<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998.
REGISTRATION NO. 333-_____.
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)
<TABLE>
<S> <C> <C>
COLORADO 5190 84-1084061
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
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:
HANK GRACIN, ESQ.
Lehman & Eilen
50 Charles Lindbergh Blvd.
Uniondale, New York 11553
Telephone: (516) 222-0888
Facsimile: (516) 222-0948
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: /X/
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. / /
<PAGE>
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 this Form is a post-effective amendment filed pursuant to Rule
462(d) 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. / /
-----------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title Of Each Maximum Proposed Maximum
Class Of Amount Aggregate Aggregate Amount Of
Securities To To Be Price Per Offering Registration
Be Registered Registered Share (1) Price (1) Fee (5)
- ------------- ---------- --------- --------- -------
<S> <C> <C> <C> <C>
Common Stock,
$.0001 par value (2) 1,280,293 $3.5625 $4,561,043.81 $1,345.51
Common Stock,
$.0001 par value (3) 175,000 $3.5625 $ 623,437.50 $ 183.91
Common Stock,
$.0001 par value 50,000 $3.5625 $ 178,125.00 $ 52.55
Total 1,505,293 $3.5625 $5,362,606.31 $1,581.97
<FN>
- --------------
(1) Estimated solely for the purpose of calculating the registration fee. The
Proposed Maximum Aggregate Offering Price was calculated pursuant to Rule 457(c)
under the Securities Act of 1933, as amended, on the basis of the closing price
reported in the NASDAQ SmallCap Market system on July 9,1998.
(2) Issuable upon the conversion of the 8% Convertible Debentures (the
"Debentures"), which is estimated based on conversion terms of the Debentures
and is subject to adjustment and could be materially more or less than such
estimated amount depending upon factors that cannot be predicted by the Company
at this time, including, among others, the future market price of the Common
Stock. This is not intended to constitute a prediction as to the number of
shares of Common Stock into which the Debentures will be converted.
(3) Issuable upon exercise of warrants evidencing the right to purchase shares
of Common Stock.
</FN>
</TABLE>
-----------
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 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, may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 17, 1998 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.
PROSPECTUS
1,505,293 SHARES
NEW FRONTIER MEDIA, INC.
The shares of Common Stock ("Common Stock") offered hereby are offered
by the holders of 8% Convertible Debentures (the "Debentures") of New Frontier
Media, Inc. (the "Company"), the holders of warrants to purchase 175,000 shares
of the Company's Common Stock (the "Warrants") and the holder of 50,000
restricted shares of the Company's Common Stock (the "Restricted Shares").
Except for the Restricted Shares, the shares of Common Stock so offered are
issuable upon the conversion of the Debentures. See "Selling Securityholders."
The Common Stock is currently quoted on the under the symbol "NOOF." On July 9,
1998, the closing price on the Nasdaq SmallCap Market of the Common Stock was
$3.5625 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
THIS PROSPECTUS RELATES TO AN AGGREGATE OF 1,505,293 SHARES OF COMMON STOCK,
$.0001 PAR VALUE PER SHARE, WHICH IS BASED ON THE SHARES ISSUABLE IF $3,500,000
PRINCIPAL AMOUNT OF DEBENTURES HAD BEEN OUTSTANDING ON JULY 9, 1998 AND ALL THE
DEBENTURES HAD BEEN CONVERTED ON THAT DATE AT AN 10% DISCOUNT TO THE MARKET
PRICE (AS DEFINED IN THE DEBENTURES) OF THE COMMON STOCK. SEE "SELLING
SECURITYHOLDERS." THE EXACT NUMBER OF SHARES THAT WILL BE ISSUED ON THE
CONVERSION OF THE DEBENTURES WILL DEPEND ON THE MARKET PRICE OF THE COMMON STOCK
ON THE DATE OF CONVERSION) AND IS NOT NOW KNOWN. SEE "DESCRIPTION OF SECURITIES
- - 8% CONVERTIBLE DEBENTURES." ALL THE COMMON STOCK OFFERED HEREBY IS BEING SOLD
BY THE SELLING SECURITYHOLDERS AND MAY BE OFFERED TO THE PUBLIC FROM TIME TO
TIME BY THE SELLING SECURITYHOLDERS. THE COMPANY WILL NOT RECEIVE ANY OF THE
PROCEEDS RECEIVED BY THE SELLING SECURITYHOLDERS FROM THE COMMON STOCK SOLD.
THE COMPANY WILL PAY ALL REASONABLE EXPENSES OF THIS OFFERING ESTIMATED AT
$40,000. THE SELLING SECURITYHOLDERS, HOWEVER, WILL BEAR THE COST OF ALL
BROKERAGE COMMISSIONS AND DISCOUNTS INCURRED IN CONNECTION WITH THE SALE OF
THEIR COMMON STOCK. THE COMMON STOCK MAY BE SOLD BY THE SELLING SECURITYHOLDERS
DIRECTLY OR THROUGH UNDERWRITERS, DEALERS OR AGENTS IN MARKET TRANSACTIONS OR
PRIVATELY NEGOTIATED TRANSACTIONS. SEE "SELLING SECURITYHOLDERS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<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. 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."
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
On February 18, 1998, pursuant to Asset Purchase Agreements with 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"), simultaneous with
the closing of the Company's secondary public offering, the Company acquired the
adult satellite television business of Fifth Dimension, a leading provider of
subscriber-based premium television channels and transaction-based television
networks.
The Company, through its Colorado Satellite Broadcasting, Inc. ("CSB")
subsidiary, and by reason of its consummation of its Asset Purchase Agreements
with Fifth Dimension, is a leading provider of subscriber-based premium
television channels and transaction-based ("pay-per-view") television networks.
CSB currently owns, operates, and distributes the three leading C-band adult
programming networks: Extasy, True Blue, and Exotica (collectively referred to
hereinafter as the "Extasy Networks"). CSB, through the Extasy Networks, is a
leading provider of unedited adult programming via direct to home ("DTH") C-band
satellite. To a lesser extent, CSB provides its services through cable
television and wireless cable television multiple system operators ("MSOs") and
Ku-band (small dish or digital satellite) satellite providers. As of March 31,
1998, the Extasy Networks were available to an estimated 2.0 million C-band DTH
subscribers, and approximately 100,000 cable television subscribers. The Extasy
Networks have maintain distribution agreements with nearly every major
distributor of C-band satellite programming in the United States.
Extasy, True Blue, and Exotica each feature approximately 36 movie
titles per week, or 100 to 150 movies each month, with at least 15 first-time
exhibitions per month. All channels are available 24 hours per day, featuring a
mix of standard industry format 90 minute feature films and special 30-minute
and 60-minute features and interviews. Staggered movie start times occur three
times daily, allowing for maximum viewing flexibility. Currently, the Extasy
Networks deliver unedited adult programming exclusively.
On August 15, 1998, CSB plans to launch TeN: The Erotic Network, a new,
24-hour adult network targeted specifically to cable television systems and
medium to high-powered satellite service providers ("DBS"). CSB plans to
position TeN as cable television's and DBS satellites' alternative to the
traditional fully edited adult movie services offered by Playboy and Spice. In
order to further increase the attractiveness and initial market share of TeN,
CSB is offering extremely competitive revenue sharing terms to those cable and
satellite distribution affiliates who agree to carry the service.
Based on the recent developments described below, Management believes
that CSB has an unique opportunity to successfully launch a new adult network
exclusively programmed with adult films and videos that mirror the editing
standards of Spice Hot, a more liberally programmed sister network of Spice.
* Playboy's recent $100 million acquisition of Spice, Inc. (at a
valuation of 4.5 times trailing 1997 revenue of $22 million), which
effectively reduces the cable and DBS adult network industry to a
single player;
* Playboy's corporate policy to offer only fully edited adult
programming on its networks;
* the quality and number of cable operators now willing to carry
partially edited, more explicit services and the momentum toward
broader market acceptance of unedited and partially edited adult
programming by cable system operators and their subscribers;
* the recent success of Spice Hot, a partially edited, more explicit
version of Spice Channel in terms of the buy rates it has achieved (3
to 4 times greater than fully edited adult programming); and
* the Company's success in head-to-head competition with Spice in
C-Band satellite.
2
<PAGE>
THE OFFERING
Common Stock Offered ............. 1,505,293 shares (based upon the
1,280,293 shares issuable upon the
conversion of 8% Convertible
Debentures, based on 90% of the Market
Price (as defined in the
Debentures) of $3.03750 per share on
July 9, 1998), 175,000 shares issuable
upon exercise of the Warrants and 50,000
shares held by a Selling Securityholder
Common Stock Outstanding
Prior to Offering ................ 6,542,000 shares
Common Stock to be Outstanding
Immediately After Offering ....... 7,997,293 shares based on all
shares offered under this Prospectus
Use of Proceeds .................. None of the proceeds of the sale of
the Common Stock registered
hereunder will accrue to the
Company. See "Use of Proceeds."
Risk Factors ..................... The Securities offered hereby involve
a high degree of risk. Investors should
purchase the securities offered hereby only
if they can afford the loss of their entire
investment.
NASD SmallCap Market Symbol ...... "NOOF"
The Company was incorporated under the laws of the State of Colorado on
February 23, 1988, under the name "Strategic Acquisitions Inc.". The Company
changed its name to "New Frontier Media, Inc." on September 15, 1995. Its
executive offices are located at 1050 Walnut Street, Suite 301, Boulder,
Colorado 80302 and its telephone numbers is (303) 444-0632.
CURRENT FINANCING
In June 1998, pursuant to a private placement, the Company (a) sold to two
investors $1,750,000 principal amount of 8% Convertible Debentures (the
"Debentures") and (b) received a commitment from the investors, subject to
various conditions, to purchase additional Debentures in the aggregate principal
amount of $1,750,000. The investor may convert the Debentures into Common Stock
(the "Conversion Shares"). In connection with such private placement, the
Company issued warrants to purchase up to 175,000 shares of its Common Stock
(the "Warrant Shares"). The Conversion Shares, Warrant Shares and 50,000
currently issued and outstanding Restricted Shares of Common Stock constitute
the Selling Securityholders' Common Stock being offered and sold by the Selling
Securityholders pursuant to this Prospectus. See "Description of Securities,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Selling Securityholders and
Plan of Distribution."
3
<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 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.
LIMITED OPERATING HISTORY; LOSSES FROM INCEPTION; SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT
The Company was organized in July, 1995 and has incurred losses from
inception. The Company incurred a net loss of $3,258,343, or $.73 per share, on
revenues of $1,645,192 for the fiscal year ended March 31, 1998 and a net loss
of $386,030, or $.09 per share, on revenues of $2,515,802 for the fiscal year
ended March 31, 1997. As of March 31, 1998 the Company had an accumulated
deficit of $3,818,151. See "FINANCIAL STATEMENTS." 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. The ability of the Company to operate profitably is dependent upon
successful execution of the business plans of each of its subsidiaries. See
"BUSINESS." The Company is in the early operational stage 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. See "BUSINESS" and "FINANCIAL
STATEMENTS."
PURCHASE OF FIFTH DIMENSION ASSETS; NO EXPERIENCE IN SATELLITE BROADCASTING
BUSINESS
On February 18, 1998, the Company, through its subsidiary CSB, acquired
certain assets related to the adult satellite network broadcasting business of
Fifth Dimension. The Company has had no prior experience in the satellite
broadcasting business. There can be no assurance given that the Company will be
successful in managing the assets acquired from Fifth Dimension.
PROVISION OF ADULT CONTENT
The Company, through its subsidiary CSB, is engaged in the business of
providing partially edited and unedited adult programming. Certain investors,
investment banking entities, market makers, lenders and others in the investment
community may decline to participate in the Company's public market, finance or
other activities due to the nature of the Company's business, which, in turn,
may negatively impact the value of the Company's stock, and its opportunities to
attract market support. See "BUSINESS."
RELIANCE ON FIFTH DIMENSION
As part of the Fifth Dimension Assets Acquisition, the Company and Fifth
Dimension entered into an Uplink Management Services Agreement ("UMSA"). Under
the UMSA, Fifth Dimension operates, maintains and manages the Company's uplink
and playback facility which is capable of providing continual uninterrupted
services for CSB's networks of a substantially similar nature and quality as
those services currently being provided by Fifth Dimension to its current
subscribers. Should Fifth Dimension fail to provide the services contracted for
under the UMSA, or otherwise improperly manage the Uplink Facility, such actions
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 that Fifth Dimension fail to perform
as required under the UMSA, CSB's operations would in all likelihood be
suspended, resulting in loss of substantial revenues to the Company. See
"BUSINESS-Fifth Dimension Assets Acquisition."
4
<PAGE>
SATELLITE SERVICE AGREEMENTS; REFUSAL OF SERVICE OR TERMINATION OF
AGREEMENTS
The Company currently provides its satellite programming to subscribers
via a sublease with Fifth Dimension under its satellite transponder agreements
with Loral SpaceCom Corporation d/b/a Loral Skynet (the "transponder
agreement"). The transponder agreement runs for a period of five years from the
date the Telstar 5 satellite was placed in service (approximately June, 1997).
The transponder agreement provides for a subsequent five-year extension.
The transponder agreement contains provisions that allow Loral Skynet to
refuse to provide its transponder service on Telstar 5 if the material being
transmitted is deemed harmful to the service provider's name or business, or if
the Company is indicted or is otherwise charged as a defendant in a criminal
proceeding, or is convicted under any obscenity law, or has been found by any
governmental authority to have violated such law. Fifth Dimension has operated
its unedited adult 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 agreement, is subject to arbitrary
refusal of service by 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. Although the Company believes that the risk of any
disruption in service on that basis to be remote, at best, any such service
disruption would substantially and adversely affect the financial condition of
the Company. See "BUSINESS."
RELUCTANCE OF SOME CABLE COMPANIES TO CARRY UNEDITED OR PARTIALLY EDITED
ADULT PROGRAMMING
The Company believes that Fifth Dimension had been not able to
successfully expand its base of distribution, for two principal reasons: (1)
C-Band (large dish) satellite system sales have plateaued, and small dish
systems are beginning to dominate the market; and (2) some cable system
operators have, to date, been reluctant to carry unedited or partially edited
adult programming on their systems. Most major cable and small-dish systems
carry fully edited adult programming, such as the Playboy Channel, and the
Company believes that the SPICE HOT network's partially edited programming is
available to approximately 4.5 million addressable small dish and cable
television subscribers. The Company believes that by reason of its contacts in
the cable industry (as well as the success of SPICE HOT's partially edited
programming) it may be more successful than Fifth Dimension has been in
convincing cable operators to carry its programming. In this regard, on August
15, 1998, CSB plans to launch TeN: The Erotic Network, a new, 24-hour adult
network targeted specifically to cable television systems and small dish
satellite service providers ("DBS"). CSB plans to position TeN (a partially
edited adult programming service) as cable television's and DBS satellites'
alternative to the traditional fully edited adult movie services offered by
Playboy and Spice. In order to further increase the attractiveness and initial
market share of TeN, CSB is offering extremely competitive revenue sharing terms
to those cable and satellite distribution affiliates who agree to carry the
service. There can be no assurance that the Company will be able to expand on
the current Fifth Dimension programming base by convincing cable and small-dish
operators to carry one or more unedited explicit networks or by establishing TeN
as a viable alternative to the Playboy Channel. See "BUSINESS."
GOVERNMENT REGULATION-GENERAL
By virtue of the Fifth Dimension Assets Acquisition, the Company, through
its wholly owned subsidiary CSB, has become a leading provider of unedited and
partially edited adult programming via direct-to-home C-band satellites. As
disclosed above, CSB intends to expand its C-band subscriber base, market its
programming to multiple-system operators and small dish satellite providers and
launch a new partially edited network, TeN, that mirrors the editing standards
of Spice Hot, to compete with the Playboy Channel and Spice. During the 1980s,
the availability of adult movies on videocassette and on cable television helped
to legitimize the consumption of adult material by putting it in the home
setting. The result, in the opinion of Management, has been the legitimization
of adult 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 (pay-per-view adult programming), 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.
On the other hand, Federal and state governments, along with various
religious and children's advocacy groups, have in the past been able to propose
and pass legislation aimed at restricting provision of, access to, and content
of "adult entertainment." These groups also have filed lawsuits against
providers of adult entertainment, encouraged boycotts against such providers and
mounted negative publicity campaigns against companies whose businesses involve
adult entertainment. There can be no assurance given that the Company will not
be subjected to such adverse publicity, litigation and legislation, although the
believes that the likelihood that such actions could occur to be remote.
Nonetheless, the Company may incur substantial costs defending themselves
against such actions, which may negatively impact the Company's finances.
Negative publicity, boycotts and litigation could also discourage institutional
and other investors from investing in the Company, to the detriment of the
Company's shareholders. 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 unedited programming provided by
the Company through CSB may cause the service providers to refuse to provide
service under the terms of the transponder agreements, the Company, however,
believes that the likelihood that such refusal could occur to be remote, at
best. See "BUSINESS-Overview-Adult Entertainment Industry and -The Company's
Adult Programming Networks."
5
<PAGE>
Recently, federal and state government officials have targeted "sin
industries," such as tobacco, alcohol, and adult entertainment for special tax
treatment and legislation. In 1996, Congress passed the Communications Decency
Act of 1996 (the "CDA"). Section 505 of the CDA required full audio and video
scrambling. If the multi-channel video program distributor (including cable
system operators) could not comply with the full scrambling requirement, it was
prohibited from carrying sexually explicit programming between the hours of 6:00
a.m. and 10:00 p.m. Recently, the U.S. Supreme Court, in ACLU v. Reno, held
certain substantive provisions of the CDA unconstitutional. Businesses in the
adult entertainment and programming industries expended millions of dollars in
legal and other fees in overturning the CDA. Investors in this Offering should
understand that the adult entertainment industry may 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-Overview-Adult
Entertainment Industry and -The Company's Adult Programming Networks."
GOVERNMENT REGULATION-ADULT PROGRAMMING
CSB's unedited and partially edited adult programming directly competes
with the partially edited adult programming broadcast by Spice Hot and the fully
edited programming broadcast by Playboy Channel and Spice. On August 15, 1998,
CSB plans to launch TeN: The Erotic Network, a new, 24-hour adult network
targeted specifically to cable television systems and small dish satellite
service providers. CSB plans to position TeN as cable television's and small
dish satellites' alternative to the traditional fully edited adult movie
services offered by Playboy and Spice. In 1996, the United States Congress
passed the Telecommunications Act of 1996 (for this paragraph only, the "Act"),
a comprehensive overhaul of the Federal Communications Act of 1934. Section 641
of the Act requires full audio and video scrambling of channels which are
primarily dedicated to "sexually explicit" programming. Both fully edited
programming providers (such as Playboy) and partially edited or unedited
programming providers (such as Spice and CSB's Extasy Networks) feature
"sexually explicit" programming within the contemplation of Section 641 of the
Act. 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. Although all adult
programming companies fully scramble their signals for security purposes,
several cable television multiple-system operators ("MSOs") lack the technical
capability to fully scramble the audio portion of the signal. These cable
systems would be required to block adult broadcasts between 6:00 a.m. and 10:00
p.m. Both Spice 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. Compliance with the Act
therefore could have a material adverse effect on the Company's business and
operating results. See "BUSINESS."
ADDITIONAL FINANCING MAY BE REQUIRED
The Company anticipates that its capital resources will be sufficient to
satisfy its capital requirements for at least the next twelve months. There can
be no assurance, however, that the Company's cash requirements during this
period will not exceed its available resources. The Company's future capital
requirements will depend on many factors, including the Company's ability to
operate its subsidiaries successfully, as well as market developments and cash
flow from operations. In the event that the Company's capital resources and cash
generated from operations are insufficient to fund the Company's activities, the
Company will be required to raise additional funds through bank or other
borrowings, or equity or debt financings. There can be no assurance that
additional financing, if required, will be available at all or in amounts or on
terms acceptable to the Company. In addition, any equity financing could result
in dilution to the Company's existing stockholders. Failure to obtain additional
working capital in a timely manner or on acceptable terms could have a material
adverse effect on the Company, its operations, financial results and prospects
and could cause the Company to amend or delay its expansion plans. See
"BUSINESS" and the Financial Statements of the Company included elsewhere
herein.
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."
6
<PAGE>
COLORADO SATELLITE BROADCASTING, INC.
The market for adult premium channel and pay-per-view programming is
divided into two separate and distinct types of programming: unedited adult
programming networks, and partially or fully edited programming networks.
Unedited and partially edited adult programming, like that offered by the Extasy
Networks, TeN and Spice, consists of movies and other programming that contains
sexually explicit film and video. Fully edited adult programming, like that
offered by Playboy, is edited so as to remove most of the explicit elements
which make up a typical adult film. Fully edited programming, while generally
not rated by the Motion Picture Association of America, would receive an "R" or
"NC-17" rating if submitted for review.
The Company also faces general competition from other forms of non-adult
entertainment, including sporting and cultural events, television, feature
films, and other programming. In addition, the Company will face competition in
the adult entertainment arena from other providers of adult programming, adult
video rentals and sales, adult film theaters, newspapers and magazines aimed at
adult consumers, telephone talk lines ("telephone sex" services), and
adult-oriented Internet services.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the
contributions of its executive officers and its other key technical personnel,
and upon its ability to continue to attract and retain highly talented
personnel. Competition for such personnel, particularly software development
technical personnel (as utilized and relied upon by Inroads) is intense. The
Company currently has only one employment agreement, with Andrew Brandt, in
effect, and only Mr. Brandt is subject to a noncompetition agreement. The loss
of the services of any of its executive officers or other key personnel could
have a material adverse effect on the Company's business and operating results,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. See "BUSINESS" and "MANAGEMENT."
EFFECT OF DEBENTURE CONVERSION
Upon conversion of the Debentures and exercise of the Warrants there will
be not less than 7,997,293 shares of Common Stock outstanding, consisting of
6,542,000 shares currently outstanding and an estimated 1,280,293 shares (and
potentially substantially more depending upon the Market Price at the time of
conversion) issuable upon conversion by the Debentures and 175,000 shares
issuable upon exercise of the Warrants available for offer by the Selling
Securityholders, which shares will be tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), as long as the Prospectus covering such sales remains current and
effective. No prediction can be made as to the effect, if any, that future sales
of shares of Common Stock, whether offered by the Selling Securityholders or
others, will have on the market price of the shares of Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock, or the
perception that these sales could occur, could adversely affect prevailing
market prices for the Common Stock and could impair the ability of the Company
to raise additional capital through the sale of its equity securities or through
debt financing. See "Market for Common Equity and Related Stockholder Matters."
LEGAL PROCEEDINGS
On November 11, 1996, the Company entered into a financial consulting
agreement (the "Sands Agreement"), with Sands Brothers & Co., Ltd. ("Sands
Brothers"), a broker-dealer headquartered in New York City under which Sands
Brothers agreed to provide financial advisory services to the Company. The Sands
Agreement also contained a provision granting Sands Brothers the exclusive right
to underwrite or place any private or public financing undertaken by the Company
during the two-year term of the Sands Agreement.
On May 20, 1997, the Company terminated the Sands Agreement based, among
other things, on the Company's allegation of non-performance on the part of
Sands Brothers. On September 26, 1997, counsel for Sands Brothers sent a letter
to Mark Kreloff, the Company's President, alleging that the Sands Agreement was
still in force, alleging breach of the Sands Agreement by the Company and
demanding that the Company comply with its terms.
On October 3, 1997, the Company filed a Complaint in District Court in
Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers, alleging breach
of the terms of the Sands Agreement by Sands Brothers. The Company also alleged
fraud in the inducement, and is seeking return of its initial payment of $25,000
to Sands Brothers and rescission of the Sands Agreement. Sands Brothers has
filed an answer and counter-claim to the Company's complaint, and the Company
has filed an answer to Sands Brothers counter-claim. The Company intends to
vigorously pursue its claim against Sands Brothers and believes that Sands
Brothers' counter-claim against the Company is wholly without merit.
7
<PAGE>
CONTROL BY PRINCIPALS OF THE COMPANY
The Company's executive officers, directors, and their affiliates
beneficially own 2,331,400 restricted Common Shares of the Company. This
represents approximately 35.64% of the 6,542,000 Common Shares issued and
outstanding. 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."
CONTINUED NASDAQ LISTING; POTENTIAL ADVERSE EFFECTS OF DELISTING
There can be no assurance that the Company will be able to maintain the
standards for continued listing of the Common Stock on The Nasdaq SmallCap
Market. Delisting of the Common Stock would adversely affect the price of the
Common Stock and the ability of holders to sell their shares. In addition, in
order to be relisted on Nasdaq, the Company would be required to comply with the
initial listing requirements, which are substantially more onerous than the
maintenance standards.
If the Company were unable to satisfy the maintenance requirements for
continued listing on the Nasdaq SmallCap Market and the share price for Common
Stock were to remain below $5.00 per share, unless the Company satisfies certain
asset or revenue tests (at least $5,000,000 in net tangible assets if in
business less than three years, at least $2,000,000 in net tangible assets if in
business at least three years, or average revenues of at least $6,000,000 for
the last three years), the Common Stock would become subject to the so-called
"penny stock" rules promulgated by the Securities and Exchange Commission (the
"Commission"). Under the penny stock rules, a broker or dealer selling penny
stock to anyone other than an established customer or "accredited investor"
(generally, an individual with net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with his or her spouse) must
make a special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the broker
or dealer or the transaction otherwise is exempt. In addition, the penny stock
rules require the broker or dealer to deliver, prior to any transaction, a
disclosure schedule prepared by the Commission relating to the penny stock
market, unless the broker or dealer or the transaction otherwise is exempt. A
broker or dealer also is required to disclose commissions payable thereto and to
the registered representative and current quotations for the securities. In
addition, a broker or dealer is required to send monthly statements disclosing
recent price information with respect to the penny stock held in a customer's
account and information with respect to the limited market in penny stocks.
These additional sales practice and disclosure requirements could adversely
effect the level of trading activity in the secondary market and could impede
the sale of the Company's Common Stock in that market, with a concomitant
adverse effect on the price of the Common Stock in the secondary market.
