6,348.
SUBSIDIARY SALE OF STOCK
On September 20, 1996, Quarto Holdings, Inc., a Delaware Corporation,
purchased 30% of newly issued common stock of BIG for $1,250,000 in cash and
rights to develop and exploit digital material owned by Quarto. The Company
placed a $-0- value on the rights received from Quarto. The Company recorded 70%
of the $1,250,000 in proceeds as equity on a consolidated basis and 30% of this
amount as a minority interest (see Note 1).
In connection with the purchase, NFMI entered into a stockholder agreement
with Quarto whereby at least 75% of stockholder approval is necessary to approve
certain actions taken on behalf of BIG. The agreement enumerates various actions
and restrictions as it relates to the operations of BIG, specifically (1) that
the funding proceeds can only be used to fund BIG's development and
commercialization of CD-ROM titles and (2) 75% shareholder approval is required
before encumbering any assets of BIG. Therefore, cash and certificates of
deposit of $687,773 and $841,568 at June 30, 1997 and March 31, 1997,
respectively was restricted to BIG's operations and could not be used for the
operations of NFMI or its affiliates. On November 4, 1996 and February 11, 1997
NFMI opened lines of credit with a banking institution (see Note 7) and secured
these lines of credit with BIG's certificates of deposit. Under (2) above NFMI
breached the terms of the stockholder agreement by not obtaining 75% stockholder
approval before encumbering the assets of BIG. On July 2, 1997, the Company
unencumbered the certificates of deposit (see Note 10).
WARRANTS
In connection with the above transaction, Quarto purchased a warrant from
NFMI for $400 cash which allows the right to purchase up to 400,000 common
shares of NFMI at an exercise price of $6.00 per share expiring on September 20,
2001. Pursuant to the terms of the warrant agreement, these shares and the
related exercise price will be adjusted if additional shares of common stock are
issued by the Company.
On October 12, 1995, the Company issued 20,000 warrants at an exercise price
of $4.00, expiring October 12, 1998, to an investment banker in connection with
a financial advisor agreement.
NOTE 5--INCOME TAXES
The Company has an unused net operating loss carry forward on a consolidated
basis of approximately $240,000 for income tax purposes, which principally
expires in 2012. In addition, the Company's 70% owned subsidiary BIG, which is
not part of the consolidated income tax return, has a net operating loss of
approximately $216,000 expiring in 2012. These net operating loss carryforwards
may result in future income tax benefits; however, because realization is
uncertain at this time, a valuation reserve in the same amount has been
established. Temporary differences arise from the recording of depreciation.
F-20
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 5--INCOME TAXES (CONCLUDED)
Significant components of the Company's deferred tax liabilities and assets as
of March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred tax liabilities.............................................. $ -- $ --
----------- ---------
----------- ---------
Deferred tax assets
Net operating loss carry forwards................................... 174,808 3,270
Valuation allowance for deferred tax assets......................... (174,808) (3,270)
----------- ---------
$ -- $ --
----------- ---------
----------- ---------
</TABLE>
The income tax provision reflected on the statement of operations of $12,147
in 1996 was due to filing a short period return to coincide the respective
entities' tax year end. This provision is not recoverable from the utilization
of the above net operating loss.
NOTE 6--COMMITMENTS AND AGREEMENTS
The Company has leases for office space and equipment under various
operating and capital leases. Included in furniture and equipment at March 31,
1997 is $19,310 of equipment under capital lease and accumulated depreciation
relating to this lease of $3,862.
Future minimum lease payments under these leases as of March 31, 1997 are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL DUE
YEAR ENDED MARCH 31, OPERATING CAPITAL CAPITAL LEASE
- ------------------------------------------------------------------ ----------- --------- -------------
<S> <C> <C> <C>
1998.............................................................. $ 56,000 $ 7,606 $ 5,139
1999.............................................................. -- 7,606 5,814
2000.............................................................. -- 6,473 6,102
2001.............................................................. -- 1,414 1,010
----------- --------- -------------
$ 56,000 23,099 $ 18,065
----------- -------------
----------- -------------
Less amount representing interest................................. 5,034
---------
Present value of net minimum lease payments....................... $ 18,065
---------
---------
</TABLE>
Total rent expense for the three months ended June 30, 1997 and 1996 and the
years ended March 31, 1997 and 1996, was $18,339, $21,080, $136,013 and
$100,441, respectively.
On November 11, 1996 the Company entered into a two year financial advisory
and consulting agreement requiring annual payments of $50,000 and warrants to
purchase 150,000 shares of NFMI's common stock at an exercise price of the
market value of the common stock at the date of issuance. As of March 31, 1997
none of the above warrants were issued.
F-21
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 6--COMMITMENTS AND AGREEMENTS (CONCLUDED)
The Company's subsidiary FUZZY has entered into an agreement with an
individual to find images, negotiate artist contracts, finalize prints and
proofs and the marketing and selling of the prints. The agreement is for a term
of seven years and the Company has agreed to advance the venture as a line of
credit up to $250,000. Net profits will be split on a 50%/50% basis; however, in
the event advances are drawn by this individual, profits will be split on a
60%/40% basis until the advances have been paid in full. Included in other
assets as of June 30, 1997 and March 31, 1997 is approximately $78,716 and
$70,000 of advances to this individual under the agreement.
NOTE 7--LINES OF CREDIT
The Company has lines of credit with a banking institution as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997
JUNE 30, ----------
1997
-----------
(UNAUDITED)
<S> <C> <C>
$250,000 line of credit, dated November 4, 1996, bearing interest at 7.950%,
due November 4, 1997 secured by certificate of deposit....................... $ 248,934 $ 247,241
$100,000 line of credit, dated February 11, 1997, bearing interest at 8.280%,
due November 4, 1997 secured by certificate of deposit....................... 99,682 94,033
----------- ----------
$ 348,616 $ 341,274
----------- ----------
----------- ----------
</TABLE>
The two certificates of deposit securing the above lines of credit are held
in the name of the Company's subsidiary BIG. The certificates bear interest at
rates ranging from 6% to 7% and mature in November and December of 1997 (see
Note 4).
NOTE 8--STOCK WARRANTS
The Company has no formal stock option plan; however, it has granted
warrants to officers and employees allowing them to purchase common stock of the
Company in excess of the market value of the stock at date of grant. Warrants
granted are for a three-year term.
In addition, common stock warrants have been issued in connection with
certain offerings of stock and in connection with a financial advisory agreement
(see Note 4). At March 31, 1997, warrants to purchase common stock at various
prices were outstanding which expire as follows:
<TABLE>
<CAPTION>
EXERCISE
EXPIRATION DATE WARRANTS PRICE
- ------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
December, 1997........................................................... 189,000 $ 5.50
October, 1998............................................................ 20,000 4.00
September, 2001.......................................................... 400,000 6.00
---------
609,000
---------
---------
</TABLE>
F-22
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 8--STOCK WARRANTS (CONCLUDED)
The following table describes certain information related to the Company's
compensatory stock warrant activity for the year ending March 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Outstanding, March 31, 1996.................................... -- $ --
Grants during year--Exercise price > market price.............. 146,666 6.00
Exercised, forfeited and expired during year................... -- --
----------- -----
Outstanding and exercisable, March 31, 1997.................... 146,666 $ 6.00
----------- -----
----------- -----
</TABLE>
The weighted average grant date fair value of the warrants granted in 1997
was as follows:
<TABLE>
<S> <C>
Exercise price > market price....... $ .5329
---------
---------
</TABLE>
The fair value of each option warrant is estimated using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest rate of
6.50%; dividend yield of -0-%; expected life three years; and volatility of
16.71%.
