<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1997.
REGISTRATION NO. 33- .
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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 $5.00 $8,625,000 $2,614
Common Stock, par value $.001 per share,
issuable upon exercise of the
Underwriter's Warrants(3)................. 150,000 $6.00 $900,000 $273
Totals...................................... $9,525,000 $2,886
</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) 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
120 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................................... Not Applicable
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>
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
NEW FRONTIER MEDIA, INC.
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." The last reported sale price of the Common Stock on the Bulletin Board
was $5.00 per share. It is currently estimated that the public Offering price
will be between $5.00 and $5.50 per share. 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.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total (3)............................................. $ $ $
</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 of $225,000
($258,750 if the Underwriter's Overallotment Option is exercised in full),
estimated at $450,000.
(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 $ , $ , and $ , 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 , 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 , 1997.
<PAGE>
[INSIDE FRONT COVER PAGE--COLOR ILLUSTRATION]
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."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
SMALL CAP MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE
ACT OF 1934. 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 ASSET PURCHASE. 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 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 completion of a public offering of at least $7,000,000.
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."
BUSINESS STRATEGY
The Company's business strategy is to create, license, and/or acquire
high-quality 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. 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
3
<PAGE>
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 $897,298 (pre-tax income, as adjusted by Fifth
Dimension 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 $7,900,000,
consisting of $3,500,000 in cash, Common Stock of the Company valued at
$3,400,000, and a promissory note for $1,000,000. Terms of the Asset Purchase
Agreements provide that the Company will issue a minimum of 840,000 shares of
Common Stock, and a maximum of 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 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.
The Company believes it can enhance shareholder value by:
- Integrating the Fifth Dimension Assets into the Company via CSB;
- Substantially reducing operating costs associated with the Fifth Dimension
assets by moving the Call Center to Denver, Colorado;
- Eliminating related-party leases and payments;
- 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 near future. 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,
4
<PAGE>
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.
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-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. The Company is evaluating the
possibility of selling In-Sight, to concentrate on its satellite network, DVD
content and CD-ROM publishing businesses. Accordingly, 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 755,666 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 Underwriters'
Warrants 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 asset purchase price. See "BUSINESS--Fifth Dimension Assets
Acquisition."
5
<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 $ 3,626
Net income (loss) from operations....... (451) 5 (226) 1,219 2,008 315
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 4,666 4,449 4,464
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.
6
<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 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. 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 Virtual 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
Colorado Satellite Broadcasting, Inc. 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."
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
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("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."
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."
SATELLITE SERVICE AGREEMENTS; REFUSAL OF SERVICE OR TERMINATION OF AGREEMENTS
Fifth Dimension currently provides its adult satellite programming to
subscribers via an assignable satellite transponder agreement with AT&T Corp.
(the "AT&T Agreement") for one transponder, and via an assignable satellite
transponder agreement with Loral SpaceCom Corporation d/b/a Loral Skynet (the
"Loral Agreement") for three transponders. 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 is placed in service (approximately June, 1997).
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,
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respectively) if the material being transmitted by Fifth Dimension or its
assigns is harmful to the service provider's name or business, or if Fifth
Dimension or its assigns 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."
GOVERNMENT REGULATION
The Company, through its wholly-owned subsidiary Colorado Satellite
Broadcasting, Inc. ("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 file lawsuits against providers of adult entertainment,
mount 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 itself 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 the 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."
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." In the event the
Fifth Dimension assets acquisition were not
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completed, the Company and the Managing Underwriter may be required to undertake
a 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.
ADDITIONAL FINANCING MAY BE REQUIRED
The Company will receive net proceeds of approximately $6,300,000 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. (NASDAQ: SPZE). 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.
DAVID.
The management of DaViD intends to complete the acquisition of content
rights to approximately 500 unrated motion picture titles, and thereafter
concentrate on releasing those titles gradually over time, as the market
dictates. DaViD will rely on one or more third-party distributors to market its
titles. Competition in the distribution of unrated motion pictures has become
intense in the past five years. DaViD is subject to the competition that its
distributor(s) will face.
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.
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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 closing 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 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. None of the Company's employees 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."
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 at least 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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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 exclusively 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 Holdings, Inc. ("Quarto"), contains anti-dilution and exercise price
provisions that may 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 asset acquisition. An additional 400,000 shares of Common Stock have
been reserved for issuance upon exercise of the Fifth Dimension warrants, 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."
LIMITS ON SECONDARY TRADING; POSSIBLE ILLIQUIDITY OF TRADING MARKET
The Company has applied to have the 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.
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.
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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 rules require: (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
identify 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 offering 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 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 assurances 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 WARRANTS
At the closing of this Offering, the Company will sell to the Managing
Underwriter for nominal consideration warrants to purchase up to 150,000 shares
of the Company's Common Stock. The Underwriter's Warrants will be exercisable
for a period of four years commencing twelve months after the date of this
Prospectus, at an exercise price equal to 120% of the Offering price per share.
As long as the Underwriter's Warrants 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 Warrants 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 the 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 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
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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.
RAPID TECHNOLOGICAL CHANGE
DaViD and Inroads are engaged in businesses (digital virtual 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 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
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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 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 $3.77 per
share of Common Stock, or a 75.4% reduction between the Offering price of $5.00
per share of Common Stock and the net tangible book value of $1.23 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 at least 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 $.61 per share. This represents total
dilution of $4.39 per share, or 87.8%, 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.
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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 $7,500,000 ($8,625,000 if the
Underwriter's Overallotment Option is exercised in full), assuming an offering
price of $5.00 per share. The net proceeds to the Company are estimated to be
approximately $6,300,000 ($7,278,750 if the Underwriter's Overallotment Option
is exercised in full), after deducting estimated underwriting discounts of
approximately $750,000 ($862,500 if the Underwriter's Overallotment Option is
exercised in full) and Offering expenses of approximately $450,000 ($483,750 if
the Underwriter's Overallotment Option is exercised in full), including the
Managing Underwriter's nonaccountable expense allowance of $225,000 ($258,750 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 Asset Acquisition(1)........................................ $ 3,500,000 55.6%
Transponder Deposit......................................................... 500,000 7.9
New Equipment Purchases--Uplink Facility.................................... 500,000 7.9
Tenant Improvement, Relocation, and Equipment--Call Center.................. 500,000 7.9
DaViD--Acquisition of Titles................................................ 500,000 7.9
Working Capital and Other General Corporate Purposes(2)..................... 800,000 12.7
------------ -----
Total..................................................................... $ 6,300,000 100.0%
------------ -----
------------ -----
</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.
16
<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 $6,300,000 (after deducting underwriting discounts and
estimated expenses of this offering), the net tangible book value of the Company
will be $7,017,144, or $1.23 per share. This represents an immediate increase in
the net tangible book value of $.99 (or 413%) per share to shareholders at June
30, 1997, and an immediate decrease in value of $3.77 per share (or 75.4%) to
investors in this Offering. After giving effect to the Fifth Dimension assets
acquisition, the net tangible book value of the Company will be $3,995,637, or
$.61 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............................................................... $ 5.00
Pro forma net tangible book value per share before Offering............................ $ .24
Increase per share attributable to new investors....................................... $ .99
---------
Pro forma net tangible book value per share after Offering............................. $ 1.23
---------
Dilution per share to new investors.................................................... $ 3.77
---------
---------
Pro forma net tangible value per share after Fifth Dimension assets acquisition........ $ .61
---------
Dilution per share to new investors following Fifth Dimension assets acquisition....... $ 4.39
---------
---------
</TABLE>
To the extent outstanding options and Warrants are exercised, further
dilution to new investors in this Offering may result.
17
<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 0.7% $ 5.67
Existing Shareholders(1)................ 4,192,511 64.0 1,695,937 13.3 0.41
New Investors........................... 1,500,000(2) 23.0 7,500,000 59.2 5.00
Fifth Dimension Sellers................. 840,000 12.8 3,400,000 26.8 4.05
-------------- ----- ------------- ----- -----
Total................................. 6,547,511 100.0% $ 12,680,937 100.0% $ 1.94
-------------- ----- ------------- ----- -----
-------------- ----- ------------- ----- -----
</TABLE>
- ------------------------
(1) Excludes 755,666 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 may 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. See "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."
18
<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 $5.00 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........................................................... -- 2,003
Series A and B Preferred Stock, $.10 par value, 5,000,000 shares authorized, 15,000
shares issued and outstanding.................................................... 1,500 1,500
Additional paid-in capital(2)...................................................... 1,779,018 11,177,434
Accumulated deficit................................................................ (763,793) (763,793)
------------ -------------
Total stockholders' equity......................................................... 1,017,144 10,417,144
------------ -------------
Total capitalization............................................................... $ 1,027,992 $ 11,427,992
------------ -------------
------------ -------------
</TABLE>
- ------------------------
(1) Based upon shares issued and outstanding as of June 30, 1997. Does not
include 755,666 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 $1,200,000.00.
19
<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 VENUS, collectively referred to hereinafter as the Exxxtasy
Networks. DaViD is in the business of acquiring content rights to existing rated
and unrated motion picture titles for distribution on laserdisc and digital
versatile disc ("DVD"). DaViD currently owns content rights to approximately 500
unrated 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 $ 782,345 $ 277,112 $ 165,286
Other Income (Expense)........................... $ 182,516 $ 65,716 $ 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>
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
20
<PAGE>
$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 this public offering of stock 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.
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, and is
exploring the possiblity of selling In-Sight in order to focus on the satellite
network, digital versatile disc, and CD-ROM publishing components of its
business.
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 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 (please 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
21
<PAGE>
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 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. 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.
22
<PAGE>
The Company believes that Inroads will develop and commercially exploit
several Quarto-based titles in the fiscal year ending March 31, 1998, and that
Inroads' revenue performance will improve over last year.
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 is evaluating the possibility of selling In-Sight, to concentrate on
its satellite network, DVD content, and CD-ROM publishing businesses.
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.
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>
23
<PAGE>
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. At the request of the Fifth Dimension
directors, Ernst & Young, independent auditors for Fifth Dimension, provided
adjusted audited combined financial statements to reflect, among other things,
reasonable adjustments to related party transactions and expense bases that
could be reasonably expected had Fifth Dimension operated as a publicly-held
company. Ernst & Young reported adjusted pre-tax income of $2,755,297 for Fifth
Dimension for March 31, 1997. Managements of the Company and Fifth Dimension
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. $840,184 of the Company's cash and
cash equivalents are held in Inroad's bank accounts, and are restricted from
transfer to or use by NOOF or its other subsidiaries by the terms of the Quarto
agreements. NOOF had cash and cash equivalents of $1,384 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. NOOF 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. 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.
24
<PAGE>
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. Management is evaluating the possibility
of selling In-Sight.
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BUSINESS
HISTORY OF THE COMPANY
New Frontier Media, Inc. was originally incorporated as Strategic
Acquisitions, Inc. ("Strategic") 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. 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 create and/or acquire high-quality content which can
be successfully placed into the Company's strong distribution networks 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. These agreements provide cross-indemnification for events
occurring after closing of the acquisition only. 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.
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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 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. These companies expect half or more of their revenues to come from
overseas markets within the next decade.
The adult entertainment industry continues to grow as technological advances
allow easier and more private access to products. All major hotel chains 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 VENUS (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-
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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. 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 VENUS 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.
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. 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, featuring a mix of amateur adult movies and classic adult
feature films. 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.
VENUS (TELSTAR T-405, CHANNEL 22)
Venus features a new movie every 90 minutes. As of April 3, 1997, VENUS had
38,442 subscribers. VENUS offers a mix of recent adult feature film hits, new
adult features, European adult films, and classic adult features. VENUS 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 VENUS, following completion of the Fifth Dimension
asset acquisition.
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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) 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 and PLAYBOY 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.
NETWORK PROGRAMMING
100 percent 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 3 million 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 3 million to 3.2 million units for the
next several years.
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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 gather, 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.
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.
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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, 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. Customer pay for
their orders with credit cards, which are authorized and charges 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
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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 Spice's explicit channel; mid quality
progamming.
XXXCite 5,000 n/a; $59.95 C-band only Spice's second explicit channel. Plays
programming already aired on Eurotica.
X! Channel 24,000 $8.99/$59.95 C-band only Owned by Logix Development. Low quality,
budget programming.
XXXPlore 40,000 $8.99/$59.95 C-band only The second Logix channel. 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.
Venus 38,422 $6.95/$139.95 C-band only Complimentary high-quality film and video
programming for Exxxtasy subs.
</TABLE>
EUROTICA/XXXCITE
These are premium channels owned by Spice, Inc. Management considers
Eurotica/XXXcite programming to be lower in quality than that offered by
Exxxtasy Networks. Management believes Eurotica/ XXXcite offer fewer movies per
month than the Exxxtasy Networks.
X! CHANNEL/XXXPLORE
These channels are owned by Logix Development Corporation, a small software
company based in Westlake, California. Management considers the programming
offered on X! Channel and XXXplore to be of very low quality. This competitor
offsets low quality programming by offering a low annual subscription rate
($59.95).
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.
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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
Entertainment, Inc. DaViD is 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 Interactive. 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 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. (NYSE:PLAA) and Spice, Inc. (Nasdaq:SPZE),
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.
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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."
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 Video 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 currently releases five to six new titles per month in the LaserDisc
only format. 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
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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.
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 a Warrant to purchase up to 400,000 shares of the Company, at an
exercise price of $6.00 per share.
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.
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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 $550,000 worth of digital material. The
Quarto agreement grants the Company the right to commercially exploit Quarto
titles. Management of the Company believes this agreement provides Inroads with
a significant source of material for future 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.
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
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the previous month. Inroads is responsible for all costs associated with
software development, package design and printing, disc replication, and
marketing.
STRATEGIC ALLIANCES.
New Frontier Media recently entered into a strategic partnership with
Quarto, a large co-edition book publisher. Among other things, Quarto has agreed
to license Inroads with content in the form of text, photography, and graphics
from Quarto's library of nearly 5,000 children's and adult reference and "how
to" books, for the purpose of creating new multimedia products. The first two
CD-ROM titles developed under this alliance were based on best-selling Quarto
books on the subjects of photography and cigars. The Cigar title is based on the
best-selling book THE CIGAR COMPANION, and is titled THE CIGAR COMPANION
INTERACTIVE. This title features a digital, sortable catalog of the world's
leading cigars. The photography title, IN FOCUS, THE GUIDE TO BETTER
PHOTOGRAPHY, is based on Quarto's best-selling books by Michael Freeman.
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 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.
OTHER PROJECTS.
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 negotiation on the following projects:
P.F. MAGIC/AMERICA ONLINE. America Online and PF. Magic included
demonstration segments of MULTIMEDIA DOGS, MULTIMEDIA CATS, and MULTIMEDIA
EXOTIC PETS on the disc they are shipping to 180,000 retail
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outlets offering 50 free hours of America Online access. Sixty thousand discs
were shipped each month in October, November, and December, 1996.
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.
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,
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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 will be 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 titled 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.
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
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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 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
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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. 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.
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LEGAL PROCEEDINGS
The Company is not a party to any pending lawsuits, which, in the aggregate,
will have a material adverse effect on the Company's financial position.
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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 and Director, 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.
Kent D. Krausman................ 37 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 for 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 BIG's 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 post
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.
43
<PAGE>
Mr. Weiner is a partner in the investment firm Maxim Financial Corporation, a
multi-million dollar trading and investment banking concern based in Boulder,
Colorado.
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.
KENT D. KRAUSMAN. Mr. Krausman has been a director of the Company since
March, 1997. He has been a licensed Colorado attorney since May, 1985. Mr.
Krausman has owned and operated his own law firm, Krausman LLC, since January,
1987. His firm specializes in securities, corporate finance, and SEC reporting.
Mr. Krausman acted as special counsel to Sherman & Howard, LLC, representing
TeleCommunications, Inc. in its Bell Atlantic, Liberty Media, and QVC
transactions. From January, 1991 through September, 1993, Mr. Krausman owned the
Galleria Theatre (as well as the smaller Encore Theatre) in the Denver Center
for the Performing Arts. Mr. Krausman was the Chief Operating Officer and
Executive Producer of those facilities, financing and engineering the turnaround
of the facilities from bankruptcy to their current status as one of Denver's
most successful and popular cabaret theatres. Mr. Krausman sold the theatres to
Robert Garner Center Attractions in 1993. Mr. Krausman earned his B.A. degree in
Economics (cum laude, Honors Program) from the University of Denver in 1981. He
earned his Juris Doctor degree from The University of Michigan Law School, Ann
Arbor, Michigan in 1984. His law firm, Krausman, L.L.C., is counsel to the
Company.
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 no outside
directors on the Company's Board of Directors. The Company's compensation
committee is comprised of Messrs. Kreloff, Weiner, and Krausman. The Company's
audit committee is comprised of Messrs. Kreloff, Weiner, and Wussow. The Company
intends to name two outside directors to its Board of Directors following
completion of this Offering. Fifth Dimension will be entitled to name one
nominee to the Company's Board of Directors, upon completion of the Fifth
Dimension Assets Acquisition.
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.
44
<PAGE>
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 $10,000.
Upon completion of the Fifth Dimension assets acquisitions, the Company
intends to pay Messrs. Kreloff and Weiner salaries commensurate with those for
similarly situated executives in the industry.
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
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 Comapny
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.
45
<PAGE>
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 June 19, 1998.
The Company subleases 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 subleases. 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. See
"FINANCIAL STATEMENTS." In addition, the Company lent Mr. Brandt $38,000 on June
1, 1995. This loan is a quarterly interest-only loan, with the principal due on
June 1, 1998.
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%
Michael Weiner(2)(3)........................................ 615,000 14.7 615,000 10.8
Andrew V. Brandt(1)......................................... 279,500 6.7 279,500 4.9
Stephen P. Cherner.......................................... 475,000(3) 11.3 475,000(4) 8.3
Kent D. Krausman(3)......................................... 10,000 0.2 10,000 0.2
------------ --- ------------ ---
Total..................................................... 2,393,500 57.1% 2,393,500 42.1%
------------ --- ------------ ---
------------ --- ------------ ---
</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.
46
<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 $.001 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 755,666 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
47
<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 755,666 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 (a minimum of 840,000 shares plus a warrant to
purchase 400,000 shares) and subsequent conversion of all warrants issued and
outstanding would result in the Company having 7,853,177 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 requires 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.
48
<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 120 days 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 120 days 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 120% 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 certain dealers, or
their officers, directors or partners, subject to certain conditions and by will
or operation of law.
49
<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 Comapny 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 this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq SmallCap Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 10b-6A under the Exchange Act. Passive market making consists of,
amoung other things, displaying bids on the Nasdaq SmallCap Market limited by
the bid prices of independent market makers and purchases limited by such prices
and effected in response to order flow. Net purchases by a passive market maker
on each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified prior
period, and all passive market making activity must be discontinued when such
limit is reached. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail 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 doees 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. Kent D. Krausman, sole
owner and manager of Krausman, L.L.C., is a director of the Company. 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 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.
50
<PAGE>
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.
51
<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 Statements of Operations for the three months ended June 30,
1997......................................................................... F-5
Notes to Pro Forma Combined Statements 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 & Company dated July 3,
1997......................................................................... F-9
F-10 -
Balance Sheets, June 30, 1997 (unaudited), March 31, 1997 and 1996............. F-11
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
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
Statements of Cash Flows for the three months ended June 30, 1997 and 1996 F-14 -
(unaudited) and the years ended March 31, 1997 and 1996...................... F-15
F-16 -
Notes to the Unaudited and Audited Financial Statements........................ F-24
FIFTH DIMENSION COMMUNICATION (BARBADOS) INC., 1043133 ONTARIO AND
MERLIN SIERRA INC.
Auditors' Report of Ernst & Young dated June 27, 1997.......................... F-25
Unaudited Combined Balance Sheets, June 30, 1997 (unaudited), March 31, 1997
and 1996..................................................................... F-26
Unaudited 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................................................................ F-27
Unaudited Combined Statements of Changes in Financial Position for the three
months ended June 30, 1997 (unaudited) and the years ended March 31, 1997 and
1996......................................................................... F-28
F-29 -
Notes to the Unaudited and Audited Financial Statements........................ F-39
</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 of 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 $7,500,000 of proceeds received, less offering
expenses.
The acquisition of assets of Fifth Dimension will be accomplished though the
issuance of 840,000 shares 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 form Fifth Dimension will be allocated to goodwill.
F-2
<PAGE>
NEW FRONTIER MEDIA INC.
AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEETS
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......................................... $ 655,281 $ 524,376 $ (3,500,000)(b) $ 3,155,281
6,000,000(a)
(524,376)(c)
Accounts receivables, 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
Film exhibition rights....................... -- 495,319 -- 4,866,194
------------ --------------- ---------------- ---------------
Total current assets....................... 1,670,875 4,464,445 (1,269,126) 495,319
------------ --------------- ---------------- ---------------
FURNITURE AND EQUIPMENT,
at cost--net................................. 55,667 406,286 713,980(d) 1,175,933
------------ --------------- ---------------- ---------------
OTHER ASSETS
Notes receivable--officer (Note 3)........... 38,000 -- -- 38,000
Other assets--net............................ 203,444 831,002 (672,775)(c) 361,671
Goodwill..................................... -- -- 5,926,188(b) 5,926,188
------------ --------------- ---------------- ---------------
Total other assets......................... 241,444 831,002 5,253,413 6,325,859
------------ --------------- ---------------- ---------------
TOTAL ASSETS............................... $1,967,986 $ 5,701,733 $ 4,698,267 $ 12,367,986
------------ --------------- ---------------- ---------------
------------ --------------- ---------------- ---------------
<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) 2,003
(272)(c)
1,500(a)
Preferred stock.............................. 1,500 -- -- 1,500
Additional paid-in capital................... 1,779,018 -- 3,399,916(b) 11,177,434
5,998,500(a)
Retained earnings (deficit).................. (763,793) 2,602,853 (2,602,853)(c) (763,793)
------------ --------------- ---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY................... 1,017,144 2,603,125 6,796,875 10,417,144
------------ --------------- ---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................... $1,967,986 $ 5,701,733 $ 4,698,267 $ 12,367,986
------------ --------------- ---------------- ---------------
------------ --------------- ---------------- ---------------
</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 $6,000,000).
(b) Adjustment to record issuance of 840,000 shares of common stock valued at
$3,400,000, $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 resulting in $5,926,188 of goodwill.
(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.
See Notes to Pro Forma Combined Balance Sheets.
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>
PRO FORMA
NEW FRONTIER ADJUSTMENTS PRO FORMA AFTER
MEDIA, INC. AND FIFTH ACQUISITION OF ACQUISTION OF
SUBSIDIARIES DIMENSION FIFTH DIMENSION FIFTH 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
Legal and professional...................... 30,264 59,362 26,587(f) 89,626
Advertising and promotion................... 67,674 149,369 -- 197,656
Salaries, wages and benefits................ 68,812 322,719 (19,387)(c) 346,249
Communications.............................. 7,785 47,068 (45,282)(d) 54,853
General and administrative.................. 41,243 152,051 -- 193,294
Research and development.................... 7,048 -- -- 7,048
Consulting.................................. 18,256 1,323 -- 19,579
---------------- ------------ --------------- -----------------
Total operating expenses.................. 277,112 819,668 (80,908) 1,015,872
---------------- ------------ --------------- -----------------
OTHER INCOME (EXPENSE)
Licensing fees and royalties................ 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 80,908 169,210
Minority interest in loss of subsidiary....... 21,808 -- -- 21,808
Income taxes.................................. -- (20,000) 43,500(g) (63,500)
---------------- ------------ --------------- -----------------
NET INCOME (LOSS)............................. $ (203,985) $ 294,095 37,408 127,518
---------------- ------------ --------------- -----------------
---------------- ------------ --------------- -----------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK... $ (.05) $ .02
---------------- --------------- -----------------
---------------- --------------- -----------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING................................. 4,192,511(a) 6,547,511(b)
---------------- --------------- -----------------
---------------- --------------- -----------------
</TABLE>
See Notes to Pro Forma Combined Balance Sheets.
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.
F-6
<PAGE>
NEW FRONTIER MEDIA INC.
AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
NEW FRONTIER PRO FORMA
MEDIA, INC. ADJUSTMENTS PRO FORMA AFTER
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
Legal and professional.................. 67,625 213,889 113,298(h) 281,514
Advertising and promotion............... 199,238 530,301 -- 650,559
Salaries, wages and benefits............ 236,017 1,650,714 (78,980)(d) 1,471,004
Commissions............................. -- 363,457 (415,727)(e) 57,475
Communications.......................... 32,137 254,398 (305,982)(f) 286,535
General and administrative.............. 129,615 735,280 -- 864,895
Consulting.............................. 76,035 -- -- 76,035
-------------- ------------- ----------------- ------------------
Total operating expenses.............. 931,342 4,105,395 (826,087) 4,210,650
-------------- ------------- ----------------- ------------------
OTHER INCOME (EXPENSE)
Licensing fees and royalties............ 191,995 -- -- 191,995
Interest, net........................... 17,714 (158,749) -- (141,035)
Loss on investment shares............... -- (220,000) 220,000(c) --
Other, net................................ (27,193) -- -- (27,193)
-------------- ------------- ----------------- ------------------
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 1,046,087 1,594,399
Minority interest in loss of subsidiary 64,806 -- -- 64,806
Income taxes -- (101,850) (496,050)(i) (597,900)
-------------- ------------- ----------------- ------------------
NET INCOME (LOSS)......................... $ (386,030) $ 897,298 $ 550,037 $ 1,061,305
-------------- ------------- ----------------- ------------------
-------------- ------------- ----------------- ------------------
NET INCOME (LOSS) PER SHARE OF COMMON
STOCK................................... $ (.09) $ .16
-------------- ------------------
-------------- ------------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING............................. $ 4,188,459 $ 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 shares outstanding at 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. 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 be no longer 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.
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.
SPICER, JEFFRIES & CO.
Denver, Colorado
July 3, 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>
MARCH 31, MARCH 31,
1997 1996
JUNE 30, ------------ ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash (Note 4)......................................................... $ 104,386 $ 109,387 $ 48,523
Investment in certificates of deposit (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 BALANCE SHEETS
MARCH 31, 1997 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
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
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
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
------------ ------------ ------------ ------------
Total operating expenses............................. 277,112 165,286 931,342 782,345
------------ ------------ ------------ ------------
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)
Abandoned project costs................................ -- -- -- (25,316)
------------ ------------ ------------ ------------
Total other income................................... 23,772 50,720 182,516 65,716
------------ ------------ ------------ ------------
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...................... 4,192,511 4,181,917 4,188,459 4,051,896
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
* less than 1 CENTS per share
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF 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 $0.001 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
--------- --------- ---------- ---------
<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 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................................................... 7,341 -- 341,274 --
Payments of notes payable...................................................... -- -- -- (45,427)
Issuance of common stock, net of offering costs................................ 7,533 100,000 89,078 681,000
Retirement of common stock..................................................... (37,175) -- (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, YEAR ENDED MARCH 31,
--------------------- ---------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH..................................... $ (5,001) $ (24,283) $ 60,864 $ 47,846
CASH, BEGINNING OF YEAR............................................. 109,387 48,523 48,523 677
---------- --------- ---------- ---------
CASH, END OF YEAR................................................... $ 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
$95,235,
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)
$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.
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.
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.
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 (CONTINUED)
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-dillutive. 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>
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>
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
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 3--RELATED PARTY TRANSACTIONS (CONTINUED)
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
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 7000 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.
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
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 (CONTINUED)
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 $841,568 at March 31, 1997 was restricted to BIG's operations and can
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 deposits. Actions, if
any, that Quarto may take against NFMI regarding the breach of the stockholder
agreement cannot be determined at the present time.
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.
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 of approximately
$240,000 for income tax purposes, which principally expires in 2012. This net
operating loss carryforward 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. 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..................................... 78,544 2,421
Valuation allowance for deferred tax assets (78,544) (2,421)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
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 (CONTINUED)
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, were $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.
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.
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 7--LINES OF CREDIT
The Company has lines of credit with a banking institution as follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
---------- ----------
<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
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>
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>
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 (CONTINUED)
The weighted average grant date fair value of the warrants granted in 1997
was as follows:
<TABLE>
<S> <C> <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 are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES LIFE (MONTHS) WARRANTS REMAINING CONTRACTUAL
- ---------------------------------------------------------- ----------- -------------------------
<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>
NOTE 9--RISKS AND UNCERTAINTIES
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
F-23
<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 9--RISKS AND UNCERTAINTIES (CONTINUED)
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 the $100,000 is subject to loss should the
bank cease business.
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 sheet 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 year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 generally accepted
accounting principles accepted in the United States.
[LOGO]
Charted Accountants
Ottawa, Canada
June 27, 1997
F-25
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC. AND MERLIN SIERRA INC.
UNAUDITED COMBINED BALANCE SHEETS AS OF JUNE 30, 1997
(UNITED STATES DOLLARS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, MARCH 31,
1997 1997 1996
----------- ---------- ----------
$ $ $
(UNAUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash....................................................................... 524,376 642,466 615,559
Accounts receivable--net allowance for doubtful accounts of $1,450 (1996
$59,530)................................................................. 2,953,093 3,014,470 2,325,217
Film exhibition rights..................................................... 495,319 525,765 651,442
Inventory.................................................................. -- -- 11,409
Transponder deposits....................................................... 200,000 200,000 150,000
Deferred income taxes...................................................... -- -- 71,500
Prepaid expenses........................................................... 291,657 282,883 623,756
----------- ---------- ----------
4,464,445 4,665,584 4,448,883
NON-CURRENT PORTION OF FILM EXHIBITION RIGHTS.............................. 158,227 222,566 11,493
RESTRICTED INVESTMENTS--at cost............................................ 672,775 691,492 825,449
INVESTMENT IN SHARES....................................................... -- -- 220,000
CAPITAL ASSETS--net........................................................ 406,286 348,463 400,259
----------- ---------- ----------
5,701,733 5,928,105 5,906,084
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES
CURRENT LIABILITIES
Bank loan.................................................................. -- 35,128 98,958
Accounts payable and accrued charges....................................... 902,425 1,481,055 1,766,385
Income taxes payable....................................................... 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
----------- ---------- ----------
----------- ---------- ----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK.............................................................. 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>
F-26
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC. AND MERLIN SIERRA INC.
UNAUDITED COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
AND THE YEARS ENDED MARCH 31, 1997 AND 1996
(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............................................. 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>
F-27
<PAGE>
FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC.
1043133 ONTARIO INC. AND MERLIN SIERRA INC.
UNAUDITED COMBINED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
(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) (UNAUDITED) (UNAUDITED)
<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.................................... 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
Dividends.................................... -- -- (144,928) --
Net change in accounts receivable and
payable, related companies................. 41,487 (206,964) (835,262) (398,661)
-------------- -------------- ---------------- ----------------
41,487 (206,964) (980,190) (398,561)
-------------- -------------- ---------------- ----------------
INCREASE (DECREASE) IN CASH EQUIVALENTS FOR
THE YEAR................................... (82,962) (202,465) 90,737 393,084
CASH EQUIVALENTS--BEGINNING OF YEAR.......... 607,338 516,601 516,601 123,517
-------------- -------------- ---------------- ----------------
CASH EQUIVALENTS--END OF YEAR................ 524,376 314,136 607,338 516,601
-------------- -------------- ---------------- ----------------
-------------- -------------- ---------------- ----------------
CASH EQUIVALENTS IS COMPRISED OF:
CASH......................................... 524,376 397,469 642,466 615,559
Bank loan.................................... -- (83,333) (35,128) (98,958)
-------------- -------------- ---------------- ----------------
524,376 314,136 607,338 516,601
-------------- -------------- ---------------- ----------------
-------------- -------------- ---------------- ----------------
</TABLE>
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 complimentary 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 generally accepted accounting principles 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.
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 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
Assets and liabilities denominated in currencies other than United States
dollars are translated at exchange rates in effect at the balance sheet date.
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 49,196 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 secured 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 amount due to related
companies totalling $471,282 (1996 $860,703).
The significant balances receivable from or (payable to) related companies
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 COMMITMENT 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 purchased 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 50 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.
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-34
<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.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 17
Dilution.................................................................. 17
Capitalization............................................................ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 26
Management................................................................ 43
Certain Transactions...................................................... 46
Principal Shareholders.................................................... 46
Description of Securities................................................. 47
Underwriting.............................................................. 49
Legal Matters............................................................. 50
Experts................................................................... 50
Available Information..................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 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
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(i) Article of the Company's First Amended Bylaws provides as follows:
"ARTICLE
LIMITATIONS ON LIABILITY
Section 1. 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 of the Company's First Amended Bylaws provides as follows:
"ARTICLE
INDEMNIFICATION
Section 1. 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.
Section 2. The corporation may maintain indemnification insurance
regardless of its power to indemnify under the Colorado Business Corporation
Act.
Section 3. 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>
Section 4. 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............................................... 2,927
NASD Filing Fee.................................................... 1,466
Blue Sky Filing Fees............................................... 5,000
Blue Sky Legal Fees................................................ 10,000
Printing Expenses.................................................. 50,000
Legal Fees and Expenses............................................ 65,000
Accounting Fees.................................................... 30,000
Transfer Agent..................................................... 3,000
NASDAQ SmallCap Application Fee.................................... 5,000
Miscellaneous Expenses............................................. 52,607
-----------
TOTAL............................................................ 225,000(1)
-----------
-----------
</TABLE>
- ------------------------
(1) Does not include the Managing Underwriter's commission and nonaccountable
expenses of $975,000 ($1,137,500 if the Overallotment Option is exercised).
All expenses, except the SEC registration fee and the NASD filing 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
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)
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.
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)
27.01* Financial Data Schedule
</TABLE>
- ------------------------
* Filed Herewith.
+ To be filed by Amendment.
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,
II-3
<PAGE>
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 Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Boulder, Colorado on September 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 September 10, 1997
Mark H. Kreloff Officer, President
/s/ MICHAEL WEINER Executive Vice President,
- ------------------------------ Secretary, Treasurer and September 10, 1997
Michael Weiner Director
/s/ SCOTT WUSSOW Chief Financial Officer
- ------------------------------ (Principal Accounting September 10, 1997
Scott Wussow Officer)
/s/ KENT D. KRAUSMAN
- ------------------------------ Director September 10, 1997
Kent D. Krausman
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)
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.
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)
27.01* Financial Data Schedule
</TABLE>
- ------------------------
* Filed Herewith.
+ To be filed by Amendment.
<PAGE>
NEW FRONTIER MEDIA, INC.
Shares
UNDERWRITING AGREEMENT
______________, 1997
Centex Securities Incorporated
(As Representative of the Several
Underwriters Named in Schedule 1 hereto)
1020 Prospect Street, Suite 200
La Jolla, CA 92037
Dear Sirs:
New Frontier Media, Inc., a Colorado corporation (the "Company"), hereby
confirms its agreement (this "Agreement") with the several underwriters named
in Schedule 1 hereto (the "Underwriters"), for whom Centex Securities
Incorporated has been duly authorized to act as representative (in such
capacity, the "Representative"), as set forth below:
SECTION 1.
DESCRIPTION OF TRANSACTION
The Company proposes to issue and sell to the Underwriters on the Closing
Date (as defined below), pursuant to the terms and conditions of this
Agreement, an aggregate of ____________ shares ("Firm Shares") of the
Company's Common Stock ("Common Stock") at a price of $____ per Share on the
terms as hereinafter set forth. The Company also proposes to issue and sell
to the several Underwriters on or after the Closing Date not more than
_______ additional Shares if requested by the Representative as provided in
Section 3.2 of this Agreement (the "Option Shares"). The Firm Shares and any
Option Shares are collectively referred to herein as the "Shares."
SECTION 2.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Underwriters to enter into this Agreement, the
Company hereby represents and warrants to and agrees with the Underwriters
that:
<PAGE>
2.1 REGISTRATION STATEMENT AND PROSPECTUS. A registration
statement on Form SB-2 (File No. ________) with respect to the Shares,
including the related prospectus, copies of which have heretofore been
delivered by the Company to the Underwriters, has been filed by the Company
in conformity with the requirements of the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
and one or more amendments to such registration statement have been so filed.
After the execution of this Agreement, the Company will file with the
Commission either (a) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in
such registration statement), with such changes or insertions as are required
by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as
have been provided to and approved by the Representative prior to the
execution of this Agreement, or (b) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective
under the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and approved
by the Representative prior to the execution of this Agreement. As used in
this Agreement, the term "Registration Statement" means such registration
statement on Form SB-2 and all amendments thereto, including the prospectus,
all exhibits and financial statements, as it becomes effective; the term
"Preliminary Prospectus" means each prospectus included in said Registration
Statement before it becomes effective; and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the
Act or, if no prospectus is required to be filed pursuant to said Rule
424(b), such term means the prospectus included in the Registration Statement
when it becomes effective.
2.2 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. Neither
the Commission nor the "blue sky" or securities authority of any jurisdiction
has issued any order preventing or suspending the use of any Preliminary
Prospectus. When (a) any Preliminary Prospectus was filed with the
Commission, (b) the Registration Statement or any amendment thereto was or is
declared effective, and (c) the Prospectus or any amendment or supplement
thereto is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and
on the Closing Date the Prospectus, as amended or supplemented at any such
time, such filing (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission promulgated thereunder (the "Rules and
Regulations") and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading in light of the circumstances under which
they were made. The foregoing representation does not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or
any amendment thereto or the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representative specifically for
use therein.
2
<PAGE>
2.3 INCORPORATION AND STANDING. The Company and each of its
subsidiaries have been duly incorporated and are validly existing as
corporations in good standing under the laws of the State of Colorado and are
duly qualified to transact business as foreign corporations and are in good
standing under the laws of all other jurisdictions where the ownership or
leasing of their properties or the conduct of their business requires such
qualification, except where the failure to be so qualified does not amount to
a material liability or disability to the Company or any of its subsidiaries.
2.4 DUE POWER AND AUTHORITY. The Company and each of its
subsidiaries has full corporate power to own or lease their properties and
conduct their business as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company and each of its subsidiaries has full
corporate power to enter into this Agreement and to carry out all the terms
and provisions hereof to be carried out by it. The execution and delivery of
this Agreement and consummation of the transactions contemplated herein have
been duly authorized by the Company and this Agreement has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
the terms thereof, except as may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and by general equitable principles, and as rights to indemnity and
contribution hereunder may be limited by applicable law.
2.5 CONSENTS; NO DEFAULTS. The issuance, offering and sale of the
Shares to the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (a) require
the consent, approval, authorization, registration or qualification of or
with any governmental authority, except such as have been obtained, or as may
be required under the Act or under the securities or blue sky laws of any
jurisdiction, or (b) conflict with or result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other material agreement or instrument to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its properties is bound, or the charter documents or bylaws
of the Company or any of its subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any of its
subsidiaries.
2.6 NO BREACH OR DEFAULT. Neither the Company nor any of its
subsidiaries is in breach of any term or provision of their Articles of
Incorporation or Bylaws; no default exists, and no event has occurred which
with notice or lapse of time or both, would constitute a default, in the
Company's or any of its subsidiaries' due performance and observance of any
term, covenant or condition of any indenture, mortgage, deed of trust, lease,
note, bank loan or credit agreement or any other material agreement or
instrument to which the Company, its subsidiaries or their properties may be
bound or affected in any respect which would have a material adverse effect
on the condition (financial or otherwise), business, properties, prospects,
net worth or results of operations of the Company.
3
<PAGE>
2.7 LICENSES. The Company and each of its subsidiaries possesses
all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary for the conduct of
their business, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or modification
of any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Registration
Statement. Each approval, registration, qualification, license, permit,
consent, order, authorization, designation, declaration or filing by or with
any regulatory, administrative or other governmental body or agency necessary
in connection with the execution and delivery by the Company of this
Agreement and the consummation of the transactions contemplated (except such
additional actions as may be required by the National Association of
Securities Dealers, Inc. or may be necessary to qualify the Common Stock for
public offering under state securities or blue sky laws) has been obtained or
made and each is in full force and effect.
2.8 COMPLIANCE WITH LAWS. Except as disclosed in the Registration
Statement and in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), neither the Company nor any of its
subsidiaries is in violation of any laws, ordinances, governmental rules or
regulations to which it is subject, which would have a material adverse
effect on the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company.
2.9 EXISTING CAPITAL STRUCTURE AND SHAREHOLDER RIGHTS. The
Company has an authorized, issued and outstanding capitalization as set forth
in, and capital stock conforms in all material respects to the description
contained in, the Prospectus or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus. Except as described in the Registration
Statement and in the Prospectus there are no outstanding (a) securities or
obligations of the Company convertible into or exchangeable for any capital
stock of the Company, (b) warrants, rights or options to subscribe for or
purchase from the Company any such capital stock or any such convertible or
exchangeable securities or obligations, or (c) obligations of the Company to
issue such shares, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or obligations. All of the issued
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and have been issued in
compliance with all federal and state securities laws. No preemptive rights
of shareholders exist with respect to any capital stock of the Company. No
shareholder of the Company has any right pursuant to any agreement which has
not been waived or honored to require the Company to register the sale of any
securities owned by such shareholder under the Act in the public offering
contemplated herein except as disclosed in the Registration Statement. Other
than Boulder Interactive Group, Inc. (dba Inroads Interactive), a Colorado
corporation, DaViD Entertainment, Inc., a Colorado corporation, Fuzzy
Entertainment, Inc. (dba In-Sight Editions), a Colorado corporation and
Colorado Satellite Broadcasting, Inc., a Colorado corporation, the Company
has no subsidiaries, and does not own any shares of stock or any other equity
interest in any firm, partnership, association or other entity.
4
<PAGE>
2.10 AUTHORITY FOR ISSUANCE OF SHARES. The issuance of the Common
Stock issuable in connection with the Shares has been duly authorized and at
any Firm or Option Closing Date as defined herein after payment therefor in
accordance herewith, such Common Stock will be validly issued, fully paid and
nonassessable. The Shares will conform in all material respects with all
statements with regard thereto in the Registration Statement and the
Prospectus.
2.11 TITLE TO TANGIBLE PROPERTY. Except as otherwise set forth in
or contemplated by the Registration Statement and Prospectus, the Company and
each of its subsidiaries has good and marketable title to all items of
personal property owned by the Company and each such subsidiary, free and
clear of any security interest, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely affect the
value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or its subsidiaries, and
any real property and buildings held under lease by the Company and its
subsidiaries are held under valid, subsisting and enforceable leases, with
such exceptions as are not material and do not materially interfere with the
use made or proposed to be made of such property and buildings by the Company
and its subsidiaries.
2.12 TITLE TO INTELLECTUAL PROPERTY. Except as described in the
Prospectus, the Company and its subsidiaries does not own any patents or
trademarks. The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material, service marks, trade names, licenses,
copyrights and proprietary or other confidential information currently
employed by it in connection with its business, and neither the Company nor
any of its subsidiaries has received any notice of infringement of or
conflict with asserted rights of any third party with respect to any of the
foregoing intellectual property rights which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Prospectus.
2.13 CONTRACT RIGHTS. The agreements to which the Company and each
of its subsidiaries is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable by the Company and its
subsidiaries, as appropriate, in accordance with their terms, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditor's rights generally or by equitable principles, and, to the Company's
knowledge, the other contracting party or parties thereto are not in material
breach or material default under any of such agreements.
2.14 NO MARKET MANIPULATION. The Company has not taken nor will it
take, directly or indirectly, any action designed to cause or result, or
which might reasonably be expected to cause or result, in the stabilization
or manipulation of the price of any security of the Company to facilitate the
sale or resale of the Common Stock.