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES.
Future sales of shares of Common Stock by the Company and its
stockholders could adversely affect the prevailing market price of the Common
Stock. There are currently 840,000 restricted shares and 5,702,000 shares of
Common Stock which are freely tradeable or eligible to have the restrictive
legend removed pursuant to Rule 144(k) promulgated under the Securities Act. Of
the 840,000 restricted shares, none of such shares are currently eligible for
resale under Rule 144. Of the restricted and Rule 144(k) shares, 1,856,400
shares held by certain of the Company's officers and directors are subject to
certain lock-up agreements through February 18, 1999. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
may occur, could have a material adverse effect on the market price of the
Common Stock. Pursuant to its Certificate of Incorporation, the Company has the
authority to issue additional shares of Common Stock and Preferred Stock. The
issuance of such shares could result in the dilution of the voting power of
Common Stock purchased in this Offering. See "Description of Securities,"
"Shares Eligible for Future Sale," and "Principal Shareholders."
DILUTION TO SHAREHOLDERS BY ISSUANCE OF PREFERRED SHARES
The Company's Articles of Incorporation and First Amended and Restated
Bylaws provide that the Company may issue shares of Preferred Stock without
approval of the Company's shareholders. The terms and preferences of any class
of Preferred Stock, including conversion of Preferred Shares into shares of the
Company's common stock and preferred rights to the assets of the Company upon
liquidation, may be determined by the Company's Board of Directors. Such terms
and preferences may result in more shares of the Company's common stock being
issued, which would have a dilutive effect on any common shares or warrants not
protected by anti-dilution provisions. Such terms and preferences may otherwise
adversely affect holders of the Company's common stock. See "DESCRIPTION OF
SECURITIES."
8
<PAGE>
RAPID TECHNOLOGICAL CHANGE
CSB and DaViD are engaged in businesses (satellite programming and
digital versatile disc content) that have experienced tremendous technological
change over the past two 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." In addition, DaViD has
invested heavily in DVD technology, which technology is relatively new, and, as
such, has yet to gain broad market acceptance. In the event, and to the extent,
DVD technology does not gain broad acceptance in the consumer marketplace,
DaViD's operations will be materially and adversely affected. No assurance can
be given if and when DVD technology will gain such market acceptance. 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.
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 trading price for the Common Stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
the Company's quarterly operating results, general conditions in the adult
entertainment industry or the general economy, and other factors. In addition,
the stock market is subject to price and volume fluctuations affecting the
market price for public companies generally, or within broad industry groups,
which fluctuations may be unrelated to the operating results or other
circumstances of a particular company. Such fluctuations may adversely affect
the liquidity of the Common Stock, as well as the price that holders may achieve
for their shares upon any future sale.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to February 11, 1998, a limited public market for the Company's
Common Stock existed on the NASDAQ Bulletin Board under the symbol NOOF.
Commencing on February 11, 1998, the Company's Common Stock and Units (each
consisting of one share of Common Stock and one redeemable common stock purchase
warrant) were quoted on the Nasdaq SmallCap Market under the symbols NOOF and
NOOFU, respectively. As of the close of business on May 18, 1998, the Company
split the Units into their component parts. Commencing on May 19, 1998, the
Company's warrants were quoted on the Nasdaq SmallCap Market under the symbol
NOOFW.
The following table sets forth the range of high and low close prices for
the Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
Quarter Ended High Low
------------- ----- -----
September 30, 1997 5 1/2 5
December 31, 1997 5 3/4 4 3/4
March 31, 1998 5 1/4 2 7/8
June 30, 1998 4 1/4 2 7/8
As of June 30, 1998, there were approximately 200 record holders of the
Company's Common Stock.
9
<PAGE>
REGISTRATION RIGHTS
In connection with the Company's private placement of $1,750,000 principal
amount of 8% Convertible Debentures on June 3, 1998, the Company is obligated to
use its best efforts to cause this registration statement to become effective by
October 1, 1998 and to keep the registration statement effective for two years
or until the Selling Securityholders may sell all registerable securities under
Rule 144 or until the Selling Securityholders no longer own any registerable
securities, whichever occurs first. The Company is further obligated to register
and qualify the registerable shares under such state securities laws as the
Selling Securityholders may request subject to specified limitations. The
Company will bear the reasonable expenses of the registration and qualification
of the shares under the Securities Act and state securities laws other than any
underwriting discounts and commissions and the expenses of counsel for the
Selling Securityholders.
If the Registration Statement is not effective by October 1, 1998 (the
"Initial Date"), then the Company must make payments to the Selling
Securityholders in such amounts and at such times as determined pursuant to
Section 2(c) of the Registration Rights Agreement, which states that the amount
to be paid by the Company to the Selling Securityholder shall be determined as
of each Computation Date, and such amount shall be equal to two percent (2%) of
the purchase price paid by the Selling Securityholder for the Debenture for the
period from the Initial Date to the first Computation Date, and three and
one-half percent (3 1/2%) of the purchase price for each Computation Date
thereafter, to the date the Registration Statement is declared effective by the
SEC, except to the extent any delay in the effectiveness of the Registration
Statement occurs because of an act of, or a failure to act or to act timely, by
the Selling Securityholder or its counsel. "Computation Date" means the date
which is the earlier of (a) five days after the Company is notified by the SEC
that the Registration Statement may be declared effective or (b) October 1,
1998, and, if the Registration Statement has not theretofore been declared
effective by the SEC, each date which is thirty (30) days after the previous
Computation Date until such Registration Statement is so declared effective.
Thus, if the registration statement is not effective by October 1, 1998, and
such delay is not related to an act, or a failure to act or to act timely, by
the Selling Securityholders or their counsel, then for the period from October
1, 1998 to October 31, 1998, the Company must pay to the Selling Securityholders
a penalty of $35,000. If the registration statement still is not effective on
November 1, 1998, and such delay is not related to an act, or a failure to act
or to act timely, by the Selling Securityholders or their counsel, then for the
period from November 1, 1998 to December 1, 1998, the Company must pay to the
Selling Securityholder an additional penalty of $61,250, and so on.
In connection with the Company's private placement of Debentures, the
Company also issued to the Selling Securityholders Warrants to purchase 175,000
shares of Common Stock exercisable at 110% of the Market Price on June 3, 1998,
or $3.47875, for a period of three (3) years. The Company is required to prepare
and file a registration statement under the Securities Act for the number of
shares of Common Stock issuable upon the exercise of the above Warrants. Timely
filing of the registration statement has been made.
USE OF PROCEEDS FROM SALE OF DEBENTURES
None of the proceeds from the sale of the Common Stock registered hereunder
will accrue to the Company.
Through private placement, the Company has obtained $1,750,000 of financing
in the form of 8% Convertible Debentures. The Company has a call option (herein
"Call"), for a period of 24 months following the June 3, 1998 date of such
private placement, to cause the Selling Securityholders to purchase up to an
additional $1,750,000 principal amount of Debentures (the "Additional
Debentures") upon three (3) business days' written notice, subject to the
following conditions:
(i) This Registration Statement to which this Prospectus relates
shall have been declared effective, and no stop order shall
have been issued with respect thereto;
(ii) The dollar amount of each Call shall be as follows: $583,334
for the first Call and $583,333 each for the second and third
Calls;
(iii) There must be at least 30 business days between each Call;
(iv) No Call may be delivered to the extent that it will result in
the issuance of common shares in excess of 19.9% of the shares
of Company's Common Stock outstanding on the date thereof , or
to the extent that the common shares subject to the Call are
not then reserved and authorized to be issued by the Company;
and
(v) The Company's share price on the date of the Call must be at
least $2.50 per share. In addition, if the share price is
below $3.00, the average volume of the Company's Common Stock
for the sixty days preceding the date of the Call must be at
least 25,000 shares per day.
The Company intends to apply the net proceeds of the Debentures to launch
TeN: The Erotic Network, its new, 24-hour adult network targeted specifically to
cable television systems and medium to high-powered satellite service providers,
as well as for working capital purposes.
10
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Selling Securityholders whose Conversion Shares and 175,000 of Warrant
Shares are being registered hereby are The Augustine Fund and Pro Futures
Special Equities Fund, L.P ("The ProFutures Fund"). The Augustine Fund is an
Illinois limited partnership with a principal place of business at 144 W.
Jackson Street, Chicago, Illinois 60604. Pro Futures Special Equities Fund, L.P.
is a Delaware limited partnership with a principal place of business located at
1310 Highway 620 South, Suite 200, Austin, Texas 78734.
As of the date of this Prospectus, The Augustine Fund owned $1,350,000
principal amount of 8% Convertible Debentures, and had committed, under the
circumstances described above, to purchase an additional $1,350,000 of
Debentures. Upon conversion of the outstanding Debentures, The Augustine Fund
will acquire shares on the basis set forth in the second following paragraph,
provided however, that The Augustine Fund can never own more than 4.9% of the
outstanding shares. (See note(1), in Common Stock Ownership of Certain
Beneficial Owners and Management.)
As of the date of this Prospectus, The ProFutures Fund owned $1,350,000
principal amount of 8% Convertible Debentures, and had committed, under the
circumstances described above, to purchase an additional $1,350,000 of
Debentures. Upon conversion of the outstanding Debentures, The ProFutures Fund
will acquire shares on the basis set forth in the following paragraph, provided
however, that The ProFutures Fund can never own more than 4.9% of the
outstanding shares. (See note(1), in Common Stock Ownership of Certain
Beneficial Owners and Management.)
The Company has agreed to register the public offering of the Selling
Securityholders shares of Common Stock under the Securities Act and to pay all
expenses in connection therewith other than brokerage commissions and discounts
in connection with the sale of the Conversion Shares and the expenses of
counsel. The aggregate number of Conversion Shares that may be offered and sold
pursuant to this Prospectus by the Selling Securityholders will be determined by
how many shares are issued upon conversion of the Debentures, which will be
determined by the conversion price applicable to the Conversion Shares. See
"Description of Securities." The conversion price for a Conversion Share will be
the lesser of 125% of the Closing Price (as defined in the Debentures) on June
3, 1998, which was $3.96875, or 90% of the Market Price on the Conversion Date.
Assuming that the Market Price on the date of Conversion is $3.03750 (which is
the Market Price calculated as of July 9, 1998) with respect to all the
Debentures, and that all the Debentures are converted at 90% of the Market
Price, or $2.73375, the aggregate number of Conversion Shares issued would be
1,280,293 (excluding any Conversion Shares issued with respect to accrued
interest on the Debentures at the time of conversion).
This Prospectus also relates to the resale of 135,000 Warrant Shares by The
Augustine Fund, the resale of 40,000 Warrant Shares by The Pro Futures Fund,
which may be acquired upon the exercise of the Warrants respectively held by
them. This Prospectus further relates to the resale of 50,000 restricted shares
of Common Stock previously acquired by the Augustine Fund from a shareholder of
the Company.
The following table sets forth the names of the Selling Securityholders, the
number of shares of Common Stock owned beneficially by each of the Selling
Securityholders as of July 17, 1998, and the number of shares which may be
offered for resale pursuant to this Prospectus. For the purpose of calculating
the number of shares of Common Stock beneficially owned by the Selling
Securityholders, the number of shares of Common Stock calculated to be issuable
in connection with the conversion of the 8% Convertible Debentures is based on a
conversion price that is derived from the average of the five lowest closing
market prices of the Common Stock for the twenty trading days preceding July 9,
1998 (which was $3.03750). The calculation of the total number of shares of
Common Stock to be offered by the holders of such Convertible Debentures,
however, is a hypothetical estimate based upon the shares of Common Stock
issuable upon conversion of $3,500,000 principal amount of 8% Convertible
Debentures at a 10% discount to the average of the five lowest closing market
prices of the Common Stock on the five trading days preceding July 9, 1998 (or
$2.73375). The actual number of shares issuable upon conversion of the
Debentures cannot be predicted at this time insofar as it will be based, among
other things, on the future market price of the Common Stock. The use of such
hypothetical number of shares of Common Stock is not intended to constitute a
prediction as to the number of shares of Common Stock into which the Debentures
will be converted.
The information included below is based upon information provided by the
Selling Securityholders. Because the Selling Securityholders may offer all, some
or none of their Common Stock, no definitive estimate as to the number of shares
thereof that will be held by the Selling Securityholders after such offering can
be provided and the following table has been prepared on the assumption that all
shares of Common Stock offered under this Prospectus will be sold.
11
<PAGE>
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY SHARES OF BENEFICIALLY
OWNED PRIOR TO COMMON STOCK OWNED AFTER
NAME OFFERING (1) (2) BEING OFFERED OFFERING (3)
---- ---------------- ------------- ------------
<S> <C> <C> <C>
The Augustine Fund (4) 185,000 1,172,655 0
Pro Futures Special
Equities Fund, L.P. (5) 40,000 332,638 0
<FN>
-----------------------
(1) Each of the parties listed has sole voting and investment power with
respect to all shares of Common Stock indicated.
(2) As required by regulations of the Securities and Exchange Commission,
the number of shares shown as beneficially owned includes shares which can be
purchased within 60 days after July 14, 1998. The actual number of shares shown
as beneficially owned is subject to adjustment and could be materially less or
more than the estimated amount indicated depending upon factors which cannot be
predicted by the Company at this time, including, among others, the market price
of the Common Stock prevailing at the actual date of conversion of the
Debentures.
(3) Assumes the sale of all shares offered hereby.
(4) The listed Selling Securityholder holds outstanding Warrants to purchase
135,000 shares of Common Stock at a price of $3.47875 per share, $1,350,000
principal amount of Debentures and 50,000 previously acquired Restricted Shares.
The Company has the right to require the Selling Securityholder to purchase an
additional $1,350,000 principal amount of Debentures under certain conditions.
The Debentures are convertible into convertible into Common Stock at a
conversion price per share equal to the lesser of (a) 125% of the Closing Price
of the Common Stock (as defined in the Debenture) or, (b) 90% of the Market
Price of the Common Stock (as defined in the Debenture). The "Closing Price" as
used in the Debenture means the average closing bid price of the Common Stock
on the five (5) trading days immediately preceding June 3, 1998, as reported by
the National Association of Securities Dealers. The "Market Price" as used in
the Debenture means the average of five lowest closing bid prices for the Common
Stock for the twenty consecutive trading days preceding the Conversion Date, as
reported as stated above. The number of shares shown as being offered in the
table is a hypothetical amount based upon the shares of Common Stock issuable
upon conversion of $2,700,000 of Debentures at a 10% discount to the Market
Price, as defined, on July 9, 1998, i.e.,the average of the five lowest closing
market prices of the Common Stock on the twenty trading days proceeding July 9,
1998 (or $2.73375). Notwithstanding the foregoing, the Selling Securityholder
can convert Debentures into Common Stock only to the extent the number of shares
issued thereby, combined with the number of shares already held by it and its
affiliates, would not exceed 4.9% of the outstanding Common Stock.
(5) The listed Selling Securityholder holds outstanding Warrants to purchase
40,000 shares of Common Stock at a price of $3.47875 per share and $400,000
principal amount of Debentures. The Company has the right to require the Selling
Securityholder to purchase an additional $400,000 principal amount of Debentures
under certain conditions. The Debentures are convertible into convertible into
Common Stock at a conversion price per share equal to the lesser of (a) 125% of
the Closing Price of the Common Stock (as defined in the Debenture) or, (b) 90%
of the Market Price of the Common Stock (as defined in the Debenture). The
number of shares shown as being offered in the table is a hypothetical amount
based upon the shares of Common Stock issuable upon conversion of $800,000 of
Debentures at a 10% discount to the Market Price, as defined, on July 9, 1998,
i.e.,the average of the five lowest closing market prices of the Common Stock on
the twenty trading days proceeding July 9, 1998 (or $2.73375). Notwithstanding
the foregoing, the Selling Securityholder can convert Debentures into Common
Stock only to the extent the number of shares issued thereby, combined with the
number of shares already held by it and its affiliates, would not exceed 4.9% of
the outstanding Common Stock.
</FN>
</TABLE>
The Selling Securityholders' Shares may be offered and sold from time to
time as market conditions permit, provided that a registration statement
covering such Shares is effective at the time of such offer and/or sale. Under
Section 10(a)(3) of the Securities Act of 1933, as amended, when a prospectus is
used more than nine months after the effective date of the registration
statement, the information contained therein must be as of a date not more than
16 months prior to such use.
The Selling Securityholders' Shares may be offered and sold in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then-current market price, or in negotiated transactions.
The Selling Securityholders' Shares may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer so
engaged will attempt to sell the share as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (ii) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
accounts pursuant to this Prospectus; (iii) ordinary brokerage transactions and
transactions in which the broker solicits purchases; and (iv) transactions
between sellers and purchasers without a broker or dealer. In effecting sales,
brokers or dealers engaged by the Selling Securityholders may arrange for other
brokers or dealers to participate. Such brokers or dealers may receive
commissions or discounts from Selling Securityholders in amounts to be
negotiated. Such brokers and dealers and any other participating brokers and
dealers may be deemed to be "underwriters" within the meaning of the Securities
Act, in connection with such sales.
12
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
March 31, 1998, as adjusted to reflect the sale of $3,500,000 principal amount
of Debentures and as further adjusted to reflect the conversion of all of the
Debentures assuming that 90% of the Market Price (as defined in the Debentures)
of the Common Stock on the date of the conversion was $2.73375, which is
equivalent to 90% of the average of five lowest closing bid prices for the
Common Stock for the twenty consecutive trading days ended July 9, 1998. This
table should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
(unaudited)
Proforma Assuming
Proforma Assuming Conversion of
Actual Sale of Debentures Debentures
------ ------------------ -----------------
<S> <C> <C> <C>
8% Convertible Debentures......................................... - 0 - 3,500,000 - 0 -
Long term debt and other liabilities (excluding current
portion)........................................................ 6,716 6,716 6,716
Common Stock, $.0001 par value; 50,000,000 shares authorized,
6,542,000 shares issued and outstanding, actual; 7,822,293
shares outstanding as adjusted................................. 654 654 782
Deficit........................................................... (3,818,151) (3, 818,151) (3,818,151)
Total shareholders equity......................................... 8,447,752 8,447,752 11,947,752
Total capitalization.............................................. 8,454,468 8,454,468 11,954,468
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the expansion of its business. See "Risk
Factors -- No Dividends."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this document. The discussion of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
13
<PAGE>
SELECTED FINANCIAL DATA
New Frontier Media, Inc.
The following table sets forth selected operating data for the periods
and upon the basis indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Sales, net................................................ $1,645,192 $2,515,802
Cost of Sales............................................. 2,021,404 2,217,812
---------- ----------
Gross Profit.............................................. (376,212) 297,990
Total Operating Expenses.................................. 1,415,002 931,342
Other Income (Expense).................................... (159,454) 182,516
---------- ----------
Loss from Continuing Operations........................... (1,950,668) (450,836)
Discontinued Operations................................... (1,595,548) -0-
---------- ----------
Net Income (Loss) Before Income Taxes and Minority
Interest................................................ (3,546,216) (450,836)
Minority Interest in Loss of Subsidiary................... 287,873 64,806
---------- ----------
Net Income (Loss)......................................... (3,258,343) $(386,030)
========== ==========
</TABLE>
SEGMENT INFORMATION
The Financial Accounting Standards Board released statement #131
"Disclosures about Segments of an Enterprise and Related Information" which will
be effective for all financial reporting periods subsequent to December 15,
1997. This statement requires the reporting of certain information about
operating segments. The following table reflects certain information as
promulgated by the statement for the years ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
BOULDER FUZZY
CORPORATE AND DAVID INTERACTIVE ENTERTAINMENT,
ELIMINATIONS ENTERTAINMENT, INC. GROUP, INC. INC. TOTALS
------------- ------------------- ----------- -------------- ------
<S> <C> <C> <C> <C> <C>
Net Sales $400 $2,211,388 $290,994 $13,020 $2,515,802
Other Income (loss) (5,882) 800 187,598 -- 182,516
Net Income (loss) (245,779) 141,736 (212,905) (69,082) (386,030)
Segment assets 52,729 535,132 1,432,541 166,069 2,186,471
Segment liabilities (63,090) 178,845 321,744 232,757 670,256
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
COLORADO
CORPORATE AND DAVID BROADCASTING, DISCONTINUED
ELIMINATIONS ENTERTAINMENT, INC. INC. OPERATIONS TOTALS
------------- ------------------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $932,611 $712,581 $353,128 $1,998,320
Other Income (loss) (94,705) -- (64,749) 121,866 (37,588)
Net Income (loss) (1,108,787) (100,456) (1,200,475) (848,625) (3,258,343)
Segment assets 524,598 395,388 9,409,797 418,166 10,747,949
Segment liabilities (112,920) 139,557 2,207,990 48,000 2,282,627
</TABLE>
14
<PAGE>
COMPARISON OF YEARS ENDED MARCH 31, 1998 AND 1997
Corporate
New Frontier Media, Inc.'s corporate office ("Corporate") functions as
a holding company for its subsidiaries, and as such generates no independent
income. Corporate incurs administrative expenses relating to the operation of
its subsidiaries, particularly concerning financial, public relations, and
capital raising activities. Corporate also incurs expenses related to the
operation of the Company and its subsidiaries as a public entity, such as legal,
accounting and public relations.
New Frontier Media, Inc.
The Company's total revenue for 1998 was $1,645,192, down $870,610
(34.6%) from 1997. Giving full recognition to collected revenue arising from the
sale of quarterly, semi-annual and annual subscriptions resulting from the
Company's Colorado Satellite Broadcasting, Inc. subsidiary, revenue for 1998 was
$2,092,136 as compared to $2,515,802 the prior year, down approximately 16.8%.
The decrease in total revenue is largely attributable to a dramatic
reduction in the demand for the Company's 12 inch laser disc home video
products. Beginning in June, 1997, the Company's traditional video disc customer
began to migrate to the new Digital Versatile Disc (DVD) format. As a result of
the migration away from laser disc and toward DVD by the Company's wholesale and
retail customers, the Company's David Entertainment, Inc. subsidiary generated
revenue of $932,611 in 1998 as compared to $2,211,388 in 1997 (a reduction of
58%). As of January, 1998, the Company's David Entertainment, Inc. subsidiary
has fully transitioned to providing feature films utilizing the DVD format
exclusively. In June, 1998, the Company agreed to sell Boulder Interactive
Group, Inc., its CD-ROM software publishing subsidiary, to Quarto Holdings, Inc.
("Quarto") and thus did not include approximately $348,261 in 1998 subsidiary
revenue from continuing operations. The revenue shortfalls experienced by the
transition from laser disc to DVD and the discontinued status of Boulder
Interactive Group, Inc. were nearly entirely made up by the Company's Colorado
Satellite Broadcasting, Inc. ("CSB") subsidiary which reported revenue of
$712,581 and adjusted revenue (including full recognition of deferred revenue
related to quarterly, semi-annual and annual subscriptions) of $1,159,525. CSB
completed its acquisition of three subscription and pay-per-view based
television networks on February 18, 1998 and began recording revenue generated
from this acquisition on this date. The year ending March 31, 1998 represents
approximately 41 days of revenue from the Company's CSB subsidiary.
Cost of goods sold decreased to $2,021,404 for the 1998 year from
$2,217,812 (a decrease of 8.9 percent) due to the Company's decision to
discontinue the manufacture and sale of laser disc home video products resulting
from a dramatic drop-off in demand for this product line.
For the 1998 year, the Company generated a negative gross profit of
$376,212 compared with gross profit of $297,990 for the prior year. The negative
gross profit for the 1998 year was attributable to two factors: 1) the
non-recognition of $446,944 in revenue actually collected related to quarterly,
semi-annual and annual subscriptions sold by the Company's CSB subsidiary and 2)
the dramatic drop-off in laser disc sales recorded by the Company's David
Entertainment, Inc. subsidiary.
Company operating expenses for the 1998 year were $1,415,002 up form
the prior year number of $931,342. The increase of $483,660 (52%) was largely
attributable to increased salary, wages, benefits and general and administrative
expenses associated with the Company's Colorado Satellite Broadcasting, Inc.
subsidiary. Specifically, the Company increased its number of personnel to
operate this subsidiary's subscription and pay-per-view business. In addition,
goodwill amortization increased to $73,226, up from $0 the prior year also due
to the acquisition.
For the 1998 year, the Company's net loss from continuing operations
widened to $1,950,668 from a total loss of $450,836 for the prior year. The
increase in year-to-year net losses was due to the following: 1) the integration
of the acquired subscription and pay-per-view television services into the
Company and the costs incurred to adequately staff, upgrade systems and promote
and market these services, 2) the increase travel expenditures associated with
the Company's acquisition financing of $7.08 million and 3) the inability to
recognize $446,944 of revenue generated from Colorado Satellite Broadcasting's
sale of quarterly, semi-annual and annual subscriptions.
In June, 1998, the Company completed a private placement of $1.75
million in convertible debentures and may, if certain conditions are met,
require an additional $1.75 million of debentures to be purchased by the same
institutional investors after 90 days from the placement date. Proceeds of this
offering will be utilized to launch a fourth network called TeN: The Erotic
Network. TeN will be targeted to a much broader distribution base including
cable television system operators and DBS providers.
15
<PAGE>
Management believes that the Company will become profitable in the next
two quarters based on the following: 1) the elimination, either through the sale
or discontinuation of the Company's Boulder Interactive Group, Inc. and Fuzzy
Entertainment, Inc. subsidiaries which collectively generated $1,595,548 in net
losses for 1998, 2) the decision by Management to focus solely on the electronic
distribution of adult entertainment content, 3) the full integration of the
subscription and pay-per-view television acquisition and the resulting cost
savings expected to be generated by the Company's absorption of this business,
and 3) the launch of the Company's new network, TeN, which employs a more
broadly accepted editing standard for adult programming.