A summary of the Company's outstanding and exercisable stock warrants as of
March 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF REMAINING CONTRACTUAL
EXERCISE PRICES WARRANTS LIFE (MONTHS)
- ---------------------------------------------------------- ----------- -------------------------
<S> <C> <C>
$6.00--Outstanding and exercisable........................ 546,666 48
$4.00--Outstanding and exercisable........................ 20,000 18
$5.50--Outstanding and exercisable........................ 189,000 9
</TABLE>
As previously described, the Company applies APB 25 and related
Interpretations in accounting for its stock warrants. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
warrants been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS 123, the Company's net loss and loss per
share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------
<S> <C>
Net loss........................................................................ $ (464,189)
------------
------------
Net loss per share.............................................................. $ (.11)
------------
------------
</TABLE>
F-23
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE 9--RISKS AND UNCERTAINTIES (CONCLUDED)
As previously discussed in Note 3, the Company distributes, through a
related entity, its adult laserdisc format titles. This related entity generates
substantially all of its sales from two distributors in California.
The Company sells the majority of its CD-Rom products through a distributor
in California. For the periods ended March 31, 1997 and 1996, 6% and 35% of
total sales were received from this distributor (see Note 1). The loss of this
distributor or the loss of the related entity's distributors mentioned above
could have an adverse effect on the Company's operations.
The Company also uses one major vendor to replicate all of its laserdisc
products; management believes that other vendors could be substituted on
materially the same terms if the loss of this vendor occurred.
The Company has deposits in a bank in excess of the FDIC insured amounts of
$100,000. The amounts in excess of $100,000 are subject to loss should the bank
cease business.
NOTE 10--EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT
On October 24, 1997, the Company obtained a $1,000,000 unsecured,
conditional (if the Company fails to obtain at least $1,000,000 in alternate
funding on or before December 31, 1997), revocable line of credit from an entity
controlled by a shareholder of the Company. The line of credit is valid for nine
months beginning January 1, 1998, and any amounts the Company draws against the
line of credit will bear interest at a rate of 9% per annum.
In addition, on September 29, 1997 the Company encumbered BIG's certificate
of deposit which is alleged by Quarto to be a violation of the terms of the
stockholder agreement (see Note 4). On October 23, 1997, Quarto filed an action
seeking, among other things, rescission of the purchase agreement, a temporary
restraining order and preliminary injunction against the Company and BIG,
preventing BIG from transferring or encumbering BIG's assets for the benefit of
the Company. On October 28, 1997, the Company and Quarto entered into a
Stipulation, whereby the Company agreed that it would not transfer, or otherwise
encumber, any assets of BIG without the prior written consent of Quarto.
Actions, if any, that Quarto may pursue are uncertain at the present time.
F-24
<PAGE>
AUDITORS' REPORT
To the Directors of
Fifth Dimension Communications (Barbados) Inc.,
1043133 Ontario Inc. and Merlin Sierra Inc.
We have audited the combined balance sheets of Fifth Dimension
Communications (Barbados) Inc., 1043133 Ontario Inc. and Merlin Sierra Inc. as
at March 31, 1997 and 1996 and the combined statements of income and retained
earnings and cash flows for the years then ended. These combined financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of the companies as at March 31, 1997
and 1996 and the results of their operations and the changes in their financial
position for the years then ended in accordance with accounting principles
generally accepted in the United States.
ERNST & YOUNG
Ottawa, Canada
June 27, 1997 Chartered Accountants
F-25
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC. AND MERLIN SIERRA INC. (NOTE 1)
COMBINED BALANCE SHEETS
(UNITED STATES DOLLARS)
ASSETS
<TABLE>
<CAPTION>
AS AT: JUNE 30,
- --------------------------------------------------------------------------- 1997
----------- MARCH 31, MARCH 31,
1997 1996
$ ---------- ----------
(UNAUDITED) $ $
<S> <C> <C> <C>
CURRENT ASSETS
Cash....................................................................... 524,376 642,466 615,559
Accounts receivable--net of allowance for doubtful accounts of $1,450 (June
30, 1997); $1,450 (March 31, 1997); $59,530 (March 31, 1996)............. 1,929,997 1,522,195 560,351
Related party receivables (Note 6)......................................... 1,023,096 1,492,275 1,764,866
Inventory.................................................................. -- -- 11,409
Transponder deposits....................................................... 200,000 200,000 150,000
Deferred income taxes...................................................... -- -- 71,500
Prepaid expenses........................................................... 291,657 282,883 623,756
----------- ---------- ----------
3,969,126 4,139,819 3,797,461
Film exhibition rights..................................................... 653,546 748,331 662,935
Restricted investments--at cost (Note 3)................................... 672,775 691,492 825,449
Investment in shares....................................................... -- -- 220,000
Capital assets--net (Note 4)............................................... 406,286 348,463 400,259
----------- ---------- ----------
5,701,733 5,928,105 5,906,084
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES
CURRENT LIABILITIES
Bank loan (Note 5)......................................................... -- 35,128 98,958
Accounts payable and accrued charges....................................... 375,005 1,009,773 905,682
Related party payables (Note 6)............................................ 527,420 471,282 860,703
Income taxes payable (Note 10)............................................. 402,082 382,082 408,744
Deferred subscription revenue.............................................. 1,794,101 1,720,810 2,075,337
----------- ---------- ----------
3,098,608 3,619,075 4,349,424
----------- ---------- ----------
----------- ---------- ----------
Commitments and Contingent Liabilities (Notes 6 & 7)
SHAREHOLDERS' EQUITY
Capital Stock (Note 8)..................................................... 272 272 272
Retained Earnings.......................................................... 2,602,853 2,308,758 1,556,388
----------- ---------- ----------
2,603,125 2,309,030 1,556,660
----------- ---------- ----------
5,701,733 5,928,105 5,906,084
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to Financial Statements.
F-26
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC. AND MERLIN SIERRA INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED JUNE ENDED JUNE YEAR ENDED YEAR ENDED
30, 30, MARCH 31, MARCH 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (AUDITED)
Sales................................................ $ 3,041,068 $ 3,573,571 $ 15,044,139 $ 12,223,731
Cost of Sales........................................ 1,904,646 2,236,915 9,560,847 6,317,438
------------- ------------- ------------- -------------
Gross Profit......................................... 1,136,422 1,336,656 5,483,292 5,906,293
Expenses (see Schedule).............................. 822,327 1,103,317 4,264,144 3,898,653
------------- ------------- ------------- -------------
Net income from operations........................... 314,095 233,339 1,219,148 2,007,640
Loss on investment in Shares......................... -- 220,000 220,000 --
------------- ------------- ------------- -------------
314,095 13,339 999,148 2,007,640
------------- ------------- ------------- -------------
Provision for (recovery of) income taxes
Current............................................ 20,000 -- 30,350 (113,563)
Deferred........................................... -- (574,980) 71,500 (71,500)
------------- ------------- ------------- -------------
20,000 (574,980) 101,850 (185,063)
------------- ------------- ------------- -------------
Net Income for the period............................ 294,095 588,319 897,298 2,192,703
Retained Earnings (Deficit), beginning of period..... 2,308,758 1,556,388 1,556,388 (636,315)
------------- ------------- ------------- -------------
2,602,853 2,144,707 2,453,686 1,556,388
Dividends paid....................................... -- -- 144,928 --
------------- ------------- ------------- -------------
Retained Earnings end of period...................... $ 2,602,853 $ 2,144,707 $ 2,308,758 $ 1,556,388
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to Financial Statements.
