-----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, VYN4a/jQaGVrfDBTZKQk+XtUNyDOgvweCtOqJl5P+iPD1tvaWN1EuBLWdArbZgcD vWZmqwCutVNvvSZLyAc94A== 0001047469-97-006729.txt : 19971205 0001047469-97-006729.hdr.sgml : 19971205 ACCESSION NUMBER: 0001047469-97-006729 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19971204 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/A SEC ACT: SEC FILE NUMBER: 333-35337 FILM NUMBER: 97732138 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/A 1 SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1997. REGISTRATION NO. 333-35337. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ NEW FRONTIER MEDIA, INC. (Exact name of small business issuer as specified in its charter) COLORADO 5190 84-1084061 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Identification No.) incorporation or organization) Classification Code Number) 1050 WALNUT STREET, SUITE 301 BOULDER, COLORADO 80302 (303) 444-0632 (Address, including zip code, and telephone number, including area code, of registrant's principal place of business) ------------------------------ MICHAEL WEINER 1050 WALNUT STREET, SUITE 301 BOULDER, COLORADO 80302 (303) 444-0632 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ Copies of all communications to: Issuer's Counsel: Underwriter's Counsel: HANK GRACIN, ESQ. DENNIS J. DOUCETTE, ESQ. Lehman & Eilen Luce, Forward, Hamilton & Scripps, LLP 50 Charles Lindbergh Blvd. 600 West Broadway, Suite 2600 Uniondale, New York 11553 San Diego, California 92101 Telephone: (516) 222-0888 Telephone: (619) 236-1414 Facsimile: (516) 222-0948 Facsimile: (619) 232-8311 APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITY AMOUNT BEING MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION BEING REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE FEE Units....................................... 1,725,000 $5.25 $9,056,250 $2,672(3) Common Stock, par value $.0001 per share.... 1,725,000 (3) (3) (3) Redeemable Common Stock Purchase Warrants... 1,725,000 (3) (3) (3) Common Stock, par value $.001 per share, issuable upon exercise of Redeemable Common Stock Purchase Warrants............ 1,725,000 $6.50 $11,212,500 $3,308 Common Stock, par value $.001 per share, issuable upon exercise of the Underwriter's Warrants(4)................. 150,000 $6.75 $1,012,500 $299 Totals...................................... $21,281,250 $6,279
(1) Includes 225,000 Units which the Underwriters have the option to purchase to cover overallotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as amended. (3) Included in the Units. No additional registration fee is required. (4) The Company has agreed to sell the Managing Underwriter a Warrant (the "Underwriter's Warrant") for $100 at closing of this offering. The Underwriter's Warrant shall entitle the Managing Underwriter to purchase up to 10 percent of the number of shares of Common Stock underlying the Units purchased by the underwriters in this offering. The Underwriter's Warrant is exercisable at $6.75 per share of Common Stock, for a period of four years beginning one year from the date of closing of this offering. See "UNDERWRITING." ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NEW FRONTIER MEDIA, INC. CROSS-REFERENCE SHEET
ITEM CAPTION LOCATION OR CAPTION IN PROSPECTUS - ----------- ---------------------------------------------------- ---------------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............................ Outside Front Cover Page 2. Inside Front and Outside Back Cover Page of Prospectus.......................................... Inside Front and Outside Back Cover Pages 3. Summary Information and Risk Factors................ Prospectus Summary; Risk Factors 4. Use of Proceeds..................................... Use of Proceeds 5. Determination of Offering Price..................... Cover Page; Risk Factors; Underwriting 6. Dilution............................................ Dilution 7. Selling Security Holders............................ Not Applicable 8. Plan of Distribution................................ Underwriting 9. Legal Proceedings................................... Business--Legal Proceedings 10. Directors, Executive Officers, Promoters and Control Persons............................................. Management; Principal Shareholders 11. Security Ownership of Certain Beneficial Owners and Management.......................................... Principal Shareholders 12. Description of Securities........................... Description of Securities 13. Interest of Named Experts and Counsel............... Legal Matters 14. Disclosure of Commission Position on Indemnification for Securities...................................... Part II: Item 24; Item 28 15. Organization Within Last Five Years................. Prospectus Summary; Certain Transactions 16. Description of Business............................. Risk Factors; Business 17. Management's Discussion and Analysis or Plan of Operations.......................................... Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property............................. Not Applicable 19. Certain Relationships and Related Transactions........................................ Certain Transactions 20. Market for Common Equity and Related Shareholder Matters............................................. Description of Securities 21. Executive Compensation.............................. Management--Executive Compensation 22. Financial Statements................................ Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. Not Applicable
SUBJECT TO COMPLETION, DATED DECEMBER 4, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS 1,500,000 UNITS [LOGO] NEW FRONTIER MEDIA, INC. CONSISTING OF 1,500,000 SHARES OF COMMON STOCK AND 1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS New Frontier Media, Inc. (the "Company") is hereby offering 1,500,000 units, each unit (the "Units") consisting of one share (the "Shares") of Common Stock, $.001 par value (the "Common Stock"), and one Redeemable Common Stock Purchase Warrant (the "Warrants"). The Units, the Shares and the Warrants offered hereby are referred to collectively as the "Securities." The Shares and Warrants included in the Units may not be separately traded until 120 days after the effective date of this Offering unless an earlier date is agreed upon by the Company and Centex Securities, Inc. and ten days prior written notice is given to the Unit holders. Each Warrant entitles the holder thereof to purchase one share of Common Stock at an exercise price of $6.50 per share, commencing at any time after the Common Stock and Warrants become separately tradeable, until five years following the effective date of this Offering. The Warrants are subject to redemption by the Company at $0.05 per Warrant, on thirty days prior written notice, if the Common Stock has traded at or above $8.00 for ten consecutive trading days. The Warrant exercise price is subject to adjustment under certain circumstances; see "Description of Securities." Prior to this Offering, a limited public market for the Common Stock of the Company has existed. The Company's Common Stock is currently traded on the Nasdaq "Bulletin Board" under the symbol "NOOF." The last reported sale price of the Common Stock on the Bulletin Board was $5.00 per share. The public offering price of the Unit will be $5.25, consisting of $5.00 per Common Stock share and $0.25 per Warrant. The Company has applied to have its Units, Common Stock and Warrants approved for quotation on the Nasdaq SmallCap Market under the symbols "NOOFU," "NOOF" and "NOOFW," respectively. THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Company intends to utilize approximately 64% of the net proceeds from this offering to enter the satellite broadcasting business. See "USE OF PROCEEDS." The Company has no prior experience in satellite broadcasting. See "RISK FACTORS" and "BUSINESS." THE COMPANY AND THE MANAGING UNDERWRITER WILL MAKE A RECISSION OFFER TO INVESTORS IN THIS OFFERING IF THE COMPANY FAILS TO COMPLETE THE FIFTH DIMENSION ASSETS ACQUISITION. TO REDUCE THE POSSIBILITY OF SUCH RECISSION OFFER, THE COMPANY HAS ARRANGED FOR ALL THE CLOSING DOCUMENTS FOR THE FIFTH DIMENSION ASSETS ACQUISITION TO BE EXECUTED IN ADVANCE AND PLACED IN ESCROW PENDING RECEIPT OF THE PURCHASE PRICE THEREFOR. SEE "BUSINESS." INSOFAR AS THE COMPANY BELIEVES THAT THERE IS LITTLE LIKELIHOOD THAT IT WILL BE UNABLE TO CLOSE THE FIFTH DIMENSION ASSETS ACQUISITION FOLLOWING THIS OFFERING, PROCEEDS FROM THIS OFFERING WILL NOT BE PLACED IN ESCROW PENDING COMPLETION OF THE FIFTH DIMENSION ASSETS ACQUISITION. SEE "RISK FACTORS." THE FIFTH DIMENSION ASSETS ACQUISITION INCLUDES SUBLEASING OF SATELLITE TRANSPONDERS BY THE COMPANY FROM FIFTH DIMENSION. THE COMPANY HAS OBTAINED NEITHER AN OPINION FROM INDEPENDENT COUNSEL NOR THE CONSENT OF THE TRANSPONDER LESSORS CONCERNING THE VALIDITY OF THE SUBLEASES. SEE "RISK FACTORS."
UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT(2) COMPANY(3) Per Unit(1)........................................... $ $ $ Total(4).............................................. $ $ $
(1) The Company has reserved the right to sell up to 200,000 Units directly to certain industry partners at $4.725 per Unit. Since no commissions will be paid in connection with direct sales by the Company, there will be no effect on the proceeds to the Company. Subscriptions for Units to be directly sold by the Company will be held in escrow by Lehman & Eilen, counsel to the Company, and will be released to the Company concurrent with and subject to the delivery of payment for the Units to be purchased by the Underwriters. See "Underwriting." (2) See "UNDERWRITING" for indemnification arrangements with the several Underwriters. In addition to the underwriting discount, the Company has agreed to pay the Managing Underwriter a 3% nonaccountable expense allowance, and to sell the Managing Underwriter a warrant to purchase a number of shares of Common Stock equal to 10% of the shares of Common Stock underlying the Units sold in this Offering. See "UNDERWRITING." (3) Before deducting expenses of the Offering payable by the Company, including the Managing Underwriter's nonaccountable expense allowance estimated to be $236,250 ($271,688 if the Underwriter's Overallotment Option is exercised in full), estimated at $511,250. (4) The Company has granted to the Underwriters a 30-day option (the "Overallotment Option") to purchase up to 225,000 additional Units on the same terms as the Units offered hereby solely to cover overallotments, if any. If the Overallotment Option is exercised in full, the total Price to Public, Underwriting Discount, and Proceeds to Company will be $ , $ , and $ , respectively. See "UNDERWRITING." The Securities are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Securities will be made on or about December , 1997 against payment therefor at the offices of the Managing Underwriter, 1020 Prospect Street, Suite 200, La Jolla, California 92037. CENTEX SECURITIES INCORPORATED The date of this Prospectus is , 1997. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON STOCK OR WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING, AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS FOUND ELSEWHERE IN THIS PROSPECTUS, AND THE INFORMATION INCORPORATED HEREIN BY REFERENCE. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVERALLOTMENT OPTION. SEE "UNDERWRITING." AS USED IN THIS PROSPECTUS, THE TERM "NEW FRONTIER MEDIA" AND THE "COMPANY" REFER TO NEW FRONTIER MEDIA, INC. AND ITS SUBSIDIARIES, UNLESS OTHERWISE STATED OR INDICATED BY THE CONTEXT. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH IN "RISK FACTORS." EXCEPT WHERE OTHERWISE INDICATED, ALL SHARE AND PER SHARE DATA IN THIS PROSPECTUS (INCLUDING DATA WITH RESPECT TO OPTIONS AND WARRANTS TO PURCHASE SHARES OF COMMON STOCK) HAVE BEEN ADJUSTED TO REFLECT THE FIFTH DIMENSION ASSETS ACQUISITION (AS DEFINED HEREIN). SEE "BUSINESS." THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH MAY INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY New Frontier Media, Inc. (the "Company") is a diversified holding company, consisting of four subsidiaries: (1) Colorado Satellite Broadcasting, Inc. ("CSB"); (2) DaViD Entertainment, Inc. ("DaViD"); (3) Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads"); and (4) Fuzzy Entertainment, Inc. d/b/a In-Sight Editions ("In-Sight"). The Company is engaged in three primary business activities: (i) reference CD-ROM publishing; (ii) acquisition and distribution of unrated and adult feature films in all video disc formats, including 12" laserdisc and 5 1/4" digital versatile disc; and (iii) fine art and decorative art poster publishing and distribution. The Company has suffered losses in all but two quarters since its inception on July 26, 1995. See "FINANCIAL STATEMENTS." The Company intends to enter into a fourth business, satellite broadcasting of adult entertainment, upon completion of the acquisition of certain assets from Fifth Dimension Communications (Barbados), Inc., a Barbados corporation, 1043133 Ontario Inc., an Ontario (Canada) corporation, 1248663 Ontario Inc., an Ontario (Canada) corporation, and Merlin Sierra, Inc., a California corporation (hereinafter referred to collectively as "Fifth Dimension"). See "BUSINESS--Fifth Dimension Assets Acquisition." The Company has entered into agreements to acquire certain assets of Fifth Dimension, subject to successful completion of a public offering by the Company of at least $7,000,000 in gross proceeds (the "Fifth Dimension Assets Acquisition"). See "USE OF PROCEEDS" and "BUSINESS." The Company intends to utilize its wholly owned subsidiary CSB to acquire certain Fifth Dimension assets and operate the subscription-based and transaction-based television networks acquired from Fifth Dimension. See "BUSINESS--Fifth Dimension Assets Acquisition." RECENT DEVELOPMENTS The Company is currently engaged in legal disputes with Sands Brothers & Company ("Sands Brothers"), a New York broker-dealer, and Quarto Holdings, Inc. ("Quarto"), a wholly owned subsidiary of Quarto Group, Inc., a co-edition book publisher which owns 30 percent of Inroads. The Company disputes the validity of and is vigorously contesting the Sands Brothers' and Quarto claims. See "BUSINESS--Legal Proceedings." Inroads and DaViD are in transition periods. Inroads' sales and marketing focus has shifted to a more specialized "enthusiast and hobbyist" consumer niche, as evidenced by Inroads' recent releases of CD-ROM titles GUNS and CIGARS. DaViD has recently transitioned from being a licensor of adult films for release exclusively on LaserDisc, to a licensor and distributor of such films on Digital Versatile Disc ("DVD"). These transitions have negatively impacted the Company's revenues and cash flow; accordingly, on October 24, 1997 the Company obtained an unsecured, conditional, revocable $1,000,000 line of credit from one of the Company's principal shareholders. The Company may draw against this line of credit beginning January 1, 1998, for a period of nine months. In addition, on August 29, 1997, the Company 3 borrowed $500,000 from Golf Partners, LLC, an unaffiliated third party, on a secured basis. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity" and "FINANCIAL STATEMENTS (Note 10)." BUSINESS STRATEGY The Company's business strategy is to create, license and/or acquire high-quality (professionally produced, directed, and/or filmed, with paid actors) content that can be successfully placed into the Company's distribution networks and exploited through analog and digital disc technologies, satellite broadcasting, and print media. A substantial portion of the net proceeds from this offering will be utilized to complete the Fifth Dimension Assets Acquisition, which will result in the Company becoming a provider of sexually explicit video programming. See "BUSINESS." The Fifth Dimension assets to be acquired account for approximately 85.7% of the pro forma adjusted revenues of the Company, set forth in "FINANCIAL STATEMENTS" and the notes thereto. Each of the Company's subsidiaries or intended subsidiaries is summarized below. COLORADO SATELLITE BROADCASTING, INC. ("CSB") CSB is the Company's wholly owned subsidiary that will operate the subscription-based and transaction-based television networks to be acquired from Fifth Dimension. A substantial portion of the proceeds from this Offering will be used to complete the Fifth Dimension transaction. See "USE OF PROCEEDS" and "BUSINESS--Fifth Dimension Assets Acquisition." Fifth Dimension is a leading provider of subscriber-based adult content premium television channels (hereinafter "premium channels" or "pay television") and transaction-based television networks ("pay-per-view"). Fifth Dimension owns, operates and distributes the three leading C-band adult programming networks, and is a leading provider of explicit adult programming via direct to home ("DTH") C-band satellite. Pursuant to the terms of the Asset Purchase Agreements between the Company and Fifth Dimension, the Company will acquire certain assets from Fifth Dimension, including the satellite uplink facility equipment, call center facility equipment, satellite transponder subleases, film inventories, intangible assets (including trade names, trademarks, service marks, copyrights, mask work rights, licenses, brand names, trade secrets, trade dress, technical know-how, good will and other intangibles), subscriber base and lists, vendor lists, books and records, permits and licenses, and all other property of Fifth Dimension used in connection with Fifth Dimension's adult programming business. The Company will enter into an Uplink Management Services Agreement and a Call Center Interim Services Agreement with Fifth Dimension, pursuant to which Fifth Dimension will operate, maintain, manage, and sustain the satellite uplink facility and will receive and process subscriber calls for a period of nine months following the closing. See "BUSINESS." The assets to be acquired from Fifth Dimension generated sales of $15,044,139 and pre-tax income of $999,148 (pre-tax income, as adjusted for non-recurring expenses and related party transactions, would have been $2,755,297) for the year ended March 31, 1997. The Company has agreed to acquire certain Fifth Dimension assets for a total purchase price of $8,700,000, consisting of $3,500,000 in cash, Common Stock of the Company valued at $4,200,000, and a promissory note for $1,000,000. The Company evaluated certain non-recurring costs included in the operation of Fifth Dimension in arriving at the purchase price for the assets. The Company believes approximately $1,800,000 of expenses incurred by Fifth Dimension for the year ended March 31, 1997 will not recur in the future, including excess salaries and related-party payments of approximately $850,000, loss on investment shares of $220,000, certain legal fees of approximately $100,000, approximately $415,000 of costs for duplication of existing facilities and operations that the Company already has in place, and other non-recurring costs of approximately $215,000. Terms of the Asset Purchase Agreements provide that the Company will issue 840,000 shares of Common Stock to Fifth Dimension as part of the purchase price. The Company will also issue Fifth Dimension or its assignees warrants to purchase up to an additional 400,000 shares of the Company's Common Stock at $5.00 per share, all pursuant to the terms of the Asset Purchase Agreements and the Warrant Agreement. See 4 "BUSINESS--Fifth Dimension Assets Acquisition." The Company has also agreed to pay Fifth Dimension "formula profits" exceeding $2,000,000 for the first 12 months after closing. "Formula Profits" is defined in the Asset Purchase Agreements as the total revenue from operations minus actual operating costs. Maximum operating costs under this provision are limited to an amount not greater than 125% of the projected costs set forth in Schedule 2.1(f) to the Asset Purchase Agreements. Schedule 2.1(f) details projected costs of $12,294,444, and maximum operating costs of $15,368,055. The Company believes it can enhance shareholder value by: - Integrating the Fifth Dimension Assets into the Company via CSB, which is currently a shell corporation; - Substantially reducing operating costs associated with the Fifth Dimension assets by, 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 - Utilizing personnel of Inroads to implement simultaneous "web casting" of CSB programming via the Internet. DAVID ENTERTAINMENT, INC. ("DAVID") DaViD is in the business of acquiring content rights to existing unrated and adult motion picture titles for distribution on laserdisc and digital versatile disc ("DVD") by third-party distributors. DaViD is a leading content licensor of feature-length unrated and adult motion pictures for release on video disc. DaViD currently has content rights to approximately 350 unrated and adult motion picture titles, and intends to acquire rights to approximately 500 more in the next 24 months. The Company has allocated $750,000 of the net proceeds from this offering for acquisition of titles by DaViD. See "USE OF PROCEEDS." There are currently no contracts to acquire additional titles in effect. DaViD's titles are distributed in the 8" and 12" LaserDisc formats and the 5 1/4" Digital Versatile Disc format. The distribution terms for these titles range from seven years to perpetuity. DaViD has released over 140 titles as of the date of this Prospectus, currently releases 4 to 8 titles per month for distribution, and intends to release up to 20 titles per month, primarily on DVD, by the end of 1998. See "BUSINESS--DaViD." BOULDER INTERACTIVE GROUP, INC., D/B/A INROADS INTERACTIVE ("INROADS") Inroads is a vertically integrated CD-ROM software publishing company that designs and develops CD-ROM titles and licenses third-party-developed titles. Inroads is 70% owned by New Frontier Media, Inc., and 30% owned by Quarto Holdings, Inc. ("Quarto"), a wholly owned subsidiary of Quarto Group, Inc., a co-edition book publisher. In September, 1996, Inroads acquired rights to commercially exploit certain titles in Quarto's extensive reference library in digital formats, providing Inroads with a significant source of material for future titles. Inroads has recently completed development of IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY and CIGAR COMPANION, its first titles released under this agreement with Quarto. The Company is currently engaged in a dispute with Quarto. See "BUSINESS--Legal Proceedings." Inroads' in-house developed titles are produced, designed, and developed by the Company's twelve-person staff. Inroads' licensed titles (developed by unaffiliated third parties) are localized, packaged, and, if necessary, enhanced with new graphics or interface design/operating elements by Inroads. Inroads' staff includes writers, software engineers, artists, and management. All of Inroads' CD-ROM titles, whether developed in-house or licensed, contain video, still photography, audio, music, and text. These elements are combined with custom-designed interfaces and computer code to deliver high-quality, easy-to-use CD-ROM titles. Utilizing state-of-the-art technology and approximately ten workstations, Inroads has developed and released nine CD-ROM titles since its inception in June, 1994. Other titles are under development. 5 FUZZY ENTERTAINMENT, INC., D/B/A IN-SIGHT EDITIONS ("IN-SIGHT") In-Sight is a niche publisher and distributor of fine-art and decorative art posters which are priced in the low to moderate price range. Based in Marina Del Rey, California, In-Sight employs two full-time employees in the design and production areas, and one employee in shipping/warehousing. In-Sight's accounting, inventory control and accounts receivable/payable functions are managed by the Company's Boulder, Colorado office. In-Sight is not currently a significant factor in the Company's future business plans. RISK FACTORS The Securities offered hereby involves a high degree of risk. This Prospectus contains forward-looking statements, including those discussed under "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS." These forward-looking statements involve a number of risks and uncertainties including, but not limited to, those discussed under "RISK FACTORS." The Company's actual results may differ significantly from the results discussed in the forward-looking statements. See "RISK FACTORS." THE OFFERING Securities offered hereby......... 1,500,000 Units, each consisting of one share of Common Stock and one Warrant, each Warrant entitling the holder to purchase one share of Common Stock at a price of $6.50 per share until , 2002 [5 years after the date of this Prospectus]. See "DESCRIPTION OF SECURITIES."(1) Description of the Warrants....... The Warrants are not immediately exercisable and not transferable separately from the Shares until , 1998 [120 days after the date of this Prospectus]. The Warrants are redeemable by the Company at a price of $0.05 per Warrant under certain conditions. See "DESCRIPTION OF SECURITIES." Common Stock to be outstanding after the Offering and Fifth Dimension Assets Acquisition.... 6,535,368(1)(2) Warrants to be outstanding after the Offering.................... 1,500,000 Warrants(3) Use of Proceeds................... The net proceeds of the offering will be utilized to complete the Fifth Dimension Assets Acquisition, establish CSB operations, fund expansion of DaViD, and for general corporate purposes, including marketing, sales, and working capital. See "USE OF PROCEEDS" and "BUSINESS." Proposed Nasdaq SmallCap Market Symbols Units........................... NOOFU Common Stock.................... NOOF Warrants........................ NOOFW
- ------------------------ (1) Excludes an aggregate of up to 2,100,000 shares of Common Stock issuable upon exercise of (i) the Warrants, (ii) the Underwriters' Overallotment Option and (iii) the Underwriters' Warrant to be issued in connection with this Offering. See "UNDERWRITING." (2) Excludes 835,666 shares of Common Stock issuable upon exercise of warrants outstanding as of June 30, 1997, and exercisable at various periods through September, 2001. See "CERTAIN TRANSACTIONS." Includes 840,000 shares of Common Stock to be issued to Fifth Dimension as part of the Assets purchase price. See "BUSINESS--Fifth Dimension Assets Acquisition." (3) Does not include up to 225,000 Warrants issuable upon exercise of the Underwriters' Overallotment option. 6 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 (AUDITED) AND THE SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
NEW FRONTIER MEDIA, INC. ----------------------------------- FIFTH DIMENSION(1) YEAR ENDED MARCH 31, ----------------------------------------- YEAR ENDED MARCH 31, -------------------- ------------------------ 1997 1996 1997 1996 --------- --------- SIX MONTHS ----------- ----------- SIX MONTHS ENDED ENDED SEPTEMBER SEPTEMBER 30, 30, ------------- --------------- 1997 1997 ------------- --------------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Sales............................... $ 2,516 $ 2,566 $ 728 $ 15,044 $ 12,224 $ 5,976 Net income (loss) from operations before minority interest and income taxes...................... (451) 5 (474) 1,219 2,008 333 Net income (loss)................... (386) (7) (431) 897 2,193 316 Net income (loss) per share......... (0.09) * (0.10) 3,299 8,061 1,162 Shares used in computing net income or loss per share................. 4,188,459 4,051,896 4,195,321 272(2) 272(2) 272(2) BALANCE SHEET DATA: Total current assets................ 1,882 861 1,677 4,140 3,797 4,296 Total assets........................ 2,186 1,017 2,304 5,928 5,906 6,051 Current liabilities................. 657 342 1,242 3,619 4,349 3,426 Long-term debt...................... 13 0 9 0 0 0 Total liabilities................... 670 342 1,251 3,619 4,349 3,426 Total stockholders' equity.......... 1,211 675 790 2,309 1,557 2,625
- ------------------------------ (1) "Fifth Dimension" includes the combined financial statements for Fifth Dimension Communications (Barbados), Inc., Merlin Sierra and 1043133 Ontario, Inc. for the years ended March 31, 1997 and 1996. See "FINANCIAL STATEMENTS." (2) Consists of 100 common shares of Fifth Dimension Communications (Barbados) Inc., 100 common shares of Merlin Sierra, Inc., and 72 common shares of 1043133 Ontario, Inc. See Note 8 to "FINANCIAL STATEMENTS." * Less than $.01 per share. 7 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS RELATING TO THE COMPANY AND THIS OFFERING SHOULD BE CONSIDERED CAREFULLY WHEN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS INCLUDES CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THIS PROSPECTUS THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING SUCH MATTERS AS FUTURE OPERATING RESULTS PERTAINING TO THE FIFTH DIMENSION ASSETS ACQUISITION, BUSINESS STRATEGIES, EXPANSION AND GROWTH OF THE COMPANY'S OPERATIONS AND OTHER SUCH MATTERS ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE BASED ON CERTAIN ASSUMPTIONS AND ANALYSES MADE BY THE COMPANY IN LIGHT OF ITS EXPERIENCE AND ITS PERCEPTION OF HISTORICAL TRENDS, CURRENT CONDITIONS, EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS IT BELIEVES ARE APPROPRIATE IN THE CIRCUMSTANCES. SUCH STATEMENTS ARE SUBJECT TO A NUMBER OF ASSUMPTIONS, RISKS AND UNCERTAINTIES, INCLUDING THE RISK FACTORS DISCUSSED BELOW, GENERAL ECONOMIC AND BUSINESS CONDITIONS, THE BUSINESS OPPORTUNITIES (OR LACK THEREOF) THAT MAY BE PRESENTED TO AND PURSUED BY THE COMPANY, CHANGES IN LAWS OR REGULATIONS AND OTHER FACTORS, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND THAT ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. NEW FRONTIER MEDIA A RECENTLY ORGANIZED BUSINESS WITH LIMITED OPERATING HISTORY The Company was organized in July, 1995 and has incurred losses from inception. As of September 30, 1997 the Company had an accumulated deficit of $991,128. See "FINANCIAL STATEMENTS." The ability of the Company to operate profitably is dependent upon successful execution of the business plans of each of its subsidiaries. In particular, Boulder Interactive Group, Inc. must successfully develop commercially viable CD-ROM products for enthusiasts and hobbyists, and finalize strategic partnerships. DaViD Entertainment, Inc. must successfully acquire content rights, and implement its release strategy as Digital Versatile Disc ("DVD") technology becomes commercially affordable and available. Fuzzy Entertainment must successfully acquire fine art images, and begin to produce and distribute those images commercially. Finally, and most importantly, the Company must complete the acquisition of the Fifth Dimension assets and implement the CSB business plan. See "BUSINESS." The Company is in the early operational stage, has generated limited revenues from operations to date and there is no assurance the Company's intended activities will be successful or result in significant revenue or generate profits for the Company. The Company faces all risks which are associated with any new business, such as under-capitalization, cash flow problems, and personnel, financial and resource limitations, as well as special risks associated with its proposed operations. Management cannot assure when or if the Company may generate substantial revenues. The likelihood of the success of the Company must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation of a new business. The Company has had a limited operating history and has generated only limited revenues and earnings from operations. The Company has no significant financial resources and limited assets. See "BUSINESS" and "FINANCIAL STATEMENTS." LOSSES FROM INCEPTION; SUBSTANTIAL ACCUMULATED EARNINGS DEFICIT The Company was organized in July, 1995 and incurred a net loss of $386,030, or $.09 per share, on revenues of $2,515,802 for the fiscal year ended March 31, 1997, and a net loss of $6,870, or less than $.01 per share, for the period from July 17, 1995 (inception) to March 31, 1996. The Company incurred a net loss of $431,320, or $.10 per share, on revenues of $727,775 for the six months ended September 30, 1997. As of September 30, 1997 the Company had an accumulated deficit of $991,128. See "FINANCIAL STATEMENTS." 