Colorado Satellite Broadcasting ("CSB")
Colorado Satellite Broadcasting reported sales of $712,581 up from $0
for the prior year. Giving full credit for unrealized revenue attributable to
the sale of quarterly, semi-annual and annual subscriptions, sales (adjusted for
unrealized subscriptions longer than one month) were $1,159,525, up from $0 the
prior year. The increase in sales are entirely attributable to the CSB's
February 18, 1998 acquisition of the subscription and pay-per-view television
assets of Fifth Dimension. As a result of the acquisition date, only 41 days of
revenue are attributable to the 1998 year.
Operating expenses, largely consisting of play-back, broadcasting and
transponder costs for the 1998 year were $1,227,150 up from $0. Gross profit for
the year was a negative $514,569 without giving effect to unrealized revenue
from non-monthly subscriptions. After fully crediting CSB for collected
subscription longer than one month, gross profit, adjusted for non-monthly
revenue realization, was negative $67,625. Management attributes the negative
gross profit to 1) one-time integration costs associated with the broadcasting
and play-out operation, 2) a temporary loss of continuity on subscription
renewals due to a major overhaul and transfer of the call center function to
Turnervision, Inc. in West Virginia and 3) transitional malaise associated with
the predecessor company and its effect on advertising, marketing,
distributor/dealer relations and confusion in the marketplace about the transfer
of ownership.
Management believes that the vast majority of the transition issues
related to the acquisition and associated integration of assets are behind it
and CSB should generate strong cash flow from its newly acquired subscription
and pay-per-view television business in the coming quarters.
David Entertainment, Inc. ("David")
David had net sales of $932,611 for the year compared to $2,211,388 for
the prior year or a decrease of 58%. The decrease in sales is largely
attributable to a dramatic reduction in the demand for David's 12 inch laser
disc home video products. Beginning in June, 1997, the Company's traditional
video disc customers began to migrate to the new Digital Versatile Disc (DVD)
format. As of January, 1998, David has fully transitioned to providing feature
films on the DVD format exclusively. Management believes that the DVD format
should achieve critical mass in the U.S. within the next two quarters and that
the Company's sales of DVD products should be equal to or higher than previous
years' sales generated from laser disc products.
Cost of goods sold for the David were $757,928 versus $1,961,933 or a
decrease of 61% due to the Company's decision to discontinue the manufacture and
sale of laser disc titles resulting from a dramatic drop-of in demand for these
products. Operating expenses were $324,998 versus $71,216 for the prior year or
an increase of 356%. This increase was due to a complete transition from
third-party contracted distribution services to in-house personnel to handle all
aspects of film licensing, replication, sales, marketing and distribution. In
addition, David Entertainment, Inc. expended nearly $23 thousand on the
development of a direct-sales web site.
For the 1998 year, David generated a net loss from operations $150,315
versus net income of $178,239. Management anticipates revenue growth from David
for the following reasons: 1) DVD technology has advanced considerably in terms
of acceptance among US hardware purchasers, 2) The Company plans to aggressively
cross promote David's DVD product line on its subscription and pay-per-view
television networks and 3) David's web site, completed in April, 1998, gives
David a direct sales capability with DVD consumers.
Boulder Interactive Group, Inc. ("Inroads")
In June, 1998, the Company sold its remaining interest in Inroads to
Quarto Holdings, Inc. Inroads reported a 19.5% increase in sales for the 1998
year. Sales were $348,261 versus $290,994 for the prior year. Cost of goods sold
increased to $683,555 from $245,589 the prior year resulting in a negative gross
profit of $335,294 versus gross profit of $45,405. Operating expenses were
$727,645 versus $510,715 for the prior year. Net losses from operations widened
to $1,062,939 from $465,310 the prior year. Management attributes the increased
year-to-year net loss to a declining market for reference CD-ROM software and a
ramp-up in title development associated with the Quarto partnership.
16
<PAGE>
Fuzzy Entertainment, Inc. ("Fuzzy")
In March, 1998, the Company elected to discontinue Fuzzy. Fuzzy
reported revenue of $4,867 versus $13,020 for the prior year. Cost of goods sold
increased to $86,199 from $10,290 due to inventory write-downs associated with
the Company's decision to discontinue operations. Operating expenses were
$95,813 versus $71,812 for the prior year. Net loss was $177,144 versus a net
loss of $69,082 for the prior year. Management elected to discontinue Fuzzy
because of poor financial results and a decision to focus on its core
subscription and pay-per-view television 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 from operations of $450,836 for the
fiscal year ended March 31, 1997. This increase was also due to Inroads
beginning to develop and commercially exploit Quarto-based titles. In
particular, Inroads dedicated significant resources to developing the IN FOCUS
and CIGAR COMPANION titles, both of which were released after the end of the
fiscal year. Operating expenses for NOOF and Inroads remained relatively
constant for the year ($277,600 and $510,715, respectively), while operating
expenses for DaViD increased to $71,216, from $6,801 for the same period the
prior year (see Management's discussion concerning Inroads and DaViD, below).
NOOF performs many administrative functions for Inroads, DaViD, and Fuzzy, and
generates little or no revenue separately. As a result, NOOF reported total
revenue of $400, total operating expenses of $277,600, and a net loss from
operations of $277,200 for the fiscal year ended March 31, 1997, compared with a
net loss from operations of $206,858 for the same period the prior year.
Management attributes the higher net loss for the year ended March 31, 1997 to
increased travel and lodging expenses, office expenses, employee benefits
(health plan), and rent expense. NOOF will continue to show net operating losses
in the future, as it continues to function as the administrative holding company
for its subsidiaries.
DaViD
DaViD 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 in 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 (DVD) technology advances in
acceptance in the consumer computer marketplace.
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 was
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.
17
<PAGE>
Inroad's latest CD-ROM products are targeted at enthusiasts and
hobbyists, primarily as a result of the titles that Inroads is developing and
commercially exploiting under the Quarto agreement. The Company is currently
engaged in a dispute with Quarto. See "BUSINESS-Legal Proceedings." Inroads
dedicated a major portion of its resources over the past several months to
development of its CIGAR COMPANION interactive CD-ROM, which was released to the
market on July 1, 1997. Management believes that Inroads and the Company will
realize revenues from CIGAR COMPANION, based upon the surging popularity of
cigars and cigar-related products in the United States. Cigar Afficianado
magazine reports that in the first quarter of 1997, consumers in the United
States purchased over 500 million cigars, a 96 percent increase over 1996 and a
300 percent increase over 1995.
In addition to CIGAR COMPANION, Inroads has developed and recently
released a photography CD-ROM, IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY,
utilizing the material acquired from Quarto. Inroads recently signed agreements
for distribution of IN FOCUS in Spain and Italy. IN FOCUS is co-branded by
Olympus America, which includes a free roll of film from Kodak for every person
who registers the IN FOCUS software with Inroads.
Inroad's MULTIMEDIA GUNS CD-ROM title was listed as the 17th-highest
selling software title on PC Data's top-selling software list for April, 1997.
MULTIMEDIA GUNS reached number 15 on the PC Data list for June, 1997. Currently,
Inroads only sells the MULTIMEDIA GUNS title through Wal-Mart at full retail.
Due to the success of MULTIMEDIA GUNS in this limited distribution channel,
CompUSA has agreed to carry the title. Management of Inroads anticipates sales
of MULTIMEDIA GUNS by CompUSA to meet or exceed sales of the title at Wal-Mart.
Fuzzy Entertainment, Inc. dba In-Sight Editions ("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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at March 31, 1998 were
$503,123, down $356,264 from $859,387 at March 31, 1997. This relative stability
of the Company's current assets was primarily the result of the Company's sale
of 1,500,000 Units in a public offering for $7,087,500 cash (less offering
expenses). The Company had cash and cash equivalents of $503,123 at March 31,
1998. Management believes that the Company has sufficient liquidity and capital
to operate for the next twelve months.
BUSINESS
HISTORY OF THE COMPANY
The Company was originally incorporated in the State of Colorado on
February 23, 1988.
On September 15, 1995, the Company consummated the acquisition of New
Frontier Media, Inc. in a stock-for-stock exchange. The Company first effected a
2,034.66:1 reverse split of all 569,706,000 of its common stock then issued and
outstanding, resulting in 280,000 shares of Common Stock being issued and
outstanding prior to the New Frontier acquisition. The Company also approved a
change of the Company's name to New Frontier Media, Inc. For a period of five
years preceding this acquisition, the Company had not conducted any significant
business operations.
By reason of its 1995 acquisition of New Frontier's operations, the
Company became engaged in reference CD-ROM publishing, through a 70%-owned
subsidiary, Boulder Interactive Group, Inc. d/b/a Inroads Interactive
("Inroads"), and in the acquisition and distribution of unrated and adult
feature films in the digital versatile disc format through a wholly owned
subsidiary DaViD Entertainment, Inc. ("DaViD").
On February 18, 1998, the Company consummated an underwritten public
offering of 1,500,000 units, each consisting of one share of common stock and
one redeemable common stock purchase warrant, raising $7,087,500 in net proceeds
after underwriting fees (excluding related offering expenses). Simultaneous with
the closing of the Company's public offering, pursuant to Asset Purchase
Agreements with 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"), the Company acquired the adult satellite television business of
Fifth Dimension, a leading provider of subscriber-based premium television
channels and transaction-based television networks.
18
<PAGE>
By reason of its 1998 acquisition of the adult satellite television
business of Fifth Dimension, the Company, through its wholly owned subsidiary,
Colorado Satellite Broadcasting, Inc. ("CSB"), owns and is engaged in the
operation and distribution of, the three leading C-band adult programming
networks in the United States, and is a leading provider of adult programming
via direct to home ("DTH") C-band satellite.
On June 16, 1998, the Company agreed to sell its 70% interest in Inroads.
See "DESCRIPTION OF BUSINESS -- INROADS."
The Company's executive offices are located at 1050 Walnut Street,
Suite 301, Boulder, Colorado 80302. The telephone number is (303) 444-0632.
OVERVIEW-ADULT ENTERTAINMENT INDUSTRY
During the 1980s, the availability of adult movies on videocassette and
on cable television helped to legitimize the consumption of adult material by
putting it in the home setting. The result, in the opinion of Management, has
been the legitimization of adult 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
(pay-per-view adult programming), 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 adult entertainment materials 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 eliminated the adult theater business.
Management believes that fully edited and partially edited adult
material routinely available on a variety of cable television systems and
satellite providers acts to reinforce consumer demand. Americans spent over $190
million on adult pay-per-view in 1997, according to Paul Kagan Associates, Inc.
Cable companies such as Time Warner, TeleCommunications, Inc., and Cablevision
Systems offer fully edited services like the Playboy Channel. Other cable
companies such as Jones Intercable, Verto Communications and Greater Media offer
partially-edited or fully-edited adult programming, such as that available from
Spice and the Company. According to public documents, the Playboy and Spice
channels generate as much as $200 million in revenue from cable and DTH
satellite services. Both companies have launched overseas services.
The adult entertainment industry has continued to grow as technological
advances allow easier and more private access to products. Most major hotel
chains, including Marriott, Hyatt, and Hilton, offer in-room fully-edited adult
programming through services such as 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 through
the privacy of their personal computers. In a recent ruling, ACLU v. Reno, the
Supreme Court struck down portions of the Communications Decency Act. 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-THE COMPANY'S ADULT PROGRAMMING NETWORKS
The Company, through its Colorado Satellite Broadcasting, Inc. ("CSB")
subsidiary, and by reason of its consummation of its Asset Purchase Agreements
with 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"). CSB currently owns,
operates, and distributes the three leading C-band adult programming networks:
Extasy, True Blue, and Exotica (collectively referred to hereinafter as the
"Extasy Networks"). CSB, through the Extasy Networks, is a leading provider of
unedited adult programming via direct to home ("DTH") C-band satellite. To a
lesser extent, CSB provides its services through cable television and wireless
cable television multiple system operators ("MSOs") and Ku-band (small dish or
digital satellite) satellite providers. CSB sells its network programming on a
subscription basis and on a pay-per-view basis. The Company's subscribers
receive the Extasy Networks through a television set-top decoder box.
Subscribers have the option of purchasing block programming (e.g., one day, one
month, one year), or single movies or events for a flat fee. As of March 31,
1998, the Extasy Networks were available to an estimated 2.0 million C-band DTH
subscribers, and approximately 100,000 cable television subscribers. The Extasy
Networks have maintain distribution agreements with nearly every major
distributor of C-band satellite programming in the United States.
19
<PAGE>
CSB aggressively promotes its networks' brand names with bold logotypes
and high-quality interstitial programming between feature films and special
programming. The Extasy Networks also feature advertising which promotes
adult-oriented entertainment and information through pay-per-call telephone
lines.
Extasy, True Blue, and Exotica each feature approximately 36 movie
titles per week, or 100 to 150 movies each month, with at least 15 first-time
exhibitions per month. There is little 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-minute and 60-minute
features and interviews. Staggered movie start times occur three times daily,
allowing for maximum viewing flexibility. Currently, the Extasy Networks deliver
unedited adult programming exclusively.
Extasy (Telstar T-405, Channel 19)
Extasy is the premium channel of the three channels that make up the
Extasy Networks. As of March 31, 1998, Extasy had 50,472 active subscriptions.
Extasy offers a diverse programming mix within the adult genre, consisting of
movies and specials that appeal to a wide variety of tastes and interests. Each
day of the broadcast week is specially constructed to deliver the widest variety
of unedited adult programming in addition to special thematic segments and
features. Extasy is available on an all-day pay-per-view basis ($8.95), as well
as periodic 1-month ($29.95), 3-month ($49.95), 6-month ($79.95), and 1-year
($139.95) subscriptions.
True Blue (Telstar T-405, Channel 05)
True Blue is the budget service in the Extasy Networks family. As of
March 31, 1998, True Blue had 44,130 active subscriptions. True Blue is a leader
in "classic" adult programming (professionally produced titles more than 5 years
old), and features a mix of amateur adult movies and classic adult feature
films. True Blue is available on an all-day pay-per-view basis ($8.95), as well
as periodic 1-month ($16.95), 3-month ($37.95), 6-month ($59.95), and 1-year
($99.00) subscriptions.
Exotica (Telstar T-405, Channel 22)
Exotica is the internationally programmed service in the Extasy
Networks family. As of March 31, 1998, Exotica had 35,130 active subscriptions.
Exotica offers a mix of recent adult feature film hits, new adult features,
European adult films, and classic adult features. Exotica is available on an
all-day pay-per-view basis ($8.95), as well as periodic 1-month ($19.95),
3-month ($41.95), 6-month ($69.95), and 1-year ($129.95) subscriptions.
TeN: The Erotic Network (Telstar T02R, Test Broad cast on Channel 19)
On August 15, 1998, CSB plans to launch TeN: The Erotic Network, a new,
24-hour adult network targeted specifically to cable television systems and
medium to high-powered satellite service providers ("DBS"). CSB plans to
position TeN as cable television's and DBS satellites' alternative to the
traditional fully edited adult movie services offered by Playboy and Spice. In
order to further increase the attractiveness and initial market share of TeN,
CSB is offering extremely competitive revenue sharing terms to those cable and
satellite distribution affiliates who agree to carry the service.
Based on the recent developments described below, Management believes
that CSB has an unique opportunity to successfully launch a new adult network
exclusively programmed with adult films and videos that mirror the editing
standards of Spice Hot, a more liberally programmed sister network of Spice.
* Playboy's recent $100 million acquisition of Spice, Inc. (at a
valuation of 4.5 times trailing 1997 revenue of $22 million), which
effectively reduces the cable and DBS adult network industry to a
single player;
* Playboy's corporate policy to offer only fully edited adult
programming on its networks;
* the quality and number of cable operators now willing to carry
partially edited, more explicit services and the momentum toward
broader market acceptance of unedited and partially edited adult
programming by cable system operators and their subscribers;
* the recent success of Spice Hot, a partially edited, more
explicit version of Spice Channel in terms of the buy rates it has
achieved (3 to 4 times greater than fully edited adult programming);
and
* the Company's success in head-to-head competition with Spice in
C-Band satellite.
20
<PAGE>
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 fully
edited programming providers (such as Playboy) and partially edited programming
providers (such as Spice and the Extasy 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. The Company does not expect to
be impacted by this provision insofar as it broadcasts only a fully scrambled
signal. Section 641 of the Act would only affect the Company if it decided to
pursue cable television MSOs without technical scrambling ability as a source of
distribution for its programming.
NETWORK PROGRAMMING
All of the Extasy Networks' broadcast programming is acquired from
third party adult content studios. In most cases, CSB 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 four years). CSB has 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.
NETWORK DELIVERY
The C-band Satellite Business
Currently there are approximately 2.0 million C-band "big dish"
satellite systems in place in the United States. These systems feature receivers
which are larger (one meter) in diameter than digital satellite systems. 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 or program supplier
fees for a vast majority of received programming. In the past several years, the
market for C-band satellites has declined significantly, as small digital
satellite services (Ku-band) have flourished. These 18-inch digital satellite
dishes are much less expensive than the large C-band satellite hardware ($200
versus approximately $3,000 for C-band), are relatively easy to mount in
unobtrusive locations, and offer digital channels. C-band satellite equipment is
also negatively affected by stricter zoning regulations and covenant
restrictions.
Approximately 90,000 C-band system owners replaced their big dishes
with the smaller Direct Broadcast Satellite ("DBS") dish systems in the last
year, according to General Instruments Access Control Center. Management
believes the C-band equipment base will remain in the 2.0 million range for the
next several years.
The introduction and rapid growth of the number of digital channels,
due to introduction of DBS and reduced transponder costs, affects C-band
satellite, which is broadcast in analog format. Management believes digital and
analog formats will co-exist for several years, and that new technologies will
allow C-band systems to receive digital channels. For example, General
Instruments' new 4DTV technology enables C-band users to watch programming
transmitted via DigiCipher II format. C-band continues to be the "work horse" of
the satellite entertainment industry. Every major cable system in the United
States is C-band based, delivering dozens of C-band channels to more than 65
million subscribers. Hundreds of government, corporate, education, and network
broadcasters use C-band. C-band is also the preferred method of transmitting
sports backhauls, satellite news gathering, international broadcasts, and
syndicated program and wild feeds.
21
<PAGE>
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
to the C-band market has resulted in the transition of nearly 40,000 households
from C-band analogue to C-band analogue/digital receiving capability.
Cable Television Systems and DBS Providers
According to Paul Kagan Associates ("Kagan"), a leading media industry
analyst, as of January, 1998, there were 98 million television households in the
U.S. of which approximately 65 million households receive cable television
service, 7 million households receive DBS (high-powered) satellite service and
2.0 million households receive C-band (large dish) satellite service.
Of the 65 million cable television households, approximately 51.5
million subscribers have the capacity to receive one or more adult channels and
100% of the DBS and C-band satellite households (total of 9 million households)
have the capacity to receive at lease one adult channel.
According to Kagan, the market for adult pay-per-view and subscription
television is expected to grow from $200 million in 1998 to over $300 million in
2001.
In an effort to greatly broaden its reach into the cable television and
DBS markets, the Company has announced that it will be launching TeN:The Erotic
Network on August 15, 1998 (see TeN:The Erotic Network, above).
Satellite Transmission
CSB delivers its video programming to its C-band customers (and to a
lesser extent to cable television customers) via satellite transmission.
Satellite delivery of video programming is accomplished as follows:
Video programming is played directly from an 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 used 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.
22
<PAGE>
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
delivered its Extasy Networks programming since January, 1997 via these two
satellites. Fifth Dimension then 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 maintains a sub-lease with Fifth Dimension under its
non-cancelable sublease agreement on the three transponder slots on the Telstar
405 satellite, and is currently broadcasting its three Extasy Networks channels
on this satellite. CSB's 24-hour "barker" or promotional channel is currently
broadcasting Telstar 402R, which enables it to promote the Extasy Networks on
the same satellite where most of its competitors' services are offered.
Uplink Facility
CSB has engaged Fifth Dimension to maintain a fully operational uplink
facility in Ottawa, Canada, dedicated exclusively to the Extasy 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.
Call Service Center
Fifth Dimension had maintained a call service center in Ottawa, Canada.
Following the Fifth Dimension acquisition, CSB out-sourced these operations to
Turnervision, Inc. and relocated its call service function to the United States.
The call service center receives incoming calls from customers wishing to order
network programming, or having questions about service or billing. The call
service center is accessed from anywhere in the U.S. or Canada via a toll-free
"800" number. It is equipped with approximately 30 work stations, each of which
contains a networked computer work station, proprietary order processing
software, and telephone equipment. These components are tied into a master
switch which routes incoming calls and enables orders to be processed and
subscriber information to be updated "on-line."
The call service center is operational 24 hours each day, and staffed
according to call traffic patterns which take into account time of day, day of
the week, seasonal variances, holidays, and special promotions. Customers pay
for their orders with credit cards, which are authorized and charged before the
order is sent electronically to General Instrument's satellite operations
facility in San Diego, California for processing. General Instrument receives
the subscriber order and the subscriber's identification information, and sends
a signal up to the appropriate satellite, which "unlocks" the service ordered
for the applicable period of time.
Competition
The market for adult premium channel and pay-per-view programming is
divided into two separate and distinct types of programming: unedited adult
programming networks, and partially or fully edited programming networks.
Unedited and partially edited adult programming, like that offered by the Extasy
Networks, TeN and Spice, consists of movies and other programming that contains
sexually explicit film and video. Fully edited adult programming, like that
offered by Playboy, is edited so as to remove most of the explicit elements
which make up a typical adult film. Fully edited programming, while generally
not rated by the Motion Picture Association of America, would receive an "R" or
"NC-17" rating if submitted for review.
The Company also faces general competition from other forms of
non-adult entertainment, including sporting and cultural events, television,
feature films, and other programming. In addition, the Company will face
competition in the adult entertainment arena from other providers of adult
programming, adult video rentals and sales, adult film theaters, newspapers and
magazines aimed at adult consumers, telephone talk lines ("telephone sex"
services), and adult-oriented Internet services.
Marketing
CSB markets its services primarily through an open-air, 24-hour,
broadcast on a channel which promotes the programming featured on the Extasy
Networks. This channel, known as a "barker" channel, uses fully edited movie
clips and interstitial programming to entice viewers who are "channel surfing"
to subscribe to one of the Extasy 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, CSB advertises in print publications
such as satellite channel guides or adult themed magazines. CSB also
aggressively markets its Extasy Network programming directly to satellite
program packagers or distributors, through direct marketing campaigns,
face-to-face meetings, trade show exhibits and industry gatherings. CSB's
marketing department has developed numerous programs and promotions to support
the Extasy Networks. These have included the development of detailed monthly
program guides, glossy promotional pieces, and celebrity appearances at industry
trade shows. CSB also maintains a salesforce of four (4) full-time employees to
promote carriage of its programming on cable television, DBS and alternative
platform systems.
23
<PAGE>
The Company exhibits at two to three industry trade shows per year,
including the national Cable Television Association (NCTA) shows (Western and
National) and the Satellite Broadcasting and Communications Association (SBCA)
shows. In addition, the Company attends a variety of other industry trade shows,
including the Cable Television Advertising and Marketing (CTAM) and the DBS
Summit.
With the planned August 15, 1998 launch of TeN, the Company's marketing
efforts have been enhanced to include cable television and DBS trade
advertisements, marketing binders, and air checks/test broadcasts.
DaViD
DaViD is a leading content owner of feature-length adult and unrated
motion pictures for the Digital Versatile Disc ("DVD") market.
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 DVD media. 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. Prior to March 1997, DaViD had been
primarily engaged in the licensing of existing feature-length adult and unrated
motion picture content on Laser Disc media. DaViD no longer releases any titles
on Laser Disc media.
DaViD's typical exclusive distribution term ranges from seven years to
perpetuity. Exclusive distribution territory ranges from North America
(approximately 80% of DaViD's titles) to worldwide (approximately 20% 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's contracted acquisition library includes classic and new release
adult features such as Hidden Obsessions and Japanese animation titles such as
Urotsukidoji: The Legend of the Overfiend.
DaViD acquires video disc rights to approximately 100 feature films
each year, and historically has released four to five new titles per month. As
awareness and acceptance of DVD technology grows, DaViD intends to release up to
10 titles per month.
Jacket Printing
DaViD maintains an in-house art department which designs and produces
the electronic art necessary to print DVD jewel case inserts. Jewel case inserts
are printed and inserted by the replication company.
Disc Replication
DaViD contracts out the replication for its DVD titles to third-party
manufacturers. The replication companies receive masters from DaViD in the form
of digital "one- off" discs (DVD). Glass masters and stampers are created from
the one-off masters. Jacket printing and disc assembly (insertion into a jewel
case) is handled by the replication company.
FIFTH DIMENSION ASSETS ACQUISITION
On February 18, 1998, the Company, through its wholly owned subsidiary
CSB, acquired the assets relating to the subscription-based and
transaction-based adult satellite television business of Fifth Dimension.
Pursuant to the terms of the Asset Purchase Agreements between the Company and
Fifth Dimension, the Company acquired Fifth Dimension's satellite uplink
facility equipment, call center facility equipment, satellite transponder
subleases, film inventories, intangible assets (including trade names,
trademarks, service marks, copyrights, 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 also entered into an Uplink Management
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 for a period of nine months following the
acquisition.
24
<PAGE>
The assets acquired from Fifth Dimension generated sales of $15,044,139
and pre-tax income of $999,148 (pre-tax income, as adjusted for non-recurring
expenses and related party transactions, would have been $2,755,297) for the
year ended March 31, 1997. The Company acquired the Fifth Dimension assets for a
total purchase price of $7,700,000, consisting of $3,500,000 in cash and Common
Stock of the Company valued at $4,200,000. The original purchase price for the
Fifth Dimension assets had been $8,700,000, however, on January 16, 1998, Fifth
Dimension waived the requirement that the Company issue a promissory note for
$1,000,000, reducing the purchase price by $1,000,000. The Company also issued
840,000 shares of Common Stock and warrants to purchase up to an additional
400,000 shares of the Company's Common Stock at $5.00 per share, to Fifth
Dimension as part of the purchase price. The Company also agreed to pay Fifth
Dimension "formula profits" exceeding $2,000,000 for the first 12 months after
closing. "Formula Profits" is defined in the Asset Purchase Agreements as the
total revenue from operations minus actual operating costs. Maximum operating
costs under this provision are limited to an amount not greater than 125% of the
projected costs set forth in Schedule 2.1(f) to the Asset Purchase Agreements.