F-27
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC. AND MERLIN SIERRA INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS YEAR YEAR
ENDED JUNE 30, ENDED JUNE 30, ENDED MARCH 31, ENDED MARCH 31,
1997 1996 1997 1996
-------------- -------------- ---------------- ----------------
$ $ $ $
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C>
CASH PROVIDED FROM (USED IN)
OPERATING ACTIVITIES
Net income for the period.................... 294,095 588,319 897,298 2,192,703
Items not affecting cash--
Amortization of capital assets............... 30,744 48,077 120,347 144,398
Amortization of film exhibition rights....... 200,302 271,325 931,637 776,758
Loss on investment in shares................. -- 220,000 220,000 --
Deferred income taxes........................ -- (574,980) 71,500 (71,500)
Net change in operating components of working
capital (Note 11).......................... 136,496 (253,254) (936,660) (821,184)
-------------- -------------- ---------------- ----------------
661,637 299,487 1,304,122 2,221,175
-------------- -------------- ---------------- ----------------
INVESTING ACTIVITIES
Investment in shares......................... -- -- -- (220,000)
Purchases of capital assets.................. (88,567) (13,719) (74,682) (144,108)
Sales of capital assets...................... -- -- 6,131 11,893
Transfers of capital assets to related
company.................................... -- -- -- 567,373
(Advances to) repayments from, Teletheatre
Plus Inc................................... -- -- 718,432 (718,432)
Purchases of film exhibition rights.......... (105,517) (271,325) (1,017,033) (904,121)
(Purchase) redemption of restricted
investments................................ (592,002) (9,944) 133,957 (22,135)
-------------- -------------- ---------------- ----------------
(786,086) (294,988) (233,195) (1,429,530)
-------------- -------------- ---------------- ----------------
FINANCING ACTIVITIES
Capital stock................................ -- -- -- 100
Bank loan.................................... (35,128) (15,625) (63,830) 98,958
Dividends.................................... -- -- (144,928) --
Net change in accounts receivable and
payable, related companies................. 41,487 (206,964) (835,262) (398,661)
-------------- -------------- ---------------- ----------------
6,359 (222,589) (1,044,020) (299,603)
-------------- -------------- ---------------- ----------------
INCREASE (DECREASE) IN CASH FOR THE PERIOD... (118,090) (218,090) 26,907 492,042
CASH--BEGINNING OF PERIOD.................... 642,466 615,559 615,559 123,517
-------------- -------------- ---------------- ----------------
CASH--END OF PERIOD.......................... 524,376 397,969 642,466 615,559
-------------- -------------- ---------------- ----------------
-------------- -------------- ---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC., MERLIN SIERRA INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. BASIS OF PRESENTATION
These financial statements present the combined assets, liabilities,
revenues and expenses of Fifth Dimension Communications (Barbados) Inc. and
1043133 Ontario Inc. for the years ended March 31, 1997 and 1996 and those of
Merlin Sierra Inc., from February 1, 1996, the date of acquisition to March 31,
1996 and the year ended March 31, 1997.
The three companies carry on complementary but different businesses related
to the broadcasting of movies to subscribers by satellite and cable. Fifth
Dimension Communications (Barbados) Inc. is incorporated under the laws of
Barbados, 1043133 Ontario Inc. is incorporated under the laws of the Province of
Ontario in Canada and Merlin Sierra Inc. is incorporated under the laws of the
State of California in the United States. None of the three companies own shares
in the other companies.
These combined financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States
applied on a consistent basis and are presented in United States dollars. They
have been prepared in connection with a proposed sale of the combined business
of the three companies as expressed in a letter of intent dated April 14, 1997.
Under the terms of the letter of intent, the purchaser will only acquire certain
of the assets of the combined entities presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory is recorded at the lower of cost and net realizable value.
FILM EXHIBITION RIGHTS
Rights to exhibit films are recorded at cost and are amortized on a
straight-line basis over the period of the contract, which is normally
twenty-four months.
INVESTMENT IN SHARES
The investment in shares, originally recorded at cost, has been accounted
for by the equity basis.
CAPITAL ASSETS
Capital assets are initially recorded at cost and amortized over their
estimated useful lives. Furniture and fixtures are being amortized on the
diminishing balance basis at a rate of 20% per year. Automobiles and computers
are being amortized on the diminishing balance basis at a rate of 30% per year.
Leaseholds and the telephone system are amortized on a straight line basis over
the five year term of the realty lease. Software is amortized at a 100% rate.
F-29
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC., MERLIN SIERRA INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from sales of television movie subscriptions from three to twelve
months is recognized on a monthly basis over the term of the subscription.
FOREIGN EXCHANGE
Monetary assets and liabilities denominated in currencies other than United
States dollars are translated at exchange rates in effect at the balance sheet
date. Non-monetary assets and liabilities in currencies other than United States
dollars are translated at historical rates. Revenue and expense items are
translated at average rates of exchange for the year. Translation gains and
losses are included in the determination of earnings.
3. RESTRICTED INVESTMENTS
Restricted investments consist of short-term marketable securities and
deposits recorded at cost held as collateral by the financial institutions
providing merchant credit card service to 1043133 Ontario Inc.
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
$ $ $ $
Furniture and fixtures.................................... 101,562 40,196 95,444 25,522
Leaseholds................................................ 52,004 15,042 50,470 31,528
Telephone system.......................................... 105,297 44,836 100,731 398
Automobiles............................................... 55,489 36,028 55,489 20,352
Computers................................................. 298,197 149,749 271,439 100,640
Software.................................................. 38,234 16,469 14,766 9,640
---------- ------------ ---------- ------------
650,783 302,320 588,339 188,080
Accumulated amortization.................................. 302,320 188,080
---------- ----------
348,463 400,259
---------- ----------
---------- ----------
</TABLE>
5. BANK LOAN
The bank loan to Merlin Sierra Inc. bears interest at 16% with monthly
principal repayments of $12,148 to June, 1997. The loan is collateralized by a
commercial security agreement on all assets of Merlin Sierra Inc. and personal
guarantees of certain officers of Merlin Sierra Inc.
6. RELATED COMPANY INFORMATION
The companies are related by common control.
F-30
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC., MERLIN SIERRA INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
6. RELATED COMPANY INFORMATION (CONTINUED)
(A) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
Accounts receivable include amounts due from related companies totalling
$1,492,275 (1996 $1,764,866). Accounts payable include amounts due to related
companies totalling $471,282 (1996 $860,703).
The significant balances receivable from or (payable to) related companies,
each of which are related by being under common control, are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
Fifth Dimension Communications (1996) Corporation......................................... (171,971) (698,847)
Fifth Dimension Communications Holdings, Inc. ............................................ 461,599 45,880
Fifth Dimension Capital Corporation....................................................... 929,854 577,517
Fifth Dimension Communications Atlantic Inc. ............................................. -- 132,609
Fifth Dimension SatCom Inc. .............................................................. (86,408) 31,408
Turks & Caicos Island Wireless Television Ltd. ........................................... (150,000) --
Fifth Dimension Technologies Inc. ........................................................ 60,066 (102,772)
FirstLink Communications Inc. ............................................................ 14,011 164,671
Teletheatre Plus Inc. note receivable..................................................... -- 718,432
</TABLE>
(B) TRANSACTIONS
Related party transactions are measured at exchange values which correspond
to the amount established and agreed upon by both parties.
The significant transactions entered into by 1043133 Ontario Inc. with
related companies are as follows:
Rented offices from Fifth Dimension Capital Corporation for $47,826 (1996
$47,826).
Rented satellite uplink from 841161 Ontario Limited for $62,000 (1996
$62,000) and space for broadcasting facilities for $41,526 (1996
$18,141). Prepaid expenses include prepaid rent to 841161 Ontario Limited
of $118,000 (1996 Nil).
Purchased accounting and administrative services from Fifth Dimension
Capital Corporation for $166,423 (1996 $142,140).
Purchased engineering services from Fifth Dimension SatCom Inc. for
$365,836 (1996 $374,177).
Purchased full period satellite space segment from Fifth Dimension
Communications (1996) Corporation for Nil (1996 $377,570) and occasional
use satellite space segment for $53,934 (1996 Nil) and rented
broadcasting equipment for $113,000 (1996 $117,174). In addition, a
management fee of $81,500 was charged to Fifth Dimension Communications
(1996) Corporation in 1996. No amount was required to be charged in 1997.