2.15 NO OTHER SALES OR COMMISSIONS. The Company has not since the
filing of the Registration Statement (i) sold, bid for, purchased, attempted
to induce any person to purchase, or
5
<PAGE>
paid anyone any compensation for soliciting purchases of, its capital stock
or (ii) paid or agreed to pay to any person any compensation for soliciting
another to purchase any securities of the Company except for the sale of
Shares by the Company under this Agreement.
2.16 ACCURACY OF FINANCIAL STATEMENTS. The financial statements and
schedules of the Company included in the Registration Statement and the
Prospectus, or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus, fairly present in all material respects the financial
position of the Company and the results of operations and changes in
financial condition as of the dates and periods therein specified. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as otherwise noted therein and include all financial
information required to be included by the Act. The selected financial data
set forth under the captions "PROSPECTUS SUMMARY--Summary Financial
Information," "SELECTED FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Prospectus,
or, if the Prospectus is not in existence the most recent Preliminary
Prospectus, fairly present in all material respects, on the basis stated in
the Prospectus or such Preliminary Prospectus, the information included
therein.
2.17 INDEPENDENT PUBLIC ACCOUNTANT. Spicer, Jeffries & Company
which have certified or shall certify certain of the financial statements of
the Company filed or to be filed as part of the Registration Statement and
the Prospectus, are independent certified public accountants within the
meaning of the Act and the Rules and Regulations.
2.18 INTERNAL ACCOUNTING. The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (a) transactions are executed in accordance with
management's general or specific authorization; (b) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset
accountability; (c) access to assets is permitted only in accordance with
management's general or specific authorization; and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
2.19 LITIGATION. Except as set forth in the Registration Statement
and Prospectus, there is and at the Closing Date there will be no action,
suit or proceeding before any court or governmental agency, authority or body
pending or to the knowledge of the Company threatened which might result in
judgments against the Company or any of its subsidiaries not adequately
covered by insurance or which collectively might result in any material
adverse change in the condition (financial or otherwise), the business or the
prospects of the Company, or would have a material adverse effect on the
properties or assets of the Company. Neither the Company nor its
subsidiaries is subject to the provisions of any injunction, judgement,
decree or order of any court, regulatory body, administrative agency or other
governmental body or arbitral forum, which might result in a material adverse
change in the business, assets or condition of the Company.
6
<PAGE>
2.20 NO MATERIAL ADVERSE CHANGE. Subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), (a) the Company has not incurred any material
adverse change in or affecting the condition, financial or otherwise, of the
Company or any of its subsidiaries or the earnings, business affairs,
management, or business prospects of the Company or any of its subsidiaries,
whether or not occurring in the ordinary course of business, (b) there has
not been any material transaction entered into by the Company or any of its
subsidiaries, other than transactions in the ordinary course of business or
transactions specifically described in the Registration Statement as it may
be amended or supplemented, (c) neither the Company nor any of its
subsidiaries has sustained any material loss or interference with its
business or properties from fire, flood, windstorm, accident or other
calamity, (d) neither the Company nor any of its subsidiaries has paid or
declared any dividends or other distribution with respect to its capital
stock and neither the Company nor any of its subsidiaries is in default in
the payment of principal or interest on any outstanding debt obligations, and
(e) there has not been any change in the capital stock (other than the sale
of the Common Stock hereunder or the exercise of outstanding stock options or
warrants as described in the Registration Statement) or material increase in
indebtedness of the Company. The Company does not have any known material
contingent obligation which is not disclosed in the Registration Statement
(or contained in the financial statements or related notes thereto), as such
may be amended or supplemented.
2.21 TRANSACTIONS WITH AFFILIATES. Subsequent to the respective
dates as of which information is given in the Registration Statement and
Prospectus or if the Prospectus is not in existence the most recent
Preliminary Prospectus, and except as may otherwise be indicated or
contemplated herein or therein, (a) neither the Company nor any of its
subsidiaries has entered into any transaction with an "affiliate" of the
Company or any of its subsidiaries, as defined in the Act and the Rules and
Regulations, or (b) declared, paid or made any dividend or distribution of
any kind on or in connection with any class of its capital stock, and (c) the
Company has no knowledge of any transaction between any affiliate of the
Company or one of its subsidiaries and any significant customer or supplier
of the Company or one of its subsidiaries, except in its ordinary course of
business.
2.22 INSURANCE. Except as otherwise set forth in or contemplated
by the Registration Statement and Prospectus, the Company and each of its
subsidiaries is insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and
customary in the business in which it is engaged; neither the Company nor any
of its subsidiaries has been refused any insurance coverage sought or applied
for; and the Company has no reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect the
condition (financial or otherwise), business prospects, net worth or results
of operations of the Company.
2.23 TAX RETURNS. The Company and each of its subsidiaries has
filed all foreign, federal, state and local tax returns that are required to
be filed or has requested extensions thereof and
7
<PAGE>
has paid all taxes required to be paid by it and any other assessment, fine
or penalty levied against it, to the extent that any of the foregoing is due
and payable or adequate accruals have been set up to cover any such unpaid
taxes, except for any such assessment, fine or penalty that is currently
being contested in good faith.
2.24 POLITICAL CONTRIBUTIONS. Neither the Company nor any of its
subsidiaries has directly or indirectly, (a) made any unlawful contribution
to any candidate for public office, or failed to disclose fully any
contribution in violation of law, or (b) made any payment to any federal,
state, local, or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any other such
jurisdiction.
2.25 INVESTMENT COMPANY ACT. The Company and each of its
subsidiaries conducts their operations in a manner that does not subject them
to registration as an investment company under the Investment Company Act of
1940, as amended, and the transactions contemplated by this Agreement will
not cause the Company to become an investment company subject to registration
under the Investment Company Act of 1940, as amended.
2.26 ASSET PURCHASE AGREEMENT. The execution and delivery of the
Asset Purchase Agreement between the Company and Fifth Dimension
Communications, Inc. ("Fifth Dimension") and the consummation of the
transactions contemplated herein have been duly authorized by the Company and
the Asset Purchase Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with the terms
thereof, except as may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and by
general equitable principles, and as rights to indemnity and contribution
hereunder may be limited by applicable law.
2.27 FIFTH DIMENSION FINANCIAL STATEMENTS. To the knowledge of
the Company, the financial statements and schedules of Fifth Dimension
[included in the Registration Statement and the Prospectus, or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus,]
fairly present in all material respects the financial position of Fifth
Dimension and the results of operations and changes in financial condition as
of the dates and periods therein specified. To the knowledge of the Company,
such financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as otherwise noted therein and include all financial
information required to be included by the Act. [To the knowledge of the
Company, the selected financial data set forth under the captions "PROSPECTUS
SUMMARY--Summary Financial Information," "SELECTED FINANCIAL DATA" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in the Prospectus, or, if the Prospectus is not in existence the
most recent Preliminary Prospectus, fairly present in all material respects,
on the basis stated in the Prospectus or such Preliminary Prospectus, the
information included therein.]
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2.28 CHANGES IN FIFTH DIMENSION FINANCIAL CONDITION. Except as
set forth in the Registration Statement and Prospectus, to the knowledge of
the Company, there is and at the Closing Date there will be no action, suit
or proceeding before any court or governmental agency, authority or body
pending or threatened which might result in judgments against Fifth Dimension
or any of its subsidiaries not adequately covered by insurance or which
collectively might result in any material adverse change in the condition
(financial or otherwise), the business or the prospects of Fifth Dimension,
or would have a material adverse effect on the properties or assets of Fifth
Dimension. To the knowledge of the Company, Fifth Dimension is not subject
to the provisions of any injunction, judgement, decree or order of any court,
regulatory body, administrative agency or other governmental body or arbitral
forum, which might result in a material adverse change in the business,
assets or condition of Fifth Dimension. To the knowledge of the Company,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (a) Fifth Dimension has
not incurred any material adverse change in or affecting the condition,
financial or otherwise, of Fifth Dimension or any of its subsidiaries or the
earnings, business affairs, management, or business prospects of Fifth
Dimension, whether or not occurring in the ordinary course of business, (b)
there has not been any material transaction entered into by Fifth Dimension
any of its subsidiaries, other than transactions in the ordinary course of
business or transactions specifically described in the Registration Statement
as it may be amended or supplemented, (c) Fifth Dimension has not sustained
any material loss or interference with its business or properties from fire,
flood, windstorm, accident or other calamity, (d) Fifth Dimension has not
paid or declared any dividends or other distribution with respect to its
capital stock and Fifth Dimension is not in default in the payment of
principal or interest on any outstanding debt obligations to be assumed by
the Company, and (e) there has not been any material increase in indebtedness
of Fifth Dimension to be assumed by the Company.
SECTION 3.
PURCHASE, SALE AND DELIVERY OF THE SHARES
3.1 PURCHASE OF FIRM SHARES. On the basis of the representations,
warranties, agreements and covenants herein contained and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
to each of the Underwriters named in Schedule I hereto, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company,
at a purchase price of $____ per Share, the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule 1 hereto. The Company will
make one or more certificates for Common Stock constituting the Firm Shares,
in definitive form and in such denomination or denominations and registered
in such name or names as the Representative shall request upon notice to the
Company at least 48 hours prior to the Firm Closing Date, available for
checking and packaging by the Representative at the offices of the Company's
transfer agent or registrar (or the correspondent or the agent of the
Company's transfer agent or registrar) at least 24 hours prior to the Firm
Closing Date. Payment for the Firm Shares shall be made by bank wire payable
in same day funds to the order of the Company drawn to the order of the
Company for the Firm Shares, against delivery of certificates therefor to the
Representative. Delivery of the documents, certificates and opinions
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described in Section 6 of this Agreement, the Firm Shares and payment for the
Firm Shares and the Option Shares shall be made at the offices of Centex
Securities Incorporated, 1020 Prospect Street, Suite 200, La Jolla,
California 92037, at 9:00 a.m., California time, on the third full business
day following the date hereof (on the fourth full business day if this
Agreement is executed after 12:30 p.m., California time), or at such other
places, time or date as the Representative and the Company may agree upon or
as the Representative may determine pursuant to Section 9 hereof, such time
and date of delivery against payment being herein referred to as the "Firm
Closing Date."
3.2 OVER-ALLOTMENTS; OPTION SHARES. For the purpose of covering
any over-allotments in connection with the distribution and sale of the Firm
Shares as contemplated by the Prospectus, the Company hereby grants to you on
behalf of the several Underwriters an option to purchase, severally and not
jointly, the Option Shares. The purchase price to be paid for any Option
Shares shall be the same price per share as the price per Share for the Firm
Shares set forth above in Section 3.1, plus, if the purchase and sale of any
Option Share takes place after the Firm Closing Date and after the Common
Stock is trading "ex-dividend," an amount equal to the dividends payable on
the Common Stock contained in such Option Shares. The option granted hereby
may be exercised in the manner described below as to all or any part of the
Option Shares from time to time within forty-five days after the date of the
Prospectus. The Underwriters shall not be under any obligation to purchase
any of the Option Shares prior to the exercise of such option. The
Representative may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the
Company setting forth the aggregate number of Option Shares as to which the
several Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Shares. Any such date of delivery
shall be determined by the Representative but shall not be earlier than two
business days or later than seven business days after such exercise of the
option and, in any event, shall not be earlier than the Firm Closing Date.
The time and date set forth in such notice, or such other time on such other
date as the Representative and the Company may agree upon or as the
Representative may determine pursuant to Section 9 hereof, is herein called
the "Option Closing Date" with respect to such Option Shares. Upon each
exercise of the option as provided herein, subject to the terms and
conditions herein set forth, the Company shall become obligated to sell to
each of the several Underwriters, and each of the Underwriters (severally and
not jointly) shall become obligated to purchase from the Company, the same
percentage of the total number of the Option Shares as to which the several
Underwriters are then exercising the option as such Underwriter is obligated
to purchase of the aggregate number of Firm Shares, as adjusted by the
Representative in such manner as it deems advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Shares, one or more certificates for the Common Stock contained in such
Option Shares, in definitive form, and payment therefore, shall be delivered
on the related Option Closing Date in the manner, and upon the terms and
conditions, set forth in Section 3.1, except that reference therein to the
Firm Shares and the Firm Closing Date shall be deemed, for purposes of this
Section 3.2, to refer to such Option Shares and Option Closing Date,
respectively. No Option Shares shall be required to be, or be, sold and
delivered unless the Firm Shares have been, or simultaneously are, sold and
delivered as provided in this Agreement.
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3.3 DEFAULT BY AN UNDERWRITER. It is understood that you,
individually and not as the Representative, may (but shall not be obligated
to) make payment on behalf of any Underwriter or Underwriters for any of the
Shares to be purchased by such Underwriter or Underwriters. No such payment
shall relieve such Underwriter or Underwriters from any of its or their
obligations hereunder.
SECTION 4.
OFFERING BY THE UNDERWRITERS
Upon payment by the Underwriters of the purchase price of $____ per Share
and the Company's authorization of the release of the Firm Shares, the
several Underwriters shall offer the Firm Shares for sale to the public upon
the terms set forth in the Prospectus. The Representative may from time to
time thereafter change the public offering prices and other selling terms.
If the option set forth in Section 3.2 of this Agreement is exercised, then
upon the Company's authorization of the release of the Option Shares the
several Underwriters shall offer such Shares for sale to the public upon the
foregoing terms.
SECTION 5.
COVENANTS OF THE COMPANY
Except as otherwise stated below, the Company covenants and agrees with
each of the Underwriters that:
5.1 COMPANY'S BEST EFFORTS TO CAUSE REGISTRATION STATEMENT TO
BECOME EFFECTIVE. The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. If required, the Company will file the Prospectus and any
amendment or supplement thereto with the Commission in the manner and within
the time period required by Rule 424(b) under the Act. During any time when
a prospectus relating to the Common Stock is required to be delivered under
the Act, the Company (a) will comply with all requirements imposed upon it by
the Act and the Rules and Regulations to the extent necessary to permit the
continuance of sales of or dealings in the Common Stock in accordance with
the provisions hereof and of the Prospectus, as then amended or supplemented,
and (b) will not file with the Commission the prospectus or the amendment
referred to in the second sentence of Section 2.1 hereof, any amendment or
supplement to such prospectus or any amendment to the Registration Statement
unless and until the Representative has been advised of such proposed filing,
has been furnished with a copy for a reasonable period of time prior to the
proposed filing, and has given its consent to such filing, which shall not be
unreasonably withheld or delayed.
5.2 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The
Company will prepare and file with the Commission, in accordance with the
Rules and Regulations of the Commission, promptly upon written request by the
Representative or counsel for the Representative,
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any amendments to the Registration Statement or amendments or supplements to
the Prospectus that may be reasonably necessary or advisable in connection
with the distribution of the Shares by the several Underwriters, and the
Company will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the Commission as promptly
as possible. The Company will advise the Representative, promptly after
receiving notice thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the Prospectus or
any amendment or supplement thereto has been filed and will provide evidence
satisfactory to the Representative of each such filing or effectiveness.
5.3 NOTICE OF STOP ORDERS. The Company will advise the
Representative promptly after receiving notice or obtaining knowledge of: (a)
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or any amendment thereto, or any order
preventing or suspending the use of any Preliminary Prospectus of the
Prospectus or any amendment or supplement thereto; (b) the suspension of the
qualification of the Shares for offering or sale in any jurisdiction; (c) the
institution, threatening or contemplation of any proceeding for any such
purpose; or (d) any request made by the Commission for amending the
Registration Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to prevent the
issuance of any such stop order and, if any such stop order is issued to
obtain the withdrawal thereof as promptly as possible.
5.4 BLUE SKY QUALIFICATION. The Company will arrange and cooperate
with counsel to the Representative for the qualification of the Shares for
offering and sale under the securities or blue sky laws of such jurisdictions
as the Representative may designate and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Shares; provided, however, that in connection therewith the Company shall not
be required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.
5.5 POST-EFFECTIVE AMENDMENTS. If, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
occurs as a result of which the Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading, in the light of the circumstances under which they were made, or
if for any other reason it is necessary at any time to amend or supplement
the Prospectus to comply with the Act or the Rules or Regulations, the
Company will promptly notify the Representative thereof and, subject to
Section 3 hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or
effects such compliance.
5.6 DELIVERY OF PROSPECTUSES. The Company will, without charge,
provide (a) to the Representative and to counsel for the Representative a
signed copy of the Registration Statement originally filed with respect to
the Shares and each amendment thereto (in each case including exhibits
thereto), (b) to each other Underwriter so requesting in writing, a conformed
copy of such Registration Statement and each amendment thereto (in each case
without exhibits thereto) and (c)
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so long as a prospectus relating to the Shares is required to be delivered
under the Act, as many copies of each Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto as the Representative may
reasonably request.
5.7 SECTION 11(a) FINANCIALS. The Company will, as soon as
practicable but in any event not later than 90 days after the period covered
thereby, make generally available to its security holders and to the
Representative a consolidated earnings statement of the Company and its
subsidiaries that satisfies the provisions of Section 11(a) of the Act and
Rule 158 thereunder covering a twelve-month period beginning not later than
the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement.
5.8 APPLICATION OF PROCEEDS. The Company will apply the net
proceeds from the sale of the Shares as set forth in the Prospectus and
Registration Statement and will not take any action that would cause it to
become an investment company under the Investment Company Act of 1940, as
amended.
5.9 SALES OF SECURITIES. The Company will not, directly or
indirectly, without ten (10) days prior written notice to the Representative,
offer, sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of one year after the
date hereof, except (a) to the Underwriters pursuant to this Agreement; (b)
up to _____ options to be granted pursuant a stock option plan to be adopted
by the Company; and (c) up to 675,250 shares of Common Stock reserved for
issuance upon exercise of warrants outstanding as of June 30, 1997, including
400,000 shares reserved for issuance to Quarto Holdings, Inc.; provided that
such persons have delivered to the Representative the agreement described in
Section 7.7 of this Agreement.
5.10 APPLICATION TO NASDAQ. The Company will cause the Shares to be
duly included for quotation on the Nasdaq SmallCap Market prior to the
Closing Date. If requested by the Representative, the Company will also
cause the Shares to be duly included for listing on the Pacific Stock
Exchange. The Company will use its best efforts to ensure that the Shares
remain included for quotation on the Nasdaq SmallCap Market and the Pacific
Stock Exchange (if applicable) following the Closing Date for a period of not
less than three years.
5.11 APPLICATION FOR SECONDARY MARKET EXEMPTIONS. To the extent
necessary or appropriate, the Company will make such applications, file such
documents, and furnish such information as may be necessary to list the
Shares in the securities listing manuals of Standard & Poor's Corporation or
Moody's Industrial Services contemporaneous with the filing of the Prospectus
with the Commission, and shall maintain listing in such manuals thereafter
for a period of no less than five years. As of the first date that the
Company and its securities are eligible, the Company will apply with the
Department of Corporations in the State of California to have the Shares
listed as an "Eligible Security" for purposes of secondary market exemptions
in the State of California. The
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Company will take such other similar steps as are reasonably necessary to
obtain exemptions for secondary trading of the Company's Shares in various
United States jurisdictions.
5.12 REPORTS TO SHAREHOLDERS. So long as any Common Stock is
outstanding until five years after the Closing Date, the Company will furnish
to the Representative (a) as soon as available a copy of each report of the
Company mailed to shareholders and filed with the Commission and (b) from
time to time such other information concerning the Company as the
Representative may reasonably request.
5.13 DELIVERY OF DOCUMENTS. At or prior to the Closing, the Company
will deliver to the Representative true and correct copies of the certificate
of incorporation of the Company and all amendments thereto, all such copies
to be certified by the Secretary of State of the State of Colorado, a good
standing certificate from the Secretary of State of Colorado, dated no more
than five business days prior to the Closing Date; true and correct copies of
the bylaws of the Company, as amended, certified by the Secretary of the
Company and true and correct copies of the minutes of all meetings of the
directors and shareholders of the Company held prior to the Closing Date
which in any way relate to the subject matter of this Agreement.
5.14 UNDERWRITERS' WARRANT. On or prior to the Closing Date, the
Company shall deliver to the Representative warrants (the "Underwriter's
Warrants"), at an aggregate purchase price of $100, to purchase Shares equal
to 10% of the Firm Shares sold in the Offering, which Underwriter's Warrants
shall be exercisable for a per Share exercise price equal to 120% of the per
Share public offering price of the Firm Shares.
5.15 COOPERATION WITH REPRESENTATIVE' DUE DILIGENCE. At all times
prior to the Closing Date, the Company will cooperate with the Representative
in such investigation as the Representative may make or cause to be made of
all the properties, business and operations of the Company and its
subsidiaries in connection with the purchase and public offering of the
Shares and the Company will make available to the Representative in
connection therewith such information in its possession and the possession of
its subsidiaries as the Representative may reasonably request.
5.16 STOCK TRANSFER AGENT. The Company has appointed Corporate
Stock Transfer, Inc., Denver, Colorado, as Transfer Agent for the Common
Stock. The Company will not change or terminate such appointment for a
period of two years from the effective date without first obtaining the
written consent of the Representative, which consent shall not be
unreasonably withheld.
5.17 PUBLICITY. Prior to the Firm Closing Date, or the Option Closing
Date, as the case may be, the Company shall not issue any press release or other
communication directly or indirectly and shall hold no press conference with
respect to the Company, its financial condition, results of operations,
business, properties, assets, liabilities and any of them, or this offering,
without the prior written consent of the Representative. If at any time during
the 90 day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in the opinion of the Representative the market price of the
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Common Stock has been or is likely to be materially affected, regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus, the Company will, after written notice from the
Representative, evaluate the propriety of disseminating a press release or
other public statement reasonably acceptable to the Representative and its
counsel, commenting on such rumor, publication or event.
5.18 BOARD OF DIRECTORS MEETINGS. The Company shall notify the
Representative of all meetings of the Board of Directors and shareholders of
the Company and shall have the right, for a period of three (3) years from
the date of the Prospectus, to have an observer at such meetings. Such
designee shall be entitled to receive reimbursement for all reasonable costs
incurred in attending such meetings, including, but not limited to, food,
lodging, and transportation.
5.19 FORECASTS AND PROJECTIONS. For a period of two years from the
effective date of the Registration Statement, the Company shall provide the
Representative with routine internal forecasts if any such reports are
prepared by the Company for dissemination to the public.
5.20 KEY MAN INSURANCE. The Company will maintain for a period of
at least two (2) years, Key Man Insurance on each of Mark Kreloff and Daniel
Bender in the amount of $1,000,000.
SECTION 6.
EXPENSES
6.1 OFFERING EXPENSES. The Company will pay upon demand all costs
and expenses incident to the performance of the Company's obligations under
this Agreement, whether or not the transactions contemplated herein are
consummated or this Agreement is terminated pursuant to Section 11 hereof,
including all costs and expenses incident to (a) the printing or other
production of documents with respect to the transactions, including any costs
of printing the Registration Statement originally filed with respect to the
Shares and any amendment thereto, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, and any blue sky
memoranda, (b) all arrangements relating to the delivery to the Underwriters
of copies of the foregoing documents, (c) the fees and disbursements of
counsel, accountants and any other experts or advisors retained by the
Company, (d) preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Common Stock, including transfer agent's and
registrar's fees, (e) the qualification of the Shares under state securities
and blue sky laws, including filing fees and fees and disbursements of
counsel for the Representative relating thereto, (f) the filing fees of the
Commission and the National Association of Securities Dealers, Inc. relating
to the Shares, (g) any listing fees for the quotation of the Common Stock on
the Nasdaq SmallCap Market or listing on the Pacific Stock Exchange (if
applicable), (h) one-half the cost of placing "tombstone advertisements" in
any publications which may be selected by the Representative (provided that
any such cost in excess of $5,000 shall require the consent of both the
Company and the Representative), and (i) all other
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advertising that has been approved in advance by the Company relating to the
offering of the Shares (other than as shall have been specifically approved
in writing by the Representative to be paid for by the Underwriters). In
addition to the foregoing, the Company agrees to pay to the Representative a
non-accountable expense allowance of 3% of the gross amount to be raised from
the sale of the Shares hereunder, payable at the Closing(s), of which $70,000
has already been paid by the Company in connection with this offering. If
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 7
(other than Section 7.5) hereof is not satisfied, because this Agreement is
terminated pursuant to Section 11 hereof or because of any failure, refusal
or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder
other than by reason of a default by any of the Underwriters, the Company
will reimburse the Underwriters severally upon demand for all out-of-pocket
expenses (including counsel fees and disbursements) that shall have been
reasonably incurred by them in connection with the proposed purchase and sale
of the Shares. The Company shall in no event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
6.2 INTERIM INDEMNIFICATION. The Company agrees that as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8.1 hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse the Underwriters for such expenses and
the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) listed
from time to time in THE WALL STREET JOURNAL which represents the base rate
on corporate loans posted by a substantial majority of the nation's thirty
(30) largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date
of such request.
The Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8.2 hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Underwriters' obligation to reimburse the Company for such expenses and
the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
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reimbursement payments which are not made to the Company within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request.
SECTION 7.
CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS
The obligations of the several Underwriters to purchase and pay for the
Firm Shares shall be subject, unless waived by the Representative in its sole
discretion, to the accuracy of the representations and warranties of the
Company contained herein as of the date hereof and as of the Firm Closing
Date as if made on and as of the Firm Closing Date, to the accuracy of the
statements of the Company's officers made pursuant to the provisions hereof,
to the performance by the Company of its covenants and agreements hereunder
and to the following additional conditions:
7.1 EFFECTIVENESS OF REGISTRATION STATEMENT. If the Registration
Statement or any amendment thereto filed prior to the Firm Closing Date has
not been declared effective as of the time of execution hereof, the
Registration Statement or such amendment shall have been declared effective
not later than 11 a.m., California time, on the date on which the amendment
to the Registration Statement originally filed with respect to the Shares or
to the Registration Statement, as the case may be, containing information
regarding the initial public offering price of the Shares has been filed with
the Commission, or such later time and date as shall have been consented to
by the Representative; if required, the Prospectus and any amendment or
supplement thereto shall have been filed with the Commission in the manner
and within the time period required by Rule 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company
or the Representative, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus
or otherwise) to the reasonable satisfaction of counsel for the underwriters.
7.2 OPINION OF COUNSEL. The Representative shall have received an
opinion, dated the Firm Closing Date, of Krausman, LLC, counsel for the
Company, and from the Company's Federal Communications Commission counsel,
substantially to the effect that:
(a) the Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under the
laws of the State of Colorado, and duly qualified to transact business as a
foreign corporation and are in good standing under the laws of all other
jurisdictions where the ownership or leasing of their properties or the
conduct of their business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
Company;
(b) the Company and each of its subsidiaries has the corporate
power to own or lease their properties; to conduct their business as
described in the Registration Statement
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and the Prospectus; to enter into this Agreement and to carry out all of the
terms and provisions hereof to be carried out by them;
(c) the Company has an authorized capital stock as set forth
under the heading "CAPITALIZATION" in the Prospectus; effective upon the
Closing all of the Company's all of the shares have been duly authorized and
validly issued and are fully paid and nonassessable; the shares have been
duly authorized by all necessary corporate action of the Company, and, when
issued and delivered to and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable; the shares have been duly
authorized for quotation on the Nasdaq SmallCap Market; no holders of
outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Shares; and no
holders of securities of the Company are entitled to have such securities
registered under the Registration Statement;
(d) the capital stock of the Company conforms, as to legal
matters, to the statements set forth under the heading "DESCRIPTION OF
SECURITIES" in the Prospectus in all material respects;
(e) the execution and delivery of this Agreement have been
duly authorized by all necessary corporate action of the Company and this
Agreement is a valid and binding obligation of the Company except as rights
to indemnity and contribution thereunder may be limited by applicable federal
or state securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforceability of creditors' rights generally and subject to general
principles of equity.
(f) no legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the property of
the Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein, and, to the best knowledge of such counsel, no such
proceedings have been threatened against the Company, its subsidiaries or
with respect to any of their properties that can reasonably be expected to,
or, if determined adversely to the Company or any of its subsidiaries, would,
in any individual case or in the aggregate, result in any material adverse
change in the business, financial condition or results of operations of the
Company;
(g) no contract or other document is required to be described
in the Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement that is not described therein or filed as
required;
(h) the issuance, offering and sale of the Shares by the
Company pursuant to this Agreement, the compliance by the Company with the
other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required
under state securities or blue sky laws, or conflict with or result in a
breach or violation of any of the terms and provisions of, or
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constitute a default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument, known to such counsel, to which the Company or
any of its subsidiaries is a party or by which the Company, its subsidiaries
or any of their properties are bound, or the Articles of Incorporation or
Bylaws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel and applicable
to the Company or any of its subsidiaries;
(i) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued by the Commission, and no proceedings for
that purpose have been instituted or, to the knowledge of such counsel, are
threatened or contemplated by the Commission;
(j) the Registration Statement and the Prospectus and each
amendment or supplement thereto (in each case, other than the financial
statements and other financial and statistical information contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the Rules
and Regulations;
(k) neither the Company nor any of its subsidiaries is
required, and, if the Company uses the proceeds of the sale of the Firm
Shares and the Option Shares solely as described in the Prospectus, will not
be required as a result of the sale of such Shares to be registered as an
investment company within the meaning of the Investment Company Act of 1940,
as amended; and
(l) such counsel shall also state that they have no reason to
believe that the Registration Statement, as of its effective date, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or the date of such
opinion, included or includes any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided that in each case such counsel need not express any
opinion as to the financial statements and other financial and statistical
information contained therein.
In rendering any such opinion, such counsel may rely as to matters of fact,
to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials. The foregoing opinion may be
limited to the laws of the United States, the laws of the State or Colorado
and the General Corporation Law of the State of Colorado. References to the
Registration Statement and the Prospectus in this Section 7.2 shall include
any amendment or supplement thereto at the date of such opinion. Such
counsel shall permit Luce, Forward, Hamilton & Scripps LLP to rely upon such
opinion in rendering its opinion in Section 7.3.
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7.3 REVIEW BY AND OPINION OF REPRESENTATIVE'S COUNSEL. The
Representative shall have received an opinion, dated the Firm Closing Date,
of Luce, Forward, Hamilton & Scripps LLP, counsel for the Representative,
with respect to certain matters as the Representative may reasonably require,
and the Company shall have furnished to such counsel such documents and
certificates as they may reasonably request for the purpose of enabling them
to pass upon such matters.
7.4 ACCOUNTANT'S LETTER. The Representative shall have received
from Spicer, Jeffries & Company with respect to the Company and from Ernst &
Young, L.L.P., with respect to Fifth Dimension Communications, Inc. ("Fifth
Dimension"), a letter or letters dated, respectively, the date hereof and the
Closing Date, in form and substance reasonably satisfactory to the
Representative, substantially to the effect that:
(a) they are independent accountants with respect to the
Company or Fifth Dimension as appropriate, within the meaning of the Act and
the Rules and Regulations;
(b) in their opinion, the financial statements audited by them
and included in the Registration Statement and the Prospectus comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(c) on the basis of a reading of the audited financial
statements of the Company, for the years ended March 31, 1997, March 31, 1996
and March 31, 1995 and the unaudited financial statements of the Company for
the period ended June 30, 1997 and the notes thereto, carrying out certain
specified procedures (which do not constitute an audit made in accordance
with generally accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth in this
paragraph, a reading of the minute books of the shareholders, the board of
directors and any committees thereof of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and accounting
matters and on the basis of a reading of the audited financial statements of
Fifth Dimension, for the years ended March 31, 1997, March 31, 1996 and March
31, 1995 and the unaudited financial statements of Fifth Dimension for the
period ended June 30, 1997 and the notes thereto, carrying out certain
specified procedures (which do not constitute an audit made in accordance
with generally accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth in this
paragraph, a reading of the minute books of the shareholders, the board of
directors and any committees thereof of Fifth Dimension, and inquiries of
certain officials of Fifth Dimension who have responsibility for financial
and accounting matters, nothing came to their attention that caused them to
believe that:
(i) the unaudited condensed financial statements of the
Company and the Fifth Dimension, as appropriate, included in the Registration
Statement and the Prospectus do not comply in form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations thereunder or are not in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in the
Registration Statement and the Prospectus; and
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(ii) at a specific date not more than five business days
prior to the date of such letter, there were any changes in the capital stock
or long-term debt of the Company or the Fifth Dimension, as appropriate, or
any decreases in net current assets or shareholders' equity of the Company or
the Fifth Dimension, as appropriate, in each case compared with amounts shown
on the June 30, 1997 balance sheet included in the Registration Statement and
the Prospectus, or for the period from June 30, 1997 to such specified date
there were any decreases, as compared with the corresponding period in the
preceding year, in net sales, gross profit, selling, general and
administrative expenses, employee plans and bonuses, income (loss) from
operations, interest expenses, income (loss) before income taxes, provision
(benefit) for income taxes, net income (loss) or net income (loss) per share
of the Company, except in all instances for changes, decreases or increases
set forth in such letter; and
(e) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records of
the Company or the Fifth Dimension, as appropriate, and are included in the
Registration Statement and the Prospectus, and have compared such amounts,
percentages and financial information with such records of the Company or the
Fifth Dimension, as appropriate, and with information derived from such
records and have found them to be in agreement, excluding any questions of
legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that such letters shall be accompanied by a
written explanation of the Company or the Fifth Dimension, as appropriate, as
to the significance thereof, unless the Representative deems such explanation
unnecessary, and such changes, decreases or increases do not, in the sole
judgment of the Representative, make it impractical or inadvisable to proceed
with the purchase and delivery of the Shares as contemplated by the
Registration Statement, as amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
Section 7.4 with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
7.5 OFFICER'S CERTIFICATE. The Representative shall have received
a certificate, dated the Firm Closing Date, of the president and the
principal financial or accounting officer of the Company to the effect that:
(a) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing Date;
the Registration Statement, as amended as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading, in light of the
circumstances in which they were made and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein not misleading,
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in the light of the circumstances under which they were made; and the Company
has in all material respects performed all covenants and agreements and
satisfied all conditions on its part to be performed or satisfied at or prior
to the Firm Closing Date;
(b) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the
best of their knowledge, are contemplated by the Commission; and
(c) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company has
not sustained any material loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse change,
or any development involving a prospective material adverse change, in the
condition (financial or otherwise), business prospects, net worth or results
of operations of the Company, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or supplement
thereto).
7.6 NASD REVIEW. The NASD, upon review of the terms of the public
offering of the Firm Shares and Option Shares, shall not have objected to the
Underwriters' participation in such offering.
7.7 LOCKUPS. The Representatives shall have received from each
person who owns Common Stock, or securities convertible into Common Stock, an
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of the Representative, offer, sell or grant
any option to purchase or otherwise dispose (or announce any offer, sale,
grant of an option to purchase or other disposition) of any shares of Common
Stock or any securities convertible into, or exchangeable for, shares of
Common Stock for a period of twelve months.
7.8 CONDITIONS TO CLOSING OF FIFTH DIMENSION TRANSACTION. On the
Firm Closing Date, the sole remaining condition to closing the acquisition of
Fifth Dimension by the Company shall be the raising funds in this Offering to
pay the cash portion of the consideration in the transaction.
7.9 DUE DILIGENCE EXAMINATION. The counsel to the Representative
and other persons retained by the Representative to conduct a due diligence
investigation with respect to the offering, shall be reasonably satisfied
with the results of their respective due diligence investigations.
7.10 BLUE SKY QUALIFICATION. The Shares shall be qualified in such
states as the Representative may reasonably request pursuant to Section 5.4,
and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Closing Date or Option Closing Date, as the
case may be.
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7.10 OTHER DOCUMENTS. On or before the Firm Closing Date, the
Representative and counsel for the Representative shall have received such
further certificates, documents or other information as they may have
reasonably requested from the Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representative. The
Company shall furnish to the Representative such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Representative and the counsel to the Representative shall reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Shares shall be subject, in the Representative'
discretion, to each of the foregoing conditions to purchase the Firm Shares,
except that all references to the Firm Shares and the Firm Closing Date shall
be deemed to refer to such Option Shares and the related Option Closing Date,
respectively.
SECTION 8.
INDEMNIFICATION AND CONTRIBUTION
8.1 INDEMNIFICATION BY COMPANY. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934 (the "Exchange Act") against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter
or such controlling person may become subject under the Act, the Exchange Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon:
(a) any untrue statement or alleged untrue statement made by
the Company in Section 2 of this Agreement;
(b) any untrue statement or alleged untrue statement of any
material fact contained in (i) the Registration Statement or any amendment
thereto or any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (ii) any application or other document, or any
amendment or supplement thereto, executed by the Company and based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or blue sky
laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"); or
(c) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any Application
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in which they
are made, and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in
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connection with investigating, defending against or appearing as a
third-party witness in connection with any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement
or any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein; and
provided further, that the Company will not be liable to any Underwriter or
any person controlling such Underwriter with respect to any such untrue
statement or omission made in any Preliminary Prospectus that is corrected in
the Prospectus (or any amendment or supplement thereto) if the person
asserting any such loss, claim, damage or liability purchased Shares from
such Underwriter but was not sent or given a copy of the Prospectus (as
amended or supplemented), other than the documents incorporated by reference
therein at or prior to the written confirmation of the sale of such Shares to
such person in any case where such delivery of the Prospectus (as amended or
supplemented) is required by the Act, unless such failure to deliver the
Prospectus (as amended or supplemented) was a result of noncompliance by the
Company with Section 5.5 of this Agreement. This indemnity agreement will be
in addition to any liability which the Company may otherwise have. The
Company will not, without the prior written consent of each Underwriter,
settle or compromise or consent to the entry of any judgment in any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or
any person who controls such Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent includes
an unconditional release of such Underwriter and each such controlling person
from all liability arising out of such claim, action, suit or proceeding.
8.2 INDEMNIFICATION BY UNDERWRITERS. Each Underwriter will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act against any losses, claims, damages or liabilities to
which the Company, any such director or officer of the Company or any such
controlling person of the Company may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(a) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application or (b) the omission or the alleged omission to
state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading in light of the
circumstances in which they are made, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representative specifically for use therein; and, subject to the limitation
set forth
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immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses reasonably incurred by the Company or any director, officer or
controlling person of the Company in connection with investigation or
defending against or appearing as a third-party witness in connection with
any such loss, claim, damage, liability or any action in respect thereof.
This indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have. No Underwriter will, without the prior
written consent of the Company, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder
(whether or not the Company, any of its directors, any of its officers who
signed the Registration Statement or any person who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of the
Company and each such director, officer and controlling person from all
liability arising out of such claim, action, suit or proceeding.
8.3 NOTICE OF DEFENSE. Promptly after receipt by an indemnified
party under this Section 8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
the indemnifying party under this Section 8, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnifying
party shall not have the right to direct the defense of such action on behalf
of such indemnified party or parties and such indemnified party or parties
shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed
to defend such action, the indemnifying party will not be liable to such
indemnified party (which may not be unreasonably withheld or delayed) under
this Section 8 for any legal or other expenses, other than reasonable costs
of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (a) the indemnified party shall
have employed separate counsel in accordance with the proviso to the next
preceding sentence (it being understood, however, that in connection with
such action the indemnifying party shall not be liable for the expenses of
more than one separate counsel at any one time in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representative
in the case of Section 8.1, representing the indemnified parties under such
Section 8.1 who are parties to such action or actions) or (b) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. After such
notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the
consent of the indemnifying party, unless such
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indemnified party waived its rights under this Section 8 in which case the
indemnified party may effect such a settlement without such consent.
8.4 CONTRIBUTION. In circumstances in which the indemnity
agreement provided for in the preceding paragraphs of this Section 8 is
unavailable or insufficient to hold harmless an indemnified party in respect
of any losses, claims, damages or liability (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect (a) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party on the other from the
offering of the Shares or (b) if the allocation provided by the foregoing
clause (a) is not permitted by applicable law, not only such relative
benefits but also the relative fault of the indemnifying party or parties on
the one hand and the indemnified party on the other in connection with the
statements or omissions or alleged statements or omissions that resulted in
such losses, claims, damages or liability (or action in respect thereof).
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (after deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by
the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any
other equitable considerations appropriate in the circumstances. The Company
and the Underwriters agree that it would not be equitable if the amount of
such contribution were determined by pro rata or per capita allocation (even
if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take into account the equitable
consideration referred to in the first sentence of this Section 8.4.
Notwithstanding any other provision of this Section 8.4, no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
underwriter discount on the Shares purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion
to their respective underwriting obligations and not joint, and contributions
among Underwriters shall be governed by the provisions of the Agreement Among
Underwriters. For purposes of this Section 8.4, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the
Company who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, shall have the same right to contribution as the
Company as the case may be.
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SECTION 9.
DEFAULT OF UNDERWRITERS
If one or more Underwriters default in their obligations to purchase Firm
Shares, or Option Shares hereunder and the aggregate number of such Shares
that such defaulting Underwriter or Underwriters agreed but failed to
purchase is ten percent or less of the aggregate number of Firm Shares or
Option Shares to be purchased by all of the Underwriters at such time
hereunder, the other Underwriters may make arrangements satisfactory to the
Representative for the purchase of such Shares by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representative), but if no such arrangements are made by the Firm Closing
Date or the related Option Closing Date, as the case may be, the other
Underwriters shall be obligated severally in proportion to their respective
commitments hereunder to purchase the Firm Shares, or Option Shares that such
defaulting Underwriter or Underwriters agreed but failed to purchase. In the
event of any default by one or more Underwriters as described in this Section
9, the Representative shall have the right to postpone the Firm Closing Date
or the Option Closing Date, as the case may be, established as provided in
Section 3 hereof for not more than seven business days in order that any
necessary changes may be made in the arrangements or documents for the
purpose and delivery of the Firm Shares or Option Shares, as the case may be.
As used in this Agreement, the term "Underwriter" includes any persons
substituted for an Underwriter under this Section 9. Nothing herein shall
relieve any defaulting Underwriter from liability for its default.
SECTION 10.
SURVIVAL
The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and directors
and the several Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (a) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person referred to in Section 8 hereof and (b) delivery of and
payment for the Shares. The respective agreements, covenants, indemnities and
other statements set forth in Sections 5 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
SECTION 11.
TERMINATION
11.1 BY REPRESENTATIVE. This Agreement may be terminated with
respect to the Firm Shares or any Option Shares in the sole discretion of the
Representative by notice to the Company given prior to the Firm Closing Date
or the related Option Closing Date, respectively, in the event that the
Company shall have failed, refused or been unable to perform all obligations
and
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satisfy all conditions on its part to be performed or satisfied hereunder at
or prior thereto or, if at or prior to the Firm Closing date or such Option
Closing Date, respectively:
(a) the Company shall have sustained any material loss or
interference with its business or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding or there shall have
been any material adverse change, or any development involving a prospective
material adverse change (including financial or otherwise), in the business
prospects, net worth or results of operations of the Company, except in each
case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto);
(b) trading in the Common Stock shall have been suspended by
the Commission or the National Association of Securities Dealers Automated
Quotation SmallCap Market or trading in securities generally on the New York
Stock Exchange or the American Stock Exchange shall have been suspended or
minimum or maximum prices shall have been established on any such exchange or
market system;
(c) a banking moratorium shall have been declared by New York,
California, or United States authorities; or
(d) there shall have been (i) an outbreak or escalation of
hostilities between the United States and any foreign power, (ii) an outbreak
or escalation of any other insurrection or armed conflict involving the
United States or (iii) any other calamity or crisis having an effect on the
financial markets that, in the reasonable judgment of the Representative,
makes it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares as contemplated by the Registration Statement, as
amended as of the date hereof.