Schedule 2.1(f) details projected costs of $12,294,444, and maximum operating
costs of $15,368,055.
The Company intends to enhance shareholder value by:
* Integrating the Fifth Dimension Assets into the Company;
* Substantially reducing operating costs associated with the
Fifth Dimension assets by, among other things, outsourcing the
Call Center's operations to a third party provider in the
United States;
* Eliminating related-party leases and payments that were
previously made by Fifth Dimension;
* Reducing licensing fees by combining the purchasing power of
DaViD and CSB; and
* The implementation of simultaneous "web casting" of CSB
programming via the Internet.
In the Asset Purchase Agreements, Fifth Dimension agreed to indemnify,
defend, and hold harmless the Company against claims and losses that arise,
result from or relate to any breach of, or failure by Fifth Dimension to
perform, any of its representations, warranties, covenants or agreements under
the Agreements. The Asset Purchase Agreements do not contain standard
indemnification language particularly relating to claims, losses, costs, damages
and liabilities that may arise after closing as a result of acts that occurred
prior to closing. The Company, however, has retained the right to set off
against the Formula Profits any claim it may have against Fifth Dimension
following the acquisition.
INROADS
Inroads is a vertically integrated CD-ROM software publishing company.
As of December 31, 1997, the Company owned seventy percent (70%) of Inroads;
thirty percent (30%) of Inroads is owned by Quarto Holdings, Inc. ("Quarto"), a
subsidiary of the Quarto Group, Inc. On June 16, 1998, the Company sold its 70%
interest in Inroads to Quarto in exchange for, among other things, the
cancellation of Quarto's warrant to purchase up to 480,000 shares of Common
Stock of the Company, at an exercise price of $5.00 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.
25
<PAGE>
CD-ROM Content Licensing and Creation
Inroads has licensed 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
typically range from 2% to 5% of collected wholesale dollars.
CD-ROM Title Licensing
In September 1996, the Company completed agreements with Quarto whereby
Quarto acquired 30 percent of Inroads for $1,250,000 in cash and digital
material valued by the Company at $-0-, and valued at $525,000 by Quarto. The
Quarto agreement granted Inroads the right to commercially exploit Quarto
titles. Inroads has completed and released two Quarto-based titles to date:
CIGAR COMPANION INTERACTIVE, based on the best-selling Quarto title The Complete
Cigar Companion, and IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY, based on
best-selling Quarto books by Michael Freeman. On June 16, 1998, the Company
agreed to sell its 70% interest in Inroads to Quarto in exchange for, among
other things, the cancellation of Quarto's warrant to purchase up to 480,000
shares of Common Stock of the Company, at an exercise price of $5.00 per share.
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
The Company 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 packaging
are all handled by the replication companies. Inroads receives finished CD-ROM
goods from its manufacturers in boxes containing 200 units each.
MARKETS FOR PRODUCTS
The Extasy Networks/TeN
According to Paul Kagan Associates, a leading media industry analyst,
as of January, 1998, their were 98 million television households in the U.S. of
which approximately 65 million households receive cable television, 7 million
households receive DBS (high-powered) satellite services and 2.0 million
households receive C-band (large dish) satellite services.
Of the 65 million cable television households, approximately 51.5
million subscribers have the capacity to receive one or more adult channels and
100% of the DBS and C-band satellite households (total of 9 million households)
have the capacity to receive at least one adult channel.
According to Kagan, the market for adult pay-per-view and subscription
television is expected to grow from $200 million in 1998 to over $300 million in
2001.
On August 15, 1998, CSB plans to launch TeN: The Erotic Network, a new,
24-hour adult network targeted specifically to cable television systems and DBS
satellite service providers. CSB plans to position TeN as cable television's and
DBS satellites' alternative to the traditional fully edited adult movie services
offered by Playboy and Spice. In order to further increase the attractiveness
and initial market share of TeN, CSB is offering extremely competitive revenue
sharing terms to those cable and satellite distribution affiliates who agree to
carry the service.
26
<PAGE>
Based on the recent developments described under "Overview-The
Company's Adult Programming Networks-TeN: The Erotic Network (Telstar T02R, Test
Broad cast on Channel 19)" above, Management believes that CSB has an unique
opportunity to successfully launch a new adult network exclusively programmed
with adult films and videos that mirror the editing standards of Spice Hot.
Digital Versatile Disc Markets
The market for Digital Versatile Disc ("DVD") is expected to grow
dramatically. 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 estimates that nearly five million multimedia computer
households will be equipped with a DVD-ROM drive by the year 2000.
EMPLOYEES AND OFFICE SPACE
As of the date of this Report, the Company has 19 full-time and no
part-time employees. Five full-time employees are employed in executive
positions; seven part-time employees are employed in administrative and clerical
positions; the remainder of the Company's employees are employed in sales or
software development. The Company's employees are not members of a union, and
the Company has never suffered a work stoppage. The Company 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 $3,400 per month. The Company also sub-leases
approximately 6,000 square feet of space in Marina Del Rey, California.
LEGAL PROCEEDINGS
On November 11, 1996, the Company entered into a financial consulting
agreement (the "Sands Agreement"), with Sands Brothers & Co., Ltd. ("Sands
Brothers"), a broker-dealer headquartered in New York City under which Sands
Brothers agreed to provide financial advisory services to the Company. The Sands
Agreement also contained a provision granting Sands Brothers the exclusive right
to underwrite or place any private or public financing undertaken by the Company
during the two-year term of the Sands Agreement.
On May 20, 1997, the Company terminated the Sands Agreement based,
among other things, on the Company's allegation of non-performance on the part
of Sands Brothers. On September 26, 1997, counsel for Sands Brothers sent a
letter to Mark Kreloff, the Company's president, alleging that the Sands
Agreement was still in force, alleging breach of the Sands Agreement by the
Company and demanding that the Company comply with its terms.
On October 3, 1997, the Company filed a Complaint in District Court in
Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers, alleging breach
of the terms of the Sands Agreement by Sands Brothers. The Company also alleged
fraud in the inducement, and is seeking return of its initial payment of $25,000
to Sands Brothers and rescission of the Sands Agreement. Sands Brothers has
filed an answer and counter-claim to the Company's complaint, and the Company
has filed an answer to Sands Brothers counter-claim. The Company intends to
vigorously pursue its claim against Sands Brothers and believes that Sands
Brothers' counter-claim against the Company is wholly without merit.
27
<PAGE>
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.
NAME AGE POSITION
Mark H. Kreloff 36 Chairman of the Board, President and
Chief Executive Officer, New
Frontier Media, Inc.; Vice President
and Director, DaViD; President
and Director, CSB.
Andrew V. Brandt 29 Senior Vice President and Director,
New Frontier Media, Inc.
Michael Weiner 56 Executive Vice President,
Secretary-Treasurer and Director,
New Frontier Media, Inc.; President,
Secretary-Treasurer and Director,
DaViD; Vice President,
Secretary-Treasurer and Director,
CSB.
Scott D. Wussow 42 Chief Financial Officer, New
Frontier Media, Inc.
Clive Ng 36 Director, New Frontier Media, Inc.
Koung Y. Wong 45 Director, New Frontier Media, Inc.
MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief
Executive Officer of New Frontier Media, Inc. since the Company's inception in
September, 1995. Mr. Kreloff has been actively involved in the cable television,
entertainment and computer software industries since 1977. Prior to founding the
Company and during the four years immediately preceding his employment with the
Company, he was the President and Chairman of the Board for LEI Partners, L.P.,
a LaserDisc publishing company; Elmfield IV, Inc., an entertainment production
and distribution company, and California Software Partners, L.P., a computer
software development and publishing company. Previously, Mr. Kreloff held the
title Vice President, Mergers and Acquisitions, with Kidder Peabody & Co. and
Drexel Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by
Butcher & Singer, Inc., a Philadelphia-based investment bank, in the Cable
Television and Broadcast Media Group. From 1977 through 1983, Mr. Kreloff held a
variety of positions, including Marketing Director, in his family's cable
television system based in New Jersey. Mr. Kreloff is an honors graduate of
Syracuse University and holds B.S. degrees in Finance and Public Communications.
ANDREW V. BRANDT. Mr. Brandt has held the title of Senior Vice President
of New Frontier Media since the Company's inception. Mr. Brandt has extensive
experience in software company management, 3-D computer graphics, user interface
design, and software engineering. Prior to joining New Frontier Media, Inc., Mr.
Brandt spent two years developing numerous 3-D graphics libraries and graphical
user interfaces for a variety of platforms. Mr. Brandt developed a system for
medical applications utilizing real-time, three-dimensional ultrasound
acquisition and a video see-through head-mounted display. He also helped
prototype the first digital video interactive system and led the port of Pixar's
RenderMan to a supercomputer. Mr. Brandt graduated Magna Cum Laude from the
University of California, San Diego with a B.S. in Computer Engineering and
holds an M.S. in Computer Science from the University of North Carolina at
Chapel Hill.
MICHAEL WEINER. Mr. Weiner has been the Executive Vice President and a
director of New Frontier Media, Inc. since the Company's inception. Prior to
founding the Company, Mr. Weiner was actively involved as a principal and
director in a variety of publishing businesses, including a fine art poster
company. Mr. Weiner has been actively involved in creative businesses for the
past 25 years. His background includes 15 years in real estate development and
syndication as well as ownership in various publishing companies. Mr. Weiner is
a partner in the investment firm Maxim Financial Corporation, a private
portfolio management company based in Boulder, Colorado. From June, 1995 to the
present, Mr. Weiner has been Executive Vice President of the Company. For the 15
years prior to June, 1995, Mr. Weiner was self-employed as a real estate and
business consultant.
28
<PAGE>
SCOTT D. WUSSOW. Mr. Wussow has eighteen years of accounting and finance
experience, and is a Certified Public Accountant. He joined the Company as Chief
Financial Officer on April 1, 1996. For the past five years before joining the
Company, Mr. Wussow was Chief Financial Officer for Hart Bornhoft Group, an
investment firm. He was responsible for financial reporting, systems
development, operations, compliance, and risk management. Previous to that, Mr.
Wussow was Controller at Neodata Services, a publisher services company, and was
Accounting Manager for a division of MCI Communications. While at MCI, Mr.
Wussow was department head for general accounting and special projects for the
Western Division start-up. Among his responsibilities was fixed asset accounting
for the network system and the establishment of the customer service call
center. Mr. Wussow graduated Magna Cum Laude from the University of Wisconsin at
Eau Claire with a B.A. degree in Accounting.
CLIVE C.N. NG. Mr. Ng is Deputy Chairman of Pacific Media PLC, a
publicly-listed UK company. Pacific Media PLC owns the United Artists Theaters
Asia with United Artists Theaters of the US and with TVB of Hongkong, the
Chinese Channel in Europe. Mr. Ng co-founded UIH Asia Holdings, a regional
partnership to develop Asian cable television markets, as well as Spectradyne
Asia, then the leader in the TV settop box business for hotels. In 1995 he led
Pacific Media's purchase of a key share in one of Hongkong's leading ISP's,
Hongkong Supernet. Mr. Ng earned a Bachelor of Arts degree from Syracuse
University's School of Management in 1983, and earned a Master's Degree in
Business Administration from New York University in 1985.
KOUNG Y. WONG. Mr. Wong was born in Canton, China in 1952 and immigrated
to the United States in 1969 with his family. He earned a Bachelor of Arts
degree from City College of San Francisco in 1975, and studied Architecture at
the University of California at Berkeley for one year. In 1976, Mr. Wong opened
a stereo store, Wong's Hi-Fi, in San Francisco. For the last 21 years, Mr. Wong
has been the president and sole shareholder of Wong's Audio-Visual, Inc. a
leading commerce electronics hardware and software distribution company based in
South San Francisco, California. Wong's Audio-Visual, Inc. includes a 20,000
square-foot corporate headquarters and distribution center and an 8,500
square-foot retail superstore in San Francisco.
No director or executive officer of the Company is related to any other
director or executive officer. None of the Company's officers or directors hold
any directorships in any other public company. There are currently two outside
directors on the Company's Board of Directors. The Company's compensation
committee is comprised of Messrs. Kreloff, Weiner, and Wong. The Company's audit
committee is comprised of Messrs. Kreloff, Ng and Wong. Fifth Dimension is
entitled to name one nominee to the Company's Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During the fiscal year ended March 31, 1998, Messrs. Kreloff, Weiner
and Brandt each inadvertently failed to file on a timely basis a Form 4 Report
with respect to private gift transactions effected in March 1998. With respect
to Mr. Kreloff, the late filing related to one (1) gift transaction, with
respect to Mr. Weiner, the late filing related to three (3) gift transactions,
and with respect to Mr. Brandt, the late filing related to four (4) gift
transactions. In none of the above transactions did any of such executive
officers receive any compensation for the disposed shares.
DIRECTOR COMPENSATION
None of the Company's directors received any compensation during the
most recent fiscal year for serving in his position as a director. No plans have
been adopted to compensate directors in the future; however, it is likely that
during fiscal 1998 the Board of Directors will adopt an employee stock option
plan which includes provision for stock options to be issued to directors.
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid to
executive officers of the Company for the fiscal year ended March 31, 1998. No
executive officer received annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL RESTRICTED OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION STOCK AWARDS SAR PAYOUTS COMPENSATION
- ------------------ ---- --------- -------- ------------ ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark H. Kreloff, CEO, COO, 1998 39,167 75,000 0 0 0 0 3,053
Pres., and Chairman
Michael Weiner, Sr. V.P., 1998 39,167 75,000 0 0 0 6,229
Sec.-Treas. and Director
Andrew V. Brandt, Sr. V.P. 1998 80,627 0 0 0 0 0 6,511
and Director
Scott D. Wussow, CFO 1998 55,108 0 0 0 0 0 0
</TABLE>
29
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Brandt. Such agreement
will continue through August, 2000, unless earlier terminated for cause, and
provides for annual compensation of $75,695. Mr. Brandt also has agreed not to
solicit the Company's customers for a period of 5 years after his employment
ends; 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 solicit 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 Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
As of March 31, 1998, the Company has notes payable to officers and
shareholders bearing interest at 8.5%, unsecured and due on demand anytime after
December 31, 1996 in the amount of $106,465.
On March 2, 1998, the Company loaned an entity owned by two major
shareholders of the Company $100,000 in the form of a promissory note
receivable. The note bears interest at 8% per annum, is due on demand after
April 30, 1998 and is secured by common stock of the Company.
The Company had an agreement with an entity related to a major shareholder
to sell, package, handle, replicate and his adult video disc titles at the
Company's expense for a management fee of $35,000 per month through May 31, 1996
and $40,000 per month through July 1, 1997. As of July 1, 1997 this agreement
was terminated and the Company assumed all responsibilities associated with the
titles. During the years ended March 31, 1998 and 1997 this related entity
withheld from sales of $353,293 and $2,236,143. Replicating costs of $286,361
and $1,646,364 and management fees of $120,000 and $470,000, respectively.
Included in accounts payable at March 31, 1998 is $22,332 due to the related
entity. Included in accounts receivable at March 31, 1998 is $141,585 due from
the related entity. 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 years
ended March 31, 1998 and 1997 was $2,318 and $2,318.
The Company leases certain equipment and office space via entities
controlled by an officer and shareholder on a month to month basis (see note G).
During the years ended March 31, 1998 and 1997 the Company paid $87,033 and
$116,549 to these entities relating to these leases.
Any ongoing or future transactions between the Company and its officers,
directors, principal shareholders, or other affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
on an arms-length basis and will be approved by a majority of the Company's
independent and disinterested directors. Any future loans to officers,
directors, principal shareholders, or affiliates will be made for a bonafide
business purpose, on terms no less favorable than could be obtained from
unaffiliated third parties and will be approved by a majority of the Company's
independent and disinterested directors.
30
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this 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>
NAME OF NUMBER
BENEFICIAL OWNER(1) SHARES BENEFICIALLY OWNED PERCENT
------------------- ------------------------- -------
<S> <C> <C>
Mark H. Kreloff....................................................... 1,014,000 15.50%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Michael Weiner........................................................ 595,400 9.10%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Andrew V. Brandt...................................................... 224,500 3.43%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Maxim Corporation(2).................................................. 475,000 7.26%
1035 Pearl Street
Boulder, CO 80302
All officers and directors as a group (10 persons) 1,856,400 28.38%
<FN>
-----------
(1) Except as otherwise indicated, each of the parties listed has sole
voting and investment power with respect to all shares of Common Stock
indicated. Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
under the Exchange Act. The ownership of the shares deemed to be held by the
Selling Securityholders, due to their ownership of $1,750,000 principal amount
of Debentures is not reflected due to their contractual obligations to the
Company pursuant to which they are not entitled to convert any Debenture to the
extent that after such conversion the number of shares of Common Stock
beneficially owned by them and their respective affiliates (excluding any shares
deemed beneficially owned through any continuing ownership of Debentures)
exceeds 4.9% of the outstanding Common Stock. The conversion price will be
adjusted and the number of shares beneficially owned and being offered by the
Selling Securityholder will vary in accordance with the terms of the Debentures
to reflect changes in the market price of common stock, stock dividends, stock
splits, and certain other circumstances. See "Description of Securities."
(2) 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.
</FN>
</TABLE>
DESCRIPTION OF SECURITIES
Prior to this Offering there were approximately 200 holders of record
of the Company's Common Stock. The Company is currently authorized to issue
50,000,000 shares of its Common Stock, par value $.0001 per share, and 5,000,000
shares of its Preferred Stock, par value $.10 per share. As of the date of this
Prospectus, and prior to issuance of any shares of Common Stock to investors,
the Company has 6,542,000 shares of its Common Stock, and no shares of its
Preferred Stock, issued and outstanding. There are also warrants to purchase an
additional 1,796,666 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.
31
<PAGE>
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.
8% CONVERTIBLE DEBENTURES
The Company's 8% Convertible Debentures ("Debentures") bear an interest rate
of eight percent (8%) per annum and mature on June 3, 2000 as to the $1,750,000
principal amount of Debentures currently outstanding and as of the end of the
first anniversary month of the issuance of the additional $1,750,000 tranche of
Debentures that the Selling Shareholder has agreed to purchase. See "Use of
Proceeds from Sale of Debentures." The Debentures are issuable in denominations
of $100,000 and integral multiples thereof and, at the holder's request, are
exchangeable for an equal aggregate principal amount of debentures of different
authorized denominations. Upon maturity of the Debentures, payment for principal
and accrued interest will be made either in currency or in shares of the
Company's Common Stock, at the option of the holder.
The conversion price for a Conversion Share will be the lesser of 125% of
the Closing Price on June 3, 1998, which was $3.96875, or 90% of the Market
Price on the Conversion Date. Assuming that the Market Price on the date of
Conversion is $3.03750 (which is the Market Price calculated as of July 9, 1998)
with respect to all the Debentures, and that all the Debentures are converted at
90% of the Market Price, the aggregate number of Conversion Shares issued would
be 1,280,293 (excluding any Conversion Shares issued with respect to accrued
interest on the Debentures at the time of conversion). The "Closing Price" as
used in the Debenture means the average closing bid price of the Common Stock on
the five (5) trading days immediately preceding June 3, 1998, as reported by the
National Association of Securities Dealers. The "Market Price" as used in the
Debenture means the average of five lowest closing bid prices for the Common
Stock for the twenty consecutive trading days preceding the Conversion Date, as
reported as stated above. The Company has the option to pay the interest accrued
from the date of issuance to the date of conversion either in cash or in shares
of Common Stock.
The Company may redeem any Debentures for which a Notice of Conversion has
not been submitted by delivering a Notice of Redemption to the holder.
The redemption price will be calculated so that the Holder will realize the
full economic benefit that the Holder would derive from converting the
securities into Common Stock and immediately selling same on the date of the
Notice of Redemption. The Company must pay the redemption price to the holder
within ten days from the date of the Notice of Redemption. If the Company fails
to make the redemption payment within these ten days, the Company forfeits its
right to redeem those Debentures.
If the Company merges or consolidates with another corporation or sells or
transfers all or substantially all of its assets to another person and, as a
condition of such merger, consolidation or sale, the holders of the Company's
Common Stock are entitled to receive stock or securities in another corporation
or to receive property in exchange for the Company's Common Stock, then the
Debenture may be converted into the kind and amount of stock, securities or
property receivable by the holders of the Company's Common Stock pursuant to the
transaction. If, within fifteen (15) days of the holder's receipt of a notice
from the Company advising of a proposed merger, consolidation or sale, the
holder has not submitted a Notice of Conversion, then the Company may prepay all
outstanding principal and accrued interest and thereby terminate the holder's
conversion rights.
PUBLICLY TRADED WARRANTS
In connection with the Company's February 1998 secondary public
offering, the Company issued 1,500,000 warrants in registered form under,
governed by, and subject to the terms of a warrant agreement between the Company
and Corporate Stock Transfer, Inc. as warrant agent. The warrants are currently
listed on the Nasdaq SmallCap Market under the symbol "NOOFW."
Each such warrant entitles the holder thereof to purchase at any time
one share of Common Stock at an exercise price of $6.50 until February 10, 2003.
The right to exercise the warrants will terminate at the close of business on
February 10 , 2003. The warrants contain provisions that protect the warrant
holders against dilution by adjustment of the exercise price in certain events,
including but not limited to stock dividends, stock splits, reclassification, or
mergers.
32
<PAGE>
Commencing August 11, 1998, the Company may redeem some or all of the
warrants at a call price of $0.05 per warrant, upon thirty (30) days' prior
written notice if the closing sale price of the Common Stock on the Nasdaq
SmallCap Market has equaled or exceeded $8.00 for ten (10) consecutive days.
The warrants may be exercised only if a current prospectus relating to
the underlying Common Stock is then in effect and only if the shares are
qualified for sale or exempt from registration under the securities laws of the
state or states in which the purchaser resides. So long as the warrants are
outstanding, the Company has undertaken to file all post-effective amendments to
its February 1998 Registration Statement required to be filed under the
Securities Act, and to take appropriate action under federal law and the
securities laws of those states where the warrants were initially offered to
permit the issuance and resale of the Common Stock issuable upon exercise of the
warrants.
UNDERWRITER'S WARRANTS
In connection with the Company's February 1998 secondary public
offering, the Company granted to the managing underwriter, underwriters warrants
(the "Underwriter's Warrants") to purchase Underwriters' Warrants to purchase
150,000 shares of Common Stock of the Company. The Underwriters' Warrants have
an exercise price equal to $6.75 per share of Common Stock, and are exercisable
beginning on February 18, 1999 and for a period of four years thereafter. The
shares of Common Stock issuable upon exercise of the Underwriter's Warrants are
identical to the Shares being registered by this Prospectus. The Underwriter's
Warrants contain anti-dilution provisions providing for adjustment in the number
of Warrants and the exercise price thereof under certain circumstances.
At any time the Underwriters' 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
Underwriters' 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 ending February 17, 2003, the holders of
the Underwriters' Warrants or underlying Common Stock will have the right,
subject to certain conditions, to include in such registration statement, at the
Company's expense, all or part of the underlying Common Stock at the request of
the holders. Additionally, the Company has agreed, for a period of five years
commencing on the date of this Prospectus, on demand of the holders of a
majority of the Underwriters' Warrants or the Common Stock issued or issuable
thereunder, to register the Common Stock underlying the Underwriters' Warrants
one time at the Company's expense. The registration of securities pursuant to
the Underwriters' 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 Underwriters' Warrants
are outstanding.
LIMITATION OF LIABILITY; INDEMNIFICATION MATTERS AND DIRECTORS' AND
OFFICERS' INSURANCE
The Company's Bylaws require the Company, to the fullest extent
permitted or required by Colorado law, to (i) indemnify its directors against
any and all liabilities and (ii) advance any and all reasonable expenses,
incurred in any proceeding to which any such director is a party or in which
such director is deposed or called to testify as a witness because he or she is
or was a director of the Company. Generally, Colorado statutory law permits
indemnification of a director upon a determination that he or she acted in good
faith and in a manner he or she reasonably 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.
33
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by the Company and its stockholders
could adversely affect the prevailing market price of the Common Stock. There
are currently 840,000 restricted shares and 5,702,000 shares of Common Stock
which are freely tradeable or eligible to have the restrictive legend removed
pursuant to Rule 144(k) promulgated under the Securities Act. Of the 840,000
restricted shares, none of such shares are currently eligible for resale under
Rule 144. Of the restricted shares and Rule 144(k) shares, 1,856,400 shares held
by certain of the Company's officers and directors are subject to certain
lock-up agreements through February 18, 1999. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales may occur,
could have a material adverse effect on the market price of the Common Stock.
Pursuant to its Certificate of Incorporation, the Company has the authority to
issue additional shares of Common Stock and Preferred Stock. The issuance of
such shares could result in the dilution of the voting power of Common Stock
purchased in this Offering. See "Description of Securities" and "Principal
Shareholders."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will passed
upon for the Company by Combs & Associates, Boulder, Colorado.
EXPERTS
The financial statements of the Company for the fiscal years ended
March 31, 1998 and 1997 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.
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.