Purchased subscriber activation services from FirstLink Communications
Inc. for $224,275 (1996 $181,017).
F-31
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC., MERLIN SIERRA INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
6. RELATED COMPANY INFORMATION (CONTINUED)
Wrote down amounts receivable from NA Microsat Corporation of $20,141
(1996 $91,217) to their estimated realizable value.
Transferred equipment to Fifth Dimension Communications (1996)
Corporation for $564,161 (1996 Nil).
Rented a hospitality suite from Fifth Dimension Technologies Inc. for
$75,938 (1996 $18,750) and purchased computer equipment for $30,605 (1996
$38,287).
The significant transactions entered into by Merlin Sierra Inc. with related
companies are as follows:
Purchase of satellite space segment from Fifth Dimension Communications
(1996) Corporation for $1,188,000 (1996 $132,000).
The significant transactions entered into by Fifth Dimension Communications
(Barbados) Inc. with related companies are as follows:
Sold to Fifth Dimension Atlantic Communications Inc. space segment for
$76,500 (1996 $102,000).
Rented broadcasting equipment for $25,700 (1996 Nil) and purchased
occasional use satellite space segment for $80,900 (1996 Nil) from Fifth
Dimension Communications (1996) Corporation.
Purchased subscriber activation services from FirstLink Communications
Inc. for $34,600 (1996 Nil).
Purchased engineering services from Fifth Dimension SatCom Inc. for
$92,000 (1996 Nil).
(C) COMMITMENTS
Commitments by 1043133 Ontario Inc. to related companies are as follows:
The minimum amounts of future lease payments to 841161 Ontario Limited
for office accommodation are $40,000 for each of 1998 and 1999.
The minimum amounts of future lease payments to 841161 Ontario Limited
for a satellite uplink facility are $62,000 for 1998 and $31,000 for
1999.
The minimum amounts of future lease payments to Fifth Dimension Capital
Corporation for office facilities are $48,000 for 1998 and 1999.
A commitment to purchase full period satellite space segment from Fifth
Dimension Communications (1996) Corporation for $770,000.
The minimum amount of future lease payments to Fifth Dimension
Communications (1996) Corporation are $128,070 for 1998.
A commitment to Fifth Dimension SatCom Inc. for the purchase of
engineering services in amounts which are based on usage.
F-32
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC., MERLIN SIERRA INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
7. THIRD PARTY COMMITMENTS AND CONTINGENT LIABILITIES
Commitments of Fifth Dimension Communications (Barbados) Inc.
The Company will be committed as of July 1, 1997 for purchases of full
period space segment on three additional satellite transponders totalling
$22.5 million during the estimated five year life of the contracts.
The Company has committed as of March 31, 1997 to purchase full period
space segment totalling $5.4 million to December 31, 1999.
Fifth Dimension Communications (Barbados) Inc. and 1043133 Ontario Inc. have
given a guarantee to the vendor in regard to the unpaid purchase price for the
acquisition of the business of Merlin Sierra Inc. for a total amount of
$850,000. The balance owing as at March 31, 1997 was $643,830 (1996 Nil).
1043133 Ontario Inc. has a commitment to purchase promotional video services
of $217,000 in each of 1998 and 1999.
8. CAPITAL STOCK
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
$ $
AUTHORIZED
Fifth Dimension Communications (Barbados) Inc. is authorized to issue an unlimited number of common
shares and redeemable non-voting preference shares. Non-cumulative dividends on both classes of
shares may be declared at the discretion of the directors.
1043133 Ontario Inc. is authorized to issue an unlimited number of common shares
Merlin Sierra Inc. is authorized to issue 100 common shares.
ISSUED
Fifth Dimension Communications (Barbados) Inc.
100 Common shares................................................................................. 100 100
1043133 Ontario Inc.
100 Common shares................................................................................. 72 72
Merlin Sierra Inc.
100 Common shares................................................................................. 100 100
--- ---
272 272
--- ---
--- ---
</TABLE>
9. FAIR MARKET VALUE
The carrying amounts of the current assets and liabilities, restricted
investments and investment in shares approximate fair market values.
10. INCOME TAXES
The Companies have accumulated timing differences relating to a write down
of accounts receivable which, if recognized, would have resulted in a deferred
income tax debit of $365,000 (1996 $351,000). A valuation allowance for deferred
tax assets was booked for $365,000 (1996 $351,000).
F-33
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC., MERLIN SIERRA INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
11. NET CHANGE IN WORKING CAPITAL
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
----------------------- ----------------------
JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1997 1996 1997 1996
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash (used in) provided by:
Accounts receivable............................................. $ 30,608 (748,169) (961,844) (233,525)
Inventory....................................................... -- (22,311) 11,409 (6,545)
Transponder deposits............................................ -- (144,609) (50,000) (150,000)
Prepaid expenses................................................ (8,774) 246,065 340,873 10,509
Accounts payable................................................ (578,629) 1,166,768 104,091 459,304
Income taxes payable............................................ 20,000 -- (26,662) (186,023)
Deferred subscription revenue................................... 73,291 (750,998) (354,527) (714,901)
----------- ---------- ---------- ----------
136,496 (253,254) (936,660) (821,184)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
F-34
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC., MERLIN SIERRA INC.
COMBINED SCHEDULE OF EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
$ $
(U.S. DOLLARS)
<S> <C> <C>
Advertising............................................................................ 360,304 425,996
Amortization of capital assets......................................................... 120,347 144,398
Bank and credit card charges........................................................... 209,824 115,061
Bad debts.............................................................................. 68,000 162,095
Business development................................................................... 3,361 15,369
Commissions............................................................................ 363,457 375,924
Computer............................................................................... 9,970 25,809
Consulting fees........................................................................ 11,718 8,166
Employee benefits...................................................................... 104,959 114,100
Interest............................................................................... 158,749 161,305
Insurance.............................................................................. 10,186 12,133
Maintenance............................................................................ 24,868 28,381
Office................................................................................. 265,761 233,149
Professional fees...................................................................... 346,329 230,752
Rent................................................................................... 202,171 96,890
Salaries............................................................................... 1,545,755 1,282,237
Sales expense.......................................................................... 2,500 556
Security............................................................................... 4,655 945
Taxes other than income................................................................ 4,053 604
Travel................................................................................. 164,136 153,260
Telephone.............................................................................. 254,398 289,436
Utilities.............................................................................. 28,643 22,087
---------- ----------
4,264,144 3,898,653
---------- ----------
---------- ----------
</TABLE>
F-35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 21
Dilution.................................................................. 21
Capitalization............................................................ 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 24
Business.................................................................. 30
Management................................................................ 48
Certain Transactions...................................................... 51
Principal Shareholders.................................................... 52
Description of Securities................................................. 53
Underwriting.............................................................. 55
Legal Matters............................................................. 56
Experts................................................................... 56
Available Information..................................................... 57
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL DECEMBER 7, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO TO OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
SHARES
NEW FRONTIER MEDIA, INC.
---------------------
PROSPECTUS
---------------------
CENTEX SECURITIES
INCORPORATED
November 12, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(i) Article 3, Section 3.17 of the Company's First Amended and Restated
Bylaws provides as follows:
"SECTION 3.17
LIMITATIONS ON LIABILITY
To the fullest extent permitted by the Colorado Business Corporation Act as
the same exists or may hereafter be amended, a director of the corporation shall
not be liable to the corporation or its stockholders for monetary damages for
any action taken or any failure to take any action as a director.
Notwithstanding the foregoing, a director will have liability for monetary
damages for a breach or failure which involves: (i) a violation of criminal law;
(ii) a transaction from which the director derived an improper personal benefit,
either directly or indirectly; (iii) destributions in violation of the Colorado
Business Corporation Act or the Articles of the corporation (but only to the
extent provided by law); (iv) willful misconduct or disregard for the best
interests of the corporation concerning any acts or omissions concerning any
proceeding other than in the right of the corporation or a shareholder; or, (v)
reckless, malicious or wanton acts or omissions concerning any proceeding other
than in the right of the corporation or of a shareholder. No repeal, amendment
or modiffication of this Article, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director of the
corporation occurring prior to such repeal, amendment or modification."