8 PURCHASE OF FIFTH DIMENSION ASSETS; NO EXPERIENCE IN SATELLITE BROADCASTING BUSINESS The Company and its subsidiary CSB have entered into agreements to acquire certain assets of Fifth Dimension (the assets to be acquired are collectively referred to as the "Fifth Dimension assets"). The Fifth Dimension assets to be acquired include, but are not limited to: trademarks, proprietary rights and other intellectual property rights associated with the adult movie programming and broadcasting business ("Adult Movies Business"); equipment, software technology, furniture, machinery, appliances and other tangible personal property used in the satellite uplink and customer call center facilities; any and all rights Fifth Dimension has in adult programming in any format; all subscriptions for the Adult Movies Business owned by Fifth Dimension; and all rights to any "1-800" numbers used by Fifth Dimension in the Adult Movies Business. The Company has no prior experience in the satellite network broadcasting business. The Company intends to integrate or phase in the much larger business operations associated with the Fifth Dimension assets into the Company's business via management agreements with Fifth Dimension. See "BUSINESS--Fifth Dimension Assets Acquisition." PROVISION OF SEXUALLY EXPLICIT CONTENT The Company, through its subsidiary CSB, will be engaged in the business of providing sexually explicit programming and other products to adult television subscribers, once the Fifth Dimension Assets Acquisition is completed. Many people may regard the Company's primary business as unwholesome and as purveying pornography. The nature of the Company's primary business may negatively taint the Company's other subsidiaries. Certain investors, investment banking entities, market makers, lenders, and others in the investment community may refuse to participate in the Company's public market, finance, or other activities due to the nature of the Company's primary business. Such refusal may negatively impact the value of the Company's stock, and its opportunities to attract market support. See "BUSINESS." RELIANCE ON FIFTH DIMENSION As part of the Fifth Dimension Assets Acquisition, the Company and Fifth Dimension will enter into an Uplink Management Services Agreement ("UMSA") and a Call Center Interim Services Agreement ("CCISA"). Under the UMSA as currently proposed, Fifth Dimension will operate, maintain, manage, and sustain an uplink and playback facility capable of providing continual uninterrupted services for the Adult Movies Business of a substantially similar nature and quality as those services currently being provided by Fifth Dimension to its current subscribers. The Company does not own an uplink facility, and to the extent Fifth Dimension fails to provide the services contracted for under the UMSA, the Company and its shareholders are subject to significant risks. Failure to properly manage the Uplink Facility could result in loss of customers, signal disruptions, and quality problems that, if not immediately addressed, could negatively impact the Company's subscriber base and revenues. In the event the Company and Fifth Dimension fail to consummate the UMSA, or if Fifth Dimension failed to perform as required under the UMSA, CSB's operations would in all likelihood terminate, resulting in loss of substantial projected revenues to the Company. See "BUSINESS--Fifth Dimension Assets Acquisition." Under the terms of the CCISA as currently proposed, Fifth Dimension will agree to receive and process subscriber calls on behalf of the Company from its Ottawa (Canada) Call Center for a period of nine months from the Assets Acquisition date, using the Call Center assets to be acquired. The Company intends to outsource the call center to a third party provider in the United States prior to expiration of the CCISA. To the extent there is any disruption in Call Center operations, the Company may lose subscribers or miss opportunities to capture calls, resulting in lost revenue to the Company. See "BUSINESS--Fifth Dimension Assets Acquisition." SATELLITE SERVICE AGREEMENTS; REFUSAL OF SERVICE OR TERMINATION OF AGREEMENTS Fifth Dimension currently provides its adult satellite programming to subscribers via satellite transponder agreements with AT&T Corp. (the "AT&T Agreement") and Loral SpaceCom Corporation d/b/a Loral Skynet (the "Loral Agreement"). The AT&T Agreement runs through December 31, 1999. The 9 Loral Agreement runs for a period of five years from the date the Telstar 5 satellite was placed in service (approximately June, 1997). Both of the transponder agreements provide for a subsequent 5-year extension. The Company intends to sublease these transponders from Fifth Dimension as part of the Fifth Dimension Assets Acquisition. The AT&T Agreement and the Loral Agreement are collectively referred to as the "transponder agreements." The Company has not obtained opinions of counsel concerning sublease of the transponders under the terms of the transponder agreements. In the event either or both of the transponder agreements otherwise preclude the type of sublease agreement entered into between the Company and Fifth Dimension, the Fifth Dimension Assets Acquisition would, in all likelihood, be abandoned, to the financial detriment of the Company and its shareholders. The transponder agreements contain provisions that allow the respective service providers to refuse to provide the service (defined as service on preemptible transponders on Telstar 402R and Telstar 5, respectively) if the material being transmitted by Fifth Dimension or the Company is harmful to the service provider's name or business, or if Fifth Dimension or the Company is indicted or is otherwise charged as a defendant in a criminal proceeding, or is convicted under any obscenity law, or has been found by any governmental authority to have violated such law. Fifth Dimension has operated its adult content satellite programming under these terms for several years without disruption or refusal of service; nonetheless, the Company, as subleasee of the transponders under the transponder agreements, is subject to arbitrary refusal of service by the the service provider if that service provider determines that the content being transmitted by the Company is harmful to the service provider's name or business. Any such service disruption would substantially and adversely affect the financial condition of the Company. See "BUSINESS." RELUCTANCE OF SMALL-DISH AND CABLE COMPANIES TO CARRY EXPLICIT ADULT PROGRAMMING Cable television and Ku-Band (small dish) satellite are the fastest-growing segments providing programming to homes in the United States. Fifth Dimension has been unable to expand its base of distribution recently, for two principal reasons: (1) C-Band (large dish) satellite system sales have plateaued, and small dish systems are beginning to dominate the market; and (2) cable system operators and small-dish system operators have, to date, been reluctant to carry explicit adult programming on their systems. Most major cable and small-dish systems carry "soft core" adult programming, such as the PLAYBOY CHANNEL and SPICE. There is no assurance that the Company will be able to expand on the current Fifth Dimension programming base by establishing a "soft-core" network to compete with PLAYBOY CHANNEL and SPICE, or by convincing cable and small-dish operators to carry one or more sexually explicit networks. See "BUSINESS." GOVERNMENT REGULATION--GENERAL The Company, through its wholly owned subsidiary CSB, will be engaged in the business of providing explicit adult movies and other programming to adult subscribers, if and when the Fifth Dimension Assets Acquisition is completed. By virtue of the Fifth Dimension Assets Acquisition, CSB will become a leading provider of explicit or "X-rated" adult programming via direct-to-home C-band satellite. CSB intends to expand its C-band subscriber base, market its programming to multiple-system operators, and pursue launching a soft-core network to compete with PLAYBOY CHANNEL and SPICE. Federal and state governments, along with various religious and children's advocacy groups, consistently propose and pass legislation aimed at restricting provision of, access to, and content of "adult entertainment." These groups also often file lawsuits against providers of adult entertainment, encourage boycotts against such providers, and mount negative publicity campaigns against companies whose businesses involve adult entertainment. The Company and CSB may be subjected to such adverse publicity, litigation, and legislation. See "BUSINESS--Fifth Dimension Assets Acquisition." The Company and CSB may incur substantial costs defending themselves against such actions, which may negatively impact the Company's finances. Negative publicity, boycotts, and litigation may discourage 10 institutional and other investors from investing in the Company, to the detriment of the Company's shareholders and investors in this Offering. The Company may not be able to attract as large a base of investors as a similarly situated company in a business not involving "adult entertainment." Negative publicity concerning programming provided by the Company through CSB may cause the service providers to refuse to provide service under the terms of the transponder agreements. See "BUSINESS--Fifth Dimension Assets Acquisition." Recently, federal and state government officials have targeted "sin industries," such as tobacco, alcohol, and adult entertainment for special tax treatment and legislation. In 1996, Congress passed the Communications Decency Act of 1996 (the "CDA"). Section 505 of the CDA required full audio and video scrambling. If the multi-channel video program distributor (including cable system operators) could not comply with the full scrambling requirement, it was prohibited from carrying sexually explicit programming between the hours of 6:00 a.m. and 10:00 p.m. Recently, the U.S. Supreme Court, in ACLU v. Reno, held certain substantive provisions of the CDA unconstitutional. Businesses in the adult entertainment and programming industries expended millions of dollars in legal and other fees in overturning the CDA. Investors in this Offering should understand that the adult entertainment industry will continue to be a target for legislation. In the event the Company must defend itself and/or join with other companies in the adult programming business to protect its rights, the Company may incur significant expenses that could have a material adverse effect on the Company's business and operating results. See "BUSINESS--Fifth Dimension Assets Acquisition." GOVERNMENT REGULATION--"SOFT-CORE" ADULT PROGRAMMING The Company is currently evaluating the possibility of establishing a "soft-core" adult network to compete directly with the PLAYBOY CHANNEL and SPICE. In 1996, the United States Congress passed the Telecommunications Act of 1996 (for this paragraph only, the "Act"), a comprehensive overhaul of the Federal Communications Act of 1934. Section 641 of the Act requires full audio and video scrambling of channels which are primarily dedicated to "sexually explicit" programming. If a multi-channel video programming distributor, including a cable television operator, cannot comply with the full scrambling requirement, then the channel must be blocked during the hours when children are likely to be watching television, i.e., from 6:00 a.m. to 10:00 p.m. Both non-explicit programming providers (such as Playboy) and explicit programming providers (such as Exxxtasy Networks) feature "sexually explicit" programming within the contemplation of Section 641 of the Act. Although all adult programming companies fully scramble their signals for security purposes, several cable television multiple-system operators ("MSOs") lack the technical capability to fully scramble the audio portion of the signal. These cable systems would be required to block adult broadcasts between 6:00 a.m. and 10:00 p.m. Both Spice, Inc. (NASDAQ:SPZE) and Playboy, Inc. (NYSE:PLAA) predict that revenues from cable television distribution sources could be negatively affected by as much as 25% as a result of this provision, until new equipment can be installed. Compliance with the Act could have a material adverse effect on the Company's business and operating results. See "BUSINESS." LOSS OF MARKET SHARE TO DIRECT BROADCAST SATELLITE ("DBS") Although management believes C-Band "big dish" satellite systems provide more stable delivery of programming and that new technologies will allow C-Band systems to receive digital channels (See "BUSINESS--Satellite Transmission"), the market for C-Band systems has plateaued, particularly with the introduction and rapid proliferation of Ku-Band Direct Broadcast Satellite systems, such as Dish Network and Direct TV. Consequently, it will be difficult to further develop sales revenue growth from this business, and the growth of Ku-Band Direct Broadcast Satellite Systems may reduce future sales revenue from this business, which could adversely affect the financial performance of the Company. See "BUSINESS-- Satellite Transmission" and "--Competition." 11 RECISSION OFFER IF FIFTH DIMENSION ACQUISITION NOT COMPLETED; NO ESCROW OF OFFERING PROCEEDS A significant portion of the proceeds of this Offering are allocated to the Fifth Dimension Assets Acquisition. See "USE OF PROCEEDS." In the event the Fifth Dimension assets acquisition is not completed, the Company and the Managing Underwriter will undertake a registered recission offer to investors in this Offering. The effect of such a recission could result in a return of all proceeds, to the extent available, of this Offering to investors. The Company does not intend to escrow proceeds of this offering pending completion of the Fifth Dimension Assets Acquisition. Rather, to reduce the possibility of such recission offer the Company has arranged for all the closing documents for the Fifth Dimension Assets Acquisition to be executed in advance and placed in escrow pending receipt of the purchase price therefor. The Company intends to utilize a portion of the net offering proceeds as working capital. There is no assurance that all of the net proceeds of this offering would be available for return to investors in the unlikely event the Company were unable to consummate the Fifth Dimension Assets Acquisition and a recission offer is undertaken by the Company. ADDITIONAL FINANCING MAY BE REQUIRED The Company will receive net proceeds of approximately $6,576,250 from this Offering. The Company believes that the proceeds of this offering will be sufficient to fund the Fifth Dimension Assets Acquisition, the ongoing operations of the Company for the next twelve months, and to allow the Company to expand the operations of its subsidiaries. The Company's success may be dependent upon its ability to raise additional capital, or to have other parties bear a portion of the required costs to further develop or exploit its business objectives. There is no assurance that funds will be available from any source, or on terms favorable to the Company, and if not available, the Company's operations may be limited. See "USE OF PROCEEDS" and "BUSINESS." COMPETITION The domestic and international markets for the products developed, licensed, and marketed by the Company's subsidiaries are highly competitive. Many of the Company's competitors have longer operating histories, greater name recognition, greater market acceptance of their products, and significantly greater financial, technical, sales, marketing and other resources to devote to the development, promotion, and sale of their products. Many large companies with sophisticated product marketing and technical abilities and financial resources that do not currently compete with the Company may enter the market and quickly become significant competitors. To the extent such competitors establish a performance, price or distribution advantage, the Company could be adversely affected. See "BUSINESS--Competition." COLORADO SATELLITE BROADCASTING, INC. CSB faces competition in the area of explicit adult programming from several companies, including Spice, Inc. The Company intends to pursue establishing a non-explicit cable and satellite network. CSB will face competition in the non-explicit arena from Playboy, Inc., the dominant non-explicit provider, Spice, Inc., and from other well-funded sources. Management estimates that establishing a non-explicit cable and satellite network will require $2 million or more and 12 to 24 months to fully implement. Only a small portion of the net proceeds of this Offering will be allocated to this project, and will be used to continue the Company's evaluation of the merits of pursuing such a direction. There is no assurance that the Company will ultimately decide to fully pursue launching of a soft-core network. In the event the Company does decide to pursue such a venture, the Company would, in all likelihood, need to raise additional capital. There is no assurance that the Company would be successful in raising funding to establish a soft-core network. 12 DAVID. The management of DaViD intends to complete the acquisition of content rights to an additional approximately 500 unrated and adult motion picture titles, and thereafter concentrate on releasing those titles gradually over time, as the market dictates. Competition in the distribution of unrated and adult motion pictures has become intense in the past five years. INROADS. The personal computer consumer software industry is intensely competitive. The market for CD-ROM products has increased dramatically the past three years. CD-ROM software is quickly replacing the floppy disc as the most popular personal computer format for programs, games, and information. The fluid nature of the consumer software industry and rapidly changing demand for products make it difficult to predict the future success of the Company in the business of producing packaged software products for the retail market. Numerous large, well-funded software developing and publishing competitors exist. These competitors have greater capital, marketing resources and brand recognition than the Company. Inroads' success is dependent upon the ability of its staff to continue to develop CD-ROM titles and products that are commercially viable. Inroads will continue to face significant competition for the foreseeable future. IN-SIGHT. In-Sight will face competition from publishers of fine art posters and decorative art posters. SIGNIFICANT GROWTH OF BUSINESS Management anticipates that the Company will be entering a period of significant growth upon the completion of this Offering. This growth, if effected, will expose the Company to increased competition, greater overhead, marketing and support costs and other risks associated with entry into new markets and development of new products. To manage growth effectively, the Company will need to continue to improve and expand its operational, financial and management information systems and to expand, train, motivate and manage its employees. Should the Company be unable to manage growth effectively, its results of operations could be adversely affected. See "BUSINESS." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the contributions of its executive officers and its other key technical personnel, and upon its ability to continue to attract and retain highly talented personnel. Competition for such personnel, particularly software development technical personnel (as utilized and relied upon by Inroads) is intense. The Company currently has only one employment agreement, with Andrew Brandt, in effect. The Company will acquire key-man life insurance on the lives of Messrs. Kreloff and Bender, in the amount of $1,000,000 each and naming the Company as beneficiary, on or before the closing of this Offering. Only Mr. Brandt is subject to a noncompetition agreement. The loss of the services of any of its executive officers or other key personnel could have a material adverse effect on the Company's business and operating results, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. See "BUSINESS" and "MANAGEMENT." LEGAL PROCEEDINGS The Company has filed a complaint in state District Court, Boulder, Colorado against Sands Brothers, seeking rescission of a financial advisory agreement with and a return of all monies paid by the Company to Sands Brothers. As of the date of this prospectus, Sands Brothers had not filed an Answer or Counterclaim(s); however, management believes it is likely that Sands Brothers will respond to the complaint. See "BUSINESS--Legal Proceedings." The Company intends to vigorously pursue its claims against Sands Brothers. In the event Sands Brothers asserts one or more counterclaims against the Company, and in the event Sands Brothers were to prevail at trial against the Company, the financial condition of the Company, and as a consequence shareholder value, might be adversely affected. 13 On October 23, 1997, Quarto filed an action, in the federal District Court for the District of Colorado, against the Company and Inroads seeking, among other things, rescission of certain agreements among the Company, Inroads, and Quarto, and a return of all monies Quarto has invested in Inroads. On October 28, 1997, the Company and Quarto entered into a Stipulation for Entry of Preliminary Injunction, whereby the Company agreed to not transfer, pledge, or otherwise encumber any assets of Inroads for the benefit of the Company, without the prior written consent of Quarto. Under the terms of the agreements between the Company and Quarto, the parties are required to file an action in arbitration to settle disputes arising under the agreements. As of the date of this prospectus, Quarto had not filed an action in arbitration against the Company or Inroads. See "BUSINESS--Legal Proceedings." In the event Quarto were to file an action in arbitration against the Company and/or Inroads, and prevail in that action or in the current action in federal court against the Company and/or Inroads, Inroads' ability to utilize the Quarto library as a source of material for new releases could be jeopardized. BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS A significant portion of the net proceeds from this Offering will be used for working capital, and to expand the operations of the Company's subsidiaries. As a consequence, the Company's management will have the discretion to allocate a large percentage of the proceeds to uses which the shareholders may not deem desirable, and there can be no assurance that the proceeds can or will yield a significant return. See "USE OF PROCEEDS." CONTROL BY PRINCIPALS OF THE COMPANY The Company's executive officers, directors, and their affiliates beneficially own 2,419,000 restricted Common Shares of the Company. This represents approximately 42.5% of the 5,695,368 Common Shares that will be issued and outstanding following this Offering, assuming the Underwriter does not exercise its Overallotment Option and prior to exercise of any other outstanding options or warrants, and prior to issuance of 840,000 shares of Common Stock to Fifth Dimension. Following the Fifth Dimension transaction, but prior to any warrant or option exercise and assuming no exercise of the Underwriter's Overallotment Option and Warrants, there will be 6,535,368 shares issued and outstanding, of which executive officers, directors, and affiliates of the Company will own 37%. 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." CERTAIN PRIOR TRANSACTIONS NOT APPROVED BY DISINTERESTED BOARD MEMBERS The Company has entered into certain transactions, prior to the date of this prospectus, with affiliates of the Company and other "interested" parties which were not on an "arms-length" basis. These transactions were not submitted for the approval of a majority of the Company's independent directors who did not have an interest in the transactions and who had access, at the Company's expense, to the Company's or independent legal counsel. These transactions rather were approved by a majority of disinterested, but not independent, directors. Any ongoing or future transactions between the Company and its officers, directors, principal shareholders, or other affiliates will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company's independent and disinterested directors. Any future loans to officers, directors, principal shareholders, or affiliates will be made for a bonafide business purpose, on 14 terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of the Company's independent and disinterested directors. See "CERTAIN TRANSACTIONS." INVESTORS MAY BE UNABLE TO EXERCISE WARRANTS For the life of the Warrants, the Company will use its best efforts to maintain a current effective registration statement with the Commission relating to the shares of Common Stock issuable upon exercise of the Warrants. If the Company is unable to maintain a current registration statement the Warrant holders would be unable to exercise the Warrants and the Warrants may become valueless. Although the Underwriters have agreed to not knowingly sell the Warrants in any jurisdiction in which the shares of Common Stock issuable upon exercise of the Warrants are not registered, exempt from registration or otherwise qualified, a purchaser of the Warrants may relocate to a jurisdiction in which the shares of Common Stock underlying the Warrants are not so registered or qualified. In addition, a purchaser of the Warrants in the open market may reside in a jurisdiction in which the shares of Common Stock underlying the Warrants are not registered, exempt or qualified. If the Company is unable or chooses not to register or qualify or maintain the registration or qualification of the shares of Common Stock underlying the Warrants for sale in all of the states in which the Warrantholders reside, the Company would not permit such Warrants to be exercised and Warrant holders in those states may have no choice but to either sell their Warrants or let them expire. Prospective investors and other interested persons who wish to know whether or not shares of Common Stock may be issued upon the exercise of Warrants by Warrant holders in a particular state should consult with the securities department of the state in question or send a written inquiry to the Company. See "DESCRIPTION OF SECURITIES--Warrants." OFFERING PRICE The pricing of this offering of the Common Stock was determined by the Company and the Managing Underwriter based on a discounted present value of future projected earnings and the trading price of the Company's common stock on the Nasdaq Electronic Bulletin Board. The Company's common stock currently is "thinly traded," and the price of the Company's common stock as quoted on the Nasdaq Electronic Bulletin Board may not be an accurate indication of the true value of the stock. The discounted present value of future projected earnings valuation method relies extensively on management's subjective belief of future performance, and bears little relationship to the assets or any objective criteria of value applicable to the Company. In making such valuation the risks of the Company's proposed product and service lines, the business potential of the Company, the Company's competitive position, the proceeds to be raised by the offering, the percentage of ownership desired to be retained by current shareholders, and conditions of the market for new securities offerings were all considered. EXERCISE OF WARRANTS AND OPTIONS As of September 30, 1997, 146,666 shares of Common Stock were issuable upon exercise of outstanding employee, officer, director or consultant stock options at an average exercise price of $6.00 per share, and 609,000 shares of Common Stock were issuable upon exercise of other outstanding warrants at prices of $4.00 per share (20,000 warrants), $5.50 per share (189,000 warrants), and $6.00 per share (400,000 warrants). One of these warrants, for 400,000 shares, is held by Quarto, and contains anti-dilution and exercise price provisions that require the Company to issue additional warrant(s) to Quarto to purchase additional shares of the Company's Common Stock, depending on the price of the shares of Common Stock offered hereby and the value of the Company's Common Stock issued to Fifth Dimension sellers as part of the Fifth Dimension Assets Acquisition. See "--Quarto Warrant." An additional 400,000 shares of Common Stock have been reserved for issuance upon exercise of the Fifth Dimension warrant, and 150,000 shares of Common Stock are issuable upon exercise of the Underwriter's Warrant and 1,500,000 shares of Common Stock are issuable upon exercise of the Warrants. See "BUSINESS--Fifth Dimension Assets Acquisition" and "UNDERWRITING." For the life of such options and warrants, the holders thereof will have the opportunity to profit from a rise in the market price of the Common Stock. Further, the terms upon which the Company could obtain additional capital during the life of such options 15 and warrants may be adversely affected. The holders of such options and warrants may be expected to exercise such options and warrants at a time when the Company would, in all likelihood, be able to obtain any needed capital by a new offering of its securities on more favorable terms than those provided for by those options and warrants. The existence of such warrants may adversely affect the terms on which the Company may obtain additional financing, and may have a depressing affect on the trading price of the Company's Common Stock. See "DESCRIPTION OF SECURITIES--Shares Eligible for Future Sale." QUARTO WARRANT On September 20, 1996, the Company issued a stock purchase warrant to Quarto (the "Quarto Warrant") as part of the acquisition of 30% of Inroads by Quarto. Pursuant to the terms of the Quarto Warrant, Quarto is entitled to purchase up to 400,000 shares of the Company's common stock for $6.00 per share anytime between September 20, 1996 and September 20, 2001. The Quarto Warrant contains certain anti-dilution and price adjustment provisions which will result in adjustment of the number of shares Quarto may purchase and the exercise price per share upon exercise of the Quarto Warrant. Specifically, upon completion of this Offering, but prior to consummation of the Fifth Dimension Assets Acquisition, the Quarto Warrant will be adjusted to provide that Quarto may purchase up to 457,143 shares of the Company for $5.25 per share. Upon completion of the Fifth Dimension Assets Acquisition, the Quarto Warrant will again be adjusted to provide that Quarto may purchase up to a total of 480,000 shares of the Company's common stock for $5.00 per share. LIMITS ON SECONDARY TRADING; POSSIBLE ILLIQUIDITY OF TRADING MARKET; UNDERWRITING CONDITION OF LISTING The Company has applied to have its Units, Common Stock and Warrant Securities listed on the Nasdaq SmallCap Market, which is less liquid than the Nasdaq National Market and other stock exchanges. There can be no assurance that this application will be accepted and that the Units, Common Stock and Warrant Securities will be listed on the Nasdaq SmallCap Market. The underwriting agreement between the Managing Underwriter and the Company requires the Company to obtain Nasdaq listing as a condition of closing this Offering. If the Company is unable to maintain listing standards once listed, then trading, if any, in the Common Stock would be conducted in the over-the-counter market on an electronic bulletin board established for securities that do not meet the Nasdaq SmallCap or other exchange listing requirements. As a result, an investor would find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Units, Common Stock and Warrant Securities. In addition, depending on several factors including the future market price of the Units, Common Stock and Warrant Securities, the Units, Common Stock and Warrant Securities could become subject to the so-called "penny stock" rules that impose additional sales practice and market making requirements on broker-dealers who sell and/or make a market in such securities, which could adversely affect the ability or willingness of the purchasers of Units, Common Stock and Warrant Securities to sell their shares in the secondary market. POTENTIAL ADVERSE EFFECT ON THE MARKET FOR THE COMPANY'S SECURITIES Effective August 11, 1993, the Securities and Exchange Commission adopted Rule 15g-9, which established the definition of a "penny stock," for purposes relevant to the Company, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rule requires: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, 16 prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlighted form: (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The foregoing required penny stock restrictions will not apply to the Company's securities in the event such securities are approved for listing on a national stock exchange and have certain price and volume information provided on a current and continuing basis. There can be no assurance that the Company's securities will qualify for exemption from these restrictions if a market ever develops for the Company's securities. If such a market does develop and the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities could be severely adversely affected. EFFECT OF OUTSTANDING WARRANTS AND UNDERWRITERS' WARRANT Until the date five (5) years following the date of this Prospectus, the holders of the Warrants and Underwriters' Warrants are given an opportunity to profit from a rise in the market price of the Common Stock, with a resulting dilution in the interests of the other shareholders. The shares of Common Stock underlying the Underwriters' Warrants have certain registration rights. Further, the terms on which the Company might obtain additional financing during that period may be adversely affected by the existence of the Warrants and Underwriters' Warrants. The holders of the Warrants and Underwriters' Warrants may exercise the Warrants and Underwriters' Warrants at a time when the Company might be able to obtain additional capital through a new offering of securities on terms more favorable than those provided herein. The Company has agreed that, under certain circumstances, it will register under federal and state securities laws the Underwriters' Warrants and/or the securities issuable thereunder. Exercise of these registration rights could involve substantial expense to the Company at a time when it could not afford such expenditures and may adversely affect the terms upon which the Company may obtain financing. See "DESCRIPTION OF SECURITIES" and "UNDERWRITING." POTENTIAL RULE 144 SALES Of the 4,195,368 shares of common stock of the Company currently outstanding 3,739,000 are "restricted securities," as that term is defined in Rule 144 as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. As restricted shares, these 3,739,000 shares may be resold only pursuant to an effective registration or under the requirements of Rule 144 or other applicable exemption from registration under the Act as required under applicable state securities laws. Rule 144 provides in essence that a person not affiliated with the issuer who has held restricted securities for a period of one year, under certain conditions, may sell every three months, in brokerage transactions, a number of shares which does not exceed the greater of one percent of a company's outstanding common stock or the average weekly trading volume during the four calendar weeks prior to the sale. The shares held by the Company's founders became available for trading in the open market, subject to volume and other limitations imposed by Rule 144, between July, 1996 and September, 1997; however, these shares are restricted from sale pursuant to the terms of lock up agreements between the founders and the Underwriters. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the restricted securities have been held by the owner for a period of two years. A sale under Rule 144 or any other exemptions from the Act, if available, or subsequent registrations of common stock of the current shareholders, may have a depressive effect upon the price of the common stock in any market that may develop. 17 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." RAPID TECHNOLOGICAL CHANGE DaViD and Inroads are engaged in businesses (digital versatile disc content and CD-ROM publishing) that have experienced tremendous technological change over the past two years. CSB will be engaged in the satellite programming business shortly after completion of this Offering. The satellite broadcasting business has also experienced rapid technological changes, as smaller satellite dishes and services have been introduced over the past three years. The Company and its investors face all risks inherent in businesses that are subject to rapid technological advancement, such as the possibility that a technology that the Company has invested heavily in may become obsolete. In that event, the Company may be required to invest in new technology. The inability of the Company to identify, fund the investment in, and commercially exploit such new technology could have an adverse impact on the financial condition of the Company. See "BUSINESS." 