11.2 EFFECT OF TERMINATION HEREUNDER. Termination of this Agreement
pursuant to this Section 11 shall be without liability of any party to any
other party, except as provided in Section 10 hereof.
SECTION 12.
INFORMATION SUPPLIED BY UNDERWRITERS
The statements set forth in the last paragraph on the front cover page
and under the heading "Underwriting" in any Preliminary Prospectus or the
Prospectus, to the extent such statements relate to the Underwriters
constitute the only information furnished by any Underwriter through the
Representative to the Company for the purposes of Section 8 and 10 hereof.
The Underwriters represent and warrant to the Company that such statements,
to such extent, are correct as of the date hereof and at each Closing Date.
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SECTION 13.
NOTICES
All communications hereunder shall be in writing and, if sent to any of
the Underwriters, shall be mailed (certified or registered mail, postage
prepaid, return receipt requested) or delivered or sent by facsimile
transmission and confirmed in writing to Centex Securities Incorporated, 1020
Prospect Street, Suite 200, La Jolla, California 92037, Attention: Mr. Bruce
A. Biddick (with a copy to Dennis J. Doucette, Esq., Luce, Forward, Hamilton
& Scripps LLP, 600 West Broadway, Suite 2600, San Diego, CA 92101), if sent
to the Company, shall be mailed (certified or registered mail, postage
prepaid, return receipt requested), delivered or telegraphed and confirmed in
writing to the Company at 1050 Walnut St., Suite 301, Boulder, Colorado
80302, Attention: Mr. Mark H. Kreloff (with a copy to Kent D. Krausman, Esq.,
Krausman, L.L.C., 3200 Cherry Creek South Drive, Suite 400, Denver, Colorado
80209). Notices shall be effective if mailed, 48 hours after deposit in the
mail properly addressed, sent by facsimile, upon receipt and in any other
instance, when delivered.
SECTION 14.
SUCCESSORS
This Agreement shall inure to the benefit of and shall be binding upon
the several Underwriters, the Company and their respective successors and
legal Representative, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that
(a) the indemnities of the Company contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (b) the indemnities of the Underwriters contained in Section
8 of this Agreement shall also be for the benefit of the directors of the
Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act. No
purchaser of Shares from any Underwriter shall be deemed a successor because
of such purchase.
SECTION 15.
APPLICABLE LAW
The validity and interpretation of this Agreement, and the terms and
conditions set forth herein, shall be governed by and construed in accordance
with the laws of the State of California without giving effect to any
provisions relating to conflicts of laws.
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SECTION 16.
COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, and
each of the several Underwriters.
Very truly yours,
NEW FRONTIER MEDIA, INC.
By:
-------------------------------
Mark H. Kreloff
President
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Centex Securities Incorporated
(As Representative of the several
Underwriters named in Schedule 1 hereto)
By:
-------------------------------
Bruce Biddick, President
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SCHEDULE 1
UNDERWRITERS
Number of Firm Shares
Underwriter to be purchased
- ----------- ---------------
Centex Securities Incorporated
Total ---------------
<PAGE>
NEW FRONTIER MEDIA, INC.
___________ Shares
AGREEMENT AMONG UNDERWRITERS
_____________, 1997
Centex Securities Incorporated
(As Representative of the several
Underwriters Named in Schedule I
to Exhibit A annexed hereto)
1020 Prospect Street, Suite 200
La Jolla, CA 92037
Gentlemen:
We understand that New Frontier Media, Inc., a Colorado corporation (the
"Company"), desires to enter an agreement, substantially in the form of
Exhibit A hereto (the "Underwriting Agreement"). The Underwriting Agreement
provides for the sale by the Company to you and the other prospective
Underwriters named in Schedule I to the Underwriting Agreement, severally and
not jointly, of an aggregate of _______ shares (the "Firm Shares") of common
stock ("Common Stock") of the Company. In addition, the Company, pursuant to
the Underwriting Agreement, will grant to the Underwriters an option to
purchase up to an additional _________ Shares underwritten (the "Option
Shares") for the purpose of covering over-allotments in connection with the
sale of the Firm Shares. The Firm Shares and any Option Shares purchased
pursuant to the Underwriting Agreement are herein called the "Shares."
We understand that changes may be made in those who are to be
Underwriters and in the respective number of Shares to be purchased by them,
but that the number of Shares to be purchased by us as set forth in said
Schedule I will not be changed without our consent except as provided herein
or in the Underwriting Agreement. The parties on whose behalf you execute the
Underwriting Agreement are herein called the "Underwriters."
We desire to confirm the agreement among you, the undersigned and the
other Underwriters with respect to the purchase of the Shares by the
Underwriters, severally and not jointly, from the Company. The aggregate
number of Shares which any Underwriter will be obligated to purchase from the
Company pursuant to the terms of the Underwriting Agreement is herein called
the "Underwriting Obligation" of that Underwriter.
1. AUTHORITY AND COMPENSATION OF REPRESENTATIVE. We hereby authorize
you, as our representative (the "Representative") and on our behalf, (a) to
enter into an agreement with the Company, in substantially the form attached
hereto as Exhibit A, but with such changes therein as in
<PAGE>
Any Retail Sales shall be as nearly as practicable in proportion to the
Underwriting Obligations of the respective Underwriters. Any sales to
Selected Dealers made for our account shall be as nearly as practicable in the
ratio that the Shares reserved for our account for offering to Dealers
bears to the aggregate of all Shares of all Underwriters including you so
reserved. The over-allotment option to the extent exercised, shall be
exercised by you as a Representative of the Underwriters, and shall be
exercised only for the purpose of making Retail Sales or sales to Selected
Dealers by you. Such sales for our account of the over-allotment option shall
as nearly as practicable be in proportion to the Underwriting Obligations of
the respective Underwriters. On any Retail Sales or sales to Selected
Dealers, including those pertaining to the overallotment option, made by you
on our behalf we shall be entitled to receive only the Underwriter's
concession.
We agree that, from time to time prior to the termination of the
provisions referred to in Section 13 hereof, we shall furnish to you such
information as you may request in order to determine the number of Shares
purchased by us under the Underwriting Agreement which then remain unsold,
and we shall upon your request sell to you for the account of any Underwriter
as many of such unsold Shares as you may designate at the Offering Price,
less all or any part of the concession to Selected Dealers as you, in your
sole discretion, shall determine. The provisions of Section 4 hereof shall
not be applicable in respect of any such sale.
We authorize you to determine the form and manner of any communications
or agreements with the Selected Dealers. In the event that there shall be any
agreements with Selected Dealers, you are authorized to act as manager
thereunder and we agree, in such event, to be governed by the terms and
conditions of such agreements. The form of Selected Dealer Agreement attached
hereto as Exhibit B is satisfactory to us. Sales to Dealers shall be made
under a Selected Dealers Agreement, attached hereto as Exhibit B, attached
hereto and by this reference incorporated herein. Each Underwriter agrees
that it will not offer any of the Shares for sale at a price below the
Offering Price or allow any concession therefrom except as herein otherwise
provided. We as to our Shares may enter into agreements with dealers, but any
reallowance concession shall not exceed half of the Dealer's Concession.
It is understood that any Selected Dealer to whom an offer may be made as
hereinbefore provided shall be actually engaged in the investment banking or
securities business and shall be either (a) a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or (b) a dealer
with its principal place of business located outside the United States, its
territories and its possessions and not registered as a broker or dealer
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), who
agrees not to make any sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein.
Each Selected Dealer shall agree to comply with the provisions of Rule 2740
of the Conduct Rules of the NASD, and each foreign Selected Dealer who is not
a member of the NASD also shall agree to comply with the NASD's
interpretation with respect to free-riding and withholding, to comply, as
though it were a member of the NASD, with the provisions of Rules 2730 and
2750 of the Conduct Rules, and to comply with Rule 2420 of the Conduct Rules
thereof as that Rule applies to a non-member foreign dealer. The several
Underwriters may allow, and the Selected Dealers, if any,
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<PAGE>
may re-allow such concession or concessions as you may determine from time to
time on sales of Shares to any qualified dealer, all subject to the Conduct
Rules of the NASD.
Nothing contained in this Agreement shall be deemed to restrict our
right, subject to the provisions of this Section 3, to offer our Shares prior
to the effective date of the Registration Statement, provided that any such
offer shall be made in compliance with any applicable requirements of the
Securities Act of 1933 (the "1933 Act") and the 1934 Act and the rules and
regulations of the Securities and Exchange Commission thereunder and of any
applicable state securities laws.
4. REPURCHASES IN THE OPEN MARKET. Any Shares sold by us (otherwise
than through you) which shall be contracted for or purchased in the open
market by you on behalf of any Underwriter or Underwriters shall be
repurchased by us on demand at a price equal to the cost of such purchase
plus commissions and taxes on redelivery. Any Shares delivered on such
repurchase need not be the identical Shares originally sold by us. In lieu of
delivery of such Shares to us, you may sell such Shares in any manner for our
account and charge us with the amount of any loss or expense or credit us
with the amount of any profit, less any expense, resulting from such sale, or
charge our account with an amount not in excess of the concession to Selected
Dealers.
5. DELIVERY AND PAYMENT. We agree to deliver to you at or before
6:00 a.m. California time on the Closing Date referred to in the Underwriting
Agreement payment for the Shares to be purchased by us under the Underwriting
Agreement in an amount equal to the Offering Price for such Shares less the
concession to Selected Dealers for Shares which we retained for direct sale
by us, against delivery of certificates for the Shares for our account
hereunder. If we are a member of or clear through a member of The Depository
Trust Company ("DTC"), you may, in your discretion, deliver our Shares
through the facilities of DTC.
You shall remit to us, as promptly as practicable, the amounts received
by you from Selected Dealers and retail purchasers as payment in respect of
Shares sold by you for our account pursuant to Section 3 hereof for which
payment has been received. Shares purchased by us under the Underwriting
Agreement and not reserved or sold by you for our account pursuant to Section
3 hereof shall be delivered to us as promptly as practicable after receipt by
you. Any Shares purchased by us and so reserved which remains unsold at any
time prior to the settlement of accounts hereunder may, in your discretion,
and shall, upon your request, be delivered to us, but, until termination of
the first three paragraphs of Section 7 of the Selected Dealer Agreements
pursuant to Section 8 thereof and of other selling arrangements, such
delivery shall be for carrying purposes only. In case any Shares reserved for
sale in Retail Sales or to Selected Dealers shall not be purchased and paid
for in due course as contemplated hereby, we agree (a) to accept delivery
when tendered by you of any Shares so reserved for our account and not so
purchased and paid for, and (b) in case we shall have received payment from
you in respect of any such Shares, to reimburse you on demand for the full
amount which you shall have paid us in respect for such Shares.
In the event of our failure to tender payment for Shares as provided in
the Underwriting Agreement, you shall have the right under the provisions
thereof to arrange for other persons, who
4
<PAGE>
may include you and any other Underwriter, to purchase such Shares which we
had agreed to purchase, but without relieving us from liability for our
default.
6. AUTHORITY TO BORROW. We authorize you to advance your funds for
our account (charging current interest rates) and to arrange loans for our
account or the account of the Underwriters for the purpose of carrying out
this Agreement, and in connection therewith to execute and deliver any notes
or other instruments and to hold or pledge as security therefor all or any
part of our Shares or other Shares purchased hereunder for our account. Any
lender is hereby authorized to accept your instructions in all matters
relating to such loans. Any part of our Shares or of such other Shares so
held by you may be delivered to us for carrying purposes and, if so
delivered, will be redelivered to you upon demand.
7. ALLOCATION OF EXPENSES AND LIABILITY. We authorize you to charge
our account with and we agree to pay (a) all transfer taxes on sales made by
you for our account, except as herein otherwise provided, and (b) our
proportionate share (based on our Underwriting Obligation) of all expenses
incurred by you in connection with the purchase, carrying, sale and
distribution of the Shares and all other expenses arising under the terms of
the Underwriting Agreement or this Agreement. Your determination of all such
expenses and your allocation thereof shall be final and conclusive. You may
at any time make partial distributions of credit balances or call for payment
of debit balances. Funds for our account at any time in your hands may be
held in your general funds without accountability for interest. As soon as
practicable after the termination of this Agreement, the net credit or debit
balance in our account, after proper charge and credit for all interim
payments and receipts, shall be paid to or paid by us, provided that you may
establish such reserves as you, in your sole discretion, shall deem advisable
to cover possible additional expenses chargeable to the several Underwriters.
Notwithstanding any settlement, we will remain liable for any taxes on
transfers for our account and for our proportionate share (based on our
Underwriting Obligation) of all expenses and liabilities that may be incurred
for the accounts of the Underwriters.
8. LIABILITY FOR FUTURE CLAIMS. Neither any statement by you of any
credit or debit balance in our account nor any reservation from distribution
to cover possible additional expenses relating to the Shares shall constitute
any representation by you as to the existence or non-existence of possible
unforeseen expenses or liabilities of or charges against the several
Underwriters. Notwithstanding the distribution of any net credit balance to
us or the termination of this Agreement or both, we shall be and remain
liable for, and will pay on demand, (a) our proportionate share (based on our
Underwriting Obligation) of all expenses and liabilities which may be
incurred by or for the accounts of the Underwriters, or any of them,
including any liability which may be incurred by or for the accounts of the
underwriters, or any of them, based on the claim that the Underwriters
constitute an association, unincorporated business, partnership or any
separate entity, and (b) any transfer taxes paid after such settlement on
account of any sale or transfer for our account.
9. STABILIZATION AND OVER-ALLOTMENT. We authorize you (a) to make
purchases and sales of Shares in the open market or otherwise, for long or
short account, and on such terms and at such prices as you, in your sole
discretion, shall deem advisable, (b) in arranging for sales of the Shares,
5
<PAGE>
to over-allot, and (c) either before or after the termination of this
Agreement, to cover any short position or liquidate any long position
incurred pursuant to this Section 9; subject, however, to the applicable
rules and regulations of the Securities and Exchange Commission (the
"Commission") under the 1934 Act. All such purchases and sales and
over-allotments shall be made for the accounts of the several Underwriters as
nearly as practicable in proportion to their respective Underwriting
Obligations; provided, however, that our net position resulting from such
purchases and sales and over-allotments shall not at the time of each such
purchase or sale or over-allotment exceed, for either long or short account,
15% of the aggregate amount which we shall become obligated to pay in respect
of the total number of Firm Shares and Option Shares purchased for our
account. If you engage in any stabilizing transactions as Representative of
the Underwriters, you shall notify us of that fact. Each of us agrees to file
with you, within five business days following the date of termination of such
transactions, triplicate originals of a report "not as manager" on Form
X-17A-1 in accordance with the requirements of Rule 17a-2(e) under the
Securities Exchange Act of 1934. You shall, as such Representative, file such
reports with, and make the requisite reports on such transactions as required
by, the Securities and Exchange Commission in accordance with Rule 17a-2
under the 1934 Act.
10. OPEN MARKET TRANSACTIONS. We agree that we will not make bids or
offers, or make or induce purchases or sales for our own account or the
accounts of customers, in the open market or otherwise, either before or
after the purchase of the Shares and for either long or short account, of
any shares of Common Stock or any security of the same class and series, or
any right to purchase any such security except: (a) as provided in this
Agreement, the Underwriting Agreement and the Selected Dealer Agreements or
otherwise approved by you, (b) in brokerage transactions not involving
solicitation of the customer's order and otherwise consistent with the
provisions of Regulation M promulgated by the SEC, and (c) in connection with
option and option-related transactions that are consistent with the
"no-action" position set forth in Release No. 17609, as amended in Release
No. 19565, of the Commission under the 1934 Act. We further agree that we
will not lend, either before or after the purchase of the Shares, to any
customer, Underwriter, Selected Dealer or to any other securities broker or
dealer any shares of Common Stock. Prior to the completion (as defined in
Rule 10b-6 under the 1934 Act) of our participation in the distribution, we
will otherwise comply with Rule 10b-6.
11. BLUE SKY. Prior to the initial offering by the Underwriters, you
will inform us as to the states and other jurisdictions under the respective
securities or blue sky laws of which it is believed that the Shares have been
qualified for sale or is exempt from such qualification, but you do not
assume any responsibility or obligation as to the accuracy of such
information or as to the right of any Underwriter or dealer to offer or sell
the Shares in any state or other jurisdiction.
12. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement shall not
release us from any of our obligations. In the event of such default by one
or more Underwriters, you are authorized to increase, pro rata with the other
non-defaulting Underwriters, the number of Shares which we shall be obligated
to purchase from the Company; provided, however, that the aggregate amount of
all such increases for all
6
<PAGE>
non-defaulting Underwriters shall not exceed 10% of the Shares and, if the
aggregate amount of the Shares not taken up by such defaulting Underwriters
exceeds such 10%, you are further authorized, but shall not be obligated, to
arrange for the purchase by other persons, who may include you and other
non-defaulting Underwriters, of all or a portion of the Shares not taken up
by such Underwriters. In the event any such increases or arrangements are
made, the respective amounts of the Shares to be purchased by the
non-defaulting Underwriters and by any such other person or persons shall be
taken as the basis for the Underwriter's obligations under this Agreement,
but this shall not in any way affect the liability of any defaulting
Underwriter to the other Underwriters for damages resulting from such
default. In the event of default by one or more Underwriters in respect of
their obligations under this Agreement to take up and pay for any Shares
purchased by you for their respective accounts pursuant to Section 9 hereof,
or to deliver any Shares sold or over-allotted by you for their respective
accounts pursuant to any provision of this Agreement, and to the extent that
arrangements shall not have been made by you for other persons to assume the
obligations of such defaulting Underwriter or Underwriters, each
non-defaulting Underwriter shall assume its proportionate share of the
aforesaid obligations of each such defaulting Underwriter without relieving
any such defaulting Underwriter of its liability therefor.
13. TERMINATION. Unless earlier terminated by you, the provisions of
Section 2, 3, 4, 6, 9 and 10 of this Agreement shall, except as otherwise
provided herein, terminate thirty full business days after the effective date
of the Registration Statement herein referred to, but may be extended by you
for an additional period or periods not exceeding thirty full business days
in the aggregate. You may, however, terminate this Agreement or any
provisions hereof at any time by written or telegraphic notice to us.
14. GENERAL POSITION OF THE REPRESENTATIVE. In taking action under
this Agreement, you shall act only as agent of the several Underwriters. Your
authority shall include the taking of such action as you may deem advisable
in respect of all matters pertaining to any and all offers and sales of the
Shares, including the right to make any modifications which you consider
necessary or desirable in the arrangements with Selected Dealers or others.
You shall be under no liability for or in respect of the value of the Shares
or the validity or the form thereof, the Registration Statement, the
Prospectus or agreements or other instruments executed by the Company or
others; or for or in respect of the delivery of the Shares; or for the
performance by the Company or others of any agreement on its or their part;
nor shall you as Representative or otherwise be liable under any of the
provisions hereof or for any matters connected herewith, except for want of
good faith, and except for any liability arising under the 1933 Act; and only
obligations expressly assumed by you as Representative herein shall be
implied from this Agreement. In representing the Underwriters hereunder, you
shall act as Representative of each of them respectively. Nothing herein
contained shall constitute the several Underwriters partners with you or with
each other, or render any Underwriter liable for the commitments of any other
Underwriter, except as otherwise provided in Section 12 hereof and in Section
7 of the Underwriting Agreement. If the Underwriters shall be deemed to
constitute a partnership for Federal income tax purposes, it is the intent of
each Underwriter to be excluded from the application of Subchapter x, Chapter
1, Subtitle A, of the Internal Revenue Code of 1986, as amended. Each
Underwriter elects to be so excluded and agrees
7
<PAGE>
not to take any position inconsistent with such election. Each Underwriter
authorizes you, in your discretion, to execute and file on behalf of the
Underwriters such evidence of election as may be required by the Internal
Revenue Service. The commitments and liabilities of each of the several
Underwriters are several in accordance with their respective Underwriting
Obligations and are not joint.
15. ACKNOWLEDGMENT OF RECEIPT OF REGISTRATION STATEMENT, ETC. We
hereby confirm that we have examined the Registration Statement relating to
the Shares as heretofore filed by the Company with the Commission and each
amendment thereto, if any, filed through the date hereof, including any
documents filed under the 1934 Act through the date hereof and incorporated
by reference into the Prospectus, that we are willing to be named as an
underwriter therein and to accept the responsibilities of an underwriter
thereunder, and that we are willing to proceed as therein contemplated. We
confirm that we have authorized you to advise the Company on our behalf (a)
as to the statements to be included in any Preliminary Prospectus and in the
Prospectus under the heading "Underwriting" insofar as they relate to us, and
(b) that there is no other information about us required to be stated in the
Registration Statement or Prospectus. We understand that the aforementioned
documents are subject to further change and that we will be supplied with
copies of any further amendments or supplements to the Registration
Statement, of any document filed under the 1934 Act after the effective date
of the Registration Statement and before termination of the offering of the
Shares by the Underwriters if such document is deemed to be incorporated by
reference into the Prospectus and of any amended or supplemented Prospectus
promptly, if and when received by you, but the making of such changes,
amendments and supplements shall not release us or affect our obligations
hereunder or under the Underwriting Agreement.
16. INDEMNIFY. We agree to indemnify and hold harmless each other
Underwriter and any person who controls any such Underwriter within the
meaning of Section 15 of the 1933 Act, to the extent that, and upon the terms
on which, we agree to indemnify and hold harmless the Company and other
specified persons as set forth in the Underwriting Agreement. Our indemnity
agreement contained in this Section 16 shall remain in full force and effect
regardless of any investigation made by or on behalf of such other
Underwriter or controlling person and shall survive the delivery of and
payment for the shares and the termination of this Agreement and the similar
agreements entered into with the other Underwriters.
Each Underwriter (including you) will pay, upon your request, as
contribution, its proportionate share, based upon its Underwriting
Obligation, of any loss, claim damage or liability, joint or several, paid or
incurred by any Underwriter (including you) to any person other than an
Underwriter, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
the Prospectus, any amendment or supplement thereto or any preliminary
Prospectus or any other selling or advertising material approved by you for
use by the Underwriters in connection with the sale of the Shares, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading
(other than an untrue statement or alleged untrue statement or omission or
alleged omission made in conformity with written information furnished to the
Company
8
<PAGE>
through you by or on behalf of an Underwriter expressly for use therein) or
relating to any transaction contemplated by this Agreement; and will pay such
proportionate share of any legal or other expense reasonably incurred by you
or with your consent in connection with investigating or defending against
any such loss, claim, damage or liability, or any action in respect thereof.
In determining the amount of our obligation under this paragraph, appropriate
adjustment may be made by you to reflect any amounts received by any one or
more Underwriters in respect of such claim from the Company pursuant to
Section 6 of the Underwriting Agreement or otherwise. There shall be credited
against any amount paid or payable by us pursuant to this paragraph any loss,
claim, damage, liability or expense which is incurred by us as a result of
any such claim asserted against us, and if such loss, claim, damage,
liability or expense is incurred by us subsequent to any payment by us
pursuant to this paragraph, appropriate provision shall be made to effect
such credit, by refund or otherwise. If any such claim is asserted, you may
take such action in connection therewith as you deem necessary or desirable,
including retention of counsel for the Underwriters, and in your discretion
separate counsel for any particular Underwriter or group of Underwriters, and
the fees and disbursements of any counsel so retained by you shall be
included in the amounts payable pursuant to this paragraph. In determining
amounts payable pursuant to this paragraph, any loss, claim, damage,
liability or expense incurred by any person who controls any Underwriter
within the meaning of Section 15 of the 1933 Act which has been incurred by
reason of such control relationship shall be deemed to have been incurred by
such Underwriter. Any Underwriter may elect to retain, at its own expense,
its own counsel. You may settle or consent to the settlement of any such
claim on advice of counsel retained by you. Whenever you receive notice of
the assertion of any claim to which the provisions of this paragraph would be
applicable, you will give prompt notice thereof to each Underwriter. If any
Underwriter or Underwriters defaults in its or their obligation to make any
payments under this paragraph, each non-defaulting Underwriter shall be
obligated to pay its proportionate share of all defaulted payments, based
upon the proportion such non-defaulting Underwriter's Underwriting Obligation
bears to the Underwriting Obligations of all non-defaulting Underwriters.
Nothing therein shall relieve a defaulting Underwriter from liability for its
default.
17. CAPITAL REQUIREMENTS. We confirm that the incurrence by us of our
obligations under this Agreement and under the Underwriting Agreement will
not place us in violation of the net capital requirements of Rule 15c3-1
under the 1934 Act or of any applicable rules relating to capital
requirements of any securities exchange to which we are subject.
18. UNDERTAKING TO MAIL PROSPECTUSES. We represent to you that we have
taken all action on our part required to have been taken to satisfy the
policy set forth in Release No. 4968 of the Commission under the 1933 Act,
including the distribution in the manner and at or prior to the time set
forth in such Release, of copies of the Preliminary Prospectus relating to
the Shares (or, if you have so requested, copies of any revised Preliminary
Prospectus) to all persons to whom we expect to mail confirmation of sale. As
contemplated by Rule 15c2-8 under the 1934 Act, you agree to mail a copy of
the Prospectus mentioned in the Underwriting Agreement to any person making a
written request therefor during the period referred to in said Rule, the
mailing to be made to the address given in the request. We confirm that we
have delivered all Preliminary Prospectuses and revised Preliminary
Prospectuses, if any, required to be delivered under the provisions of Rule
15c2-8 and
9
<PAGE>
agree to deliver all Prospectuses required to be delivered thereunder. We
acknowledge that the copies of the Preliminary Prospectus furnished to us
have been distributed to dealers who have been notified of the foregoing
requirements pertaining to the delivery of Preliminary Prospectuses and
Prospectuses. You have heretofore delivered to us such number of copies of
Preliminary Prospectuses as have been reasonably requested by us, receipt of
which is hereby acknowledged, and will deliver such number of copies of
Prospectuses as will be reasonable requested by us.
19. MISCELLANEOUS. We have transmitted herewith a completed
Underwriters' Questionnaire on the form thereof supplied by you. Any notice
hereunder from you to us or from us to you shall be deemed to have been duly
given if sent by registered mail, telegram or teletype, to us at our address
as set forth in our Underwriters' Questionnaire previously delivered to you,
or to you at 1020 Prospect Street, Suite 200, La Jolla, California 92037,
Attention: Mr. Bruce A. Biddick.
We understand that you are a member in good standing of the NASD. We
hereby confirm that we are actually engaged in the investment banking or
securities business and are either (a) a member in good standing of the NASD
or (b) a dealer with its principal place of business located outside the
United States, its territories and its possessions and not registered as a
broker or dealer under the 1934 Act who agrees not to make any sales within
the United States, its territories or its possessions or to persons who are
nationals thereof or residents therein (except that we may participate in
sales to Selected Dealers and others under Section 3 of this Agreement). We
hereby agree to comply with the provisions of Rule 2740 of the Conduct Rules
of the NASD, and, if we are a foreign dealer and not a member of the NASD, we
also hereby agree to comply with the NASD's interpretation with respect to
free-riding and withholding and to comply, as though we were a member of the
NASD, with the provisions of Rules 2730 and 2750 of the Conduct Rules, and to
comply with Rule 2720 of the Conduct Rules as that Rule applies to a
non-member foreign dealer. In connection with sales and offers to sell Shares
made by us outside the United States, its territories and possessions (i) we
will either furnish to each person to whom any such sale or offer is made a
copy of the then current Preliminary Prospectus or the Prospectus, as the
case may be, or inform such person that such Preliminary Prospectus or
Prospectus will be available upon request, and (ii) we will furnish to each
person to whom any such sale or offer is made such prospectus, advertisement
or other offering document containing information relating to the Shares or
the Company as may be required under the law of the jurisdiction in which
such sale or offer is made. Any prospectus, advertisement or other offering
document furnished by us to any person in accordance with the preceding
sentence and any any such addition offering material as we may furnish to any
person (x) shall comply in all respects with the law of the jurisdiction in
which it is so furnished, (y) shall be prepared and so furnished at our sole
risk and expense and (z) shall not contain information relating to the Shares
or the Company which is inconsistent in any respect with the information
contained in the then current Preliminary Prospectus or in the Prospectus, as
the case may be.
This instrument may be signed by or on behalf of the Underwriters in one
or more counterparts each of which shall constitute an original and all of
which together shall constitute one and the same agreement among all the
Underwriters and shall become effective at such time as all the
10
<PAGE>
Underwriters shall have signed or have had signed on their behalf such
counterparts and you shall have confirmed all such counterparts. You may
confirm such counterparts by facsimile signature.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California without giving effect to the choice of law or
conflicts of laws principles thereof.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
---------------------------------------
As Attorney-in-Fact for each of the
several Underwriters named in Schedule I
to the Underwriting Agreement
Confirmed as of the date
first above written:
Centex Securities Incorporated
As Representative
By:
----------------------------------
11
<PAGE>
EXHIBIT A
UNDERWRITING AGREEMENT
<PAGE>
EXHIBIT B
SELECTED DEALER AGREEMENT
<PAGE>
NEW FRONTIER MEDIA, INC.
________Shares
UNDERWRITERS' QUESTIONNAIRE
---------------------------
Each prospective Underwriter must deliver executed a copy to the
Representative not later than ______________, 1997 at the following address:
Mr. Bruce A. Biddick
Centex Securities Incorporated
1020 Prospect Street, Suite 200
La Jolla, CA 92037
Dear Mr. Biddick:
In connection with the proposed offering of _________newly issued shares
("Shares") of common stock of New Frontier Media, Inc. (the "Company") and
for use in the Registration Statement (Form SB-2) relating thereto filed with
the Securities and Exchange Commission and the Prospectus included therein,
the undersigned, as a prospective Underwriter, advises you as follows:
1. Our exact name (as it should appear in the Prospectus) and our
address are as follows:
2. Except as indicated below: (a) neither we nor any of our
directors, officers or partners have a "material" (as defined in the Rules
and Regulations under the Securities Act of 1933) relationship with the
Company or any of its officers or directors; (b) during the last three years,
neither we nor any of our officers, directors or partners have been an
officer or director of the Company or an "associate" (as defined in such
Rules and Regulations) of any of the officers or directors of the Company or
of any person who, to our knowledge, now owns of record or beneficially more
than 10% of any class of voting securities of the Company; (c) neither we nor
any of our directors, officers or partners, separately or as a group, now
owns of record or beneficially more than 1% of any class of voting securities
of the Company; (d) other than as may be stated in the Agreement Among
Underwriters, the Underwriting Agreement, the Selected Dealer Agreement or
in the Registration Statement, we do not know of any arrangements to limit or
restrict the sale of the Shares for the period of distribution, to stabilize
the market for the Shares, for withholding commissions, or otherwise to hold
each prospective Underwriter or dealer responsible for the distribution of
his participation in the Shares, or for any discounts or commissions to be
allowed or paid to dealers; (e) other than as set forth in the Preliminary
Prospectus we have no knowledge that more than 5% of any class of voting
securities of the Company is or is to be held subject to any voting trust or
any similar agreement; (f) our proposed commitment to purchase the Shares
will not result
<PAGE>
in a violation of the financial responsibility requirements of rule 15c3-1
under the Securities Exchange Act of 1934; (g) none of us, any of our
directors, officers, partners or "persons associated with" us (as defined in
the Bylaws of the National Association of Securities Dealers, Inc. "NASD"),
or, to our knowledge, any "related person" (defined by the NASD to include
counsel, financial consultants and advisors, finders, members of the selling
or distribution groups and any other persons associated with or related to
any of the foregoing), or any other broker-dealer (i) within the last 18
months has purchased in private transactions, or intend before, at or within
six months after the commencement of the public offering to purchase in
private transactions, any securities of the Company or any parent or
subsidiary thereof or (ii) within the last 12 months had any dealings with
the Company, or any parent, subsidiary or controlling stockholder thereof
(other than relating to the proposed Agreement Among Underwriters and
Selected Dealer Agreement), as to which documents or information are required
to be filed with the NASD pursuant to its Statement of Policy Concerning
Venture Capital and Other Investments or its Interpretation with Respect to
Review of Corporate financing, dated March 10, 1970, as amended; (h) we do
not intend to confirm sales of Shares to any accounts over which we exercise
discretionary authority.
(State exceptions, if any, or state "No Exceptions")
3. Set forth below or attached separately is a list of the states under
the laws of which we are registered as a dealer in securities:
4. Except an indicated below, we have not within the past 12 months
prepared or had prepared for us any investment research reports or memoranda
relating to the Company, engineering, management or report or memorandum
relating to broad aspects of the business, operations or product of the
Company, and no report or memorandum has been prepared for external use by us
in connection with the proposed offering.
(State "No Exceptions" or list and enclose three copies
of each report or memorandum and describe distribution.)
The undersigned understands that a court has held that it would be against
the public policy manifested by the federal securities laws to permit an
underwriter which has been found to have actual knowledge of false or
misleading statements or omissions contained in a prospectus or an offering
circular, to enforce against the issuer of the indemnity provisions
customarily contained in an underwriting agreement. In this connection, the
undersigned represents that it has no actual knowledge of false and
misleading statements in or omissions from the Registration Statement and
that, in
2
<PAGE>
accordance with the next paragraph, it will advise you if it becomes aware of
any such statements or omissions.
We agree to keep an accurate record of the distribution by us of copies of
the Registration Statement and of each amendment thereto, and of each
preliminary prospectus, and we also agree promptly upon request by the
Company or by Centex Securities Incorporated to furnish to each person who
received copies of the above, copies of any subsequent amendment or revised
preliminary prospectus or of any memorandum furnished to us outlining changes
in the Registration Statement or Prospectus. We agree to deliver a copy of
the final form of Prospectus to each person who purchases any of the Shares
from us and shall otherwise comply with the provisions of Rule 15c2-8 under
the 1934 Act and Release No. 4968 under the 1933 Act.
The answers to the foregoing questions are correctly stated and are to the
best knowledge, information and belief of the undersigned. The undersigned
agrees to notify the Company promptly of any material changes in the
foregoing information which may occur prior to the effective date of the
Registration Statement covering the Shares.
In the event of a summary or cursory review by the Securities and Exchange
Commission in accordance with Release No. 4934 under the Securities Act of
1933, as amended (the "1933 Act"), you are authorized on our behalf to
acknowledge our awareness thereof and of our statutory responsibilities under
the 1933 Act.
Very truly yours,
[For Corporate Signature] -------------------------------------
Corporate Name
By:
----------------------------------
Title:
-------------------------------
[For Partnership Signature] -------------------------------------
Partnership Name
Dated: , 1997 By:
--------------- ----------------------------------
Partner
3
<PAGE>
NEW FRONTIER MEDIA, INC.
____________Shares
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby
irrevocably constitute and appoint Bruce A. Biddick and Phil Hanna of Centex
Securities Incorporated, 1020 Prospect Street, Suite 200, La Jolla,
California 92037, or any one of them, the true and lawful agent and
attorney-in-fact of the undersigned, with full power to appoint a substitute
or substitutes to act hereunder with the same power and authority as said
agent and attorney-in-fact would have if personally acting, with respect to
all matters arising in connection with the undersigned's acting as one of the
Underwriters of the proposed offering of the above-captioned securities, with
full power and authority to execute and deliver for and on behalf of the
undersigned all such agreements, consents and documents in connection
therewith as said agent and attorney-in-fact may deem advisable. The
undersigned hereby gives to said agent and attorney-in-fact full power and
authority to act in the premises, including, without limiting the generality
of the foregoing, the power and authority to execute and deliver in such form
as said agent and attorney-in-fact may determine the Agreement Among
Underwriters with respect to such securities, authorizing the
Representative(s) named in such Agreement in turn to execute and deliver the
Underwriting Agreement relating to the purchase of such securities and any
Selected Dealer Agreement. The undersigned hereby ratifies and confirms all
that said agent and attorney-in-fact, or any substitute or substitutes, may
do by virtue hereof.
WITNESS the due execution hereof at_____________________, this ___day of
________, 1997.
------------------------------------
(Name of corporation or Firm)
[SEAL]
------------------------------------
Officer or Partner
<PAGE>
NEW FRONTIER MEDIA, INC.
_________ Shares
SELECTED DEALER AGREEMENT
________________, 1997
Dear Sirs:
Centex Securities Incorporated, and the other Underwriters named in the
Prospectus relating to the above shares (the "Underwriters"), acting through
us as Representative, is severally offering for sale an aggregate of
__________ Shares (the "Firm Shares") of common stock ("Common Stock") of New
Frontier Media, Inc. (the "Company") at a price of $____ per Share. In
addition, the several Underwriters have been granted an option to purchase
from the Company up to an additional ____ Shares (the "Option Shares") to
cover over-allotments in connection with the sale of the Firm Shares. The
Firm Shares and any Option Shares purchased are herein called the "Shares".
The Shares and the terms under which they are to be offered for sale by the
several Underwriters are more particularly described in the Prospectus.
The Underwriters are offering the Shares pursuant to a Registration
Statement (the "Registration Statement") under the Securities Act of 1933, as
amended, subject to the terms of (a) their Underwriting Agreement with the
Company, (b) this Agreement, and (c) the Representative's instructions which
may be forwarded to the Selected Dealers from time to time. This invitation
is made by the Representative only if the Shares may be lawfully offered by
dealers in your state. The terms and conditions of this invitation are as
follows:
1. OFFER TO SELECTED DEALERS. The Representative is hereby soliciting
offers to buy, upon the terms and conditions hereof, a portion of the Shares
from Selected Dealers who are to act as principal. Shares are to be offered
to the public at a price of $____ per Share (the "Offering Price"). Selected
Dealers who are members of the National Association of Securities Dealers,
Inc. (the "NASD") will be allowed, on all Shares sold by them, a concession
of $______ payable as hereinafter provided. Selected Dealers may reallow
other dealers who are members of the NASD a portion of that concession up to
the amount of $______ per Share with respect to Shares sold by or through
them. No NASD member may reallow commissions to any non-member broker-dealer
including foreign broker-dealers registered pursuant to the Securities
Exchange Act of 1934. This offer is solicited subject to the Company's
issuance and delivery of certificates and other documents evidencing its
Shares and the acceptance thereof by the Representative, to the approval of
legal matters by counsel, and to the terms and conditions set forth herein.
2. REVOCATION OF OFFER. The Selected Dealer's offer to purchase, if made
prior to the effective date of the Registration Statement, may be revoked in
whole or in part without obligation or commitment of any kind by it any time
prior to acceptance and no offer may be accepted by the
<PAGE>
Representative and no sale can be made until after the Registration Statement
covering the Shares has become effective with the Securities and Exchange
Commission. Subject to the foregoing, upon execution by the Selected Dealer
of the Offer to Purchase below and the return of same to the Representative,
the Selected Dealer shall be deemed to have offered to purchase the number of
Shares set forth in its offer on the basis set forth in Section 1 above. Any
oral offer to purchase made by the Selected Dealer shall be deemed subject to
this Agreement and shall be confirmed by the Representative by the subsequent
execution and return of this Agreement. Any oral notice by the
Representative of acceptance of the Selected Dealer's offer shall be followed
by written or telegraphic confirmation preceded or accompanied by a copy of
the Prospectus. If a contractual commitment arises hereunder, all the terms
of this Selected Dealer Agreement shall be applicable. The Representative may
also make available to the Selected Dealer an allotment to purchase Shares,
but such allotment shall be subject to modification or termination upon
notice from the Representative any time prior to an exchange of confirmations
reflecting completed transactions. All references hereafter in this
Agreement to the purchase and sale of Shares assume and are applicable only
if contractual commitments to purchase are completed in accordance with the
foregoing.
3. SELECTED DEALER SALES. Any Shares purchased by a Selected Dealer
under the terms of this Agreement may be immediately re-offered to the public
at the Offering Price in accordance with the terms of the offering thereof
set forth herein and in the Prospectus, subject to the securities or blue sky
laws of the various states or other jurisdictions. Shares shall not be
offered or sold by the Selected Dealers below the Offering Price. The
Selected Dealer agrees to advise the Representative, upon request, of any
Shares purchased by it remaining unsold and, the Representative has the right
to purchase all or a portion of such Shares, at the Public Offering Price
less the selling concession or such part thereof as the Representative shall
determine.
4. PAYMENT FOR SHARES. Payment for Shares which the Selected Dealer
purchases hereunder shall be made by the Selected Dealer on or before three
(3) business days after the date of each confirmation by certified or bank
cashier's check payable to the Representative. Certificates for the
securities shall be delivered as soon as practicable after delivery
instructions are received by the Representative.
5. OPEN MARKET TRANSACTIONS; STABILIZATION.
5.1 For the purpose of stabilizing the market in the Shares, the
Representative has been authorized to make purchases and sales of the
Company's Shares in the open market or otherwise, and, in arranging for
sales, to overallot. If, in connection with such stabilization, the
Representative contracts for or purchases in the open market any Shares sold
to the Selected Dealer hereunder and not effectively placed by the Selected
Dealer, the Representative may charge the Selected Dealer for the accounts of
the several Underwriters an amount equal to the Selected Dealer concession on
such Shares, together with any applicable transfer taxes, and the Selected
Dealer agrees to pay such amount to the Representative on demand.
Certificates for Shares delivered on such repurchases need not be the
identical certificates originally purchased.
5.2 The Selected Dealer will not, until advised by the
Representative that the entire offering has been distributed and closed, bid
for or purchase Shares in the open market or otherwise
<PAGE>
make a market in the Shares or otherwise attempt to induce others to purchase
Shares in the open market. Nothing contained in this section shall prohibit
the Selected Dealer from acting as an agent in the execution of unsolicited
orders of customers in transactions effectuated for them through a market
maker.
6. ALLOTMENTS. The Representative reserves the right to reject all
subscriptions, in whole or in part, to make allotments and to close the
subscription books at any time without notice. If an order from a Selected
Dealer is rejected or if a payment is received which proves insufficient, any
compensation paid to the Selected Dealer shall be returned by the Selected
Dealer either in cash or by a charge against the account of the Selected
Dealer, as the Representative may elect.
7. RELIANCE ON PROSPECTUS. The Selected Dealer agrees not to use any
supplemental sales literature of any kind without prior written approval of
the Representative unless it is furnished by the Representative for such
purpose. In offering and selling the Company's Shares, the Selected Dealer
will rely solely on the representations contained in the Prospectus.
Additional copies of the current Prospectus will be supplied by the
Representative in reasonable quantities upon request.
8. REPRESENTATIONS OF SELECTED DEALER. REPRESENTATIONS OF SELECTED
DEALER. By accepting this Agreement, the Selected Dealer represents that it:
(a) is registered as a broker-dealer under the Securities Exchange Act of
1934, as amended; (b) is qualified to act as a Dealer in the States or other
jurisdictions in which it offers the Shares; (c) is a member in good standing
with the NASD; (d) will maintain all such registrations, qualifications, and
memberships throughout the term of this Agreement; (e) will comply with all
applicable Federal laws relating to the offering, including, but not limited
to, Rule 15c2-8 under the Securities Exchange Act of 1934 and Release No.
4968 under the Securities Act of 1933 relating to delivery of preliminary and
final prospectuses, and Regulation M governing the activities of participants
in a distribution of securities; (f) will comply with the laws of the state
or other jurisdictions concerned; (g) will comply the rules and regulations
of the NASD including, but not limited to, full compliance with Rules 2100,
2730 2740, 2720 and 2750 of the Conduct Rules of the NASD and the
interpretations of such sections promulgated by the Board of Governors of the
NASD including an interpretation with respect to "Free-Riding and
Withholding" dated November 1, 1970, and as thereafter amended; and (h)
confirms that the purchase of the number of Shares it has subscribed for and
may be obligated to purchase will not cause it to violate the net capital
requirements of Rule 15c3-1 under the Exchange Act.