34
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-19
F-1
<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, 1998 and 1997, 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, 1998 and 1997, 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
June 11, 1998, except for Note 13, as
to which the date is June 26, 1998
F-2
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash - restricted (Note 4) $ 253,123 $ 109,387
Investment in certificates of deposit - restricted (Notes 4 and 7) 250,000 750,000
Accounts receivable (Note 3) 813,456 212,370
Inventorles (Note 1) 182,508 659,503
Prepaid distribution and film exhibition rights (Note 1) 721,062 82,250
Trading securities, at market value 193,350 -
Transponder deposit 495,000 _
Notes receivable - related parties (Note 3) 138,000 _
Other 243,148 68,225
----------- -----------
Total current assets 3,289,647 1 881,735
----------- -----------
FURNITURE AND EQUIPMENT, at cost (Note 1) 1,113,428 65,552
Less: accumulated depreciation and amortization (62,209) (22,661)
----------- -----------
Net furniture and equipment 1,051,219 42,891
----------- -----------
OTHER ASSETS:
Notes receivable - related parties (Note 3) - 38,000
Accounts receivable - retainage (Note 1) 108,304 88,844
Other 11,114 135,001
Goodwill, less accumulated amortization of $73,226 (Note 1) 6,287,665 -
----------- -----------
Total other assets 6,407,083 261,845
----------- -----------
$10,747,949 $ 2,186,471
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accountspayable $ 585,001 $ 125,928
Note payable (Note 2) 500,000 -
Notes payable related parties (Note 3) 106,465 139,573
Current portion of obligations under capital lease (Note 6) 6,041 5,139
Lines of credit (Note 7) - 341,274
Otheraccrued liabilities 172,410 45,416
Accrued disposal costs (Note 9) 459,050 -
Deferred revenue (Note 1) 446,944 -
----------- -----------
Total current liabilities 2,275,911 657,330
----------- -----------
LONG-TERM DEBT - Obligations under capital leases (Note 6) 6,716 12,926
----------- -----------
Total liabilities 2,282,627 670,256
----------- -----------
MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4) 17,570 305,443
----------- -----------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Notes 1, 4 and 8):
Common stock, $.0001 par value, 50,000,000
shares authorized, 6,542,000 and 4,189,000,
shares issued and outstanding, respectively 654 419
Preferred stock, $.10 par value, 5,000,000 shares authorized:
Class A, 0 and 10,000 shares issued and outstanding, respectively - 1,000
Class B, 0 and 5,000 shares issued and outstanding, respectively - 500
Additional paid-in capital 12,265,249 1,768,661
Deficit (3,818,151) (559,808)
----------- -----------
Total shareholders' equity 8,447,752 1,210,772
----------- -----------
$10,747,949 $ 2,186,471
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31.
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
SALES, net $ 1,645,192 $ 2,515,802
COST OF SALES 2,021,404 2,217,812
----------- -----------
GROSS MARGIN (376,212) 297,990
----------- -----------
OPERATING EXPENSES:
Occupancy andequipment 161,883 190,675
Legal and professional 117,466 67,625
Advertising and promotion 204,061 199,238
Salaries, wages and benefits 574,546 236,017
Communications 22,854 32,137
General and administrative 205,071 129,615
Goodwill amortization 73,226 -
Consulting 55,895 76,035
----------- -----------
Total operating expenses 1,415,002 931,342
----------- -----------
OTHER INCOME (EXPENSE):
Unrealized loss on trading securities (31,785)
Licensing fees and royalties - 191,995
Licensing commissions - (27,193)
Interest income 3,427 37,736
Interest expense (131,096) (20,022)
----------- -----------
Total other income (expense) (159,454) 182,516
----------- -----------
Lossfromcontinuingoperations (1,950,668) (450,836)
----------- -----------
DISCONTINUED OPERATIONS (Note 9):
Loss from operations of discontinued subsidiaries (1,136,498) -
Loss on disposal of discontinued subsidiaries, including provision
of $35,000 for operating losses during the phase out period (459,050) -
----------- -----------
(1,595,548) -
----------- -----------
Net loss before minority interest (3,546,216) (450,836)
Minority interest in loss of discontinued subsidiary 287,873 64,806
----------- -----------
NET LOSS $(3,258,343) $ (386,030)
----------- -----------
----------- -----------
NET LOSS PER COMMON SHARE FROM
CONTINUING OPERATIONS (Note 1) $ (.44) $ (.09)
----------- -----------
----------- -----------
NET LOSS PER COMMON SHARE FROM
DISCONTINUED OPERTIONS (Note 1) $ (.29) $ -
----------- -----------
----------- -----------
NET LOSS PER COMMON SHARE (Note 1) $ (.73) $ (.09)
----------- -----------
----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1) 4,460,744 4,188,459
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Class A Class B
Common Stock Preferred Stock Preferred Stock
--------------------- ------------------ ------------------ Additional
$0.0001 Par Value $0.10 Par Value $0.10 Par Value Paid-In
Shares Amount Shares Amount Shares Amount Capital Deficit
---------- ------ ------- -------- ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, March 31, 1996 4,175,250 $ 418 10,000 $ 1,000 - $ - $ 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 _ _ _ _ 5,000 500 12,837 -
Issuance of common stock, less
offering costs of $10,922 20,000 2 - - - - 69,076 -
Retirement of common stock (6,250) (1) - - - - - -
---------- ------ ------- -------- ------ ------ ----------- -----------
Net loss - - - - - - - -
BALANCES, March 31, 1997 4,189,000 419 10,000 1,000 5,000 500 1,768,661 (559,808)
Issuance of common stock for
services 8,000 1 - - - - 39,999 -
Conversion of preferred stock
to common stock 5,000 - (10,000) (1,000) (5,000) (500) 1,500 -
Issuance of common stock,
less offering costs of
$1,585,374 1,500,000 150 - - - - 6,184,476 -
Issuance of common stock for
acquisition of assets 840,000 84 - - - - 4,199,916 -
Related party notes and
accrued interest contributed
as capital - _ - - - - 70,697 -
Net loss - - - - - - - (3,258,343)
---------- ------ ------- -------- ------ ------ ----------- -----------
BALANCES, March 31, 1998 6,542,000 $ 654 - $ - - $ - $12,265,249 $(3,818,151)
---------- ------ ------- -------- ------ ------ ----------- -----------
---------- ------ ------- -------- ------ ------ ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,258,343) $ (386,030)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 112,959 12,244
Unrealized loss on securities 31,785 -
Increase (decrease) in accounts payable 459,073 (60,814)
Increase in accounts receivable (620,546) (1,885)
Decrease (increase) in inventories 476,995 (305,414)
Decrease in prepaid distribution rights 8,126 12,250
Decrease (increase) in other assets 457,372 (141,715)
Decrease in income tax receivable - 72,500
Increase in other accrued liabilities 126,994 29,854
Minority interest in loss of subsidiary (287,873) (64,806)
Increase in transponder deposit (495,000) -
Increase in accrued disposal costs 459,050 -
Increase in deferred revenue 446,944 -
Stock issued for services 40,000 -
----------- -----------
Net cash used in operating activities (2,042,464) (833,816)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (77,210) (6,928)
Increase in notes receivable - related party (100,000) -
Sale (purchase) of certificates of deposit 500,000 (750,000)
Increase in trading securities (193,350) -
Acquisition of Fifth Dimension assets (4,281,284) -
----------- -----------
Net cash used in investing activities (4,151,844) (756,928)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (5,308) (1,245)
Proceeds from line of credit - 341,274
Payments on line of credit (341,274) -
Proceeds from note payable 500,000 -
Issuance of common stock, net of offering costs 6,184,626 89,078
Retirement of common stock - (25,000)
Issuance of preferred stock, net of offering costs - 13,337
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 6,338,044 1,651,608
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET INCREASE IN CASH 143,736 60,864
CASH, beginning of year 109,387 48,523
----------- -----------
CASH, end of year $ 253,123 $ 109,387
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interestpaid $ 93,508 $ 5,487
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment via capital lease obligation $ - $ 19,310
----------- -----------
----------- -----------
Common stock issued for services $ 40,000 $ -
----------- -----------
----------- -----------
Common stock issued for acquisition of Fifth Dimension assets $ 4,200,000 $ -
----------- -----------
----------- -----------
Related party notes payable and accrued interest contributed
as capital $ 70,697 $ -
----------- -----------
----------- -----------
Reclassification of accrued interest payable to related party
notes payable $ 21,465 $ -
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business, and Consolidation
The Company was originally incorporated in the state of Colorado on February 23,
1988. On September 15, 1995 the Company acquired New Frontier Media, Inc. in a
stock for stock exchange and changed the Company's name to New Frontier Media,
Inc. ("NFMI" or the "Company"). For a period of five years preceding this
acquisition the Company had not conducted any significant business operations.
As of March 31, 1996 the Company had three wholly owned subsidiaries; Boulder
Interactive Group, Inc. ("BIG") (a developer and publisher of entertainment and
educational computer software on CD-ROM), 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 20, 1996 Quarto Holdings, Inc. ("Quarto") purchased 1,714 newly
issued common shares of BIG for a 30% minority interest (see Note 4).
On February 18, 1998 the Company purchased certain assets of Fifth Dimension
Communications (Barbados) Inc. and its related entities ("Fifth Dimension")
pursuant to an asset purchase agreement dated September 18, 1997. The Company
subsequently contributed these assets to its newly formed wholly owned
subsidiary Colorado Satellite Broadcasting, Inc. ("CSB"). The acquisition was
completed through the issuance of 840,000 shares of the Company's common stock
valued at $5.00 per share, warrants to purchase an additional 400,000 shares of
the Company's common stock at $5.00 per share and the payment of $4,281,284 in
cash. The acquisition was accounted for using the purchase method of accounting.
The excess of the cost of the acquisition over the fair value of the assets
acquired was recorded as goodwill. The acquisition was funded from the proceeds
of a public offering of the Company's common stock which also closed on February
18, 1998. The Company raised approximately $6,184,000 net of offering costs, by
selling 1,500,000 shares of the Company's common stock.
The Company, through its subsidiary CSB, and by reason of its consummation of
its Asset Purchase Agreements with Fifth Dimension, is a provider of
subscriber-based premium television channels ("premium channels" or "pay
television") and transaction-based television networks ("pay-per-view"). CSB
currently owns, operates and distributes three C-band adult programming
networks: Extasy, True Blue, and Exotica. CSB is a provider of unedited adult
programming via direct to home ("DTH") C-band satellite. CSB also provides its
services through cable television and wireless cable television multiple system
operators.
The accompanying consolidated financial statements include the historical
accounts of NFMI, BIG DVD and FUZZY for all periods presented and CSB 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.
F-9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 March 31, 1998 and 1997, retention amounts included in trade accounts
receivable were $108,304 and $88,844.
Inventories
Inventories are stated at the lower of cost (first in, first out) or market.
These costs include acquisition, duplication, production and the physical
packaging of the products for distribution on a unit-specific basis and are
charged to cost of sales when revenue from the sale of the units is recognized.
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 filed a consolidated
income tax return with its subsidiaries through September 30, 1996 when a 30%
minority interest was sold. Subsequent to September 30, 1996 the Company files a
consolidated income tax return with its subsidiaries excluding BIG.
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 for replication and distribution.
F-10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
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.
Fair Value of Financial Instruments
The carrying amount of cash, certificates of deposit, accounts receivable,
accounts payable and notes receivable and payable approximates fair value.
Long-Lived Assets
The Company adopted the provisions of SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in its financial
statements for the year ended March 31, 1998. The adoption of SFAS 121 had no
material affect on the Company's financial statements. The Company reviews its
long-lived assets for impairment to determine if the carrying amount of the
asset is recoverable.
Goodwill
Goodwill, which resulted from the acquisition of assets from Fifth Dimension, as
described above, is being amortized over a period of 120 months.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Warrants
The Company follows the intrinsic value based method of accounting as prescribed
by APB 25, Accounting for Stock Issued to Employees, for its stock-based
compensation. Under the Company's stock warrant issuances, the exercise price is
in excess of the fair value of the warrants at the grant date and no
compensation cost is recognized.
F-11
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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. Common stock equivalents are not included in
the weighted average calculation since their effect would be anti-dilutive.
Preferred dividends of $3,417 have been added back to the net loss to arrive at
net loss per common share for the year ended March 31, 1997. Net loss per common
share from discontinued operations includes the minority interest in loss of
discontinued subsidiary.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 2 - NOTE PAYABLE
$500,000 note payable to an unrelated entity, dated August 29, 1997, secured by
all of the assets of the Company and the common stock of the Company owned by
the majority shareholders of the Company, bearing interest at 12% per annum and
due on August 29, 1998.
NOTE 3 - RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Notes payable to officers and shareholders bearing interest at 8.5%,
unsecured and due on demand anytime after December 31, 1996 $ 99,981 $ 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 6,484 54,573
------------- -------------
$ 106,465 $ 139,573
============= =============
</TABLE>
On March 31, 1998, in connection with the discontinuance of the Company's
subsidiary BIG, $54,573 of the above related party notes payable, plus accrued
interest of $16,124 were forgiven and credited to additional paid in capital. In
addition at March 31, 1998, $21,465 of accrued interest on the remaining note
balances of $85,000 was credited to the notes. Included in other liabilities at
March 31, 1997 was $26,574 of accrued interest relating to these notes.
On March 2, 1998, the Company loaned an entity owned by two major shareholders
of the Company $100,000 in the form of a promissory note receivable. The note
bears interest at 8% per annum, is due on demand after April 30, 1998 and is
secured by common stock of the Company.
The Company had an agreement with an entity related to a major shareholder to
sell, package, handle, replicate and ship adult video disc titles at the
Company's expense for a management fee of $35,000 per month through May 31, 1996
and $40,000 per month through July 1, 1997. As of July 1, 1997
F-12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 3 - RELATED PARTY TRANSACTIONS (continued)
this agreement was terminated and the Company assumed all responsibilities
associated with the titles. During the years ended March 31, 1998 and 1997 this
related entity withheld from sales of $353,293 and $2,236,143, replicating costs
of $286,361 and $1,646,364 and management fees of $120,000 and $470,000,
respectively. Included in accounts receivable at March 31, 1997 was $141,585 due
from the related entity. Included in accounts payable at March 31, 1998 is
$22,332 due to the related entity. 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
years ended March 31, 1998 and 1997 was $2,318 and $2,318.
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
years ended March 31, 1998 and 1997 the Company paid $87,033 and $116,549 to
these entities relating to these leases.
NOTE 4 - SHAREHOLDERS' EQUITY
Common Stock
For the year ended March 31, 1996 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.
On February 18, 1998 the Company issued 1,500,000 units (one share of common
stock and one warrant to purchase one share of common stock at an exercise price
of $6.50 expiring February 18, 2003) in a public offering for cash of $7,770,000
less offering costs of $1,585,374. A portion of these proceeds along with the
issuance of 840,000 shares of common stock valued at $5.00 per share were used
to acquire certain assets of Fifth Dimension (see Note 1).
In addition, in connection with the public offering, 150,000 warrants to
purchase one share of common stock at an exercise price of $6.75 expiring
February 18, 2003 were issued to the underwriter .
Preferred Stock
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 September 30, 1997, each share of Class A preferred stock was given back
to the Company and the shares were retired. In addition the Class B preferred
stock was converted into 5,000 shares of common stock. The dividends in arrears
on both the Class A and B preferred stock were forgiven in the above
transactions.
F-13
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 4 - SHAREHOLDERS' EQUITY (continued)
Subsidiary Sale of Stock
On September 20, 1996 Quarto Holdings, Inc., a Delaware Corporation, purchased
30% of newly issued common stock of BIG for $1,250,000 in cash and rights to
develop and exploit digital material owned by Quarto. The Company placed a $-0-
value on the rights received from Quarto. The Company recorded 70% of the
$1,250,000 in proceeds as equity on a consolidated basis and 30% of this amount
as a minority interest, (see Note 1).
In connection with the purchase, NFMI entered into a stockholder agreement with
Quarto whereby at least 75% of stockholder approval is necessary to approve
certain actions taken on behalf of BIG. The agreement enumerates various actions
and restrictions as it relates to the operations of BIG, specifically (1) that
the funding proceeds can only be used to fund BIG's development and
commercialization of CD-ROM titles and (2) 75% shareholder approval is required
before encumbering any assets of BIG. Therefore, cash and certificates of
deposit of $250,000 and $841,568 at March 31, 1998 and 1997 were restricted to
BIG's operations and could not be used for the operations of NFMI or its
affiliates (see Note 7).
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.
As mentioned in Note 13, the above warrants were retired.
NOTE 5 - INCOME TAXES
The Company has an unused net operating loss carry forward of approximately
$2,400,000 for income tax purposes, of which approximately $240,000 expires in
2012 and the remainder in 2013. In addition, the Company's 70% owned subsidiary
BIG, which is not part of the consolidated income tax return, has a net
operating loss of approximately $1,160,000 of which approximately $216,000
expires in 2012 and the remainder in 2013. 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. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of March 31,
1998 and 1997 are as follows:
F-14
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 5 - INCOME TAXES (continued)
<TABLE>
<CAPTION>
1998 1997
---------------- ------------
<S> <C> <C>
Deferred tax liabilities $ - $ -
================ =============
Deferred tax assets:
Net operating loss carry forwards $ 898,206 $ 78,544
Deferred revenue 167,604 -
---------------- -------------
Total deferred tax assets 1,065,810 78,544
Valuation allowance for deferred tax assets (1,065,810) (78,544)
---------------- -------------
$ - $ -
================ =============
</TABLE>
The valuation allowance for deferred tax assets was increased by $987,266 and
$76,123 during 1998 and 1997 respectively.
As a result of the disposition of BIG and FUZZY as discussed in Note 9,
approximately $1,400,000 of the above NOL will not be available to the Company.
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, 1998 is
$19,310 of equipment under capital lease and accumulated depreciation relating
to this lease of $11,586. In addition, CSB has entered into sub-lease agreements
with Fifth Dimension for the use of transponders to broadcast CSB's channels on
satellites.
Future minimum lease payments under these leases as of March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Year ended Principal Due
March 31, Operating Capital Capital Lease
- ---------- ------------ --------- -------------
<S> <C> <C> <C>
1999 $ 6,889,968 $ 7,609 $ 6,041
2000 4,729,968 6,473 5,706
2001 929,968 1,065 1,010
2002 8,328 - -
------------ --------- --------
$ 12,558,232 15,147 $ 12,757
============ ========
Less amount representing interest 2,390
---------
Present value of net minimum lease payments $ 12,757
=========
</TABLE>
Total rent expense for the years ended March 31, 1998 and 1997, was $810,602,
which includes transponder payments, and $136,013, respectively.
In connection with the asset purchase agreement with Fifth Dimension (see Note
1), CSB has entered into a three year uplink service agreement requiring monthly
payments of $80,000. The agreement can be terminated upon 30 days written notice
for a termination fee of $21,800 and one half of the remaining payments or
$200,000, whichever is greater.
The Company has agreed to pay Fifth Dimension "formula profits" (total revenue
from CSB's operations less actual operating costs) exceeding $2,000,000 for the
first twelve months after closing.
F-15
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 7 - LINES OF CREDIT
The Company had lines of credit with a banking institution as follows:
<TABLE>
<CAPTION>
1998 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 $ - $ 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 - 94,033
--------- ---------
$ - $ 341,274
========= =========
</TABLE>
The two certificates of deposit securing the above lines of credit were held in
the name of the Company's subsidiary BIG.
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 at
a price 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, 1998, warrants to purchase common stock at various prices
were outstanding which expire as follows:
Expiration Date Warrants Exercise Price
--------------- --------- --------------
September, 2001 400,000* 6.00
February, 2003 1,500,000 6.50
February, 2003 150,000 6.75
---------
2,050,000
=========
*As discussed in Note 13, these warrants were retired in connection with the
sale of BIG.
The following table describes certain information related to the Company's
compensatory stock warrant activity for the year ending March 31, 1997. There
were no compensatory stock warrants granted, exercised, forfeited or expired for
the year ending March 31, 1998.
<TABLE>
<CAPTION>
Number Weighted Average
of Warrants Exercise Price
------------ ----------------
<S> <C> <C>
Outstanding, March 31, 1996 - $ -
Grants during 1997 - Exercise price > market price 146,666 6.00
Exercised, forfeited and expired during 1997 - -
------------
Outstanding and exercisable, March 31, 1997 and 1998 146,666 6.00
============
</TABLE>
F-16
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 8 - STOCK WARRANTS (continued)
The weighted average grant date fair value of the warrants granted in 1997 was
as follows:
Exercise price > market price $ .9052
=======
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, 1998 are as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Remaining Contractual
Exercise prices of Warrants Life (months)
- --------------- ----------- ---------------------
<S> <C> <C>
$6.00
Outstanding and exercisable 546,666 36
$6.50
Outstanding and exercisable 1,500,000 59
$6.75
Outstanding and exercisable 150,000 59
</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:
March 31,
1997
----------
Net loss $ (518,805)
==========
Net loss per share $ (.12)
==========
NOTE 9 - DISCONTINUED OPERATIONS
As of March 31, 1998, the Company formalized its plan to discontinue the
operations of its subsidiaries BIG and FUZZY. Accordingly, operating results
have been reclassified and reported in discontinued operations. The Company has
sold its interest in BIG to Quarto (see Note 13) and is in the process of
discontinuing FUZZY and expects the transaction to be completed in fiscal 1999.
Management has accrued a $459,050 anticipated loss on the disposition of these
subsidiaries. Operating results of discontinued operations are as follows:
1998 1997
------------ ----------
Revenues $ 474,994 $ 491,612
Loss before minority interest (1,136,498) (346,794)
Net loss (848,625) (281,987)
F-17
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 9 - DISCONTINUED OPERATIONS (continued)
Assets and liabilities of discontinued operations are as follows at March 31:
1998 1997
---------- ----------
Current assets $ 259,893 $1,598,610
Noncurrent assets 158,273 3,186
---------- ----------
$ 418,166 $1,601,796
========== ==========
Current liabilities $ 41,284 $ 554,501
Long-term debt 6,716 12,926
---------- ----------
$ 48,000 $ 567,427
========== ==========
NOTE 10 - SEGMENT INFORMATION
The Financial Accounting Standards Board has released statement #131
"Disclosures about Segments of an Enterprise and Related Information" which will
be effective for all financial reporting periods subsequent to December 15,
1997. This statement requires the reporting of certain information about
operating segments. The following table reflects certain information as
promulgated by the statement for the years ended March 31, 1997 and 1998:
March 31, 1997
<TABLE>
<CAPTION>
Corporate
and
DVD BIG FUZZY Eliminations Totals
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,211,388 $ 290,994 $ 13,020 $ 400 $ 2,515,802
Other income (loss) 800 187,598 - (5,882) 182,516
Net income (loss) 141,736 (212,905) (69,082) (245,779) (386,030)
Segment assets 535,132 1,432,541 166,069 52,729 2 186,471
Segment liabilities 178,845 321,744 232,757 (63,090) 670,256
</TABLE>
March 31, 1998
<TABLE>
<CAPTION>
Corporate
Discontinued and
DVD CSB Operations Eliminations Totals
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 932,611 $ 712,581 $ 353,128 $ - $ 1,998,320
Other income (loss) - (64,749) 121,866 (94,705) (37,588)
Net income (loss) (100,456) (1,200,475) (848,625) (1,108,787) (3,258,343)
Segment assets 395,388 9,409,797 418,166 524,598 10,747,949
Segment liabilities 139,557 2,207,990 48,000 (112,920) 2,282,627
</TABLE>
F-18
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
(Concluded)
NOTE 11 - RISKS AND UNCERTAINTIES
CSB, as sublessee of the transponders under the transponder agreements, is
subject to arbitrary refusal of service by 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
Notes 1 and 6).
The Company has deposits in a bank in excess of the FDIC insured amounts of
$100,000. The amount in excess of the $100,000 is subject to loss should the
bank cease business.
NOTE 12 - SUBSEQUENT EVENT
On June 3, 1998, pursuant to a private placement, the Company sold $1,750,000 of
8% convertible debentures, interest due quarterly and due on June 3, 2000. The
debentures are convertible into shares of common stock of the Company at a
conversion price for each share of common stock equal to the lesser of : (a)
125% of the closing price or (b) 90% of the market price on the conversion date.
NOTE 13 - EVENT SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT
On June 26, 1998, the Company finalized the sale of it's 70% interest in BIG to
Quarto. In connection with the settlement, any and all claims arising from its
business with Quarto were settled. In addition, Quarto's warrant to purchase
400,000 shares of common stock of the Company was returned to the Company for
cancellation.
F-19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
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
PAGE
----
Prospectus Summary.............................................. 2
Risk Factors.................................................... 4
Market for Common Equity and Related Stockholder Matters........ 9
Registration Rights............................................. 10
Use of Proceeds from Sale of Debentures......................... 10
Selling Securityholders and Plan of Distribution................ 11
Capitalization.................................................. 13
Dividend Policy................................................. 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13
Business........................................................ 18
Management...................................................... 28
Principal Shareholders.......................................... 31
Description of Securities....................................... 31
Shares Eligible for Future Sale................................. 34
Legal Matters................................................... 34
Experts......................................................... 34
Available Information........................................... 34
Index to Financial Statements................................... F-1
Until , 1998 (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 obligation of dealers to deliver a Prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
1,505,293 Shares of Common Stock
NEW FRONTIER MEDIA, INC.
-----------
PROSPECTUS
-----------
July 17, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(i) Article 3, Section 3.17 of the Company's First Amended and Restated
Bylaws provides as follows:
"SECTION 3.17
LIMITATIONS ON LIABILITY
To the fullest extent permitted by the Colorado Business Corporation Act
as the same exists or may hereafter be amended, a director of the corporation
shall not be liable to the corporation or its stockholders for monetary damages
for any action taken or any failure to take any action as a director.
Notwithstanding the foregoing, a director will have liability for monetary
damages for a breach or failure which involves: (i) a violation of criminal law;
(ii) a transaction from which the director derived an improper personal benefit,
either directly or indirectly; (iii) distributions 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 modification of this Article, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director of the
corporation occurring prior to such repeal, amendment or modification."
(ii) Article 3, Section 3.18 of the Company's First Amended and Restated
Bylaws provides as follows:
"SECTION 3.18
INDEMNIFICATION
Subject to and in accordance with the Colorado Business Corporation Act,
and except as may be expressly limited by the Articles of Incorporation and any
amendments thereto, the corporation shall indemnify any person:
(i) made a party to any proceeding (other than an action by,
or in the right of, the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is
or was serving at the corporation's request, as a director, officer,
employee or agent of another corporation, or other enterprise; or,
(ii) who was or is a party to any proceeding by or in the
right of the corporation, to procure a judgment in its favor by reason
of the fact that his is or was a director, officer, employee, or agent
of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise.