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. PRICE REDUCTIONS IN PERSONAL COMPUTER SOFTWARE--INROADS Major personal computer software publishers have begun to reduce the prices of their products in an effort to gain market share. Companies have been known to have distributed products at no or nominal cost, in order to obtain entry into the market. The retail prices of many of the Company's competitor's products have declined. There can be no assurance that product price reductions will abate; if anything, the growing number of competitors in the personal computer software field suggests further retail price reductions in the future. Such reductions may lead to a decrease in gross margins on discounted items, and could result in lower cash flow and operating margins for the Company. See "BUSINESS--Inroads." INTELLECTUAL PROPERTY CLAIMS AND LITIGATION The Company relies on a combination of copyright and trademark laws, trade secrets, software security measures, license agreements and nondisclosure agreements to protect its proprietary products. Despite the Company's precautions, it may be possible for unauthorized third parties to copy aspects of, or otherwise obtain and use, the Company's software products without authorization, or to substantially use the Company's concepts and market them, trading on the Company's established customer base. In addition, the Company cannot be certain that others will not develop substantially equivalent or superseding products, thereby substantially reducing the value of the Company's proprietary rights. Furthermore, there can be no assurance that any confidentiality agreements between the Company and its employees or any license agreements with its customers will provide meaningful protection for the Company's proprietary information in the event of any unauthorized use or disclosure of such proprietary information. The Company is not aware that any of its products infringes the proprietary rights of third parties, and is not currently engaged in any intellectual property litigation or proceedings. Nonetheless, there can be no assurance that the Company will not become the subject of infringement claims or legal proceedings by 18 third parties with respect to current or future products. In addition, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Any such claims could be time-consuming, result in costly litigation, cause product shipment delays or lead the Company to enter into royalty or licensing agreements rather than disputing the merits of such claims. Moreover, an adverse outcome in litigation or similar adversarial proceedings could subject the Company to significant liabilities to third parties, require expenditure of significant resources to develop non-infringing technology, require disputed rights to be licensed from others or require the Company to cease the marketing or use of certain products, any of which could have a material adverse effect on the Company's business and operating results. To the extent the Company wishes or is required to obtain licenses to patents or proprietary rights of others, there can be no assurance that any such licenses will be made available on terms acceptable to the Company, if at all. See "BUSINESS." PRODUCT ERRORS/PRODUCT LIABILITY--INROADS Software products such as those developed by Inroads often contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that errors will not occur or be found after commencement of commercial shipments, resulting in loss of or delay in market acceptance, any of which could have a material adverse effect upon the Company's business and operating results. Further, the Company's license agreements with its customers contain provisions designed to limit the Company's exposure to potential product liability claims. Although the Company has not experienced any product liability claims, the sale and support of products by the Company entails the risk of such claims. See "BUSINESS--Inroads." IMMEDIATE AND SUBSTANTIAL DILUTION This Offering involves an immediate and substantial dilution of $4.03 per share of Common Stock, or a 77% reduction between the Offering price of $5.25 per Unit and the net tangible book value of $1.22 per share of Common Stock upon completion of the Offering, assuming no exercise of the Overallotment Option, the Warrants, the Underwriters' Warrant or other outstanding warrants and options, and excluding issuance of 840,000 shares of Common Stock to Fifth Dimension as part of the Fifth Dimension Assets Acquisition. Upon completion of the Fifth Dimension Assets Acquisition and the Offering, and assuming no warrant or option exercise, the Company's Common Stock will have a net tangible book value of $.56 per share. This represents total dilution of $4.69 per share, or 89%, to investors in this Offering. See "DILUTION." NO DIVIDENDS The Company has not paid any dividends on its Common Stock and does not intend to pay dividends in the foreseeable future. See "DIVIDEND POLICY." LIMITATIONS ON LIABILITY OF DIRECTORS The Company's Bylaws substantially limit the liability of the Company's directors to the Company and its shareholders for breach of fiduciary or other duties. See "DESCRIPTION OF SECURITIES-- Limitation on Liabilities." POSSIBLE VOLATILITY OF SECURITIES PRICES The market price of the Common Stock following the Offering may be highly volatile, as has been the case recently with the securities of other companies completing public offerings. Factors such as the Company's operating results, its ability to complete the Fifth Dimension Assets Acquisition in a timely manner, and public announcements by the Company or its competitors may have a significant effect on the market price of the securities. In addition, market prices for the securities of many small capitalization companies have experienced wide fluctuations due to variations in quarterly operating results, general economic conditions and other factors beyond the Company's control. 19 USE OF PROCEEDS The gross proceeds to the Company from the sale of the Securities offered hereby are estimated to be $7,875,000 ($9,056,250 if the Underwriters' Overallotment Option is exercised in full). The net proceeds to the Company are estimated to be approximately $6,576,250 ($7,603,937 if the Underwriters' Overallotment Option is exercised in full), after deducting estimated underwriting discounts of $787,500 ($905,625 if the Underwriters' Overallotment Option is exercised in full) and Offering expenses of approximately $511,250 ($546,688 if the Underwriters' Overallotment Option is exercised in full), including the Managing Underwriters' nonaccountable expense allowance of $236,250 ($271,688 if the Underwriters' Overallotment Option is exercised in full). The Company currently expects to use the estimated net proceeds as follows:
APPROXIMATE APPROXIMATE DOLLAR PERCENTAGE OF APPLICATION OF NET PROCEEDS AMOUNT NET PROCEEDS - ---------------------------------------------------------------------------- ------------ -------------- Fifth Dimension Assets Acquisition(1)....................................... $ 3,500,000 53.2% DaViD--Acquisition of Titles................................................ 750,000 11.4 Transponder Deposits........................................................ 500,000 7.6 New Equipment Purchases--Uplink Facility.................................... 500,000 7.6 Repayment of Note(3)........................................................ 500,000 7.6 Repayment of Line of Credit................................................. 250,000 3.8 Working Capital and Other General Corporate Purposes(2)..................... 576,250 8.8 ------------ ----- Total..................................................................... $ 6,576,250 100.0% ------------ ----- ------------ -----
- ------------------------ (1) Including, but not limited to, acquisition of: trademarks, proprietary rights and other intellectual property rights associated with the adult movie programming and broadcasting business; equipment, software technology, furniture, machinery, appliances and other tangible personal property used in the satellite uplink and customer call center facilities; any and all rights Fifth Dimension has in adult programming in any format; all subscriptions for the Adult Movies Business owned by Fifth Dimension; and all rights to any "1-800" numbers used by Fifth Dimension in the Adult Movies Business. (2) This sum shall be available to fund anticipated increases in accounts receivable and inventories and for the payment of operational expenses including salaries, rent and other similar items to the extent revenues from operations are insufficient for such purposes. Additionally, these proceeds may be used to acquire the assets or operations of other companies which would supplement the growth of the Company. (3) This promissory note bears interest at 12% per annum and is due upon consummation of this Offering. The amounts set forth above are the Company's best estimates only, based upon the Company's business plan and certain assumptions regarding general economic and industry conditions and the Company's anticipated future revenue and expenditures, and merely indicate the proposed use of proceeds. The foregoing represent estimates only, and the actual amounts expended by the Company for these purposes and the timing of such expenditures will depend on numerous factors. The Company may use a portion of the net proceeds to acquire businesses or companies complementary to the Company's business, although the Company currently has no specific plans or commitments to acquire any business or companies other than certain assets owned by Fifth Dimension. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade obligations and federally insured certificates of deposit. 20 DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently anticipates that it will retain all future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend on, among other things, future earnings, operations, capital requirements, the general financial condition of the Company, general business conditions and contractual restrictions on payment of dividends, if any. DILUTION The difference between the Offering price per share of Common Stock and the adjusted pro forma net tangible book value per share after giving effect to this Offering and the Fifth Dimension assets acquisition constitutes the dilution to investors in this Offering. Adjusted net tangible book value per share is determined by dividing the adjusted pro forma net tangible book value of the Company (total tangible assets less total liabilities) by the number of shares of Common Stock outstanding. All numbers included herein do not give effect to the conversion or exercise of any convertible securities or options outstanding or being sold hereby. As of September 30, 1997, the net tangible book value of the Company was $395,035, or $.09 per share of Common Stock (based on 4,195,368 shares outstanding). After giving effect to the sale by the Company of the 1,500,000 Units (1,500,000 shares of Common Stock and 1,500,000 Warrants) offered by it hereby at an assumed offering price per Unit of $5.25, or $5.25 per share of Common Stock (no valued assigned to the Warrants) and the receipt of estimated net proceeds to the Company of $6,576,250 (after deducting underwriting discounts and estimated expenses of this offering), the net tangible book value of the Company will be $6,971,285, or $1.22 per share. This represents an immediate increase in the net tangible book value of $1.13 (or 1,256%) per share to shareholders at September 30, 1997, and an immediate decrease in value of $4.03 per share (or 77%) to investors in this Offering. After giving effect to the Fifth Dimension Assets Acquisition, the net tangible book value of the Company will be $3,687,182, or $.56 per share. The following table illustrates the foregoing dilution to the investors on a per share basis:
Offering price per Unit................................................................ $ 5.25 Pro forma net tangible book value per share before Offering............................ $ .09 Increase per share attributable to new investors....................................... $ 1.13 --------- Pro forma net tangible book value per share after Offering............................. $ 1.22 --------- Dilution per share to new investors.................................................... $ 4.03 --------- --------- Pro forma net tangible value per share after Fifth Dimension assets acquisition........ $ .56 --------- Dilution per share to new investors following Fifth Dimension assets acquisition....... $ 4.69 --------- ---------
To the extent the Warrants and/or other outstanding options and warrants are exercised, further dilution to new investors in this Offering may result. 21 The following table sets forth, on an unaudited pro forma basis as of September 30, 1997, the differences in the total consideration and the average price per share of Common Stock paid by the Company's existing shareholders, investors in this Offering, and the Fifth Dimension sellers:
TOTAL CONSIDERATION SHARES PURCHASED ------------------------ ------------------------------------------ AVERAGE APPROX. APPROX. PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE -------------- ----------- ------------- ----------- ----------- Existing Shareholders(1)................ 4,195,368 64.2 1,780,936 12.8 .42 New Investors........................... 1,500,000(2) 23.0 7,875,000 56.9 5.25(3) Fifth Dimension Sellers................. 840,000 12.8 4,200,000 30.3 5.00 -------------- ----- ------------- ----- ----- Total................................. 6,535,368 100.0% $ 13,855,936 100.0% $ 2.12 -------------- ----- ------------- ----- ----- -------------- ----- ------------- ----- -----
- ------------------------ (1) Excludes 835,666 shares of Common Stock reserved for issuance upon exercise of outstanding warrants. The Quarto warrant to purchase up to 400,000 shares of the Company's Common Stock will be adjusted depending on the price of the shares offered hereby and the value of the shares of Common Stock issued to Fifth Dimension sellers as part of the Fifth Dimension Assets Acquisition. These adjustments will result in Quarto owning a warrant to purchase 480,000 shares of the Company's restricted common stock for $5.00 per share. See "RISK FACTORS--Quarto Warrant" and "BUSINESS." (2) Excludes an aggregate of 2,100,000 shares of Common Stock issuable upon exercise of: (i) the Warrants, (ii) the Underwriters' Overallotment Option and (iii) the Underwriters' Warrant to be issued in this Offering. (3) This amount assumes the attribution of the Unit purchase price solely to the Common Stock included in each Unit. See "USE OF PROCEEDS." 22 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1997 (i) on an actual basis; (ii) on a pro forma basis as adjusted to give effect to the sale of the 1,500,000 Units offered hereby at an assumed price of $5.25 per Unit, and the application of the net proceeds therefrom as described under "USE OF PROCEEDS," including completion of the Fifth Dimension assets acquisition. This table should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus.
SEPTEMBER 30, --------------------------- AS 1997 ADJUSTED(3) ------------ ------------- Long-term obligations, excluding current portion..................................... $ 9,349 $ 1,009,349 Shareholders' equity (deficit): Common Stock, $.0001 par value, 50,000,000 shares authorized, 4,195,368 shares issued and outstanding(1)(2), actual; 6,535,368 shares issued and outstanding, as adjusted......................................................................... 420 654 Additional paid-in capital......................................................... 1,780,516 12,556,532 Accumulated deficit................................................................ (991,128) (991,128) ------------ ------------- Total shareholders' equity......................................................... 789,808 11,565,058 ------------ ------------- Total capitalization............................................................... $ 799,157 $ 12,575,407 ------------ ------------- ------------ -------------
- ------------------------ (1) Based upon shares issued and outstanding as of September 30, 1997. Does not include 948,197 shares of Common Stock reserved for issuance upon exercise of warrants, excluding the Underwriter's Warrant, or any adjustments thereto. (2) Excludes an aggregate of 2,100,000 shares of Common Stock issuable upon exercise of: (i) the Warrants, (ii) the Underwriters' Overallotment Option and (iii) the Underwriters' Warrant to be issued in this Offering. (3) The "As Adjusted" calculations are net of underwriting discounts and other expenses of this Offering estimated to total $1,273,750. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW New Frontier Media, Inc. ("NOOF" or the "Company") is a holding company with three wholly owned subsidiaries and one majority-owned subsidiary: Colorado Satellite Broadcasting, Inc. ("CSB"); DaViD Entertainment, Inc. ("DaViD"); Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads"); and Fuzzy Entertainment, Inc. d/b/a Insight Editions ("In-Sight"). Management has formed CSB to acquire certain assets of Fifth Dimension and operate a subscription-based and transaction-based satellite television broadcasting business following such acquisition (the "Fifth Dimension Assets Acquisition"). Upon completion of this Offering and the Fifth Dimension Assets Acquisition, CSB will own, operate and distribute the leading three C-band adult programming networks: EXXXTASY, TRUE BLUE, and EXOTICA, collectively referred to hereinafter as the Exxxtasy Networks. DaViD is in the business of licensing content rights to existing adult and unrated motion picture titles for distribution on laserdisc and digital versatile disc ("DVD"). DaViD currently has the content rights to approximately 500 unrated and adult motion picture titles. Inroads is a CD-ROM software publishing company, designing and developing CD-ROM titles and licensing third party-developed titles. In-Sight acquires, produces and distributes fine art images and decorative posters. RESULTS OF OPERATIONS NEW FRONTIER MEDIA, INC. The following table sets forth selected operating data for the periods and upon the basis indicated:
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, -------------------------- ------------------------- 1997 1996 1997 1996 ------------ ------------ ----------- ------------ Sales, net...................................... $ 2,515,802 $ 2,565,671 $ 727,775 $ 1,322,094 Cost of Sales................................... $ 2,217,812 $ 1,843,765 $ 627,053 $ 1,074,626 ------------ ------------ ----------- ------------ Gross Profit.................................... $ 297,990 $ 721,906 $ 100,722 $ 247,468 Total Operating Expenses........................ $ 931,342 $ 807,661 $ 650,568 $ 363,583 Other Income (Expense).......................... $ 182,516 $ 91,032 $ 75,747 $ 93,866 ------------ ------------ ----------- ------------ Net Income (Loss) Before Income Taxes and Minority Interest............................. $ (450,836) $ 5,277 $ (474,099) $ (22,249) Income Taxes.................................... -- $ (12,147) -- $ (2,454) Minority Interest in Loss of Subsidiary......... $ 64,806 -- $ 42,779 -- ------------ ------------ ----------- ------------ Net Income (Loss)............................... $ (386,030) $ (6,870) $ (431,320) $ (24,703) ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------
IMPENDING ACCOUNTING CHANGES The Financial Accounting Standards Board released statement #128, "Earnings per share," which will be effective for all financial reporting periods subsequent to December 15, 1997. This statement establishes standards for computing and presenting earnings per share (EPS) and replaces the current presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution from common stock equivalents (potential common stock) while diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. 24 In addition, the Financial Accounting Standards Board released statement #131 "Disclosures about Segments of an Enterprise and Related Information" which will be effective for all financial reporting periods subsequent to December 15, 1997. This statement requires the reporting of certain information about operating segments. The following table reflects certain information as promulgated by the statement for the year ended March 31, 1997:
ELIMINATIONS DAVID BOULDER FUZZY OF NEW FRONTIER ENTERTAINMENT, INTERACTIVE ENTERTAINMENT, INTERCOMPANY MEDIA, INC. INC. GROUP, INC. INC. AMOUNTS 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.......... 497,766 535,132 1,432,541 166,069 (445,037) 2,186,471 Segment liabilities..... 381,947 178,845 321,744 232,757 (445,037) 670,256
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30, 1996 NEW FRONTIER MEDIA, INC. (THE "COMPANY") The Company functions as a holding company for its subsidiaries, and as such generates no independent income. The Company incurs administrative expenses relating to operation of its subsidiaries, particularly concerning advertising, financial, public relations, and capital-raising activities. The Company incurs expenses related to operation of the Company and its subsidiaries as a public entity, such as legal, accounting, and public relations costs. NEW FRONTIER MEDIA, INC. ("NOOF" OR THE "COMPANY") For the six month period ended September 30, 1997, the Company reported no income and total operating expenses of $264,752, compared with total operating expenses of $112,140 for the same period the prior year. The increase of $152,612 for the period was due to increases in travel expense ($54,260 in 1997 versus $11,575 in 1996), payroll costs ($57,884 in 1997 versus $16,893 in 1996), legal ($33,230 in 1997 versus $8,490 in 1996), and investor relations ($33,055 in 1997 verus $0 in 1996). These cost increases are primarily due to the planned public offering and acquisition of Fifth Dimension. BOULDER INTERACTIVE GROUP, INC. DBA INROADS INTERACTIVE ("INROADS") Inroads reported sales of $142,937 for the period, down from $84,152 the prior period last year. This decline in sales is due to no new titles released during the period. Operating expenses were $307,051, up from $242,407, as Inroads has hired more personnel and spent more on advertising and on development of new products. Net loss of $142,597 increased from the $61,691 loss in the prior period last year. Management believes its investment in product development and advertising will produce increased sales in the coming quarters. DAVID ENTERTAINMENT, INC. ("DAVID") DaViD had sales of $581,469 for the period, down from $1,237,542 in the prior year period. Sales were limited by the advent of the DVD format and resulting consumer slow down in laser disc purchases. Operating expenses were $220,694 versus $265,256 last year due primarily to elimination of the distribution agreement with ELM Releasing, LP. and lower corresponding expenses associated with direct management of the distribution function. Net loss was $56,898 compared to a gain of $146,204 for the prior year period. Management believes that profitability will return in the following quarters as the DVD format gains acceptance. 25 FUZZY ENTERTAINMENT, INC. DBA IN-SIGHT EDITIONS ("IN-SIGHT") In-Sight reported total revenue of $3,369 for the period, along with operating expenses of $11,498 and a net loss of $9,852. The Company is focused on its public offering and pending acquisition and is not devoting significant resources to In-Sight. COMPARISON OF YEARS ENDED MARCH 31, 1997 AND 1996 NEW FRONTIER MEDIA, INC. The Company's total revenue for 1997 was $2,515,802, down $49,869 (1.9%) from 1996. Cost of sales increased to $2,217,812 from $1,843,765 the prior year, resulting in a $423,916 (58.7%) decrease in gross profit for the fiscal year ended March 31, 1997 from the same period the prior year. The small decrease in total revenue for 1997, as compared with 1996, is directly attributable to the normal new product development and introduction timeline experienced by Inroads as it develops and commercially exploits new titles under the agreement with Quarto. Total operating expenses increased $148,997 (19.0%), from $782,345 for the year ended March 31, 1996 to $931,342 for the year ended March 31, 1997, resulting in a net loss from operations of $450,836 for the fiscal year ended March 31, 1997. This increase was also due to Inroads beginning to develop and commercially exploit Quarto-based titles. In particular, Inroads dedicated significant resources to developing the IN FOCUS and CIGAR COMPANION titles, both of which were released after the end of the fiscal year. Operating expenses for NOOF and Inroads remained relatively constant for the year ($277,600 and $510,715, respectively), while operating expenses for DaViD increased to $71,216, from $6,801 for the same period the prior year (see Management's discussion concerning Inroads and DaViD, below). NOOF performs many administrative functions for Inroads, DaViD, and Fuzzy, and generates little or no revenue separately. As a result, NOOF reported total revenue of $400, total operating expenses of $277,600, and a net loss from operations of $277,200 for the fiscal year ended March 31, 1997, compared with a net loss from operations of $206,858 for the same period the prior year. Management attributes the higher net loss for the year ended March 31, 1997 to increased travel and lodging expenses, office expenses, employee benefits (health plan), and rent expense. NOOF will continue to show net operating losses in the future, as it continues to function as the administrative holding company for its subsidiaries. DAVID DaViD 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 26 March 31, 1997, compared with $971,370 for the same period the prior year. Management attributes this 70 percent revenue decline to several factors, including diversion of the Inroads resources to the Ralston Purina project, normal delays in developing products under the Quarto agreement, and Inroad's evolving market focus from "edutainment" products to alternative and specialty products. See "BUSINESS." In addition, management attributes lower revenue figures to the underperformance of its distributors, and the transition of Inroads distribution strategy away from software retail outlets and toward direct sales. Inroad's latest CD-ROM products are targeted at enthusiasts and hobbyists, primarily as a result of the titles that Inroads is developing and commercially exploiting under the Quarto agreement. The Company is currently engaged in a dispute with Quarto. See "BUSINESS--Legal Proceedings." Inroads dedicated a major portion of its resources over the past several months to development of its CIGAR COMPANION interactive CD-ROM, which was released to the market on July 1, 1997. Management believes that Inroads and the Company will realize revenues from CIGAR COMPANION, based upon the surging popularity of cigars and cigar-related products in the United States. Cigar Afficianado magazine reports that in the first quarter of 1997, consumers in the United States purchased over 500 million cigars, a 96 percent increase over 1996 and a 300 percent increase over 1995. In addition to CIGAR COMPANION, Inroads has developed and recently released a photography CD-ROM, IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY, utilizing the material acquired from Quarto. Inroads recently signed agreements for distribution of IN FOCUS in Spain and Italy. IN FOCUS is co-branded by Olympus America, which includes a free roll of film from Kodak for every person who registers the IN FOCUS software with Inroads. Inroad's MULTIMEDIA GUNS CD-ROM title was listed as the 17th-highest selling software title on PC DATA's top-selling software list for April, 1997. MULTIMEDIA GUNS reached number 15 on the PC DATA list for June, 1997. Currently, Inroads only sells the MULTIMEDIA GUNS title through Wal-Mart at full retail. Due to the success of MULTIMEDIA GUNS in this limited distribution channel, CompUSA has agreed to carry the title. Management of Inroads anticipates sales of MULTIMEDIA GUNS by CompUSA to meet or exceed sales of the title at Wal-Mart. The Company is currently engaged in a legal dispute with Quarto. See "BUSINESS--Legal Proceedings." IN-SIGHT The Company capitalized In-Sight in November and December, 1996. In-Sight reported total revenue of $13,020, cost of goods of $10,290, operating expenses of $71,812, and a net loss of $69,082 for the fiscal year ended March 31, 1997. In-Sight has not yet transitioned into the fully-operational stage. Most of In- Sight's operating expenses were attributable to consulting expense of $40,187. Management does not believe In-Sight will be a significant part of the Company's business in the future. COLORADO SATELLITE BROADCASTING, INC. ("CSB") CSB is a wholly owned subsidiary of the Company, formed to acquire the Fifth Dimension assets and to operate and distribute a satellite broadcasting business following such acquisition. Results of operations from the Fifth Dimension assets to be acquired is discussed at Fifth Dimension Assets, below. 27 FIFTH DIMENSION OPERATIONS The combined statements of income and retained earnings for Fifth Dimension (Barbados) Inc., 1043133 Ontario Inc., and Merlin Sierra Inc. for the fiscal year ended March 31, 1997 and 1996, and for the six-month period ended September 30, 1997 and 1996 follow (in U.S. dollars):
SIX MONTHS SIX MONTHS ENDED ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, MARCH 31, MARCH 31, 1997 1996 1997 1996 ------------- ------------- ------------- ------------- (UNAUDITED) (AUDITED) Sales................................................ $ 5,975,842 $ 6,665,701 $ 15,044,139 $ 12,223,731 Cost of Sales........................................ 3,895,078 4,531,727 9,560,847 6,317,438 ------------- ------------- ------------- ------------- Gross Profit......................................... 2,080,764 2,133,974 5,483,292 5,906,293 Expenses............................................. 1,747,317 2,066,084 4,264,144 3,898,653 ------------- ------------- ------------- ------------- Net income from operations........................... 333,447 67,890 1,219,148 2,007,640 Loss on investment in Shares......................... -- 220,000 220,000 -- ------------- ------------- ------------- ------------- 333,447 (152,110) 999,148 2,007,640 ------------- ------------- ------------- ------------- Provision for (recovery of) income taxes Current............................................ 17,477 (283,019) 30,350 (113,563) Deferred........................................... -- -- 71,500 (71,500) ------------- ------------- ------------- ------------- 17,477 (283,019) 101,850 (185,063) ------------- ------------- ------------- ------------- Net Income for the period............................ 315,970 130,909 897,298 2,192,703 Retained Earnings (Deficit) beginning of period...... 2,308,758 1,556,388 1,556,388 (636,315) ------------- ------------- ------------- ------------- 2,624,728 1,687,297 2,453,686 1,556,388 Dividends paid....................................... -- -- 144,928 -- ------------- ------------- ------------- ------------- Retained Earnings end of period...................... $ 2,624,728 $ 1,687,297 $ 2,308,758 $ 1,556,388 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