9. BLUE SKY QUALIFICATION. The Selected Dealer agrees that it will
offer to sell the Shares only (a) in states or jurisdictions in which it is
licensed as a broker-dealer under the laws of such states, and (b) in which
the Representative has been advised by counsel that the Shares have been
qualified for sale under the respective securities or Blue Sky laws of such
states. The Representative assumes no obligation or responsibility as to the
right of any Selected Dealer to sell the Shares in any state or as to any
sale therein.
10. EXPENSES. No expenses will be charged to Selected Dealers. A
single transfer tax, if any, on the sale of the Shares by the Selected Dealer
to its customers will be paid when such Shares are delivered to the Selected
Dealer for delivery to its customers. However, the Selected Dealer will pay
its proportionate share of any transfer tax or any other tax (other than the
single transfer tax
<PAGE>
described above) if any such tax shall be from time to time assessed against
the Underwriters and other Selected Dealers.
11. NO JOINT VENTURE. No Selected Dealer is authorized to act as the
Underwriters' agent, or otherwise to act on our behalf, in the offering or
selling of Shares to the public or otherwise. Nothing contained herein will
constitute the Selected Dealers as an association or other separate entity or
partners with the Underwriters, or with each other, but each Selected Dealer
will be responsible for its share of any liability or expense based on any
claim to the contrary.
12. COMMUNICATIONS. This Agreement and all communications to the
Underwriters shall be sent to the Representative at the following address or,
if sent by facsimile, to the number set forth below:
Mr. Bruce A. Biddick
Centex Securities Incorporated
1020 Prospect Street, Suite 200
La Jolla, CA 92037
Fax No. (619) 456-8211
Any notice to the Selected Dealer shall be properly given if mailed,
telephoned, or transmitted by facsimile to the Selected Dealer at its address
or number set forth below its signature to this Agreement. All
communications and notices initially transmitted by facsimile shall be
confirmed in writing.
13. GOVERNING LAW. This Agreement shall be governed by and construed
according to the laws of the State of California.
14. REPRESENTATIVE'S AUTHORITY AND OBLIGATIONS. The Representative
shall have full authority to take such actions as it may deem advisable in
respect of all matters pertaining to the offering or arising thereunder. The
Representative shall not be under any liability to the Selected Dealer,
except such as may be incurred under the Securities Act of 1933 and the rules
and regulations thereunder, except for lack of good faith and except for
obligations assumed by it in this Agreement, and no obligation on its part
shall be implied or inferred herefrom.
15. ASSIGNMENT. This Agreement may not be assigned by the Selected
Dealer without the Representative's prior written consent.
16. TERMINATION. The Selected Dealer will be governed by the terms and
conditions of this Agreement until it is terminated. This Agreement will
terminate upon the termination of the Offering.
17. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and all of which together shall
constitute one instrument. A copy of an executed counterpart of this
Agreement may be sent via facsimile by any party to the other party, and the
other party may deem such facsimile copy of the executed counterpart to be an
original.
<PAGE>
18. APPLICATION. If you desire to purchase any of the Shares, please
confirm your application by signing and returning to us your confirmation on
the duplicate copy of this letter, even though you may have previously
advised us thereof by telephone or telegraph. Our signature hereon may be by
facsimile.
CENTEX SECURITIES INCORPORATED
Dated: ____________, 1997 By:
---------------------------
Bruce A. Biddick, President
<PAGE>
OFFER TO PURCHASE
The undersigned does hereby offer to purchase (subject to the right to
revoke set forth in Section 2) ______ Shares in accordance with the terms and
conditions set forth above.
-------------------------------------
By:
-------------------------------------
Its:
-------------------------------------
Address:
------------------------------
Facsimile Number:
----------------------
Telephone Number:
----------------------
("Selected Dealer")
Date of Acceptance:
----------------------
Accepted By:
---------------------------
IRS Employer Identification No.:
-------
Share Allocation:
-----------------------
<PAGE>
THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH
OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS
MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A
PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS
EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE COMPANY SUCH
OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT.
WARRANT
For the Purchase of Shares of Common Stock
of
NEW FRONTIER MEDIA, INC.
Void After 5 P.M., __________, 2002
No. 1
Warrant to Purchase ___________ (______) Shares of Common Stock
THIS IS TO CERTIFY, that, for value received, Centex Securities
Incorporated (the "Underwriter") or registered assigns, is entitled, subject to
the terms and conditions hereinafter set forth, on or after __________, 1998 and
at any time prior to 5 P.M., Pacific Standard Time ("PST"), on __________, 2002,
but not thereafter, to purchase such number of shares of Common Stock (the
"Shares") of New Frontier Media, Inc., a Colorado corporation (the "Company"),
from the Company as is set forth above and upon payment to the Company of $____
per Share (the "Purchase Price"), if and to the extent this Warrant is
exercised, in whole or in part, during the period this Warrant remains in force,
subject in all cases to adjustment as provided in Section 2 hereof, and to
receive a certificate or certificates representing the Shares so purchased, upon
presentation and surrender to the Company of this Warrant, with the form of
subscription attached hereto, including changes thereto reasonably requested by
the Company, duly executed, and accompanied by payment of the Purchase Price of
each Share.
SECTION 1.
TERMS OF THIS WARRANT
1.1 TIME OF EXERCISE. Subject to the provisions of Sections 1.5 and 3.1
hereof, this Warrant may be exercised at any time and from time to time after
9:00 A.M., PST, on ___________, 1998 (the "Exercise Commencement Date"), but no
later than 5:00 P.M., ___________, 2002 (the "Expiration Time") at which it
shall become void, and all rights hereunder shall thereupon cease.
<PAGE>
1.2 MANNER OF EXERCISE.
1.2.1 The holder of this Warrant (the "Holder") may exercise this
Warrant, in whole or in part, upon surrender of this Warrant with the form of
subscription attached hereto duly executed, to the Company at its corporate
office in Boulder, Colorado, together with the full Purchase Price for each
Share to be purchased in lawful money of the United States, or by certified
check, bank draft or postal or express money order payable in United States
dollars to the order of the Company, and upon compliance with and subject to the
conditions set forth herein.
1.2.2 Upon receipt of this Warrant with the form of subscription
duly executed and accompanied by payment of the aggregate Purchase Price for the
Shares for which this Warrant is then being exercised, the Company shall cause
to be issued certificates for the total number of whole Shares for which this
Warrant is being exercised in such denominations as are required for delivery to
the Holder, and the Company shall thereupon deliver such certificates to the
Holder or its nominee. Such payment shall be made either by check payable to
the order of the Company or the holder may elect to receive that number of
Warrant Shares equal to the value (as determined below) of this Warrant, in
which event the Company shall issue to the holder of this Warrant the number of
shares of Common Stock determined by using the following formula:
Y (A - B)
X =-------------
A
where X = the number of shares of Common Stock (or Warrant Shares) to be issued
to the holder; Y = the number of Warrant Shares subject to this Warrant; A = the
Fair Market Value of one (1) Warrant Share; B = the Exercise Price per Warrant
Share. Certificates for the Warrant Shares so purchased shall be delivered to
the Warrantholders, at their respective addresses designated in the completed
Exercise Forms, within a reasonable time, in no event exceeding 10 days after
the rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired or been exercised in full, a new Warrant representing
the number of shares (if any) with respect to which this Warrant shall not then
have been exercised shall also be issued to the Warrantholders within such time.
1.2.3 In case the Holder shall exercise this Warrant with respect
to less than all of the Shares that may be purchased under this Warrant, the
Company shall execute a new Warrant for the balance of the Shares that may be
purchased upon exercise of this Warrant and deliver such new Warrant to the
Holder.
1.2.4 The Company covenants and agrees that it will pay when due
and payable any and all taxes which may be payable in respect of the issue of
this Warrant, or the issue of any Shares upon the exercise of this Warrant. The
Company shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issuance or delivery of this Warrant or
of the Shares in a name other than that of the Holder at the time of surrender,
and until the payment of such tax the Company shall not be required to issue
such Shares.
2
<PAGE>
1.3 EXCHANGE OF WARRANT. This Warrant may be split-up, combined or
exchanged for another Warrant or Warrants of like tenor to purchase a like
aggregate number of Shares. If the Holder desires to split-up, combine or
exchange this Warrant, he shall make such request in writing delivered to the
Company at its corporate office and shall surrender this Warrant and any other
Warrants to be so split-up, combined or exchanged, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split-up,
combination or exchange which will result in the issuance of a Warrant entitling
the Holder to purchase upon exercise a fraction of a Share. The Company may
require the Holder to pay a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any split-up, combination or
exchange of Warrants.
1.4 HOLDER AS OWNER. Prior to due presentment for registration of
transfer of this Warrant, the Company may deem and treat the Holder as the
absolute owner of this Warrant (notwithstanding any notation of ownership or
other writing hereon) for the purpose of any exercise hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
1.5 TRANSFER AND ASSIGNMENT. Prior to one year from the date hereof,
this Warrant may not be sold, hypothecated, exercised, assigned or transferred,
except to individuals who are officers of the Underwriter or any successor to
its business or pursuant to the laws of descent and distribution, and thereafter
and until its expiration shall be assignable and transferable in accordance with
and subject to the provisions of the Securities Act of 1933 and applicable state
securities laws; provided, however, that if not exercised immediately upon such
transfer, this Warrant shall lapse.
1.6 METHOD OF ASSIGNMENT. Any assignment permitted hereunder shall be
made by surrender of this Warrant to the Company at its principal office with
the form of assignment attached hereto duly executed and funds sufficient to pay
any transfer tax. In such event, the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants which carry the same rights upon
presentation thereof at the corporate office of the Company together with a
written notice signed by the Holder, specifying the names and denominations in
which such new Warrants are to be issued.
1.7 RIGHTS OF HOLDER. Nothing contained in this Warrant shall be
construed as conferring upon the Holder the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of this Warrant and prior to its exercise, any of the following
shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings;
3
<PAGE>
as indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to the holders of its Common Stock
any additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) there shall be proposed any capital reorganization or
reclassification of the Common Stock, or a sale of all or substantially all of
the assets of the Company, or a consolidation or merger of the Company with
another entity; or
(d) there shall be proposed a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to be mailed to
the Holder, at the earliest practicable time (and, in any event, not less than
twenty (20) days before any record date or other date set for definitive
action), written notice of the date on which the books of the Company shall
close or a record shall be taken to determine the shareholders entitled to such
dividend, distribution, convertible or exchangeable securities or subscription
rights, or entitled to vote on such reorganization, reclassification, sale,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be. Such notice shall also set forth such facts as shall indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Purchase Price and the kind and amount of the Shares and other securities
and property deliverable upon exercise of this Warrant. Such notice shall also
specify the date as of which the holders of the Common Stock of record shall
participate in said distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, sale, consolidation, merger, dissolution,
liquidation or winding up, as the case may be (on which date, in the event of
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the right to exercise this Warrant shall terminate)
Without limiting the obligation of the Company to provide notice to the
holder of actions hereunder, it is agreed that failure of the Company to give
notice shall not invalidate such action of the Company.
1.8 LOST CERTIFICATES. If this Warrant is lost, stolen, mutilated or
destroyed, the Company shall, on such reasonable terms as to indemnity or
otherwise as it may impose (which shall, in the case of a mutilated Warrant,
include the surrender thereof), issue a new Warrant of like denomination and
tenor as, and in substitution for, this Warrant, which shall thereupon become
void. Any such new Warrant shall constitute an additional contractual
obligation of the Company, whether or not the Warrant so lost, stolen, destroyed
or mutilated shall be at any time enforceable by anyone.
4
<PAGE>
1.9 COVENANTS OF THE COMPANY. The Company covenants and agrees as
follows:
1.9.9 At all times it shall reserve and keep available for the
exercise of this Warrant such number of authorized shares of Common Stock as are
sufficient to permit the exercise in full of this Warrant.
1.9.2 Prior to the issuance of any Shares upon exercise of this
Warrant, the Company shall secure the listing of such Shares upon any securities
exchange or automated quotation system upon which the Company's Common Stock is
listed for trading.
1.9.3The Company covenants that all Shares when issued upon the
exercise of this Warrant will be validly issued, fully paid, non-assessable and
free of preemptive rights.
SECTION 2.
ADJUSTMENT OF PURCHASE PRICE
AND NUMBER OF SHARES PURCHASABLE UPON EXERCISE
2.1 STOCK SPLITS. If the Company at any time or from time to time after
the issuance date of this Warrant effects a subdivision of the outstanding
Common Stock, the Purchase Price then in effect immediately before that
subdivision shall be proportionately decreased and the number of shares
purchasable hereunder shall be proportionately increased, and conversely, if the
Company at any time or from time to time after the issuance date of this Warrant
combines the outstanding shares of Common Stock, the Purchase Price then in
effect immediately before the combination shall be proportionately increased and
the number of shares purchasable hereunder shall be proportionately decreased.
Any adjustment under this subsection 2.1 shall become effective at the close of
business on the date the subdivision or combination becomes effective.
2.2 DIVIDENDS AND DISTRIBUTIONS. In the event the Company at any time,
or from time to time after the issuance date of this Warrant makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Purchase Price then in effect shall be
decreased as of the time of such issuance or, in the event such a record date is
fixed, as of the close of business on such record date, by multiplying the
Purchase Price then in effect by a fraction (i) the numerator of which is the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date, and
(ii) the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution; provided, however,
that if such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Purchase Price
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Purchase Price shall be adjusted pursuant to this subsection
2.2 as of the time of actual payment of such dividends or distributions.
5
<PAGE>
2.3 RECAPITALIZATION OR RECLASSIFICATION. If the Shares issuable upon
the exercise of the Warrant are changed into the same or a different number of
shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend or a reorganization, merger, consolidation or sale of assets,
provided for elsewhere in this Section 2), then and in any such event each
holder of Warrants shall have the right thereafter to exercise such Warrant as
to the kind and amount of stock and/or other securities and property receivable
upon such reclassification or other change, by the holder of the number of
Shares as to which such Warrant might have been exercised immediately prior to
such reclassification or exchange, all subject to further adjustment as provided
herein.
2.4 SALE OF THE COMPANY. If at any time or from time to time there is a
capital reorganization of the Common Stock (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for
elsewhere in this Section 2) or a merger or consolidation of the Company with or
into another Company, or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Warrants shall thereafter be entitled to receive upon
exercise of the Warrants, the number of shares of stock or other securities or
property of the Company, or of the successor Company resulting from such merger
or consolidation or sale, to which a holder of Shares deliverable upon exercise
would have been entitled on such capital reorganization, merger, consolidation,
or sale. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 2 with respect to the rights of
the holders of the Warrants after the reorganization, merger, consolidation or
sale to the end that the provisions of this Section (including adjustment of the
Purchase Price then in effect and number of shares purchasable upon exercise of
the Warrants) shall be applicable after that event and be as nearly equivalent
to the provisions hereof as may be practicable.
2.5 OBSERVANCE OF DUTIES. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
section 2 and in the taking of all such action as may be necessary or
appropriate in order to protect the Exercise Rights of the holders of the
Warrants against dilution or other impairment.
SECTION 3.
REGISTRATION UNDER THE SECURITIES ACT OF 1933
3.1 REGISTRATION AND LEGENDS. This Warrant and the Shares issuable upon
exercise of this Warrant have not been registered under the Securities Act of
1933, as amended ("the Act"). Upon exercise, in part or in whole, of this
Warrant, the certificates representing the Shares shall bear the following
legend:
6
<PAGE>
THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT
OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY NOT
BE OFFERED AND SOLD UNLESS REGISTERED AND/OR QUALIFIED PURSUANT TO THE
RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR AN
EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION APPLICABLE. THEREFORE,
NO SALE OR TRANSFER OF THIS SECURITY SHALL BE MADE, NO ATTEMPTED SALE OR
TRANSFER SHALL BE VALID, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE ANY
EFFECT TO ANY SUCH TRANSACTION UNLESS (A) SUCH TRANSACTION SHALL HAVE BEEN
DULY REGISTERED UNDER THE ACT AND QUALIFIED OR APPROVED UNDER APPROPRIATE
STATE OR BLUE SKY LAWS, OR (B) THE ISSUER SHALL HAVE FIRST RECEIVED AN
OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH REGISTRATION, QUALIFICATION
OR APPROVAL IS NOT REQUIRED.
3.2 NO ACTION LETTER. The Company agrees that it shall be satisfied
that no post-effective amendment or new registration is required for the public
sale of the Shares if it shall be presented with a letter from the Staff of the
Securities and Exchange Commission (the "Commission") stating in effect that,
based upon stated facts which the Company shall have no reason to believe are
not true in any material respect, the Staff will not recommend any action to the
Commission if such shares are offered and sold without delivery of a
prospectus, and that, therefore, no post-effective amendment to the Registration
Statement under which such Shares are to be registered or new registration
statement is required to be filed.
3.3 DEMAND REGISTRATION RIGHTS. The Company has agreed, upon the
Underwriter's demand, to register the Shares, to file a new Registration
Statement, and to file all necessary undertakings with the Commission so as to
permit the Underwriter, or any assignee of the Underwriter, the right to sell
publicly the Shares issued on exercise of this Warrant on two occasions at any
time within five (5) years from the effective date of the Company's Form SB-2
Registration Statement as filed in 1997. In connection with the first request,
the Company will bear all expenses attendant to registering the securities
(subject to Section 3.5(e)), and in connection with the second request, the
holders of the securities will bear all expenses.
3.4 PIGGYBACK REGISTRATION RIGHTS. In the event that the Underwriter
does not exercise its right to demand that the Shares be registered, the Company
agrees to include any appropriate Shares issuable upon exercise of the Warrants
in any Registration Statement filed by the Company at any time within seven (7)
years from the effective date of the Company's Form SB-2 Registration Statement
as filed in 1997 (except for any registration on Forms S-4 or S-8 or similar
forms).
3.5 COVENANTS REGARDING REGISTRATION. In connection with any
registration under Section 3.3 or 3.4 hereof, the Company covenants and agrees
as follows:
7
<PAGE>
(a) The Company will, within twenty days after written request
from the Representative, take all steps necessary to effectuate preparation and
filing with the Securities and Exchange Commission of the registration statement
as required by and in compliance with the Act.
(b) The Company shall keep such registration statement effective
for the lesser of (i) one hundred twenty (120) days, or (ii) the period of time
in which the Holders of such securities have effected the distribution of their
Shares. During such period the Company shall prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement.
(c) The Company shall notify each Holder of Shares covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing.
(d) The Company shall furnish to the Holders such numbers of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Act, and such other documents as they may reasonably
request in order to facilitate the disposition of the Shares owned by them.
(e) The Company shall pay all costs, fees, and expenses in
connection with new registration statements under Section 3.3 (excluding the
costs attendant to a second demand registration) and Section 3.4 hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses, except that the Company shall not pay for
any of the following costs and expenses: (i) underwriting discounts and
commissions allocable to the Shares, (ii) state transfer taxes, (iii) brokerage
commissions, (iv) fees and expenses of counsel and accountants for the holders
of this Warrant or the Shares.
(f) The Company will take all necessary action which may be
required in qualifying or registering the Shares included in any Registration
Statement or post-effective amendment or new registration statement for offering
and sale under the securities or blue sky laws of such states as are reasonably
requested by the holders of such Shares, provided that the Company shall not be
obligated to execute or file any general consent to service of process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(g) The Holder shall be entitled to pay the Purchase Price for
the Shares purchasable upon the exercise of this Warrant out of the proceeds of
any sale of the Shares purchasable upon its exercise.
8
<PAGE>
3.6 INDEMNITY.
3.6.1 The Company shall indemnify and hold harmless each person
registering securities pursuant to this Section (the "Seller") and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any Seller any of the Common Stock from and against any and all losses, claims,
damages, and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any new registration statement or any
supplemented prospectus under the Act included therein required to be filed or
furnished by reason of this Section, or caused by any omission or alleged
omission to state therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished or required to be furnished in
writing to the Company by such Seller or underwriter within the meaning of such
Act; provided, however, that the indemnity agreement set forth in this Section
3.6 with respect to any prospectus which shall be subsequently amended prior to
the written confirmation of sale of any Shares shall not inure to the benefit of
any Seller or underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased such Shares which are the subject
thereof (or to the benefit of any person controlling such Seller or
underwriter), if such Seller or underwriter failed to send or give a copy of the
prospectus as amended to such person at or prior to the written confirmation of
the sale of such Shares and if such amended prospectus did not contain any
untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such cause, claim, damage, or liability.
3.6.2 Each Seller which avails itself of the procedures under this
Section 3 shall indemnify and secure the agreement of any underwriter which the
Seller employs to indemnify the Company, its directors, each officer signing the
related post-effective amendment or registration statement and each person, if
any, who controls the Company, within the meaning of the Act from and against
any losses, claims, damages, and liabilities caused by any untrue statement or
alleged untrue statement of a material fact contained in any post-effective
amendment or registration statement or any prospectus required to be filed or
furnished by reason of this Section 3 or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, insofar as such losses,
claims, damages, or liabilities are caused by any untrue statement or alleged
untrue statement or omission or alleged omission based upon information
furnished in writing to the Company by any such Seller or underwriter expressly
for use therein.
3.7 SURVIVAL OF OBLIGATIONS. The agreements in this Section 3 shall
continue in effect regardless of the exercise and surrender of this Warrant.
SECTION 4.
OTHER MATTERS
4.1 PAYMENT OF TAXES. The Company will from time to time promptly pay,
subject to the provisions of paragraph (4) of Section 1.2 hereof, all taxes and
charges that may be imposed upon
9
<PAGE>
the Company in respect of the issuance or delivery of this Warrant or the Shares
purchasable upon the exercise of this Warrant.
4.2 BINDING EFFECT. All the covenants and provisions of this Warrant by
or for the benefit of the Company shall bind and inure to the benefit of its
successors and assigns hereunder.
4.2 NOTICES. Notices or demands pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made if
sent by certified or registered mail, return receipt requested, postage prepaid,
or facsimile and addressed, until another address is designated in writing by
the Company, as follows:
New Frontier Media, Inc.
1050 Walnut St., Ste. 301
Boulder, Colorado 80302
Notices to the Holder provided for in this Warrant shall be deemed given or made
by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.
4.4 GOVERNING LAW. The validity, interpretation and performance of this
Warrant shall be governed by the laws of the State of California.
4.5 PARTIES BOUND AND BENEFITTED. Nothing in this Warrant expressed and
nothing that may be implied from any of the provisions hereof is intended, or
shall be construed, to confer upon, or give to, any person or corporation other
than the Company and the Holder any right, remedy or claim under promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements contained in this Warrant shall be for the sole and exclusive benefit
of the Company and its successors and of the Holder, its successors and, if
permitted, its assignees.
4.6 HEADINGS. The Section headings herein are for convenience only and
are not part of this Warrant and shall not affect the interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ___ day of _________, 1997.
NEW FRONTIER MEDIA, INC.
By:
-----------------------------------------
Mark H. Kreloff, President
10
<PAGE>
NEW FRONTIER MEDIA, INC.
Assignment of Warrant
FOR VALUE RECEIVED, Centex Securities Incorporation hereby sells, assigns
and transfers unto ____________________________________________ the within
Warrant and the rights represented thereby, and does hereby irrevocably
constitute and appoint _______________________________ Attorney, to transfer
said Warrant on the books of the Company, with full power of substitution.
Dated:
---------------------
Signed:
--------------------------------
Signature guaranteed:
- ----------------------------
11
<PAGE>
New Frontier Media, Inc.
1050 Walnut St., Ste. 301
Boulder, Colorado 80302
Subscription Agreement for the Exercise of Warrants
The undersigned hereby irrevocably subscribes for the purchase of
_____________ Shares pursuant to and in accordance with the terms and conditions
of this Warrant, and herewith makes payment, covering such Shares which should
be delivered to the undersigned at the address stated below, and, if said number
of Shares shall not be all of the Shares purchasable hereunder, that a new
Warrant of like tenor for the balance of the remaining Shares purchasable
hereunder be delivered to the undersigned at the address stated below.
The undersigned agrees that: (1) the undersigned will not offer, sell,
transfer or otherwise dispose of any Shares unless either (a) a registration
statement, or post-effective amendment thereto, covering the Shares has been
filed with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Act"), such sale, transfer or other disposition is
accompanied by a prospectus meeting the requirements of Section 10 of the Act
forming a part of such registration statement, or post-effective amendment
thereto, which is in effect under the Act covering the Shares to be so sold,
transferred or otherwise disposed of, and all applicable state securities laws
have been complied with, or (b) counsel to New Frontier Media, Inc. satisfactory
to the undersigned has rendered an opinion in writing and addressed to New
Frontier Media, Inc. that such proposed offer, sale, transfer or other
disposition of the Shares is exempt from the provisions of Section 5 of the Act
in view of the circumstances of such proposed offer, sale, transfer or other
disposition; (2) New Frontier Media, Inc. may notify the transfer agent for the
Shares that the certificates for the Shares acquired by the undersigned are not
to be transferred unless the transfer agent receives advice from New Frontier
Media, Inc. that one or both of the conditions referred to in (1)(a) and (1)(b)
above have been satisfied; and (3) New Frontier Media, Inc. may affix the legend
set forth in Section 3.1 of this Warrant to the certificates for the Shares
hereby subscribed for, if such legend is applicable.
Dated: Signed:
----------------------------- --------------------------------
Signature guaranteed: Address:
-------------------------------
---------------------------------------
- -----------------------------------
12
<PAGE>
LOCK-UP AGREEMENT
FOR OFFICER, DIRECTORS AND SIGNIFICANT SHAREHOLDERS
This Lock-Up Agreement ("Agreement") is effective as of ____________,
1997 by and between New Frontier Media, Inc., a Colorado corporation (the
"Company"), _____________________ an officer, director or 5% shareholder of
the Company (the "Shareholder"), and Centex Securities Incorporated (the
"Underwriter"). The parties hereto agree as follows:
1. LOCK-UP. The Company is currently in the process of preparing a
registration statement on Form SB-2 (the "Registration Statement") which will
register shares of the Company's common stock (the "Shares") to be sold by
the Underwriter on a "firm commitment" basis. In order to induce the
Underwriter to undertake the firm commitment public offering of the Company's
Shares and to comply with the regulatory requirements of the NASDAQ Stock
Market, the Securities and Exchange Commission and certain state "Blue Sky"
authorities, the Shareholder agrees that it will not, directly or
indirectly, without the Underwriter's prior written consent, offer, sell,
pledge, contract to sell, grant any option to purchase, pledge, or otherwise
dispose (or announce any offer, sale, grant of an option to purchase or other
disposition) of, directly or indirectly, any shares of the Company's common
stock or any security or other instrument which by its terms is convertible
into, exercisable for, or exchangeable for shares of the Company's common
stock beginning on the date hereof and ending twelve (12) months after the
effective date of the Registration Statement.
2. UNDERTAKINGS. The parties to this Agreement shall cause:
2.1 A copy of this Agreement to be available from the Company
or transfer agent upon request without charge;
2.2 A notice to be placed on the face of each stock
certificate covered by the terms of this Agreement stating that the transfer
of the stock evidenced by the certificate is restricted in accordance with
the conditions set forth on the reverse side of the certificate;
2.3 A typed legend to be placed on the reverse side of each
stock certificate representing stock covered by this Agreement which states
that the sale or transfer of the shares evidenced by the certificate is
subject to certain restrictions until eighteen months from the effective
date of the registration statement pursuant to an agreement between the
shareholder (whether beneficial or of record) and the Company, which
agreement is on file with the Company and the stock transfer agent from which
a copy is available upon request without charge; and
2.4 If the securities are registered in Pennsylvania, a
manually signed copy of this Agreement will be filed with the Pennsylvania
Securities Commission as part of the registration document.
3. AMENDMENT. The terms and conditions contained in this Agreement
may only be modified (including premature termination of this Agreement) in
extremely rare circumstances and
<PAGE>
then, only with the approval of the Pennsylvania Securities Commission if
the securities are registered in Pennsylvania.
4. ATTORNEYS FEES. In the event of a dispute between the parties
concerning the enforcement or interpretation of this Agreement, the
prevailing party in such dispute, whether by legal proceedings or otherwise,
shall be reimbursed immediately for the reasonably incurred attorneys' fees
and other costs and expenses by the other parties to the dispute.
5. CHOICE OF LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without reference to
its choice of law rules.
6. ARBITRATION. Any dispute or claim arising to or in any way
related to this Agreement shall be settled by arbitration in San Diego,
California. All arbitration shall be conducted in accordance with the rules
and regulations of the American Arbitration Association ("AAA"). AAA shall
designate an arbitrator from an approved list of arbitrators following both
parties' review and deletion of those arbitrators on the approved list having
a conflict of interest with either party. Each party shall pay its own
expenses associated with such arbitration (except as set forth in Section 3
above). A demand for arbitration shall be made within a reasonable time after
the claim, dispute or other matter has arisen and in no event shall such
demand be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statutes of limitations. The decision of the
arbitrators shall be rendered within 60 days of submission of any claim or
dispute, shall be in writing and mailed to all the parties included in the
arbitration. The decision of the arbitrator shall be binding upon the parties
and judgment in accordance with that decision may be entered in any court
having jurisdiction thereof.
7. SUCCESSORS. The provisions of this Agreement shall be deemed to
obligate, extend to and inure to the benefit of the successors, assigns,
transferees, grantees, and indemnities of each of the parties to this
Agreement.
8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth next to his or its signature.
NEW FRONTIER MEDIA, INC.
By:
---------------------------------
Its:
--------------------------------
SHAREHOLDER
------------------------------------
CENTEX SECURITIES INCORPORATED
By:
---------------------------------
Its:
--------------------------------
3
<PAGE>
0651
CUSIP 644398 10 9
SEE REVERSE
FOR CERTAIN DEFINITIONS
NEW FRONTIER MEDIA, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF COLORADO
50,000,000 AUTHORIZED SHARES $0.0001 PAR VALUE
THIS CERTIFIES THAT
-SPECIMEN-
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF $0.0001 PAR VALUE COMMON STOCK OF
NEW FRONTIER MEDIA, INC.
transferable only on the books of the Corporation by the holder hereof in
person or by attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and
Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed
by the facsimile signatures of its duly authorized officers and to be sealed
with the facsimile seal of the Corporation.
Dated: NEW FRONTIER MEDIA, INC.
/s/ Michael Weiner /s/ Mark H. Kreloff
MICHAEL WEINER, SECRETARY MARK H. KRELOFF, PRESIDENT
NEW FRONTIER MEDIA, INC.
CORPORATE SEAL
COLORADO
COUNTERSIGNED: Securities Transfer, Inc.
CORPORATE STOCK TRANSFER, INC.
370-17TH STREET, SUITE 2350, DENVER, COLORADO 80202
BY
-------------------------------------------------
TRANSFER AGENT AUTHORIZED SIGNATURE
-------------------------------------------------
[illegible] Authorized Signature
<PAGE>
NEW FRONTIER MEDIA, INC.
TRANSFER FEE: $15.00 PER NEW CERTIFICATE ISSUED
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT- Custodian
--- ---
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act
in common --------------------
(State)
Additional abbreviations may also be used though not in the above list.
- -------------------------------------------------------------------------------
For Value Received, hereby sell, assign and transfer unto
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated
------------------
---------------------------------------------------------------
---------------------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATSOEVER
Signature(s) Guaranteed:
- --------------------------------------
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee Medallion Program), pursuant to
S.E.C. Rule 17Ad-15.
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made to be effective
September 5, 1997 (the "Effective Date"), among NEW FRONTIER MEDIA, INC., a
Colorado corporation, COLORADO SATELLITE BROADCASTING, INC. ("Buyer"), a
wholly owned subsidiary of New Frontier Media, Inc., and FIFTH DIMENSION
COMMUNICATIONS (BARBADOS) INC., a Barbados corporation, and MERLIN SIERRA,
INC., a California corporation. New Frontier Media, Inc. and Buyer are
collectively referred to in this Agreement as "Buyers." Fifth Dimension
Communications (Barbados) Inc. and Merlin Sierra, Inc. are each referred to
in this Agreement as "Seller" and collectively referred to as "Sellers".
This Agreement sets forth the terms and conditions upon which Buyers
agree to purchase from Sellers, and Sellers agree to sell to Buyers, certain
properties and assets of Sellers ("Subject Assets") relating to the "Adult
Movies Business" of Sellers.
NOW THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained in this Agreement, the parties agree
as follows:
DEFINITIONS
"104 Agreement" means the asset purchase agreement made on the same date as
this Agreement among the Buyers and 1043133 Ontario Inc.
"124 Agreement" means the asset purchase agreement made on the same date as
this Agreement among the Buyers, and 1248663 Ontario Inc. and Merlin Sierra,
Inc., wherein the Buyers agreed to purchase certain satellite uplinking and
playback equipment and certain call center equipment and related assets from
1248663 Ontario Inc. and Merlin Sierra, Inc.
"5DBC" means Fifth Dimension Communications (Barbados) Inc.
"Adult Movies Business" means any and all present or contemplated satellite
broadcast services on television or any other medium, including cable
television and the Internet, which broadcasts, replays, and/or otherwise
exploits feature length adult programming and all related promotional content
and other programming of a non-rated or X-rated nature and whose main theme
embodies nudity and/or sexually explicit material between consenting adults
and such other related business assets as are necessary for the operation
thereof.
"adverse or adversely", when used alone or in conjunction with other terms
(including without limitation "affect," "change" and "effect"), means any
event discovered by either party after the date hereof which is reasonably
likely in the respective business judgment of either Buyers or Sellers, as
the case may be, to be expected to (a) adversely affect the validity or
enforceability of this Agreement, or (b) adversely affect the business,
operation, management or properties of Sellers taken as a whole or Buyers, or
(c) impair Sellers or Buyers, or (d) adversely affect the
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respective aggregate rights and remedies of either party under this
Agreement. Notwithstanding the foregoing no event affecting the adult movie
industry generally shall be deemed to constitute an adverse change, have an
adverse effect or to adversely affect or effect.
"Agreement" means this Agreement as originally in effect, including unless
the context otherwise specifically requires, all schedules and all exhibits
hereto, and as any of the same may from time to time be supplemented,
amended, modified or restated in the manner herein or therein provided.
"Applicable Law" shall mean any Law of any Authority, whether domestic or
foreign, including without limitation all federal and state securities and
environmental laws, to which a person or entity is subject or by which it or
any of its business or operations is subject or any of its property or assets
is bound.
"Authority" means any governmental or quasi-governmental authority, whether
administrative, executive, judicial, legislative or other, or any combination
thereof, including without limitation, any federal, provincial, state,
territorial, county, municipal or other government or governmental or
quasi-governmental agency, arbitrator, authority, board, body, branch,
bureau, central bank or comparable agency, or Entity, commission,
corporation, court, department, instrumentality, master, mediator, panel,
referee, system, or other political unit or subdivision or other Entity of
any of the foregoing whether domestic or foreign.
"Buyers' Disclosure Schedule" means the schedule attached as SCHEDULE 8.2(a).
"Closing" means the closing of the transactions contemplated herein and
"Closing Date" means the date on which the closing takes place.
"Collateral Agreements" means agreements and other documents executed or
required to be executed pursuant to the terms of this Agreement.
"Entity" means any corporation, firm, unincorporated organization,
association, partnership, limited liability company, trust (inter vivos or
testamentary), estate of a deceased, individual, business trust, joint stock
company, joint venture or other organization, entity or business, whether
acting in an individual, fiduciary or other capacity, or any Authority.
"Governmental Authorizations" means all approvals, concessions, consents,
franchises, licenses, permits, and other authorizations of all applicable
Authorities.
"material, materially or materiality", unless specifically stated otherwise,
shall be determined without regard to the fact that various provisions of
this Agreement set forth specific dollar amounts.
"Merlin" means Merlin Sierra, Inc.
"New Frontier" means New Frontier Media, Inc.
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"Private Authorizations" means all approvals, concessions, consents,
franchises, licenses, permits, and other authorizations of all persons (other
that Authorities) including without limitation those with respect to
copyrights, computer software programs, patents, service marks, trademarks,
trade names, technology and know-how.
"Subject Assets" means:
(a) any and all trademarks, proprietary rights and other intellectual
property rights owned by Sellers and associated with the Adult Movies
Business. These include but are not necessarily limited to the trade
names, trademarks and/or service marks listed on SCHEDULE 1(a),
"Trademarks List," and any goodwill associated with such trade names,
trademarks and/or service marks;
(b) any and all rights Sellers 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 non-rated or X-rated and whose main theme
embodies nudity and/or sexually explicit material between consenting
adults, and all promotional materials and programming related thereto
as set forth in SCHEDULE 1(b), "Programming List." No representation
or warranty is made with respect to the nature and extent of the
rights Sellers may have in such programming;
(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
Sellers, as described in SCHEDULE 1(c), "Subscribers List" (and it is
understood that the subscriber lists shall be delivered on disk(s) in
electronic form only because of the length of such lists);
(d) a complete list of all advertisers, marketing partners and vendors
used by Sellers in relations to the Adult Movies business and related
services, with contact names, mailing addresses, and phone and fax
numbers; as set forth in SCHEDULE 1(d) "Vendors List";
(e) all rights, title and interest Sellers 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) upon request of Buyers, Sellers shall provide copies of all papers,
computerized databases, and records in Sellers' custody or control
relating to any or all of the above described assets and the
operation of Sellers' Adult Movies Business, including but not
limited to all sales and subscription records, maintenance and
production records, and plans and designs of all structures, fixtures
and equipment, but excluding accounting and financial records and
personnel and labor relations records;
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(g) 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 Adult
Movies Business of Sellers, 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;
(h) any tort or insurance proceeds arising out of any damages or
destruction of any of the Subject Assets herein between the date of
this Agreement and the Closing Date to the extent required to repair
or replace any subject asset being acquired hereunder; and
(i) all other assets to be transferred from Sellers to Buyer under
SECTION 1 of this Agreement.
"Transactions" means the transactions contemplated by this Agreement and all
Collateral Agreements.
ARTICLE 1. TRANSFER OF ASSETS
Subject to the terms and conditions set forth in this Agreement, Sellers
agree to sell, convey, transfer, assign and deliver to Buyer, and Buyers
agree to purchase from Sellers at the Closing described in ARTICLE 3, all of
the Subject Assets, whether tangible, intangible, real, personal or mixed,
and wherever located, including those assets set forth in the lists of
SCHEDULES 1(a) through (d) and as further described in this ARTICLE 1.
1.1 TRANSPONDER SUBLEASES. Pursuant to SCHEDULE 1.1, the Transponder
Sublease Agreements, 5DBC and its successors or assigns agree to sublease to
Buyer, all rights, title and interests 5DBC may have in and pursuant to the
Agreement between 5DBC and AT&T Corp. concerning Skynet Transponder Service
dated November 21, 1996, and the Agreement between 5DBC and Loral Skynet
concerning Skynet Transponder service dated April 29, 1997 ("Skynet
Transponder Agreements"). The terms and conditions of the Subleases to Buyer
shall be the substantially identical to the terms and conditions of the
Skynet Transponder Agreements. Buyer shall have the right to upgrade, if
available, the rights and interest under the Transponder Sublease Agreements
(for example, to a "Silver Service") at Buyers' expense. For each
Transponder Sublease Agreement, Buyer shall furnish and maintain throughout
the terms of the Skynet Transponder Agreements, to the lessors under the
Skynet Transponder Agreements, a security deposit in an amount equal to one
month of the monthly rate to be paid by 5DBC for the service provided under
the applicable Skynet Transponder Agreement. The deposit may be in the form
of cash or its equivalent or an acceptable letter of credit. Payments under
the Transponder Sublease Agreements shall be due five (5) working days before
the date on which payments by 5DBC are due pursuant to the applicable Skynet
Transponder Agreements. All payments under the Transponder Sublease
Agreements by Buyer shall be applied directly to 5DBC's obligations under
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the Skynet Transponder Agreements. The Buyer shall be entitled to any
renewal rights 5DBC may have pursuant to the Skynet Transponder Agreements.
New Frontier shall guarantee the obligations Buyer will have under the
Transponder Sublease Agreements. If 5DBC is in default of or cannot
otherwise perform its obligations under the Skynet Transponder Agreements
(which reasons shall include the insolvency or bankruptcy of 5DBC), 5DBC
agrees to assign, according to the to the terms of those agreements and
contingent upon acceptance and approval of the assignments by the lessors
thereto, its interests in the Skynet Transponder Agreements to Buyers.
1.2 FUTURE SATELLITE RIGHTS. Buyers shall have a right of first refusal to
obtain satellite transponder service rights on Nahuel, AsiaSat and IntelSat
satellites to the extent 5DBC may have such rights in such satellites and
desires to sublease those transponder service rights to third parties for use
in Adult Movies Programming.
ARTICLE 2. PURCHASE PRICE
2.1 PAYMENT OF PURCHASE PRICE. In consideration for the transfer and
assignment of the Subject Assets and in consideration of the representations,
warranties and covenants of Sellers set forth herein, Buyers on the
conditions set forth herein:
(a) shall pay, subject to ARTICLE 5, an earnest money deposit in the
amount of US$85,000.00;
(b) shall deliver to Sellers at the Closing (as hereinafter defined)
US$2,339,828.00 plus taxes as provided in ARTICLE 6, payable in cash
as more fully described in SECTION 3.2;
(c) shall deliver at the Closing a promissory note in the amount of
US$814,289.00 executed by Buyer and payable to Sellers in the form
substantially similar to that set forth in SCHEDULE 2.1(c). Buyer's
performance under the promissory note shall be guaranteed by New
Frontier. Additionally, in order to secure Buyer's obligations
pursuant to the promissory note, at the Closing (i) Buyer shall
execute and deliver to Sellers a security agreement in the form
attached as Exhibit A to SCHEDULE 2.1(c) pursuant to which Buyer
shall grant to Sellers a security interest/lien in all of its
furniture, fixtures, equipment and inventory, ranking first in
priority over all other security interests/lienholders, except the
interests of Buyers' chief financial institutions which shall have a
first priority up to an amount of US $2,000,000.00;
(d) shall deliver to Sellers at the Closing Date, a certificate
representing shares of New Frontier common stock duly registered in
the name of Sellers (or such other parties as Sellers may direct)
equivalent in value to US$3,400,000.00 based on the "closed bid price
of the common stock on the Closing Date" and which in any event shall
be no less than 840,000 shares. For such purposes, "closed bid price
of the common stock on the Closing Date" means the last sale price of
common stock of
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New Frontier prior to the Closing Date reported on the Nasdaq
National Market System and, for such purposes, any sale by or to
a person not dealing at arms length with New Frontier (which, without
limitation, shall include officers, directors and employees of New
Frontier and their relatives) shall be not be considered;
(e) shall deliver to Sellers (or to such other parties as Sellers may
direct) at the Closing Date and subject to SCHEDULE 2.1(e), the
"Warrant Purchase Agreement," a total of 400,000 warrants for New
Frontier common stock exerciseable at US$5.00 per share;
(f) shall pay to Sellers any and all "Formula Profits" exceeding
US$2,000,000,00 in the first twelve months of operations of the
business by Buyer after the Closing Date. "Formula Profits" shall
equal the total revenue derived from operations less the actual
operating costs of Buyer, provided that for the purposes of
calculating Formula Profits the amount attributed to operating costs
shall not exceed 125% of the projected costs as set forth in SCHEDULE
2.1(f), the "Valuation of the Adult Business Companies as of March
31, 1997." Formula Profits shall be payable by Buyer to Sellers
within three months after the completion of the first twelve months
of operation of the business by Buyer. If Formula Profits are not
paid within such three month period, Buyer shall pay to Sellers
interest on the outstanding balance of Formula Profits, such interest
to be calculated at 24% per annum from the last day of such three
month period, compounded daily, and payable on the last day of every
calendar month. New Frontier hereby guarantees Buyer's obligations
under this SECTION 2.1(f); and
(g) shall assume and discharge, and shall indemnify Sellers against,
liabilities and obligations of Sellers under the leases, contracts or
other agreements, if any, specified on SCHEDULE 4 but only to the
extent that such liabilities or obligations accrue on or after the
Closing Date.