This indemnification shall be mandatory in all circumstances in which
indemnification is permitted by law.
The corporation may maintain indemnification insurance regardless of
its power to indemnify under the Colorado Business Corporation Act.
The corporation may make any other or further indemnification or
advancement of expenses of any of the directors, officers, employees or agents
under any bylaw, agreement, vote of shareholders or disinterested 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.
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."
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
SEC Registration Fee......................... 1,582
Printing Expenses............................ 5,000
Legal Fees and Expenses...................... 25,000
Accounting Fees.............................. 3,500
Miscellaneous Expenses....................... 4,918
---------
TOTAL................................ 40,000
=========
-----------
All expenses, except the SEC registration fees 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) 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.
(ii) 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.
(iii) 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.
(iv) On June 3, 1998, pursuant to a private placement, the
Company sold to two investors $1,750,000 principal amount of 8%
Convertible Debentures.
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 transfer 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 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.
EXHIBIT
NO. TITLE
3.01 Articles of Incorporation of Company, with Amendment (incorporated by
reference to Exhibit 3.01 of the Company's Registration Statement on
Form SB-2 (File No. 333-35337) as amended (the "Registration
Statement")).
3.02 First Amended Bylaws of Company (incorporated by reference to Exhibit
3.02 of the Company's Registration Statement).
II-2
<PAGE>
4.01 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.01 of the Company's Registration Statement).
4.02 Form of 8% Debenture issued to the Selling Securityholders.
4.03 Form of Warrant issued to the Selling Securityholders.
5.01 Opinion of Combs & Associates
10.01 Asset Purchase Agreement Among the Company, CSB, Fifth Dimension
Communications (Barbados) Inc., and Merlin Sierra, Inc.(incorporated
by reference to Exhibit 10.01 of the Company's Registration
Statement).
10.02 Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario
Inc.(incorporated by reference to Exhibit 10.02 of the Company's
Registration Statement).
10.03 Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario
Inc.(incorporated by reference to Exhibit 10.03 of the Company's
Registration Statement).
10.04 Revocable Line of Credit Agreement (incorporated by reference to
Exhibit 10.04 of the Company's Registration Statement).
10.05 Promissory Note (incorporated by reference to Exhibit 10.05 of the
Company's Registration Statement).
10.06 Call Center Interim Service Agreement between the Company and
1248663 Ontario Inc.(incorporated by reference to Exhibit 10.07 of
the Company's Registration Statement).
10.07 Settlement and Stock and Warrant Transfer Agreement, dated June 16,
1998, by and among the Company, BIG, Quarto Holdings, Inc., Old
Frontier Media, Inc., Mark Kreloff, Michael Weiner, Andrew Brandt and
Scott Wussow (incorporated by reference to Exhibit 10.8 of the
Company's Annual Report or Form 10-KSB for the year ended March 31,
1998).
10.08 Securities Purchase Agreement, dated June 3, 1998, by and between
the Company and The Augustine Fund.
10.09 Securities Purchase Agreement, dated June 3, 1998, by and between
the Company and Pro Futures Special Equities Fund, L.P.
10.10 Registration Rights Agreement, dated June 3, 1998, by and among the
Company, The Augustine Fund and Pro Futures Special Equities Fund,
L.P.
21.01 Subsidiaries of the Company (incorporated by reference to Exhibit
21.01 of the Company's Annual Report or Form 10-KSB for the year
ended March 31, 1998.
23.01 Consent of Spicer, Jefferies & Co.
23.02 Consent of Combs & Associates (included in Exhibit 5.1)
27.01 Financial Data Schedule.
ITEM 28. UNDERTAKINGS.
The Company hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate 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-3
<PAGE>
(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.
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
on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Boulder, Colorado on July 17, 1998.
NEW FRONTIER MEDIA, INC.
By: /s/ Mark H. Kreloff
------------------------
Mark H. Kreloff
President
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mark H. Kreloff Chairman, Chief Executive Officer, July 17, 1998
- ----------------------------- President
Mark H. Kreloff
/s/ Michael Weiner Executive Vice President, Secretary, July 17, 1998
- ----------------------------- Treasurer and Director
Michael Weiner
/s/ Scott Wusson Chief Financial Officer July 17, 1998
- -----------------------------
Scott Wusson
/s/ Andrew V. Brandt Senior Vice President, Director July 17, 1998
- -----------------------------
Andrew V. Brandt
/s/ Clive Ng Director July 17, 1998
- ------------------------------
Clive Ng
/s/ Koung Y. Wong Director July 17, 1998
- -----------------------------
Koung Y. Wong
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. TITLE
- ---------- -----
3.01 Articles of Incorporation of Company, with Amendment (incorporated by
reference to Exhibit 3.01 of the Company's Registration Statement on
Form SB-2 (File No. 333-35337) as amended (the "Registration
Statement")).
3.02 First Amended Bylaws of Company (incorporated by reference to Exhibit
3.02 of the Company's Registration Statement).
4.01 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.01 of the Company's Registration Statement).
4.02 Form of 8% Debenture issued to the Selling Securityholders.
4.03 Form of Warrant issued to the Selling Securityholders.
5.01 Opinion of Combs & Associates
10.01 Asset Purchase Agreement Among the Company, CSB, Fifth Dimension
Communications (Barbados) Inc., and Merlin Sierra, Inc.(incorporated
by reference to Exhibit 10.01 of the Company's Registration
Statement).
10.02 Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario
Inc.(incorporated by reference to Exhibit 10.02 of the Company's
Registration Statement).
10.03 Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario
Inc.(incorporated by reference to Exhibit 10.03 of the Company's
Registration Statement).
10.04 Revocable Line of Credit Agreement (incorporated by reference to
Exhibit 10.04 of the Company's Registration Statement).
10.05 Promissory Note (incorporated by reference to Exhibit 10.05 of the
Company's Registration Statement).
10.06 Call Center Interim Service Agreement between the Company and
1248663 Ontario Inc.(incorporated by reference to Exhibit 10.07 of
the Company's Registration Statement).
10.07 Settlement and Stock and Warrant Transfer Agreement, dated June 16,
1998, by and among the Company, BIG, Quarto Holdings, Inc., Old
Frontier Media, Inc., Mark Kreloff, Michael Weiner, Andrew Brandt and
Scott Wussow (incorporated by reference to Exhibit 10.8 of the
Company's Annual Report or Form 10-KSB for the year ended March 31,
1998).
10.08 Securities Purchase Agreement, dated June 3, 1998, by and between
the Company and The Augustine Fund.
10.09 Securities Purchase Agreement, dated June 3, 1998, by and between the
Company and Pro Futures Special Equities Fund, L.P.
10.10 Registration Rights Agreement, dated June 3, 1998, by and among the
Company, The Augustine Fund and Pro Futures Special Equities Fund,
L.P.
21.01 Subsidiaries of the Company (incorporated by reference to Exhibit
21.01 of the Company's Annual Report or Form 10-KSB for the year
ended March 31, 1998).
23.01 Consent of Spicer, Jeffries & Co.
23.02 Consent of Combs & Associates (included in Exhibit 5.1)
27.01 Financial Data Schedule.
II-5
<PAGE>
EXHIBIT 4.02
Annex I
to
Securities
Purchase
Agreement
FORM OF DEBENTURE
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
No. 98- US $
NEW FRONTIER MEDIA, INC.
8% CONVERTIBLE DEBENTURE DUE JUNE 3, 2000
THIS DEBENTURE is one of a duly authorized issue up to $3,500,000 in
Debentures of NEW FRONTIER MEDIA, INC., a corporation duly organized and
existing under the laws of the State of Colorado (the "Company") designated as
its 8% Convertible Debenture Due June 3, 2000.
FOR VALUE RECEIVED, the Company promises to pay to , the
registered holder hereof (the "Holder"), the principal sum of
(US $ ) Dollars on June 3, 2000 (the "Maturity Date") and to pay
interest,in arrears on the principal sum outstanding from time to time in
arrears, on a quarterly basis on June 30, September 30, December 31, and March
31 of each year, at the rate of 8% per annum accruing from the date of initial
issuance. Accrual of interest shall commence on the first such business day to
occur after the date hereof until payment in full of the principal sum has been
made or duly provided for. Subject to the provisions of P. 4 below, the
principal of, and interest on, this Debenture are payable at the option of the
Holder, in shares of Common Stock $.0001 par value per share of the Company
("Common Stock"), or in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private debts,
at the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder from time to time. The Company will pay the
principal of and interest upon this Debenture on the Maturity Date, less any
amounts required by law to be deducted, to the
<PAGE>
registered holder of this Debenture as of the tenth day prior to the Maturity
Date and addressed to such holder as the last address appearing on the Debenture
Register. The forwarding of such check shall constitute a payment of principal
and interest hereunder and shall satisfy and discharge the liability for
principal and interest on this Debenture to the extent of the sum represented by
such check plus any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Fifty Thousand
Dollars (US$50,000) and integral multiples thereof. The Debentures are
exchangeable for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holders surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture, the Company may require, prior to issuance of a new
Debenture in the name of such other person, that it receive reasonable transfer
documentation including opinions that the issuance of the Debenture in such
other name does not and will not cause a violation of the Act or any applicable
state or foreign securities laws. Prior to due presentment for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Company's Debenture Register
as the owner hereof for the purpose of receiving payment as herein provided and
for all other purposes, whether or not this Debenture be overdue, and neither
the Company nor any such agent shall be affected by notice to the contrary.
4. A. Subject to Section 4B and 4C, the Holder of this Debenture is
entitled, at its option, to convert at any time commencing the earlier of (a)
one hundred twenty (120) days after the date of this Debenture, or (b) the
effective date of the Registration Statement filed pursuant to the Registration
Rights Agreement between the Company and the Holder, or the Holder's predecessor
in interest, the principal amount of this Debenture, provided that the principal
amount is at least US $10,000 (unless if at the time of such election to convert
the aggregate principal amount of all Debentures registered to the Holder is
less that Ten Thousand Dollars (US $10,000), then the whole amount thereof) into
shares of Common Stock of the Company at a conversion price for each share of
Common Stock equal to the lesser of: (a) 125% of the Closing Price (as herein
defined) or (b) 90% of the Market Price (as herein defined) on the Conversion
Date. For purposes of this Section 4, the "Closing Price" shall mean the average
closing sales price of the
<PAGE>
Company's Common Stock for the five days preceding June 3, 1998, as reported by
the National Association of Securities Dealers. For purposes of this Section 4,
the "Market Price" shall mean the average of the five lowest closing bid prices
of the Company's Common Stock for the twenty consecutive trading days ending on
the day prior to the Conversion Date, as reported by the National Association of
Securities Dealers. Conversion shall be effectuated by surrendering the
Debentures to be converted to the Company with the form of conversion notice
attached hereto as Exhibit A, executed by the Holder of the Debenture evidencing
such Holder's intention to convert this Debenture or a specified portion (as
above provided) hereof, and accompanied, if required by the Company, by proper
assignment hereof in blank. Interest (and penalties) accrued or accruing from
the date of issuance to the date of conversion shall, at the option of the
Company, be paid in cash or Common Stock upon conversion at the Conversion Rate.
No fraction of Shares or scrip representing fractions of shares will be issued
on conversion, but the number of shares issuable shall be rounded to the nearest
whole share. The date on which notice of conversion is given (the "Conversion
Date") shall be deemed to be the date on which the Holder has delivered this
Debenture, with the conversion notice duly executed, to the Company or, the date
set forth in such facsimile delivery of the notice of conversion if the
Debenture is received by the Company within three (3) business days therefrom.
Facsimile delivery of the conversion notice shall be accepted by the Company at
telephone number (303-444-0734); ATTN: M. Kreloff). Certificates representing
Common Stock upon conversion will be delivered within three (3) business days
from the date the notice of conversion with the original Debenture is delivered
to the Company.
B. (i) The Company shall have the right to
redeem any Debentures for which a Notice of
Conversion has not theretofore been
submitted by delivering a Notice of
Redemption to the Holder of the Debenture,
so long as the average closing price of the
Company's Common Stock is less than $6.00 on
the five days immediately preceding such
Notice of Redemption date.
(ii) The redemption price shall be the greater
of: (i) 120% of the then outstanding
principal amount of the Debenture; provided,
however, if such redemption is not effected
during the first six months following the
Closing Date, such redemption price will
thereafter increase by 2% per month or (ii)
the closing bid price of the Company's
Common Stock on the Notice of Redemption
date multiplied by the number of shares
which would be issuable upon conversion of
the Debenture on such date. The Company
cannot redeem if stock price is greater
than $6.00.
(iii) The redemption price shall be paid to the
Holder within ten (10) days from the date of
the Notice of Redemption. In the event such
payment is not timely made, the Notice of
Redemption shall be null and void.
<PAGE>
C. The Company shall have the right to require, by written
notice to the Holder of this Debenture no more than thirty (30) days, and no
less than ten (10) days, prior to the Maturity Date, that the Holder of this
Debenture exercise its right of conversion with respect to all or that portion
of the principal amount and interest outstanding on the Maturity Date.
5. No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, subject to adjustments which shall
be as nearly equivalent as may be practicable. In the event of any proposed
merger, consolidation or sale or transfer of all or substantially all of the
assets of the Company (a "Sale"), the Holder hereof shall have the right to
convert by delivering a Notice of Conversion to the Company within fifteen (15)
days of receipt of notice of such Sale from the Company. In the event the Holder
hereof shall elect not to convert, the Company may prepay all outstanding
principal and accrued interest on this Debenture, less all amounts required by
law to be deducted, upon which tender of payment following such notice, the
right of conversion shall terminate.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. This Debenture shall be governed by and construed in
accordance with the laws of the State of Illinois. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of Chicago or the state courts of the State of Illinois sitting
<PAGE>
in the City of Chicago in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non coveniens, to the bringing
of any such proceeding in such jurisdictions.
10. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal
or interest on this Debenture and such default shall
remain unremedied for three (3) business days after the
Company has been notified of the default in writing by
a Holder; or
b. Any of the representations or warranties made by the
Company herein, in the Securities Purchase Agreement,
or in any certificate or financial or other written
statements furnished by the Company in connection with
the execution and delivery of this Debenture or the
Securities Purchase Agreement shall be false or
misleading in any material respect at the time made; or
c: The Company fails to issue shares of Common Stock to
the Holder or to cause its Transfer Agent to issue
shares of Common Stock upon exercise by the Holder of
the conversion rights of the Holder in accordance with
the terms of this Debenture, fails to transfer or to
cause its Transfer Agent to transfer any certificate
for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this
Debenture or the Registration Rights Agreement, or
fails to remove any restrictive legend or to cause its
Transfer Agent to transfer on any certificate or any
shares of Common Stock issued to the Holder upon
conversion of this Debenture as and when required by
this Debenture, the Securities Purchase Agreement or
the Registration Rights Agreement and any such failure
shall continue uncured for three (3) business days
after the Company has been notified of such failure in
writing by Holder.
d. The Company shall fail to perform or observe, in any
material respect, any other covenant, term, provision,
condition, agreement or obligation of the Company under
this Debenture and such failure shall continue uncured
for a period of thirty (30) days after written notice
from the Holder of such failure; or
e. The Company shall (1) admit in writing its inability to
pay its debts generally as they mature; (2) make an
assignment for the benefit of creditors or commence
proceedings for its dissolution; or (3) apply for or
consent to the appointment of a trustee, liquidator or
receiver for its or for a substantial part of its
property or business; or
<PAGE>
f. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall not
be discharged within sixty (60) days after such
appointment; or
g. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency
shall assume custody or control of the whole or any
substantial portion of the properties or assets of the
Company and shall not be dismissed within sixty (60)
days thereafter; or
h. Any money judgment, writ or warrant of attachment, or
similar process in excess of Five Hundred Thousand
($500,000) Dollars in the aggregate shall be entered or
filed against the Company or any of its properties or
other assets and shall remain unpaid, unvacated,
unbonded or unstayed for a period of sixty (60) days or
in any event later than five (5) days prior to the date
of any proposed sale thereunder; or
i. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed
within sixty (60) days after such institution or the
Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or
admit the material allegations of, or default in
answering a petition filed in any such proceeding; or
j. The Company shall have its Common Stock suspended or
delisted from an exchange or over-the-counter market
from trading for a period in excess of five trading
days.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law.
11. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: __________________, 1998
NEW FRONTIER MEDIA, INC.
By:
---------------------------------------
------------------------------------------
(Print Name)
------------------------------------------
(Title)
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ _______________
of the principal amount of the above Debenture No. ___ into shares of Common
Stock of NEW FRONTIER MEDIA, INC. (the "Company") according to the conditions
hereof, as of the date written below. In converting the Debenture No.
______________, the undersigned hereby confirms and acknowledges that the shares
of Common Stock are being acquired solely for the account of the undersigned and
not a nominee for any other party, and that the undersigned will not offer, sell
or otherwise dispose of any such shares of Common Stock, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended.
Date of Conversion*
-----------------------------------------------------------
Applicable Conversion Price
--------------------------------------------------
Signature
--------------------------------------------------------------------
[Name]
Address:
---------------------------------------------------------------------
---------------------------------------------------------------------
* This original Debenture and Notice of Conversion must be received by the
Company by the third business date following the Date of Conversion.
<PAGE>
EXHIBIT 4.03
Annex IV
to
Securities
Purchase
Agreement
FORM OF WARRANT
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF THIS
WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY OTHER SECURITIES
LAWS (THE "ACTS"). NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK
PURCHASABLE HEREUNDER MAY BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THIS WARRANT OR COMMON
STOCK PURCHASABLE HEREUNDER, AS APPLICABLE, UNDER THE ACTS, OR (B) AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT
REQUIRED UNDER SUCH ACTS.
NEW FRONTIER MEDIA, INC
WARRANT AGREEMENT
Issue Date: July 3, 1998
Basic Terms. This Warrant Agreement (the "Warrant") certifies that,
for value received, the registered holder specified below or its registered
assigns ("Holder"), is the owner of a warrant of New Frontier Media, Inc. , a
Colorado corporation, (the Corporation) adjustments as provided herein, to
purchase __________ (_______) shares of the Common Stock, $.0001 par value (the
"Common Stock"), of the Corporation from the Corporation at the price per share
shown below (the "Exercise Price").
Holder:
Exercise Price per share:
Except as specifically provided otherwise, all references in this Warrant to the
Exercise Price and the number of shares of Common Stock purchasable hereunder
shall be to the Exercise Price and number of shares after any adjustments are
made thereto pursuant to this Warrant.
2. Corporation's Representations/Covenants. The Corporation represents
and covenants that the shares of Common Stock issuable upon the exercise of this
Warrant shall at delivery be fully paid and non-assessable and free from taxes,
liens, encumbrances and charges with respect to their purchase. The Corporation
shall take any necessary actions to assure that the par value per share of the
Common Stock is at all times equal to or less than the then current Exercise
Price per share of Common Stock issuable pursuant to this Warrant. The
Corporation shall at all times reserve and hold available sufficient shares of
Common Stock to satisfy all conversion and purchase rights of outstanding
convertible securities, options and warrants of the Corporation, including this
Warrant.
3. Method of Exercise; Fractional Shares. This Warrant is exercisable
at the option of the Holder in whole at any time or in part from time to time by
surrendering this Warrant, on any business day during the period (the "Exercise
Period") beginning on the issue date of this Warrant specified above and ending
at 5:00 p.m. (New York time) three (3) years after the issue date. To exercise
this Warrant, the Holder shall surrender this Warrant at the principal office of
the Corporation or that of the duly authorized and acting transfer agent for its
Common Stock, together with the executed exercise form (substantially in the
form of that attached hereto) and together with payment for the Common Stock
purchased under this Warrant. The principal office of the Corporation is located
at the address specified on the signature page of this Warrant; provided,
however, that the Corporation may change its principal office upon notice to the
Holder. At the option of the Holder payment shall be made either by check
payable to the order of the Corporation or by wire transfer, or the Holder may
elect to receive shares of Common Stock calculated pursuant to paragraph
4. Upon the partial exercise of this Warrant, the Corporation shall issue to the
Holder a new Warrant of the same tenor and date, and for the balance of the
number of shares of Common Stock not purchased upon such partial exercise and
any previous exercises. This Warrant is not exercisable with respect to a
fraction of a share of Common Stock. In lieu of issuing a fraction of a share
remaining after exercise of this Warrant as to all full shares covered by this
Warrant, the
- 1 -
<PAGE>
Corporation shall either at its option (a) pay for the fractional share cash
equal to the same fraction at the fair market price for such share; or (b) issue
scrip for the fraction in the registered or bearer form which shall entitle the
Holder to receive a certificate for a full share of Common Stock on surrender of
scrip aggregating a full share.
4. Protection Against Dilution. The number of shares of Common Stock
purchasable under this Warrant, and the Exercise Price, shall be adjusted as set
forth as follows. If at any time or from time to time after the date of this
Warrant, the Corporation:
(i) takes a record of the holders of its outstanding shares of
Common Stock for the purposes of entitling them to receive a dividend payable
in, or other distribution of, Common Stock, or
(ii) subdivides its outstanding shares of Common Stock into a
larger number of shares of Common Stock. or
(iii) combines its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then, and in each such case, the Exercise Price shall be adjusted to that price
determined by multiplying the Exercise Price in effect immediately prior to such
event by a fraction (A) the numerator of which is the total number of
outstanding shares of Common Stock immediately prior to such event and (B) the
denominator of which is the total number of outstanding shares of Common Stock
immediately after such event.
Upon each adjustment in the Exercise Price under this Warrant
such number of shares of Common Stock purchasable under this Warrant shall be
adjusted by multiplying the number of shares of Common Stock by a fraction, the
numerator of which is the Exercise Price immediately prior to such adjustment
and the denominator of which is the Exercise Price in effect upon such
adjustment.
5. Adjustment for Reorganization, Consolidation, Merger, Etc.
(a) During the Exercise Period, the Corporation shall, prior to
consummation of a consolidation with or merger into another corporation, or
conveyance of all or substantially all of its assets to any other corporation or
corporations, whether affiliated or unaffiliated (any such corporation being
included within the meaning of the term "successor corporation"), or agreement
to so consolidate, merge or convey assets, require the successor corporation to
assume, by written instrument delivered to the Holder, the obligation to issue
and deliver to such Holder such shares of stock, securities or property as, in
accordance with the provisions of paragraph 5(b), the Holder shall be entitled
to purchase or receive
(b) In the case of any capital reorganization or reclassification of
the Common Stock of the Corporation (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
during the Exercise Period or in case, during the Exercise Period, the
Corporation (or any such other corporation) shall consolidate with or merge into
another corporation or convey all or substantially all its assets to another
corporation, the Holder, upon exercise, at any time after the consummation of
such reorganization, consolidation, merger or conveyance, shall be entitled to
receive, in lieu of the Common Stock of the Corporation (or such other
corporation), the proportionate share of all stock, securities or other property
issued, paid or delivered for or on all of the Common Stock of the Corporation
(or such other corporation) as is allocable to the shares of Common Stock then
called for by this Warrant as if the Holder had exercised the Warrant
immediately prior thereto, all subject to further adjustment as provided in
paragraph 4 of this Warrant.
6. Notice of Adjustment. On the happening of an event requiring an
adjustment of the Exercise Price or the shares purchasable under this Warrant,
the Corporation shall immediately give written notice to the Holder stating the
adjusted Exercise Price and the adjusted number and kind of securities or other
property purchasable under this Warrant resulting from the event and setting
forth in reasonable detail the method of calculation and the facts upon which
the calculation is based.
- 2 -
<PAGE>
7. Dissolution, Liquidation. In case the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation (other than in
connection with a reorganization, consolidation, merger, or other transaction
covered by paragraph 5 above) is at any time proposed, the Corporation shall
give at least thirty days prior written notice to the Holder. Such notice shall
contain: (a) the date on which the transaction is to take place; (b) the record
date (which shall be at least thirty (30) days after the giving of the notice)
as of which holders of Common Stock will be entitled to receive distributions as
a result of the transaction; (c) a brief description of the transaction, (d) a
brief description of the distributions to be made to holders of Common Stock as
a result of the transaction; and (d) an estimate of the fair value of the
distributions. On the date of the transaction, if it actually occurs, this
Warrant and all rights under this Warrant shall terminate.
8. Rights of Holder. The Corporation shall deliver to the Holder all
notices and other information provided to its holders of shares of Common Stock
or other securities which may be issuable hereunder concurrently with the
delivery of such information to the holders. This Warrant does not entitle the
Holder to any voting rights or, except for the foregoing notice provisions, any
other rights as a shareholder of the Corporation. No dividends are payable or
will accrue on this Warrant or the Shares purchasable under this Warrant until,
and except to the extent that, this Warrant is exercised. Upon the surrender of
this Warrant and payment of the Exercise Price as provided above, the person or
entity entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the record holder of such shares
as of the close of business on the date of the surrender of this Warrant for
exercise as provided above. Upon the exercise of this Warrant, the Holder shall
have all of the rights of a shareholder in the Corporation.
9. Exchange for Other Denominations. This Warrant is exchangeable, on
its surrender by the Holder to the Corporation, for a new Warrant of like tenor
and date representing in the aggregate the right to purchase the balance of the
number of shares purchasable under this Warrant in denominations and subject to
restrictions on transfer contained herein, in the names designated by the Holder
at the time of surrender.
10. Substitution. Upon receipt by the Corporation of evidence
satisfactory (in the exercise of reasonable discretion) to it of the ownership
of and the loss, theft or destruction or mutilation of the Warrant, and (in the
case or loss, theft or destruction) of indemnity satisfactory (in the exercise
of reasonable discretion) to it, and (in the case of mutilation) upon the
surrender and cancellation thereof, the Corporation will issue and deliver, in
lieu thereof, a new Warrant of like tenor.