28 Management of the Company did not direct the operations of Fifth Dimension or its subsidiaries during the periods reported upon, and have prepared this discussion of financial condition based upon extensive interviews with management of those companies and review of the audited and unaudited financial statements for those companies. "Fifth Dimension," as used herein, refers to Fifth Dimension (Barbados) Inc., 1043133 Ontario Inc., and Merlin Sierra Inc. For the six month period ended September 30, 1997, Fifth Dimension reported sales of $5,975,842 compared with $6,665,701 for the same period the prior year. Management attributes the nearly $690,000 loss in revenue to consumer confusion relating to Fifth Dimension's transponder locations being moved from Telstar 402/ ANIK E-2 to Telstar 405 during this period. Cost of sales increased as a percentage of sales to 68% as compared to 65% for the prior year six month period primarily due to duplicate transponder costs in the month of July, 1997 related to Fifth Dimension's transition from Telstar 402R/ ANIK E-2 to Telstar 405. For the six month period ended September 30, 1997, Fifth Dimension reduced expenses to $1,747,317 (29.2% of sales) as compared to $2,066,084 (31% of sales) for the same period in 1996. Net income from operations for the period increased to $333,447 (5.6% of sales) as compared to $67,890 (1.0% of sales) for the prior year period. Fifth Dimension's net income for the six months ended September 30, 1997 was $315,970 up from $130,909 for the same period the prior year. Without the provision for recovery of income taxes, Fifth Dimension's net loss for the period ended September 30, 1996 was $152,110, compared to net income of $333,447 (an increase of $485,557) for the same period in 1997. Fifth Dimension's sales increased $2,820,408 (23.1%) to $15,044,139 for the fiscal year ended March 31, 1997, from $12,223,731 for the prior year. This increase was due to continued expansion of Fifth Dimension's subscriber-based adult network programming. There was a significant increase in cost of sales for the year ended March 31, 1997, up $3,243,409 (51.3%) to $9,560,847 from $6,317,438 the prior year. Management of the Company attributes a majority of this increase in cost of sales to related party transactions, set forth in Note 6 to the Financial Statements. Management believes that it can reduce or eliminate future related party transactions, resulting in cost of sales approximating 55 percent of sales. Because of the large increase in cost of sales, and the smaller increase in expenses also associated with related party transactions, Fifth Dimension's net income from operations fell to $1,219,148 for the fiscal year ended March 31, 1997, a $788,492 (39.3%) drop from the same period the prior year. Fifth Dimension also suffered a one-time loss on investment shares of $220,000 for the fiscal year ended March 31, 1997. Fifth Dimension's net income for the year ended March 31, 1997 was $897,298, compared with $2,192,703 for the same period the prior year. Management of the Company attributes this decline in net income primarily to the related party transactions discussed in Note 6 to the Fifth Dimension Financial Statements, and the loss on investment shares. Fifth Dimension provided adjusted combined financial statements to reflect, among other things, reasonable adjustments to related party transactions and expenses that are not anticipated to reoccur in the future. Fifth Dimension reported adjusted pre-tax income of $2,755,297 for March 31, 1997. The Company evaluated certain non-recurring costs included in the operation of Fifth Dimension in arriving at the purchase price for the assets. The Company believes approximately $1,800,000 of expenses incurred by Fifth Dimension for the year ended March 31, 1997 will not recur in the future, including excess salaries and related-party payments of approximately $850,000, loss on investment shares of $220,000, certain legal fees of approximately $100,000, approximately $415,000 of costs for duplication of existing facilities and operations that the Company already has in place, and other non-recurring costs of approximately $215,000. Management of the Company relied on the adjusted pre-tax income in determining the purchase price for the Fifth Dimension assets. See "FINANCIAL STATEMENTS." LIQUIDITY AND CAPITAL RESOURCES The Company's net increase in cash and certificates of deposit for the fiscal year ended March 31, 1997 was $810,864 (1,671.1%), up from $48,523 to $859,387. This increase was primarily the result of the Company's sale of 30 percent of Inroads to Quarto for $1,250,000 cash, and digital material which for 29 accounting purposes has been valued at $0. $841,568 of the Company's cash and cash equivalents are held in Inroad's bank accounts, and are restricted from transfer to or use by the Company or its other subsidiaries by the terms of the Quarto agreements. The Company had cash and cash equivalents of $1,384 at March 31, 1997. DaViD had cash and cash equivalents of $18,441 at March 31, 1997. Fuzzy had cash and cash equivalents of $(622) at March 31, 1997. The Company retains some operating revenue from its share of the net income of DaViD, and by assessing operating costs to its subsidiaries on a pro rata basis. Inroads and DaViD have recently suffered decreases in revenues and cash flow as they transition to different consumer markets and products. Since March 31, 1997, the Company's total current liabilities have increased approximately $585,000 (89%), primarily due to an increase in notes payable and accounts payable. During that same period, the Company reduced its bank credit line by approximately $171,000. On October 24, 1997, the Company obtained a $1 million unsecured, conditional (if the Company fails to obtain at least $1 million in alternate funding on or before December 31, 1997), revocable line of credit from a principal shareholder of the Company. The Company can draw against this line of credit under certain conditions beginning January 1, 1998, and for nine months thereafter. In addition, on August 29, 1997, the Company borrowed $500,000 from Golf Partners, LLC. The loan bears interest at 12% per annum and is secured by the Company's assets. The Company intends to repay this loan with the proceeds of this Offering. Management believes that upon completion of this offering and the subsequent Fifth Dimension Assets Acquisition, the Company will have sufficient liquidity and capital to operate for the next 12 months. BUSINESS DEVELOPMENT AND OUTLOOK CSB intends to continue to expand the subscription base of Fifth Dimension through advertising, marketing, and expansion of services to traditional cable television providers, while streamlining operations and cutting administrative and other costs. In addition, CSB is exploring the possibility of launching a soft-core adult network to compete with PLAYBOY CHANNEL and SPICE. Digital Versatile Disc ("DVD") Players are becoming part of the consumer electronic landscape in the United States and abroad. Paul Kagan Associates, Inc. estimates that approximately 800,000 DVD players will be sold in the United States by the end of December, 1997 and that this figure will grow to 10 million by the year 2000. Management believes that the low replication price of DVD (and the correspondingly low retail price of titles on DVD) will result in a software to hardware purchase ratio of 5:1. Management expects that approximately 5 percent of the total forecasted 10 million units of DVD software sold in 1997, or 500,000 units, will be in the adult entertainment category. DaViD continues to acquire content rights to unrated and adult motion pictures, and to release an increasing number of titles per month, primarily on DVD. Management believes DaViD revenues and net income will continue to grow as DVD technology is introduced to the consumer market. Inroads continues to develop new CD-ROM products, and Management believes it has secured a source of future titles by virtue of the Quarto agreements. Although CD-ROM software publishing remains a highly competitive business, Management believes Inroads has begun to demonstrate an ability to create demand for its products through conventional (e.g., Wal-Mart and CompUSA) and alternative (e.g., Ralston Purina and Time Warner licensing agreements) retail channels. In-Sight is in the early development stages, and Management anticipates reaching break-even by March 31, 1998. 30 BUSINESS HISTORY OF THE COMPANY New Frontier Media, Inc. was originally incorporated as Strategic Acquisitions, Inc. ("Strategic"), a "blank check" company, on February 23, 1988 in the State of Colorado. On September 7, 1989, Strategic completed a reverse acquisition of National Securities Network, Inc. ("NSN"), a privately-held Colorado corporation and registered securities broker-dealer. Strategic issued 470,016,000 restricted common shares to NSN shareholders, in exchange for all of the issued and outstanding NSN common stock. Shareholders also approved a change of Strategic's name to National Securities Holding Corporation ("NSHC"). NSHC continued in operation as a broker-dealer until October 8, 1990, when it ceased operations and sold its remaining broker-dealer business to Tamarron Investments, Inc., a Colorado broker-dealer. NSHC had no operations between October 8, 1990 and September 15, 1995. On September 15, 1995, NSHC consummated the acquisition of New Frontier Media, Inc. in a stock-for-stock exchange. NSHC first effected a 2,034.66:1 reverse split of all 569,706,000 NSHC Common Shares issued and outstanding, resulting in 280,000 NSHC Common Shares issued and outstanding prior to the New Frontier acquisition. NSHC shareholders also approved a change of the Company's name to New Frontier Media, Inc. Currently, the Company has 4,207,511 Common Shares and no Preferred Shares issued and outstanding. The Company is authorized to issue a total of 50,000,000 Common Shares, par value $.0001 per share, and 5,000,000 Preferred Shares, par value $.10 per share. All of the Company's current revenues are derived through its subsidiaries: Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads"); DaViD Entertainment, Inc. ("DaViD"); and Fuzzy Entertainment, Inc. d/b/a Insight Editions ("In-Sight"). The Company will not derive any revenue from its fourth subsidiary, Colorado Satellite Broadcasting, Inc. ("CSB") until the completion of the Fifth Dimension Assets Acquisition. No assurance can be given as to revenues CSB will be able to generate following such acquisition. The Company's offices are located at 1050 Walnut Street, Suite 301, Boulder, Colorado 80302. The telephone number is (303) 444-0632. OVERVIEW New Frontier Media, Inc. (the "Company") is a diversified publishing holding company, doing business through its subsidiaries: CSB, DaVid, Inroads, and In-Sight. The Company is currently engaged in three primary businesses: (i) reference CD-ROM publishing; (ii) acquisition and distribution of unrated and adult feature films in laser disc and DVD formats; and, (iii) fine art and decorative art poster publishing and distribution. Upon the completion of this Offering and the subsequent completion of the Fifth Dimension Assets Acquisition, the Company (through CSB) intends to enter the subscription-based and transaction-based satellite television business, particularly as it relates to the provision of adult entertainment programming in the C-band satellite markets. The Company's goal is to acquire high-quality content which can be distributed by the Company and exploited through a wide variety of media. A portion of the Company's CD-ROM sales are handled through Broderbund Software, Inc. FIFTH DIMENSION ASSETS ACQUISITION The Company has entered into agreements to acquire certain assets relating to the subscription-based and transaction-based satellite adult television business of Fifth Dimension. The assets to be acquired from Fifth Dimension include but are not limited to: (a) any and all trademarks, proprietary rights and other intellectual property rights owned by Fifth Dimension and associated with the adult movie programming and broadcasting business (the "Adult Movies Business"; 31 (b) any and all rights Fifth Dimension may have in adult programming in any format, including feature length films and other films and programming, and all related promotional materials and programming; (c) all subscriptions for the Adult Movies Business, including all subscriber lists, and related marketing data; (d) information regarding all advertisers, marketing partners and vendors used by Fifth Dimension in relation to the Adult Movies Business and related services; (e) all rights, title and interest Fifth Dimension may have in 1-800 phone numbers and Internet web sites used for the Adult Movies Business and related services; (f) all rights, title and interests in any permits, licenses, franchises, consents or authorizations issued by, and all registrations and filings with, any government agency solely in connection with the Adult Movies Business, to the extent transferable to CSB. CSB is a wholly owned subsidiary formed by the Company to operate the subscription-based and transaction-based television networks to be acquired from Fifth Dimension. A substantial portion of the proceeds from this Offering will be used to complete the Fifth Dimension transaction. See "USE OF PROCEEDS" and "BUSINESS--Fifth Dimension Assets Acquisition." The Company has arranged to have all of the closing documents for the Fifth Dimension Assets Acquisition executed and placed in escrow pending the closing of this Offering and receipt of the purchase price for such assets. Fifth Dimension is a leading provider of subscriber-based premium television channels (hereinafter "premium channels" or "pay television") and transaction-based television networks ("pay-per-view"). Fifth Dimension owns, operates and distributes the three leading C-band adult programming networks, and is a leading provider of explicit adult programming via direct to home ("DTH") C-band satellite. Pursuant to the terms of the Asset Purchase Agreements between the Company and Fifth Dimension, the Company will acquire certain assets from Fifth Dimension, including the satellite uplink facility equipment, call center facility equipment, satellite transponder subleases, film inventories, intangible assets (including trade names, trademarks, service marks, copyrights, mask work rights, licenses, brand names, trade secrets, trade dress, technical know-how, good will, and other intangibles), subscriber base and lists, vendor lists, books and records, permits and licenses, and all other property of Fifth Dimension used in connection with Fifth Dimension's adult programming business. The Company will enter into an Uplink Management Services Agreement and a Call Center Interim Services Agreement with Fifth Dimension, pursuant to which Fifth Dimension will operate, maintain, manage, and sustain the satellite uplink facility and will receive and process subscriber calls for nine months following the acquisition. Thereafter, the Company intends to outsource the Call Center's operations to a third party provider in the United States. See "BUSINESS." The assets to be acquired from Fifth Dimension generated sales of $15,044,139 and pre-tax income of $999,148 (pre-tax income, as adjusted for non-recurring expenses and related party transactions, would have been $2,755,297) for the year ended March 31, 1997. The Company has agreed to acquire certain Fifth Dimension assets for a total purchase price of $8,700,000, consisting of $3,500,000 in cash, Common Stock of the Company valued at $4,200,000, and a promissory note for $1,000,000. The Company evaluated certain non-recurring costs included in the operation of Fifth Dimension in arriving at the purchase price for the assets. The Company believes approximately $1,800,000 of expenses incurred by Fifth Dimension for the year ended March 31, 1997 will not recur in the future, including excess salaries and related-party payments of approximately $850,000, loss on investment shares of $220,000, certain legal fees of approximately $100,000, approximately $415,000 of costs for duplication of existing facilities and operations that the Company already has in place, and other non-recurring costs of approximately $215,000. Terms of the Asset Purchase Agreements provide that the Company will issue 840,000 shares of Common Stock to Fifth Dimension as part of the purchase price. The Company will also issue Fifth Dimension or its assignees 32 warrants to purchase up to an additional 400,000 shares of the Company's Common Stock at $5.00 per share, all pursuant to the terms of the Asset Purchase Agreements and the Warrant Agreement. See "BUSINESS--Fifth Dimension Assets Acquisition." The Company has also agreed to pay Fifth Dimension "formula profits" exceeding $2,000,000 for the first 12 months after closing. "Formula Profits" is defined in the Asset Purchase Agreements as the total revenue from operations minus actual operating costs. Maximum operating costs under this provision are limited to an amount not greater than 125% of the projected costs set forth in Schedule 2.1(f) to the Asset Purchase Agreements. Schedule 2.1(f) details projected costs of $12,294,444, and maximum operating costs of $15,368,055. The Company believes it can enhance shareholder value by: - Integrating the Fifth Dimension Assets into the Company; - 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 - Utilizing personnel of Inroads to implement simultaneous "web casting" of CSB programming via the Internet. In the Asset Purchase Agreements, Fifth Dimension has agreed to indemnify, defend, and hold harmless the Company against claims and losses that arise, result from or relate to any breach of, or failure by Fifth Dimension to perform, any of its representations, warranties, covenants or agreements under the Agreements. The Asset Purchase Agreements do not contain standard 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 Fifth Dimension's $1,000,000 promissory note and Formula Profits any claim it may have against Fifth Dimension following the acquisition. The Company intends to acquire the Fifth Dimension assets and operate its adult satellite network business through its wholly owned subsidiary CSB in much the same way that Fifth Dimension is currently operating its network business, except that, as described above, the Company intends to institute various cost-cutting measures. A significant portion of the net proceeds from this offering are allocated to this transaction. See "USE OF PROCEEDS." OVERVIEW--ADULT ENTERTAINMENT INDUSTRY Despite nearly two decades of intense political campaigning against adult entertainment, consumer purchases of adult entertainment have increased dramatically. Adult Video News, an adult entertainment industry trade publication, estimated the number of explicit adult video rentals rose from 75 million in 1985, to 490 million in 1992, and finally to an all-time high 665 million in 1996. Adult Video News reported that Americans spent more than $8 billion in 1996 on all forms of sexually explicit materials. During the 1980s, the availability of adult movies on videocassette and on cable television helped to legitimize the consumption of explicit material by putting it in the home setting. The result, in the opinion of Management, has been the legitimization of industry products by other businesses not traditionally associated with the adult entertainment industry. Video stores (video rentals), long distance telephone carriers (adult conversation lines, internet adult services), satellite providers (transponder leases, adult networks), cable companies (adult channels and networks), hotel chains (soft-porn movies), and even mutual funds (investments in publicly-traded adult entertainment companies) earn significant returns by supplying or investing in adult entertainment either directly or indirectly. The distribution of sexually explicit material is intensely competitive. Hundreds of companies now produce and distribute films to wholesalers and retailers, as well as directly to the consumer. The low cost of videotape and the introduction of low cost video tape recorders, along with the minimal production 33 budgets of many adult films, has resulted in much lower barriers to entry in the adult entertainment industry. The availability of adult films on videocassette has virtually destroyed the adult theatre business. Management believes that the "soft core" material routinely available on a variety of cable television networks acts to reinforce consumer demand. Americans spent over $150 million on adult pay-per-view in 1996, according to a recent article in U.S. NEWS AND WORLD REPORT magazine (February 10, 1997). Cable companies such as Time Warner, TeleCommunications, Inc., and Continental Cablevision offer non-explicit services like the PLAYBOY CHANNEL and SPICE. According to public documents, the PLAYBOY and SPICE channels generate as much as $200 million in revenue from cable and DTH satellite services. Both companies have launched overseas services. 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 non-explicit adult programming through services such as SPECTRAVISION and ON COMMAND. The tremendous growth of the Internet, including chat rooms and web sites dedicated to adult entertainment, has resulted in millions of potential customers accessing these sites from the relative privacy of their personal computers. In a recent ruling, ACLU v. Reno, the Supreme Court struck down portions of the Communications Decency Act. Finally, telephone sex services continue to report record sales. Industry sources estimate that total revenues generated in the telephone sex business in 1996 exceeded $1 billion. Management believes that the adult entertainment industry in general, and the private viewing segment of that industry in particular, will continue to experience significant growth in the coming years, particularly as advances in technology allow more private and secure adult access to adult themed material. OVERVIEW--FIFTH DIMENSION Fifth Dimension is a leading provider of subscriber-based premium television channels ("premium channels" or "pay television") and transaction-based television networks ("pay-per-view"). Fifth Dimension currently owns, operates, and distributes the three leading C-band adult programming networks: EXXXTASY, TRUE BLUE, and EXOTICA (collectively referred to hereinafter as the "Exxxtasy Networks"). Fifth Dimension, through the Exxxtasy Networks, is a leading provider of explicit adult programming via direct to home ("DTH") C-band satellite. To a lesser extent, Fifth Dimension provides its services through cable television and wireless cable television multiple system operators ("MSOs"). Fifth Dimension does not currently provide Ku-band (small dish or digital satellite) services. Fifth Dimension sells its network programming on a subscription basis and on a pay-per-view basis. Premium channel subscribers and pay-per-view subscribers have television set-top decoder boxes. They purchase block programming (e.g., one day, one month, one year), or single movies or events for a flat fee. As of December 1, 1997, the Exxxtasy Networks are available to an estimated 2.35 million C-band DTH subscribers, and approximately 121,000 MSO subscribers. The Exxxtasy Networks have distribution agreements with nearly every major distributor of C-band satellite programming in the United States. Fifth Dimension has been unable to significantly expand its Exxxtasy Networks distribution base primarily due to the refusal of MSOs and digital satellite companies to carry explicit adult programming. CSB intends to launch a branded, non-explicit service to compete with PLAYBOY CHANNEL and SPICE, the two leading MSO and digital satellite adult networks. The Company has allocated a small portion of the net proceeds from this Offering to continue evaluation of the costs and timing of launching such a service. Management estimates a cost of over $2 million and a timeframe of 12 to 24 months to launch a branded soft-core adult network. In all likelihood, the Company would be required to seek additional financing to fund this project. Fifth Dimension aggressively promotes its networks' brand names with bold logotypes and high-quality interstitial programming between feature films and special programming. The Exxxtasy Networks also offer home shopping programming between feature film and special programming, featuring adult theme products. The Exxxtasy Networks sell air time to third parties who provide adult-oriented entertainment and information through pay-per-call telephone lines. 34 EXXXTASY, TRUE BLUE, and EXOTICA each features approximately 36 movie titles per week, or 100 to 150 movies each month, with at least 15 first-time exhibitions per month. There is no cross-over programming between channels. All channels are available 24 hours per day, featuring a mix of standard industry format 90 minute feature films and special 30- and 60-minute features and interviews. Staggered movie start times occur three times daily, allowing for maximum viewing flexibility. Currently, the Exxxtasy Networks deliver explicit adult programming exclusively. EXXXTASY (TELSTAR T-405, CHANNEL 19) EXXXTASY is the premium channel of the three channels that make up the Exxxtasy Networks. As of December 1, 1997, EXXXTASY had 42,331 subscribers. EXXXTASY offers a diverse programming mix within the adult genre, consisting of movies and specials that appeal to a wide variety of sexual preferences. Each day of the broadcast week is specially constructed to deliver the widest variety of sexually explicit programming in addition to special thematic segments and features. EXXXTASY is available on an all-day pay-per-view basis ($6.95), as well as periodic 1-month ($21.95), 3-month ($53.95), 6-month ($89.95), and 1-year ($149.95) subscriptions. Exxxtasy Networks does not allow refunds, and services may be exchanged on an equal basis only. CSB does not intend to alter the name, format or subscription structure of EXXXTASY, following completion of the Fifth Dimension assets acquisition. TRUE BLUE (TELSTAR T-405, CHANNEL 05) TRUE BLUE is the budget service in the Exxxtasy Networks family. As of December 1, 1997, TRUE BLUE had 39,383 subscribers. TRUE BLUE is a leader in "classic" adult programming (professional titles more than 5 years old), and features a mix of amateur adult movies and classic adult feature films. "Amateur" movies are those typically produced by unpaid producers and actors, utilizing consumer-grade film, equipment, sets, etc. TRUE BLUE is available on an all-day pay-per-view basis ($6.95), as well as periodic 1-month ($15.95), 3-month ($39.95), 6-month ($67.95), and 1-year ($109.95) subscriptions. Exxxtasy Networks does not allow refunds, and services may be exchanged on an equal basis only. CSB does not intend to alter the name, format or subscription structure of TRUE BLUE, following completion of the Fifth Dimension assets acquisition. EXOTICA (TELSTAR T-405, CHANNEL 22) EXOTICA features a new movie every 90 minutes. As of December 1, 1997, EXOTICA had 37,448 subscribers. EXOTICA offers a mix of recent adult feature film hits, new adult features, European adult films, and classic adult features. EXOTICA is available on an all-day pay-per-view basis ($6.95), as well as periodic 1-month ($18.95), 3-month ($46.95), 6-month ($89.95), and 1-year ($139.95) subscriptions. Exxxtasy Networks does not allow refunds, and services may be exchanged on an equal basis only. CSB does not intend to alter the name, format or subscription structure of EXOTICA, following completion of the Fifth Dimension asset acquisition. GOVERNMENT REGULATION In 1996, the United States Congress passed the Telecommunications Act of 1996 (for this paragraph only, the "Act"), a comprehensive overhaul of the Federal Communications Act of 1934. Section 641 of the Act requires full audio and video scrambling of channels which are primarily dedicated to "sexually explicit" programming. If a multi-channel video programming distributor, including a cable television operator, cannot comply with the full scrambling requirement, then the channel must be blocked during the hours when children are likely to be watching television, i.e., from 6:00 a.m. to 10:00 p.m. Both non- explicit programming providers (such as Playboy, Inc.) and explicit programming providers (such as Exxxtasy Networks) feature "sexually explicit" programming within the contemplation of Section 641 of the Act. Although all adult programming companies fully scramble their signals for security purposes, several cable television MSOs lack the technical capability to fully scramble the audio portion of the signal. 35 These cable systems would be required to block adult broadcasts between 6:00 a.m. and 10:00 p.m. Both Spice, Inc. and Playboy, Inc. predict that revenues from cable television distribution sources could be negatively affected by as much as 25% as a result of this provision, until new equipment can be installed. The Company should not be impacted by this provision, until and unless it decides to launch a non-explicit service to compete with SPICE and the PLAYBOY CHANNEL. The vast majority of Fifth Dimension's customers receive their broadcast signals from a fully secure, fully-scrambled distribution source. Section 641 of the Act should only affect the Company if it decides to pursue cable television MSOs as a source of distribution for its programming. NETWORK PROGRAMMING All of the Exxxtasy Networks' broadcast programming is acquired from third party adult content studios. In most cases, Fifth Dimension pays a flat rate ranging from $200 to $2,000 for unlimited broadcast rights to a feature film for a specified period of time (usually one to three years). Fifth Dimension has established relationships with nearly all of the major adult movie studios, and purchases a wide variety of programming from each on a monthly basis. These studios send Betacam SP, 1" or 3/4" master tapes to a dubbing facility in Los Angeles, California. Dubbed copies of the programming are then forwarded to the uplink facility, where they are screened and edited, if necessary, for quality control purposes and to comply with running time requirements. CSB intends to enter into an agreement with a U.S.-based company to create interstitial programming (promotional segments, Network IDs, and movie trailers) for the Exxxtasy Networks, following completion of the Fifth Dimension assets acquisition. NETWORK DELIVERY THE C-BAND SATELLITE BUSINESS There are currently approximately 2,300,000 C-band "big dish" satellite systems in place in the United States. These systems feature the larger diameter receivers. C-band systems, with their ability to scan different satellites, offer owners an enormous variety of programming, significantly more than any other service or delivery system (such as cable or digital satellite, which locks on only one satellite). C-band satellite owners incur no cable charges, premium channel costs (although this is changing, as premium providers have begun to scramble their signals), or program supplier fees. In the past several years, the market for C-band satellites has declined significantly, as small digital satellite services (Ku-band) have flourished. These 18-inch digital satellite dishes are much less expensive than the large C-band satellite hardware ($200 versus approximately $3,000 for C-band), are relatively easy to mount in unobtrusive locations, and offer digital channels. C-band satellite equipment is also negatively affected by stricter zoning regulations and covenant restrictions. Approximately 90,000 C-band system owners replaced their big dishes with the smaller Direct Broadcast Satellite ("DBS") dish systems in the last year, according to General Instruments Access Control Center. Management believes the C-band equipment base will remain in the 2,300,000 to 2,500,000 units range for the next several years. The introduction and rapid growth of the number of digital channels, due to introduction of DBS and reduced transponder costs, affects C-band satellite, which is broadcast in analog format. Management believes digital and analog formats will co-exist for several years, and that new technologies will allow C-band systems to receive digital channels. For example, General Instruments' new 4DTV technology enables C-band users to watch programming transmitted via DigiCipher II format. C-band continues to be the "work horse" of the satellite entertainment industry. Every major cable system in the United States is C-band based, delivering dozens of C-band channels to more than 65 million subscribers. Hundreds of government, corporate, education, and network broadcasters use C-band. C-band is also the preferred method of transmitting sports backhauls, satellite news gathering, international broadcasts, and syndicated program and wild feeds. 36 Management believes that C-band also offers a more stable delivery source, particularly concerning satellite lifespan. Most satellites have a service life of approximately 15 years; however, when cosmic accidents occur, as in the case of the Telstar 401 in January, 1997, all channel occupants on that satellite must find immediate replacement residency. In the case of the Telstar 401, all channels were switched to other satellites that C-band customers could access within a matter of hours. DBS customers, who are locked on one satellite, could suffer significant delays in service if their satellite experienced a problem similar to the Telstar 401 accident. It is unlikely the DBS provider would be able to find an empty, viable "spare" satellite already in orbit to switch to. Such a switch would involve re-programming every DBS dish to the new satellite location. A more likely scenario would involve launch of a replacement satellite, which could take weeks or months. The future of C-band is, in the opinion of management, far less volatile. The gradual changeover from analog to digital satellites will proceed as the market dictates. This slow, deliberate change could take as long as 15 years to fully implement. In the meantime, the introduction of digital receivers in the C-band market can be expected. SATELLITE TRANSMISSION Fifth Dimension delivers its video programming to its C-band customers (and to a lesser extent to cable television customers) via satellite transmission. CSB intends to continue to deliver the Exxxtasy Networks via satellite, as the most efficient means of delivery available for point to multi-point distribution. Satellite delivery of video programming is accomplished as follows: Video programming is played directly from the uplink facility. The program signal is then scrambled (encrypted) so that the signal is unintelligible unless it is passed through the proper decoding devices. The signal is then transmitted (uplinked) by the earth station to a designated transponder on a communications satellite. The transponder receives the program signal uplinked by the earth station, amplifies the program signal and broadcasts (downlinks) it to satellite dishes located within the satellite's area of signal coverage. The signal coverage of the domestic satellite currently utilized by Fifth Dimension, and to be utilized by CSB, is the continental United States, Hawaii, portions of the Caribbean, Mexico, and Canada. Each transponder can retransmit one complete analog color television signal, together with associated audio and data sidebands. For cable systems, the scrambled signal received by the cable system's satellite dish is then descrambled. The cable system then rescrambles the signal using rescrambling technology that is compatible with the addressable set top decoders deployed in its system, and then distributes the signal throughout its cable system. The satellite receivers of DTH and Digital Satellite customers contain descrambling equipment. To offer pay-per-view services, the set top boxes or satellite receivers must have an electronic "address" and the cable system or satellite service provider must be able to remotely control each customer's set-top box or satellite receiver, and cause it to descramble the television signal for a specific period of time after the customer has made a purchase of a premium service or pay-per-view movie or event. The ability to control the scrambling and descrambling of a signal from a cable system's facilities is essential for marketing and delivery of pay-per-view programming services. TRANSPONDER AGREEMENTS In 1992, Fifth Dimension entered into contracts with AT&T's satellite division to lease four channels on Telstar 401. Fifth Dimension delivered Exxxtasy Network broadcasts utilizing Telstar 401 until January 11, 1997, when Telstar 401 experienced an irreversible equipment failure. Fifth Dimension immediately moved its transponders to AnikE2 (2) and Telstar 402R (2), and has delivered its Exxxtasy Networks programming since January, 1997 via these two satellites. Fifth Dimension has entered into an agreement to lease three transponders on Telstar 405, a new AT&T satellite that was placed in service in June, 1997. CSB will immediately benefit from the non-cancelable sublease agreement on the three transponder slots 37 on the new Telstar 405 satellite. Fifth Dimension is currently broadcasting its three Exxxtasy Networks channels on Telstar 405. Following the Fifth Dimension Assets Acquisition, CSB plans to continue to provide the three Exxxtasy Networks channels on Telstar 405. Fifth Dimension's 24-hour "barker" or promotional channel is currently broadcasting Telstar 402R, which enables it to promote the Exxxtasy Networks on the same satellite where most of its competitors' services are offered. UPLINK FACILITY Fifth Dimension maintains a fully operational uplink facility in Ottawa, Canada, dedicated exclusively to the Exxxtasy Networks. An uplink facility is the means by which a video signal can be sent to a designated satellite transponder so that it can be broadcast back to the earth to reach a large geographic territory. The Ottawa uplink facility is equipped with the necessary satellite equipment, editing equipment, power supplies and other equipment necessary to provide 24-hour programming for its three networks, plus a barker channel. CSB intends to enter into a contract with Fifth Dimension, whereby Fifth Dimension will operate the uplink facility for a period of at least one year from the date of the Fifth Dimension assets acquisition. CALL SERVICE CENTER Fifth Dimension currently maintains a call service center in Ottawa, Canada. CSB is currently in discussions with various third-party providers regarding outsourcing these operations and relocating the call service center 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: explicit adult programming networks, and non-explicit programming networks. Explicit adult programming, like that offered by Exxxtasy Networks, consists of movies and other programming that contains sexually explicit film and video, and which is generally referred to as "X-rated" adult material. Non-explicit material is edited so as to be acceptable under the self-imposed guidelines of the cable television and digital satellite industries. Non-explicit programming, while generally not rated by 38 the Motion Picture Association of America, would receive an "R" rating if submitted for review. The following table illustrates the Company's competitors in the explicit adult network industry:
PRICE NAME OF SERVICE SUBSCRIBERS (PPV ALL DAY; ANNUAL) DISTRIBUTION DESCRIPTION OF SERVICE - ---------------- ----------- --------------------- -------------- -------------------------------------------- Eurotica 30,000 $8.99;$129.99 C-band only Emerald Media, Inc.'s explicit channel. XXXCite 5,000 n/a; $59.95 C-band only Emerald Media, Inc.'s second explicit channel. Plays programming already aired on Eurotica. X! Channel 24,000 $8.99/$59.95 C-band only Owned by Emerald Media, Inc. Budget programming. XXXPlore 40,000 $8.99/$59.95 C-band only Emerald Media, Inc. Same programming as X! Channel. Exxxtasy 42,331 $6.95/$149.95 C-band only Premium Channel. High quality programming, high price. True Blue 39,383 $6.95/$109.95 C-band only Classic and Amateur programming. Budget priced. Exotica 37,448 $6.95/$139.95 C-band only Complementary high-quality film and video programming for Exxxtasy subs.