2.2 ALLOCATION OF THE PURCHASE PRICE. The parties agree that the Purchase
Price (defined as the sum of the amounts specified in SECTIONS 2.1 (b) and
(c) above and the transfer of the stocks and warrants as referred to in
SECTIONS 2.1 (d) and (e) above) shall be allocated as set forth in SCHEDULE
2.2 and that such allocation will be used by the parties in reporting the
transaction contemplated by this Agreement for tax purposes.
ARTICLE 3. THE CLOSING
The closing of the purchase and sale of the Subject Assets by Sellers to
Buyers (the "Closing") shall take place at 2500 Don Reid Drive, Ottawa,
Ontario, sixty-four (64) days after the date of this Agreement or at such
other place and/or time as the parties may agree in writing (the "Closing
Date"). In the event that the conditions specified in this Agreement have
not be fulfilled by such date, either Sellers or Buyers may extend the
Closing Date for a period or periods not
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exceeding an aggregate of thirty (30) days by written notice to the other
parties.
3.1. SELLERS' OBLIGATIONS AT CLOSING.
(a) At the Closing Sellers shall deliver or cause to be delivered to
Buyer:
(i) assignment and assumption agreements for personal property
leases, all contracts and agreements of Sellers to be assumed
in connection herewith, in form and substance reasonably
satisfactory to Buyers' counsel, and accompanied by all
consents required by this Agreement and the personal property
leases, contracts and agreements being assigned;
(ii) instruments of assignment and transfer (including a bill of
sale) of all the Subject Assets in form and substance
reasonably satisfactory to Buyers' counsel; and
(iii) such other documents as shall be reasonably requested by
Buyers or Buyers' counsel (for example, a BULK SALES ACT
affidavit).
(b) Simultaneously, with the consummation of the transfer, Sellers,
through its officers, agents and employees, shall put Buyer into full
possession and enjoyment of all the Subject Assets to be sold,
conveyed, transferred, assigned and delivered by this Agreement.
(c) Sellers, at any time before or after the Closing Date shall execute,
acknowledge, and deliver any further deeds, assignments, conveyances
and other assurances, documents and instruments of transfer,
reasonably requested by Buyers and shall take any other action
consistent with the terms of this Agreement that may be reasonably
requested by Buyers for the purpose of assigning, transferring,
granting, conveying and confirming to Buyers, or reducing to
possession, any or all property and assets to be conveyed or
transferred by this Agreement. If requested by Buyers, Sellers
further agrees to prosecute or otherwise enforce in their own names
for the benefit of Buyers any claims, rights, or benefits that are
transferred to Buyers by this Agreement and that require prosecution
or enforcement in any of Sellers' names. Any prosecution or
enforcement of claims, rights, or benefits under this Section shall
be solely at Buyer's expense, unless the prosecution or enforcement
is made necessary by a breach of this Agreement by Sellers.
3.2. BUYER'S OBLIGATIONS AT CLOSING. At the Closing Buyers shall deliver to
Sellers against delivery of the items specified in SECTION 2.1, a certified
bank or cashier's check, or a wire transfer of immediately available funds,
in the amount of US$2,339,828.00 plus taxes pursuant to ARTICLE 6 payable to
Sellers and the promissory note payable to Sellers in the amount of
US$814,289.00. Sellers shall notify Buyers within five (5) days of the
Closing Date whether the amount payable at Closing shall be delivered by
certified bank or cashier's check, or by wire
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transfer. At closing, Buyers shall deliver to Sellers such documents that
shall be reasonably requested by Sellers or Sellers' counsel.
ARTICLE 4. ASSUMPTION OF LIABILITIES
Buyers are not assuming any debt, liability or obligation of Sellers, whether
known or unknown, fixed or contingent, except as herein specifically
otherwise provided. Sellers agree to indemnify and hold Buyers harmless
against all debts, claims, liabilities and obligations of Sellers not
expressly assumed by Buyers hereunder, and to pay any and all attorneys' fees
and legal costs incurred by Buyers, its successors and assigns in connection
therewith. Buyers shall have the benefit of and shall perform and assume all
leases, contracts and agreements, if any, specifically listed on SCHEDULE 4,
in accordance with the terms and conditions thereof, except to the extent
modifications are specifically set forth in SCHEDULE 4 and except to the
extent set forth in the assignments or assignment and assumption agreements
for such leases, contract and agreements.
ARTICLE 5. RETURN OF DEPOSIT
Upon execution of this Agreement, Buyers shall pay to Sellers an earnest
money deposit of US$21,250.00. Upon parties' final acceptance of the form
and content of the schedules to this Agreement, Buyers shall pay to Sellers a
further earnest money deposit of US$63,750.00. Such deposits shall be
returned to Buyers if the Transactions are not closed due to: (a) the failure
of any conditions set forth in ARTICLE 11 to be met at or before the Closing
as a result of any act or omission by Sellers; or (b) the occurrence of any
default by Sellers described in SECTION 17.3. If the Transactions are not
closed for any other reason, the deposit shall be retained by Sellers. Upon
Closing, the deposit shall be applied towards the payment due to Sellers
under SECTION 2.1(b).
ARTICLE 6. TAXES
Buyers shall pay all sales, use and transfer taxes arising out of the
transfer of the Subject Assets, including any foreign transfer taxes and
shall pay its portion, prorated as of the Closing Date, of state, provincial,
and local real and personal property taxes of the business being sold
hereunder, to a maximum of the amount such taxes that would have been payable
if the sale of the Subject Assets had been made by a company located in the
Province of Ontario, Canada. Buyers shall not be responsible for any
business, occupation, withholding or similar tax, or for any income, sales,
use, value-added or similar taxes related to any period, or transaction
occurring during any period, before the Closing Date.
ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers, jointly and severally, hereby represent and warrant to Buyers that
the following facts and
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circumstances are and will be at all times up to the Closing Date, except as
contemplated hereby, true and correct, and hereby acknowledge that such facts
and circumstances constitute the basis upon which Buyers are induced to enter
into and perform this Agreement. Each warranty set forth in this ARTICLE 7
shall survive eighteen (18) months past the Closing Date and any
investigation made by or on behalf of Buyers. Buyers shall conduct their own
due diligence investigation and that investigation shall include an
investigation into whether Sellers is or has operated in accordance with the
warranties and representations of Sellers. If prior to the closing date,
Buyers believe they have discovered any breach of the representations and
warranties of Sellers, they shall forthwith advise Sellers in writing of such
breach. If Sellers does not or cannot cure such breach prior to the Closing
Date, Buyers may elect to close (in which case the breach shall be deemed
non-material) or not close provided such breach is material. If Buyers fail
to give such notice then the breach will be deemed non-material.
7.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each Seller is a
corporation organized, validly existing, and in good standing under the laws
of of its jurisdiction of incorporation. Each Seller has all necessary
corporate powers to own its properties and to carry on its business as now
owned and operated by it, and is duly qualified to transact any business and
is in good standing in all jurisdictions in which the nature of its business
or its properties makes such qualification necessary.
7.2 FINANCIAL STATEMENTS. SCHEDULE 7.2(a) is the Combined Financial
Statements for the years ending March 31, 1997 and 1996 for Sellers and
1043133 Ontario Inc., certified by Ernst & Young, chartered accountants,
whose opinions with respect to such financial statements are included into
this Agreement. SCHEDULE 7.2(b) sets forth unaudited combined balance sheets
of Sellers and others as of June 30, 1997 (the "Stub Period Date"), together
with related unaudited combined statements of changes in financial positions
and unaudited combined statements of income and retained earnings for the
three (3) month period then ending, as prepared by Sellers. These financial
statements in SCHEDULES 7.2(a) and (b) are referred to as the "Financial
Statements." The Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") consistently followed by
Sellers throughout the periods indicated, are complete and correct in all
material respects and accurately and fairly depict the present financial
position of Sellers as of the respective dates of the balance sheets included
in the Financial Statements, and the results of their operations for the
respective periods indicated. Sellers have no liabilities or obligations of
any nature (known or unknown, absolute, accrued, contingent or otherwise) of
the type required to be reflected or disclosed in a balance sheet (or notes
thereto) prepared in accordance with GAAP that were not fully reflected or
reserved against in the Financial Statements. The Audited Financial
Statements being provided by Sellers shall contain in footnotes or otherwise
information concerning adjustments and add-back payments as reflected on page
7 of the Letter of Understanding dated April 14, 1997 Sellers from New
Frontier, which is attached as SCHEDULE 7.2(c). The Financial Statements
accurately reflect the revenues and expenses of Sellers' Adult Movies
Business.
7.3 ABSENCE OF SPECIFIED CHANGES. Since March 31, 1997, there has not been
any:
(a) adverse material changes in the financial condition, liabilities,
assets, business,
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operating results or prospects of Sellers with respect to their
Adult Movies Business;
(b) destruction, damage to, or loss of any of the Subject Assets (whether
or not covered by insurance) that materially and adversely effects
the assets, financial condition, business, assets or prospects of
Sellers with respect to their Adult Movies Business;
(c) labor trouble or other event or condition of any character materially
and adversely effecting the financial condition, business, assets or
prospects of Sellers;
(d) revaluation by Sellers of any of the Subject Assets in a manner that
would be materially adverse to Buyers;
(e) execution, creation, amendment, nonrenewal or termination of any
material contract, agreement or license to which Sellers are a party,
except in the ordinary course of business or except as can be
terminated prior to the Closing Date without materially adversely
effecting the Subject Assets;
(f) creation or assumption by Sellers of any mortgage, pledge, security
interest or lien or other encumbrance on any material asset of
Sellers related to their Adult Movies Business, except as set forth
in SCHEDULE 7.3(f);
(g) receipt by Sellers of notice of any loss of, or material order
cancellation by, any major customers of Sellers, except as set forth
in SCHEDULE 7.3(g);
(h) other event or condition of any character of which Sellers have
knowledge that has or might reasonably have a material adverse effect
on the financial condition, business, assets, operating results or
prospects of their Adult Movies Business, except as set forth in
SCHEDULE 7.3(h); or
(i) agreement by Sellers to do any of the things described in the
preceding clauses (a) through (h).
7.4 SUBJECT ASSETS SUFFICIENT FOR OPERATIONS. The Subject Assets, together
with the "Subject Assets" described in the 124 Agreement and in the 5DBC
Agreement, constitute all assets of Sellers (except premises) which are
necessary for the continued uninterrupted operation by Sellers of its Adult
Movies Business as now conducted. Except as stated in SCHEDULE 4, none of
the Subject Assets are held under any lease, security agreement, conditional
sales, contract, or other title of retention or security agreement, or are in
the possession of anyone other than Sellers.
7.5 TRADE NAMES, TRADEMARKS AND COPYRIGHTS. Except as set forth IN SCHEDULE
7.5, Sellers do not use or own any trademark, service mark, trade name, trade
secret, or brand name in their Adult Movies Business. To the actual
knowledge of Sellers, no person has made any outstanding claims against
Sellers in respect of any trademark, trademark registration or application,
service
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mark, trade name, copyright, copyright registration or application or brand
name, the use of which is necessary or contemplated in connection with the
performance of any contract to which Sellers are a party.
7.6 TRADE SECRETS. Sellers are not aware of any trade secrets owned by, used
in or necessary for the operation of its Adult Movies Business.
7.7 TITLE TO ASSETS. To the best of Sellers' knowledge, Sellers have good
and marketable title to all the Subject Assets free and clear of mortgages,
liens, pledges, charges, encumbrances, equities, claims, easements, rights of
way, covenants, conditions, or restrictions, except for (i) those disclosed
in Sellers' balance sheet as of the Stub Period Date, included in the
Financial Statements, or in the Schedules to this Agreement; (ii) the lien of
current taxes not yet due and payable; and (iii) possible minor matters that,
in the aggregate, are not substantial in amount and do not materially detract
from or interfere with the present or intended use of any of these assets,
nor materially impair the operations of the Adult Movies Business. All the
Subject Assets are in good operating condition and repair, ordinary wear and
tear excepted. Sellers are in possession of all premises leased to it from
others and used in connection with their Adult Movies Business.
7.8 CUSTOMERS AND SALES. SCHEDULE 7.8 to this Agreement is a correct and
current list of all customers/subscribers of Sellers together with summaries
of the sales made to each customer during the most recent fiscal year.
Except as indicated in SCHEDULE 7.8, Sellers have no information and are not
aware of any facts indicating that any dealers or distributors of the
services offered by their Adult Movies Business intend to cease doing
business with Sellers or alter the amount of the business that they are
presently doing with Sellers where such cessation or alteration would have a
material adverse effect on their Adult Movies Business.
7.9 INSURANCE POLICIES. SCHEDULE 7.9 to this Agreement is a description of
all insurance policies held by Sellers concerning the Subject Assets. All
these policies are in the respective principal amounts set forth in SCHEDULE
7.9. Sellers have maintained and now maintain (a) insurance on all the
Subject Assets of a type customarily insured, covering property damage by
fire or other casualty, and (b) adequate insurance protection against all
liabilities, claims, and risks against which it is customary to insure. Such
insurance coverage will be cancelled as of Closing.
7.10 OTHER CONTRACTS. Copies of all contracts which will be assigned to or
assumed by Buyers under this Agreement are attached as part of SCHEDULE 4.
Except as set forth in SCHEDULE 4 and to the best of Sellers' knowledge, the
Subject Assets will not at Closing or thereafter (as a result of actions or
conduct of Sellers) be bound or potentially bound by, any distributor's or
manufacturer's representative or agency agreement, any output or requirements
agreement, any agreement not entered into in the ordinary course of business,
any indenture, mortgage, deed of trust, lease or any other agreement that is
unusual in nature, duration or amount (including, without limitation, any
agreement requiring the performance by Sellers of any obligation for a period
of time extending beyond one year from Closing Date or calling for
consideration of more than US$10,000.00 or requiring purchases at prices in
excess of, or sales at prices lower than, prevailing market prices). To the
best of Sellers' knowledge, there is no default or event that with notice or
lapse of time, or both, would constitute a default by any party to any of the
agreements
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listed in SCHEDULE 4 and such contracts remain in full force and effect.
Sellers have not received notice that any party to any of the agreements
listed in SCHEDULE 4 intends to cancel or terminate any of these agreements
or to exercise or not exercise any options under any of these agreements.
Sellers are not parties to, nor are Sellers or the Subject Assets bound by,
any agreement that is materially adverse to the business, assets, property,
operating results, prospects or financial condition of Sellers.
7.11 COMPLIANCE WITH LAWS. Sellers have received no notice of any violation
of any statutes, laws or regulations (including, without limitation any
applicable obscenity, environmental, health, building, zoning, or other law,
ordinance or regulations) from any Authority the violation of which may
materially adversely affect the Adult Movies Business. Sellers are not in
violation of or default under any provisions of their Articles of
Incorporation or Bylaws, both as amended. The execution, delivery and
performance of the Agreement and the consummation of the Transactions will
not result in any such violation or default, or be in conflict with or
constitute, with or without the passage of time or the giving of notice or
both, a default under Sellers' Articles of Incorporation or Bylaws, both as
amended. To the best of Sellers' actual knowledge, all licenses, permits,
approvals, registrations, qualifications, certificates and other
authorizations necessary for the conduct of Sellers' Adult Movies Business as
presently conducted (the "Licenses") have been duly obtained, are in full
force and effect, and there are no proceedings pending or threatened which
may result in the revocation, cancellation, suspension or modification of any
of such Licenses.
7.12 LITIGATION. There is no suit, action, arbitration or legal,
administrative or other proceeding, or governmental investigation ("Actions")
pending or, to the best knowledge of Sellers, threatened, against or
affecting Sellers, or any of its business, assets or financial condition, or
against any officer, director or employee of Sellers in connection with such
officer's, director's or employee's relationship with or actions taken on
behalf of Sellers. Sellers are not party to or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality, and there are no actions or claims by Sellers
currently pending or, to which Sellers intend to initiate. To the best
knowledge of Sellers, there has not occurred any event nor does there exist
any condition on the basis of which any litigation, proceeding or
investigation is likely to be instituted by or against Sellers. Sellers are
not in default with respect to any order, writ, injunction or decree of any
federal, state, local or foreign court, department, agency or instrumentality.
7.13 AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. Neither the entry into
this Agreement nor the consummation of the transactions contemplated hereby
will result in or constitute any of the following events where the occurrence
of such event would render Sellers materially unable to comply with this
Agreement: (a) a default or an event that, with notice or lapse of time or
both, would be a default, breach or violation of any lease, license,
promissory note, conditional sales contract, commitment, indenture, mortgage,
deed of trust or other agreement, instrument or arrangement; (b) an event
that would permit any party to terminate any agreement or to accelerate the
maturity of any indebtedness or other obligation; (c) the creation or
imposition of any lien, charge or encumbrance on any of the Subject Assets;
or (d) the violation of any law, regulation, ordinance, judgment, order or
decree.
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7.14 AUTHORITY AND CONSENTS. Except as set forth in SCHEDULE 7.14, Sellers
has the right, power, legal capacity and authority to enter into, and perform
its obligations under this Agreement, and no approvals or consents of any
persons other than the shareholders of Sellers are necessary in connection
with it. The execution and delivery of this Agreement and the consummation of
this transaction by Sellers have been, or prior to the Closing will have
been, duly authorized by all necessary corporate action of Sellers (including
any necessary action by SellersSellers' security holders). This Agreement
constitutes a legal, valid and binding obligation of Sellers enforceable in
accordance with its terms except as limited by bankruptcy and insolvency laws
and by other laws affecting the rights of creditors generally.
7.15 INTEREST IN CUSTOMERS, SUPPLIERS AND COMPETITORS. Except as set forth
in SCHEDULE 7.15 or as contemplated by a Collateral Agreement, neither
Sellers nor any officer or director or shareholder of Sellers, nor any spouse
or child of any of them has any direct or indirect interest in any
competitor, supplier or customer of Sellers or in any person with whom
Sellers are doing business.
7.16 DOCUMENTS DELIVERED. Each copy or original of any agreement, contract
or other instrument which is identified in any exhibit or schedule delivered
by Sellers or its counsel to Buyers (or their counsel or representatives),
whether before or after the execution hereof, is in fact what it is purported
to be by Sellers and has not been amended, canceled or otherwise modified.
7.17 FULL DISCLOSURE. None of the representations and warranties made by
Sellers or made in any letter, certificate or memorandum furnished or to be
furnished by Sellers or on their behalf, contains or will contain any untrue
statement of a material fact, or omits any material fact the omission of
which would make the statements made misleading and materially adverse to
Buyers. Except matters of general knowledge within the Adult Movies industry
and other matters generally available to the public, there is no fact known
to Sellers which materially adversely affects the condition, assets,
liabilities, business, or operations of the Sellers' Adult Movies Business
that has not been set forth herein or heretofore communicated to Buyer in
writing.
7.18 TRANSPONDER LEASE AGREEMENTS. 5DBC specifically represents and warrants
that it is not in default or otherwise been notified of any potential
material default or breach regarding the Skynet Transponder leases, except as
disclosed in SCHEDULE 7.18. To the extent necessary, 5DBC shall cooperate
with Buyers in obtaining any consents required with respect to Buyer's
sublease of the Skynet Transponders.
7.19 SOLVENCY. As of the execution and delivery of this Agreement, and,
after giving effect to the consummation of the Transactions, Sellers will be
solvent.
7.20 TAX MATTERS. Sellers shall continue to be responsible for and will
discharge all obligations and liabilities in respect to taxes pertaining to
their Adult Movies Business and the Subject Assets which arise or accrue for
all periods ending on or before the Closing Date (but excluding the taxes
referred to in ARTICLE 6). Sellers will indemnify and hold harmless Buyers
against any and all claims and demands incurred by Buyers that directly or
indirectly arise out of such obligations or
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liabilities. Without limiting the foregoing, Sellers will be responsible for
all federal, state, provincial, local, foreign and other net income, gross
income, gross receipts, alternative or add on minimum, profits, sales, use,
occupation, value-added, ad valorem, transfer, franchise, license, lease,
service use, withholding, payroll, employment, excise, severance, premium,
property, windfall profits, customs, duties, or other taxes, fees
assessments, or charges of any kind whatsoever, together with any interest,
penalties or additions to tax imposed with respect thereto, or any
obligations to any agreements or arrangements with respect to and taxes
described above.
7.21 EMPLOYMENT MATTERS. Buyer shall be under no obligation to offer
employment to any of Sellers' employees employed in connection with the Adult
Movies Business ("affected employees"), except as otherwise stated in this
Agreement. Buyer may, however, choose to retain the services of or to offer
employment to one or more of the affected employees, should it wish to do so,
subject to SECTION 13.4.
Sellers will continue to be responsible for and will discharge all
obligations and liabilities in respect of the affected employees which arise
or accrue prior to, on or after the Closing Date. Sellers will indemnify and
save harmless Buyers against any and all claims and demands incurred by
Buyers that directly or indirectly pertain to or arise out of such
obligations or liabilities. Without limiting the forgoing, Sellers will be
responsible for and will bear and discharge any and all obligations and
liabilities for wages, severance pay, termination pay, notice of termination
of employment or pay in lieu of such notice, damages for wrongful discharge
or other employee benefits or claims, including vacation pay, which may arise
in connection with the employment or dismissal of any of the affected
employees, including any interest, award, judgment or penalty relating
thereto and any costs or expenses incurred by Buyers in defending against any
claim or demand relating to such obligation or liabilities.
7.22 124 AGREEMENT.
(a) The equipment (including without limitation essential spares and
replacement parts) and software technology, furniture, machinery,
appliances, and other tangible personal property and technology as
specifically set forth in SCHEDULE 1(a) of the 124 Agreement is
substantially similar to the equipment and technology used by Sellers
in connection with or historically allocated to their Adult Movies
Business carried on by the Sellers as of July 31, 1997 at the Uplink
Facility.
(b) The uplink facility to be operated, maintained, managed and sustained
under SECTION 1.1 of the 124 Agreement shall be of a substantially
similar nature and quality as those services currently being provided
by Sellers to their present subscribers.
(c) The "Subject Assets" described in the 124 Agreement constitute all
assets (other than premises) necessary for the continued
uninterrupted operation by 1248663 Ontario Inc. of the call center
and uplink facility as now conducted on behalf of the Sellers in
respect of their Adult Movies Business.
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(d) SCHEDULE 1(b) of the 124 Agreement contains a complete list of the
hardware, equipment, furniture, machinery, appliances, software and
other tangible personal property now used at the Ottawa Call Center.
ARTICLE 8. BUYERS' REPRESENTATIONS AND WARRANTIES
Buyers represents, warrants, and covenants to, and agrees with Sellers as
follows:
8.1 ORGANIZATION AND BUSINESS: POWER AND AUTHORITY: EFFECT OF TRANSACTION.
(a) Each Buyer (i) is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation;
(ii) has all requisite power and authority to own or hold under lease
its properties and to conduct its business as now conducted and as
presently proposed to be conducted, and has in full force and effect
all Governmental Authorizations and Private Authorizations and has
made all governmental filings, to the extent required for such
ownership and lease of its property and conduct of its business and
is in good standing in such jurisdictions in which the failure to be
in good standing would have a material adverse effect upon its
property or the nature of its business or operations.
(b) Each Buyer has all requisite power and authority (corporate and
other) and has in full force and effect all Governmental
Authorizations and Private Authorizations in order to enable it to
execute and deliver, and to perform its obligations under, this
Agreement and each Collateral Agreement executed or required to be
executed pursuant hereto or thereto or to consummate the Transactions
and the Collateral Agreements; and the execution, delivery and
performance of this Agreement and each Collateral Agreement has been
duly authorized by all requisite corporate or other action. No
further action or approval on the part of Buyers' stockholders is
required in connection with the execution, delivery and performance
of this Agreement or each Collateral Agreement or the consummation of
the Transactions. This Agreement has been duly executed and
delivered by each Buyer and constitutes, and each Collateral
Agreement executed or required to be executed pursuant hereto or
thereto or to consummate the Transactions when executed and delivered
by Buyers will constitute, legal, valid and binding obligations of
Buyers enforceable in accordance with their respective terms.
(c) Neither the execution and delivery of this Agreement or any
Collateral Agreement, nor the consummation of the Transactions, nor
compliance with the terms, conditions and provisions hereof or
thereof by Buyers:
(i) will conflict with, or result in a material breach or violation
of, or constitute a material default under, any Applicable Law
on the part of Buyers or will conflict with, or result in a
material breach or violation of, or constitute a
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material default under, or permit the acceleration of any
obligation or liability in, or but for any requirement of
giving notice or passage of time or both would constitute such
a conflict with, material breach or violation of, or material
default under, or permit any such acceleration in, any
contractual obligation of Buyers;
(ii) will require any Governmental Authorization or Private
Authorization, except for filing requirements under Applicable
Law in connection with the issuance of Buyers' shares to
Sellers.
8.2 FINANCIAL AND OTHER INFORMATION
(a) Buyers have heretofore furnished to Sellers copies of the
consolidated financial statements of New Frontier and all of its
subsidiaries ("Buyers' Financial Statements"). Buyers' Financial
Statements, including in each case the notes thereto, have been
prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby, except as otherwise noted
therein or as set forth in SCHEDULE 8.2(a) (Buyers' Disclosure
Schedule), and are true, accurate and complete, do not contain any
untrue statement of material fact or omit to state a material fact
required by GAAP to be stated therein or necessary in order to make
the statements contained therein not misleading, and fairly present
the financial condition and the results of operations of Buyers, on
the bases therein stated, as of the respective dates thereof, and for
the respective periods covered thereby subject, in the case of
unaudited financial statements, to normal year-end audit adjustments
and accruals.
(b) Neither Buyers' Disclosure Schedule, Buyers' Financial Statements,
this Agreement, any Collateral Agreement, or any data, information or
statement furnished or to be furnished by or on behalf of Buyers
pursuant to this Agreement or any Collateral Agreement or required to
consummate the Transactions, contains or will contain any untrue
statement of material fact or omits or will omit to state a material
fact required to be stated herein or therein or necessary in order to
make statements contained herein or therein not misleading and all
Collateral Agreements, data, information or statements are and will
be true, accurate and complete.
8.3 CHANGES IN CONDITION. Since the date of the most recent financial
statements forming part of Buyers' Financial Statements, there has been no
material adverse change in Buyers taken as a whole or individually. Except
matters of general applicability to Buyers' industries, there is no event
known to Buyers which materially adversely affects Buyers taken as a whole or
individually, or the ability of Buyers to perform any of the obligations set
forth in this Agreement or any Collateral Agreement or to consummate the
Transactions.
8.4 COMPLIANCE WITH PRIVATE AUTHORIZATIONS. Each Buyer has obtained all
Private Authorizations which are necessary for the ownership by such Buyer of
its properties and the
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conduct of its business as now conducted or as presently proposed to be
conducted or which, if not obtained and maintained, could, singly or in the
aggregate, materially adversely affect such Buyer. Neither Buyer is in
breach or violation of, or is in default in the performance, observance or
fulfillment of, any Private Authorization, and no event exists or has
occurred, which constitutes, or but for any requirement of giving of notice
or passage of time or both would constitute, such a breach, violation or
default, under any contractual obligation of such Buyer or Private
Authorization, except for such defaults, breaches or violations, as do not
and will not have in the aggregate any material adverse affect on such Buyer
or the ability of such Buyer to perform any of its obligations set fourth in
this Agreement or any Collateral Agreement or to consummate the Transactions.
No Private Authorization is the subject of any pending or, to Buyers'
knowledge, information or belief, threatened attack, revocation or
termination.
8.5 COMPLIANCE WITH GOVERNMENTAL AUTHORIZATIONS AND APPLICABLE LAW.
(a) Each Buyer has obtained all other Governmental Authorizations which
are necessary for the ownership or uses of its properties and the
conduct of its business as now conducted or as presently proposed to
be conducted and which, if not obtained and maintained, would singly
or in the aggregate, have any material adverse affect on such Buyer
and its subsidiaries taken as a whole. No other Governmental
Authorization is subject of any pending or, to Buyers' knowledge,
information and belief, threatened challenge or proceeding to revoke
or terminate any such Governmental Authorization. Buyers' have no
reason to believe that any other Governmental Authorization would not
be renewed in the name of Buyer by the granting Authority in the
ordinary course.
(b) Neither Buyers nor any officer or director (in connection with the
business, operations and properties of such Buyer) is in or is
charged with or, to such Buyer's knowledge, information and belief,
at any time since its organization has been in or has been charged
with, or is threatened or under investigation with respect to, breach
or violation of, or default in the performance, observance or
fulfillment of, any Governmental Authorization or any Applicable Law,
and no event exists or has occurred, which constitutes, or but for
any requirement of giving notice or passage of time or both would
constitute, such a breach, violation or default, under:
(i) any Governmental Authorization or any Applicable Law, except for
such breaches, violations or defaults as do not and will not
have in the aggregate any material adverse affect on Buyers
taken as a whole or the ability of Buyers to perform any of the
obligations set forth in this Agreement or any Collateral
Agreement or to consummate the Transactions, or
(ii) any requirement of any insurance carrier, applicable to its
business, operations or properties.
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8.6 AUTHORIZED AND OUTSTANDING STOCK.
(a) The authorized and outstanding capital stock of New Frontier is as
set forth below:
DESCRIPTION AUTHORIZED ISSUED AND OUTSTANDING
Common 50,000,000 4,192,511
Preferred 5,000,000 none
(b) The warrants for New Frontier common stock issued and outstanding as
of July 28, 1997 is as follows:
HOLDER WARRANT(S)TO PURCHASE EXPIRATION DATE EXERCISE PRICE
Original Private
Placement 189,000 12/31/97 $5.50
National Securities 20,000 10/12/98 4.00
New Frontier
Employees 146,666 10/15/99 6.00
Quarto 400,000 (i) 9/20/2001 6.00 (ii)
(i) Subject to upward adjustment pursuant to the terms of the Quarto
Warrant Agreement.
(ii) Subject to downward adjustment pursuant to the terms of the
Quarto Warrant Agreement.
Buyers represent and warrant that: (i) Colorado Satellite Broadcasting, Inc.
is a wholly owned subsidiary of New Frontier; (ii) except as set forth above
in this SECTION 8.6, there are no options, warrants, commitments or other
rights to purchase shares or other securities of the Buyers; (iii) except as
set forth above in this SECTION 8.6, no securities or obligations convertible
into or exchangeable for shares or other securities of the Buyers have been
authorized or agreed to be issued or are outstanding; (iv) there are no
shareholders agreements or similar agreements (including agreements that
contain voting arrangements) with respect to any or all of the shares of
either Buyer; and (v) SCHEDULE 8.6 is a list of all persons who own 5% or
more of the issued and outstanding shares of any class of shares of New
Frontier.
8.7 DISCLOSURE. None of the representations and warranties made by Buyers or
made in any letter, certificate or memorandum furnished or to be furnished by
Buyers or on their behalf, contains or will contain any untrue statement of a
material fact, or omits any material fact the omission of which would make
the statements made misleading and materially adverse to Sellers.
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8.8 CONTINUING REPRESENTATION AND WARRANTY. Except for those representations
and warranties which speak as of a specific date, all of the representations
and warranties of Buyers set forth in this Article shall be true and correct
on the Closing Date with the same force and effect as though made on and as
of that date and those, if any which speck as of a specific date shall be
true and correct on the Closing Date.
8.9 SOLVENCY. As of the execution and delivery of this Agreement, and, after
giving effect to the consummation of the transactions contemplated herein,
Buyers taken as a whole and individually will be solvent.
8.10 INTERPRETATION. For the purposes of this ARTICLE 8, New Frontier and
Colorado Satellite Broadcasting, Inc. are each considered to be a "Buyer".
ARTICLE 9. SELLERS' OBLIGATIONS BEFORE CLOSING
Sellers covenant that, except as otherwise agreed in writing by Buyer, from
the date of this Agreement until the Closing:
9.1 BUYERS' ACCESS TO PREMISES AND INFORMATION. Buyers and its counsel,
accountants and other representatives shall be entitled to have full access
during normal business hours to all Sellers' properties, books, accounts,
records, contracts and documents of or relating to the Subject Assets.
Sellers shall furnish or cause to be furnished to Buyers and their
representatives all data and information concerning the Subject Assets and
Adult Movies Business that may reasonably be requested.
9.2 CONDUCT OF BUSINESS IN NORMAL COURSE. Each Seller shall carry on its
business and activities diligently and in substantially the same manner as
they previously have been carried on, and shall not make or institute any
unusual or novel methods of purchase, sale, lease, management, accounting or
operation that will vary materially from the methods used by Seller as of the
date of this Agreement if it would have a material adverse affect on the
Sellers' Adult Movies Business.
9.3 PRESERVATION OF BUSINESS AND RELATIONSHIPS. Each Seller shall use its
best efforts, without making any commitments on behalf of Buyers, to preserve
the Sellers' Adult Movies Business intact, to keep available to each Seller,
its present officers and employees, and to preserve its present relationships
with suppliers, customers and others having business relationships with it.
9.4 MAINTENANCE OF INSURANCE. Each Seller shall continue to carry its
existing insurance, subject to variations in amounts required by the ordinary
operations of their businesses. At the request of Buyers and at Buyers' sole
expense, the amount of insurance against fire and other casualties which, at
the date of this Agreement, Sellers carry on any of the Subject Assets or in
respect of their operations shall be increased by such amount or amounts as
Buyers shall specify.
9.5 NEW TRANSACTIONS. Sellers shall not do or agree to enter into any
contract, commitment or
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transaction which would materially adversely effect the ability of Sellers to
perform any obligation set forth in this Agreement of any Collateral
Agreement.
9.6 EXISTING AGREEMENTS. Except in ordinary course of business, Sellers
shall not modify, amend, cancel or terminate any of its existing contracts or
agreements, or agree to do any of those acts without the consent of Buyers,
if doing so would materially adversely affect the Adult Movies Business.
9.7 CONSENT OF OTHERS. As soon as reasonably practical after the execution
and delivery of this Agreement, and in any event on or before the Closing
Date, Sellers shall obtain the written consent of the persons described in
SCHEDULE 7.14 in form and substance satisfactory to Buyers and will furnish
to Buyers executed copies of those consents.
9.8 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Each Seller shall use
its reasonable commercial efforts to assure that all representations and
warranties of Sellers set forth in this Agreement and in any written
statements delivered to Buyers by Sellers under this Agreement will also be
true and correct as of the Closing Date as if made on that date and that all
conditions precedent to Closing shall have been met. Sellers shall promptly
disclose to Buyers any information contained in the Schedules to this
Agreement which, because of an event occurring after the date hereof, is
incomplete or is no longer correct as of all times after the date hereof
until the Closing Date; provided, however, that none of such disclosures
shall be deemed to modify, amend or supplement the representations and
warranties of Sellers or the schedules hereto for the purposes of ARTICLE 11,
unless Buyer shall have consented thereto in writing.
9.9 STATUTORY FILINGS. Sellers shall cooperate fully with Buyers in
preparing and filing all information and documents required under any
statutes or governmental rules or regulations pertaining to the Transactions,
including but not limited to, any licenses required by Industry Canada and
the rules promulgated thereunder.
ARTICLE 10. BUYERS' OBLIGATIONS BEFORE CLOSING
10.1 GENERAL OBLIGATIONS AND CONFIDENTIALITY. Prior to the Closing Date (or,
in the event the Closing does not occur, for a period of two years following
the date of this Agreement) Buyers shall use its best efforts to preserve the
confidentiality of any commercial information which is confidential and which
Sellers identify in writing as confidential which is disclosed to Buyers or
to its representatives by Sellers; provided that Buyers at all times shall
not be materially restricted in its investigation of the assets or matters
relating thereto. The above provisions of this Section shall not apply to
any information which (i) is already known to Buyers at the time of
disclosure by Sellers, (ii) is published or through no fault of Buyers
becomes published or (iii) is lawfully disclosed to Buyer by a third party.
Whether or not the Closing shall take place, Sellers waive any cause of
action, right or claim arising out of the access of Buyers or their
representatives to any trade secrets or other confidential business
information of Sellers from the date of this Agreement until the Closing
Date, except for the intentional competitive misuse by Buyers or its
representatives of such trade secrets or other confidential business
information (identified as
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confidential as required by this Article) if the Closing does not take place.
10.2 SELLERS' ACCESS TO PREMISES AND INFORMATION. Each Seller and its
counsel, accountants and other representatives shall be entitled to have full
access during normal business hours to all Buyers' properties, books,
accounts, records, contracts and documents. The Buyers shall furnish or
cause to be furnished to each Seller and its representatives all data and
information concerning Buyers that may reasonably be requested.
ARTICLE 11. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE
The obligation of Buyers to purchase the Subject Assets under this Agreement
are subject to the satisfaction, at or before the Closing, of all the
conditions set out below in this Article. Buyers may waive any or all of
these conditions; provided, however, that no such waiver of a condition shall
constitute a waiver by Buyers of any of its other rights or remedies, at law
or in equity, if Sellers shall be in default of any of their representations,
warranties or covenants under this Agreement.
11.1 ACCURACY'S OF SELLERS' REPRESENTATIONS AND WARRANTIES. All
representations and warranties by Sellers contained in this Agreement or in
any Collateral Agreement or in any written statement delivered by Sellers
thereunder shall be true on and as of the Closing as though such
representations and warranties were made on and as of that date. Buyers
shall have received a certificate, dated the Closing Date, signed by Sellers'
Presidents certifying, in such detail as Buyers and their counsel may
reasonably request, that the representations and warranties set out herein
are true and correct as of the Closing Date.
11.2 SELLERS' PERFORMANCE. Sellers shall have performed, satisfied, and
complied with all covenants, agreements, and conditions required by this
Agreement to be performed or complied with by Sellers on or before the
Closing Date.
11.3 CERTIFICATION BY SELLERS. Buyers shall have received a certificate,
dated the Closing Date, signed by Sellers' Presidents certifying, in such
detail as Buyer and its counsel may reasonably request, that the
representations and warranties set out herein are true and correct as of the
Closing Date.
11.4 OPINION OF SELLERS' COUNSEL. Buyers shall have received from counsel
for Sellers, opinions dated the Closing Date, in form and substance
reasonably satisfactory to Buyers and their counsel, stating that:
(a) each Seller is a corporation duly organized, validly existing and in
good standing under the applicable laws of the jurisdiction of their
incorporation and have all necessary corporate power to own their
properties as now owned and operate their businesses as now operated;
(b) all corporate proceedings required by law or by the provisions of
this Agreement
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to be taken by each Seller on or before the Closing Date in
connection with the execution and delivery of this Agreement and the
consummation of the Transactions have been duly and validly taken;
(c) this Agreement has been duly and validly authorized and, when
executed and delivered by each Seller will be valid and binding on
such Seller and enforceable in accordance with its terms, except as
limited by bankruptcy and insolvency laws and by other laws affecting
the rights of creditors generally; and
(d) neither the execution nor delivery of this Agreement nor the
consummation of the Transactions will constitute a default, or an
event that would with notice or lapse of time or both constitute a
default under, or violation or breach of Seller's articles of
incorporation or bylaws.
In rendering their opinions, counsel for each Seller may rely on certificates
of governmental authorities, certificates of Seller's officers, directors or
shareholders, and on opinions of associate counsel.
11.5 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority, pertaining to the Transactions or
their consummation shall have been instituted or threatened on or before the
Closing Date.
11.6 CORPORATE APPROVAL. The execution and delivery of this Agreement by
Sellers, and the performance of their covenants and obligations under it,
shall have been duly authorized by all necessary corporate action, and Buyer
shall have received copies of all resolutions pertaining to that
authorization, certified by the secretaries of Sellers.
11.7 CONSENTS. All necessary agreements and consents of any parties (other
than Buyers, their shareholders or directors, and Authorities in the United
States of America) to the consummation of the Transaction, or otherwise
pertaining to the matters covered by this Agreement, shall have been obtained.
11.8 APPROVAL OF DOCUMENTATION. The form and substance of all certificates,
instruments, opinions and other documents delivered to Buyers under this
Agreement shall be satisfactory in all reasonable respects to Buyers and
their counsel.
11.9 CONSULTING AGREEMENT. Buyers and the Shareholders identified in
SCHEDULE 11.9 shall enter into a consulting agreement substantially in the
form of SCHEDULE 11.9.
11.10 CONDITION OF ASSETS. The Subject Assets shall not have been materially
or adversely affected in any way as a result of any fire, accident, storm or
other casualty or labor or civil disturbance or act of God or the public
enemy.
11.11 NON-COMPETITION AGREEMENT. The shareholders of Sellers shall each have
duly executed and delivered to Buyers a Non-competition Agreement
substantially in the form of SCHEDULE
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11.11.
11.12 AGREEMENT ON SCHEDULES. At the date of execution of this Agreement by
the parties, the form and content of the schedules to this Agreement had not
been settled by the parties and it is a condition precedent to Buyers'
performance under this Agreement that such schedules be settled prior to
Closing.
ARTICLE 12. CONDITIONS PRECEDENT TO SELLERS' PERFORMANCE
The obligations of Sellers to sell and transfer the Subject Assets under this
Agreement are subject to the satisfaction, at or before the Closing, of all the
following conditions:
12.1 ACCURACY OF BUYERS' REPRESENTATIONS AND WARRANTIES. All representations
and warranties by Buyers contained in this Agreement or in any Collateral
Agreement or in any written statement delivered by Buyers thereunder shall be
true on and as of the Closing as though such representations and warranties
were made on and as of that date. Sellers shall have received a certificate,
dated the Closing Date, signed by Buyers' Presidents certifying, in such detail
as Sellers and their counsel may reasonably request, that the representations
and warranties set out herein are true and correct as of the Closing Date.
12.2 BUYERS' PERFORMANCE. Buyers shall have performed and complied with all
covenants and agreements, and satisfied all conditions that it is required by
this Agreement to perform, comply with, or satisfy, before or at the Closing.
12.3 OPINION OF BUYERS' COUNSEL. Buyers shall have furnished Sellers with an
opinion from counsel for Buyers, dated the Closing Date, satisfactory to
Sellers and their counsel, stating that:
(a) Buyers are corporations duly organized, validly existing and in good
standing under the laws of the State of Colorado and have all
requisite corporate power to perform their obligations under this
Agreement;
(b) all corporate proceedings required by law or by the provisions of this
Agreement to be taken by Buyers on or before the Closing Date in
connection with the execution and delivery of this Agreement and
the consummation of the Transactions shall have been duly and
validly taken;
(c) this Agreement has been duly and validly authorized and, when executed
and delivered by Buyers will be valid and binding on Buyers and
enforceable in accordance with its terms, except as limited by
bankruptcy and insolvency laws and by other laws affecting the rights
of creditors generally;
(d) neither the execution nor delivery of this Agreement nor the
consummation of the Transactions will constitute a default, or an
event that would with notice or lapse of time or both constitute a
default under, or violation or breach of Buyers'
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articles of incorporation or bylaws;
(e) the shares described in SECTION 2.1(d) and the Warrants described in
SECTION 2.1(e) have been duly authorized and, when issued and
delivered pursuant the this Agreement, will have been validly issued,
and will be fully paid and non-assessable; the stockholders of New
Frontier will have no preemptive rights or other rights with respect
to such shares or warrants; when such warrants are exercised in
accordance with their terms, the New Frontier shares that are due
Sellers upon such exercise will have been validly issued, and will be
fully paid and non-assessable; the stockholders of New Frontier will
have no preemptive rights with respect to the shares issued upon the
exercise of such warrants; and
(f) to the best of such counsel's knowledge, there is no legal action
pending or threatened against either of Buyers which could have a
material adverse affect on Buyers.