11. Restrictions on Transfer. Neither this Warrant nor the shares of
Common Stock issuable on exercise of this Warrant have been registered under the
Securities Act or any other securities laws (the "Acts"). Neither this Warrant
nor the shares of Common Stock purchasable hereunder may be sold, transferred,
pledged or hypothecated in the absence of (a) an effective registration
statement for this Warrant or Common Stock purchasable hereunder, as applicable,
under the Acts, or (b) an opinion of counsel reasonably satisfactory to the
Corporation that registration is not required under such Acts. If the Holder
seeks an opinion as to transfer without registration from Holder's counsel, the
Corporation shall provide such factual information to Holder's counsel as
Holder's counsel reasonably request for the purpose of rendering such opinion.
Each certificate evidencing shares of Common Stock purchased hereunder will bear
a legend describing the restrictions on transfer contained in this paragraph
unless, in the opinion of counsel reasonably acceptable to the Corporation, the
shares need no longer to be subject to the transfer restrictions.
12. Transfer. Except as otherwise provided in this Warrant, this
Warrant is transferable only on the books of the Corporation by the Holder in
person or by attorney, on surrender of this Warrant, properly endorsed.
13. Recognition of Holder. Prior to due presentment for registration of
transfer of this Warrant, the Corporation shall treat the Holder as the person
exclusively entitled to receive notices and otherwise to exercise rights under
this Warrant. All notices required or permitted to be given to the Holder shall
be in writing and shall be given by first class mail, postage prepaid, addressed
to the Holder at the address of the Holder appearing in the records of the
Corporation.
14. Payment of Taxes. The Corporation shall pay all taxes and other
governmental charges, other than
- 3 -
<PAGE>
applicable income taxes, that may be imposed with respect to the issuance of
shares of Common Stock pursuant to the exercise of this Warrant.
15. Headings. The headings in this Warrant are for purposes of
convenience in reference only, shall not be deemed to constitute a part of this
Warrant and shall not affect-the meaning or construction of any of the
provisions of this Warrant.
16. Miscellaneous. This Warrant may not be changed, waived, discharged
or terminated except by an instrument in writing signed by the Corporation and
the Holder. This Warrant shall inure to the benefit of and shall be binding upon
the successors and assigns of the Corporation and the Holder.
17. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Colorado without giving effect to its
principles governing conflicts of law.
NEW FRONTIER MEDIA, INC.
a Colorado corporation
By:
----------------------------------------
Authorized Officer
Printed Name:
------------------------------
Title:
-------------------------------------
1050 Walnut Street, Suite 301
Boulder, CO 80302
- 4 -
<PAGE>
NEW FRONTIER MEDIA, INC.
FORM OF TRANSFER
(To be executed by the Holder to transfer the Warrant)
For value received the undersigned registered holder of the attached Warrant
hereby sells, assigns, and transfers the Warrant to the Assignee(s) named below
:
<TABLE>
<CAPTION>
Number of shares
Names of subject to transferred
Assignee Address Taxpayer ID No. Warrant
- --------- ------- --------------- -----------------------
<S> <C> <C> <C>
</TABLE>
The undersigned registered holder further irrevocably appoints
____________________ _______________________________ attorney (with full power
of substitution) to transfer this Warrant as aforesaid on the books of the
Corporation.
Date:
-------------------------- -------------------------------------------
Signature
- 5 -
<PAGE>
NEW FRONTIER MEDIA, INC.
EXERCISE FORM
(To be executed by the Holder to purchase
Common Stock pursuant to the Warrant)
The undersigned holder of the attached Warrant hereby: (1) irrevocably
elects to exercise purchase rights represented by such Warrant for, and to
purchase, ___________ shares of Common Stock of New Frontier Media, Inc, a
Colorado corporation, and encloses a check or has wired payment of
$___________________________ therefor; (2) requests that a certificate for the
shares be issued in the name of the undersigned; and (3) if such number of
shares is not all of the shares purchasable under this Warrant, that a new
Warrant of like tenor for the balance of the remaining shares purchasable under
this Warrant be issued.
Date:
--------------------------- -----------------------------------------
Signature
- 6 -
COMBS & ASSOCIATES
Suite 301
1050 Walnut Street
Boulder, Colorado 80302
303-444-0632
July 16, 1998
New Frontier Media, Inc.
Suite 301
1050 Walnut Street
Boulder, Colorado 80302
We are members of the bar of the State of Colorado. For that reason,
you have requested our opinion for the use of New Frontier Media, Inc. (the
"Company"), in connection with your Registration Statement under the Securities
Act of 1933, as amended, and the Rules and Regulations promulgated thereunder.
Your Registration Statement is intended to register 1,280,293 shares of the
common stock of the Company issuable upon the conversion of $3,500,00 principal
amount of its 8% convertible debentures, 175,000 shares of common stock of the
Company issuable upon the exercise of its common stock purchase warrants and
50,000 shares of common stock of the Company which are currently outstanding.
We have examined the Company's Registration Statement on Form SB-2 in
the form to be filed with the Securities and Exchange Commission on or about
July 17, 1998 (the "Registration Statement"). We further have examined such
corporate records of the Company as we deemed relevant to the opinion hereafter
expressed.
Based on the foregoing examination, we are of the opinion that, under
Colorado law, upon issuance and receipt by the Company of the consideration in
the amount and in the manner described in the Registration Statement will be
legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Combs & Associates
By: /s/ John Combs
JOHN COMBS
<PAGE>
EXHIBIT 10.08
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of
acceptance set forth below, is entered into by and between NEW FRONTIER MEDIA,
INC., a Colorado corporation, with headquarters located at 1050 Walnut Street,
Suite 301, Boulder, CO 80302 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in accordance with and in reliance upon the exemption
from securities registration afforded, inter alia, by Rule 506 under Regulation
D ("Regulation D" as promulgated by the United States Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, 8% Convertible Debentures (the
"Debentures"), of the Company which will be convertible into shares of Common
Stock, $.0001 par value per share of the Company (the "Common Stock"), upon the
terms and subject to the conditions of such Debentures (the Common Stock and the
Debentures sometimes referred to herein as the "Securities"), and subject to
acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase. The undersigned hereby agrees to initially
purchase from the Company, the Debentures of the Company, in the principal
amount set forth on the signature page of this Agreement, out of a total
offering of $3,500,000 in Debentures as more specifically set forth in P. 4(h),
and having the terms and conditions and being in the form attached hereto as
Annex I. The purchase price for the Debentures shall be as set forth on the
signature page hereto and shall be payable in United States Dollars.
b. Form of Payment. The Buyer shall pay the purchase price for
the Debentures by delivering immediately available good funds in United States
Dollars to the Company in an amount equal to the principal amount of Debentures
being so purchased, less the $500,000 heretofore advanced to the Company
pursuant to that certain bridge note dated May 19, 1998 (the "Bridge Note").
Promptly following payment by the Buyer to the Company of the purchase price of
the Debentures, the Company shall deliver the Debentures duly executed on behalf
of the Company to the Buyer, and the Bridge Note shall be cancelled and deemed
to have been paid in full.
<PAGE>
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and
agrees with, the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock
pursuant to the Registration Statement (as defined below), the Buyer is
purchasing the Debentures and will be acquiring the shares of Common Stock
issuable upon conversion of the Debentures for its own account for investment
only and not with a view towards the public sale or distribution thereof and not
with a view to or for sale in connection with any distribution thereof;
b. The Buyer is (i) an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), and (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason of
the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the Securities;
c. All subsequent offers and sales of the Debentures and the
shares of Common Stock issuable upon conversion of, or issued as dividends on,
the Debentures (the "Shares" or "Common Stock") by the Buyer shall be made
pursuant to registration of the Shares under the 1933 Act or pursuant to an
exemption from registration;
d. The Buyer understands that the Debentures are being offered
and sold, and the Shares are being offered, to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgements and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Debentures and to receive an offer of the Shares;
e. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Debenture and the
offer of the Shares which have been requested by the Buyer. The Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received complete and satisfactory answers to any such
inquiries. Without limiting the generality of the foregoing, the Buyer has also
had the opportunity to obtain and to review the Company's (1) Quarterly Report
on Form 10-Q for the fiscal quarter ended December 31, 1997 and (2) Form SB-2
dated February 11, 1998 (the "Company's SEC Documents").
f. The Buyer understands that its investment in the
Securities involves a high degree of risk;
<PAGE>
g. The Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities;
h. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
i. Neither the Buyer, nor any affiliate of the Buyer, will
enter into, any put option, short position, or other similar position with
respect to the Debentures or the Shares.
j. Notwithstanding the provisions hereof or of the Debentures,
in no event (except with respect to an Event of Mandatory Conversion upon the
maturity of the Debentures) shall the holder be entitled to convert any
Debenture to the extent after such conversion, the sum of (1) the number of
shares of Common Stock beneficially owned by the Buyer and its affiliates (other
than shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Debenture), and (2) the number of
shares of Common Stock issuable upon the conversion of the Debenture with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Buyer and its affiliates of more than 4.99% of
the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), except as otherwise provided in clause (1) of such proviso. In
addition, the Company and Buyer agree that until the Company either obtains
shareholder approval of the issuance of the shares of Common Stock upon
conversion of the Debentures and exercise of the Warrants herein described, or
an exemption from Nasdaq's corporate governance rules as they may apply to such
issuable shares, the Buyer may not and will not convert the Debentures into more
than 19.9% of the shares of Company's Common Stock outstanding on the date
hereof (the "Common Share Limit").
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
a. Concerning the Shares. There are no preemptive
rights of any stockholder of the Company, as such, to acquire the Common Stock.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado, and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary other than those jurisdictions in which the failure to
so qualify would not
<PAGE>
have a material and adverse effect on the business, operations, properties,
prospects or condition (financial or otherwise) of the Company. The Company has
registered its Common Stock pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the Common Stock is listed and
traded on the NASDAQ/Small Cap Market. The Company shall promptly provide to
Buyer copies of any notices it receives regarding the continued eligibility of
the Common Stock for listing on the NASDAQ/Small Cap Market.
c. Authorized Shares. The Company has sufficient authorized
and unissued Shares as may be reasonably necessary to effect the conversion of
the Debentures. The Shares have been duly authorized and, when issued upon
conversion of, or as interest on, the Debentures, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights
Agreement and Stock. This Agreement and the Registration Rights Agreement, the
form of which is attached hereto as Annex II (the "Registration Rights
Agreement"), and the transactions contemplated thereby, have been duly and
validly authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Registration Rights
Agreement, when executed and delivered by the Company, will be, valid and
binding agreements of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally; and the Debentures will be duly and
validly authorized and, when executed and delivered on behalf of the Company in
accordance with this Agreement, will be a valid and binding obligation of the
Company in accordance with its terms, subject to general principles of equity
and to bankruptcy, insolvency, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company, the issuance of
the Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Debentures do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under (i)
the articles of incorporation or by-laws of the Company, (ii) any indenture,
mortgage, deed of trust, or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
including any listing agreement for the Common Stock except as herein set forth,
(iii) to its knowledge, any existing applicable law, rule, or regulation or any
applicable decree, judgment, or (iv) to its knowledge, order of any court,
United States federal or state regulatory body, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, except such conflict, breach or default which would not have a
material adverse effect on the transactions contemplated herein. The Company is
not in violation of any material laws, governmental orders, rules, regulations
or ordinances to which its property, real, personal, mixed, tangible or
intangible, or its businesses related to such properties, are subject.
f. Approvals. No authorization, approval or consent of any
court, governmental
<PAGE>
body, regulatory agency, self-regulatory organization, or stock exchange or
market is required to be obtained by the Company for the issuance and sale of
the Securities to the Buyer as contemplated by this Agreement, except such
authorizations, approvals and consents that have been obtained.
g. SEC Documents, Financial Statements. The Common Stock of
the Company is registered pursuant to Section 12(g) of the Exchange Act and the
Company has filed on a timely basis all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Exchange Act, including material filed pursuant
to Section 13(a) or 15(d), in addition to one or more registration statements
and amendments thereto heretofore filed by the Company with the SEC under the
Act (all of the foregoing including filings incorporated by reference therein
being referred to herein as the "SEC Documents"). The Company, through its
agent, has delivered to the Buyer true and complete copies of the SEC Documents
(except for exhibits and incorporated documents). The Company has not provided
to the Buyer any information which, according to applicable law, rule or
regulation, should have been disclosed publicly by the Company but which has
not been so disclosed, other than with respect to the transactions contemplated
by this Agreement.
As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Act or the Exchange Act as
the case may be and the rules and regulations of the SEC promulgated thereunder
and other federal, state and local laws, rules and regulations applicable to
such SEC Documents, and none of the SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
h. Absence of Certain Changes. Since April 30, 1997, there
has been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, or results of operations
of the Company.
i. Full Disclosure. There is no fact known to the Company
(other than general economic conditions known to the public generally) or as
disclosed in the documents referred to in Section 2(e), that has not been
disclosed in writing to the Buyer that (i) would reasonably be expected to have
a material adverse effect on the business or financial condition of the Company
or (ii) would reasonably be expected to materially and adversely affect the
ability of the Company to perform its obligations pursuant to this Agreement.
<PAGE>
j. Absence of Litigation. Except as disclosed in the SEC
Documents referred to in Section 2(e), which the Buyer has reviewed, there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board or body pending or, to the knowledge of the Company, threatened
against or affecting the Company, wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the business or financial
condition of the Company or the transactions contemplated by this Agreement or
any of the documents contemplated hereby or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents.
k. Absence of Events of Default. No Event of Default, as
defined in the respective agreement to which the Company is a party, and no
event which, with the giving of notice or the passage of time or both, would
become an Event of Default (as so defined), has occurred and is continuing,
which would have a material adverse effect on the Company's financial condition
or results of operations.
l. Prior Issues. During the twelve (12) months preceding
the date hereof, the Company has not issued any convertible securities.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the
Debentures have not been and are not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that
the Debentures, and, until such time as the Common Stock has been registered
under the 1933 Act as contemplated by the Registration Rights Agreement and sold
in accordance with an effective registration statement ("Registration
Statement"), the Shares issued to the Holder upon conversion of the Debentures
shall bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Debentures and such
Shares):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED
<PAGE>
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE
AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR
AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree
to enter into the Registration Rights Agreement, in substantially the form
attached hereto as Annex II, on or before the Closing Date.
d. Filings. The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Debentures to the Buyer
under any United States laws and regulations, or by any domestic securities
exchange or trading market, and to provide a copy thereof to the Buyer promptly
after such filing.
e. Reporting Status. So long as the Buyer beneficially owns
any of the Debentures, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.
f. Use of Proceeds. The Company will use the proceeds from the
sale of the Debentures (excluding amounts paid by the Company for legal fees in
connection with the sale of the Debentures) for the purchase of film rights,
equipment and working capital/deposits purposes, and shall not, directly or
indirectly, use such proceeds for any loan to or investment in any other
corporation, partnership enterprise or other person.
g. Call Option. At the option of the Company, for a period of
24 months following the date of this Agreement, the Buyer agrees to purchase up
to an additional $1,350,000 principal amount of Debentures (the "Additional
Debentures") upon three (3) business days' written notice (which may be given
after the close of the market but prior to 5:30 P.M. New York time) to the
Buyer, subject to the following conditions:
(i) The Registration Statement required to be filed under the
Registration Rights Agreement shall have been declared
effective, and no stop order shall have been issued with
respect thereto;
(ii) The dollar amount of each Call shall be as follows: $450,000
for the first Call and $450,000 each for the second and
third Calls;
(iii) There must be at least 30 business days between each Call;
(iv) No Call may be delivered to the extent that it will result in
the issuance of common shares in excess of the Common Share
Limit, or to the extent that the common shares
<PAGE>
subject to the Call are not then reserved and authorized to
be issued by the Company;
(v) The Company's share price on the date of the Call must be at
least $2.50 per share. In addition, if the share price is
below $3.00, the average volume of the Company's Common Stock
for the sixty days preceding the date of the Call must be at
least 25,000 shares per day; and
(vi) If the conditions in subsection (v) above are not satisfied
for any period of six (6) consecutive months following the
effective date of the above-referenced Registration Statement,
the Call shall be deemed to have expired pursuant to its own
terms.
Each such additional Closing will occur on or before the third business
day following the Call notice from the Company.
h. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield the number of shares of Common Stock issuable
at conversion as may be required to satisfy the conversion rights of the Buyer
pursuant to the terms and conditions of the Debentures.
i. Warrants. The Company agrees to issue to Buyer within
thirty (30) days after the Closing Date transferable divisible warrants, in the
form annexed hereto as Annex IV (the "Warrants") for 135,000 shares of Common
Stock. Such Warrants shall bear an exercise price per share of Common Stock
equal to 110% of the Closing Price, as defined in the Debentures, and shall be
immediately exercisable and for a period of three (3) years thereafter together
with piggy-back registration rights, and demand registration rights, as
provided in the Registration Rights Agreements.
j. Non-Public Information. The Company shall in no event
disclose non-public information to the Buyer, advisors to or representatives of
the Buyer unless prior to disclosure of such information the Company marks such
information as "Non-Public Information - Confidential" and provides the Buyer,
such advisors and representatives with a reasonable opportunity to accept or
refuse to accept such non-public information for review. Nothing herein shall
require the Company to disclose non-public information to the Buyer or its
advisors or representatives, and the Company represents that it does not
disseminate non-public information to any Buyers who purchase stock in the
Company in a public offering, to money managers or to securities analysts;
provided, however, that notwithstanding anything herein to the contrary, the
Company will, as hereinabove provided, immediately notify the advisors and
representatives of the Buyer and, if any, underwriters, of any event or the
existence of any circumstance (without any obligation to disclose the specific
event or circumstance) of which it becomes aware, constituting non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the registration statement, would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein, in light
of the circumstances in which they were made, no misleading. Nothing herein
shall be construed to mean that such persons or entities other than the Buyer
(without the written consent
<PAGE>
of the Buyer prior to disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration Statement contains
an untrue statement of a material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.
5. TRANSFER AGENT INSTRUCTIONS.
(a) In order to effect the conversion of all or part of the
Debenture, the Debentureholder shall issue a notice of conversion substantially
in the form attached hereto (the "notice of conversion") which may be by
facsimile and surrender the Debenture for conversion if the Debenture is not
already in possession of the Company. Each conversion of all or any portion of
the Debenture will be deemed to have been effected as of the close of business
on the date on which such notice of conversion is delivered to the principal
office of the Company via facsimile. At such time as such conversion has been
effected, to the extent that any portion of the Debenture is converted, the
rights of the Debentureholder with respect to such portion of the Debenture
shall cease and the Debentureholder shall be deemed to have become the holder o
record of the shares of conversion Shares represented thereby.
(b) No fractional shares of Common Stock shall be issued upon
conversion of the Debenture. In lieu of any fractional share to which the holder
would otherwise be entitled, the Company shall round up to the nearest whole of
Common Share.
(c) The Company shall, immediately upon receipt of a notice of
conversion, issue and deliver to or upon the order of such Debentureholder,
against delivery of the Debentures which have been converted, a certificate or
certificates for the number of shares of Common Stock to which such holder
shall be entitled and such certificate or certificates shall not bear any
restrictive legend; provided (a) the Common Stock evidenced thereby are sold
pursuant to an effective registration statement under the Securities Act, (b)
the holder provides the Company with an opinion of counsel reasonably acceptable
to the Company to the effect that a public sale of such shares may be made
without registration under the Securities Act, or (c) such holder provides the
Company with reasonable assurance that such shares can be sold free of any
limitations imposed by Rule 144, promulgated under the Securities Act. The
Company shall cause such issuance and delivery to be effected within five (5)
business days and shall transmit the certificates by messenger or overnight
delivery service, or via the DWAC system, to reach the address designated by
such holder within five (5) business days after the receipt of such notice.
6. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Illinois. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of Chicago or the state courts of the State of Illinois sitting in the
City of Chicago in connection with any dispute arising under this Agreement and
hereby
<PAGE>
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions. A facsimile transmission of this signed Agreement shall
be legal and binding on all parties hereto. This Agreement may be signed in one
or more counterparts, each of which shall be deemed an original. The headings
of this Agreement are for convenience of reference and shall not form part of,
or affect the interpretation of, this Agreement. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such
invalidity or unenforceability shall not affect the validity or enforceability
of the remainder of this Agreement or the validity or enforceability of this
Agreement in any other jurisdiction. This Agreement may be amended only by an
instrument in writing signed by the party to be charged with enforcement. This
Agreement supersedes all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof.
7. NOTICES. Any notice required or permitted hereunder shall
be given in writing (unless otherwise specified herein) and shall be deemed
effectively given, (i) on the date delivered, (a) by personal delivery, or (b)
if advance copy is given by fax, (ii) seven business days after deposit in the
United States Postal Service by regular or certified mail, or (iii) three
business days mailing by international express courier, with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days advance written notice to each of the other parties hereto.
COMPANY: NEW FRONTIER MEDIA, INC.
1050 Walnut Street, Suite 301
Boulder, CO 80302
ATTN: Mr. Mark H. Kreloff
Telecopier No.: (303) 444-0734
with a copy to:
Lehman & Eilen, Esqs.
50 Charles Lindbergh Blvd.
Uniondale, New York 11553
Attention: Hank Gracin, Esq.
Telecopier No.: (516) 222-0948
BUYER: At the address set forth on the signature page of
this Agreement.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Company's
representations and warranties shall survive the execution and delivery hereof
of this Agreement and the delivery of the Debentures and the Purchase Price, and
shall inure to the benefit of their respective successors and assigns.
9. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by
the Buyer or one of its officers thereunto duly authorized as of the date set
forth below.
AGGREGATE INITIAL PURCHASE PRICE OF SUCH DEBENTURE: $1,350,000
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Agreement to be duly
executed on its behalf this 3rd day of June, 1998.
144 W. Jackson The Augustine Fund
- -------------------------------- -------------------------------
Address Printed Name of Subscriber
Chicago, Illinois
- --------------------------------
By: /s/ Thomas F. Duzynski
----------------------------
Telecopier No. (Signature of Authorized Person)
----------------- Thomas F. Duzynski
---------------------------------
Printed Name and Title
Illinois
- --------------------------------
Jurisdiction of Incorporation
or Organization
This Agreement has been accepted as of the date set forth
below.
NEW FRONTIER MEDIA, INC.
By: /s/ Mark H. Kreloff
-------------------------------------
Mark H. Kreloff, Chairman & CEO
<PAGE>
EXHIBIT 10.09
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of
acceptance set forth below, is entered into by and between NEW FRONTIER MEDIA,
INC., a Colorado corporation, with headquarters located at 1050 Walnut Street,
Suite 301, Boulder, CO 80302 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in accordance with and in reliance upon the exemption
from securities registration afforded, inter alia, by Rule 506 under Regulation
D ("Regulation D" as promulgated by the United States Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, 8% Convertible Debentures (the
"Debentures"), of the Company which will be convertible into shares of Common
Stock, $.0001 par value per share of the Company (the "Common Stock"), upon the
terms and subject to the conditions of such Debentures (the Common Stock and the
Debentures sometimes referred to herein as the "Securities"), and subject to
acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase. The undersigned hereby agrees to initially
purchase from the Company, the Debentures of the Company, in the principal
amount set forth on the signature page of this Agreement, out of a total
offering of $3,500,000 in Debentures as more specifically set forth in P. 4(h),
and having the terms and conditions and being in the form attached hereto as
Annex I. The purchase price for the Debentures shall be as set forth on the
signature page hereto and shall be payable in United States Dollars.
b. Form of Payment. The Buyer shall pay the purchase price for
the Debentures by delivering immediately available good funds in United States
Dollars to the Company in an amount equal to the principal amount of Debentures
being so purchased, less the $500,000 heretofore advanced to the Company
pursuant to that certain bridge note dated May 19, 1998 (the "Bridge Note").
Promptly following payment by the Buyer to the Company of the purchase price of
the Debentures, the Company shall deliver the Debentures duly executed on behalf
of the Company to the Buyer, and the Bridge Note shall be cancelled and deemed
to have been paid in full.
<PAGE>
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock
pursuant to the Registration Statement (as defined below), the Buyer is
purchasing the Debentures and will be acquiring the shares of Common Stock
issuable upon conversion of the Debentures for its own account for investment
only and not with a view towards the public sale or distribution thereof and not
with a view to or for sale in connection with any distribution thereof;
b. The Buyer is (i) an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), and (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason of
the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the Securities;
c. All subsequent offers and sales of the Debentures and the
shares of Common Stock issuable upon conversion of, or issued as dividends on,
the Debentures (the "Shares" or "Common Stock") by the Buyer shall be made
pursuant to registration of the Shares under the 1933 Act or pursuant to an
exemption from registration;
d. The Buyer understands that the Debentures are being offered
and sold, and the Shares are being offered, to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgements and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Debentures and to receive an offer of the Shares;
e. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Debenture and the
offer of the Shares which have been requested by the Buyer. The Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received complete and satisfactory answers to any such
inquiries. Without limiting the generality of the foregoing, the Buyer has also
had the opportunity to obtain and to review the Company's (1) Quarterly Report
on Form 10-Q for the fiscal quarter ended December 31, 1997 and (2) Form SB-2
dated February 11, 1998 (the "Company's SEC Documents").
f. The Buyer understands that its investment in the Securities
involves a high degree of risk;
<PAGE>
g. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities;
h. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
i. Neither the Buyer, nor any affiliate of the Buyer, will
enter into, any put option, short position, or other similar position with
respect to the Debentures or the Shares.
j. Notwithstanding the provisions hereof or of the Debentures,
in no event (except with respect to an Event of Mandatory Conversion upon the
maturity of the Debentures) shall the holder be entitled to convert any
Debenture to the extent after such conversion, the sum of (1) the number of
shares of Common Stock beneficially owned by the Buyer and its affiliates (other
than shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Debenture), and (2) the number of
shares of Common Stock issuable upon the conversion of the Debenture with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Buyer and its affiliates of more than 4.99% of
the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), except as otherwise provided in clause (1) of such proviso. In
addition, the Company and Buyer agree that until the Company either obtains
shareholder approval of the issuance of the shares of Common Stock upon
conversion of the Debentures and exercise of the Warrants herein described, or
an exemption from Nasdaq's corporate governance rules as they may apply to such
issuable shares, the Buyer may not and will not convert the Debentures into more
than 19.9% of the shares of Company's Common Stock outstanding on the date
hereof (the "Common Share Limit").