EUROTICA/XXXCITE These are premium channels owned by Emerald Media, Inc. Spice licenses content for use by Emerald Media, Inc., sub-leases transponder slots to Emerald Media, Inc., and provides playback services for Emerald Media, Inc. Management believes Eurotica/XXXcite offer fewer movies per month than the Exxxtasy Networks. X! CHANNEL/XXXPLORE These channels are also owned by Emerald Media, Inc. This competitor offsets lower-quality programming by offering a low annual subscription rate ($59.95). The Company will face general competition from other forms of non-adult entertainment, including sporting and cultural events, television, feature films, and non-explicit programming. In addition the Company will face competition in the adult entertainment arena from other providers of explicit programming, adult video rentals and sales, adult film theaters, newspapers and magazines aimed at adult consumers, telephone talk lines ("telephone sex" services), and adult-oriented Internet services. MARKETING Fifth Dimension markets its services primarily through a free, 24-hour satellite channel which promotes the programming featured on the Exxxtasy Networks. This channel, known as a "barker" channel, uses non-explicit movie clips and interstitial programming to entice viewers who are "channel surfing" to subscribe to one of the Exxxtasy Networks channels (periodic subscription), or the purchase a "block" of programming (a single pay-per-view movie or event, or an all-day purchase). To a lesser extent, Fifth Dimension advertises in print publications such as satellite channel guides or adult themed magazines. Fifth Dimension also aggressively markets its Exxxtasy Network programming directly to satellite program packagers or distributors, through direct marketing campaigns, face-to-face meetings, trade show exhibits and industry gatherings. The distributors represent an important source of advertising and marketing materials for the Exxxtasy Networks. Fifth Dimension's marketing department has developed numerous programs and promotions to support the Exxxtasy Networks. These have included the development of detailed monthly program guides, glossy promotional pieces, and celebrity appearances at industry trade shows. CSB plans to continue to market the Exxxtasy Networks in the same manner as Fifth Dimension. 39 BUSINESS DEVELOPMENT STRATEGY Together, the Exxxtasy Networks currently have the largest number of explicit adult programming customers in the industry. CSB intends to continue to acquire high-quality adult movie titles and features, and to market the Exxxtasy Networks as they have been previously marketed by Fifth Dimension. Management believes that numerous synergies exist between the Company and the assets to be acquired from Fifth Dimension. The Company is already involved in the adult entertainment video business through its subsidiary DaViD, the largest publisher and distributor of adult video discs (LaserDisc and Digital Versatile Disc) in the world. DaViD acquires video programming from every major adult movie studio and many independents. Management believes DaViD and CSB can achieve significant savings in licensing fees by combining their content acquisitions and expertise. The Company is also engaged in the software publishing business through its subsidiary Inroads. Inroads' personnel are highly-skilled software engineers with strong video compression and Internet-based capabilities. CSB plans to construct an Internet link via fiber optic cable from its uplink facility, to enable simultaneous "web-casting" of its programming. As part of the Fifth Dimension Assets Acquisition, the Company will acquire Fifth Dimension's internet site and customer base. After the acquisition, CSB intends to upgrade the website www.Exxxtasy.com to include live one-on-one adult video feeds, through the Company's www.sexsee.com site, and to add a variety of other adult products and services. The Company's Chief Executive Officer and president, as well as several of the Company's largest shareholders, have been involved in the cable television industry to a significant extent over the last 20 years. Management believes that it can utilize this experience to its advantage, particularly as CSB approaches MSOs as a distribution source of explicit and non-explicit programming. POSSIBLE LAUNCH OF NON-EXPLICIT, BRANDED NETWORK Two companies, Playboy, Inc. and Spice, Inc., currently dominate the non-explicit adult programming arena, a $259 million retail revenue industry segment. Playboy offers the PLAYBOY CHANNEL and ADULTVISION, and Spice offers SPICE/ADAM & EVE NETWORKS. Playboy is the dominant participant in the non-explicit adult programming television network business, with 1996 revenues of $44 million and strong brand name recognition. Playboy's programming consists of high-quality specials and edited or "cable version" adult films. Spice generated $33 million in revenues for the year ended December, 1996. Spice has experienced unfavorable financial results in the past two years due to unsuccessful attempts to diversify out of the adult movie business and poor returns on international and non-core business investments. As a result, Management believes that Spice has limited resources to expand its business. Spice does not have strong brand name recognition, and its programming is considered to be inferior to that offered by Playboy. Fifth Dimension has been successful in significantly impacting Spice's revenue from the C-band market over the past three years. Management of the Company intends to explore entering into the "soft-core" adult satellite and cable programming business by forming a joint venture with a branded adult magazine or other highly-recognizable name brand. Management has begun discussions with companies that meet the criteria of offering quality adult products with name recognition from the buying public. A portion of the net proceeds of this offering may be utilized to undertake entry into such non-explicit adult programming business. INTERNATIONAL OPPORTUNITIES Fifth Dimension has begun discussions with numerous parties in Europe, Asia, and South America to launch explicit and non-explicit services in these geographic areas. Management of the Company intends to continue these discussions. These discussions are in the preliminary stages, and there can be no assurance that any of these discussions will result in completed deals for the Company in the future. 40 MARKETING THE EXXXTASY NETWORKS TO CABLE TELEVISION MULTIPLE SYSTEM OPERATORS Cable television multiple system operators are facing increasing competitive pressure from digital satellite providers. Many of these MSOs are seeking ways to differentiate their services. Recently, Fifth Dimension successfully secured distribution for its explicit adult programming on two cable television systems. Based on this success, CSB intends to focus its efforts on the bottom to middle tier cable television MSOs, and launch a major marketing effort to increase awareness of the Company's alternative programming. Management hopes to gradually persuade smaller MSOs to carry the Exxxtasy Networks. DAVID DaViD is a leading content owner of feature-length adult and unrated motion pictures for the video disc markets. LASERDISC CONTENT LICENSING DaViD is primarily engaged in the licensing of existing feature-length adult and unrated motion picture content for periods ranging from seven years to perpetuity, for distribution on all formats of video disc media (e.g., LaserDisc and Digital Versatile Disc, or "DVD"). DaViD licenses its motion picture programming from approximately ten motion picture studios and/or licensors. DaViD has purchased approximately 90% of its titles for single licensing fees, ranging from $2,000 to $5,000 per title. Over 50% of DaViD's exclusive licensing agreements are for all formats of laser video disc whether now known or hereafter devised. Current formats exploited by DaViD, or which DaViD intends to exploit, include 8" and 12" LaserDisc, CD-ROM (QuickTime-TM- Compression), VideoCD (MPEG1 Video Compression), and Digital Versatile Disc (MPEG2 Video Compression), collectively referred to as "Video Discs." DaViD's typical exclusive distribution term ranges from seven years to perpetuity. Exclusive distribution territory ranges from North America (approximately 40% of DaViD's titles) to worldwide (approximately 60% of DaViD's titles). For a few, high-quality titles in DaViD's library (approximately five percent of total library titles), DaViD pays royalties ranging from ten to twenty percent of collected wholesale revenues. DaViD has reached a definitive agreement to acquire a library of approximately 350 adult feature film rights for distribution on 8" and 12" LaserDisc and DVD, for $2,000 to $5,000 per title. The distribution term for these titles ranges from seven years to perpetuity. These titles range in content from Japanese animation to foreign films to adult entertainment. DaViD sells its 8" and 12" LaserDisc titles on a worldwide basis under the LASERDISC ENTERTAINMENT label, and plans to sell its 5 1/4" Digital Versatile Disc titles under the DAVID ENTERTAINMENT label. DaViD is currently negotiating to acquire Digital Versatile Disc rights to approximately 500 additional adult and unrated feature films, and expects to begin exploiting these rights in late 1997 and 1998, when the projected installed base of Digital Versatile Disc hardware is expected to be a minimum of 2 million households. DaViD's contracted acquisition library includes classic and new release adult features such as CALIGULA, INSATIABLE, LES FEMMES EROTIQUE, and HIDDEN OBSESSIONS, foreign feature films such as the award-winning Japanese film IN THE REALM OF THE SENSES, and Japanese animation titles such as UROTSUKIDOJI: THE LEGEND OF THE OVERFIEND. DaViD acquires video disc rights to approximately 100 feature films each year, and historically has released five to six new titles per month in the LaserDisc format only. In March, 1997, DaViD began the transition to release of titles on DVD. Release of titles on LaserDisc, and revenues associated with those releases, have declined. DaViD intends to release most of its titles on the DVD format in the future. As awareness and acceptance of DVD technology grows, DaViD expects to release up to 20 titles per month. 41 JACKET PRINTING DaViD maintains an in-house art department which designs and produces the electronic art necessary to print LaserDisc jackets and DVD jewel case inserts. Jewel case inserts are printed by the replication company, while jackets for LaserDiscs are printed by third-party printers and shipped to the replication company for disc insertion. DISC REPLICATION DaViD contracts out the replication for LaserDisc and Digital Versatile Disc to third-party manufacturers, including Pioneer Video Manufacturing, Inc., a wholly-owned subsidiary of Japan-based Pioneer Electronics. The replication companies receive masters from DaViD in the form of D-2 master tapes (LaserDisc) or digital "one- off" discs (DVD). Glass masters and stampers are created from the D-2 or one-off masters. Disc assembly (insertion into a jacket or jewel case) is handled by the replication company. DISTRIBUTION DaViD currently distributes its titles in the 8" and 12" LaserDisc and DVD formats......................................................................... DaViD began to distribute its titles in the 5 1/4" VideoCD format in February, 1997. DaViD currently releases five to six feature-length motion picture titles per month in the 12" LaserDisc format. DaViD intends to release eight to ten feature-length motion picture titles per month in the DVD format in the first quarter of 1998, ten to fifteen titles per month in the DVD format in the second and third quarters of 1998, and up to 20 titles per month beginning in the fourth quarter of 1998. 42 INROADS Inroads is a vertically-integrated CD-ROM software publishing company. The Company owns seventy percent (70%) of Inroads; thirty percent (30%) of Inroads is owned by Quarto Holdings, Inc. ("Quarto"), a subsidiary of the Quarto Group, Inc., the largest co-edition book publisher in the world. Quarto also owns an adjustable Warrant to purchase up to 400,000 shares of the Company, at an exercise price of $6.00 per share. Assuming completion of this Offering and the Fifth Dimension Assets Acquisition, Quarto's warrant will be adjusted to entitle Quarto to purchase up to 480,000 shares of the Company's restricted common stock for $5.00 per share. See "RISK FACTORS--Quarto Warrant." CD-ROM DEVELOPMENT Inroads' in-house developed titles are produced, designed, and developed directly by the Inroads' twelve-person staff. Inroads' licensed titles (developed outside of the Company's offices) are localized, packaged, and, if necessary, enhanced with new graphics or interface design/operating elements by Inroads. Inroads' staff consists of producers, writers, software engineers, artists, and management personnel. All of Inroads' CD-ROM titles, whether developed in-house or licensed, contain video, still photography, audio, original music, and text. These elements are combined with custom-designed interfaces and computer code to deliver high-quality, easy-to-use, original CD-ROM titles. Utilizing state-of-the-art technology, Inroads has developed and released nine titles since its inception in June, 1994: (1) MULTIMEDIA DOGS: THE COMPLETE INTERACTIVE GUIDE TO DOGS; (2) MULTIMEDIA DOGS VERSION 2.0; (3) MULTIMEDIA CATS: THE COMPLETE INTERACTIVE GUIDE TO CATS; (4) MULTIMEDIA EXOTIC PETS: HORSES, BIRDS, AQUATICS & POCKET PETS; (5) MULTIMEDIA BUGS: THE COMPLETE INTERACTIVE GUIDE TO INSECTS; (6) MULTIMEDIA GUNS: THE ENTHUSIAST'S GUIDE TO FIREARMS; (7) MULTIMEDIA HORSES: THE COMPLETE INTERACTIVE GUIDE TO HORSES; (8) CIGAR COMPANION INTERACTIVE; and, (9) IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY. Other titles are under development. In addition, Inroads is developing a line of children's "MY FIRST" which will be based on MULTIMEDIA DOGS, MULTIMEDIA CATS, MULTIMEDIA HORSES, AND MULTIMEDIA EXOTIC PETS. Inroads releases one to two CD-ROM titles per quarter. CD-ROM CONTENT LICENSING AND CREATION Inroads licenses most of the still photography contained in its titles from third party photographers and stock photography companies. Most of the video contained in Inroads' titles is shot with Inroads' equipment and by Inroads' personnel. All text is either licensed from Quarto's library of books or written by Inroads' in-house staff. All voices (narrative) and music used in Inroads' titles are developed and owned by Inroads. Royalty arrangements for licensed video and photography are negotiated on a title by title basis and typically range from 2% to 5% of collected wholesale dollars. CD-ROM TITLE LICENSING Inroads' strong distribution network and expertise in product packaging provides a framework for numerous opportunities to acquire and/or license existing software products developed and produced by other companies, at a fraction of the cost of developing titles in-house. In September 1996, the Company completed agreements with Quarto whereby Quarto acquired 30 percent of Inroads for $1,250,000 in cash and digital material valued by the Company at $-0-, and valued at $525,000 by Quarto. The Quarto agreement grants the Company the right to commercially exploit Quarto titles. Inroads has completed and released two Quarto-based titles to date: CIGAR COMPANION INTERACTIVE, based on the best-selling Quarto title THE COMPLETE CIGAR COMPANION, and IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY, based on best-selling Quarto books by Michael Freeman. CD-ROM MASTERING CD-ROM titles are programmed, designed, developed, and tested by Inroads. Once an optical disc master ("Gold Master") has been approved for release, the Gold Master is then submitted to a replication company for manufacture. Box and jewel case art is developed simultaneously with the development of the software, and submitted for printing approximately three to four weeks prior to disc replication. 43 CD-ROM JEWEL CASE INSERT AND BOX DESIGN AND PRINTING New Frontier Media, Inc. maintains an in-house art department which designs and produces the electronic art necessary to print boxes and jewel case inserts. Jewel case inserts are printed by the replication company, while boxes are printed by third-party printers and shipped to the replication company for jewel case insertion. CD-ROM DISC REPLICATION Inroads contracts out all CD-ROM replication to third-party manufacturers, including Pioneer Video Manufacturing, Inc., a wholly-owned subsidiary of Japan-based Pioneer Electronics. The replication companies receive masters from Inroads in the form of a digital disc "one-off" master. Glass masters and stampers are then created from the "one-off" master. CD-ROM replication, jewel-case insert printing and insertion, and jewel-case boxing are all handled in-house by the replication company. Inroads receives finished CD-ROM goods from its manufacturers in boxes containing 200 units each. CD-ROM SOFTWARE DISTRIBUTION In 1995, Inroads entered into an exclusive software distribution agreement with Broderbund Software, Inc. ("Broderbund"), a publicly traded company with revenues exceeding $140 million annually. Broderbund is considered one of the premier CD-ROM software publishers in the industry. As an affiliated label of Broderbund, a small portion of Inroads' products are sold directly by Broderbund's seventeen-person direct sales force, and marketed by Broderbund's marketing staff. Under the terms of Inroads' contract with Broderbund, a minimum of 76% of all collected wholesale revenue is allocated to Inroads, and 24% to Broderbund. Unlike many affiliated label contracts, which base payments on collected accounts receivable, Broderbund pays Inroads at the end of each calendar month based on units shipped the previous month. Inroads is responsible for all costs associated with software development, package design and printing, disc replication, and marketing. RALSTON PURINA PROJECT. On August 14, 1996, Inroads entered into a Promotion Agreement and a License Agreement with the Ralston Purina Company, St. Louis, Missouri ("Purina"). Under the terms of the License Agreement, Inroads granted Purina a non-exclusive, worldwide, corporate license to copy and use specified content contained on and in two of Inroads' CD-ROM titles: MULTIMEDIA DOGS, and MULTIMEDIA CATS. Purina may, under the License Agreement, use the MULTIMEDIA DOGS and/or MULTIMEDIA CATS content to develop, publish, advertise and promote one or more Internet web sites, all within the "purina.com" Internet domain, and in the development, publication, advertisement and promotion of private-label versions of Inroads CD-ROM titles to be made available by Purina to the general public. The License Agreement runs from August 14, 1996 through December 31, 1999. Under the terms of the Promotion Agreement, Inroads has agreed to develop and provide Purina a version of Inroads' CD-ROM title MULTIMEDIA DOGS, customized to include Purina's names, logos, brand names, trademarks, designs, commercials, videos and other information requested by Purina, and to provide consulting and programming services to Purina, and produce customized CD-ROMs and CD-ROM packages. Purina has agreed, among other things, to develop and implement a Promotion Test whereby the customized Inroads MULTIMEDIA DOGS CD-ROMs shall be offered to the general consuming public nationwide through various scheduled Purina pet products Brand or Group promotional venues during the period July 1, 1996 through December 31, 1997, including over 50 million offers via Sunday free-standing inserts. Purina has guaranteed that a minimum of ten thousand (10,000) customized MULTIMEDIA DOGS CD-ROMs will be redeemed during this promotion. Inroads has also granted Ralston Purina an exclusive option to utilize MULTIMEDIA CATS as a private label promotion. The Promotion Agreement further provides that the customized MULTIMEDIA DOGS CD-ROMs will be offered to consumers for $9.95 per CD-ROM, plus shipping and handling. The consumer will be directed 44 to send the $9.95 to Inroads, of which $1.00 will be rebated back to Purina. Inroads estimates that the Company will net approximately $7.00 per unit sold under this project. Inroads will provide the fulfillment supplier for the Promotion Test. The Promotion Agreement runs from July 1, 1996 through December 31, 1997. Through September 30, 1997, the Company had realized revenues of $118,900 from the Ralston Purina Project. OTHER PROJECTS. P.F. MAGIC. America Online and P.F. Magic included demonstration segments of Multimedia Dogs, Multimedia Cats, and Multimedia Exotic Pets on the disc they shipped to approximately 180,000 retail outlets, offering 50 free hours of American Online access. INROADS AND THE COMPANY REALIZED NO REVENUES FROM P.F. MAGIC, AND HAVE ABANDONED THIS PROJECT. In addition to the "MY FIRST" SERIES and RINGLING BROS./BARNUM & BAILEY projects currently under development and referenced above, Inroads is also in various stages of development or negotiation on the following projects: INTERNATIONAL LICENSING. MULTIMEDIA HORSES has already been signed by three foreign affiliates. Inroads has taken a booth at Milia (Cannes, France), the largest multimedia show in the world, in February, 1998. At Milia, Inroads intends to showcase prototypes of its other new releases. ADVERTISING. Inroads has taken full-page, four-color ads in three major magazines to sell its CD-ROM products direct via a toll-free number, at full retail. The ads run for one year (12 issues) and are paid for through a barter arrangement which provides a rebate to the publisher on each unit sold. The magazines are SHOOTING TIMES and HANDGUNNING (MULTIMEDIA GUNS), DOG WORLD (MULTIMEDIA DOGS), and EQUUS (MULTIMEDIA HORSES). Inroads' most recent titles are marketed to hobbyists and enthusiasts. Inroads intends to advertise in specialty catalogues and magazines targeted at these potential customers. FUZZY ENTERTAINMENT, INC. D/B/A IN-SIGHT EDITIONS ("IN-SIGHT") In-Sight is a niche publisher and distributor of fine-art and decorative art posters, which are priced in the low to moderate price range. In addition, In-Sight merchandises and licenses its images for other retail and commercial uses and purposes. Based in Marina Del Rey, California, In-Sight employs two full-time employees in the design and production areas, and one employee in shipping/warehousing. All accounting, inventory control, and accounts receivable/payable functions are managed at the Company's Boulder, Colorado office. FINE ART AND DECORATIVE ART POSTER DESIGN AND PRE-PRESS In-Sight begins the poster publishing design process by licensing existing original art, or commissioning an artist to create a new design upon which a poster concept is ultimately based. Poster design concepts are selected based on a combination of aesthetic appeal, commercial potential, and the ability of In-Sight's contracted printer to execute the final design. The existing or commissioned art is ultimately modified several times through a series of carefully art-directed element changes. All art direction is overseen by In- Sight. LIMITED EDITIONS For each poster that is developed and released by In-Sight, a special, limited-edition version is designed and printed. Limited editions are printed on 100 pound stock (far heavier paper than standard poster paper), and are hand-signed and numbered in editions of no more than 1,000. Although the incremental cost to create a limited edition is approximately $.25 to $.50 per unit, the wholesale price for each limited edition poster is two to three times the standard poster price. FINE ART AND DECORATIVE ART PRINTING In-Sight sources its printing from several high-end U.S. printing companies, including Gore Graphics. 45 FINE ART AND DECORATIVE ART DISTRIBUTION In-Sight distributes its posters directly from its facility in Marina Del Rey, California to all major U.S. retail accounts, including certain upscale framing companies. SALES, MARKETING AND DISTRIBUTION DOMESTIC SALES, MARKETING & DISTRIBUTION All Video Disc sales are handled directly by DaVid. Inroads handles most CD-ROM product sales; however, a small percentage of Inroads' CD-ROM product sales are handled directly through Novato, California-based Broderbund Software, Inc., as part of Inroads' affiliated label program agreement with Broderbund. All major decorative art retailers (such as Deck the Walls, Prints Plus, and Wal-Mart) are sold direct by In-Sight's in-house sales staff. PRICING The Company's subsidiaries price their products competitively. LaserDiscs sell for a weighted average price of $30.50 per unit, which translates to a "retail street price" of $50.00 to $60.00 per unit. CD-ROM products sell for a weighted average price of $14.00 per unit, which translates to a "retail street price" of $19.95 per unit. Fine art and decorative art posters sell for a weighted average price of $6.00 to $8.00 per unit, which translates to a retail unframed street price of $10.95 to $14.95 per unit. Hand-signed and individually numbered limited editions sell for a weighted average of $20.00 per unit, and carry a suggested retail price of $35.00 to $40.00. It is anticipated that DVD titles will sell for a weighted average price of $10.00 per unit, which translates to a "retail street price" of $19.95. PRIVATE LABEL/PREMIUM DEALS Inroads has been successful in creating and securing distribution for private label versions of its consumer CD-ROM products for a number of large corporate customers, including Time Warner New Media, Ralston Purina and The Wisconsin Humane Society. Under the terms of the private-label agreement with Purina, Inroads expects to receive approximately $7.00 per unit from each CD-ROM unit sold through Purina's advertising and specially marked dog and cat food packaging. A total of over 50 million impressions has been guaranteed by Purina in the form of special newspaper inserts, specially-marked packages of Purina products, and bounce-back coupons. INTERNATIONAL SALES, MARKETING & DISTRIBUTION Approximately 10% of all Video Disc sales, 25% of all CD-ROM sales, and 10% of all fine art and decorative art sales are made in markets other than the United States. CD-ROM INTERNATIONAL SALES, MARKETING AND DISTRIBUTION. Inroads' CD-ROM titles are sold internationally primarily through re-publishing agreements with a variety of foreign software publishing companies, such as Markt & Technik/Viacom (Germany), PersonalSoft/Softkey (France), Jackson Libri (Italy), and Multimedia Industries, Ltd. (Japan). In most cases, Inroads' international re-publishing arrangements provide for a $4.00 per unit royalty payable to Inroads. In a typical re-publishing transaction, all translation work related to the re-published title is performed by the local re-publisher, and all engineering related to the re-published title is performed by Inroads. Advances against royalties received from re-publishers range from $5,000 to $7,500 per title. To a much lesser extent, Inroads sells finished CD-ROM products to English-speaking countries other than the United States, such as Australia, New Zealand, South Africa, and the Caribbean Islands. VIDEO DISC INTERNATIONAL SALES, MARKETING AND DISTRIBUTION. DaViD's 12"LaserDiscs and 5 1/4" Digital Versatile Discs are sold internationally as finished goods directly by DaViD. 46 FINE ART AND DECORATIVE ART POSTER SALES, MARKETING AND DISTRIBUTION. In-Sight's fine art and decorative art posters are sold internationally either through direct sales of finished goods, or through licensing arrangements with re-publishers in each foreign market. CUSTOMERS The Company's subsidiaries sell their CD-ROMs, Video Discs, fine art and decorative art posters, and other products (the "Products") to approximately 1,000 wholesale and retail accounts, with no final retail account representing more than 10% of total Company sales. The Products are then resold or rented on a worldwide basis to consumers of the CD-ROM software, Video Discs, and fine-art and decorative art posters. The Company's target consumer ranges in age from pre-school to adult. MARKETS FOR PRODUCTS LASERDISC MARKETS According to the LaserDisc Association, as of January, 1997, approximately 2.2 million U.S. households owned a LaserDisc player. The worldwide LaserDisc household figure is estimated to be 12.0 million with the heaviest concentrations in Japan, Taiwan, Hong Kong, Singapore, Malaysia and Indonesia. The LaserDisc Association estimates that the installed base of LaserDisc households will grow domestically at a rate of 25% per year for the next three years and then see little or no growth as the next Video Disc technology takes hold (see Digital Versatile Disc Markets). LaserDisc is primarily a sell-through business (not much rental activity) and caters to upper-income households with home-theater installations. LaserDisc employs an analog video technology along with a digital sound technology to deliver twice the resolution of ordinary home video cassette tape. LaserDisc's popularity has grown over the past ten years among movie enthusiasts for its "instant access" capabilities (similar to audio CD) and its durability as a movie playback medium. LaserDisc's disadvantages include its size (12 inches in diameter), high retail price, and the limited amount of information that can be placed on a single side of a disc (60 minutes maximum). For the calendar year ending 1996, the LaserDisc Association reported that the average U.S. LaserDisc household purchased twelve LaserDiscs. The LaserDisc Association further estimated that between five percent (5%) and ten percent (10%) of all LaserDisc purchases had strong sexual content and themes. DIGITAL VERSATILE DISC MARKETS The market for Digital Versatile Disc ("DVD") is expected to grow dramatically beginning in the fourth quarter of 1997. Up until September, 1995, two competing technologies existed for DVD video playback: Time Warner/Toshiba's technology and SONY/Philips' technology. In September, 1995 these companies agreed upon a unified format for DVD. In October, 1996 a unified, single standard was finalized for the mastering (with copy protection) and replication of DVDs. It is widely believed that this unified DVD format will make serious inroads into the market shares currently held by LaserDisc and, to a much greater extent, the Video Cassette Recorder ("VCR"). DVD has several major advantages over competing home video delivery technologies: 1) A single 5 1/4" DVD can hold up to 135 minutes per side of high resolution digital full-motion video and audio. DVD discs contain information on both sides; 2) Instant access is available to a favorite scene; 3) DVD contains significantly higher image and audio quality than LaserDisc and Video Tape; 4) Multiple language tracks can be incorporated on one disc; 5) Since DVD is 100% digital (video and sound), the cost of replication will be comparable to CD-ROM or audio CD at under $1.00 per unit in small press runs; and 6) A relatively low replication cost will translate to a retail price for a motion picture of under $20.00, giving this medium tremendous mass-market potential. Experts at Toshiba estimate that the market for DVD software could exceed $20 billion by the year 2005. Domestic hardware sales estimates made by Panasonic range from 800,000 to 1 million DVD 47 households by the calendar year ending 1997, and 5 million to 10 million domestic DVD households by the calendar year ending 1999. The earliest hardware segment to adapt to DVD will most likely be the computer hardware industry. The next evolution of the CD-ROM drive, now standard equipment for all multimedia computer systems, will be the DVD-ROM. Similar to a CD-ROM in most respects, the DVD-ROM will be capable of holding more than ten times more information than a CD-ROM. Management believes that the market for feature-film software on DVD will initially consist of computer users with DVD-ROM drives. Dataquest estimates that nearly five million multimedia computer households will be equipped with a DVD-ROM drive by the year 2000. CD-ROM MARKET The Software Publisher's Association estimates that the number of CD-ROM households is currently 23 million domestic and 35 million worldwide. By the end of calendar 1997, the Software Publisher's Association estimates that these numbers will grow to 30 million domestic and 45 million worldwide. This growth will be primarily fueled by the availability of multimedia computer systems which are shipped with bundled interactive encyclopedias on CD-ROM for the same price as a complete bound set of encyclopedias (approximately $1,500). In addition, 60% of all new computers purchased are being shipped with built-in CD-ROM drives. Over 10,000 CD-ROM titles currently exist, ranging from pure education to pure entertainment to hybrids, or "edutainment." It is estimated that only 1,000 of these titles are of a quality level acceptable to the largest retailers. Of these 1,000 high-quality titles, fewer than 50 cover reference subjects such as those CD-ROMs produced by Inroads. There are three types of software available on the Home Software market segment: Games, Home Education and Productivity. Games clearly dominate software sales, with approximately 60% of the market. Home education titles, such as those published by Inroads Interactive, represent 11% of the total market for software. According to the Software Publisher's Association, the Home Education market segment generated $958 million of the $9 billion in retail software sales in 1996. The Company's products compete with similar titles from Microsoft, Inc. (MICROSOFT DOGS), Macmillian Digital, a Viacom company (BEST OF BREED), and Dorling Kindersley (ULTIMATE CAT). In head-to-head comparisons of the products to Inroads' MULTIMEDIA DOGS: THE COMPLETE INTERACTIVE GUIDE TO DOGS and MULTIMEDIA CATS: THE COMPLETE INTERACTIVE GUIDE TO CATS, Inroads' titles have consistently been ranked higher by software magazines than those titles developed by competitors. This fact, coupled with Inroads' average development budget of less than $70,000 per title, as compared to an average of $1 million per title for the competition, explains why Inroads is able to sell its CD-ROM products profitably at far lower prices than its competitors. FINE ART AND DECORATIVE ART PUBLISHING MARKETS The fine art and decorative art market is comprised of several segments: sports celebrity and Hollywood celebrity posters; novelty posters; museum posters; and fine art and decorative posters. The fine art and decorative posters segment, which In-Sight currently focuses on, is "hit driven" and highly fragmented, with no single company dominating the market segment. Products range from the very low end in terms of price and quality, to the expensive limited edition poster market. Management's philosophy is to lead the industry in terms of subject matter, design, execution, printing quality, and value. Management has already demonstrated its ability to set trends in the industry with the success of its first six releases. EMPLOYEES AND OFFICE SPACE As of the date of this Prospectus, the Company had 10 full-time and three part-time employees. Four full-time employees are employed in executive positions; three part-time employees are employed in administrative and clerical positions; the remainder of the Company's employees are employed in software 48 development and sales. The Company's employees are not members of a union, and the Company has never suffered a work stoppage. New Frontier leases approximately 3,500 square feet of office space at 1050 Walnut Street, Suite 301, Boulder, Colorado 80302. The Company's lease on this office space runs through January, 1998, at a rate of approximately $3,400 per month. The Company also sub-leases approximately 6,000 square feet of space in Marina Del Rey, California. LEGAL PROCEEDINGS SANDS BROTHERS On November 11, 1996, the Company entered into a financial consulting agreement (the "Sands Agreement"), with Sands Brothers & Co., Ltd. ("Sands Brothers"), 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 recission of the Sands Agreement. As of the date of this prospectus, Sands Brothers has not filed an Answer to the Company's Complaint. The Company intends to vigorously defend any allegations made by Sands Brothers in such Answer. QUARTO On October 7, 1997, Quarto's counsel notified the Company of Quarto's claim that the Company had breached the Quarto Stockholder Agreement dated September 20, 1996. Counsel for Quarto demanded rescission of the Purchase Agreement between the Company and Quarto dated September 20, 1996, and a return of all amounts Quarto paid for its 30 percent interest in Inroads. Counsel for Quarto generally alleged fraud in the inducement, misrepresentation, violation of federal and state securities laws, and failure of consideration as basis for its demand for rescission and return of all amounts paid. The Company has obtained an opinion from J. John Combs III, its litigation counsel, stating that there is no basis for rescission of the Quarto agreements under the facts or under Colorado law, that any breach alleged by Quarto is not "material," and that Quarto has suffered no damages as the result of any alleged breach of the Quarto Purchase Agreement by the Company. On October 16, 1997, Quarto's counsel demanded that the Board of Directors of Inroads take all actions necessary to restore certain Inroads' certificates of deposit that had been encumbered by or for the benefit of the Company, and to obtain repayment of any funds loaned to the Company for the benefit of the Company. Counsel for Quarto also demanded that the Board of Directors of Inroads institute an action for misappropriation of assets, mismanagement, and breach of fiduciary duties against those members of Inroads' management who participated in the acts that Quarto's counsel alleges constituted a misappropriation of Inroads' assets. Counsel for Quarto has notified the Board of Directors of Inroads of Quarto's intent to institute a derivative action on behalf of Inroads against certain managers and directors of Inroads who allegedly participated in the claimed misappropriation of Inroads' assets, should Inroads' Board of Directors fail or refuse to initiate such an action on its own. 49 On October 23, 1997, Quarto filed an action in the United States District Court for the District of Colorado (Civil Action No. 97-WM-2290) seeking, among other things, rescission of the purchase agreement, a temporary restraining order and preliminary injunction against Inroads and the Company, preventing them from transferring or encumbering the assets of Inroads. On October 28, 1997, the Company and Quarto entered into a Stipulation for Entry of Preliminary Injunction (the "Stipulation"). Pursuant to the terms of the Stipulation, Inroads and the Company agreed to not make any draws on any line or lines of credit extended to them from the Bank of Boulder, Boulder, Colorado, in which any assets of Inroads, including any certificates of deposit, are used as security, without the prior written consent of Quarto. Inroads and the Company further agreed to not encumber any additional assets of Inroads or any assets transferred by Inroads to the Company or used by Inroads for the benefit of the Company as part of any loan transaction, without the written consent of Quarto, and pending further order of the Court. Inroads also agreed to not transfer any assets or monies to or for the benefit of the Company for any purpose whatsoever, pending further order of the Court. The Court denied Quarto's motion for entry of a temporary restraining order and preliminary injunction which would have frozen Inroads' assets or imposed a constructive trust over those assets and the operations of Inroads. As of the date of this prospectus, Quarto had not instituted an action in arbitration against the Company. The Company is vigorously contesting the foregoing claims. This Offering, and the Company's future operations, could be negatively affected if any of the above claimants were successful in their claims against the Company. 50 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................. 35 Chairman of the Board, President and Chief Executive Officer, New Frontier Media, Inc.; Director, Inroads; Vice President and Director, DaViD; Director, In-Sight; President and Director, CSB. Andrew V. Brandt................ 28 Senior Vice President, New Frontier; President and Director, Inroads. Michael Weiner.................. 55 Executive Vice President, Secretary-Treasurer and Director, New Frontier Media, Inc.; Director, Inroads; President, Secretary-Treasurer and Director, DaViD; President, Secretary-Treasurer and Director, In-Sight; Vice President, Secretary-Treasurer and Director, CSB. Daniel Bender................... 51 Senior Vice President and Director, CSB. Scott D. Wussow................. 41 Chief Financial Officer, New Frontier Media, Inc. Clive Ng........................ 36 Director, New Frontier Media, Inc. Koung Y. Wong................... 45 Director, New Frontier Media, Inc.
MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief Executive Officer of New Frontier Media, Inc. since the Company's inception in September, 1995. Mr. Kreloff has been actively involved in the cable television, entertainment and computer software industries since 1977. Prior to founding the Company and during the four years immediately preceding his employment with the Company, he was the President and Chairman of the Board for LEI Partners, L.P., a LaserDisc publishing company; Elmfield IV, Inc., an entertainment production and distribution company, and California Software Partners, L.P., a computer software development and publishing company. Previously, Mr. Kreloff held the title Vice President, Mergers and Acquisitions, with Kidder Peabody & Co. and Drexel Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by Butcher & Singer, Inc., a Philadelphia-based investment bank, in the Cable Television and Broadcast Media Group. From 1977 through 1983, Mr. Kreloff held a variety of positions, including Marketing Director, in his family's cable television system based in New Jersey. Mr. Kreloff is an honors graduate of Syracuse University and holds B.S. degrees in Finance and Public Communications. ANDREW V. BRANDT. Mr. Brandt has held the title of President of Boulder Interactive Group, Inc. since Inroads' inception in June, 1994. Mr. Brandt has extensive experience in software company management, 3-D computer graphics, user interface design, and software engineering. Prior to joining New Frontier Media, Inc., Mr. Brandt spent two years developing numerous 3-D graphics libraries and graphical user interfaces for a variety of platforms. Mr. Brandt developed a system for medical applications utilizing real-time, three-dimensional ultrasound acquisition and a video see-through head-mounted display. He also helped prototype the first digital video interactive system and led the port of Pixar's RenderMan to a supercomputer. Mr. Brandt graduated Magna Cum Laude from the University of California, San Diego with a B.S. in Computer Engineering and holds an M.S. in Computer Science from the University of North Carolina at Chapel Hill. MICHAEL WEINER. Mr. Weiner has been the Executive Vice President and a director of New Frontier Media, Inc. since the Company's inception. Prior to founding the Company, Mr. Weiner was actively involved as a principal and director in a variety of publishing businesses, including a fine art poster 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, 51 Mr. Weiner has been Executive Vice President of the Company. For the 15 years prior to June, 1995, Mr. Weiner was self-employed as a real estate and business consultant. DANIEL BENDER. Mr. Bender will become Senior Vice President and a director of Colorado Satellite Broadcasting, Inc. upon completion of the Fifth Dimension assets acquisition. Mr. Bender has been actively involved in the satellite broadcasting industry for the past eleven years. In 1989, Mr. Bender founded Satellite Source Programming, Inc. ("SSP"). SSP was responsible for the sale and activation of 5 million C-band subscriber accounts through on-line service marketing. In 1993, Mr. Bender launched T.V. Erotica, an adult satellite subscription and pay-per-view service. Mr. Bender negotiated all key contracts with AT&T, General Instrument, and Denver Uplink as part of his responsibilities as CEO of T.V. Erotica. In 1995, T.V. Erotica's name was changed to XXXotica, and the service was expanded to several European markets. In 1996, Mr. Bender merged XXXotica with XTC Group to create Fifth Dimension, the largest C-band satellite adult network in the world. SCOTT D. WUSSOW. Mr. Wussow has eighteen years of accounting and finance experience, and is a Certified Public Accountant. He joined the Company as Chief Financial Officer on April 1, 1996. For the past five years before joining the Company, Mr. Wussow was Chief Financial Officer for Hart Bornhoft Group, an investment firm. He was responsible for financial reporting, systems development, operations, compliance, and risk management. Previous to that, Mr. Wussow was Controller at Neodata Services, a publisher services company, and was Accounting Manager for a division of MCI Communications. While at MCI, Mr. Wussow was department head for general accounting and special projects for the Western Division start-up. Among his responsibilities was fixed asset accounting for the network system and the establishment of the customer service call center. Mr. Wussow graduated Magna Cum Laude from the University of Wisconsin at Eau Claire with a B.A. degree in Accounting. CLIVE C.N. NG. Mr. Ng is Deputy Chairman of Pacific Media PLC, a publicly-listed UK company. Pacific Media PLC owns the United Artists Theaters Asia with United Artists Theaters of the US and with TVB of Hongkong, the Chinese Channel in Europe. Mr. Ng co-founded UIH Asia Holdings, a regional partnership to develop Asian cable television markets, as well as Spectradyne Asia, then the leader in the TV settop box business for hotels. In 1995 he led Pacific Media's purchase of a key share in one of Hongkong's leading ISP's, Hongkong Supernet. Mr. Ng earned a Bachelor of Arts degree from Syracuse University's School of Management in 1983, and earned a Master's Degree in Business Administration from New York University in 1985. KOUNG Y. WONG. Mr. Wong was born in Canton, China in 1952 and immigrated to the United States in 1969 with his family. He earned a Bachelor of Arts degree from City College of San Francisco in 1975, and studied Architecture at the University of California at Berkeley for one year. In 1976, Mr. Wong opened a stereo store, Wong's Hi-Fi, in San Francisco. For the last 21 years, Mr. Wong has been the president and sole shareholder of Wong's Audio-Visual, Inc. a leading commerce electronics hardware and software distribution company based in South San Francisco, California. Wong's Audio-Visual, Inc. includes a 20,000 square-foot corporate headquarters and distribution center and an 8,500 square-foot retail superstore in San Francisco. No director or executive officer of the Company is related to any other director or executive officer. None of the Company's officers or directors hold any directorships in any other public company. There are currently two outside directors on the Company's Board of Directors. The Company's compensation committee is comprised of Messrs. Kreloff, Weiner, and Wong. The Company's audit committee is comprised of Messrs. Kreloff, Weiner, and Wussow. Fifth Dimension will be entitled to name one nominee to the Company's Board of Directors, upon completion of the Fifth Dimension Assets Acquisition. 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. 52 EXECUTIVE COMPENSATION The following table sets forth the annual compensation paid to executive officers of the Company for the fiscal year ended March 31, 1997. No executive officer received annual compensation in excess of $100,000.
NAME AND OTHER ANNUAL RESTRICTED STOCK PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION AWARDS OPTIONS/ SARS - ------------------------- --------- ----------- ----------- ------------------- ------------------- --------------- Mark H. Kreloff, CEO, COO, Pres., and Chairman............... 1997 0 15,000 0 0 0 Michael Weiner, Sr. V.P., Sec.-Treas. and Director............... 1997 0 15,828 0 0 Andrew V. Brandt, President, BIG......... 1997 75,695 3,125 0 0 0 Scott D. Wussow, CFO..... 1997 46,333 2,083 0 0 0 NAME AND ALL OTHER PRINCIPAL POSITION LTIP PAYOUTS COMPENSATION - ------------------------- ------------- --------------- Mark H. Kreloff, CEO, COO, Pres., and Chairman............... 0 36,028 Michael Weiner, Sr. V.P., Sec.-Treas. and Director............... 0 0 Andrew V. Brandt, President, BIG......... 0 5,053 Scott D. Wussow, CFO..... 0 0
Management anticipates adopting bonus and stock option plans during fiscal 1998. The current annual salaries of the executive officers of the Company are: Mark H. Kreloff, Chief Executive Officer, $0; Andrew Brandt, Senior Vice President, $75,695; Michael Weiner, Executive Vice President, Secretary and Treasurer, $0; Scott Wussow, Chief Financial Officer, $50,000. Mr. Bender, who will become President of CSB upon completion of the Fifth Dimension Assets Acquisition, will be paid an annual salary of $100,000. Upon completion of the Fifth Dimension Assets Acquisitions, the Company intends to pay Messrs. Kreloff and Weiner salaries of $100,000 each per year. The Company's Board of Directors may, at its discretion, award discretionary bonuses in the future. It is anticipated that an independent compensation committee will be established during 1998. The compensation committee will establish salaries, incentives and other forms of compensation for directors, officers and other employees of the Company, and establish and administer the Company's benefit plans and recommend policies relating to such plans. Upon completion of the Fifth Dimension transaction, Fifth Dimension will be entitled to have one nominee sit on the Company's Board of Directors. EMPLOYMENT AGREEMENTS The Company has an employment agreement with Mr. Brandt. Such agreement will continue through 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 In September, 1995, the Company purchased $65,000 of adult laserdisc format titles from Elmfield IV, L.P. a related entity controlled by Mr. Kreloff, through the issuance of preferred stock (see Notes 3 and 4 to the financial statements filed herewith). During the six months ended September 30, 1997 and 1996 and the years ended March 31, 1997 and 1996, Disc Replication International, a distributor owned in part by 53 Mark H. Kreloff, the Company's President and CEO, withheld from sales of $378,049, $1,242,439, $2,236,143 and $1,592,856 replicating costs of $324,887, $451,035, $1,646,364 and $939,622 and management fees of $120,000, $230,000, $470,000 and $262,500, respectively, all pursuant to the terms of a management agreement between the Company and Disc Replication International. Included in accounts receivable at March 31, 1997 and 1996 were $141,585 and $222,276, respectively, from the related entity. Included in advances from related parties at September 30, 1997 was $79,733 due to this related entity. In June, 1995, the Company issued a three year note receivable in the amount of $38,000 to Mr. Brandt, an officer of the Company. The note requires quarterly interest only payments at a rate of 6.1 percent per annum. The principal is due on August 31, 1998. In addition on July 14, 1997 the Company obtained a $50,000 loan from an entity controlled by a shareholder of the Company, the loan is secured by the Company's common stock owned by the majority shareholders of the Company. The loan bears interest at 10%, and was due on July 29, 1997. Subsequently, the loan was extended to January 31, 1998. The Company also leases certain equipment and office space from Elmfield IV, L.P., on a month to month basis. During the years ended March 31, 1997 and 1996 the Company paid $116,549 and $98,212, respectively, to this entity relating to these leases. Management believes the terms of these leases are commensurate with terms that would be obtained from an unrelated third party lessor. Certain of the Company's principals, or entities that the principals own and/or control, have made loans to the Company and/or its subsidiaries. These loans, totalling $139,573 are unsecured demand notes bearing interest at 8.5% per annum and due on demand anytime after December 31, 1996. See "FINANCIAL STATEMENTS." In addition, the Company lent Mr. Brandt $38,000 on June 1, 1995. This loan is a below-market 6.1% quarterly interest-only loan, with the principal due on August 31, 1998. The loan to Mr. Brandt was an isolated transaction. On June 15, 1997, the Company's Board of Directors adopted a policy prohibiting related party and below-market loans by the Company at any time after June 15, 1997. In the future, the Company will not enter into transactions and loans on terms that are no less favorable to the Company than those that can be obtained from unaffiliated third parties. Forgiveness of loans must be approved by a majority of the Company's independent directors who do not have an interest in the transactions and who have access, at the Company's expense, to the Company's or independent counsel. On October 24, 1997, the Company obtained a $1 million unsecured conditional (if the Company fails to obtain at least $1 million in alternate funding on or before December 31, 1997), revocable line of credit from an entity controlled by Stephen Cherner, a principal shareholder of the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity" and "FINANCIAL STATEMENTS (Note 10)." The Company may draw against this line of credit, subject to certain conditions, beginning January 1, 1998 and continuing for nine months thereafter. Any drawn funds accrue interest at the rate of 9 percent per annum. The above-described ongoing and past transactions were not submitted for the approval of a majority of the Company's independent directors who did not have an interest in the transactions and who had access, at the Company's expense, to the Company's or independent legal counsel. Such transactions rather were approved by a majority of disinterested, but not independent, directors. Any ongoing or future transactions between the Company and its officers, directors, principal shareholders, or other affiliates will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company's independent and disinterested directors. Any future loans to officers, directors, principal shareholders, or affiliates will be made for a bonafide business purpose, on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of the Company's independent and disinterested directors. See "CERTAIN TRANSACTIONS." 54 PRINCIPAL SHAREHOLDERS The following table sets forth, as of the date of this Prospectus and as adjusted to give effect to the sale of the 1,500,000 Units offered by the Prospectus, the number and percentage of shares of outstanding Common Stock owned by each person owning at least 5% of the Company's Common Stock, each officer and director owning stock, and all officers and directors as a group:
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING(1) NAME OF -------------------------- -------------------------- BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT - ------------------------------------------------------------ ------------ ------------ ------------ ------------ Mark H. Kreloff(2)(3)....................................... 1,014,000 24.2% 1,014,000 17.8% 1050 Walnut Street, Suite 301 Boulder, CO 80302 Michael Weiner(2)(3)........................................ 615,000 14.7 615,000 10.8 1050 Walnut Street, Suite 301 Boulder, CO 80302 Andrew V. Brandt(2)......................................... 279,500 6.7 279,500 4.9 1050 Walnut Street, Suite 301 Boulder, CO 80302 Stephen P. Cherner.......................................... 475,000(4) 11.3 475,000(4) 8.3 165 Green Rock Drive Boulder, CO 80302 ------------ --- ------------ --- Total..................................................... 2,383,500 56.9% 2,383,500 41.8% ------------ --- ------------ --- ------------ --- ------------ ---
- -------------------------- (1) Excludes exercise of warrants and options, including the Warrants, Underwriters' Warrant, and assumes the Underwriters do not exercise their Overallotment Option. Also excludes a minimum of 840,000 shares of Common Stock and a warrant to purchase up to 400,000 shares of the Company's Common Stock, to be issued to Fifth Dimension as part of the Fifth Dimension assets acquisition. (2) Officer of the Company or of Company subsidiary. See "MANAGEMENT." (3) Director of the Company or of Company subsidiary. See "MANAGEMENT." (4) 195,000 Common Shares owned by Stephen P. Cherner; 80,000 Common Shares owned by Maxim Profit Sharing Plan; 200,000 Common Shares owned by Maxim Corporation. Mr. Cherner is the owner of Maxim Corporation. 55 DESCRIPTION OF SECURITIES Prior to this Offering there were approximately 300 holders of record of the Company's Common Stock. The Company is currently authorized to issue 50,000,000 shares of its Common Stock, par value $.0001 per share, and 5,000,000 shares of its Preferred Stock, par value $.10 per share. As of the date of this Prospectus, and prior to issuance of any shares of Common Stock to investors, the Company has 4,195,368 shares of its Common Stock, and no shares of its Preferred Stock, issued and outstanding. There are also warrants to purchase an additional 835,666 shares of the Company's common stock issued and outstanding. COMMON STOCK Each holder of shares of Common Stock is entitled to one vote per share on all matters to be voted on by shareholders. The holders of Common Stock are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor and, in the event of liquidation, dissolution or winding-up of the Company, to share ratably in all assets available for distribution, subject to the rights of the holders of any Preferred Stock as described below. Upon the liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock would be entitled to share PRO RATA in the distribution of all of the Company's assets remaining available for distribution after satisfaction of all its liabilities and the payment of the liquidation preference of any outstanding Preferred Stock. The holders of Common Stock have no preemptive or conversion rights. All shares of Common Stock outstanding immediately following the Offering will be fully paid and are not subject to further calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK The Company's Articles of Incorporation, as amended, authorize the issuance of up to 5,000,000 shares of Preferred Stock. The Board of Directors is authorized, without further shareholder action, to issue such shares in one or more series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, amounts payable upon liquidation and the number of shares constituting any series or the designation of such series. If such Preferred Stock is issued, it will rank senior to the Company's Common Stock in respect of rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Company. The issuance of Preferred Stock may have the effect of delaying, deferring, discouraging or preventing a third party from acquiring a majority of the outstanding voting stock of the Company or other change in control of the Company without further action by the shareholders, and may adversely affect the voting and other rights of the holders of the common Stock, including the loss of voting control to others. The Board of Directors does not at present intend to seek shareholder approval prior to issuing any such Preferred Stock, unless required to do so by law. SERIES A PREFERRED STOCK On September 20, 1995, the Company's Board of Directors adopted a Statement of Series Shares, defining a class of Preferred Stock to be issued as "Series A." On September 20, 1995, the Company issued 10,000 shares of its Series A Preferred Stock to Banco Financial, Inc., as payment in full of a promissory note between DaViD and Banco Financial, Inc. The Series A Preferred shares were convertible into 10,000 shares of the Company's common stock; on September 1, 1997, Banco Financial, Inc. returned the Series A Preferred Stock to the Company and received no consideration or common shares. SERIES B PREFERRED STOCK On December 31, 1996, the Company's Board of Directors adopted a Statement of Series Shares, defining a class of Preferred Stock to be issued as "Series B." The Series B Preferred carries an 8% annual premium, payable annually, and is convertible into shares of the Company's common stock pursuant to the 56 terms of the Statement of Series Shares. On September 1, 1997 the Series B Preferred Stock was converted into 2,857 shares of the Company's common stock. There are no shares of Series B Preferred stock issued and outstanding as of the date of this Prospectus. The dividends in arrears on the Class A and B preferred stock were forgiven by the holders of the preferred stock. WARRANTS The Warrants will be issued in registered form under, governed by, and subject to the terms of a warrant agreement (the "Warrant Agreement") between the Company and Corporate Stock Transfer, Inc. as warrant agent (the "Warrant Agent"). The following statements are brief summaries of certain provisions of the Warrant Agreement. Copies of the Warrant Agreement may be obtained from the Company or the Warrant Agent and have been filed with the Commission as an exhibit to the Registration Statement of which this Prospectus is a part. Each Warrant entitles the holder thereof to purchase at any time one share of Common Stock at an exercise price of $6.50 per share at any time after the Common Stock and Warrants become separately tradeable until , 2002, [5 years after the date of this Prospectus]. The right to exercise the Warrants will terminate at the close of business on , 2002 [5 years after the date of this Prospectus]. 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. A Warrant holder will not possess any rights as a shareholder of the Company. Shares of Common Stock, when issued upon the exercise of the Warrants in accordance with the terms thereof, will be fully paid and non-assessable. Commencing six months after the date of this Prospectus, 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 the 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. However, there can be no assurance that the Company will be in a position to effect such action, and the failure to do so may cause the exercise of the Warrants and the resale or other disposition of the Common Stock issued upon such exercise to become unlawful. The Company may amend the terms of the Warrants, but only by extending the termination date or lowering the exercise price thereof. The Company has no present intention of amending such terms. However, there can be no assurances that the Company will not alter its position in the future with respect to this matter. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, assuming the Underwriters do not exercise their Overallotment Option, the Company will have 5,695,368 Common Shares, and no Preferred Shares, outstanding. The Company will also have warrants issued and outstanding which, if exercised in full, would require the Company to issue an additional 835,666 shares of its common stock, excluding the Warrants, Underwriters' Warrant and the warrant to be issued to Fifth Dimension. Completion of the Fifth Dimension Assets Acquisition (840,000 shares of restricted Common Stock plus a warrant to purchase 400,000 shares) and subsequent conversion of all warrants issued and outstanding would result in the Company having 7,921,034 shares of its Common Stock issued and outstanding, assuming the Underwriters do not exercise their Overallotment Option and none of the 1,500,000 Warrants registered hereby are exercised. All of the 57 shares issued upon exercise of warrants or options will initially be "restricted" from sale and public transfer. In general, Rule 144 promulgated under the Securities Act provides that a person (or persons whose shares are aggregated) who has beneficially owned "restricted" shares for at least one year, including persons who may be deemed affiliates of the Company, is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of one percent (1%) of the then-outstanding shares of Common Stock of the Company, or the average weekly trading volume of the Common Stock during the four calender weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about the Company. A person who is not an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least two years, would be entitled to sell such shares immediately following the Offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144. All of the Company's officers and directors have agreed to enter into lock-up agreements with the Underwriters, precluding Rule 144 sales by such persons for a minimum of 12 months from the date of this Prospectus. LIMITATION OF LIABILITY; INDEMNIFICATION MATTERS AND DIRECTORS' AND OFFICERS' INSURANCE The Company's Bylaws require the Company, to the fullest extent permitted or required by Colorado law, to (i) indemnify its directors against any and all liabilities and (ii) advance any and all reasonable expenses, incurred in any proceeding to which any such director is a party or in which such director is deposed or called to testify as a witness because he or she is or was a director of the Company. Generally, Colorado statutory law permits indemnification of a director upon a determination that he or she acted in good faith and in a manner he or she reasonabley believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The right to indemnification granted in the Company's Bylaws is not exclusive of any other rights to indemnification against liabilities or the advancement of expenses which a director may be entitled to under any written agreement, Board resolution, vote of stockholders, Colorado law or otherwise. At present, the Company is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of the Company in which indemnification would be required or permitted under the Company's Bylaws, any indemnification agreement, or Colorado law. TRANSFER AGENT AND WARRANT AGENT The transfer agent for the Common Stock and the Warrant Agent for the warrants is Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350, Denver, Colorado 80202, telephone (303) 595-3300. 58 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement among the Company and the Underwriters named below (the "Underwriting Agreement"), the Company has agreed to sell to each of the Underwriters named below, and each of the Underwriters named below has severally agreed to purchase from the Company, the respective number of Units set forth opposite its name below:
UNDERWRITER NUMBER OF UNITS - ----------------------------------------------------------------------------- --------------- Centex Securities, Inc.......................................................