(ii) Article 3, Section 3.18 of the Company's First Amended and Restated
Bylaws provides as follows:
"SECTION 3.18
INDEMNIFICATION
Subject to and in accordance with the Colorado Business Corporation Act, and
except as may be expressly limited by the Articles of Incorporation and any
amendments thereto, the corporation shall indemnify any person:
(i) made a party to any proceeding (other than an action by, or in the
right of, the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the corporation's request, as a director, officer, employee or
agent of another corporation, or other enterprise; or,
(ii) who was or is a party to any proceeding by or in the right of the
corporation, to procure a judgment in its favor by reason of the fact that
his is or was a director, officer, employee, or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise. This indemnification shall be mandatory in all
circumstances in which indemnification is permitted by law.
The corporation may maintain indemnification insurance regardless of its
power to indemnify under the Colorado Business Corporation Act.
The corporation may make any other or further indemnification or advancement
of expenses of any of the directors, officers, employees or agents under any
bylaw, agreement, vote of shareholders or disinteredsted directors or otherwise,
both as to action in his or her official capacity and to action in another
capacity while holding such office, except an indemnification against material
criminal or unlawful misconduct as set forth by statute, or as to any
transaction wherein the director derived an improper personal benefit.
II-1
<PAGE>
Except to the extent reimbursement shall be mandatory in accordance
herewith, the corporation shall have the right to refuse indemnification, in
whole or in part, in any instance in which the person to whom indemnification
would otherwise have been applicable, if he or she unreasonable refused to
permit the corporation, at its own expense and through counsel of its own
choosing, to defend him or her in the action, or unreasonably refused to
cooperate in the defense of such action."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
<TABLE>
<S> <C>
SEC Registration Fee............................................... 3,512
NASD Filing Fee.................................................... 1,466
Blue Sky Filing Fees............................................... 10,000
Blue Sky Legal Fees................................................ 20,000
Printing Expenses.................................................. 80,000
Legal Fees and Expenses............................................ 75,000
Accounting Fees.................................................... 30,000
Transfer Agent..................................................... 3,000
NASDAQ SmallCap Application Fee.................................... 5,000
Miscellaneous Expenses............................................. 22,022
-----------
TOTAL............................................................ 250,000(1)
-----------
-----------
</TABLE>
- ------------------------
(1) Does not include the Managing Underwriter's commission and nonaccountable
expenses of $1,023,750 ($1,177,313 if the Overallotment Option is
exercised). All expenses, except the SEC registration fee, the NASD filing
fee, and the NASDAQ SmallCap application fee are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years, the Company has sold the following shares of
its Common Stock which were not registered under the 1933 Act, as amended:
(i) Between March 1, 1996 and June 30, 1996, the Company sold 195,200
Units in an exempt private placement to accredited investors only. Each Unit
consisted of one share of Common Stock and one Warrant (the "Unit Warrant")
to purchase an additional share of Common Stock. On or about December 15,
1996, the Company's Board of Directors extended the exercise date for the
Unit Warrant to December 31, 1997. The exercise price for each Unit Warrant
is $5.50.
(ii) From time to time, the Company has issued a total of 146,666
non-qualified stock options to employees. Each option allows the holder to
purchase one share of the Company's Common Stock, at an exercise price of
$6.00 per share. The options are exercisable through December 31, 1997.
(iii) In February and March, 1997, the Company issued a total of 5,000
shares of its Preferred Series B stock to one accredited investor for total
consideration of $20,000. In July, 1997, the investor converted his
Preferred Series B shares into 20,000 shares of the Company's restricted
Common Stock, pursuant to the Statement of Series B Preferred Shares.
(iv) On May 31, 1997, the Company issued 2,511 shares of restricted
Common Stock to Krausman, L.L.C. for services valued at $7,533.12.
With respect to the sales made, the Company relied on Sections 4(2) and 4(6)
of the Securities Act of 1933, as amended (the "1933 Act"). The Company employed
no advertising or general solicitation in offering the securities. The
securities were offered to a limited number of persons, all of whom were
business associates of the Company or its executive officers and directors, and
the tranfer thereof was appropriately restricted by the Company and its transfer
agent. All shareholders were accredited investors as that term is defined in
Rule 501 of Regulation D under the 1933 Act, and were capable of analyzing the
II-2
<PAGE>
merits and risks of their investment and acknowledged in writing that they were
acquiring the securities for investment purposes only, and not with a view
toward distribution or resale. Each investor represented in writing that he or
she understood the speculative nature of his or her investment.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
1.01+ Form of Underwriting Agreement
1.02+ Form of Agreement Among Underwriters
1.03+ Form of Selected Dealer Agreement
1.04+ Form of Underwriter's Warrant
1.05+ Form of Lock-up Agreement
3.01+ Articles of Incorporation of Company, with Amendment
3.02+ Articles of Incorporation--Inroads
3.03+ Articles of Incorporation--David
3.04+ Articles of Incorporation--In-Sight
3.05+ Articles of Incorporation--CSB
3.06+ First Amended Bylaws of Company
4.01+ Form of Common Stock Certificate
5.01+ Opinion of Krausman, L.L.C., regarding legality of the Common Stock (includes consent)
5.02* Opinion of Combs & Associates re: Quarto claims
10.01+ Asset Purchase Agreement Among the Company, CSB, Fifth Dimension Communications (Barbados)
Inc., and Merlin Sierra, Inc. (Agreement previously filed; Agreement and Schedules thereto
filed herewith)
10.02+ Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario Inc. (Agreement
previously filed; Agreement and Schedules thereto filed herewith)
10.03+ Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario Inc. (Agreement
previously filed; Agreement and Schedules thereto filed herewith)
10.04* Revocable Line of Credit Agreemenet
10.05* Promissory Note
11.01+ Computation of Earnings Per Share
23.01* Consent of Spicer, Jeffries & Co.
23.02* Consent of Ernst & Young
23.03+ Consent of Krausman, L.L.C. (See 5.01, above)
23.04* Consent of Combs & Associates
27.01+ Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
+ Previously filed.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
The Company hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of approprate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the 1933 Act, and will be governed by the
final adjudication of such issue.
(b) That, subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the applicable
form, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the 1933
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
this offering.
(g) To provide to the Managing Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, as amended, the Company
certifies that it has reasonable grounds to believe that it meets the
requirements of filing on Form SB-2 and has caused this Amendment No. 2 to the
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Boulder, Colorado on November 10,
1997.
<TABLE>
<S> <C> <C>
NEW FRONTIER MEDIA, INC.
By:
/s/ MARK H. KRELOFF
---------------------------------------------
Mark H. Kreloff
PRESIDENT
</TABLE>
Pursuant to the requirements of the 1933 Act, as amended, this Registration
Statement has been signed below by the following persons on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MARK H. KRELOFF
- ------------------------------ Chairman, Chief Executive November 10, 1997
Mark H. Kreloff Officer, President
/s/ MICHAEL WEINER Executive Vice President,
- ------------------------------ Secretary, Treasurer and November 10, 1997
Michael Weiner Director
/s/ SCOTT WUSSOW Chief Financial Officer
- ------------------------------ (Principal Accounting November 10, 1997
Scott Wussow Officer)
/s/ CLIVE NG
- ------------------------------ Director November 10, 1997
Clive Ng
/s/ KOUNG Y. WONG
- ------------------------------ Director November 10, 1997
Koung Y. Wong
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. TITLE NO.