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
a. Concerning the Shares. There are no preemptive
rights of any stockholder of the Company, as such, to acquire the Common Stock.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado, and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary other than those jurisdictions in which the failure to
so qualify would not have a material and adverse effect on the business,
operations, properties, prospects or condition (financial or otherwise) of the
Company. The Company has registered its Common Stock pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Common Stock is listed and traded on the NASDAQ/Small Cap Market. The Company
shall promptly provide to Buyer copies of any notices it receives regarding the
continued eligibility of the Common Stock for listing on the NASDAQ/Small Cap
Market.
<PAGE>
c. Authorized Shares. The Company has sufficient authorized
and unissued Shares as may be reasonably necessary to effect the conversion of
the Debentures. The Shares have been duly authorized and, when issued upon
conversion of, or as interest on, the Debentures, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights
Agreement and Stock. This Agreement and the Registration Rights Agreement, the
form of which is attached hereto as Annex II (the "Registration Rights
Agreement"), and the transactions contemplated thereby, have been duly and
validly authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Registration Rights
Agreement, when executed and delivered by the Company, will be, valid and
binding agreements of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally; and the Debentures will be duly and
validly authorized and, when executed and delivered on behalf of the Company in
accordance with this Agreement, will be a valid and binding obligation of the
Company in accordance with its terms, subject to general principles of equity
and to bankruptcy, insolvency, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company, the issuance of
the Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Debentures do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under (i)
the articles of incorporation or by-laws of the Company, (ii) any indenture,
mortgage, deed of trust, or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
including any listing agreement for the Common Stock except as herein set forth,
(iii) to its knowledge, any existing applicable law, rule, or regulation or any
applicable decree, judgment, or (iv) to its knowledge, order of any court,
United States federal or state regulatory body, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, except such conflict, breach or default which would not have a
material adverse effect on the transactions contemplated herein. The Company is
not in violation of any material laws, governmental orders, rules, regulations
or ordinances to which its property, real, personal, mixed, tangible or
intangible, or its businesses related to such properties, are subject.
f. Approvals. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market is required to be obtained by the Company for the
issuance and sale of the Securities to the Buyer as contemplated by this
Agreement, except such authorizations, approvals and consents that have been
obtained.
<PAGE>
g. SEC Documents, Financial Statements. The Common Stock of
the Company is registered pursuant to Section 12(g) of the Exchange Act and the
Company has filed on a timely basis all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Exchange Act, including material filed pursuant to
Section 13(a) or 15(d), in addition to one or more registration statements and
amendments thereto heretofore filed by the Company with the SEC under the Act
(all of the foregoing including filings incorporated by reference therein being
referred to herein as the "SEC Documents"). The Company, through its agent, has
delivered to the Buyer true and complete copies of the SEC Documents (except for
exhibits and incorporated documents). The Company has not provided to the Buyer
any information which, according to applicable law, rule or regulation, should
have been disclosed publicly by the Company but which has not been so disclosed,
other than with respect to the transactions contemplated by this Agreement.
As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Act or the Exchange Act as
the case may be and the rules and regulations of the SEC promulgated thereunder
and other federal, state and local laws, rules and regulations applicable to
such SEC Documents, and none of the SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
h. Absence of Certain Changes. Since April 30, 1997, there has
been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, or results of operations
of the Company.
i. Full Disclosure. There is no fact known to the Company
(other than general economic conditions known to the public generally) or as
disclosed in the documents referred to in Section 2(e), that has not been
disclosed in writing to the Buyer that (i) would reasonably be expected to have
a material adverse effect on the business or financial condition of the Company
or (ii) would reasonably be expected to materially and adversely affect the
ability of the Company to perform its obligations pursuant to this Agreement.
j. Absence of Litigation. Except as disclosed in the SEC
Documents referred to in Section 2(e), which the Buyer has reviewed, there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board or body pending or, to the knowledge of the Company, threatened
against or affecting the Company, wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the business or financial
condition of the Company or the transactions contemplated by this Agreement or
any of the documents contemplated hereby or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents.
k. Absence of Events of Default. No Event of Default, as
defined in the respective agreement to which the Company is a party, and no
event which, with the giving of notice or the passage of time or both, would
become an Event of Default (as so defined), has occurred and is continuing,
which would have a material adverse effect on the Company's financial condition
or results of operations.
<PAGE>
l. Prior Issues. During the twelve (12) months preceding the
date hereof, the Company has not issued any convertible securities.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the
Debentures have not been and are not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that
the Debentures, and, until such time as the Common Stock has been registered
under the 1933 Act as contemplated by the Registration Rights Agreement and sold
in accordance with an effective registration statement ("Registration
Statement"), the Shares issued to the Holder upon conversion of the Debentures
shall bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Debentures and such
Shares):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF
COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to
enter into the Registration Rights Agreement, in substantially the form attached
hereto as Annex II, on or before the Closing Date.
d. Filings. The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Debentures to the Buyer
under any United States laws and regulations, or by any domestic securities
exchange or trading market, and to provide a copy thereof to the Buyer promptly
after such filing.
<PAGE>
e. Reporting Status. So long as the Buyer beneficially owns
any of the Debentures, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.
f. Use of Proceeds. The Company will use the proceeds from the
sale of the Debentures (excluding amounts paid by the Company for legal fees in
connection with the sale of the Debentures) for the purchase of film rights,
equipment and working capital/deposits purposes, and shall not, directly or
indirectly, use such proceeds for any loan to or investment in any other
corporation, partnership enterprise or other person.
g. Call Option. At the option of the Company, for a period of
24 months following the date of this Agreement, the Buyer agrees to purchase up
to an additional $400,000 principal amount of Debentures (the "Additional
Debentures") upon three (3) business days' written notice (which may be given
after the close of the market but prior to 5:30 P.M. New York time) to the
Buyer, subject to the following conditions:
(i) The Registration Statement required to be filed under the
Registration Rights Agreement shall have been declared
effective, and no stop order shall have been issued with
respect thereto;
(ii) The dollar amount of each Call shall be as follows: $133,334
for the first Call and $133,333 each for the second and third
Calls;
(iii) There must be at least 30 business days between each Call;
(iv) No Call may be delivered to the extent that it will result in
the issuance of common shares in excess of the Common Share
Limit, or to the extent that the common shares subject to the
Call are not then reserved and authorized to be issued by the
Company;
(v) The Company's share price on the date of the Call must be at
least $2.50 per share. In addition, if the share price is
below $3.00, the average volume of the Company's Common Stock
for the sixty days preceding the date of the Call must be at
least 25,000 shares per day; and
(vi) If the conditions in subsection (v) above are not satisfied
for any period of six (6) consecutive months following the
effective date of the above-referenced Registration Statement,
the Call shall be deemed to have expired pursuant to its own
terms.
Each such additional Closing will occur on or before the third business
day following the Call notice from the Company.
h. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield the number of shares of Common Stock issuable
at conversion as may be required to satisfy the conversion rights of the Buyer
pursuant to the terms and conditions of the Debentures.
i. Warrants. The Company agrees to issue to Buyer within
thirty (30) days after the Closing Date transferable divisible warrants, in the
form annexed hereto as Annex IV (the "Warrants") for 40,000 shares of Common
Stock.. Such Warrants shall bear an exercise price per share
<PAGE>
of Common Stock equal to 110% of the Closing Price, as defined in the
Debentures, and shall be immediately exercisable and for a period of three (3)
years thereafter together with piggy-back registration rights, and demand
registration rights, as provided in the Registration Rights Agreements.
j. Non-Public Information. The Company shall in no event
disclose non-public information to the Buyer, advisors to or representatives of
the Buyer unless prior to disclosure of such information the Company marks such
information as "Non-Public Information - Confidential" and provides the Buyer,
such advisors and representatives with a reasonable opportunity to accept or
refuse to accept such non-public information for review. Nothing herein shall
require the Company to disclose non-public information to the Buyer or its
advisors or representatives, and the Company represents that it does not
disseminate non-public information to any Buyers who purchase stock in the
Company in a public offering, to money managers or to securities analysts;
provided, however, that notwithstanding anything herein to the contrary, the
Company will, as hereinabove provided, immediately notify the advisors and
representatives of the Buyer and, if any, underwriters, of any event or the
existence of any circumstance (without any obligation to disclose the specific
event or circumstance) of which it becomes aware, constituting non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the registration statement, would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein, in light
of the circumstances in which they were made, no misleading. Nothing herein
shall be construed to mean that such persons or entities other than the Buyer
(without the written consent of the Buyer prior to disclosure of such
information) may not obtain non-public information in the course of conducting
due diligence in accordance with the terms of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading.
5. TRANSFER AGENT INSTRUCTIONS.
(a) In order to effect the conversion of all or part of the
Debenture, the Debentureholder shall issue a notice of conversion substantially
in the form attached hereto (the "notice of conversion") which may be by
facsimile and surrender the Debenture for conversion if the Debenture is not
already in possession of the Company. Each conversion of all or any portion of
the Debenture will be deemed to have been effected as of the close of business
on the date on which such notice of conversion is delivered to the principal
office of the Company via facsimile. At such time as such conversion has been
effected, to the extent that any portion of the Debenture is converted, the
rights of the Debentureholder with respect to such portion of the Debenture
shall cease and the Debentureholder shall be deemed to have become the holder o
record of the shares of conversion Shares represented thereby.
(b) No fractional shares of Common Stock shall be issued upon
conversion of the Debenture. In lieu of any fractional share to which the holder
would otherwise be entitled, the Company shall round up to the nearest whole of
Common Share.
(c) The Company shall, immediately upon receipt of a notice of
conversion, issue and deliver to or upon the order of such Debentureholder,
against delivery of the Debentures which have been converted, a certificate or
certificates for the number of shares of Common Stock to which such holder
<PAGE>
shall be entitled and such certificate or certificates shall not bear any
restrictive legend; provided (a) the Common Stock evidenced thereby are sold
pursuant to an effective registration statement under the Securities Act, (b)
the holder provides the Company with an opinion of counsel reasonably acceptable
to the Company to the effect that a public sale of such shares may be made
without registration under the Securities Act, or (c) such holder provides the
Company with reasonable assurance that such shares can be sold free of any
limitations imposed by Rule 144, promulgated under the Securities Act. The
Company shall cause such issuance and delivery to be effected within five (5)
business days and shall transmit the certificates by messenger or overnight
delivery service, or via the DWAC system, to reach the address designated by
such holder within five (5) business days after the receipt of such notice.
6. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Illinois. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of Chicago or the state courts of the State of Illinois sitting in the
City of Chicago in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
7. NOTICES. Any notice required or permitted hereunder shall
be given in writing (unless otherwise specified herein) and shall be deemed
effectively given, (i) on the date delivered, (a) by personal delivery, or (b)
if advance copy is given by fax, (ii) seven business days after deposit in the
United States Postal Service by regular or certified mail, or (iii) three
business days mailing by international express courier, with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days advance written notice to each of the other parties hereto.
COMPANY: NEW FRONTIER MEDIA, INC.
1050 Walnut Street, Suite 301
Boulder, CO 80302
ATTN: Mr. Mark H. Kreloff
Telecopier No.: (303) 444-0734
with a copy to:
Lehman & Eilen, Esqs.
50 Charles Lindbergh Blvd.
Uniondale, New York 11553
Attention: Hank Gracin, Esq.
Telecopier No.: (516) 222-0948
BUYER: At the address set forth on the signature page of
this Agreement.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Company's
representations and warranties shall survive the execution and delivery hereof
of this Agreement and the delivery of the Debentures and the Purchase Price, and
shall inure to the benefit of their respective successors and assigns.
9. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by
the Buyer or one of its officers thereunto duly authorized as of the date set
forth below.
AGGREGATE INITIAL PURCHASE PRICE OF SUCH DEBENTURE: $400,000
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Agreement to be duly
executed on its behalf this 3rd day of June, 1998.
1310 Hwy 620 South PRO FUTURES SPECIAL EQUITIES FUND, L.P.
Address Printed Name of Subscriber
By: Golden Eye Asset Mgt., Inc., G.P.
Austin, TX 78734 By: /s/ Marte N. Anderson
- ---------------------------- ---------------------------------------
(Signature of Authorized Person)
Telecopier No. /s/ Marte N. Anderson
------------------- ---------------------------------
Printed Name and Title
Delaware
- -----------------------------
Jurisdiction of Incorporation
or Organization
This Agreement has been accepted as of the date set forth below.
NEW FRONTIER MEDIA, INC.
By: /s/ Mark H. Kreloff
----------------------------------
Mark H. Kreloff, Chairman & CEO
<PAGE>
EXHIBIT 10.10
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of June 3, 1998
(this "Agreement"), is made by and between NEW FRONTIER MEDIA, INC., a Colorado
corporation (the "Company"), and the entity named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement, dated as of June 3, 1998, between the Initial
Investor and the Company (the "Securities Purchase Agreement"), the Company has
agreed to issue and sell to the Initial Investor one or more 8% Convertible
Debentures of the Company, in an aggregate principal amount not exceeding
$3,500,000 (collectively, the "Debentures"), and warrants to purchase up to
175,000 shares of Common Stock, which Debentures will be convertible into shares
of the common stock, $.0001 par value (the "Common Stock"), of the Company (the
"Conversion Shares") upon the terms and subject to the conditions of such
Debentures, and the Warrants will be exercisable for shares of Common Stock (the
"Warrant Shares"); and
WHEREAS, to induce the Initial Investor to execute and deliver
the Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), with respect to the Conversion Shares and Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agrees as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall
have the following meanings:
(i) "Investor" means the Initial Investor and any permitted
transferee or assignee who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(ii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Potential Material Event" means any of the following:
(a) the possession by the Company of material information not ripe for
disclosure in a registration statement, which shall be evidenced by
determinations in good faith by the Board of Directors of the Company that
<PAGE>
disclosure of such information in the registration statement would be
detrimental to the business and affairs of the Company; or (b) any material
engagement or activity by the Company which would, in the good faith
determination of the Board of Directors of the Company, be adversely affected by
disclosure in a registration statement at such time, which determination shall
be accompanied by a good faith determination by the Board of Directors of the
Company that the registration statement would be materially misleading absent
the inclusion of such information.
(iv) "Registrable Securities" means the Conversion Shares, the
Warrant Shares, the shares of Common Stock issuable in lieu of cash interest
payments on the Debentures, and the 50,000 shares of Common Stock issuable under
those certain warrants issued to the Investor as a commitment fee for the
Debentures.
(v) "Registration Statement" means a registration statement
of the Company under the Securities Act.
(b) Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file
with the SEC, no later than forty-five (45) days following the initial Closing
Date under the Securities Purchase Agreement, either a Registration Statement on
Form SB-2 registering for resale by the Investor a sufficient number of shares
of Common Stock for the Initial Investors (or such lesser number as may be
required by the SEC), but in no event less than the number of shares into which
the Debentures would be convertible and the Warrants exercisable at the time of
filing of the Form SB-2, which Registration Statement shall be declared
effective no later than 120 days after the Closing Date.
(b) Payments by the Company. If the Registration Statement
covering the Registrable Securities required to be filed by the Company pursuant
to Section 2(a) hereof is not effective within the earlier of (a) 5 days after
notice by the SEC that it may be declared effective or (b) one hundred twenty
(120) days following the initial Closing Date (the Required Effective Date"), or
after a Suspension Period (except as provided by the last sentence of section
2a), then the Company will make payments to the Initial Investor in such amounts
and at such times as shall be determined pursuant to this Section 2(b). The
amount to be paid by the Company to the Initial Investor shall be determined as
of each Computation Date, and such amount shall be equal to two (2%) percent of
the purchase price paid by the Initial Investor for all Debentures then
purchased and outstanding pursuant to the Securities Purchase Agreement for any
period from the Required Effective Date and three and one half (3 1/2%) percent
to each Computation Date thereafter, until the Registration Statement is
declared effective by the SEC (the "Periodic Amount"). The full Periodic Amount
shall be paid by the Company in immediately available funds within three
business days after each Computation Date. Notwithstanding the foregoing, the
amounts payable by the Company pursuant to this provision shall not be payable
to the extent any delay in the effectiveness of the Registration Statement
occurs because of an act of, or a failure to act or to act timely by the Initial
Investor or its counsel, or in the event all of the Registrable Securities may
be sold pursuant to Rule 144 or another available exemption under the Act.
2
<PAGE>
As used in this Section 2(b), the following terms shall have
the following meanings:
"Computation Date" means the date which is thirty (30) days
after the Required Effective Date (except as provided by the last sentence of
section 2(a)), and, if the Registration Statement required to be filed by the
Company pursuant to Section 2(a) has not theretofore been declared effective by
the SEC, each date which is thirty (30) days after the previous Computation Date
(pro rated for partial periods) until such Registration Statement is so declared
effective.
3. Obligations of the Company. In connection with the
registration of the Registrable Securities, the Company shall do each of the
following.
(a) Prepare promptly, and file with the SEC by forty-five (45)
days after the initial Closing Date, a Registration Statement with respect to
not less than the number of Registrable Securities provided in Section 2(a),
above, and thereafter use its reasonable best efforts to cause each Registration
Statement relating to Registrable Securities to become effective the earlier of
(a) 5 days after notice by the SEC that it may be declared effective or (b) one
hundred twenty (120) days following the initial Closing Date, and keep the
Registration Statement effective at all times until the earliest (the
"Registration Period") of (i) the date that is two years after the Closing Date
(ii) the date when the Investors may sell all Registrable Securities under Rule
144 or (iii) the date the Investors no longer own any of the Registrable
Securities, which Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) The Company shall permit a single firm of counsel
designated by the Initial Investors to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior to their
filing with the SEC, and not file any document in a form to which such counsel
reasonably objects;
(d) Furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel identified to the
Company, (i) promptly after the same is prepared and publicly distributed, filed
with the SEC, or received by the Company, one (1) copy of the Registration
Statement, each preliminary prospectus and prospectus, and each amendment or
supplement thereto, and (ii) such number of copies of a prospectus, and all
amendments and
3
<PAGE>
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor;
(e) As promptly as practicable after becoming aware of such
event, notify each Investor of the happening of any event of which the Company
has knowledge, as a result of which the prospectus included in the 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, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;
(f) As promptly as practicable after becoming aware of such
event, notify each Investor who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the SEC of a Notice of Effectiveness or any notice of effectiveness
or any stop order or other suspension of the effectiveness of the Registration
Statement at the earliest possible time;
(g) Notwithstanding the foregoing, if at any time or from time
to time after the date of effectiveness of the Registration Statement, the
Company notifies the Investors in writing of the existence of a Potential
Material Event, the Investors shall not offer or sell any Registrable Shares, or
engage in any other transaction involving or relating to the Registrable Shares,
from the time of the giving of notice with respect to a Potential Material Event
until such Investor receives written notice from the Company that such Potential
Material Event either has been disclosed to the public or no longer constitutes
a Potential Material Event; provided, however, that the Company may not so
suspend the right to such holders of Registrable Shares for more than two twenty
(20) day period in the aggregate during any 12-month period ("Suspension
Period") with at least a ten (10) business day interval between such periods,
during the periods the Registration Statement is required to be in effect;
(h) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(i) Cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates for the Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates for the Registrable
Securities to be in such denominations or amounts as the case may be, as the
Investors may reasonably request, and, within three (3) business days after a
Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal counsel
selected by the Company to deliver, to the transfer agent for the Registrable
Securities (with copies to the Investors whose Registrable Securities are
included in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
4
<PAGE>
(j) Take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. Obligations of the Investors. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request. At
least five (5) days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor (the "Requested
Information") if such Investor elects to have any of such Investor's Registrable
Securities included in the Registration Statement.
(b) Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(e)
or 3(f), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. Expenses of Registration. All expenses, other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 3, but including,
without limitation, all registration, listing, and qualifications fees, printers
and accounting fees, the fees and disbursements of counsel for the Company,
shall be borne by the Company.
6. Indemnification. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act (each, an "Indemnified Person" or
"Indemnified
5
<PAGE>
Party"), against any losses, claims, damages, liabilities or expenses (joint or
several) (including reasonable attorneys fees) incurred (collectively, "Claims")
to which any of them may become subject under the Securities Act, the Exchange
Act or otherwise, insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations in the Registration
Statement, or any post-effective amendment thereof, or any prospectus included
therein: (i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any post-effective amendment thereof
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,
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the final prospectus (as amended or supplemented, if the Company
files any amendment thereof or supplement thereto with the SEC) or the omission
or alleged omission to state therein any material fact necessary to make the
statements made therein, in light of the circumstances under which the
statements therein were made, not misleading or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation under the Securities Act, the Exchange
Act or any state securities law (the matters in the foregoing clauses (i)
through (iii) being, collectively, "Violations"). Subject to clause (b) of this
Section 6, the Company shall reimburse the Investors, promptly as such expenses
are incurred and are due and payable, for any legal fees or other reasonable
expenses incurred by them in connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a) shall not (I) apply to
a Claim arising out of or based upon a Violation which occurs in reliance upon
and in conformity with information furnished in writing to the Company by or on
behalf of any Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto, (II) be available to the extent such Claim is based on a
failure of the Investor to deliver or cause to be delivered the prospectus made
available by the Company; or (III) apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld. Each Investor will
indemnify the Company and its officers, directors and agents against any claims
arising out of or based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing to the Company, by or on behalf
of such Investor, expressly for use in connection with the preparation of the
Registration Statement, subject to such limitations and conditions as are
applicable to the Indemnification provided by the Company to this Section 6.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to
Section 9;
6
<PAGE>
(b) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be. In case any such action is brought against any Indemnified Person
or Indemnified Party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such Indemnified Person or
Indemnified Party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such Indemnified Person or Indemnified
Party under this Section 6 for any legal or other reasonable out-of-pocket
expenses subsequently incurred by such Indemnified Person or Indemnified Party
in connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party shall not pursue the action of its
final conclusion. The Indemnified Person or Indemnified Party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and reasonable out-of-pocket expenses of such
counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the Indemnified Person or Indemnified Party. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; provided, however, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6; (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation; and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
7
<PAGE>
8. Reports under Exchange Act. With a view to making available
to the Investors the benefits of Rule 144 promulgated under the Securities Act
or any other similar rule or regulation of the SEC that may at any time permit
the Investors to sell securities of the Company to the public without
registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. Assignment of the Registration Rights. The rights to have
the Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of the Registrable
Securities (or all or any portion of any Debenture of the Company which is
convertible into such securities) only if: (a) the Investor agrees in writing
with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, and (d) at or before the time the Company received the
written notice contemplated by clause (b) of this sentence the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein. In the event of any delay in filing or effectiveness of the
Registration Statement as a result of such assignment, the Company shall not be
liable for any damages arising from such delay, or the payments set forth in
Section 2(c) hereof.
10. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold an eighty (80%) percent interest of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
8
<PAGE>
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered (by hand, by courier, by telephone line facsimile transmission,
receipt confirmed, or other means) or sent by certified mail, return receipt
requested, properly addressed and with proper postage pre-paid (i) if to the
Company, NEW FRONTIER MEDIA, INC., 1050 Walnut Street, Suite 301, Boulder,
Colorado 80302, ATTN: Mr. Mark H. Kreloff, Telecopier No.: (303) 444-0734; with
a copy to Lehman & Eilen, Esqs., 50 Charles Lindbergh Blvd., Uniondale, New York
11553, Attention: Hank Gracin, Esq., Telecopier No.: (516) 222-0948; (ii) if to
the Initial Investor, at the address set forth under its name in the Securities
Purchase Agreement, with a copy to David M, Matteson, Esq., Foley & Lardner, One
IBM Plaza, 330 North Wabash Avenue, Suite 3300, Chicago, Illinois 60611 and
(iii) if to any other Investor, at such address as such Investor shall have
provided in writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 11(b), and shall be
effective, when personally delivered, upon receipt and, when so sent by
certified mail, four (4) calendar days after deposit with the United states
Postal Service.
(c) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Illinois. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of Chicago or the state courts of the State of Illinois sitting in the
City of Chicago in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non coveniens, to the bringing of any such
proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
9
<PAGE>
(e) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
10
<PAGE>
(j) Neither party shall be liable for consequential
damages.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
NEW FRONTIER MEDIA, INC.
By: /s/ Mark Kreloff
--------------------------------
The Augustine Fund
By: /s/ Thomas F. Duzynski
--------------------------------
PRO FUTURES SPECIAL EQUITIES FUND, L.P.
By: /s/ Marte N. Anderson
--------------------------------
11
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the New Frontier Media, Inc. registration
statement, on Form SB-2, of our report dated June 11, 1998, except for Note 13,
as to which the date is June 26, 1998, accompanying the consolidated financial
statements of New Frontier Media, Inc. for the years ended March 31, 1998 and
1997 which is part of the registration statement and to the reference to us
under the heading "Experts" in such registration statement.
SPICER, JEFFRIES & CO.
Denver, Colorado
July 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statement of New Frontier Media, Inc. included in the Company's Form
10-K for the period ended March 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 503123
<SECURITIES> 0
<RECEIVABLES> 813456
<ALLOWANCES> 0
<INVENTORY> 182508
<CURRENT-ASSETS> 3289647
<PP&E> 1113428
<DEPRECIATION> 62209
<TOTAL-ASSETS> 10747949
<CURRENT-LIABILITIES> 2275911
<BONDS> 0
0
0
<COMMON> 654
<OTHER-SE> 8447752
<TOTAL-LIABILITY-AND-EQUITY> 10747949
<SALES> 1645192
<TOTAL-REVENUES> 1645192
<CGS> 2021404
<TOTAL-COSTS> 1415002
<OTHER-EXPENSES> 159454
<LOSS-PROVISION> 1595548
<INTEREST-EXPENSE> 131096
<INCOME-PRETAX> (3258343)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1950668)
<DISCONTINUED> (1595548)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3258343)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