In rendering its opinion, counsel for Buyers may rely on certificates of
governmental authorities and on opinions of associate counsel.
12.4 BUYERS' CORPORATE APPROVAL. Buyers shall have received corporate
authorization and approval for the execution and delivery of this Agreement and
all corporate action necessary or proper to fulfill the obligations of Buyers
to be performed under this Agreement on or before the Closing Date.
12.5 BOARD OF DIRECTORS APPOINTMENT. 5DBC shall have the right to appoint at
least one director to the Board of Directors of New Frontier and 5DBC shall be
entitled to have one additional non-voting representative whom shall enjoy all
the rights and privileges of board members of New Frontier except for the right
to vote and whose expenses (traveling and lodging) shall be paid by New
Frontier. With respect to the right to appoint at least one director, at such
time after the Closing Date as 5DBC shall request, one designee of 5DBC shall
be appointed as a member of the Board of Directors of New Frontier, to hold
office until the next annual meeting of stockholders of New Frontier and until
such designee's successor shall have been elected and qualified (or the earlier
resignation or removal of such designee). Thereafter, so long as 5DBC (and its
affiliates) continue to own not less than 300,000 (as presently constituted)
shares of New Frontier, 5DBC shall, subject to the conditions hereinafter set
forth, be entitled to designate one management nominee for election as a member
of the Board of Directors of New Frontier. Notwithstanding the foregoing, 5DBC
shall not have the right to designate a nominee for election as a member of the
Board of Directors, or if such right of designation shall have been exercised,
such designee shall not have the right to continue to serve as a member if
his/her so serving would cause New Frontier to violate any statute or
regulation applicable to New Frontier.
12.6 CONSULTANT CONTRACT - DANIEL BENDER. Buyer shall enter into a Consultant
Agreement with Daniel Bender, provided Daniel Bender is prepared to enter into
such agreement, for a period of one year following the Closing Date and in the
amount of US$100,000.00 in a form substantially similar to SCHEDULE 12.6, which
shall be executed and delivered by Buyer on the Closing Date.
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12.7 AUDIO/VISUAL PRODUCTION AGREEMENT. Buyer shall enter into an Audio/Visual
Production Agreement with Diorio Productions Inc., provided Diorio Productions
Inc. is prepared to enter into such agreement, in a form substantially similar
to SCHEDULE 12.7, whereby Buyer agrees to purchase Cdn$30,000.00 of
interstitial programming per month for the acquired Adult Movies Business for a
period of nine (9) months following the Closing Date, which agreement shall be
executed and delivered by Buyer on the Closing Date.
12.8 AGREEMENT ON SCHEDULES. At the date of execution of this Agreement by the
parties, the form and content of the schedules to this Agreement had not be
settled by the parties and it is a condition precedent to Sellers' performance
under this Agreement that such schedules be settled prior to Closing and shall
be initialled by the signing officers of the parties.
12.9 CAPITALIZATION OF BUYERS. Prior to the Closing Date, the Buyers shall
have raised and received the net proceeds from a share offering of not less
than US$7,000,000.
ARTICLE 13. SELLERS' OBLIGATIONS AFTER THE CLOSING
13.1 PRESERVATION OF GOODWILL. Following the Closing, Sellers will restrict
their activities so that Buyers' reasonable expectations with respect to the
goodwill, business reputation, employee relations and prospects connected with
the Subject Assets will not be materially impaired. In furtherance but not in
limitation of this general obligation, Sellers agree that, for the period of
two (2) years following the Closing Date, or as long as Buyers or its assigns
or successors in interest carry on a like business in the counties or areas
specified, whichever is shorter:
(a) Sellers and their shareholders will not engage in any business or
activity which is substantially the same as, any business or activity
presently conducted by Sellers if such business or activity extends
to any of the geographic areas set forth in SCHEDULE 11.11 in which
Sellers have heretofore engaged in business or otherwise established
its goodwill, business reputation, or any customer relations. The
parties intend that the covenant contained herein shall be construed
as a series of separate covenants, one for each geographic area
specified in SCHEDULE 11.11. Except for geographic coverage, each
separate covenant shall be deemed identical in terms to the covenant
set forth above. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in
this Section, then this unenforceable covenant shall be deemed
eliminated from these provisions for the purpose of those proceedings
to the extent necessary to permit the remaining separate covenants to
be enforced.
(b) Sellers and their shareholders will not disclose to any person or use
for their own benefit any price lists, pricing data, customer lists
or similar matters possessed by them relating to the Subject Assets
or the business transferred to Buyer unless they first clearly
demonstrate to Buyer that such matters are at the time of the
proposed disclosure or use of common knowledge within the trade.
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13.2 SELLERS' INDEMNITIES. Sellers shall indemnify, defend and hold harmless
Buyers against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and reasonable attorneys' fees, that Buyers shall
incur or suffer, which arise, result from or relate to any breach of, or
failure by Sellers to perform, any of their representations, warranties,
covenants or agreements in this Agreement or in any schedule, certificate,
exhibit or other instrument furnished or to be furnished by Sellers under this
Agreement. Notwithstanding any other provision of this Agreement, Sellers
shall not be liable to Buyer on any warranty, representation or covenant made
by Sellers in this Agreement, or under any of their indemnities in this
Agreement, regarding any single claim, loss, expense, obligation or other
liability that does not exceed US$2,500.00; provided, however, that when the
aggregate amount of all such claims, losses, expenses, obligations and
liabilities not exceeding US$2,500.00 each reaches US$25,000.00, Sellers shall
thereafter be liable in full for all such breaches and indemnities and
regarding all those claims, losses, expenses, obligations, and liabilities.
13.3 ACCESS TO RECORDS. From and after the Closing, Sellers shall allow
Buyers, and their counsel, accountants and other representatives, such access
to records which after the Closing are in the custody or control of Sellers as
Buyers reasonably require in order to comply with its obligations under the law
or under contracts assumed by Buyers pursuant to this Agreement.
13.4 NONSOLICITATION OF EMPLOYEES. Except with the prior written consent of
Sellers, Buyers shall not, prior to the first anniversary of the Closing,
solicit any employee of Sellers or of any affiliate of Sellers to leave such
employment if such employee was at any time between the date hereof and the
Closing an employee of Seller.
13.5 RISK OF LOSS.
(a) Until the Closing Date the Subject Assets will remain at the risk of
Sellers. Sellers will maintain all risk insurance in respect of loss
or damage to or any other casualty in respect of the Subject Assets
which provides for loss settlement on a replacement cost basis if the
Subject Assets are repaired or replaced and on an actual cash value
basis if the Subject Assets are not repaired or replaced. In the
event of any loss, damage or claim, in respect of any risk for which
insurance is to be carried as aforesaid arising before the Closing
Date, Buyers, as an additional condition of closing, will be entitled
to be satisfied that the insurers have accepted the claim of Sellers
for payment in accordance with the terms of the policies. If any
destruction or damage occurs to the Subject Assets on or before the
Closing Date or if any or all of the Subject Assets are appropriated,
expropriated or seized by governmental or other lawful authority on
or before the Closing Date, Sellers will forthwith give notice
thereof to Buyers and Buyers will have the option, exercisable by
notice to Sellers on or before the Closing Date:
(i) to reduce the Purchase Price by an amount equal to the cost of
repair or, if destroyed or damaged beyond repair or if
appropriated, expropriated or
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seized, by an amount equal to the replacement cost of the assets
forming the part of the Subject Assets so damaged or destroyed
or appropriated, expropriated or seized and to complete the
purchase;
(ii) to complete the purchase without reduction of the Purchase
Price, in which event all proceeds of insurance or compensation
for the destruction or damage or appropriation, expropriation or
seizure will be payable to Buyers and all right and claim of
Sellers to any such amounts not paid by the Closing Date will be
assigned to Buyers; or
(iii) to rescind this Agreement and not complete the purchase if,
in the opinion of Buyers, such destruction, damage,
appropriation, expropriation or seizure is material and in such
event Sellers and Buyers will be released from all obligations
hereunder and the deposit referred to in SECTION 2.1(a) shall be
returned to Buyers.
(b) If Buyers elect to reduce the Purchase Price pursuant to SECTION
13.5(a)(i), Sellers and Buyers will at the Closing Date determine the
amount of the reduction to the extent that it is then determinable
and will undertake to adjust such amount after the Closing Date, if
necessary.
ARTICLE 14. COSTS
14.1 FINDER'S OR BROKER'S FEES. Each party shall be responsible for its own
costs or for any commission or finder's fee incurred on behalf of that party in
connection with the Transactions.
14.2 EXPENSES. Each of the parties shall pay all costs and expenses,
including, but not limited to attorneys' fees, incurred or to be incurred by it
in negotiating and preparing this Agreement and in closing and carrying the
Transactions.
ARTICLE 15. FORM OF AGREEMENT
15.1 HEADINGS. The subject headings of the Articles and Sections of this
Agreement are included for purposes of convenience only and shall not affect
the construction or interpretation of any of its provisions.
15.2 ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes the
entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement,
modification or amendment of this Agreement shall be binding unless executed in
writing by all the parties. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
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making the waiver.
15.3 COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
ARTICLE 16. PARTIES
16.1 PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties to it and their
respective successors and permitted assigns, nor is anything in this
Agreement intended to relieve or discharge the obligation or liability of any
third persons to any party to this Agreement, nor shall any provision give
any third persons any right of subrogation or action over against any party
to this Agreement.
16.2 ASSIGNMENT. No party can assign this Agreement without the express
written consent of the other parties. This Agreement shall be binding on and
shall inure to the benefit of the parties to it and their respective heirs or
legal representatives, and their respective successors and permitted assigns.
ARTICLE 17. REMEDIES
17.1 RECOVERY OF LITIGATION COSTS. If any legal action or any arbitration or
other proceeding is brought for the enforcement of this Agreement, or because
of an alleged dispute, breach, default or misrepresentation in connection
with any of the provisions of this Agreement, the successful or prevailing
party or parties shall be entitled to recover reasonable attorneys' fees and
other costs incurred in that action or proceeding, in addition to any other
relief to which it or they may be entitled.
17.2 CONDITIONS PERMITTING TERMINATION. Subject to the provisions of ARTICLE
3 relating to the postponement of the Closing Date, either party may on the
Closing Date terminate this Agreement by written notice to the other, without
liability to the other, if any bona fide action or proceeding shall be
pending against either party on the Closing Date that could result in a
materially adverse judgment, decree or order that would prevent or make
unlawful the carrying out of this Agreement.
17.3 DEFAULTS PERMITTING TERMINATION. If a Buyer or Seller materially
defaults in the due and timely performance of any of its material warranties,
covenants, or agreements under this Agreement, the 124 Agreement or the 104
Agreement, the non-defaulting party or parties may on the Closing Date give
notice of termination of this Agreement, in the manner provided in ARTICLE
19. The notice shall specify with particularity the default or defaults on
which the notice is based. The termination shall be on the first to occur of
the 10th day after such notice or the Closing Date, unless the specified
default or defaults have been cured by such time.
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ARTICLE 18. NATURE AND SURVIVAL OF REPRESENTATIONS AND
WARRANTIES
All representations, warranties, covenants and agreements of the parties
contained in this Agreement, or in any instrument, certificate, opinion or
other writing provided for in it, shall survive the Closing.
ARTICLE 19. NOTICES
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given on the date
of service if served personally on the party to whom notice is to be given,
or on the third day after mailing if mailed to the party to whom notice is to
be given, by first class mail registered or certified, postage prepaid, and
properly addressed as follows:
Sellers: Douglas Duncan
2500 Don Reid Drive
Ontario, Canada
K1H 8P5
Stuart Duncan
2500 Don Reid Drive
Ontario, Canada
K1H 8P5
Daniel Bender
27357 Valley Center Road
Valley Center, California
92082
with copy to: Jamie Wyllie, Esq.
Yegendorf, Brazeau, Seller, Prehogan & Wyllie
55 Metcalfe Street, Suite 750
Ontario, Canada
K1H 6L5
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Buyers: New Frontier Media, Inc.
1050 Walnut Street, Suite 301
Boulder, CO 80302
Attn.: Mark H. Kreloff
with copy to: The Law Office of Mark L. Driver, P.C.
3300 East First Ave. Suite 600
Denver, CO 80206
Attn.: Mark L. Driver
Any party may change its address for purposes of this Article by giving the
other parties written notice of the new address in the manner set forth above.
ARTICLE 20. GOVERNING LAW
This Agreement shall be construed in accordance with, and governed by, the
laws of the State of Colorado.
ARTICLE 21. MISCELLANEOUS
21.1 ANNOUNCEMENTS. Sellers will not make any announcements to the public
concerning this Agreement or the Transactions without the prior approval of
Buyers, which will not be unreasonably withheld. Notwithstanding any failure
of Buyers to approve it, Sellers may make an announcement of substantially
the same information as therefore announced to the public by Buyers, or any
announcement required by applicable law, but Sellers shall in either case
notify Buyers of the contents thereof reasonably promptly in advance of its
issuance.
21.2 REFERENCES. Unless otherwise specified, references to Sections or
Articles are to sections or articles in this Agreement.
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21.3 RELATED TRANSACTIONS. It is a condition of the obligations of the
parties to close the Transactions that on the Closing Date the transactions
referred to in the 104 Agreement and the 124 Agreement also close on the
Closing Date.
IN WlTNESS WHEREOF, the parties to this Agreement have duly executed it as of
the day and year first above written.
BUYERS: New Frontier Media, Inc.
By: /s/ Illegible
----------------------------------------
Its: President
---------------------------------------
Colorado Satellite Broadcasting, Inc.
By: /s/ Illegible
----------------------------------------
Its: President
---------------------------------------
SELLERS:
Fifth Dimension Communications (Barbados) Inc.
By:
----------------------------------------
Its authorized signing officer
Merlin Sierra, Inc.
By:
----------------------------------------
Its authorized signing officer
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ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made to be effective
September 5, 1997 (the "Effective Date"), among NEW FRONTIER MEDIA, INC., a
Colorado corporation, COLORADO SATELLITE BROADCASTING, INC. ("Buyer"), a wholly
owned subsidiary of New Frontier Media, Inc., and 1043133 ONTARIO INC., an
Ontario corporation ("Seller"). New Frontier Media, Inc. and Buyer are
collectively referred to in this Agreement as "Buyers."
This Agreement sets forth the terms and conditions upon which Buyers agree
to purchase from Seller, and Seller agrees to sell to Buyers, certain properties
and assets of Seller ("Subject Assets") relating to the "Adult Movies Business"
of Seller.
NOW THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained in this Agreement, the parties agree as
follows:
DEFINITIONS
"124 Agreement" means the asset purchase agreement made on the same date as this
Agreement among the Buyers, and 1248663 Ontario Inc. and Merlin Sierra, Inc.,
wherein the Buyers agreed to purchase certain satellite uplinking and playback
equipment and certain call center equipment and related assets from 1248663
Ontario Inc. and Merlin Sierra, Inc.
"5DBC Agreement" means the asset purchase agreement made on the same date as
this Agreement among the Buyers and Fifth Dimension Communications (Barbados)
Inc.
"Adult Movies Business" means any and all present or contemplated satellite
broadcast services on television or any other medium, including cable television
and the Internet, which broadcasts, replays, and/or otherwise exploits feature
length adult programming and all related promotional content and other
programming of a non-rated or X-rated nature and whose main theme embodies
nudity and/or sexually explicit material between consenting adults and such
other related business assets as are necessary for the operation thereof.
"adverse or adversely", when used alone or in conjunction with other terms
(including without limitation "affect," "change" and "effect"), means any event
discovered by either party after the date hereof which is reasonably likely in
the respective business judgment of either Buyers or Seller, as the case may be,
to be expected to (a) adversely affect the validity or enforceability of this
Agreement, or (b) adversely affect the business, operation, management or
properties of Seller or Buyers, or (c) impair Seller or Buyers, or (d) adversely
affect the respective aggregate rights and remedies of either party under this
Agreement. Notwithstanding the foregoing no event affecting the adult movie
industry generally shall be deemed to constitute an adverse change, have an
adverse effect or to adversely affect or effect.
"Agreement" means this Agreement as originally in effect, including unless the
context otherwise
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specifically requires, all schedules and all exhibits hereto, and as any of
the same may from time to time be supplemented, amended, modified or restated
in the manner herein or therein provided.
"Applicable Law" shall mean any Law of any Authority, whether domestic or
foreign, including without limitation all federal and state securities and
environmental laws, to which a person or entity is subject or by which it or any
of its business or operations is subject or any of its property or assets is
bound.
"Authority" means any governmental or quasi-governmental authority, whether
administrative, executive, judicial, legislative or other, or any combination
thereof, including without limitation, any federal, provincial, state,
territorial, county, municipal or other government or governmental or
quasi-governmental agency, arbitrator, authority, board, body, branch,
bureau, central bank or comparable agency, or Entity, commission,
corporation, court, department, instrumentality, master, mediator, panel,
referee, system, or other political unit or subdivision or other Entity of
any of the foregoing whether domestic or foreign.
"Buyers' Disclosure Schedule" means the schedule attached as SCHEDULE 8.2(a).
"Closing" means the closing of the transactions contemplated herein and
"Closing Date" means the date on which the closing takes place.
"Collateral Agreements" means agreements and other documents executed or
required to be executed pursuant to the terms of this Agreement.
"Entity" means any corporation, firm, unincorporated organization,
association, partnership, limited liability company, trust (inter vivos or
testamentary), estate of a deceased, individual, business trust, joint stock
company, joint venture or other organization, entity or business, whether
acting in an individual, fiduciary or other capacity, or any Authority.
"Governmental Authorizations" means all approvals, concessions, consents,
franchises, licenses, permits, and other authorizations of all applicable
Authorities.
"material, materially or materiality", unless specifically stated otherwise,
shall be determined without regard to the fact that various provisions of
this Agreement set forth specific dollar amounts.
"New Frontier" means New Frontier Media, Inc.
"Ottawa Call Center" means the subscription and pay-per-view call center at
Ottawa, Ontario now operated by Seller.
"Private Authorizations" means all approvals, concessions, consents,
franchises, licenses, permits, and other authorizations of all persons (other
that Authorities) including without limitation those with respect to
copyrights, computer software programs, patents, service marks, trademarks,
trade names, technology and know-how.
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"Subject Assets" means:
(a) any and all trademarks, proprietary rights and other intellectual
property rights owned by Seller and associated with its Adult
Movies Business. These include but are not necessarily limited to
the trade names, trademarks and/or service marks listed
on SCHEDULE 1(a), "Trademarks List," and any goodwill associated
with such trade names, trademarks and/or service marks;
(b) all subscriptions for its Adult Movies Business as of the
Date of Closing, including all subscriber lists, past and present,
and any other marketing data related thereto, in the possession of
Seller, as described in SCHEDULE 1(b), "Subscribers List" (and it
is understood that the subscriber lists shall be delivered on
disk(s) in electronic form only because of the length of such
lists);
(c) a complete list of all advertisers, marketing partners and
vendors used by Seller in relations to its Adult Movies Business
and related services, with contact names, mailing addresses, and
phone and fax numbers; as set forth in SCHEDULE 1(c) "Vendors List";
(d) all rights, title and interest Seller may have in 1-800 phone
numbers used for its Adult Movies Business and related services and
in any World Wide Web address and websites used in its Adult Movies
Business;
(e) upon request of Buyers, Seller shall provide copies of all
papers, computerized databases, and records in Seller's custody or
control relating to any or all of the above described assets and
the operation of Seller's Adult Movies Business, including but not
limited to all sales and subscription records, maintenance and
production records, but excluding accounting and financial records
and personnel and labor relations records;
(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 Adult Movies Business of Seller, 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;
(g) all other assets to be transferred from Seller to Buyer under
SECTION 1 of this Agreement; and
(h) any tort or insurance proceeds arising out of any damages
or destruction or any of the Subject Assets between the date of
this Agreement and the Closing Date to the extent required to
repair or replace any Subject Asset.
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"Transactions" means the transactions contemplated by this Agreement and all
Collateral Agreements.
"Uplink Facility" means the current facility located at 2500 Don Reid Drive,
Ottawa, Ontario and now used by Seller for uplink, playback and broadcast
programming of its Adult Movies Business.
ARTICLE 1. TRANSFER OF ASSETS
Subject to the terms and conditions set forth in this Agreement, Seller agrees
to sell, convey, transfer, assign and deliver to Buyer, and Buyers agrees to
purchase from Seller at the Closing described in ARTICLE 3, all of the Subject
Assets, whether tangible, intangible, real, personal or mixed, and wherever
located, including those assets set forth in the lists of SCHEDULES 1(a) through
(c) and as further described in this ARTICLE 1.
1.1 SOFTWARE. Pursuant to SCHEDULE 1.1, the First Link License Agreement,
Seller shall provide to Buyers a non-exclusive royalty free license to use one
networkable copy of version 2.0 or any updated version of "First Link"
subscription management software. The rights granted to Buyers shall not be
assigned, licensed or otherwise transferred voluntarily or by operation of law,
or otherwise, except pursuant to the purchase of substantially all of the
outstanding capital stock or assets of Buyers, without the written consent of
Seller. Buyers acknowledge that, prior to Closing, Seller may acquire
additional software for use in connection with its Adult Movies Business and
Buyers agree on Closing to pay 50% of the actual costs thereof (to a maximum of
US$32,608.69).
1.2 INVESTMENT CANADA ACT. The parties agree that the Transactions do not
require notice, review, approval or allowance under the INVESTMENT CANADA ACT
and it is not a condition precedent to the Closing of the Transactions that any
notice be given or approval, allowance or consent be obtained in respect
thereof. Notwithstanding anything to the contrary in this Agreement, no
representation, warranty or covenant given by any party under or pursuant to
this Agreement is intended or shall be deemed to include a representation,
warranty or covenant related to the INVESTMENT CANADA ACT.
ARTICLE 2. PURCHASE PRICE
2.1 PAYMENT OF PURCHASE PRICE. In consideration for the transfer and assignment
of the Subject Assets and in consideration of the representations, warranties
and covenants of Seller set forth herein, Buyers on the conditions set forth
herein:
(a) shall pay, subject to ARTICLE 5, an earnest money deposit in the
amount of US$5,000.00;
(b) shall deliver to Seller at the Closing (as hereinafter defined)
US$500,000.00 plus
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taxes as provided in ARTICLE 6, payable in cash as more
fully described in SECTION 3.2;
(c) shall assume and discharge, and shall indemnify Seller against,
liabilities and obligations of Seller under the leases, contracts
or other agreements, if any, specified on SCHEDULE 4 but only to
the extent that such liabilities or obligations accrue on or after
the Closing Date.
2.2 ALLOCATION OF THE PURCHASE PRICE. The parties agree that the Purchase
Price (defined as the sum of the amounts specified in SECTION 2.1(b) shall be
allocated as set forth in SCHEDULE 2.2 and that such allocation will be used
by the parties in reporting the transaction contemplated by this Agreement
for tax purposes.
2.3 ELECTIONS. Seller and Buyers will on or before the Closing Date jointly
execute an election, in prescribed form and containing the prescribed
information, to have subsection 167(1.1) of the EXCISE TAX ACT (Canada) apply
to the sale and purchase of the Subject Assets hereunder so that no tax is
payable in respect of such sale and purchase under Part IX of the EXCISE TAX
ACT (Canada). The Buyers will file such election with the Minister of
National Revenue within the time prescribed by the Excise Tax Act (Canada).
ARTICLE 3. THE CLOSING
The closing of the purchase and sale of the Subject Assets by Seller to
Buyers (the "Closing") shall take place at 2500 Don Reid Drive, Ottawa,
Ontario, sixty-four (64) days after the date of this Agreement or at such
other place and/or time as the parties may agree in writing (the "Closing
Date"). In the event that the conditions specified in this Agreement have
not been fulfilled by such date, either Seller or Buyers may extend the
Closing Date for a period or periods not exceeding an aggregate of thirty
(30) days by written notice to the other parties.
3.1. SELLER'S OBLIGATIONS AT CLOSING.
(a) At the Closing Seller shall deliver or cause to be delivered
to Buyer:
(i) assignment and assumption agreements for personal property
leases, all contracts and agreements of Seller to be
assumed in connection herewith, in form and substance
reasonably satisfactory to Buyers' counsel, and accompanied
by all consents required by this Agreement and the personal
property leases, contracts and agreements being assigned;
(ii) instruments of assignment and transfer (including a bill
of sale) of all the Subject Assets in form and substance
reasonably satisfactory to Buyers' counsel; and
(iii) such other documents as shall be reasonably requested by
Buyers or
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Buyers' counsel (for example, a BULK SALES ACT affidavit).
(b) Simultaneously, with the consummation of the transfer, Seller, through
its officers, agents and employees, shall put Buyer into full
possession and enjoyment of all the Subject Assets to be sold,
conveyed, transferred, assigned and delivered by this Agreement.
(c) Seller, at any time before or after the Closing Date shall
execute, acknowledge, and deliver any further deeds, assignments,
conveyances and other assurances, documents and instruments of
transfer, reasonably requested by Buyers and shall take any other
action consistent with the terms of this Agreement that may be
reasonably requested by Buyers for the purpose of assigning,
transferring, granting, conveying and confirming to Buyers, or
reducing to possession, any or all property and assets to be
conveyed or transferred by this Agreement. If requested by Buyers,
Seller further agrees to prosecute or otherwise enforce in their
own names for the benefit of Buyers any claims, rights, or benefits
that are transferred to Buyers by this Agreement and that require
prosecution or enforcement in Seller's name. Any prosecution or
enforcement of claims, rights, or benefits under this Section shall
be solely at Buyer's expense, unless the prosecution or enforcement
is made necessary by a breach of this Agreement by Seller.
3.2. BUYER'S OBLIGATIONS AT CLOSING. At the Closing Buyers shall deliver to
Seller against delivery of the items specified in SECTION 2.1, a certified bank
or cashier's check, or a wire transfer of immediately available funds, in the
amount of US$500,000.00 plus taxes pursuant to ARTICLE 6 payable to Seller.
Seller shall notify Buyers within five (5) days of the Closing Date whether the
amount payable at Closing shall be delivered by certified bank or cashier's
check, or by wire transfer. At closing, Buyers shall deliver to Seller such
documents that shall be reasonably requested by Seller or Seller's counsel.
ARTICLE 4. ASSUMPTION OF LIABILITIES
Buyers are not assuming any debt, liability or obligation of Seller, whether
known or unknown, fixed or contingent, except as herein specifically otherwise
provided. Seller agrees to indemnify and hold Buyers harmless against all
debts, claims, liabilities and obligations of Seller not expressly assumed by
Buyers hereunder, and to pay any and all attorneys' fees and legal costs
incurred by Buyers, its successors and assigns in connection therewith. Buyers
shall have the benefit of and shall perform and assume all leases, contracts and
agreements, if any, specifically listed on SCHEDULE 4, in accordance with the
terms and conditions thereof, except to the extent modifications are
specifically set forth in SCHEDULE 4 and except to the extent set forth in the
assignments or assignment and assumption agreements for such leases, contract
and agreements.
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ARTICLE 5. RETURN OF DEPOSIT
Upon execution of this Agreement, Buyers shall pay to Seller an earnest money
deposit of US$1,250.00. Upon parties' final acceptance of the form and
content of the schedules to this Agreement, Buyers shall pay to Seller a
further earnest money deposit of US$3,750.00. Such deposits shall be
returned to Buyers if the Transactions are not closed due to: (a) the failure
of any conditions set forth in ARTICLE 11 to be met at or before the Closing
as a result of any act or omission by Seller; or (b) the occurrence of any
default by Seller described in SECTION 17.3. If the Transactions are not
closed for any other reason, the deposit shall be retained by Seller. Upon
Closing, the deposit shall be applied towards the payment due to Seller under
SECTION 2.1(b).
ARTICLE 6. TAXES
Buyers shall pay all sales, use and transfer taxes arising out of the transfer
of the Subject Assets, including any foreign transfer taxes and shall pay its
portion, prorated as of the Closing Date, of state, provincial, and local real
and personal property taxes of the business being sold hereunder. Buyers shall
not be responsible for any business, occupation, withholding or similar tax, or
for any income, sales, use, value-added or similar taxes related to any period,
or transaction occurring during any period, before the Closing Date.
ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF SELLERS
Seller hereby represents and warrants to Buyers that the following facts and
circumstances are and will be at all times up to the Closing Date, except as
contemplated hereby, true and correct, and hereby acknowledge that such facts
and circumstances constitute the basis upon which Buyers are induced to enter
into and perform this Agreement. Each warranty set forth in this ARTICLE 7
shall survive eighteen (18) months past the Closing Date and any investigation
made by or on behalf of Buyers. Buyers shall conduct their own due diligence
investigation and that investigation shall include an investigation into whether
Seller is or has operated in accordance with the warranties and representations
of Seller. If prior to the closing date, Buyers believe they have discovered
any breach of the representations and warranties of Seller, they shall forthwith
advise Seller in writing of such breach. If Seller does not or cannot cure such
breach prior to the Closing Date, Buyers may elect to close (in which case the
breach shall be deemed non-material) or not close provided such breach is
material. If Buyers fail to give such notice then the breach will be deemed
non-material.
7.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Seller is a corporation
organized, validly existing, and in good standing under the laws of Ontario.
Seller has all necessary corporate powers to own its properties and to carry on
its business as now owned and operated by it, and is duly qualified to transact
any business and is in good standing in all jurisdictions in which the nature of
its business or its properties makes such qualification necessary.
7.2 FINANCIAL STATEMENTS. SCHEDULE 7.2(a) is the Combined Financial Statements
for the years
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ending March 31, 1997 and 1996 for Fifth Dimension Communications (Barbados)
Inc., Merlin Sierra, Inc. and Seller, certified by Ernst & Young, chartered
accountants, whose opinions with respect to such financial statements are
included into this Agreement. SCHEDULE 7.2(b) sets forth unaudited combined
balance sheets of Seller and others as of June 30, 1997 (the "Stub Period
Date"), together with related unaudited combined statements of changes in
financial positions and unaudited combined statements of income and retained
earnings for the three (3) month period then ending, as prepared in part by
Seller. These financial statements in SCHEDULES 7.2(a) and (b) are referred
to as the "Financial Statements." The Financial Statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently followed by Seller throughout the periods indicated, are
complete and correct in all material respects and accurately and fairly
depict the present financial position of Seller as of the respective dates of
the balance sheets included in the Financial Statements, and the results of
their operations for the respective periods indicated. Seller has no
liabilities or obligations of any nature (known or unknown, absolute,
accrued, contingent or otherwise) of the type required to be reflected or
disclosed in a balance sheet (or notes thereto) prepared in accordance with
GAAP that were not fully reflected or reserved against in the Financial
Statements. The Audited Financial Statements being provided by Seller shall
contain in footnotes or otherwise information concerning adjustments and
add-back payments as reflected on page 7 of the Letter of Understanding dated
April 14, 1997 from New Frontier, which is attached as SCHEDULE 7.2(c). The
Financial Statements accurately reflect the revenues and expenses of Sellers'
Adult Movies Business.
7.3 ABSENCE OF SPECIFIED CHANGES. Since March 31, 1997, there has not been any:
(a) adverse material changes in the financial condition, liabilities,
assets, business, operating results or prospects of Seller with
respect to its Adult Movies Business;
(b) destruction, damage to, or loss of any of the Subject Assets (whether
or not covered by insurance) that materially and adversely effects the
assets, financial condition, business, assets or prospects of Seller
with respect to its Adult Movies Business;
(c) labor trouble or other event or condition of any character materially
and adversely effecting the financial condition, business, assets or
prospects of Seller;
(d) revaluation by Seller of any of the Subject Assets in a manner that
would be materially adverse to Buyers;
(e) execution, creation, amendment, nonrenewal or termination of any
material contract, agreement or license to which Seller is a party,
except in the ordinary course of business or except as can be
terminated prior to the Closing Date without materially adversely
effecting the Subject Assets;
(f) creation or assumption by Seller of any mortgage, pledge,
security interest or lien or other encumbrance on any material
asset of Seller related to its Adult Movies Business, except as set
forth in SCHEDULE 7.3(f);
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(g) receipt by Seller of notice of any loss of, or material order
cancellation by, any major customers of Seller, except as set forth in
SCHEDULE 7.3(g);
(h) other event or condition of any character of which Seller has
knowledge that has or might reasonably have a material adverse effect
on the financial condition, business, assets, operating results or
prospects of its Adult Movies Business, except as set forth in
SCHEDULE 7.3(h); or
(i) agreement by Seller to do any of the things described in the preceding
clauses (a) through (h).
7.4 SUBJECT ASSETS SUFFICIENT FOR OPERATIONS. The Subject Assets, together with
the "Subject Assets" described in the 124 Agreement and in the 5DBC Agreement,
constitute all assets (except premises) which are necessary for the continued
uninterrupted operation by Seller of its Adult Movies Business as now conducted.
Except as stated in SCHEDULE 4, none of the Subject Assets are held under any
lease, security agreement, conditional sales, contract, or other title of
retention or security agreement, or are in the possession of anyone other than
Seller.
7.5 TRADE NAMES, TRADEMARKS AND COPYRIGHTS. Except as set forth IN SCHEDULE
7.5, Seller does not use or own any trademark, service mark, trade name, trade
secret, or brand name in its Adult Movies Business. To the actual knowledge of
Seller, no person has made any outstanding claims against Seller in respect of
any trademark, trademark registration or application, service mark, trade name,
copyright, copyright registration or application or brand name, the use of which
is necessary or contemplated in connection with the performance of any contract
to which Seller is a party.
7.6 TRADE SECRETS. Seller is not aware of any trade secrets owned by, used in
or necessary for the operation of its Adult Movies Business.
7.7 TITLE TO ASSETS. To the best of Seller's knowledge, Seller has good and
marketable title to all the Subject Assets free and clear of mortgages, liens,
pledges, charges, encumbrances, equities, claims, easements, rights of way,
covenants, conditions, or restrictions, except for (i) those disclosed in
Seller's balance sheet as of the Stub Period Date, included in the Financial
Statements, or in the Schedules to this Agreement; (ii) the lien of current
taxes not yet due and payable; and (iii) possible minor matters that, in the
aggregate, are not substantial in amount and do not materially detract from or
interfere with the present or intended use of any of these assets, nor
materially impair the operations of its Adult Movies Business. All the Subject
Assets are in good operating condition and repair, ordinary wear and tear
excepted. Seller is in possession of all premises leased to it from others and
used by it in connection with its Adult Movies Business.
7.8 CUSTOMERS AND SALES. SCHEDULE 7.8 to this Agreement is a correct and
current list of all customers/subscribers of Seller together with summaries of
the sales made to each customer during the most recent fiscal year. Except as
indicated in SCHEDULE 7.8, Seller has no information and is not aware of any
facts indicating that any dealers or distributors of the services offered by
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its Adult Movies Business intend to cease doing business with Seller or alter
the amount of the business that they are presently doing with Seller where
such cessation or alteration would have a material adverse effect on its
Adult Movies Business.
7.9 INSURANCE POLICIES. SCHEDULE 7.9 to this Agreement is a description of all
insurance policies held by Seller concerning the Subject Assets. All these
policies are in the respective principal amounts set forth in SCHEDULE 7.9.
Seller has maintained and now maintains (a) insurance on all the Subject Assets
of a type customarily insured, covering property damage by fire or other
casualty, and (b) adequate insurance protection against all liabilities, claims,
and risks against which it is customary to insure. Such insurance coverage will
be cancelled as of Closing.
7.10 OTHER CONTRACTS. Copies of all contracts which will be assigned to or
assumed by Buyers under this Agreement are attached as part of SCHEDULE 4.
Except as set forth in SCHEDULE 4 and to the best of Seller's knowledge, the
Subject Assets will not at Closing or thereafter (as a result of actions or
conduct of Seller) be bound or potentially bound by, any distributor's or
manufacturer's representative or agency agreement, any output or requirements
agreement, any agreement not entered into in the ordinary course of business,
any indenture, mortgage, deed of trust, lease or any other agreement that is
unusual in nature, duration or amount (including, without limitation, any
agreement requiring the performance by Seller of any obligation for a period of
time extending beyond one year from Closing Date or calling for consideration of
more than US$ 10,000.00 or requiring purchases at prices in excess of, or sales
at prices lower than, prevailing market prices). To the best of Seller's
knowledge, there is no default or event that with notice or lapse of time, or
both, would constitute a default by any party to any of the agreements listed in
SCHEDULE 4 and such contracts remain in full force and effect. Seller has not
received notice that any party to any of the agreements listed in SCHEDULE 4
intends to cancel or terminate any of these agreements or to exercise or not
exercise any options under any of these agreements. Seller is not party to, nor
are Seller or the Subject Assets bound by, any agreement that is materially
adverse to the business, assets, property, operating results, prospects or
financial condition of Seller.
7.11 COMPLIANCE WITH LAWS. Seller has received no notice of any violation of
any statutes, laws or regulations (including, without limitation any applicable
obscenity, environmental, health, building, zoning, or other law, ordinance or
regulations) from any Authority the violation of which may materially adversely
affect its Adult Movies Business. Seller is not in violation of or default
under any provisions of its Articles of Incorporation or Bylaws, both as
amended. The execution, delivery and performance of the Agreement and the
consummation of the Transactions will not result in any such violation or
default, or be in conflict with or constitute, with or without the passage of
time or the giving of notice or both, a default under Seller's Articles of
Incorporation or Bylaws, both as amended. To the best of Seller's actual
knowledge, all licenses, permits, approvals, registrations, qualifications,
certificates and other authorizations necessary for the conduct of Seller's
Adult Movies Business as presently conducted (the "Licenses") have been duly
obtained, are in full force and effect, and there are no proceedings pending or
threatened which may result in the revocation, cancellation, suspension or
modification of any of such Licenses.
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7.12 LITIGATION. Except as set forth in SCHEDULE 7.12, there is no suit,
action, arbitration or legal, administrative or other proceeding, or
governmental investigation ("Actions") pending or, to the best knowledge of
Seller, threatened, against or affecting Seller, or any of its business,
assets or financial condition, or against any officer, director or employee
of Seller in connection with such officer's, director's or employee's
relationship with or actions taken on behalf of Seller. Seller is not party
to or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality, and there are no
actions or claims by Seller currently pending or, to which Seller intends to
initiate. To the best knowledge of Seller, there has not occurred any event
nor does there exist any condition on the basis of which any litigation,
proceeding or investigation is likely to be instituted by or against Seller.
The matters set forth in SCHEDULE 7.12 if decided adversely to Seller will
not result in a material adverse change in the business, assets, operating
results, prospects or financial condition of Seller. Seller has furnished or
made available to Buyers copies of all relevant court papers and other
documents relating to the matters set forth in SCHEDULE 7.12. Seller is not
in default with respect to any order, writ, injunction or decree of any
federal, state, local or foreign court, department, agency or
instrumentality. Except as set forth in SCHEDULE 7.12, Seller is not
presently engaged in any legal action to recover moneys due to it or damages
sustained by it.
7.13 AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. Neither the entry into
this Agreement nor the consummation of the transactions contemplated hereby
will result in or constitute any of the following events where the occurrence
of such event would render Seller materially unable to comply with this
Agreement: (a) a default or an event that, with notice or lapse of time or
both, would be a default, breach or violation of any lease, license,
promissory note, conditional sales contract, commitment, indenture, mortgage,
deed of trust or other agreement, instrument or arrangement; (b) an event
that would permit any party to terminate any agreement or to accelerate the
maturity of any indebtedness or other obligation; (c) the creation or
imposition of any lien, charge or encumbrance on any of the Subject Assets;
or (d) the violation of any law, regulation, ordinance, judgment, order or
decree.
7.14 AUTHORITY AND CONSENTS. Except as set forth in SCHEDULE 7.14, Seller
has the right, power, legal capacity and authority to enter into, and perform
its obligations under this Agreement, and no approvals or consents of any
persons other than the shareholders of Seller are necessary in connection
with it. The execution and delivery of this Agreement and the consummation
of this transaction by Seller have been, or prior to the Closing will have
been, duly authorized by all necessary corporate action of Seller (including
any necessary action by Seller's security holders). This Agreement
constitutes a legal, valid and binding obligation of Seller enforceable in
accordance with its terms except as limited by bankruptcy and insolvency laws
and by other laws affecting the rights of creditors generally.
7.15 INTEREST IN CUSTOMERS, SUPPLIERS AND COMPETITORS. Except as set forth
in SCHEDULE 7.15 or as contemplated by a Collateral Agreement, neither Seller
nor any officer or director or shareholder of Seller, nor any spouse or child
of any of them has any direct or indirect interest in any competitor,
supplier or customer of Seller or in any person with whom Seller is doing
business.
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7.16 INFORMATION FURNISHED TO BUYER FOR BULK TRANSFER NOTICE. For the
purposes of furnishing notices under the BULK SALES ACT (Ontario), SCHEDULE
7.16 is a true, complete and correct list of all names and business addresses
used by Seller.
7.17 DOCUMENTS DELIVERED. Each copy or original of any agreement, contract
or other instrument which is identified in any exhibit or schedule delivered
by Seller or its counsel to Buyers (or their counsel or representatives),
whether before or after the execution hereof, is in fact what it is purported
to be by Seller and has not been amended, canceled or otherwise modified.
7.18 FULL DISCLOSURE. None of the representations and warranties made by
Seller or made in any letter, certificate or memorandum furnished or to be
furnished by Seller or on its behalf, contains or will contain any untrue
statement of a material fact, or omits any material fact the omission of
which would make the statements made misleading and materially adverse to
Buyers. Except matters of general knowledge within the Adult Movies industry
and other matters generally available to the public, there is no fact known
to Seller which materially adversely affects the condition, assets,
liabilities, business, or operations of the Seller's Adult Movies Business
that has not been set forth herein or heretofore communicated to Buyer in
writing.
7.19 SUBJECT ASSETS ARE SUFFICIENT TO OPERATE BUSINESS.
(a) The Buyers are acquiring the ownership, possession or use under this
Agreement of all or substantially all of the property and assets
(excluding premises) that can reasonably be regarded as necessary
(when added to the "Subject Assets" described in the 124 Agreement
and the 5DBC Agreement) for Buyer to be capable of carrying on the
Adult Movies Business as conducted by Seller as a business within the
meaning of section 167 of the EXCISE TAX ACT (Canada).
(b) Seller is now, or will be at Closing, registered under Part IX of the
EXCISE TAX ACT (Canada).
7.20 SOLVENCY. As of the execution and delivery of this Agreement, and, after
giving effect to the consummation of the Transactions, Seller will be solvent.