- --------- ----------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.01+ Form of Underwriting Agreement
1.02+ Form of Agreement Among Underwriters
1.03+ Form of Selected Dealer Agreement
1.04+ Form of Underwriter's Warrant
1.05+ Form of Lock-up Agreement
3.01+ Articles of Incorporation of Company
3.02+ Articles of Incorporation--Inroads
3.03+ Articles of Incorporation--David
3.04+ Articles of Incorporation--In-Sight
3.05+ Articles of Incorporation--CSB
3.06+ First Amended Bylaws of Company
4.01+ Form of Common Stock Certificate
5.01+ Opinion of Krausman, L.L.C., regarding legality of the Common Stock (incudes consent)
5.02* Opinion of Combs & Associates re: Quarto claims.
10.01+ Asset Purchase Agreement Among the Company, CSB, Fifth Dimension Communications (Barbados)
Inc., and Merlin Sierra, Inc.
10.02+ Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario Inc.
10.03+ Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario Inc.
10.04* Revocable Line of Credit Agreemenet
10.05* Promissory Note
11.01+ Computation of Earnings Per Share
23.01* Consent of Spicer, Jeffries & Co.
23.02* Consent of Ernst & Young
23.03+ Consent of Krausman, L.L.C. (See 5.01, above)
23.04* Consent of Combs & Associates
27.01+ Financial Data Schedule
</TABLE>
- ------------------------
* Filed Herewith.
+ Previously Filed.
<PAGE>
[LETTERHEAD]
October 14, 1997
Messrs. Brandt, Kreloff and Weiner
1050 Walnut Street, Suite 301
Boulder, Colorado 80302
Re: BOULDER INTERACTIVE GROUP, INC./QUARTO CLAIM
Dear Messrs. Brandt, Kreloff and Weiner:
As general counsel to New Frontier Media, Inc. ("NFM") and its related
companies and affiliates, including Boulder Interactive Group, Inc.
("Company") with respect to litigation matters, we have been asked to provide
this opinion letter regarding the Company, Quarto Holdings, Inc. ("Quarto")
and the respective contractual rights and obligations arising under and
related to that certain Stockholder Agreement dated September 20, 1996 and
claims made by Quarto thereunder.
This opinion letter is based on the various documentation provided to this
office (i.e., agreements and correspondence) and interviews of certain
officers and staff of both the Company and NFM.
FACTUAL BACKGROUND
The Company and Quarto entered into that certain Stockholder Agreement
dated September 20, 1996 ("Agreement"). Among the various provisions of the
Agreement, it is required that any dispute among the parties be resolved by
binding arbitration in Denver, Colorado, pursuant to Colorado law, with the
prevailing party being entitled to reasonable attorney's fees.
A concomitant agreement was also entered into among the parties entitling
Quarto to a certain equity position in NFM by way of the purchase of
warrants.
Prior to entering into the Agreement, Quarto conducted extensive due
diligence directly and through its designated agents. Full disclosure of the
Company's financial information and operating history was made to Quarto.
During the course of its due diligence, Quarto and its agents visited the
offices of the Company and NFM approximately four to five times and were
provided full access to all Company records and information.
Page 1 of 4
<PAGE>
Messrs. Brandt, Kreloff and Weiner
October 14, 1997
Subsequent to the Agreement being entered into, the Company has fully
complied with all obligations imposed on it, including but not limited to,
providing to Quarto all financial reports, monthly and quarterly, required of
it pursuant to paragraph 1 of the Agreement; made available a board seat to
Quarto pursuant to paragraph 2 of the Agreement(1); and amended its Bylaws and
Articles of Incorporation on or about September 16, 1996, to provide for a
super majority vote as required under paragraph 4 of the Agreement.
Further, the Company has continually provided, and continues to provide,
both written and oral updates to the designees of Quarto (I.E., Lawrence
Orbach, CEO; Jeff Gold and/or Harvey Goldstein, President, North American
Operations) as to all financial matters and business operations of the
Company. Such updates include, but are not limited to, weekly and/or monthly
reports from the Company's President, Mr. Brandt, concerning all aspects of
the Company's business operations and detailed monthly financial reports from
the Company's CFO, Mr. Wussow.
Quarto's representatives have visited the offices of the Company
approximately four to five times subsequent to the Agreement being entered
into, have spent numerous hours with the officers of the Company discussing
its business operations and strategies and have otherwise maintained an
active, hands-on, approach to the operation of the Company. For example,
Quarto has required certain CD-Rom titles be developed, dictated certain
marketing strategies; been involved in the content selection of certain
CD-Rom titles; recommended certain of the Company's employees be terminated;
made available a certain advertising agency be utilized by the Company;
terminated a web site development project undertaken by the Company;
terminated a software project undertaken by the Company; suggested CD-Rom
titles for development that are currently under consideration by the Company
and otherwise taken advantage of its unrestricted opportunity to be involved
in all aspects of the Company's business affairs.
Further, as part of the Agreement, the Company undertook to develop a
certain photographic CD-Rom project that was currently under development by
Quarto and which is believed to have been abandoned by Quarto and carried
on its financial statements as a $525,000 work in progress. By transferring
the project to the Company, Quarto was able to avoid having to "write off"
the work in progress as a loss and otherwise substantially benefitted from
the transfer.
In a letter dated October 7, 1997, Joseph Abkin, counsel for Quarto,
certain statements are set forth in which it is alleged the Company and NFM
have violated certain terms of the Agreement. The allegations arise out of
certain inter-company debt (a loan from the Company in favor of NFM)
- -----------------
(1) On or about September 16, 1996, Quarto's designee, Harvey Goldstein,
was duly elected to serve on the Company's board of directors.
Page 2 of 4
<PAGE>
Messrs. Brandt, Kreloff and Weiner
October 14, 1997
and the encumbering of a small portion of the proceeds paid by Quarto (in the
form of certificates of deposit ("CDs")) to collateralize a loan in favor of
NFM ("Loan") All payments have been made by NFM in a timely manner and no
default has occurred. Further, both the encumbering of the Company's CDs and
the inter-company loan was made at arms' length at the Company is receiving
appropriate consideration.
The letter purports to put the Company and NFM on notice of rescission of
the Agreement and seeks a return of the consideration paid by Quarto
($1,200,000) in exchange for its thirty-percent equity stake in the Company.
LEGAL ANALYSIS
RESCISSION
The general rule is well and long established under Colorado case law that
a breach of a contract does not justify rescission. SEE BRIGGS V. ROBINSON, 82
Colo. 1,256 P. 639. In other words, the party seeking rescission must first
establish certain elements before the equitable relief of rescission is
granted. Indeed, under Colorado law, rescission may be granted only if the
facts show there is a SUBSTANTIAL breach, that injury is irreparable, or that
damages would be inadequate of difficult to assess. (Emphasis added.) WALL V.
FOSTER PETROLEUM CORP., (Colo App. 1989) 971 P.2d 1148. The burden to
establish such facts is on the party seeking rescission, in this case, Quarto.
SUBSTANTIAL BREACH
Based on the instant facts of this matter as represented to this firm, and
based on the case precedent in Colorado, neither the encumbering of the CDs,
nor the inter-company loan is a "substantial" breach of any term of
provision of the Agreement. Further, in the event it is determined to be a
breach of any kind, certainly any injury that could be demonstrated by
Quarto would not be irreparable or difficult to assess. Rather, the alleged
damage would be monetary in nature and easily measurable or assessable. It is
therefore extremely unlikely that Quarto could establish the elements
necessary to give rise to rescission of the Agreement.
Additionally, an argument by Quarto that failed consideration gives rise
to rescission would be equally unsuccessful due to the fact that 1) Quarto has
had an active hands-on role in the Company which is, in actuality, the
consideration bargained for by Quarto; and 2) Quarto conducted extensive due
diligence prior to entering into the Agreement and therefor knew what
"consideration" it was receiving. Further, Quarto realized an immediate and
substantial benefit when the Company accepted the work in progress from
Quarto.