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to purchase and pay for all of the Units offered hereby, if any are taken. The Underwriters propose to offer the Units in part directly to the public at the offering price set forth on the cover page of this Prospectus, and in part to certain securities dealers at such price less a concession of $.2625 per Unit. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $.2625 per Unit to certain brokers and dealers. After the Units are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Underwriters. In addition, the Company has agreed to pay the Managing Underwriter a 3% nonaccountable expense allowance on the aggregate initial public offering price of the Units, including Units subject to the Overallotment Option, of which $70,000 has been paid. The Company has reserved the right to conduct direct sales to certain industry partners of up to 200,000 of the 1,500,000 Units being sold in this Offering, at a price of $4.725 per Unit. To the extent the Company conducts direct sales of Units, the number of Units offered by the underwriters will be reduced by an equal number, and in no event will be less than 1,300,000 Units be sold in the Public Offering. For example, if the Company directly sells 100,000 Units, then the Underwriting Agreement will cover, and the Underwriters will purchase, 1,400,000 Units. Likewise, if the Company does not sell any Units directly, then the Underwriting Agreement will cover, and the Underwriters will purchase, all 1,500,000 Units offered in the Public Offering. The sale of Units by the Company will be conducted pursuant to a Subscription Agreement to be entered into between the Company and the investors. Pursuant to the terms of the Subscription Agreement, the proceeds from any direct sales by the Company will be held in escrow by Lehman & Eilen, the Company's counsel, and the proceeds and subscriptions to purchase will only be accepted concurrent with, and subject to, the Company's receipt of payment from the Underwriters for the balance of the Units. The Company has the right pursuant to the Subscription Agreement to reduce the number of direct sold Units in whole or in part. The Subscription Agreement provides that the Company and the industry partners will indemnify the escrow agent against certain liabilities. All direct sales will be made on behalf of the Company by its executive officers, without the participation of any brokers, agents or finders, and no commissions or other form of remuneration will be paid to the executive officers based directly or indirectly on the offer or sale of Units by the Company. The Company has granted the Underwriters an Overallotment Option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 225,000 additional Units solely to cover overallotments, if any. If the Underwriters exercise their Overallotment Option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of Units to be purchased by each of them, as shown in the table above, bears to the 1,500,000 Units offered hereby. 59 The Company has agreed in the Underwriting Agreement not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, subject to certain limited exceptions, for a period of 12 months after the date of this Prospectus without the prior written consent of the Underwriters. In addition, the Company's directors and executive officers have agreed not to sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, other than as gifts, pledges, and certain other transfers to persons who agree to the same restrictions for a period of 12 months after the date of this Prospectus without the prior written consent of the Underwriters. The Company has agreed to sell to Centex Securities, Inc., the Managing Underwriter, for nominal consideration, Underwriters' Warrants to purchase 150,000 shares of Common Stock on the closing date of this offering. The Underwriters' Warrants will have an exercise price equal to $6.75 per share of common stock, and will be exercisable beginning on the first anniversary of the date of this Prospectus and for a period of four years thereafter, and will contain certain anti-dilution, registration rights, net issuance and exercise provisions. Until the first anniversary date of this Prospectus, the Underwriters' Warrants may not be sold, transferred, assigned or hypothecated, except to the Underwriters or their officers, directors or partners, subject to certain conditions and by will or operation of law. 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 following the date of this Prospectus, 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. The number of shares of Common Stock covered by the Underwriters' Warrants and the exercise price are subject to adjustment under certain events to prevent dilution. In connection with the Offering, the Underwriters and their respective affiliates may, in accordance with Regulation M under the Securities Exchange Act of 1934 (the "Exchange Act"), engage in overallotment, stabilizing transaction, syndicate covering transactions, penalty bids and other transactions that stabilize, maintain or otherwise affect the market price for the Common Stock. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position, in which case the Underwriter may engage in a syndicate covering transaction or may exercise the Underwriters' Overallotment Option described above. Syndicate covering transactions involve the purchase of Common Stock in the open market following completion of the offering to cover all or a portion of a syndicate short position. Penalty bids permit the Underwriters to reclaim a selling concession from a syndicate member when Common Stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified minimum. Any of the transactions described in this paragraph may cause the price of Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq SmallCap Market or otherwise and, if commenced, may be discontinued at any time. 60 The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments the Underwriters may be required to make in respect of such liabilities. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to copies of each such agreement which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. See "Additional Information." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will passed upon for the Company by Krausman, L.L.C., Denver, Colorado. In connection with the closing certain other matters will be passed upon for the Company by Lehman & Eilen, Uniondale, New York. Certain legal matters will be passed upon for the Underwriters by Luce, Forward, Hamilton & Scripps LLP, San Diego, California. EXPERTS The financial statements of the Company for the fiscal years ended March 31, 1997 and 1996 included in this Prospectus have been included in reliance on the report of Spicer, Jeffries & Co., Denver, Colorado, independent accountants, given on the authority of that firm as experts in accounting and auditing. The financial statements of Fifth Dimension for the fiscal years ended March 31, 1997 and 1996 and incorporated by reference in this Prospectus have been included in and incorporated herein in reliance on the report of Ernst & Young, Chartered Accountants, given on the authority of that firm as experts in accounting and auditing. 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. 61 INDEX TO FINANCIAL STATEMENTS PRO FORMA FINANCIAL STATEMENTS WITH RESPECT TO NFMI TRANSACTION Introduction................................................................... F-2 Pro Forma Combined Balance Sheet, September 30, 1997........................... F-3 Notes to Pro Forma Combined Balance Sheet, September 30, 1997.................. F-4 Pro Forma Combined Statement of Operations for the six months ended September 30, 1997..................................................................... F-5 Notes to Pro Forma Combined Statement of Operations for the three months ended September 30, 1997........................................................... F-6 Pro Forma Combined Statement of Operations for the year ended March 31, 1997... F-7 Notes to Pro Forma Combined Statement of Operations for the year ended March 31, 1997..................................................................... F-8 NEW FRONTIER MEDIA, INC. Independent Auditors' Report of Spicer, Jeffries & Co. dated July 3, 1997...... F-9 Consolidated Balance Sheets, September 30, 1997 (unaudited), March 31, 1997 and F-10 - 1996......................................................................... F-11 Consolidated Statements of Operations, for the six months ended September 30, 1997 and 1996 (unaudited) and the years ended March 31, 1997 and 1996........ F-12 Consolidated Statements of Changes in Shareholders' Equity for the six months ended September 30, 1997 (unaudited) and the years ended March 31, 1997 and 1996......................................................................... F-13 Consolidated Statements of Cash Flows for the six months ended September 30, F-14 - 1997 and 1996 (unaudited) and the years ended March 31, 1997 and 1996........ F-15 F-16 - Notes to the Consolidated Unaudited and Audited Financial Statements........... F-25 FIFTH DIMENSION COMMUNICATION (BARBADOS) INC., 1043133 ONTARIO INC. AND MERLIN SIERRA INC. Auditors' Report of Ernst & Young dated June 27, 1997.......................... F-26 Combined Balance Sheets, September 30, 1997 (unaudited), March 31, 1997 and 1996 (audited)............................................................... F-27 Combined Statements of Income and Retained Earnings, for the six months ended September 30, 1997 and 1996 (unaudited) and the years ended March 31, 1997 and 1996 (audited)........................................................... F-28 Combined Statements of Cash Flows for the six months ended September 30, 1997 and 1996 (unaudited) and the years ended March 31, 1997 and 1996 (audited)... F-29 F-30 - Notes to the Unaudited and Audited Financial Statements........................ F-36
F-1 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES INTRODUCTION TO PROFORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined balance sheet reflects (1) the shares issued and proceeds received in connection with the public offering on Form SB-2 registration statement as if it had occurred on September 30, 1997 (2) the acquisition of certain assets of Fifth Dimension Communications (Barbados) Inc., 1043133 Ontario Inc. and Merlin Sierra Inc. ("Fifth Dimension") and the acquisition of videoplayback and broadcast uplink equipment from Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited (two entities related through common ownership of Fifth Dimension's shareholders) by Colorado Satellite Broadcasting, Inc. ("CSB") a newly formed wholly owned subsidiary of New Frontier Media, Inc. ("NFMI") through the issuance of NFMI's unissued common stock, cash and debt, as if it had occurred on September 30, 1997. The following unaudited pro forma combined statements of operations reflect for the purposes of computing earnings per share the shares issued in connection with the public offering on Form SB-2 registration statement and the issuance of shares to Fifth Dimension for certain assets of Fifth Dimension, Fifth Dimension Communication (1996) Corporation and 841161 Ontario Limited by NFMI as if it had occurred on April 1, 1996. All shares issued are considered issued and outstanding for all periods presented. The public offering on Form SB-2 registration statement will add 1,500,000 shares of NFMI's common stock and $7,875,000 of proceeds received, less offering expenses. The acquisition of assets of Fifth Dimension will be accomplished though the issuance of 840,000 shares of NFMI's unissued common stock, 400,000 warrants for NFMI's common stock, $3,500,000 in cash and debt of $1,000,000. The acquisition of Fifth Dimension will be accounted for under the purchase method of accounting. Under the purchase method of accounting, assets acquired are recorded at their fair values. No adjustments have been made in the pro forma balance sheet to the carrying values of the Fifth Dimension assets acquired; final determination of the fair values of such assets will be made at the date of acquisition. Accordingly, the purchase price in excess of recorded asset amounts acquired from Fifth Dimension will be allocated to intangible assets. Management believes that the fair market value of the equipment and film inventories approximate book value. Certain intangible assets purchased from Fifth Dimension are considered to have an indefinite future value such as tradenames, trademarks, etc. In addition the subscriber base and lists, which generate the revenue, have a limited life of approximately six months to one year. Fifth Dimension has been providing services to the owners of C-band satellite dishes for the past three years. Fifth Dimension generated approximately $12,000,000 of revenue for the year ended March 31, 1996 and approximately $15,000,000 of revenue for the year ended March 31, 1997. Goodwill is derived from the name recognition of their various channels, being a limited provider of sexually explicit programming and having transponder leases in place and related uplink facilities. An important part of the operations of Fifth Dimension is maintaining the transponder leases. The benefits of the transponder leases are inuring to NFMI in connection with the acquisition. Accordingly, the goodwill amortization period will relate to the discounted estimated cash flows generated by Fifth Dimension over a certain period of time and the length of the transponder leases. The Company determined an adequate rate of return given the risk. Thus, using the expected cash flows after taxes and a 17% discount rate, the payback period was calculated to be 128 months. In addition, the satellite transponder leases are for a period of five years with an option to renew for an additional five years. Therefore, since the cash flow analysis dictates a life of 10.6 years and the transponder leases, with option, have a life of ten years, it is appropriate in this circumstance to use 120 months as a proper amortization period. In future years, this analysis will be updated to determine if the original selected amortization period was adequate, with the amortization period being adjusted downward if necessary. In Management's opinion the allocation of the purchase price and estimated transaction costs incurred in the purchase will not differ materially from the preliminary allocation used in these pro forma financial statements. F-2 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 1997 ASSETS
PRO FORMA ADJUSTMENT, PRO FORMA AFTER NEW FRONTIER PUBLIC OFFERING PUBLIC OFFERING MEDIA, INC. AND ACQUISITION AND ACQUISITION AND FIFTH OF OF FIFTH SUBSIDIARIES DIMENSION FIFTH DIMENSION DIMENSION -------------- ----------- ----------------- --------------- CURRENT ASSETS Cash and certificates of deposit.............. $ 533,456 $ 832,980 $ (3,560,000)(b) $ 3,549,706 6,576,250(a) (832,980)(c) Accounts receivable, net...................... 213,271 3,025,810 (3,025,810)(c) 213,271 Inventories................................... 739,258 -- -- 739,258 Other current assets.......................... 191,640 437,019 (237,019)(c) 391,640 -------------- ----------- ----------------- --------------- Total current assets........................ 1,677,625 4,295,809 (1,079,559) 4,893,875 -------------- ----------- ----------------- --------------- FURNITURE AND EQUIPMENT, at cost--net.................................. 55,858 389,504 687,393(d) 1,132,755 -------------- ----------- ----------------- --------------- OTHER ASSETS Film exhibition rights........................ -- 646,938 -- 646,938 Notes receivable--officer..................... 38,000 -- -- 38,000 Other assets--net............................. 532,034 718,693 (718,693)(c) 532,034 Goodwill and intangible assets................ -- -- 6,836,165(b) 6,836,165 -------------- ----------- ----------------- --------------- Total other assets.......................... 570,034 1,365,631 6,117,472 8,053,137 -------------- ----------- ----------------- --------------- TOTAL ASSETS.............................. $ 2,303,517 $ 6,050,944 $ 5,725,306 $ 14,079,767 -------------- ----------- ----------------- --------------- -------------- ----------- ----------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.............................. $ 336,266 $ 1,230,577 $ (1,230,577)(c) $ 336,266 Lines of credit............................... 170,000 -- -- 170,000 Deferred revenue.............................. -- 1,800,850 (1,800,850)(c) -- Income tax payable............................ -- 394,517 (394,517)(c) -- Notes payable................................. 500,000 -- -- 500,000 Other liabilities............................. 235,430 -- -- 235,430 -------------- ----------- ----------------- --------------- Total current liabilities................... 1,241,696 3,425,944 (3,425,944) 1,241,696 -------------- ----------- ----------------- --------------- LONG-TERM DEBT.................................. 9,349 -- 1,000,000(b) 1,009,349 -------------- ----------- ----------------- --------------- MINORITY INTEREST IN SUBSIDIARY................. 262,664 -- -- 262,664 -------------- ----------- ----------------- --------------- SHAREHOLDERS' EQUITY: Common stock.................................. 420 272 84(b) 654 (272)(c) 150(a) Additional paid-in capital.................... 1,780,516 -- 4,199,916(b) 12,556,532 6,576,100(a) Retained earnings (deficit)................... (991,128) 2,624,728 (2,624,728)(c) (991,128) -------------- ----------- ----------------- --------------- TOTAL SHAREHOLDERS' EQUITY.................. 789,808 2,625,000 8,151,250 11,565,058 -------------- ----------- ----------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $ 2,303,517 $ 6,050,944 $ 5,725,306 $ 14,079,767 -------------- ----------- ----------------- --------------- -------------- ----------- ----------------- ---------------
See Notes to Pro Forma Combined Balance Sheets. F-3 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 1997 (a) Adjustment to record common stock issued in public offering of securities on Form SB-2 registration statement. (1,500,000 shares of common stock and net proceeds of $6,576,250) (b) Adjustment to record issuance of 840,000 shares of common stock valued at $4,200,000, $3,500,000 in cash and $1,000,000 in debt for certain assets of Fifth Dimension, Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited. In addition, NFMI will incur approximately $60,000 in direct acquisition costs relating to the purchase of Fifth Dimension resulting in $6,836,165 of goodwill and intangible assets. (c) Adjustment to remove certain assets and liabilities not purchased or assumed by NFMI from Fifth Dimension relating to (b) above. (d) Adjustment to record acquisition of videoplayback and broadcast uplink equipment from Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited relating to (b) above. F-4 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
PRO FORMA NEW FRONTIER ADJUSTMENTS PRO FORMA AFTER MEDIA, INC. AND FIFTH ACQUISITION OF ACQUISITION OF SUBSIDIARIES DIMENSION FIFTH DIMENSION FIFTH DIMENSION ---------------- ------------ --------------- ---------------- SALES, net..................................... $ 727,775 $ 5,975,842 $ -- $ 6,703,617 COST OF SALES.................................. 627,053 3,895,078 -- 4,522,131 ---------------- ------------ --------------- ---------------- GROSS PROFIT................................... 100,722 2,080,764 -- 2,181,486 ---------------- ------------ --------------- ---------------- OPERATING EXPENSES: Occupancy and equipment...................... 88,728 176,255 (117,061)(e) 201,096 53,174(f) Legal and professional....................... 39,907 150,417 -- 190,324 Advertising and promotion.................... 145,981 349,430 (38,326)(c) 457,085 Salaries, wages and benefits................. 222,597 735,524 (96,166)(d) 861,955 Communications............................... 21,350 95,456 -- 116,806 General and administrative................... 93,948 233,359 -- 327,307 Research and development..................... 7,048 -- -- 7,048 Consulting................................... 31,009 2,523 -- 33,532 Amortization of goodwill and intangible assets..................................... -- -- 341,808(h) 341,808 ---------------- ------------ --------------- ---------------- Total operating expenses................... 650,568 1,742,964 143,429 2,536,961(i) ---------------- ------------ --------------- ---------------- OTHER INCOME (EXPENSE) Licensing fees and royalties, net............ 79,885 -- -- 79,885 Interest, net................................ (4,138) (4,353) -- (8,491) ---------------- ------------ --------------- ---------------- Total other income (expense)............... 75,747 (4,353) -- 71,394 ---------------- ------------ --------------- ---------------- Net income (loss) before minority interest and income taxes........................... (474,099) 333,447 (143,429) (284,081) Minority interest in loss of subsidiary........ 42,779 -- -- 42,779 Income tax (expense) benefit................... -- (17,477) 28,181(g) 10,704 ---------------- ------------ --------------- ---------------- NET INCOME (LOSS).............................. $ (431,320) $ 315,970 $ (115,248) $ (230,598) ---------------- ------------ --------------- ---------------- ---------------- ------------ --------------- ---------------- NET INCOME (LOSS) PER SHARE OF COMMON STOCK.... $ (.10) $ (.04) ---------------- ---------------- ---------------- ---------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................................. 4,195,321(a) 6,535,321(b) ---------------- ---------------- ---------------- ----------------
See Notes to Pro Forma Combined Statement of Operations. F-5 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 (a) The weighted average number of shares outstanding of NFMI at September 30, 1997. (b) The weighted average number of shares outstanding after the acquisition represents 1,500,000 common shares of NFMI issued in the public offering on Form SB-2 registration statement and 840,000 shares issued to Fifth Dimension in connection with the acquisition of certain assets from Fifth Dimension, Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited. All shares issued are considered issued and outstanding for the entire period. (c) Entertainment expense related to stadium skybox that is discontinued. (d) Marketing office closed and to be operated from existing Boulder, Colorado office of NFMI. (e) To remove rental expense on videoplayback and broadcast uplink equipment paid to Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited. (f) To add actual depreciation recorded by Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited on videoplayback and broadcast uplink equipment. (g) To adjust income taxes to United States tax rates on adjusted pro forma net income. (h) Amortization of goodwill and intangible assets ($6,836,165 / 120 months X 6 months). (i) Should Fifth Dimension not realize the benefit of the registrant incurring expenses on its behalf but instead operating on a stand alone basis, total expenses would be $2,697,014. F-6 NEW FRONTIER MEDIA INC. AND SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED MARCH 31, 1997
NEW FRONTIER PRO FORMA PRO FORMA MEDIA, INC. ADJUSTMENTS AFTER AND FIFTH ACQUISITION OF ACQUISITION OF SUBSIDIARIES DIMENSION FIFTH DIMENSION FIFTH DIMENSION -------------- ------------- ---------------- ------------------ SALES, net................................. $ 2,515,802 $ 15,044,139 $ -- $ 17,559,941 COST OF SALES.............................. 2,217,812 9,560,847 -- 11,778,659 -------------- ------------- ---------------- ------------------ GROSS PROFIT............................... 297,990 5,483,292 -- 5,781,282 -------------- ------------- ---------------- ------------------ OPERATING EXPENSES: Occupancy and equipment.................. 190,675 357,356 (138,696)(g) 522,633 113,298(h) Legal and professional................... 67,625 213,889 -- 281,514 Advertising and promotion................ 199,238 530,301 (78,980)(d) 650,559 Salaries, wages and benefits............. 236,017 1,650,714 (415,727)(e) 1,471,004 Commissions.............................. -- 363,457 (305,982)(f) 57,475 Communications........................... 32,137 254,398 -- 286,535 General and administrative............... 129,615 735,280 -- 864,895 Consulting............................... 76,035 -- -- 76,035 Amortization of goodwill and intangible assets................................. -- -- 683,617(j) 683,617 -------------- ------------- ---------------- ------------------ Total operating expenses............... 931,342 4,105,395 (142,470) 4,894,267(k) -------------- ------------- ---------------- ------------------ OTHER INCOME (EXPENSE) Licensing fees and royalties............. 191,995 -- -- 191,995 Interest, net............................ 17,714 (158,749) -- (141,035) Loss on investment shares................ -- (220,000) 220,000(c) -- Other, net............................... (27,193) -- -- (27,193) -------------- ------------- ---------------- ------------------ Total other income (expense)........... 182,516 (378,749) 220,000 23,767 -------------- ------------- ---------------- ------------------ Net income (loss) before minority interest and income taxes.............. (450,836) 999,148 362,470 910,782 Minority interest in loss of subsidiary.... 64,806 -- -- 64,806 Income taxes............................... -- (101,850) (399,774)(i) (501,624) -------------- ------------- ---------------- ------------------ NET INCOME (LOSS).......................... $ (386,030) $ 897,298 $ (37,304) $ 473,964 -------------- ------------- ---------------- ------------------ -------------- ------------- ---------------- ------------------ NET INCOME (LOSS) PER SHARE OF COMMON STOCK.................................... $ (.09) $ .07 -------------- ------------------ -------------- ------------------ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............................. 4,188,459(a) 6,531,316(b) -------------- ------------------ -------------- ------------------
See Notes to Pro Forma Combined Statement of Operations. F-7 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED MARCH 31, 1997 (a) The weighted average number of shares outstanding of NFMI represents the original weighted average shares outstanding for the year ended March 31, 1997. (b) The weighted average number of shares outstanding after the acquisition represents the 1,500,000 common shares of NFMI issued in the public offering on Form SB-2 registration statement, and 840,000 shares issued to Fifth Dimension in connection with the acquisition of certain assets from Fifth Dimension and the conversion of and retirement of 15,000 preferred shares to 2,857 common shares. All shares issued are considered issued and outstanding for the entire year. (c) Loss on investment shares not related to Satellite operations. (d) Entertainment expense related to stadium skybox that is discontinued. (e) Marketing office closed and to be operated from existing Boulder, Colorado office of NFMI. (f) Consulting payments paid to third party which will no longer be used in Satellite operations. (g) To remove rental expense on videoplayback and broadcast uplink equipment paid to Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited. (h) To add actual depreciation recorded by Fifth Dimension Communications (1996) Corporation and 841161 Ontario Limited on videoplayback and broadcast uplink equipment. (i) To increase income taxes to United States tax rates on adjusted pro forma net income. (j) Amortization of goodwill and intangible assets (6,836,165 / 120 months). (k) Should Fifth Dimension not realize the benefit of the registrant incurring expenses on its behalf but instead operating on a stand alone basis, total expenses would be $5,335,392. F-8 INDEPENDENT AUDITORS' REPORT To the Board of Directors New Frontier Media, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of New Frontier Media, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Frontier Media, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. SPICER, JEFFRIES & CO. Denver, Colorado July 3, 1997 F-9 NEW FRONTIER MEDIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND 1996 AND SEPTEMBER 30, 1997 (UNAUDITED) ASSETS
SEPTEMBER 30, MARCH 31, MARCH 31, 1997 1997 1996 ------------- ------------ ------------ (UNAUDITED) CURRENT ASSETS Cash--restricted (Note 4)............................................ $ 296,015 $ 109,387 $ 48,523 Investment in certificates of deposit--restricted (Notes 4 and 7).................................................... 237,441 750,000 -- Accounts receivable (Notes 1 and 3).................................. 213,271 212,370 222,276 Inventories (Note 1)................................................. 739,258 659,503 354,089 Prepaid distribution rights (Note 1)................................. 66,750 82,250 94,500 Common stock subscribed.............................................. -- -- 20,000 Income tax receivable................................................ -- -- 72,500 Other................................................................ 124,890 68,225 48,990 ------------- ------------ ------------ Total current assets............................................... 1,677,625 1,881,735 860,878 ------------- ------------ ------------ FURNITURE AND EQUIPMENT, at cost (Note 1).............................. 86,740 65,552 39,314 Less: accumulated depreciation and amortization...................... (30,882) (22,661) (10,479) ------------- ------------ ------------ Net furniture and equipment........................................ 55,858 42,891 28,835 ------------- ------------ ------------ OTHER ASSETS Notes receivable--officer (Note 3)................................... 38,000 38,000 38,000 Accounts receivable--retainage (Note 1).............................. 96,635 88,844 77,053 Deferred offering costs (Note 1)..................................... 277,151 -- -- Other................................................................ 158,248 135,001 12,583 ------------- ------------ ------------ Total other assets................................................. 570,034 261,845 127,636 ------------- ------------ ------------ $ 2,303,517 $ 2,186,471 $ 1,017,349 ------------- ------------ ------------ ------------- ------------ ------------
See accompanying notes to consolidated financial statements. F-10 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND 1996 AND SEPTEMBER 30, 1997 (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, MARCH 31, 1997 1996 SEPTEMBER 30, ------------ ------------ 1997 ------------- (UNAUDITED) CURRENT LIABILITIES Accounts payable..................................................... $ 256,533 $ 125,928 $ 186,742 Advances from related parties (Note 3)............................... 79,733 -- -- Notes payable--related parties (Note 2).............................. 189,573 139,573 139,573 Note payable (Note 2)................................................ 500,000 -- -- Current portion of obligations under capital lease (Note 6).......... 6,091 5,139 -- Lines of credit (Note 7)............................................. 170,000 341,274 -- Other accrued liabilities............................................ 39,766 45,416 15,562 ------------- ------------ ------------ Total current liabilities........................................ 1,241,696 657,330 341,877 LONG-TERM DEBT Obligations under capital leases (Note 6)............................ 9,349 12,926 -- ------------- ------------ ------------ Total liabilities................................................ 1,251,045 670,256 341,877 ------------- ------------ ------------ MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4)........................ 262,664 305,443 -- ------------- ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 4, 6 and 10) SHAREHOLDERS' EQUITY (Notes 1 and 4): Common stock, $.0001 par value, 50,000,000 shares authorized, 4,195,368, 4,189,000 and 4,175,250, shares issued and outstanding, respectively....................................................... 420 419 418 Preferred stock, $.10 par value, 5,000,000 shares authorized: Class A, -0-, 10,000 and 10,000 shares issued and outstanding, respectively..................................................... -- 1,000 1,000 Class B, -0-, 5,000 and -0- shares issued and outstanding, respectively..................................................... -- 500 -- Additional paid-in capital........................................... 1,780,516 1,768,661 847,832 Deficit.............................................................. (991,128) (559,808) (173,778) ------------- ------------ ------------ Total shareholders' equity....................................... 789,808 1,210,772 675,472 ------------- ------------ ------------ $ 2,303,517 $ 2,186,471 $ 1,017,349 ------------- ------------ ------------ ------------- ------------ ------------
See accompanying notes to consolidated financial statements. F-11 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, -------------------------- -------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ (UNAUDITED) SALES, net............................................... $ 727,775 $ 1,322,094 $ 2,515,802 $ 2,565,671 COST OF SALES............................................ 627,053 1,074,626 2,217,812 1,843,765 ------------ ------------ ------------ ------------ GROSS PROFIT............................................. 100,722 247,468 297,990 721,906 ------------ ------------ ------------ ------------ OPERATING EXPENSES Occupancy and equipment................................ 88,728 75,488 190,675 118,960 Legal and professional................................. 39,907 10,842 67,625 96,101 Advertising and promotion.............................. 145,981 77,018 199,238 225,319 Salaries, wages and benefits........................... 222,597 87,246 236,017 184,282 Communications......................................... 21,350 14,560 32,137 22,609 General and administrative............................. 93,948 72,838 129,615 60,942 Research and development............................... 7,048 -- -- 8,851 Consulting............................................. 31,009 25,591 76,035 65,281 Abandoned project costs................................ -- -- -- 25,316 ------------ ------------ ------------ ------------ Total operating expenses............................. 650,568 363,583 931,342 807,661 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Licensing fees and royalties........................... 95,283 117,812 191,995 157,106 Licensing commissions.................................. (15,398) (22,104) (27,193) (54,665) Interest income........................................ 21,265 4,116 37,736 4,152 Interest expense....................................... (25,403) (5,958) (20,022) (15,561) ------------ ------------ ------------ ------------ Total other income................................... 75,747 93,866 182,516 91,032 ------------ ------------ ------------ ------------ Net income (loss) before income and minority interest taxes.............................................. (474,099) (22,249) (450,836) 5,277 INCOME TAXES (Notes 1 and 5)............................. -- (2,454) -- (12,147) ------------ ------------ ------------ ------------ Net loss before minority interest.................... (474,099) (24,703) (450,836) (6,870) Minority interest in loss of subsidiary.................. 42,779 -- 64,806 -- ------------ ------------ ------------ ------------ NET LOSS................................................. $ (431,320) $ (24,703) $ (386,030) $ (6,870) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET LOSS PER COMMON SHARE (Note 1)....................... $ (.10) $ (.01) $ (.09) $ * ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1)............. 4,195,321 4,188,583 4,188,459 4,051,896 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
* less than $.01 per share See accompanying notes to consolidated financial statements. F-12 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MARCH 31, 1997 AND 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
CLASS B PREFERRED CLASS A PREFERRED STOCK COMMON STOCK STOCK ----------- ----------------------------------------------- ---------------------- $0.10 PAR NO PAR VALUE $0.0001 PAR VALUE $0.10 PAR VALUE VALUE ---------------------- ----------------------- ---------------------- ----------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES ----------- --------- ---------- ----------- --------- ----------- ----------- BALANCES, March 31, 1995................ 4,000 $ 80,000 -- $ -- -- $ -- -- Contribution of capital............... -- 3,250 -- -- -- -- -- Reverse acquisition of National Securities Holding Corporation (Note 1).................................. (4,000) (83,250) 4,000,000 400 -- -- -- Issuance of Class A preferred stock... -- -- -- -- 10,000 1,000 -- Issuance of common stock.............. -- -- 175,250 18 -- -- -- Net loss.............................. -- -- -- -- -- -- -- ----------- --------- ---------- ----- --------- ----------- ----------- BALANCES, March 31, 1996................ -- -- 4,175,250 418 10,000 1,000 -- Issuance of subsidiary's common stock, less offering costs of $11,085...... -- -- -- -- -- -- -- Issuance of Class B preferred stock, less offering costs of $6,663....... -- -- -- -- -- -- 5,000 Issuance of common stock, less offering costs of $10,922........... -- -- 20,000 2 -- -- -- Retirement of common stock............ -- -- (6,250) (1) -- -- -- Net loss.............................. -- -- -- -- -- -- -- ----------- --------- ---------- ----- --------- ----------- ----------- BALANCES, March 31, 1997................ -- -- 4,189,000 419 10,000 1,000 5,000 Retirement and conversion of preferred stock (Note 4)...................... -- -- 2,857 1 (10,000) (1,000) (5,000) Issuance of common stock.............. -- -- 10,511 1 -- -- -- Retirement of common stock............ -- -- (7,000) (1) -- -- -- Net loss.............................. -- -- -- -- -- -- -- ----------- --------- ---------- ----- --------- ----------- ----------- BALANCES, September 30, 1997............ -- $ -- 4,195,368 $ 420 -- $ -- -- ----------- --------- ---------- ----- --------- ----------- ----------- ----------- --------- ---------- ----- --------- ----------- ----------- ADDITIONAL PAID-IN AMOUNT CAPITAL DEFICIT ----------- ----------- ---------- BALANCES, March 31, 1995................ $ -- $ -- $ (166,908) Contribution of capital............... -- -- -- Reverse acquisition of National Securities Holding Corporation (Note 1).................................. -- 82,850 -- Issuance of Class A preferred stock... -- 64,000 -- Issuance of common stock.............. -- 700,982 -- Net loss.............................. -- -- (6,870) ----- ----------- ---------- BALANCES, March 31, 1996................ -- 847,832 (173,778) Issuance of subsidiary's common stock, less offering costs of $11,085...... -- 863,915 -- Issuance of Class B preferred stock, less offering costs of $6,663....... 500 12,837 -- Issuance of common stock, less offering costs of $10,922........... -- 69,076 -- Retirement of common stock............ -- (24,999) -- Net loss.............................. -- -- (386,030) ----- ----------- ---------- BALANCES, March 31, 1997................ 500 1,768,661 (559,808) Retirement and conversion of preferred stock (Note 4)...................... (500) 1,499 -- Issuance of common stock.............. -- 47,533 -- Retirement of common stock............ -- (37,177) -- Net loss.............................. -- -- (431,320) ----- ----------- ---------- BALANCES, September 30, 1997............ $ -- $ 1,780,516 $ (991,128) ----- ----------- ---------- ----- ----------- ----------
See accompanying notes to consolidated financial statements. F-13 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, YEARS ENDED MARCH 31, ----------------------- ----------------------- 1997 1996 1997 1996 ---------- ----------- ----------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................................... $ (431,320) $ (24,703) $ (386,030) $ (6,870) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................. 8,221 -- 12,244 7,807 Issuance of common stock for services..................................... 15,000 -- -- -- Increase (decrease) in accounts payable................................... 210,338 (11,476) (60,814) 170,491 (Increase) decrease in accounts receivable................................ (8,692) 4,004 (1,885) (233,997) Increase in inventories................................................... (79,755) (232,377) (305,414) (326,929) (Increase) decrease in prepaid distribution rights........................ 15,500 (8,127) 12,250 (94,500) (Increase) decrease in income tax receivable.............................. -- 60,000 72,500 (72,500) Increase in other accrued liabilities..................................... (5,650) 9,523 29,854 15,562 Minority interest in loss of subsidiary................................... (42,779) -- (64,806) -- ---------- ----------- ----------- ---------- Net cash used in operating activities................................... (319,137) (203,156) (692,101) (540,936) ---------- ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and furniture......................................... (21,188) (4,470) (6,928) (17,732) Increase in notes receivable--officer....................................... -- -- -- (38,000) (Increase) decrease in other assets......................................... (54,912) 964 (141,715) (59,309) (Purchase) redemption of certificates of deposit............................ 512,559 -- (750,000) -- ---------- ----------- ----------- ---------- Net cash provided by (used in) investing activities....................... 436,459 (3,506) (898,643) (115,041) ---------- ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligation........................................ (2,625) -- (1,245) -- Payments on line of credit.................................................. (341,275) -- -- -- Proceeds from line of credit................................................ 170,000 -- 341,274 -- Proceeds from notes payable................................................. 550,000 -- -- -- Payments of notes payable................................................... -- -- -- (45,427) Issuance of common stock, net of offering costs............................. 7,534 89,078 89,078 681,000 Retirement of common stock.................................................. (37,177) -- (25,000) -- Issuance of preferred stock, net of offering costs.......................... -- -- 13,337 65,000 Contribution of capital..................................................... -- -- -- 3,250 Issuance of subsidiary's common stock, net of offering costs................ -- 863,915 863,915 -- Increase in deferred offering costs......................................... (277,151) -- -- -- Increase in minority interest, net of offering costs of $4,751........................................................... -- 370,249 370,249 -- ---------- ----------- ----------- ---------- Net cash provided by financing activities................................. 69,306 1,323,242 1,651,608 703,823 ---------- ----------- ----------- ----------