7.21 TAX MATTERS. Seller shall continue to be responsible for and will
discharge all obligations and liabilities in respect to taxes pertaining to its
Adult Movies Business and the Subject Assets which arise or accrue for all
periods ending on or before the Closing Date (but excluding the taxes referred
to in ARTICLE 6). Seller will indemnify and hold harmless Buyers against any
and all claims and demands incurred by Buyers that directly or indirectly arise
out of such obligations or liabilities. Without limiting the foregoing, Seller
will be responsible for all federal, state, provincial, local, foreign and other
net income, gross income, gross receipts, alternative or add on minimum,
profits, sales, use, occupation, value-added, ad valorem, transfer, franchise,
license, lease, service use, withholding, payroll, employment, excise,
severance, premium, property, windfall profits, customs, duties, or other taxes,
fees assessments, or charges of any kind whatsoever, together with any interest,
penalties or additions to tax imposed with respect thereto, or any obligations
to any agreements or arrangements with respect to and taxes described above.
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7.22 EMPLOYMENT MATTERS. Buyer shall be under no obligation to offer
employment to any of Seller's employees employed in connection with its Adult
Movies Business ("affected employees"), except as otherwise stated in this
Agreement. Buyer may, however, choose to retain the services of or to offer
employment to one or more of the affected employees, should it wish to do so,
subject to SECTION 13.4.
Seller will continue to be responsible for and will discharge all obligations
and liabilities in respect of the affected employees which arise or accrue prior
to, on or after the Closing Date. Seller will indemnify and save harmless Buyers
against any and all claims and demands incurred by Buyers that directly or
indirectly pertain to or arise out of such obligations or liabilities. Without
limiting the forgoing, Seller will be responsible for and will bear and
discharge any and all obligations and liabilities for wages, severance pay,
termination pay, notice of termination of employment or pay in lieu of such
notice, damages for wrongful discharge or other employee benefits or claims,
including vacation pay, which may arise in connection with the employment or
dismissal of any of the affected employees, including any interest, award,
judgment or penalty relating thereto and any costs or expenses incurred by
Buyers in defending against any claim or demand relating to such obligation or
liabilities.
7.23 124 AGREEMENT.
(a) The equipment (including without limitation essential spares and
replacement parts) and software technology, furniture, machinery,
appliances, and other tangible personal property and technology as
specifically set forth in SCHEDULE 1(a) of the 124 Agreement is
substantially similar to the equipment and technology used in connection
with and historically allocated to the Adult Movies Business carried on
by the Seller as of July 31, 1997 at the Uplink Facility.
(b) The uplink facility to be operated, maintained, managed and sustained
under SECTION 1.1 of the 124 Agreement shall be of a substantially
similar nature and quality as those services currently being provided
by Seller to its present subscribers.
(c) The "Subject Assets" described in the 124 Agreement constitute all assets
(other than premises) necessary for the continued uninterrupted operation
by 1248663 Ontario Inc. of the call center and uplink facility as now
conducted on behalf of the Seller in respect of its Adult Movies
Business.
(d) SCHEDULE 1(b) of the 124 Agreement contains a complete list of the
hardware, equipment, furniture, machinery, appliances, software and
other tangible personal property now used at the Ottawa Call Center.
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ARTICLE 8. BUYERS' REPRESENTATIONS AND WARRANTIES
Buyers represents, warrants, and covenants to, and agrees with Seller as
follows:
8.1 ORGANIZATION AND BUSINESS: POWER AND AUTHORITY: EFFECT OF TRANSACTION.
(a) Each Buyer (i) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation; (ii) has all requisite power and authority to own or
hold under lease its properties and to conduct its business as now
conducted and as presently proposed to be conducted, and has in
full force and effect all Governmental Authorizations and Private
Authorizations and has made all governmental filings, to the extent
required for such ownership and lease of its property and conduct
of its business and is in good standing in such jurisdictions in
which the failure to be in good standing would have a material
adverse effect upon its property or the nature of its business or
operations.
(b) Each Buyer has all requisite power and authority and has
in full force and effect all Governmental Authorizations and
Private Authorizations in order to enable it to execute and
deliver, and to perform its obligations under, this Agreement and
each Collateral Agreement executed or required to be executed
pursuant hereto or thereto or to consummate the Transactions and
the Collateral Agreements; and the execution, delivery and
performance of this Agreement and each Collateral Agreement has
been duly authorized by all requisite corporate or other action.
No further action or approval on the part of Buyers' stockholders
is required in connection with the execution, delivery and
performance of this Agreement or each Collateral Agreement or the
consummation of the Transactions. This Agreement has been duly
executed and delivered by each Buyer and constitutes, and each
Collateral Agreement executed or required to be executed pursuant
hereto or thereto or to consummate the Transactions when executed
and delivered by Buyers will constitute, legal, valid and binding
obligations of Buyers enforceable in accordance with their
respective terms.
(c) Neither the execution and delivery of this Agreement or
any Collateral Agreement, nor the consummation of the Transactions,
nor compliance with the terms, conditions and provisions hereof or
thereof by Buyers will conflict with, or result in a material
breach or violation of, or constitute a material default under, any
Applicable Law on the part of Buyers or will conflict with, or
result in a material breach or violation of, or constitute a
material default under, or permit the acceleration of any
obligation or liability in, or but for any requirement of giving
notice or passage of time or both would constitute such a conflict
with, material breach or violation of, or material default under,
or permit any such acceleration in, any contractual obligation of
Buyers.
8.2 GST REGISTRATION. Buyer will be registered under Part IX of the EXCISE TAX
ACT (Canada) at Closing.
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8.3 DISCLOSURE. None of the representations and warranties made by Buyers or
made in any letter, certificate or memorandum furnished or to be furnished by
Buyers or on their behalf, contains or will contain any untrue statement of a
material fact, or omits any material fact the omission of which would make the
statements made misleading and materially adverse to Seller.
8.4 CONTINUING REPRESENTATION AND WARRANTY. Except for those representations
and warranties which speak as of a specific date, all of the representations and
warranties of Buyers set forth in this Article shall be true and correct on the
Closing Date with the same force and effect as though made on and as of that
date and those, if any which speak as of a specific date shall be true and
correct on the Closing Date.
8.5 SOLVENCY. As of the execution and delivery of this Agreement, and, after
giving effect to the consummation of the transactions contemplated herein,
Buyers taken as a whole and individually will be solvent.
8.6 INTERPRETATION. For the purposes of this ARTICLE 8, New Frontier and
Colorado Satellite Broadcasting, Inc. are each considered to be a "Buyer".
ARTICLE 9. SELLER'S OBLIGATIONS BEFORE CLOSING
Seller covenants that, except as otherwise agreed in writing by Buyer, from the
date of this Agreement until the Closing:
9.1 BUYERS' ACCESS TO PREMISES AND INFORMATION. Buyers and its counsel,
accountants and other representatives shall be entitled to have full access
during normal business hours to all Seller's properties, books, accounts,
records, contracts and documents of or relating to the Subject Assets. Seller
shall furnish or cause to be furnished to Buyers and its representatives all
data and information concerning the Subject Assets and Adult Movies Business
that may reasonably be requested.
9.2 CONDUCT OF BUSINESS IN NORMAL COURSE. Seller shall carry on its business
and activities diligently and in substantially the same manner as they
previously have been carried on, and shall not make or institute any unusual or
novel methods of purchase, sale, lease, management, accounting or operation that
will vary materially from the methods used by Seller as of the date of this
Agreement if it would have a material adverse affect on its Adult Movies
Business.
9.3 PRESERVATION OF BUSINESS AND RELATIONSHIPS. Seller shall use its best
efforts, without making any commitments on behalf of Buyers, to preserve the
Seller's Adult Movies Business intact, to keep available to Seller, its present
officers and employees, and to preserve its present relationships with
suppliers, customers and others having business relationships with it.
9.4 MAINTENANCE OF INSURANCE. Seller shall continue to carry its existing
insurance, subject to variations in amounts required by the ordinary operations
of their businesses. At the request of
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Buyers and at Buyers' sole expense, the amount of insurance against fire and
other casualties which, at the date of this Agreement, Seller carry on any of
the Subject Assets or in respect of their operations shall be increased by
such amount or amounts as Buyers shall specify.
9.5 NEW TRANSACTIONS. Seller shall not do or agree to enter into any contract,
commitment or transaction which would materially adversely effect the ability of
Seller to perform any obligation set forth in this Agreement of any Collateral
Agreement.
9.6 EXISTING AGREEMENTS. Except in ordinary course of business, Seller shall
not modify, amend, cancel or terminate any of its existing contracts or
agreements, or agree to do any of those acts without the consent of Buyers, if
doing so would materially adversely affect its Adult Movies Business.
9.7 CONSENT OF OTHERS. As soon as reasonably practical after the execution and
delivery of this Agreement, and in any event on or before the Closing Date,
Seller shall obtain the written consent of the persons described in SCHEDULE
7.14 in form and substance satisfactory to Buyers and will furnish to Buyers
executed copies of those consents.
9.8 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Seller shall use its
reasonable commercial efforts to assure that all representations and warranties
of Seller set forth in this Agreement and in any written statements delivered to
Buyers by Seller under this Agreement will also be true and correct as of the
Closing Date as if made on that date and that all conditions precedent to
Closing shall have been met. Seller shall promptly disclose to Buyers any
information contained in the Schedules to this Agreement which, because of an
event occurring after the date hereof, is incomplete or is no longer correct as
of all times after the date hereof until the Closing Date; provided, however,
that none of such disclosures shall be deemed to modify, amend or supplement the
representations and warranties of Seller or the schedules hereto for the
purposes of ARTICLE 11, unless Buyer shall have consented thereto in writing.
9.9 STATUTORY FILINGS. Seller shall cooperate fully with Buyers in preparing
and filing all information and documents required under any statutes or
governmental rules or regulations pertaining to the Transactions, including but
not limited to, any licenses required by Industry Canada and the rules
promulgated thereunder.
ARTICLE 10. BUYERS' OBLIGATIONS BEFORE CLOSING
10.1 GENERAL OBLIGATIONS AND CONFIDENTIALITY. Prior to the Closing Date (or, in
the event the Closing does not occur, for a period of two years following the
date of this Agreement) Buyers shall use its best efforts to preserve the
confidentiality of any commercial information which is confidential and which
Seller identifies in writing as confidential which is disclosed to Buyers or to
its representatives by Seller; provided that Buyers at all times shall not be
materially restricted in its investigation of the assets or matters relating
thereto. The above provisions of this Section shall not apply to any
information which (i) is already known to Buyers at the time of disclosure by
Seller, (ii) is published or through no fault of Buyers becomes published or
(iii) is lawfully
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disclosed to Buyer by a third party. Whether or not the Closing shall take
place, Seller waives any cause of action, right or claim arising out of the
access of Buyers or their representatives to any trade secrets or other
confidential business information of Seller from the date of this Agreement
until the Closing Date, except for the intentional competitive misuse by
Buyers or its representatives of such trade secrets or other confidential
business information (identified as confidential as required by this Article)
if the Closing does not take place.
10.2 SELLER'S ACCESS TO PREMISES AND INFORMATION. Seller and its counsel,
accountants and other representatives shall be entitled to have full access
during normal business hours to all Buyers' properties, books, accounts,
records, contracts and documents. The Buyers shall furnish or cause to be
furnished to Seller and its representatives all data and information concerning
Buyers that may reasonably be requested.
ARTICLE 11. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE
The obligation of Buyers to purchase the Subject Assets under this Agreement are
subject to the satisfaction, at or before the Closing, of all the conditions set
out below in this Article. Buyers may waive any or all of these conditions;
provided, however, that no such waiver of a condition shall constitute a waiver
by Buyers of any of its other rights or remedies, at law or in equity, if Seller
shall be in default of any of its representations, warranties or covenants under
this Agreement.
11.1 ACCURACY'S OF SELLER'S REPRESENTATIONS AND WARRANTIES. All representations
and warranties by Seller contained in this Agreement or in any Collateral
Agreement or in any written statement delivered by Seller thereunder shall be
true on and as of the Closing as though such representations and warranties were
made on and as of that date. Buyers shall have received a certificate, dated
the Closing Date, signed by Seller's President certifying, in such detail as
Buyers and their counsel may reasonably request, that the representations and
warranties set out herein are true and correct as of the Closing Date.
11.2 SELLER'S PERFORMANCE. Seller shall have performed, satisfied, and complied
with all covenants, agreements, and conditions required by this Agreement to be
performed or complied with by Seller on or before the Closing Date.
11.3 CERTIFICATION BY SELLER. Buyers shall have received a certificate, dated
the Closing Date, signed by Seller's President certifying, in such detail as
Buyer and its counsel may reasonably request, that the representations and
warranties set out herein are true and correct as of the Closing Date.
11.4 OPINION OF SELLER'S COUNSEL. Buyers shall have received from counsel for
Seller, an opinion dated the Closing Date, in form and substance reasonably
satisfactory to Buyers and their counsel, stating that:
(a) Seller is a corporations duly organized, validly existing and in good
standing under
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the applicable laws of the jurisdiction of its incorporation
and has all necessary corporate power to own its properties as now
owned and operate its businesses as now operated;
(b) all corporate proceedings required by law or by the provisions of
this Agreement to be taken by Seller on or before the Closing Date in
connection with the execution and delivery of this Agreement and the
consummation of the Transactions have been duly and validly taken;
(c) this Agreement has been duly and validly authorized and,
when executed and delivered by Seller will be valid and binding on
Seller and enforceable in accordance with its terms, except as
limited by bankruptcy and insolvency laws and by other laws
affecting the rights of creditors generally; and
(d) neither the execution nor delivery of this Agreement nor
the consummation of the Transactions will constitute a default, or
an event that would with notice or lapse of time or both constitute
a default under, or violation or breach of Seller's articles of
incorporation or bylaws.
In rendering their opinions, counsel for Seller may rely on certificates of
governmental authorities, certificates of Seller's officers, directors or
shareholders, and on opinions of associate counsel.
11.5 ABSENCE OF LITIGATION. No action, suit or proceeding before any court or
any governmental body or authority, pertaining to the Transactions or their
consummation shall have been instituted or threatened on or before the Closing
Date.
11.6 CORPORATE APPROVAL. The execution and delivery of this Agreement by
Seller, and the performance of their covenants and obligations under it, shall
have been duly authorized by all necessary corporate action, and Buyer shall
have received copies of all resolutions pertaining to that authorization,
certified by the secretary of Seller.
11.7 CONSENTS. All necessary agreements and consents of any parties (other than
Buyers, their shareholders or directors, and Authorities in the United States of
America) to the consummation of the Transaction, or otherwise pertaining to the
matters covered by this Agreement, shall have been obtained.
11.8 APPROVAL OF DOCUMENTATION. The form and substance of all certificates,
instruments, opinions and other documents delivered to Buyers under this
Agreement shall be satisfactory in all reasonable respects to Buyers and their
counsel.
11.9 CONSULTING AGREEMENT. Buyers and the Shareholders identified in SCHEDULE
11.9 shall enter into a consulting agreement substantially in the form of
SCHEDULE 11.9.
11.10 BULK SALES ACT. The Buyers will have been furnished with evidence
satisfactory that the sale and purchase of the Subject Assets is in compliance
with the provisions of the Bulk Sales Act
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(Ontario).
11.11 CONDITION OF ASSETS. The Subject Assets shall not have been materially or
adversely affected in any way as a result of any fire, accident, storm or other
casualty or labor or civil disturbance or act of God or the public enemy.
11.12 NON-COMPETITION AGREEMENT. The shareholders of Seller shall each have
duly executed and delivered to Buyers a Non-competition Agreement substantially
in the form of SCHEDULE 11.12.
11.13 RETAIL SALES TAX CERTIFICATE. Buyers shall have received, from Seller, a
retail sales tax certificate issued under the RETAIL SALES TAX ACT (Ontario).
11.14 AGREEMENT ON SCHEDULES. At the date of execution of this Agreement by the
parties, the form and content of the schedules to this Agreement had not be
settled by the parties and it is a condition precedent to Buyers' performance
under this Agreement that such schedules be settled prior to Closing.
ARTICLE 12. CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
The obligations of Seller to sell and transfer the Subject Assets under this
Agreement are subject to the satisfaction, at or before the Closing, of all the
following conditions:
12.1 ACCURACY OF BUYERS' REPRESENTATIONS AND WARRANTIES. All representations
and warranties by Buyers contained in this Agreement or in any Collateral
Agreement or in any written statement delivered by Buyers thereunder shall be
true on and as of the Closing as though such representations and warranties were
made on and as of that date. Seller shall have received a certificate, dated
the Closing Date, signed by Buyers' Presidents certifying, in such detail as
Seller and its counsel may reasonably request, that the representations and
warranties set out herein are true and correct as of the Closing Date.
12.2 BUYERS' PERFORMANCE. Buyers shall have performed and complied with all
covenants and agreements, and satisfied all conditions that it is required by
this Agreement to perform, comply with, or satisfy, before or at the Closing.
12.3 OPINION OF BUYERS' COUNSEL. Buyers shall have furnished Seller with an
opinion from counsel for Buyers, dated the Closing Date, satisfactory to Seller
and its counsel, stating that:
(a) Buyers are corporations duly organized, validly existing and in good
standing under the laws of the State of Colorado and have all requisite
corporate power to perform their obligations under this Agreement;
(b) all corporate proceedings required by law or by the provisions of this
Agreement to be taken by Buyers on or before the Closing Date in
connection with
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the execution and delivery of this Agreement and the consummation of
the Transactions shall have been duly and validly taken;
(c) this Agreement has been duly and validly authorized and, when executed
and delivered by Buyers will be valid and binding on Buyers and
enforceable in accordance with its terms, except as limited by
bankruptcy and insolvency laws and by other laws affecting the rights
of creditors generally;
(d) neither the execution nor delivery of this Agreement nor the
consummation of the Transactions will constitute a default, or an event
that would with notice or lapse of time or both constitute a default
under, or violation or breach of Buyers' articles of incorporation
or bylaws; and
(e) to the best of such counsel's knowledge, there is no legal action
pending or threatened against either of Buyers which could have a
material adverse affect on Buyers.
In rendering its opinion, counsel for Buyers may rely on certificates of
governmental authorities and on opinions of associate counsel.
12.4 BUYERS' CORPORATE APPROVAL. Buyers shall have received corporate
authorization and approval for the execution and delivery of this Agreement and
all corporate action necessary or proper to fulfill the obligations of Buyers to
be performed under this Agreement on or before the Closing Date.
12.5 AGREEMENT ON SCHEDULES. At the date of execution of this Agreement by the
parties, the form and content of the schedules to this Agreement had not be
settled by the parties and it is a condition precedent to Seller's performance
under this Agreement that such schedules be settled prior to Closing and shall
be initialled by the signing officers of the parties.
12.6 CAPITALIZATION OF BUYERS. Prior to the Closing Date, the Buyers shall have
raised and received the net proceeds from a share offering of not less than
US$7,000,000.
ARTICLE 13. SELLER'S OBLIGATIONS AFTER THE CLOSING.
13.1 PRESERVATION OF GOODWILL. Following the Closing, Seller will restrict its
activities so that Buyers' reasonable expectations with respect to the goodwill,
business reputation, employee relations and prospects connected with the Subject
Assets will not be materially impaired. In furtherance but not in limitation of
this general obligation, Seller agrees that, for the period of two (2) years
following the Closing Date, or as long as Buyers or its assigns or successors in
interest carry on a like business in the counties or areas specified, whichever
is shorter:
(a) Seller and its shareholders will not engage in any business or
activity which is substantially the same as any business or activity
presently conducted by Seller if
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such business or activity extends to any of the geographic areas set
forth in SCHEDULE 11.12 in which Seller has heretofore engaged in
business or otherwise established its goodwill, business reputation,
or any customer relations. The parties intend that the covenant
contained herein shall be construed as a series of separate covenants,
one for each geographic area specified in SCHEDULE 11.12. Except for
geographic coverage, each separate covenant shall be deemed identical
in terms to the covenant set forth above. If, in any judicial
proceeding, a court shall refuse to enforce any of the separate
covenants deemed included in this Section, then this unenforceable
covenant shall be deemed eliminated from these provisions for the
purpose of those proceedings to the extent necessary to permit the
remaining separate covenants to be enforced.
(b) Seller and its shareholders will not disclose to any person or use for
their own benefit any price lists, pricing data, customer lists or
similar matters possessed by them relating to the Subject Assets or
the business transferred to Buyer unless they first clearly demonstrate
to Buyer that such matters are at the time of the proposed disclosure
or use of common knowledge within the trade.
13.2 SELLER'S INDEMNITIES. Seller shall indemnify, defend and hold harmless
Buyers against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and reasonable attorneys' fees, that Buyers shall
incur or suffer, which arise, result from or relate to any breach of, or failure
by Seller to perform, any of its representations, warranties, covenants or
agreements in this Agreement or in any schedule, certificate, exhibit or other
instrument furnished or to be furnished by Seller under this Agreement.
Notwithstanding any other provision of this Agreement, Seller shall not be
liable to Buyer on any warranty, representation or covenant made by Seller in
this Agreement, or under any of its indemnities in this Agreement, regarding any
single claim, loss, expense, obligation or other liability that does not exceed
US$2,500.00; provided, however, that when the aggregate amount of all such
claims, losses, expenses, obligations and liabilities not exceeding US$2,500.00
each reaches US$25,000.00, Seller shall thereafter be liable in full for all
such breaches and indemnities and regarding all those claims, losses, expenses,
obligations, and liabilities.
13.3 ACCESS TO RECORDS. From and after the Closing, Seller shall allow Buyers,
and its counsel, accountants and other representatives, such access to records
which after the Closing are in the custody or control of Seller as Buyers
reasonably require in order to comply with its obligations under the law or
under contracts assumed by Buyers pursuant to this Agreement.
13.4 NONSOLICITATION OF EMPLOYEES. Except with the prior written consent of
Seller, Buyers shall not, prior to the first anniversary of the Closing, solicit
any employee of Seller or of any affiliate of Seller to leave such employment if
such employee was at any time between the date hereof and the Closing an
employee of any Seller.
13.5 RISK OF LOSS.
(a) Until the Closing Date the Subject Assets will remain at the risk of
Seller. Seller
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will maintain all risk insurance in respect of loss or damage to or
any other casualty in respect of the Subject Assets which provides
for loss settlement on a replacement cost basis if the Subject Assets
are repaired or replaced and on an actual cash value basis if the
Subject Assets are not repaired or replaced. In the event of any loss,
damage or claim, in respect of any risk for which insurance is to be
carried as aforesaid arising before the Closing Date, Buyers, as an
additional condition of closing, will be entitled to be satisfied that
the insurers have accepted the claim of Seller for payment in
accordance with the terms of the policies. If any destruction or
damage occurs to the Subject Assets on or before the Closing Date or
if any or all of the Subject Assets are appropriated, expropriated or
seized by governmental or other lawful authority on or before the
Closing Date, Seller will forthwith give notice thereof to Buyers and
Buyers will have the option, exercisable by notice to Seller on or
before the Closing Date:
(i) to reduce the Purchase Price by an amount equal to the cost of
repair or, if destroyed or damaged beyond repair or if
appropriated, expropriated or seized, by an amount equal to the
replacement cost of the assets forming the part of the Subject
Assets so damaged or destroyed or appropriated, expropriated or
seized and to complete the purchase;
(ii) to complete the purchase without reduction of the Purchase Price,
in which event all proceeds of insurance or compensation for the
destruction or damage or appropriation, expropriation or seizure
will be payable to Buyers and all right and claim of Seller to
any such amounts not paid by the Closing Date will be assigned
to Buyers; or
(iii) to rescind this Agreement and not complete the purchase if, in
the opinion of Buyers, such destruction, damage, appropriation,
expropriation or seizure is material and in such event Seller and
Buyers will be released from all obligations hereunder and the
deposit referred to in SECTION 2.1(a) shall be returned to
Buyers.
(b) If Buyers elect to reduce the Purchase Price pursuant to SECTION
13.5(a)(i), Seller and Buyers will at the Closing Date determine the
amount of the reduction to the extent that it is then determinable and
will undertake to adjust such amount after the Closing Date, if
necessary.
ARTICLE 14. COSTS
14.1 FINDER'S OR BROKER'S FEES. Each party shall be responsible for its on
costs or for any commission or finder's fee incurred on behalf of that party in
connection with the Transactions.
14.2 EXPENSES. Each of the parties shall pay all costs and expenses, including,
but not limited to attorneys' fees, incurred or to be incurred by it in
negotiating and preparing this Agreement and in
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closing and carrying the Transactions.
ARTICLE 15. FORM OF AGREEMENT
15.1 HEADINGS. The subject headings of the Articles and Sections of this
Agreement are included for purposes of convenience only and shall not affect the
construction or interpretation of any of its provisions.
15.2 ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes the
entire agreement between the parties pertaining to the subject matter contained
in it and supersedes all prior and contemporaneous agreements, representations,
and understandings of the parties. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by all the parties.
No waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not similar, nor shall
any waiver constitute a continuing waiver. No waiver shall be binding unless
executed in writing by the party making the waiver.
15.3 COUNTERPARTS. This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
ARTICLE 16. PARTIES
16.1 PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and permitted assigns, nor is anything in this Agreement intended to
relieve or discharge the obligation or liability of any third persons to any
party to this Agreement, nor shall any provision give any third persons any
right of subrogation or action over against any party to this Agreement.
16.2 ASSIGNMENT. No party can assign this Agreement without the express written
consent of the other parties. This Agreement shall be binding on and shall
inure to the benefit of the parties to it and their respective heirs or legal
representatives, and their respective successors and permitted assigns.
ARTICLE 17. REMEDIES
17.1 RECOVERY OF LITIGATION COSTS. If any legal action or any arbitration or
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to which
it or they may be
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entitled.
17.2 CONDITIONS PERMITTING TERMINATION. Subject to the provisions of ARTICLE 3
relating to the postponement of the Closing Date, either party may on the
Closing Date terminate this Agreement by written notice to the other, without
liability to the other, if any bona fide action or proceeding shall be pending
against either party on the Closing Date that could result in a materially
adverse judgment, decree or order that would prevent or make unlawful the
carrying out of this Agreement.
17.3 DEFAULTS PERMITTING TERMINATION. If a Buyer or Seller materially defaults
in the due and timely performance of any of its material warranties, covenants,
or agreements under this Agreement, the 104/Merlin Agreement or the 5DBC
Agreement, the non-defaulting party or parties may on the Closing Date give
notice of termination of this Agreement, in the manner provided in ARTICLE 19.
The notice shall specify with particularity the default or defaults on which the
notice is based. The termination shall be on the first to occur of the 10th day
after such notice or the Closing Date, unless the specified default or defaults
have been cured by such time.
ARTICLE 18. NATURE AND SURVIVAL OF REPRESENTATIONS AND
WARRANTIES
All representations, warranties, covenants and agreements of the parties
contained in this Agreement, or in any instrument, certificate, opinion or other
writing provided for in it, shall survive the Closing.
ARTICLE 19. NOTICES
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given on the date of
service if served personally on the party to whom notice is to be given, or on
the third day after mailing if mailed to the party to whom notice is to be
given, by first class mail registered or certified, postage prepaid, and
properly addressed as follows:
Seller: Douglas Duncan
2500 Don Reid Drive
Ontario, Canada
K1H 8P5
Stuart Duncan
2500 Don Reid Drive
Ontario, Canada
K1H 8P5
Daniel Bender
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27357 Valley Center Road
Valley Center, California
92082
with copy to: Jamie Wyllie, Esq.
Yegendorf, Brazeau, Seller, Prehogan & Wyllie
55 Metcalfe Street, Suite 750
Ontario, Canada
K1H 6L5
Buyers: New Frontier Media, Inc.
1050 Walnut Street, Suite 301
Boulder, CO 80302
Attn.: Mark H. Kreloff
with copy to: The Law Office of Mark L. Driver, P.C.
3300 East First Ave. Suite 600
Denver, CO 80206
Attn.: Mark L. Driver
Any party may change its address for purposes of this Article by giving the
other parties written notice of the new address in the manner set forth above.
ARTICLE 20. GOVERNING LAW
This Agreement shall be construed in accordance with, and governed by, the laws
of the State of Colorado.
ARTICLE 21. MISCELLANEOUS
21.1 ANNOUNCEMENTS. Seller will not make any announcements to the public
concerning this Agreement or the Transactions without the prior approval of
Buyers, which will not be unreasonably withheld. Notwithstanding any failure of
Buyers to approve it, Seller may make an announcement of substantially the same
information as therefore announced to the public by Buyers, or any announcement
required by applicable law, but Seller shall in either case notify Buyers of the
contents thereof reasonably promptly in advance of its issuance.
21.2 REFERENCES. Unless otherwise specified, references to Sections or Articles
are to sections or articles in this Agreement.
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21.3 RELATED TRANSACTIONS. It is a condition of the obligations of the parties
to close the Transactions that on the Closing Date the transactions referred to
in the 5DBC Agreement and the 124 Agreement also close on the Closing Date.
IN WlTNESS WHEREOF, the parties to this Agreement have duly executed it as of
the day and year first above written.
BUYERS: New Frontier Media, Inc.
By: /s/ Mark H. Kreloff
------------------------------------
Its: President
------------------------------------
Colorado Satellite Broadcasting, Inc.
By: /s/ (Illegible)
------------------------------------
Its: President
------------------------------------
SELLERS: 1043133 Ontario, Inc.
By: /s/ (Illegible)
------------------------------------
Its authorized signing officer
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EXHIBIT 10.3
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made to be effective
September 5, 1997 (the "Effective Date"), among NEW FRONTIER MEDIA, INC., a
Colorado corporation, COLORADO SATELLITE BROADCASTING, INC. ("Buyer"), a wholly
owned subsidiary of New Frontier Media, Inc., and 1248663 ONTARIO INC., an
Ontario corporation ( "Seller"). New Frontier Media, Inc. and Buyer are
collectively referred to in this Agreement as "Buyers."
This Agreement sets forth the terms and conditions upon which Buyers agree
to purchase from Seller, and Seller agrees to sell to Buyers, certain properties
and assets of Seller ("Subject Assets").
NOW THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained in this Agreement, the parties agree as
follows:
DEFINITIONS
"Newco" means 1248663 Ontario Inc., an Ontario corporation.
"Adult Movies Business" means any and all of Buyer's present or contemplated
satellite broadcast services on television or any other medium, including cable
television and the Internet, which broadcasts, replays, and/or otherwise
exploits feature length adult programming and all related promotional content
and other programming of a non-rated or X-rated nature and whose main theme
embodies nudity and/or sexually explicit material between consenting adults and
such other related business assets as are necessary for the operation thereof.
"adverse or adversely", when used alone or in conjunction with other terms
(including without limitation "affect," "change" and "effect"), means any event
discovered by either party after the date hereof which is reasonably likely in
the respective business judgment of either Buyers or Seller, as the case may be,
to be expected to (a) adversely affect the validity or enforceability of this
Agreement, or (b) adversely affect the business, operation, management or
properties of Seller taken as a whole or Buyers, or (c) impair Seller or Buyers,
or (d) adversely affect the respective aggregate rights and remedies of either
party under this Agreement.
"Agreement" means this Agreement as originally in effect, including unless the
context otherwise specifically requires, all schedules and all exhibits hereto,
and as any of the same may from time to time be supplemented, amended, modified
or restated in the manner herein or therein provided.
"Applicable Law" shall mean any Law of any Authority, whether domestic or
foreign, including without limitation all federal and state securities and
environmental laws, to which a person or entity is subject or by which it or any
of its business or operations is subject or any of its property or assets is
bound.
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"Authority" means any governmental or quasi-governmental authority, whether
administrative, executive, judicial, legislative or other, or any combination
thereof, including without limitation, any federal, provincial, state,
territorial, county, municipal or other government or governmental or quasi-
governmental agency, arbitrator, authority, board, body, branch, bureau, central
bank or comparable agency, or Entity, commission, corporation, court,
department, instrumentality, master, mediator, panel, referee, system, or other
political unit or subdivision or other Entity of any of the foregoing whether
domestic or foreign.
"Buyers' Disclosure Schedule" means the schedule attached as SCHEDULE 8.2(a).
"Closing" means the closing of the transactions contemplated herein and "Closing
Date" means the date on which the closing takes place.
"Collateral Agreements" means agreements and other documents executed or
required to be executed pursuant to the terms of this Agreement.
"Entity" means any corporation, firm, unincorporated organization, association,
partnership, limited liability company, trust (inter vivos or testamentary),
estate of a deceased, individual, business trust, joint stock company, joint
venture or other organization, entity or business, whether acting in an
individual, fiduciary or other capacity, or any Authority.
"Governmental Authorizations" means all approvals, concessions, consents,
franchises, licenses, permits, and other authorizations of all applicable
Authorities.
"material, materially or materiality", unless specifically stated otherwise,
shall be determined without regard to the fact that various provisions of this
Agreement set forth specific dollar amounts.
"New Frontier" means New Frontier Media, Inc.
"Private Authorizations" means all approvals, concessions, consents, franchises,
licenses, permits, and other authorizations of all persons (other that
Authorities) including without limitation those with respect to copyrights,
computer software programs, patents, service marks, trademarks, trade names,
technology and know-how.
"Subject Assets" means:
(a) that equipment (including without limitation essential spares and
replacement parts) and software technology, furniture, machinery,
appliances, and other tangible personal property and technology used
in and historically allocated to the operation of a satellite operation
uplink facility as specifically set forth in SCHEDULE 1(a), "the Uplink
Facilities Equipment List", and which shall be in operating order;
(b) all hardware, equipment, software license assignments, furniture,
machinery, appliances and other tangible personal property as set forth
in SCHEDULE 1(b), "The
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Call Center Equipment List"; and
(c) any tort or insurance proceeds arising out of any damages or
destruction of any of the Subject Assets herein between the date of
this Agreement and the Closing Date to the extent required to repair
or replace any subject asset being acquired hereunder.
"Transactions" means the transactions contemplated by this Agreement and all
Collateral Agreements.
ARTICLE 1. TRANSFER OF ASSETS
Subject to the terms and conditions set forth in this Agreement, Seller agrees
to sell, convey, transfer, assign and deliver to Buyer, and Buyers agrees to
purchase from Seller at the Closing described in ARTICLE 3, all of the Subject
Assets, whether tangible, intangible, real, personal or mixed, and wherever
located, including those assets set forth in the lists of SCHEDULES 1(a) and (b)
and as further described in this ARTICLE 1.
1.1 UPLINK FACILITY. Pursuant to SCHEDULE 1.1, the Uplink Management Services
Agreement, Newco agrees to operate, maintain, manage, and sustain an uplink and
playback facility (at 2500 Don Reid Drive, Ottawa, Ontario) capable of providing
continual uninterrupted services on behalf of Buyer for its Adult Movies
Business. The term of the Uplink Management Services Agreement shall be three
(3) years with the right at Buyers' option to successive one year renewals on
terms to be negotiated. Newco may at its option acquire a building suitable for
relocating the current satellite broadcast uplink facility in order to fulfill
its obligations under the Uplink Management Services Agreement. In the event of
such move, Newco shall be responsible for all uplink moving/installations costs,
to the New Uplink Facility. Buyers shall be responsible for the reasonable
costs associated with the necessary tenant finish at the New Uplink Facility.
Newco shall ensure that Buyers have the right to use and operate the existing
Uplink Facility under the terms of the Uplink Management Services Agreement
until the New Uplink Facility is ready for use.
1.2 CALL CENTER FACILITY. Pursuant to SCHEDULE 1.2, the Call Center Interim
Services Agreement, Newco agrees to receive and process subscriber calls on
behalf of Buyers from a call center to be located at 1825 Woodward Drive,
Ottawa, Ontario using the call center assets included in the Subject Assets for
a period of up to nine (9) months from the Closing, at a flat, prepaid monthly
rental of US$275,000.00 and on other terms to be negotiated in a Call Center
Lease Agreement. Prior to the end of the nine (9) month period, Buyers shall
have the right to unilaterally terminate such agreement upon sixty (60) days
prior written notice. Pursuant to the Call Center Interim Services Agreement,
Newco agrees to deposit all amounts collected thereto into a merchant account
and a checking account to be established in the name of Buyer.
1.3 INVESTMENT CANADA ACT. The parties agree that the Transactions do not
require notice, review, approval or allowance under the INVESTMENT CANADA ACT
and it is not a condition
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precedent to the Closing of the Transactions that any notice be given or
approval, allowance or consent be obtained in respect thereof.
Notwithstanding anything to the contrary in this Agreement, no
representation, warranty or covenant given by any party under or pursuant to
this Agreement is intended or shall be deemed to include a representation,
warranty or covenant related to the INVESTMENT CANADA ACT.
ARTICLE 2. PURCHASE PRICE
2.1 PAYMENT OF PURCHASE PRICE. In consideration for the transfer and assignment
of the Subject Assets and in consideration of the representations, warranties
and covenants of Seller set forth herein, Buyers on the conditions set forth
herein:
(a) shall pay, subject to ARTICLE 5, an earnest money deposit in the
amount of US$10,000.00;
(b) shall deliver to Seller at the Closing (as hereinafter defined)
US$660,172.00 plus taxes as provided in ARTICLE 6, payable in cash as
more fully described in SECTION 3.2;
(c) shall deliver at the Closing a promissory note in the amount of
US$185.711.00 executed by Buyer and payable to Seller in the form
substantially similar to that set forth in SCHEDULE 2.1(c). Buyer's
performance under the promissory note shall be guaranteed by New
Frontier. Additionally, in order to secure Buyer's obligations
pursuant to the promissory note, at the Closing (i) Buyer shall execute
and deliver to Seller a security agreement in the form attached as
Exhibit A to SCHEDULE 2.1(c) pursuant to which Buyer shall grant to
Seller a security interest/lien in all of its furniture, fixtures,
equipment and inventory, ranking first in priority over all other
security interests/lienholders, except the interests of Buyers' chief
financial institutions which shall have a first priority up to an
amount of US $2,000,000.00 and the interests another secured creditor
approved by Seller which shall have a second priority up to an amount
of US$725,510; and
(d) shall assume and discharge, and shall indemnify Seller against,
liabilities and obligations of Seller under the leases, contracts or
other agreements, if any, specified on SCHEDULE 4 but only to the
extent that such liabilities or obligations accrue on or after the
Closing Date.
2.2 ALLOCATION OF THE PURCHASE PRICE. The parties agree that the Purchase Price
(defined as the sum of the amounts specified in SECTIONS 2.1 (b) and (c) above
shall be allocated as set forth in SCHEDULE 2.2 and that such allocation will be
used by the parties in reporting the transaction contemplated by this Agreement
for tax purposes.
2.3 ELECTIONS. Seller and Buyers will on or before the Closing Date jointly
execute an election, in prescribed form and containing the prescribed
information, to have subsection 167(1.1) of the
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EXCISE TAX ACT (Canada) apply to the sale and purchase of the Subject Assets
hereunder so that no tax is payable in respect of such sale and purchase
under Part IX of the EXCISE TAX ACT (Canada). The Buyers will file such
election with the Minister of National Revenue within the time prescribed by
the Excise Tax Act (Canada).
ARTICLE 3. THE CLOSING
The closing of the purchase and sale of the Subject Assets by Seller to Buyers
(the "Closing") shall take place at 2500 Don Reid Drive, Ottawa, Ontario, sixty-
four (64) days after the date of this Agreement or at such other place and/or
time as the parties may agree in writing (the "Closing Date"). In the event
that the conditions specified in this Agreement have not be fulfilled by such
date, either Seller or Buyers may extend the Closing Date for a period or
periods not exceeding an aggregate of thirty (30) days by written notice to the
other parties.
3.1. SELLER'S OBLIGATIONS AT CLOSING.
(a) At the Closing Seller shall deliver or cause to be delivered to Buyer:
(i) assignment and assumption agreements for personal property
leases, all contracts and agreements of Seller to be assumed in
connection herewith, in form and substance reasonably
satisfactory to Buyers' counsel, and accompanied by all consents
required by this Agreement and the personal property leases,
contracts and agreements being assigned;
(ii) instruments of assignment and transfer (including a bill of
sale) of all the Subject Assets in form and substance reasonably
satisfactory to Buyers' counsel; and
(iii) such other documents as shall be reasonably requested by
Buyers or Buyers' counsel (for example, a BULK SALES ACT
affidavit).
(b) Simultaneously, with the consummation of the transfer, Seller, through
its officers, agents and employees, shall put Buyer into full
possession and enjoyment of all the Subject Assets to be sold,
conveyed, transferred, assigned and delivered by this Agreement.
(c) Seller, at any time before or after the Closing Date shall execute,
acknowledge, and deliver any further deeds, assignments, conveyances
and other assurances, documents and instruments of transfer, reasonably
requested by Buyers and shall take any other action consistent with the
terms of this Agreement that may be reasonably requested by Buyers for
the purpose of assigning, transferring, granting, conveying and
confirming to Buyers, or reducing to possession, any or all property
and assets to be conveyed or transferred by this Agreement. If
requested by Buyers, Seller further agrees to prosecute or otherwise
enforce in
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their own names for the benefit of Buyers any claims, rights, or
benefits that are transferred to Buyers by this Agreement and that
require prosecution or enforcement in any of Seller's names.
Any prosecution or enforcement of claims, rights, or benefits under
this Section shall be solely at Buyer's expense, unless the
prosecution or enforcement is made necessary by a breach of this
Agreement by Seller.
3.2. BUYER'S OBLIGATIONS AT CLOSING. At the Closing Buyers shall deliver to
Seller against delivery of the items specified in SECTION 2.1, a certified bank
or cashier's check, or a wire transfer of immediately available funds, in the
amount of US$660,172.00 plus taxes pursuant to ARTICLE 6 payable to Seller and
the promissory note payable to Seller in the amount of US$185,711.00. Seller
shall notify Buyers within five (5) days of the Closing Date whether the amount
payable at Closing shall be delivered by certified bank or cashier's check, or
by wire transfer. At closing, Buyers shall deliver to Seller such documents
that shall be reasonably requested by Seller or Seller's counsel.
ARTICLE 4. ASSUMPTION OF LIABILITIES
Buyers are not assuming any debt, liability or obligation of Seller, whether
known or unknown, fixed or contingent, except as herein specifically otherwise
provided. Seller agrees to indemnify and hold Buyers harmless against all
debts, claims, liabilities and obligations of Seller not expressly assumed by
Buyers hereunder, and to pay any and all attorneys' fees and legal costs
incurred by Buyers, its successors and assigns in connection therewith. Buyers
shall have the benefit of and shall perform and assume all leases, contracts and
agreements, if any, specifically listed on SCHEDULE 4, in accordance with the
terms and conditions thereof, except to the extent modifications are
specifically set forth in SCHEDULE 4 and except to the extent set forth in the
assignments or assignment and assumption agreements for such leases, contract
and agreements.
ARTICLE 5. RETURN OF DEPOSIT
Upon execution of this Agreement, Buyers shall pay to Seller an earnest money
deposit of US$2,500. Upon parties' final acceptance of the form and content of
the schedules to this Agreement, Buyers shall pay to Seller a further earnest
money deposit of US$7,500. Such deposits shall be returned to Buyers if the
Transactions are not closed due to: (a) the failure of any conditions set forth
in ARTICLE 11 to be met at or before the Closing as a result of any act or
omission by Seller; or (b) the occurrence of any default by Seller described in
SECTION 17.3. If the Transactions are not closed for any other reason, the
deposit shall be retained by Seller. Upon Closing, the deposit shall be applied
towards the payment due to Seller under SECTION 2.1(b).
ARTICLE 6. TAXES
Buyers shall pay all sales, use and transfer taxes arising out of the transfer
of the Subject Assets,
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including any foreign transfer taxes and shall pay its portion, prorated as
of the Closing Date, of state, provincial, and local real and personal
property taxes of the business being sold hereunder. Buyers shall not be
responsible for any business, occupation, withholding or similar tax, or for
any income, sales, use, value-added or similar taxes related to any period,
or transaction occurring during any period, before the Closing Date.
ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyers that the following facts and
circumstances are and will be at all times up to the Closing Date, except as
contemplated hereby, true and correct, and hereby acknowledge that such facts
and circumstances constitute the basis upon which Buyers are induced to enter
into and perform this Agreement. Each warranty set forth in this ARTICLE 7
shall survive eighteen (18) months past the Closing Date and any investigation
made by or on behalf of Buyers. Buyers shall conduct their own due diligence
investigation and that investigation shall include an investigation into whether
Seller are or have operated in accordance with the warranties and
representations of Seller. If prior to the closing date, Buyers believe they
have discovered any breach of the representations and warranties of Seller, they
shall forthwith advise Seller in writing of such breach. If Seller does not or
cannot cure such breach prior to the Closing Date, Buyers may elect to close (in
which case the breach shall be deemed non-material) or not close provided such
breach is material. If Buyers fail to give such notice then the breach will be
deemed non-material.
7.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Newco is a corporation
organized, validly existing, and in good standing under the laws of Ontario.
Seller has all necessary corporate powers to own its properties and to carry on
its business as now owned and operated by it, and is duly qualified to transact
any business and is in good standing in all jurisdictions in which the nature of
its business or its properties makes such qualification necessary.
7.2 ABSENCE OF SPECIFIED CHANGES. Since March 31, 1997, there has not been any:
(a) material and adverse destruction, damage to, or loss of any of the
Subject Assets (whether or not covered by insurance);
(b) labor trouble or other event or condition of any character materially
and adversely effecting the financial condition, business, assets or
prospects of Seller;
(c) revaluation by Seller of any of the Subject Assets in a manner that
would be materially adverse to Buyers;
(d) execution, creation, amendment, nonrenewal or termination of any
material contract, agreement or license to which Seller is a party,
except in the ordinary course of business or except as can be
terminated prior to the Closing Date without materially adversely
effecting the Subject Assets;
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(e) creation or assumption by Seller of any mortgage, pledge, security
interest or lien or other encumbrance on any of the Subject Assets,
except as set forth in SCHEDULE 7.2(e);
(f) other event or condition of any character of which Seller has
knowledge that has or might reasonably have a material adverse effect
on the Subject Assets, except as set forth in SCHEDULE 7.2(f); or
(g) agreement by Seller to do any of the things described in the preceding
clauses (a) through (f).
7.3 SUBJECT ASSETS SUFFICIENT FOR OPERATIONS. The Subject Assets constitute all
assets (other than premises) necessary for the continued uninterrupted operation
by Seller of a call center and uplink facility for the Buyers' Adult Movies
Business. Except as stated in SCHEDULE 4, none of the Subject Assets are held
under any lease, security agreement, conditional sales, contract, or other title
of retention or security agreement, or are in the possession of anyone other
than Seller.
7.4 TRADE NAMES, TRADEMARKS AND COPYRIGHTS. Seller does not own any trademark,
service mark, trade name, trade secret, or brand name. To the actual knowledge
of Seller, no person has made any outstanding claims against Seller in respect
of any trademark, trademark registration or application, service mark, trade
name, copyright, copyright registration or application or brand name, the use of
which is necessary or contemplated in connection with the performance of any
contract to which Seller is a party.
7.5 TITLE TO ASSETS. To the best of Seller's knowledge, Seller shall at Closing
have good and marketable title to all the Subject Assets free and clear of
mortgages, liens, pledges, charges, encumbrances, equities, claims, easements,
rights of way, covenants, conditions, or restrictions, except for (i) the lien
of current taxes not yet due and payable; and (ii) possible minor matters that,
in the aggregate, are not substantial in amount and do not materially detract
from or interfere with the present or intended use of any of these assets. The
parties acknowledge that Seller will not own all of the Subject Assets on the
date this Agreement is executed, but will be acquiring Subject Assets prior to
Closing and no representation, warranty, condition or covenant contained herein
is intended to state otherwise. All the Subject Assets are in good operating
condition and repair, ordinary wear and tear excepted.
7.6 INSURANCE POLICIES. SCHEDULE 7.6 to this Agreement is a description of all
insurance policies held by Seller concerning the Subject Assets. All these
policies are in the respective principal amounts set forth in SCHEDULE 7.6.
Seller has maintained and now maintain (a) insurance on all the Subject Assets
of a type customarily insured, covering property damage by fire or other
casualty, and (b) adequate insurance protection against all liabilities, claims,
and risks against which it is customary to insure. Such insurance coverage will
be cancelled as of Closing.
7.7 OTHER CONTRACTS. Copies of all contracts which will be assigned to or
assumed by Buyers under this Agreement are attached as part of SCHEDULE 4.
Except as set forth in SCHEDULE 4 and to the best of Seller's knowledge, the
Subject Assets will not at Closing or thereafter (as a result
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of actions or conduct of Seller) be bound or potentially bound by, any
distributor's or manufacturer's representative or agency agreement, any
output or requirements agreement, any agreement not entered into in the
ordinary course of business, any indenture, mortgage, deed of trust, lease or
any other agreement that is unusual in nature, duration or amount (including,
without limitation, any agreement requiring the performance by Seller of any
obligation for a period of time extending beyond one year from Closing Date
or calling for consideration of more than US$ 10,000.00 or requiring
purchases at prices in excess of, or sales at prices lower than, prevailing
market prices). To the best of Seller's knowledge, there is no default or
event that with notice or lapse of time, or both, would constitute a default
by any party to any of the agreements listed in SCHEDULE 4 and such contracts
remain in full force and effect. Seller has not received notice that any
party to any of the agreements listed in SCHEDULE 4 intends to cancel or
terminate any of these agreements or to exercise or not exercise any options
under any of these agreements. Seller is not a party to, nor is Seller or
the Subject Assets bound by, any agreement that is materially adverse to the
business, assets, property, operating results, prospects or financial
condition of Seller.
7.8 COMPLIANCE WITH LAWS. Seller has received no notice of any violation of any
statutes, laws or regulations (including, without limitation any applicable
obscenity, environmental, health, building, zoning, or other law, ordinance or
regulations) from any Authority the violation of which may materially adversely
affect its ability to fulfill its obligations under this Agreement. Seller is
not in violation of or default under any provisions of their Articles of
Incorporation or Bylaws, both as amended. The execution, delivery and
performance of the Agreement and the consummation of the Transactions will not
result in any such violation or default, or be in conflict with or constitute,
with or without the passage of time or the giving of notice or both, a default
under Seller's Articles of Incorporation or Bylaws, both as amended.
7.9 LITIGATION. There is no suit, action, arbitration or legal, administrative
or other proceeding, or governmental investigation ("Actions") pending or, to
the best knowledge of Seller, threatened, against or affecting Seller, or any of
its business, assets or financial condition, or against any officer, director or
employee of Seller in connection with such officer's, director's or employee's
relationship with or actions taken on behalf of Seller. Seller is not a party
to or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality, and there are no
actions or claims by Seller currently pending or, to which Seller intends to
initiate. To the best knowledge of Seller, there has not occurred any event nor
does there exist any condition on the basis of which any litigation, proceeding
or investigation is likely to be instituted by or against Seller. Seller is not
in default with respect to any order, writ, injunction or decree of any federal,
state, local or foreign court, department, agency or instrumentality.
7.10 AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. Neither the entry into this
Agreement nor the consummation of the transactions contemplated hereby will
result in or constitute any of the following events where the occurrence of such
event would render Seller materially unable to comply with this Agreement: (a) a
default or an event that, with notice or lapse of time or both, would be a
default, breach or violation of any lease, license, promissory note, conditional
sales contract, commitment, indenture, mortgage, deed of trust or other
agreement, instrument or
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arrangement; (b) an event that would permit any party to terminate any
agreement or to accelerate the maturity of any indebtedness or other
obligation; (c) the creation or imposition of any lien, charge or encumbrance
on any of the Subject Assets; or (d) the violation of any law, regulation,
ordinance, judgment, order or decree.
7.11 AUTHORITY AND CONSENTS. Except as set forth in SCHEDULE 7.11, Seller has
the right, power, legal capacity and authority to enter into, and perform their
obligations under this Agreement, and no approvals or consents of any persons
other than the shareholders of Seller are necessary in connection with it. The
execution and delivery of this Agreement and the consummation of this
transaction by Seller has been, or prior to the Closing will have been, duly
authorized by all necessary corporate action of Seller (including any necessary
action by Seller's security holders). This Agreement constitutes a legal, valid
and binding obligation of Seller enforceable in accordance with its terms except
as limited by bankruptcy and insolvency laws and by other laws affecting the
rights of creditors generally.
7.12 INTEREST IN CUSTOMERS, SUPPLIERS AND COMPETITORS. Except as set forth in
SCHEDULE 7.12 or as contemplated by a Collateral Agreement, neither Seller nor
any officer or director or shareholder of Seller, nor any spouse or child of any
of them has any direct or indirect interest in any competitor, supplier or
customer of Seller or in any person with whom Seller are doing business.
7.13 INFORMATION FURNISHED TO BUYER FOR BULK TRANSFER NOTICE. For the purposes
of furnishing notices under the BULK SALES ACT (Ontario), SCHEDULE 7.13 is a
true, complete and correct list of all names and business addresses used by
Newco.
7.14 DOCUMENTS DELIVERED. Each copy or original of any agreement, contract or
other instrument which is identified in any exhibit or schedule delivered by
Seller or its counsel to Buyers (or their counsel or representatives), whether
before or after the execution hereof, is in fact what it is purported to be by
Seller and has not been amended, canceled or otherwise modified.
7.15 FULL DISCLOSURE. None of the representations and warranties made by Seller
or made in any letter, certificate or memorandum furnished or to be furnished by
Seller or on its behalf, contains or will contain any untrue statement of a
material fact, or omits any material fact the omission of which would make the
statements made misleading and materially adverse to Buyers.
7.16 SUBJECT ASSETS ARE SUFFICIENT TO OPERATE BUSINESS.
(a) The Buyers are acquiring the ownership, possession or use under this
Agreement of all or substantially all of the property and assets that
can reasonably be regarded as necessary for Buyer to be capable of
operating an uplink facility and call center facility as contemplated
herein (excluding premises for such facilities) as a business within
the meaning of section 167 of the EXCISE TAX ACT (Canada).
(b) Newco will be at Closing registered under Part IX of the EXCISE TAX
ACT (Canada).
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7.17 SOLVENCY. As of the execution and delivery of this Agreement, and, after
giving effect to the consummation of the Transactions, Seller will be solvent.
7.18 TAX MATTERS. Seller shall continue to be responsible for and will
discharge all obligations and liabilities in respect to taxes pertaining to the
Subject Assets which arise or accrue for all periods ending on or before the
Closing Date (but excluding the taxes referred to in ARTICLE 6). Seller will
indemnify and hold harmless Buyers against any and all claims and demands
incurred by Buyers that directly or indirectly arise out of such obligations or
liabilities. Without limiting the foregoing, Seller will be responsible for all
federal, state, provincial, local, foreign and other net income, gross income,
gross receipts, alternative or add on minimum, profits, sales, use, occupation,
value-added, ad valorem, transfer, franchise, license, lease, service use,
withholding, payroll, employment, excise, severance, premium, property, windfall
profits, customs, duties, or other taxes, fees assessments, or charges of any
kind whatsoever, together with any interest, penalties or additions to tax
imposed with respect thereto, or any obligations to any agreements or
arrangements with respect to and taxes described above.
7.19 EMPLOYMENT MATTERS. Buyer shall be under no obligation to offer employment
to any of Seller's employees ("affected employees"), except as otherwise stated
in this Agreement. Buyer may, however, choose to retain the services of or to
offer employment to one or more of the affected employees, should it wish to do
so, subject to SECTION 13.4.
Seller will continue to be responsible for and will discharge all obligations
and liabilities in respect of the affected employees which arise or accrue prior
to, on or after the Closing Date. Seller will indemnify and save harmless
Buyers against any and all claims and demands incurred by Buyers that directly
or indirectly pertain to or arise out of such obligations or liabilities.
Without limiting the forgoing, Seller will be responsible for and will bear and
discharge any and all obligations and liabilities for wages, severance pay,
termination pay, notice of termination of employment or pay in lieu of such
notice, damages for wrongful discharge or other employee benefits or claims,
including vacation pay, which may arise in connection with the employment or
dismissal of any of the affected employees, including any interest, award,
judgment or penalty relating thereto and any costs or expenses incurred by
Buyers in defending against any claim or demand relating to such obligation or
liabilities.
ARTICLE 8. BUYERS' REPRESENTATIONS AND WARRANTIES
Buyers represents, warrants, and covenants to, and agrees with Seller as
follows:
8.1 ORGANIZATION AND BUSINESS: POWER AND AUTHORITY: EFFECT OF TRANSACTION.
(a) Each Buyer (i) is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation;
(ii) has all requisite power and authority to own or hold under lease
its properties and to conduct its business as now conducted and as
presently proposed to be conducted, and has in full force and effect
all Governmental Authorizations and Private Authorizations
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and has made all governmental filings, to the extent required for such
ownership and lease of its property and conduct of its business and is
in good standing in such jurisdictions in which the failure to be in
good standing would have a material adverse effect upon its property
or the nature of its business or operations.
(b) Each Buyer has all requisite power and authority and has in full force
and effect all Governmental Authorizations and Private Authorizations
in order to enable it to execute and deliver, and to perform its
obligations under, this Agreement and each Collateral Agreement
executed or required to be executed pursuant hereto or thereto or to
consummate the Transactions and the Collateral Agreements; and the
execution, delivery and performance of this Agreement and each
Collateral Agreement has been duly authorized by all requisite
corporate or other action. No further action or approval on the part
of Buyers' stockholders is required in connection with the execution,
delivery and performance of this Agreement or each Collateral Agreement
or the consummation of the Transactions. This Agreement has been duly
executed and delivered by each Buyer and constitutes, and each
Collateral Agreement executed or required to be executed pursuant
hereto or thereto or to consummate the Transactions when executed and
delivered by Buyers will constitute, legal, valid and binding
obligations of Buyers enforceable in accordance with their respective
terms.
(c) Neither the execution and delivery of this Agreement or any Collateral
Agreement, nor the consummation of the Transactions, nor compliance
with the terms, conditions and provisions hereof or thereof by Buyers
will conflict with, or result in a material breach or violation of, or
constitute a material default under, any Applicable Law on the part of
Buyers or will conflict with, or result in a material breach or
violation of, or constitute a material default under, or permit the
acceleration of any obligation or liability in, or but for any
requirement of giving notice or passage of time or both would
constitute such a conflict with, material breach or violation of, or
material default under, or permit any such acceleration in, any
contractual obligation of Buyers.
8.2 FINANCIAL AND OTHER INFORMATION
(a) Buyers have heretofore furnished to Seller copies of the consolidated
financial statements of New Frontier and all of its subsidiaries
("Buyers' Financial Statements"). Buyers' Financial Statements,
including in each case the notes thereto, have been prepared in
accordance with GAAP applied on a consistent basis throughout the
periods covered thereby, except as otherwise noted therein or as set
forth in SCHEDULE 8.2(a) (Buyers' Disclosure Schedule), and are true,
accurate and complete, do not contain any untrue statement of material
fact or omit to state a material fact required by GAAP to be stated
therein or necessary in order to make the statements contained therein
not misleading, and fairly present the financial condition and the
results of operations of Buyers, on the bases therein stated, as of the
respective dates thereof, and for the respective periods covered
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thereby subject, in the case of unaudited financial statements, to
normal year-end audit adjustments and accruals.
(b) Neither Buyers' Disclosure Schedule, Buyers' Financial Statements,
this Agreement, any Collateral Agreement, or any data, information or
statement furnished or to be furnished by or on behalf of Buyers
pursuant to this Agreement or any Collateral Agreement or required to
consummate the Transactions, contains or will contain any untrue
statement of material fact or omits or will omit to state a material
fact required to be stated herein or therein or necessary in order to
make statements contained herein or therein not misleading and all
Collateral Agreements, data, information or statements are and will be
true, accurate and complete.
8.3 CHANGES IN CONDITION. Since the date of the most recent financial
statements forming part of Buyers' Financial Statements, there has been no
material adverse change in Buyers taken as a whole or individually. Except
matters of general applicability to Buyers' industries, there is no event known
to Buyers which materially adversely affects Buyers taken as a whole or
individually, or the ability of Buyers to perform any of the obligations set
forth in this Agreement or any Collateral Agreement or to consummate the
Transactions.
8.4 COMPLIANCE WITH PRIVATE AUTHORIZATIONS. Each Buyer has obtained all Private
Authorizations which are necessary for the ownership by such Buyer of its
properties and the conduct of its business as now conducted or as presently
proposed to be conducted or which, if not obtained and maintained, could, singly
or in the aggregate, materially adversely affect such Buyer. Neither Buyer is
in breach or violation of, or is in default in the performance, observance or
fulfillment of, any Private Authorization, and no event exists or has occurred,
which constitutes, or but for any requirement of giving of notice or passage of
time or both would constitute, such a breach, violation or default, under any
contractual obligation of such Buyer or Private Authorization, except for such
defaults, breaches or violations, as do not and will not have in the aggregate
any material adverse affect on such Buyer or the ability of such Buyer to
perform any of its obligations set fourth in this Agreement or any Collateral
Agreement or to consummate the Transactions. No Private Authorization is the
subject of any pending or, to Buyers' knowledge, information or belief,
threatened attack, revocation or termination.
8.5 COMPLIANCE WITH GOVERNMENTAL AUTHORIZATIONS AND APPLICABLE LAW.
(a) Each Buyer has obtained all other Governmental Authorizations which
are necessary for the ownership or uses of its properties and the
conduct of its business as now conducted or as presently proposed to
be conducted and which, if not obtained and maintained, would singly
or in the aggregate, have any material adverse affect on such Buyer
and its subsidiaries taken as a whole. No other Governmental
Authorization is subject of any pending or, to Buyers' knowledge,
information and belief, threatened challenge or proceeding to revoke
or terminate any such Governmental Authorization. Buyers' have no
reason to believe that any other Governmental Authorization would not
be renewed in the name of Buyer by
13
<PAGE>
the granting Authority in the ordinary course.
(b) Neither Buyer nor any officer or director (in connection with the
business, operations and properties of such Buyer) is in or is charged
with or, to Buyer's knowledge, information and belief, at any time
since its organization has been in or has been charged with, or is
threatened or under investigation with respect to, breach or violation
of, or default in the performance, observance or fulfillment of, any
Governmental Authorization or any Applicable Law, and no event exists
or has occurred, which constitutes, or but for any requirement of
giving notice or passage of time or both would constitute, such a
breach, violation or default, under:
(i) any Governmental Authorization or any Applicable Law, except for
such breaches, violations or defaults as do not and will not have
in the aggregate any material adverse affect on Buyers taken as a
whole or the ability of Buyers to perform any of the obligations
set forth in this Agreement or any Collateral Agreement or to
consummate the Transactions, or
(ii) any requirement of any insurance carrier, applicable to its
business, operations or properties.
8.6 GST REGISTRATION. Buyer will be registered under Part IX of the EXCISE TAX
ACT (Canada) at Closing.
8.7 DISCLOSURE. None of the representations and warranties made by Buyers or
made in any letter, certificate or memorandum furnished or to be furnished by
Buyers or on their behalf, contains or will contain any untrue statement of a
material fact, or omits any material fact the omission of which would make the
statements made misleading and materially adverse to Seller.
8.8 CONTINUING REPRESENTATION AND WARRANTY. Except for those representations
and warranties which speak as of a specific date, all of the representations and
warranties of Buyers set forth in this Article shall be true and correct on the
Closing Date with the same force and effect as though made on and as of that
date and those, if any which speck as of a specific date shall be true and
correct on the Closing Date.
8.9 SOLVENCY. As of the execution and delivery of this Agreement, and, after
giving effect to the consummation of the transactions contemplated herein,
Buyers taken as a whole and individually will be solvent.
8.10 INTERPRETATION. For the purposes of this ARTICLE 8, New Frontier and
Colorado Satellite Broadcasting, Inc. are each considered to be a "Buyer".
14
<PAGE>
ARTICLE 9. SELLER'S OBLIGATIONS BEFORE CLOSING
Seller covenants that, except as otherwise agreed in writing by Buyer, from the
date of this Agreement until the Closing:
9.1 BUYERS' ACCESS TO PREMISES AND INFORMATION. Buyers and its counsel,
accountants and other representatives shall be entitled to have full access
during normal business hours to all Seller's properties, books, accounts,
records, contracts and documents of or relating to the Subject Assets. Seller
shall furnish or cause to be furnished to Buyers and its representatives all
data and information concerning the Subject Assets that may reasonably be
requested.
9.2 MAINTENANCE OF INSURANCE. Seller shall continue to carry its existing
insurance, subject to variations in amounts required by the ordinary operations
of their businesses. At the request of Buyers and at Buyers' sole expense, the
amount of insurance against fire and other casualties which, at the date of this
Agreement, Seller carries on any of the Subject Assets shall be increased by
such amount or amounts as Buyers shall specify.
9.3 NEW TRANSACTIONS. Seller shall not do or agree to enter into any contract,
commitment or transaction which would materially adversely effect the ability of
Seller to perform any obligation set forth in this Agreement of any Collateral
Agreement.
9.4 EXISTING AGREEMENTS. Except in ordinary course of business, Seller shall
not modify, amend, cancel or terminate any of its existing contracts or
agreements, or agree to do any of those acts without the consent of Buyers, if
doing so would materially adversely affect Seller's ability to fulfill its
obligations under this Agreement.
9.5 CONSENT OF OTHERS. As soon as reasonably practical after the execution and
delivery of this Agreement, and in any event on or before the Closing Date,
Seller shall obtain the written consent of the persons described in SCHEDULE
7.11 in form and substance satisfactory to Buyers and will furnish to Buyers
executed copies of those consents.
9.6 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Seller shall use its
reasonable commercial efforts to assure that all representations and warranties
of Seller set forth in this Agreement and in any written statements delivered to
Buyers by Seller under this Agreement will also be true and correct as of the
Closing Date as if made on that date and that all conditions precedent to
Closing shall have been met. Seller shall promptly disclose to Buyers any
information contained in the Schedules to this Agreement which, because of an
event occurring after the date hereof, is incomplete or is no longer correct as
of all times after the date hereof until the Closing Date; provided, however,
that none of such disclosures shall be deemed to modify, amend or supplement the
representations and warranties of Seller or the schedules hereto for the
purposes of ARTICLE 11, unless Buyer shall have consented thereto in writing.
9.7 STATUTORY FILINGS. Seller shall cooperate fully with Buyers in preparing
and filing all information and documents required under any statutes or
governmental rules or regulations pertaining to the Transactions, including but
not limited to, any licenses required by Industry
15
<PAGE>
Canada and the rules promulgated thereunder.
ARTICLE 10. BUYERS' OBLIGATIONS BEFORE CLOSING
10.1 GENERAL OBLIGATIONS AND CONFIDENTIALITY. Prior to the Closing Date (or, in
the event the Closing does not occur, for a period of two years following the
date of this Agreement) Buyers shall use its best efforts to preserve the
confidentiality of any commercial information which is confidential and which
Seller identifies in writing as confidential which is disclosed to Buyers or to
its representatives by Seller; provided that Buyers at all times shall not be
materially restricted in its investigation of the assets or matters relating
thereto. The above provisions of this Section shall not apply to any
information which (i) is already known to Buyers at the time of disclosure by
Seller, (ii) is published or through no fault of Buyers becomes published or
(iii) is lawfully disclosed to Buyer by a third party. Whether or not the
Closing shall take place, Seller waive any cause of action, right or claim
arising out of the access of Buyers or their representatives to any trade
secrets or other confidential business information of Seller from the date of
this Agreement until the Closing Date, except for the intentional competitive
misuse by Buyers or its representatives of such trade secrets or other
confidential business information (identified as confidential as required by
this Article) if the Closing does not take place.
10.2 SELLER'S ACCESS TO PREMISES AND INFORMATION. Seller and its counsel,
accountants and other representatives shall be entitled to have full access
during normal business hours to all Buyers' properties, books, accounts,
records, contracts and documents. The Buyers shall furnish or cause to be
furnished to Seller and its representatives all data and information concerning
Buyers that may reasonably be requested.
ARTICLE 11. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE
The obligation of Buyers to purchase the Subject Assets under this Agreement are
subject to the satisfaction, at or before the Closing, of all the conditions set
out below in this Article. Buyers may waive any or all of these conditions;
provided, however, that no such waiver of a condition shall constitute a waiver
by Buyers of any of its other rights or remedies, at law or in equity, if Seller
shall be in default of any of their representations, warranties or covenants
under this Agreement.
11.1 ACCURACY'S OF SELLER'S REPRESENTATIONS AND WARRANTIES. All representations
and warranties by Seller contained in this Agreement or in any Collateral
Agreement or in any written statement delivered by Seller thereunder shall be
true on and as of the Closing as though such representations and warranties were
made on and as of that date. Buyers shall have received a certificate, dated
the Closing Date, signed by Seller's President certifying, in such detail as
Buyers and their counsel may reasonably request, that the representations and
warranties set out herein are true and correct as of the Closing Date.
11.2 SELLER'S PERFORMANCE. Seller shall have performed, satisfied, and complied
with all
16
<PAGE>
covenants, agreements, and conditions required by this Agreement to be
performed or complied with by Seller on or before the Closing Date.
11.3 CERTIFICATION BY SELLER. Buyers shall have received a certificate, dated
the Closing Date, signed by Seller' Presidents certifying, in such detail as
Buyer and its counsel may reasonably request, that the representations and
warranties set out herein are true and correct as of the Closing Date.
11.4 OPINION OF SELLER'S COUNSEL. Buyers shall have received from counsel for
Seller, opinions dated the Closing Date, in form and substance reasonably
satisfactory to Buyers and their counsel, stating that:
(a) Seller is a corporation duly organized, validly existing and in good
standing under the applicable laws of the jurisdiction of its
incorporation and has all necessary corporate power to own its
properties as now owned and operate its businesses as now operated;
(b) all corporate proceedings required by law or by the provisions of
this Agreement to be taken by Seller on or before the Closing Date in
connection with the execution and delivery of this Agreement and the
consummation of the Transactions have been duly and validly taken;
(c) this Agreement has been duly and validly authorized and, when executed
and delivered by Seller will be valid and binding on Seller and
enforceable in accordance with its terms, except as limited by
bankruptcy and insolvency laws and by other laws affecting the rights
of creditors generally; and
(d) neither the execution nor delivery of this Agreement nor the
consummation of the Transactions will constitute a default, or an event
that would with notice or lapse of time or both constitute a default
under, or violation or breach of Seller's articles of incorporation or
bylaws.
In rendering their opinions, counsel for Seller may rely on certificates of
governmental authorities, certificates of Seller's officers, directors or
shareholders, and on opinions of associate counsel.
11.5 ABSENCE OF LITIGATION. No action, suit or proceeding before any court or
any governmental body or authority, pertaining to the Transactions or their
consummation shall have been instituted or threatened on or before the Closing
Date.
11.6 CORPORATE APPROVAL. The execution and delivery of this Agreement by
Seller, and the performance of their covenants and obligations under it, shall
have been duly authorized by all necessary corporate action, and Buyer shall
have received copies of all resolutions pertaining to that authorization,
certified by the secretary of Seller.
11.7 CONSENTS. All necessary agreements and consents of any parties (other than
Buyers, their
17
<PAGE>
shareholders or directors, and Authorities in the United States of America)
to the consummation of the Transaction, or otherwise pertaining to the
matters covered by this Agreement, shall have been obtained.
11.8 APPROVAL OF DOCUMENTATION. The form and substance of all certificates,
instruments, opinions and other documents delivered to Buyers under this
Agreement shall be satisfactory in all reasonable respects to Buyers and their
counsel.
11.9 BULK SALES ACT. The Buyers will have been furnished with evidence
satisfactory that the sale and purchase of the Subject Assets is in compliance
with the provisions of the Bulk Sales Act (Ontario).
11.10 CONDITION OF ASSETS. The Subject Assets shall not have been materially or
adversely affected in any way as a result of any fire, accident, storm or other
casualty or labor or civil disturbance or act of God or the public enemy.
11.11 NON-COMPETITION AGREEMENT. The shareholders of Seller shall each have
duly executed and delivered to Buyers a Non-competition Agreement substantially
in the form of SCHEDULE 11.11.
11.12 RETAIL SALES TAX CERTIFICATE. Buyers shall have received, from Newco, a
retail sales tax certificate issued under the RETAIL SALES TAX ACT (Ontario).
11.13 AGREEMENT ON SCHEDULES. At the date of execution of this Agreement by the
parties, the form and content of the schedules to this Agreement had not be
settled by the parties and it is a condition precedent to Buyers' performance
under this Agreement that such schedules be settled prior to Closing.
ARTICLE 12. CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
The obligations of Seller to sell and transfer the Subject Assets under this
Agreement are subject to the satisfaction, at or before the Closing, of all the
following conditions:
12.1 ACCURACY OF BUYERS' REPRESENTATIONS AND WARRANTIES. All representations
and warranties by Buyers contained in this Agreement or in any Collateral
Agreement or in any written statement delivered by Buyers thereunder shall be
true on and as of the Closing as though such representations and warranties were
made on and as of that date. Seller shall have received a certificate, dated
the Closing Date, signed by Buyers' Presidents certifying, in such detail as
Seller and its counsel may reasonably request, that the representations and
warranties set out herein are true and correct as of the Closing Date.
12.2 BUYERS' PERFORMANCE. Buyers shall have performed and complied with all
covenants and agreements, and satisfied all conditions that it is required by
this Agreement to perform, comply with, or satisfy, before or at the Closing.
18
<PAGE>
12.3 OPINION OF BUYERS' COUNSEL. Buyers shall have furnished Seller with an
opinion from counsel for Buyers, dated the Closing Date, satisfactory to Seller
and its counsel, stating that:
(a) Buyers are corporations duly organized, validly existing and in good
standing under the laws of the State of Colorado and have all requisite
corporate power to perform their obligations under this Agreement;
(b) all corporate proceedings required by law or by the provisions of this
Agreement to be taken by Buyers on or before the Closing Date in
connection with the execution and delivery of this Agreement and the
consummation of the Transactions shall have been duly and validly
taken;
(c) this Agreement has been duly and validly authorized and, when executed
and delivered by Buyers will be valid and binding on Buyers and
enforceable in accordance with its terms, except as limited by
bankruptcy and insolvency laws and by other laws affecting the rights
of creditors generally;
(d) neither the execution nor delivery of this Agreement nor the
consummation of the Transactions will constitute a default, or an event
that would with notice or lapse of time or both constitute a default
under, or violation or breach of Buyers' articles of incorporation
or bylaws; and
(e) to the best of such counsel's knowledge, there is no legal action
pending or threatened against either of Buyers which could have a
material adverse affect on Buyers.
In rendering its opinion, counsel for Buyers may rely on certificates of
governmental authorities and on opinions of associate counsel.
12.4 BUYERS' CORPORATE APPROVAL. Buyers shall have received corporate
authorization and approval for the execution and delivery of this Agreement and
all corporate action necessary or proper to fulfill the obligations of Buyers to
be performed under this Agreement on or before the Closing Date.
12.5 AGREEMENT ON SCHEDULES. At the date of execution of this Agreement by the
parties, the form and content of the schedules to this Agreement had not be
settled by the parties and it is a condition precedent to Seller's performance
under this Agreement that such schedules be settled prior to Closing and shall
be initialled by the signing officers of the parties.
12.6 CAPITALIZATION OF BUYERS. Prior to the Closing Date, the Buyers shall have
raised and received the proceeds from a share offering of not less than
US$7,000,000.
19
<PAGE>
ARTICLE 13. SELLER'S OBLIGATIONS AFTER THE CLOSING.
13.1 PRESERVATION OF GOODWILL. Following the Closing, Seller will restrict its
activities so that Buyers' reasonable expectations with respect to the goodwill,
business reputation, employee relations and prospects connected with the Subject
Assets will not be materially impaired. In furtherance but not in limitation of
this general obligation, Seller agrees that, for the period of two (2) years
following the Closing Date, or as long as Buyers or its assigns or successors in
interest carry on a like business in the counties or areas specified, whichever
is shorter:
(a) Seller and its shareholders will not engage in an Adult Movies
Business and will execute the non-competition agreement attached as
SCHEDULE 11.11. If, in any judicial proceeding, a court shall refuse
to enforce any of the separate covenants deemed included in this
Section, then this unenforceable covenant shall be deemed eliminated
from these provisions for the purpose of those proceedings to the
extent necessary to permit the remaining separate covenants to be
enforced.
(b) Seller and its shareholders will not disclose to any person or use for
their own benefit any price lists, pricing data, customer lists or
similar matters possessed by them relating to the Subject Assets or
the business transferred to Buyer unless they first clearly demonstrate
to Buyer that such matters are at the time of the proposed disclosure
or use of common knowledge within the trade.
13.2 SELLER'S INDEMNITIES. Seller shall indemnify, defend and hold harmless
Buyers against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and reasonable attorneys' fees, that Buyers shall
incur or suffer, which arise, result from or relate to any breach of, or failure
by Seller to perform any of its representations, warranties, covenants or
agreements in this Agreement or in any schedule, certificate, exhibit or other
instrument furnished or to be furnished by Seller under this Agreement.
Notwithstanding any other provision of this Agreement, Seller shall not be
liable to Buyer on any warranty, representation or covenant made by Seller in
this Agreement, or under any of its indemnities in this Agreement, regarding any
single claim, loss, expense, obligation or other liability that does not exceed
US$2,500.00; provided, however, that when the aggregate amount of all such
claims, losses, expenses, obligations and liabilities not exceeding US$2,500.00
each reaches US$25,000.00, Seller shall thereafter be liable in full for all
such breaches and indemnities and regarding all those claims, losses, expenses,
obligations, and liabilities.
13.3 ACCESS TO RECORDS. From and after the Closing, Seller shall allow Buyers,
and its counsel, accountants and other representatives, such access to records
which after the Closing are in the custody or control of Seller as Buyers
reasonably require in order to comply with its obligations under the law or
under contracts assumed by Buyers pursuant to this Agreement.
13.4 NONSOLICITATION OF EMPLOYEES. Except with the prior written consent of
Seller, Buyers shall not, prior to the first anniversary of the Closing, solicit
any employee of Seller or of any affiliate of Seller to leave such employment if
such employee was at any time between the date hereof and the Closing an
employee of any Seller.
20
<PAGE>
13.5 RISK OF LOSS.
(a) Until the Closing Date the Subject Assets will remain at the risk
of Seller. Seller will maintain all risk insurance in respect of
loss or damage to or any other casualty in respect of the Subject
Assets which provides for loss settlement on a replacement cost
basis if the Subject Assets are repaired or replaced and on an
actual cash value basis if the Subject Assets are not repaired or
replaced. In the event of any loss, damage or claim, in respect of
any risk for which insurance is to be carried as aforesaid arising
before the Closing Date, Buyers, as an additional condition of
closing, will be entitled to be satisfied that the insurers have
accepted the claim of Seller for payment in accordance with the
terms of the policies. If any destruction or damage occurs to the
Subject Assets on or before the Closing Date or if any or all of
the Subject Assets are appropriated, expropriated or seized by
governmental or other lawful authority on or before the Closing
Date, Seller will forthwith give notice thereof to Buyers and
Buyers will have the option, exercisable by notice to Seller on or
before the Closing Date:
(i) to reduce the Purchase Price by an amount equal to the cost of
repair or, if destroyed or damaged beyond repair or if
appropriated, expropriated or seized, by an amount equal to the
replacement cost of the assets forming the part of the Subject
Assets so damaged or destroyed or appropriated, expropriated or
seized and to complete the purchase;
(ii) to complete the purchase without reduction of the Purchase Price,
in which event all proceeds of insurance or compensation for the
destruction or damage or appropriation, expropriation or seizure
will be payable to Buyers and all right and claim of Seller to
any such amounts not paid by the Closing Date will be assigned
to Buyers; or
(iii) to rescind this Agreement and not complete the purchase if,
in the opinion of Buyers, such destruction, damage,
appropriation, expropriation or seizure is material and in such
event Seller and Buyers will be released from all obligations
hereunder and the deposit referred to in SECTION 2.1(a) shall be
returned to Buyers.
(b) If Buyers elect to reduce the Purchase Price pursuant to SECTION
13.5(a)(i), Seller and Buyers will at the Closing Date determine the
amount of the reduction to the extent that it is then determinable and
will undertake to adjust such amount after the Closing Date, if
necessary.
ARTICLE 14. COSTS
14.1 FINDER'S OR BROKER'S FEES. Each party shall be responsible for its on
costs or for any
21
<PAGE>
commission or finder's fee incurred on behalf of that party in connection
with the Transactions.
14.2 EXPENSES. Each of the parties shall pay all costs and expenses, including,
but not limited to attorneys' fees, incurred or to be incurred by it in
negotiating and preparing this Agreement and in closing and carrying the
Transactions.
ARTICLE 15. FORM OF AGREEMENT
15.1 HEADINGS. The subject headings of the Articles and Sections of this
Agreement are included for purposes of convenience only and shall not affect the
construction or interpretation of any of its provisions.
15.2 ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes the
entire agreement between the parties pertaining to the subject matter contained
in it and supersedes all prior and contemporaneous agreements, representations,
and understandings of the parties. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by all the parties.
No waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not similar, nor shall
any waiver constitute a continuing waiver. No waiver shall be binding unless
executed in writing by the party making the waiver.
15.3 COUNTERPARTS. This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
ARTICLE 16. PARTIES
16.1 PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and permitted assigns, nor is anything in this Agreement intended to
relieve or discharge the obligation or liability of any third persons to any
party to this Agreement, nor shall any provision give any third persons any
right of subrogation or action over against any party to this Agreement.
16.2 ASSIGNMENT. No party can assign this Agreement without the express written
consent of the other parties. This Agreement shall be binding on and shall
inure to the benefit of the parties to it and their respective heirs or legal
representatives, and their respective successors and permitted assigns.
ARTICLE 17. REMEDIES
17.1 RECOVERY OF LITIGATION COSTS. If any legal action or any arbitration or
other proceeding is
22
<PAGE>
brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to
which it or they may be entitled.
17.2 CONDITIONS PERMITTING TERMINATION. Subject to the provisions of ARTICLE 3
relating to the postponement of the Closing Date, either party may on the
Closing Date terminate this Agreement by written notice to the other, without
liability to the other, if any bona fide action or proceeding shall be pending
against either party on the Closing Date that could result in a materially
adverse judgment, decree or order that would prevent or make unlawful the
carrying out of this Agreement.
17.3 DEFAULTS PERMITTING TERMINATION. If a Buyer or Seller materially defaults
in the due and timely performance of any of its material warranties, covenants,
or agreements under this Agreement, the non-defaulting party or parties may on
the Closing Date give notice of termination of this Agreement, in the manner
provided in ARTICLE 19. The notice shall specify with particularity the default
or defaults on which the notice is based. The termination shall be on the first
to occur of the 10th day after such notice or the Closing Date, unless the
specified default or defaults have been cured by such time.
ARTICLE 18. NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations, warranties, covenants and agreements of the parties
contained in this Agreement, or in any instrument, certificate, opinion or other
writing provided for in it, shall survive the Closing.
ARTICLE 19. NOTICES
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given on the date of
service if served personally on the party to whom notice is to be given, or on
the third day after mailing if mailed to the party to whom notice is to be
given, by first class mail registered or certified, postage prepaid, and
properly addressed as follows:
Seller: Douglas Duncan
2500 Don Reid Drive
Ontario, Canada
K1H 8P5
Stuart Duncan
2500 Don Reid Drive
23
<PAGE>
Ontario, Canada
K1H 8P5
Daniel Bender
27357 Valley Center Road
Valley Center, California
92082
with copy to: Jamie Wyllie, Esq.
Yegendorf, Brazeau, Seller, Prehogan & Wyllie
55 Metcalfe Street, Suite 750
Ontario, Canada
K1H 6L5
Buyers: New Frontier Media, Inc.
1050 Walnut Street, Suite 301
Boulder, CO 80302
Attn.: Mark H. Kreloff
with copy to: The Law Office of Mark L. Driver, P.C.
3300 East First Ave. Suite 600
Denver, CO 80206
Attn.: Mark L. Driver
Any party may change its address for purposes of this Article by giving the
other parties written notice of the new address in the manner set forth above.
ARTICLE 20. GOVERNING LAW
This Agreement shall be construed in accordance with, and governed by, the laws
of the State of Colorado.
ARTICLE 21. MISCELLANEOUS
21.1 ANNOUNCEMENTS. Seller will not make any announcements to the public
concerning this Agreement or the Transactions without the prior approval of
Buyers, which will not be unreasonably withheld. Notwithstanding any failure of
Buyers to approve it, Seller may make an announcement of substantially the same
information as therefore announced to the public by Buyers, or any announcement
required by applicable law, but Seller shall in either case notify Buyers of the
contents thereof reasonably promptly in advance of its issuance.
24
<PAGE>
21.2 REFERENCES. Unless otherwise specified, references to Sections or Articles
are to sections or articles in this Agreement.
IN WlTNESS WHEREOF, the parties to this Agreement have duly executed it as of
the day and year first above written.
BUYERS: New Frontier Media, Inc.
By: /s/ ILLEGIBLE SIGNATURE
----------------------------------
Its: President
---------------------------------
Colorado Satellite Broadcasting, Inc.
By: /s/ ILLEGIBLE SIGNATURE
----------------------------------
Its: President
---------------------------------
SELLER: 1248663 Ontario Inc.
By: /s/ ILLEGIBLE SIGNATURE
----------------------------------
Its authorized signing officer
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the New Frontier Media, Inc. registration
statement on Form SB-2 of our report dated July 3, 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.
September ____, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENT CONTAINED IN FILER'S REGISTRATION STATEMENT ON
FORM SB-2 DATED SEPTEMBER 10, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997 MAR-31-1997
<PERIOD-END> MAR-31-1996 MAR-31-1997 JUN-30-1997
<CASH> 48,523 859,387 655,281
<SECURITIES> 0 0 0
<RECEIVABLES> 222,276 212,370 84,514
<ALLOWANCES> 0 0 0
<INVENTORY> 354,089 659,503 753,211
<CURRENT-ASSETS> 860,878 1,881,735 1,670,875
<PP&E> 39,314 65,552 81,931
<DEPRECIATION> (10,479) (22,661) (26,264)
<TOTAL-ASSETS> 1,017,349 2,186,471 1,967,986
<CURRENT-LIABILITIES> 341,877 657,330 656,359
<BONDS> 0 0 0
0 0 0
1,000 1,500 1,500
<COMMON> 418 419 419
<OTHER-SE> 847,832 1,768,661 1,779,018
<TOTAL-LIABILITY-AND-EQUITY> 1,017,349 2,186,471 1,967,986
<SALES> 2,565,671 2,515,802 479,330
<TOTAL-REVENUES> 2,565,671 2,515,802 479,330
<CGS> 1,843,765 2,217,812 451,783
<TOTAL-COSTS> 782,345 931,342 277,112
<OTHER-EXPENSES> 102,441 164,802 22,582
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (15,561) 10,543 1,190
<INCOME-PRETAX> 5,277 (386,030) (203,985)
<INCOME-TAX> (12,147) 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (6,870) (386,030) (203,985)
<EPS-PRIMARY> (.01) (.09) (.05)
<EPS-DILUTED> (.01) (.09) (.05)
</TABLE>