Page 3 of 4
<PAGE>
Messrs. Brandt, Kreloff and Weiner
October 14, 1997
DAMAGES
In addition to the fact that the nature of any alleged damage would not
give rise to rescission, to the extent that both the encumbrance and the loan
are in favor of NFM, a company in which Quarto has a substantial equitable
interest, it could be very effectively argued that not only was Quarto not
damaged at all by either transaction, but that Quarto was and continues to be
benefitted by the transactions. Therefore, even if Quarto attempts to
maintain a common law suit for breach of contract (as opposed to a suit in
equity for rescission), it is not evident that Quarto has incurred any damage
whatsoever.
SUMMARY
While the outcome of an arbitration proceeding is uncertain, it is the
opinion of this firm that Quarto would be unsuccessful in its rescission claim
and be unable to prove damages giving rise to any recovery against the
company.
Respectfully,
COMBS & ASSOCIATES
/s/ J. John Combs III
- ----------------------------------
J. John Combs III
cc: Kent Krausman, Esq.
Page 4 of 4
<PAGE>
REVOCABLE LINE OF CREDIT AGREEMENT
NEW FRONTIER MEDIA, INC., a Colorado corporation, located at 1050 Walnut
Street, Suite 301, Boulder, Colorado 80302 ("NFM"), hereinafter referred to
as the ("Borrower"), and MAXIM FINANCIAL CORP., a Colorado corporation,
hereinafter referred to as the ("Lender"), in consideration of the mutual
promises made herein, agree as follows:
1. In the event NFM is unsuccessful in its efforts to secure
alternative funding of at least $1,000,000 prior to December 31, 1997, Lender
hereby extends a revocable line of credit to NFM, not to exceed $1,000,000
for a period of nine months, commencing on January 1, 1998, pursuant to the
terms and conditions as set forth below.
2. This Agreement may be terminated earlier as hereinafter provided.
3. Borrower may draw upon the Line of Credit by executing certain
promissory notes identical to that attached hereto as Exhibit "A." All
amounts borrowed shall be paid pursuant to the terms and conditions contained
in the Notes no later than September 30, 1998. Further, NFM agrees to
execute all necessary corporate actions or other documentation required to
carry out the intent of the parties including, but not limited to those certain
Actions Without a Meeting approving and entering into this Agreement and any
Note as attached hereto.
4. Borrower hereby indemnifies and holds Lender free and harmless and,
further, agrees to defend Lender from and against any and all claims, losses,
expenses, costs, obligations and liabilities Lender may incur in connection
with its execution of this Agreement or credit extended hereunder including,
but not limited to, attorneys' fees and costs incurred by Lender in defense
of such claims, losses, expenses, costs, obligations and liabilities.
Page 1 of 4
<PAGE>
5. (a). Lender hereby reserves the right to terminate this Agreement and
revoke its line of credit if Borrower (1) breaches or fails to comply with
any of the terms or conditions of any Note or this Agreement or any other
obligation it is required to perform under the terms of this Agreement or
any Note, or (2) commits actionable acts of dishonesty, fraud, or
misrepresentation.
(b). This Agreement may be terminated by mutual written consent without
prejudice to any other remedy to which Lender may be entitled either at law,
in equity, or under this Agreement or any Note.
(c). This Agreement shall be terminated by any voluntary or involuntary
dissolution of NFM resulting from either a merger or consolidation in which
NFM is not the consolidated or surviving corporation, a transfer of all or
substantially all of the assets of NFM or the voluntary or involuntary filing
of a petition in bankruptcy.
6. In the event that this Agreement is terminated pursuant to any
provision of this Agreement, all rights and obligations arising under or
related to any Notes executed by the Borrower shall survive.
7. Any notices to be given by either party to the other shall be in
writing and may be transmitted either by personal delivery or by mail,
registered or certified, postage prepaid with return receipt requested.
Mailed notices shall be addressed to the parties at the addresses appearing
in the attachment to this Agreement, but each party may change that address
by written notice in accordance with this section. Notices delivered
personally shall be deemed communicated as of the date of actual receipt;
mailed notices shall be deemed communicated as of the date of mailing.
8. (a) Any controversy between the parties involving the construction or
application of any of the terms, provisions, or conditions of this Agreement
shall on the written request of either party
Page 2 of 4
<PAGE>
served on the other be submitted to binding and final arbitration. Arbitration
shall comply with and be governed by the provisions of the American Arbitration
Association.
(b) The cost of arbitration shall be borne by the losing party or in
such proportions as the arbitrators decide.
(c) If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition
to any other relief to which that party may be entitled. This provision
shall be construed as applicable to the entire Agreement.
(d) This Agreement supersedes any and all other agreements, either oral
or in writing, between the parties hereto with respect to the extension of
credit by Lender to Borrower, and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no representations, inducements, promises, or
agreements, orally or otherwise, have been made by any party, or anyone acting
on behalf of any party, which are not embodied herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be
valid or binding.
(e) Any modification of this Agreement will be effective only if it is
in writing signed by the party to be charged.
(f) The failure of either party to insist on strict compliance with any
of the terms, covenants, or conditions of this Agreement by the other party
shall not be deemed a waiver of that term, covenant, or condition, nor shall
any waiver or relinquishment of any right or power at any one time or times
be deemed a waiver or relinquishment of that right or power for all or any
other times.
(g) If any provision in this Agreement is held by a court of competent
jurisdiction to be
Page 3 of 4
<PAGE>
invalid, void, or unenforceable, the remaining provisions shall nevertheless
continue in full force without being impaired or invalidated in any way.
(h) This Agreement shall be governed by and construed in accordance with
the laws of the State of Colorado.
Executed as of October 24, 1997, at Boulder, Colorado.
NEW FRONTIER MEDIA, INC.
By: /s/ Michael Weiner
---------------------------------
MAXIM FINANCIAL CORP.
By: /s/ Stephen S. Cherner
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PROMISSORY NOTE
$ BOULDER, COLORADO, 1998
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A. PAYMENT.
For value received, the undersigned New Frontier Media, Inc., a Colorado
corporation, and Mark Kreloff, an individual, and Michael Weiner, an
individual, as individual guarantors, (collectively "Payors"), jointly and
severally, promise to pay to Maxim Financial Corp., a Colorado corporation
("Payee" or "Holder"), or order, the principal sum of _______________
($_____.00) with interest at the rate of nine percent (9%) per annum, as
follows:
(1) Principal and all accrued interest is due and payable on or
before September 30, 1998.
B. APPLICATION.
Any amounts received will be credited first to the unpaid principal.
Principal will be payable in lawful money of the United States at the Office
of Payee in Boulder, Colorado, or such other place as the Holder may, from
time to time, designate to Payors in writing.
C. EVENTS OF DEFAULT.
Each of the following events will constitute an "Event of Default" under
this Note:
(1) The failure of Payors to make any payment of principal on this
Note on the date such payment becomes due and payable.
(2) If Payors default under or breach any term or provision of this
Note other than Subparagraph C(1), above.
(3) Any repudiation by Payors of any obligation under this Note.
(4) Payors, or either of them, admit in writing their inability to
pay their debts as they become due, or seek to avail themselves of any law
for the release of insolvent debtors.
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(5) A custodian, trustee, receiver or agent is appointed or takes
possession of all or substantially all of property of Payors, or either of
them, and such custodian, trustee, receiver or agent is not removed within
thirty (30) days.
(6) If Payors, or any of them, are generally not paying their
debts as such debts become due.
(7) If Payors, or either of them, become "insolvent" as that term
is defined in Section 101(26) of the "Bankruptcy Code" (Title 11 of the
United States Code; 11 U.S.C. SS 101 et.seq.).
(8) If Payors, or any of them, file a petition with the Bankruptcy
Court unless the Bankruptcy Code, or (b) otherwise file any petition or apply
to any tribunal for appointment of a custodian, trustee, receiver or agent of
Payors, or any of them, or commence any proceeding relating to Payors, or any
of them, under any bankruptcy or reorganization statute or under any
arrangement, insolvency, readjustment of debt, dissolution or liquidation law
of any jurisdiction, whether now or hereafter in effect.
