-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NRM3t1YqsKTpwWjRpCABcpJGm/09ByefaSDd0D7LFJcqJNU7v1zKEhA0Kk3++zrX ldhOSyugtR4cKnDZmgi/Pw== 0000890163-98-000127.txt : 19980720 0000890163-98-000127.hdr.sgml : 19980720 ACCESSION NUMBER: 0000890163-98-000127 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980717 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW FRONTIER MEDIA INC /CO/ CENTRAL INDEX KEY: 0000847383 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE DISTRIBUTION [7822] IRS NUMBER: 841084061 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-59289 FILM NUMBER: 98667875 BUSINESS ADDRESS: STREET 1: 1050 WALNUT ST STREET 2: STE 301 CITY: BOULDER STATE: CO ZIP: 80302 BUSINESS PHONE: 3034440632 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL SECURITIES HOLDING CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STRATEGIC ACQUISITIONS INC DATE OF NAME CHANGE: 19600201 SB-2 1 FORM SB-2 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) COLORADO 5190 84-1084061 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization) Classification Code Number)
1050 WALNUT STREET, SUITE 301 BOULDER, COLORADO 80302 (303) 444-0632 (Address, including zip code, and telephone number, including area code, of registrant's principal place of business) ----------- MICHAEL WEINER 1050 WALNUT STREET, SUITE 301 BOULDER, COLORADO 80302 (303) 444-0632 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------- Copies of all communications to: 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. / / 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
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) - ------------- ---------- --------- --------- ------- 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 - -------------- (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.
----------- 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. 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. 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 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 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 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 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 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 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 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 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 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
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) ---- ---------------- ------------- ------------ The Augustine Fund (4) 185,000 1,172,655 0 Pro Futures Special Equities Fund, L.P. (5) 40,000 332,638 0 ----------------------- (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.
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 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.
March 31, 1998 (unaudited) Proforma Assuming Proforma Assuming Conversion of Actual Sale of Debentures Debentures ------ ------------------ ----------------- 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
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 SELECTED FINANCIAL DATA New Frontier Media, Inc. The following table sets forth selected operating data for the periods and upon the basis indicated:
YEAR ENDED MARCH 31, -------------------------- 1998 1997 ---------- ---------- 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) ========== ==========
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.
MARCH 31, 1997 -------------- BOULDER FUZZY CORPORATE AND DAVID INTERACTIVE ENTERTAINMENT, ELIMINATIONS ENTERTAINMENT, INC. GROUP, INC. INC. TOTALS ------------- ------------------- ----------- -------------- ------ 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
MARCH 31, 1998 -------------- COLORADO CORPORATE AND DAVID BROADCASTING, DISCONTINUED ELIMINATIONS ENTERTAINMENT, INC. INC. OPERATIONS TOTALS ------------- ------------------- ------------- ------------- ------ 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
14 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 $100,000.
NAME AND OTHER ANNUAL RESTRICTED OPTIONS/ LTIP ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION STOCK AWARDS SAR PAYOUTS COMPENSATION - ------------------ ---- --------- -------- ------------ ------------ -------- ------- ------------ 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
29 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 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:
NAME OF NUMBER BENEFICIAL OWNER(1) SHARES BENEFICIALLY OWNED PERCENT ------------------- ------------------------- ------- 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% ----------- (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.
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 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 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 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 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 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 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND 1997 ASSETS
1998 1997 ----------- ----------- 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 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-3 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND 1997 LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997 ----------- ----------- 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 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-4 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31. ---------------------------- 1998 1997 ----------- ----------- 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 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-5 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1998 AND 1997
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 ---------- ------ ------- -------- ------ ------ ----------- ----------- 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) ---------- ------ ------- -------- ------ ------ ----------- ----------- ---------- ------ ------- -------- ------ ------ ----------- -----------
See accompanying notes to consolidated financial statements. F-6 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31, ---------------------------- 1998 1997 ----------- ----------- 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 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-7 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Year ended March 31, ---------------------------- 1998 1997 ----------- ----------- 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 $ - ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-8 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 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 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 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
1998 1997 ------------- ------------- 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 ============= =============
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 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 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 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1998 AND 1997 (Continued) NOTE 5 - INCOME TAXES (continued)
1998 1997 ---------------- ------------ 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) ---------------- ------------- $ - $ - ================ =============
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:
Year ended Principal Due March 31, Operating Capital Capital Lease - ---------- ------------ --------- ------------- 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 =========
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 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:
1998 1997 --------- --------- $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 ========= =========
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.
Number Weighted Average of Warrants Exercise Price ------------ ---------------- 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 ============
F-16 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:
Weighted Average Number Remaining Contractual Exercise prices of Warrants Life (months) - --------------- ----------- --------------------- $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
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 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
Corporate and DVD BIG FUZZY Eliminations Totals ----------- ------------ ------------ ------------ ----------- 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
March 31, 1998
Corporate Discontinued and DVD CSB Operations Eliminations Totals ----------- ------------ ------------ ------------ ----------- 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
F-18 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 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 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 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 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 (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.
SIGNATURE TITLE DATE --------- ----- ---- /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
II-4 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 EX-4 2 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 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 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 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. 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 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 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. 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) 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. 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 - 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 - 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 - 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 - 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 :
Number of shares Names of subject to transferred Assignee Address Taxpayer ID No. Warrant - --------- ------- --------------- -----------------------
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 - 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 - EX-5.1 3 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 EX-10 4 MATERIAL CONTRACTS 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. 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; 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. 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. 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. 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. 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 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 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 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. 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 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. 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; 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. 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. 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. 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. 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 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 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. 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 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 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 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 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 (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 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 (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 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 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 (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 (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 EX-23 5 CONSENTS OF EXPERTS AND COUNSEL 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 EX-27 6 FINANCIAL DATA SCHEDULE
5 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. 12-MOS MAR-31-1998 MAR-31-1998 503123 0 813456 0 182508 3289647 1113428 62209 10747949 2275911 0 0 0 654 8447752 10747949 1645192 1645192 2021404 1415002 159454 1595548 131096 (3258343) 0 (1950668) (1595548) 0 0 (3258343) (.73) (.73)
-----END PRIVACY-ENHANCED MESSAGE-----