(9) If any petition is filed against Payors, or any of them, under
the Bankruptcy Code and either (a) the Bankruptcy Court orders relief against
Payors, or any of them, under the chapter of the Bankruptcy Code under which
the petition was filed, or (b) such a petition is not dismissed by the
Bankruptcy Court within thirty (30) days of filing.
(10) If any petition or application of the type as described in
subparagraph (8), above, is filed against Payors, or any of them, or any
proceeding of the type described in subparagraph (8), above, is commenced and
either (a) Payors, or any of them, consent thereto or acquiesce therein, or
(b) an order is entered appointing any such custodian, trustee, receiver or
agent, adjudicating Payors, or any of them, bankrupt or insolvent, or
approving such petition or application in any such proceeding, and any such
order remains in effect for more than thirty (30) days.
D. OCCURRENCE OF EVENT OF DEFAULT AND REMEDIES.
(1) Upon the occurrence of any Event of Default, the unpaid
principal will, at the option of the Holder, and without demand or notice
(except as may otherwise be provided in this Note or by law) become
immediately due and payable.
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(2) The failure of the Holder to exercise, in the case of one or
more Events of Default, any right or remedy given in this Note, will not
preclude the Holder from exercising any right or remedy given in this Note in
case of one or more subsequent Events of Default. In addition to the rights,
powers and remedies given in this Note, the Holder may, in its sole and
absolute discretion, at any time and from time to time, exercise any and all
rights, powers and pursue any and all remedies now or hereafter provided by
law or equity. The failure to exercise in the case of one or more Events of
Default, any right or remedy given in this Note or by law or equity will not
preclude the Holder from exercising any right or remedy given in this Note or
by law or equity in the case of one or more subsequent Events of Default.
E. NOTICES.
All notices, requests, demands and communications required, provided for
or contemplated in this Note must be in writing and will be deemed to have
been given when personally delivered to the party to whom addressed or when
personally delivered to the party to whom addressed or seventy-two (72) hours
after deposit in any United States Post Office, sent by registered or
certified mail, return receipt requested, postage prepaid and addressed as
follows:
If to Payors:
New Frontier Media, Inc.
Mark Kreloff
Michael Weiner
1050 Walnut Street, Suite 301
Boulder, Colorado 80304
The addresses and addressees for purposes of this Paragraph may be
changed by giving written notice of such change to the other parties as
provided in this Paragraph for giving notice. However, unless and until such
written notice of change is actually received, the last address and addressee
as stated by written notice, or as provided in this Note, if no written
notice of change has been sent or received, will be deemed to continue in
effect for all purposes.
F. NO WAIVER.
No course of dealing between Payors, or any of them, and the Holder and
no delay on the part of the Holder in exercising any rights under this Note
will operate as a waiver of the rights of the Holder. No covenant or other
provision of this Note or any default or Event of Default in connection
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with this Note may be waived except by a written instrument signed by the
parties so waiving such covenant or other provision of default or Event of
Default; provided, however, that no such waiver will extend to or impair any
obligation not expressly waived or impair any rights which result from that
obligation. Any waiver may be given subject to satisfaction of conditions
stated in the waiver.
G. SUCCESSORS.
The obligations of Payors under this Note may not be assumed, and the
rights of Payors may not be assigned to any person or entity without the
express written consent of the Holder. All covenants and agreements of this
Note are deemed material and will bind the successors and assigns of Payors
and all such covenants and agreements will inure to the benefit of the
Payee/Holder of this Note and its nominees, successors and assigns, whether
expressed or not. Payee and any Holder may assign this Note to any person or
entity.
H. NO RELEASE.
No extension of time for payment of this Note, or any installment
thereof, or any dealings or agreement with any guarantor of this Note, will
operate to release, discharge, modify, change or affect the original
liability of Payors under this Note either in whole or in part.
I. NO NOTICE.
In connection with this Note and the indebtedness evidenced by this
Note, Payors jointly and severally, and to the extent permitted by law (a)
waive demand, presentment for payment, notice of dishonor, protest and notice
of protest; (b) waive any and all lack of diligence or delays in the
collection or enforcement of this Note; and (c) consent that the time of
payment may be extended or this Note may be renewed without notice, and
without releasing Payors.
J. ATTORNEY'S FEES.
If an action is instituted on this Note, or if any other judicial
proceedings are instituted by the Holder, or if an attorney is employed or
consulted by the Holder in connection with this Note with respect to a
pending Event of Default, including, but not limited to, proceedings under
the Bankruptcy Code, or in or under the Probate Code, or in connection with
any state or federal tax lien, or for the appointment of a receiver, then
Payors, and every person or entity who assumes the obligations evidenced by
this Note, jointly and severally, promise to pay reasonable attorneys' and
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accounting fees for services performed by the Holder's attorneys and all court
costs and expenses incurred incident to such appointment.
K. NO SET OFF.
Payors waive all rights to set off and counterclaim with respect to
payment of this Note.
L. PREPAYMENT.
This note may be prepaid at any time without penalty.
M. INVALIDITY.
In the event that any one or more provisions contained in this Note are,
for any reason, held to be invalid, illegal or unenforceable in any respect or
in any jurisdiction, such invalidity, illegality or unenforceability will not
affect any other provision of this Note in such jurisdiction or in any other
jurisdiction, but this Note will be construed as if the invalid, illegal or
unenforceable provision was not a part of this Note.
N. MISCELLANEOUS.
(1) Whenever used, the singular number will include the plural and the
use of any gender will include all genders, whenever the context requires.
(2) This Note will be governed by and construed in accordance with the
laws of the State of Colorado.
(3) Time is strictly of the essence under this Note and any amendment,
modification or revision to this Note.
(4) All covenants, agreements, liabilities and obligations under this
Note shall be joint and several.
Con't.
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(5) Payors hereby waive all rights of setoff and counterclaim with
respect to this Note, including rights of setoff and counterclaim with
respect to this Note which may arise from claims heretofore unknown to Payors.
IN WITNESS WHEREOF, this Note has been executed by Payors as of the date
and year specified on the front of this Note.
/s/ Mark Kreloff /s/ Michael Weiner
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Mark Kreloff, an individual NEW FRONTIER MEDIA, INC.
/s/ Michael Weiner
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Michael Weiner, an individual
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the New Frontier Media, Inc. registration
statement on Form SB-2 Amendment No. 2, of our report dated July 3, 1997,
except for Note 10 as to which the date is October 28, 1997, accompanying the
consolidated financial statements of New Frontier Media, Inc. for the years
ended March 31, 1997 and 1996 which is part of the registration statement and to
the reference to us under the heading "Experts" in such registration statement.
SPICER, JEFFRIES & CO.
November 10, 1997
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 27, 1997, with respect to the combined
financial statements of Fifth Dimension Communications (Barbados) Inc.,
1043313 Ontario Inc. and Merlin Sierra Inc. included in the Registration
Statement on Form SB-2 related to the issuance of common stock of New
Frontier Media, Inc.
ERNST & YOUNG
Ottawa, Canada -----------------------------
November 10, 1997 CHARTERED ACCOUNTANTS
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[LETTERHEAD]
October 24, 1997
Board of Directors
New Frontier Media, Inc.
1050 Walnut Street, Suite 301
Boulder, Colorado 80302
Re: REGISTRATION STATEMENT ON FORM SB-2
Dear Gentlemen:
We hereby consent to the use of this firm's name as special litigation
counsel to New Frontier Media, Inc. (the "Company") in the "BUSINESS-Legal
Proceedings" section of the registration statement on form SB-2 with the SEC
by the Company on September 24, 1997.
Respectfully,
COMBS & ASSOCIATES
/s/ John Combs
J. John Combs III
JJC\rr