See accompanying notes to consolidated financial statements. F-14 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, ------------------------ --------------------- 1997 1996 1997 1996 ---------- ------------ ---------- --------- (UNAUDITED) NET INCREASE IN CASH............................................ $ 186,628 $ 1,116,580 $ 60,864 $ 47,846 CASH, BEGINNING OF PERIOD....................................... 109,387 48,523 48,523 677 ---------- ------------ ---------- --------- CASH, END OF PERIOD............................................. $ 296,015 $ 1,165,103 $ 109,387 $ 48,523 ---------- ------------ ---------- --------- ---------- ------------ ---------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid................................................. $ 11,040 $ 301 $ 5,487 $ -- ---------- ------------ ---------- --------- ---------- ------------ ---------- --------- Income taxes paid............................................. $ -- $ -- $ -- $ 12,147 ---------- ------------ ---------- --------- ---------- ------------ ---------- --------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock subscribed....................................... $ -- $ (20,000) $ -- $ 20,000 ---------- ------------ ---------- --------- ---------- ------------ ---------- --------- Purchase of equipment via capital lease obligation............ $ -- $ -- $ 19,310 $ -- ---------- ------------ ---------- --------- ---------- ------------ ---------- --------- Common stock issued for services.............................. $ 40,000 $ -- $ -- $ -- ---------- ------------ ---------- --------- ---------- ------------ ---------- --------- Preferred stock class A and B converted to common stock............................................. $ 1,500 $ -- $ -- $ -- ---------- ------------ ---------- --------- ---------- ------------ ---------- ---------
See accompanying notes to consolidated financial statements. F-15 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, BUSINESS, AND CONSOLIDATION The Company was incorporated on July 26, 1995 as New Frontier Media, Inc. and subsequently changed its name to Old Frontier Media, Inc. ("OFMI"). On July 31, 1995, OFMI acquired 100% of the outstanding common stock of Boulder Interactive Group, Inc. ("BIG") (a developer and publisher of entertainment and educational computer software on CD-ROM), incorporated on June 3, 1994, for 100% of OFMI's outstanding common stock. In addition, on July 31, 1995 OFMI capitalized two subsidiaries, David Entertainment, Inc. ("DVD") (distributor of adult laserdisc and digital video disc format titles) and FUZZY Entertainment, Inc. ("FUZZY") (developer and distributor of fine art posters and decorative art posters). On September 15, 1995, the shareholders of National Securities Holding Corporation ("NSHC") approved an exchange of common stock of NSHC for the outstanding common stock of Old Frontier Media, Inc. ("OFMI") and a name change from NSHC to New Frontier Media, Inc. ("NFMI"). As a result of this transaction, NFMI owns OFMI as a wholly owned subsidiary. OFMI is presently the only operating subsidiary (through its subsidiaries BIG, DVD, and FUZZY) of NFMI. The stock exchange between NSHC and OFMI has been considered a reverse acquisition. Under reverse acquisition accounting, OFMI was considered the acquiror for accounting and financial reporting purposes, and acquired the assets and assumed the liabilities of NSHC. The acquisition was accomplished through the exchange of all the outstanding common stock of OFMI for 3,720,000 shares of common stock and 40,000 shares of preferred stock (after giving effect to the conversion of the preferred stock to common stock and then giving effect to a 1-for 2,034.66 reverse stock split of NSHC's common stock) representing a controlling interest in NSHC. On September 20, 1996, Quarto Holdings, Inc. ("Quarto") purchased 1,714 newly issued common shares of BIG for a 30% minority interest (see Note 4). The accompanying consolidated financial statements include the historical accounts of BIG for all periods and the accounts of NFMI since September 15, 1995 and OFMI, DVD and FUZZY since inception. As a result of the issuance of the common stock of BIG as mentioned above the accompanying financial statements include 100% of the operations of BIG through September 20, 1996, and the minority interest in net loss of subsidiary represents 30% of the operations of BIG after that date. All intercompany accounts and transactions, have been eliminated in consolidation. The September 30, 1997 and 1996 amounts included herein are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, cash flows and changes in shareholders equity at September 30, 1997 and 1996 have been made. ACCOUNTS RECEIVABLE In connection with BIG's sales and distribution of its products, BIG's major distributor withholds 10% of its sales for returns from retailers. Per the agreement dated December 23, 1994 with the distributor, these funds will be retained until the agreement is terminated, but at no time shall the reserve exceed the lesser of $150,000, or 10% of the total net receipts for the previous twelve months. The agreement automatically renews after its three year term on a year to year basis unless terminated by either party upon 180 days written notice. At September 30, 1997, March 31, 1997 and 1996, retention amounts were F-16 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) $96,635, $88,844 and $77,053, respectively. In addition, included in accounts receivable at September 30, 1997 and March 31, 1997 is $(5,416) and $17,141 from this distributor. INVENTORIES Inventories consist of CD-ROM and laserdisc products which are acquired or internally developed. These costs include acquisition, production, duplication and the physical packaging of the products and are charged to cost of sales as sales are made over the number of units estimated to be sold. It is the Company's policy to evaluate these products for net realizable value on a product-by-product basis. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost. The cost of maintenance and repairs is charged to operations as incurred; significant additions and betterments are capitalized. Depreciation is computed using accelerated and straight-line methods over the estimated useful lives of three to five years. INCOME TAXES Concurrent with the stock exchange discussed above, BIG terminated its subchapter S election effective July 31, 1995. The Company files a consolidated income tax return with its subsidiaries in which the Company has an 80% or greater interest. CASH FLOWS For purposes of reporting cash flows, cash includes those investments which are short-term in nature (three months or less to original maturity), are readily convertible to cash, and represent insignificant risk of changes in value. DEFERRED OFFERING COSTS Deferred offering costs represent costs incurred in connection with the proposed public offering. In the event that such offering is successful, costs incurred and additional costs incurred subsequent will be charged against the proceeds of the offering. If the offering is not successful, the costs will be charged to operations. PREPAID DISTRIBUTION RIGHTS Prepaid distribution rights include laserdisc and digital disc format title rights purchased under agreements with related (see Note 3) and non-related entities for replication and distribution. As these format titles are placed in production, included in inventory, they will be charged to cost of sales as sales are made over the number of units estimated to be sold. F-17 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT COSTS All costs incurred to establish technological feasibility of the Company's CD-ROM products are expensed as incurred. The majority of these costs are contract services. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, certificates of deposits, accounts receivable, accounts payable and notes receivable and payable approximates fair value. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STOCK WARRANTS The Company follows the intrinsic value based method of accounting as prescribed by APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for its stock-based compensation. Under the Company's stock warrant issuances, the exercise price is in excess of the fair value of the warrants at the grant date and no compensation cost is recognized. NET LOSS PER SHARE OF COMMON STOCK Net loss per share of common stock is based on the weighted average number of shares of common stock outstanding, giving effect to the reverse acquisition and reverse stock split of NFMI discussed above. Common stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive. Preferred dividends of $2,020, $1,354, $3,417 and $1,718 have been added back to the net loss to arrive at net loss per common share for the six months ended September 30, 1997 and 1996 and years ended March 31, 1997 and 1996, respectively. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. F-18 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 2--NOTES PAYABLE
MARCH 31, ---------------------- 1997 1996 SEPTEMBER 30, ---------- ---------- 1997 ------------- (UNAUDITED) Notes payable to officers and shareholders bearing interest at 8.5%, unsecured and due on demand anytime after December 31, 1996............. $ 85,000 $ 85,000 $ 85,000 Notes payable to entities, controlled by officers and shareholders, bearing interest at 8.5%, unsecured and due on demand anytime after December 31, 1996....................................................... 54,573 54,573 54,573 Note payable to an entity controlled by a shareholder dated July 14, 1997, secured by the Company's common stock owned by the majority shareholders of the Company, bearing interest at 10% per annum and due on July 29, 1997, subsequently the note was extended to January 31, 1998............ 50,000 -- -- ------------- ---------- ---------- $ 189,573 $ 139,573 $ 139,573 ------------- ---------- ---------- ------------- ---------- ---------- Included in other liabilities at September 30, 1997, March 31, 1997 and 1996 are $32,096, $11,012 and $15,562 of accrued interest relating to the above notes, respectively. 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 upon the closing of the proposed public offering.......... $ 500,000 $ -- $ -- ------------- ---------- ---------- ------------- ---------- ----------
NOTE 3--RELATED PARTY TRANSACTIONS The Company purchased $65,000 of adult laserdisc format titles from a related entity through the issuance of preferred stock (see Note 4). In addition, the Company has an agreement with another related entity to sell, package, handle, replicate and ship these adult laserdisc format titles at the Company's expense for a management fee of $35,000 per month through May 31, 1996 and $40,000 per month thereafter. During the six months ended September 30, 1997 and 1996 and the years ended March 31, 1997 and 1996 this related entity withheld from sales of $378,049, $1,242,439, $2,236,143 and $1,592,856, replicating costs of $324,887, $451,035, $1,646,364 and $939,622 and management fees of $120,000, $230,000, $470,000 and $262,500, respectively. Included in accounts receivable at March 31, 1997 and 1996 was $141,585 and $222,276 due from the related entity, respectively. Included in advances from related parties at September 30, 1997 was $79,733 due to this 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 six months ended September 30, F-19 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED) 1997 and 1996 and the years ended March 31, 1997 and 1996 was $1,143, $1,143, $2,318 and $1,346, respectively. The Company leases certain equipment and office space via entities controlled by an officer and shareholder on a month to month basis (see Note 6). During the six months ended September 30, 1997 and 1996 and the years ended March 31, 1997 and 1996 the Company paid $36,630, $38,788, $116,549 and $98,212 to these entities relating to these leases, respectively. NOTE 4--SHAREHOLDERS' EQUITY COMMON STOCK The Company issued 195,250 units (one share of common stock and one Class A warrant to purchase one share of common stock at an exercise price of $5.50 expiring December 13, 1997) through a private placement memorandum at a price of $4.00 per unit. In December, 1996, 6,250 units were retired at the original subscription price. For the six months ended September 30, 1997 the Company issued 10,511 shares of common stock in prepayment of services to be rendered and for services rendered. In addition, the Company purchased and retired 7000 shares of common stock during the six months ended September 30, 1997. PREFERRED STOCK On September 20, 1995, the Company issued 10,000 shares of Class A preferred, 5% cumulative stock in exchange for adult laserdisc format content titles from a related entity (see Note 3). In February, 1997 the Company issued 5,000 shares of Series B, 8% cumulative, convertible preferred stock at $4.00 per share. Each Series B preferred share is convertible into one share of the Company's common stock subject to certain conditions. As of 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 2,857 shares of common stock. The dividends in arrears on both the Class A and B preferred stock was forgiven in the above transactions. 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- F-20 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 4--SHAREHOLDERS' EQUITY (CONTINUED) ROM titles and (2) 75% shareholder approval is required before encumbering any assets of BIG. Therefore, cash and certificates of deposit of $547,998 and $841,568 at September 30, 1997 and March 31, 1997 was restricted to BIG's operations and could not be used for the operations of NFMI or its affiliates. On November 4, 1996 and February 11, 1997 NFMI opened lines of credit with a banking institution (see Note 7) and secured these lines of credit with BIG's certificates of deposit. Under (2) above NFMI breached the terms of the stockholder agreement by not obtaining 75% stockholder approval before encumbering the assets of BIG. On July 2, 1997, the Company unencumbered the certificates of deposit (see Note 10). WARRANTS In connection with the above transaction, Quarto purchased a warrant from NFMI for $400 cash which allows the right to purchase up to 400,000 common shares of NFMI at an exercise price of $6.00 per share expiring on September 20, 2001. Pursuant to the terms of the warrant agreement, these shares and the related exercise price will be adjusted if additional shares of common stock are issued by the Company. On October 12, 1995, the Company issued 20,000 warrants at an exercise price of $4.00, expiring October 12, 1998, to an investment banker in connection with a financial advisor agreement. NOTE 5--INCOME TAXES The Company has an unused net operating loss carry forward on a consolidated basis of approximately $240,000 for income tax purposes, which principally expires in 2012. In addition, the Company's 70% owned subsidiary BIG, which is not part of the consolidated income tax return, has a net operating loss of approximately $216,000 expiring in 2012. These net operating loss carryforwards may result in future income tax benefits; however, because realization is uncertain at this time, a valuation reserve in the same amount has been established. Temporary differences arise from the recording of depreciation. Significant components of the Company's deferred tax liabilities and assets as of March 31, 1997 and 1996 are as follows:
1997 1996 ----------- --------- Deferred tax liabilities.............................................. $ -- $ -- ----------- --------- ----------- --------- Deferred tax assets Net operating loss carry forwards................................... 174,808 3,270 Valuation allowance for deferred tax assets......................... (174,808) (3,270) ----------- --------- $ -- $ -- ----------- --------- ----------- ---------
The income tax provision reflected on the statement of operations of $12,147 in 1996 was due to filing a short period return to coincide the respective entities' tax year end. This provision is not recoverable from the utilization of the above net operating loss. F-21 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 6--COMMITMENTS AND AGREEMENTS The Company has leases for office space and equipment under various operating and capital leases. Included in furniture and equipment at March 31, 1997 is $19,310 of equipment under capital lease and accumulated depreciation relating to this lease of $3,862. Future minimum lease payments under these leases as of March 31, 1997 are as follows:
PRINCIPAL DUE CAPITAL YEAR ENDED MARCH 31, OPERATING CAPITAL LEASE - -------------------------------------------------------------------- ----------- --------- ----------- 1998................................................................ $ 56,000 $ 7,606 $ 5,139 1999................................................................ -- 7,606 5,814 2000................................................................ -- 6,473 6,102 2001................................................................ -- 1,414 1,010 ----------- --------- ----------- $ 56,000 23,099 $ 18,065 ----------- ----------- ----------- ----------- Less amount representing interest................................... 5,034 --------- Present value of net minimum lease payments......................... $ 18,065 --------- ---------
Total rent expense for the six months ended September 30, 1997 and 1996 and the years ended March 31, 1997 and 1996, was $49,192, $38,788, $136,013 and $100,441, respectively. On November 11, 1996 the Company entered into a two year financial advisory and consulting agreement requiring annual payments of $50,000 and warrants to purchase 150,000 shares of NFMI's common stock at an exercise price of the market value of the common stock at the date of issuance. As of September 30, 1997 none of the above warrants were issued. The Company's subsidiary FUZZY has entered into an agreement with an individual to find images, negotiate artist contracts, finalize prints and proofs and the marketing and selling of the prints. The agreement is for a term of seven years and the Company has agreed to advance the venture as a line of credit up to $250,000. Net profits will be split on a 50%/50% basis; however, in the event advances are drawn by this individual, profits will be split on a 60%/40% basis until the advances have been paid in full. Included in other assets as of September 30, 1997 and March 31, 1997 is approximately $78,716 and $70,000 of advances to this individual under the agreement. F-22 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 7--LINES OF CREDIT The Company has lines of credit with a banking institution as follows:
SEPTEMBER 30, MARCH 31, 1997 1997 ------------- ---------- (UNAUDITED) $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 $250,000 line of credit, dated September, 29, 1997, bearing interest at 7.970%, due December 4, 1997 secured by certificate of deposit............. 170 000 -- ------------- ---------- $ 170,000 $ 341,274 ------------- ---------- ------------- ----------
The certificate of deposit securing the above line of credit at September 30, 1997 is held in the name of the Company's subsidiary BIG. The certificate bears interest of 6.29% and matures in December of 1997. (see Notes 4 and 10) NOTE 8--STOCK WARRANTS The Company has no formal stock option plan; however, it has granted warrants to officers and employees allowing them to purchase common stock of the Company in excess of the market value of the stock at date of grant. Warrants granted are for a three-year term. In addition, common stock warrants have been issued in connection with certain offerings of stock, and in connection with a financial advisory agreement (see Note 4). At March 31, 1997, warrants to purchase common stock at various prices were outstanding which expire as follows:
EXERCISE EXPIRATION DATE WARRANTS PRICE - ------------------------------------------------------------------------- --------- ----------- December, 1997........................................................... 189,000 $ 5.50 October, 1998............................................................ 20,000 4.00 September, 2001.......................................................... 400,000 6.00 --------- 609,000 --------- ---------
F-23 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 8--STOCK WARRANTS (CONTINUED) The following table describes certain information related to the Company's compensatory stock warrant activity for the year ending March 31, 1997.
NUMBER OF WEIGHTED AVERAGE WARRANTS EXERCISE PRICE ----------- ----------------- Outstanding, March 31, 1996..................................... -- $ -- Grants during year--Exercise price > market price............... 146,666 6.00 Exercised, forfeited and expired during year.................... -- -- ----------- Outstanding and exercisable, March 31, 1997..................... 146,666 6.00 ----------- -----------
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, 1997 are as follows:
WEIGHTED AVERAGE NUMBER OF REMAINING CONTRACTUAL EXERCISE PRICES WARRANTS LIFE (MONTHS) - ----------------------------------------------------------- ----------- ------------------------- $6.00--Outstanding and exercisable......................... 546,666 48 $4.00--Outstanding and exercisable......................... 20,000 18 $5.50--Outstanding and exercisable......................... 189,000 9
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) ----------- -----------
F-24 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997 AND 1996 AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) NOTE 9--RISKS AND UNCERTAINTIES As previously discussed in Note 3, the Company distributes, through a related entity, its adult laserdisc format titles. This related entity generates substantially all of its sales from two distributors in California. The Company sells the majority of its CD-Rom products through a distributor in California. For the periods ended March 31, 1997 and 1996, 6% and 35% of total sales were received from this distributor (see Note 1). The loss of this distributor or the loss of the related entity's distributors mentioned above could have an adverse effect on the Company's operations. The Company also uses one major vendor to replicate all of its laserdisc products; management believes that other vendors could be substituted on materially the same terms if the loss of this vendor occurred. The Company has deposits in a bank in excess of the FDIC insured amounts of $100,000. The amount in excess of the $100,000 is subject to loss should the bank cease business. NOTE 10-- EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT On October 24, 1997, the Company obtained a $1,000,000 unsecured, conditional (if the Company fails to obtain at least $1,000,000 in alternate funding on or before December 31, 1997), revocable line of credit from an entity controlled by a shareholder of the Company. The line of credit is valid for nine months beginning January 1, 1998, and any amounts the Company draws against the line of credit will bear interest at a rate of 9% per annum. In addition, on September 29, 1997 the Company encumbered BIG's certificates of deposit which is alleged by Quarto to be a violation of the terms of the stockholder agreement (see Note 4). On October 23, 1997 Quarto filed an action seeking, among other things, rescission of the purchase agreement, a temporary restraining order and preliminary injunction against the Company and BIG, preventing BIG from transferring or encumbering BIG's assets for the benefit of the Company. On October 28, 1997, the Company and Quarto entered into a Stipulation, whereby the Company agreed that it would not transfer or otherwise encumber, any additional assets of BIG without the prior written consent of Quarto. Actions, if any, that Quarto may pursue are uncertain at the present. F-25 AUDITORS' REPORT To the Directors of Fifth Dimension Communications (Barbados) Inc., 1043133 Ontario Inc. and Merlin Sierra Inc. We have audited the combined balance sheets of Fifth Dimension Communications (Barbados) Inc., 1043133 Ontario Inc. and Merlin Sierra Inc. as at March 31, 1997 and 1996 and the combined statements of income and retained earnings and cash flows for the years then ended. These combined financial statements are the responsibility of the companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these combined financial statements present fairly, in all material respects, the financial position of the companies as at March 31, 1997 and 1996 and the results of their operations and the changes in their financial position for the years then ended in accordance with accounting principles generally accepted in the United States. ERNST & YOUNG Ottawa, Canada June 27, 1997 Chartered Accountants F-26 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC. AND MERLIN SIERRA INC. (NOTE 1) UNAUDITED COMBINED BALANCE SHEETS AT SEPTEMBER 30, 1997 AND MARCH 31, 1997 AND 1996 (UNITED STATES DOLLARS) ASSETS
AS AT: SEPTEMBER 30, MARCH 31, MARCH 31, - ------------------------------------------------------------------------- 1997 1997 1996 ------------- ---------- ---------- $ $ $ (UNAUDITED) (AUDITED) (AUDITED) Current assets Cash and cash equivalents................................................ 832,980 642,466 615,559 Accounts receivable--net of allowance for doubtful accounts of $1,450 (September 30, 1997); $1,450 (March 31, 1997); $59,530 (March 31, 1996).................................................................. 527,410 1,522,195 560,351 Related party receivables (Note 6)....................................... 2,498,400 1,492,275 1,764,866 Inventory................................................................ -- -- 11,409 Transponder deposits..................................................... 200,000 200,000 150,000 Deferred income taxes.................................................... -- -- 71,500 Prepaid expenses......................................................... 237,019 282,883 623,756 ------------- ---------- ---------- 4,295,809 4,139,819 3,797,441 Film exhibition rights................................................... 646,938 748,331 662,935 Restricted investments--at cost (Note 3)................................. 718,693 691,492 825,449 Investment in shares..................................................... -- -- 220,000 Capital assets--net (Note 4)............................................. 389,504 348,463 400,259 ------------- ---------- ---------- 6,050,944 5,928,105 5,906,084 ------------- ---------- ---------- ------------- ---------- ---------- LIABILITIES Current liabilities Bank loan (Note 5)....................................................... -- 35,128 98,958 Accounts payable and accrued charges..................................... 669,638 1,009,773 905,682 Related party payables (Note 6).......................................... 560,939 471,282 860,703 Income taxes payable (Note 10)........................................... 394,517 382,082 408,744 Deferred subscription revenue............................................ 1,800,850 1,720,810 2,075,337 ------------- ---------- ---------- 3,425,944 3,619,075 4,349,424 ------------- ---------- ---------- ------------- ---------- ---------- Commitments and Contingent Liabilities (Notes 6 & 7) SHAREHOLDERS' EQUITY Capital stock (Note 8)................................................... 272 272 272 Retained earnings........................................................ 2,624,728 2,308,758 1,556,388 ------------- ---------- ---------- 2,625,000 2,309,030 1,556,660 ------------- ---------- ---------- 6,050,944 5,928,105 5,906,084 ------------- ---------- ---------- ------------- ---------- ----------
F-27 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC. AND MERLIN SIERRA INC. UNAUDITED COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996, AND THE YEARS ENDED MARCH 31, 1997 AND 1996 (UNITED STATES DOLLARS)
SIX MONTHS ENDED SEPTEMBER 30, 1996 SIX MONTHS ------------- ENDED SEPTEMBER 30, (UNAUDITED) 1997 YEAR ENDED YEAR ENDED ------------- MARCH 31, MARCH 31, 1997 1996 (UNAUDITED) ------------- ------------- (AUDITED) (AUDITED) Sales................................................ $ 5,975,842 $ 6,665,701 $ 15,044,139 $ 12,223,731 Cost of sales........................................ 3,895,078 4,531,727 9,560,847 6,317,438 ------------- ------------- ------------- ------------- Gross profit......................................... 2,080,764 2,133,974 5,483,292 5,906,293 Expenses (see Schedule).............................. 1,747,317 2,066,084 4,264,144 3,898,653 ------------- ------------- ------------- ------------- Net income from operations........................... 333,447 67,890 1,219,148 2,007,640 Loss on investment in shares......................... -- 220,000 220,000 -- ------------- ------------- ------------- ------------- 333,447 (152,110) 999,148 2,007,640 ------------- ------------- ------------- ------------- Provision for (recovery of) income taxes Current............................................ 17,477 (283,019) 30,350 (113,563) Deferred........................................... -- -- 71,500 (71,500) ------------- ------------- ------------- ------------- 17,477 (283,019) 101,850 (185,063) ------------- ------------- ------------- ------------- Net income for the period............................ 315,970 130,909 897,298 2,192,703 Retained earnings (Deficit), beginning of period..... 2,308,758 1,556,388 1,556,388 (636,315) ------------- ------------- ------------- ------------- 2,624,728 1,687,297 2,453,686 1,556,388 Dividends paid....................................... -- -- 144,928 -- ------------- ------------- ------------- ------------- Retained earnings end of period...................... $ 2,624,728 $ 1,687,297 $ 2,308,758 $ 1,556,388 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
F-28 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC. AND MERLIN SIERRA INC. UNAUDITED COMBINED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND THE YEARS ENDED MARCH 31, 1997 AND 1996 (UNITED STATES DOLLARS)
SIX MONTHS SIX MONTHS YEAR YEAR ENDED ENDED ENDED MARCH ENDED MARCH SEPTEMBER 30, SEPTEMBER 30, 31, 31, 1997 1996 1997 1996 ------------- ------------- ----------- ----------- $ $ $ $ (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES Net income for the period............................... 315,970 130,909 897,298 2,192,703 Items not affecting cash-- Amortization of capital assets.......................... 60,217 70,234 120,347 144,398 Amortization of film exhibition rights.................. 304,305 395,855 931,637 776,758 Loss on investment in shares............................ -- 220,000 220,000 -- Deferred income taxes................................... -- -- 71,500 (71,500) Net change in operating components of working capital (Note 11)............................................. 792,989 841,626 (936,660) (821,184) ------------- ------------- ----------- ----------- 1,473,481 1,658,624 1,304,122 2,221,175 ------------- ------------- ----------- ----------- INVESTING ACTIVITIES Investment in shares.................................... -- -- -- (220,000) Purchases of capital assets............................. (125,592) (39,092) (74,682) (144,108) Sales of capital assets................................. 24,334 5,784 6,131 11,893 Transfers of capital assets to related company.......... -- -- -- 567,373 (Advances to) repayments from, Teletheatre Plus Inc..... -- -- 718,432 (718,432) Purchases of film exhibition rights..................... (202,912) (497,933) (1,017,033) (904,121) (Purchase) redemption of restricted investments......... (27,201) 207,162 133,957 (22,135) ------------- ------------- ----------- ----------- (331,371) (324,079) (233,195) (1,429,530) ------------- ------------- ----------- ----------- FINANCING ACTIVITIES Capital stock........................................... -- -- -- 100 Bank loan............................................... (35,128) (31,250) (63,830) 98,958 Dividends............................................... -- -- (144,928) -- Net change in accounts receivable and payable, related companies............................................. (916,468) (1,092,709) (835,262) (398,661) ------------- ------------- ----------- ----------- (951,596) (1,123,959) (1,044,020) (299,603) ------------- ------------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD................................................ 190,514 210,586 26,907 492,042 CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD.......... 642,466 615,559 615,559 123,517 ------------- ------------- ----------- ----------- CASH AND CASH EQUIVALENTS--END OF PERIOD................ 832,980 826,145 642,466 615,559 ------------- ------------- ----------- ----------- ------------- ------------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid......................................... 4,053 106,890 158,744 161,305 ------------- ------------- ----------- ----------- ------------- ------------- ----------- ----------- Income taxes paid..................................... 34,615 94,721 141,144 54,348 ------------- ------------- ----------- ----------- ------------- ------------- ----------- -----------
F-29 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 1. BASIS OF PRESENTATION These financial statements present the combined assets, liabilities, revenues and expenses of Fifth Dimension Communications (Barbados) Inc. and 1043133 Ontario Inc. for the six month periods ended September 30, 1997 and 1996, for the years ended March 31, 1997 and 1996 and those of Merlin Sierra Inc., from February 1, 1996, the date of acquisition to March 31, 1996 and the year ended March 31, 1997 and the six month periods ended September 30, 1997 and 1996. The three companies carry on complementary but different businesses related to the broadcasting of movies to subscribers by satellite and cable. Fifth Dimension Communications (Barbados) Inc. is incorporated under the laws of Barbados, 1043133 Ontario Inc. is incorporated under the laws of the Province of Ontario in Canada and Merlin Sierra Inc. is incorporated under the laws of the State of California in the United States. None of the three companies own shares in the other companies. These combined financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States applied on a consistent basis and are presented in United States dollars. They have been prepared in connection with a proposed sale of the combined business of the three companies as expressed in a letter of intent dated April 14, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVENTORY Inventory is recorded at the lower of cost and net realizable value. FILM EXHIBITION RIGHTS Rights to exhibit films are recorded at cost and are amortized on a straight-line basis over the period of the contract, which is normally twenty-four months. INVESTMENT IN SHARES The investment in shares, originally recorded at cost, has been accounted for by the equity basis. CAPITAL ASSETS Capital assets are initially recorded at cost and amortized over their estimated useful lives. Furniture and fixtures are being amortized on the diminishing balance basis at a rate of 20% per year. Automobiles and computers are being amortized on the diminishing balance basis at a rate of 30% per year. Leaseholds and the telephone system are amortized on a straight line basis over the five year term of the realty lease. Software is amortized at a 100% rate. F-30 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenue from sales of television movie subscriptions from three to twelve months is recognized on a monthly basis over the term of the subscription. FOREIGN EXCHANGE Monetary assets and liabilities denominated in currencies other than United States dollars are translated at exchange rates in effect at the balance sheet date. Revenue and expense items are translated at average rates of exchange for the year. Translation gains and losses are included in the determination of earnings. 3. RESTRICTED INVESTMENTS Restricted investments consist of short-term marketable securities and deposits recorded at cost held as collateral by the financial institutions providing merchant credit card service to 1043133 Ontario Inc. 4. CAPITAL ASSETS
SEPTEMBER 30 MARCH 31 ------------------------------------------------ ------------------------------------------------ 1997 1996 1997 1996 ----------------------- ----------------------- ----------------------- ----------------------- ACCUMULATED ACCUMULATED ACCUMULATED ACCUMULATED COST AMORTIZATION COST AMORTIZATION COST AMORTIZATION COST AMORTIZATION --------- ------------ --------- ------------ --------- ------------ --------- ------------ $ $ $ $ $ $ $ $ Furniture and fixtures.. 110,150 47,272 106,912 33,662 101,562 40,196 95,444 25,522 Leaseholds.............. 49,116 14,157 52,004 9,949 52,004 15,042 50,470 31,528 Telephone system........ 105,297 48,085 103,411 34,425 105,297 44,836 100,731 398 Automobiles............. 55,489 39,194 55,489 32,670 55,489 36,028 55,489 20,352 Computers............... 341,444 183,325 282,590 132,364 298,197 149,749 271,439 100,640 Software................ 114,879 54,838 18,446 12,449 38,234 16,469 14,766 9,640 --------- ------------ --------- ------------ --------- ------------ --------- ------------ 776,375 386,871 618,852 255,519 650,783 302,320 588,339 188,080 Accumulated amortization.......... 386,871 255,519 302,320 188,080 --------- --------- --------- --------- 389,504 363,333 348,463 400,259 --------- --------- --------- --------- --------- --------- --------- ---------
5. BANK LOAN The bank loan to Merlin Sierra Inc. bears interest at 16% with monthly principal repayments of $12,148 to June, 1997. The loan was repaid as at June 30, 1997. The loan is secured by a commercial security agreement on all assets of Merlin Sierra Inc. and personal guarantees of certain officers of Merlin Sierra Inc. F-31 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 6. RELATED COMPANY INFORMATION The companies are related by common control. (A) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE Accounts receivable include amounts due from related companies as at September 30, 1997 totalling $2,498,400 (1996 $2,581,424) and as at March 31, 1997 totalling $1,492,275 (1996 $1,764,866). Accounts payable include amounts due to related companies as at September 30, 1997 totalling $560,939 (1996 $969,196) and as at March 31, 1997 totalling $471,282 (1996 $860,703). The significant balances receivable from or (payable to) related companies are as follows:
SEPTEMBER 30 MARCH 31 ---------------------- ---------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- $ $ $ $ Fifth Dimension Communications (1996) Corporation................. (258,281) (440,843) (171,971) (698,847) Fifth Dimension Communications Holdings, Inc. .................... 472,744 76,154 461,599 45,880 Fifth Dimension Capital Corporation............................... 542,528 817,035 929,854 577,517 Fifth Dimension Communications Atlantic Inc. ..................... 178,500 -- 132,609 Fifth Dimension SatCom Inc. ...................................... (85,583) -- (86,408) 31,408 Turks & Caicos Island Wireless Television Ltd. ................... 730,887 -- (150,000) -- Fifth Dimension Technologies Inc. ................................ (7,990) (84,623) 60,066 (102,772) FirstLink Communications Inc. .................................... -- 58,216 14,011 164,671 Teletheatre Plus Inc. note receivable............................. -- -- -- 718,432 NA Microsat Corp.................................................. 194,343 452,112 -- -- 841161 Ontario Inc................................................ 275,528 271,841 -- -- Superpower Television Inc......................................... -- (719,537) -- --
Subsequent to September 30, 1997, all of the amount due from Fifth Dimension Communications Holdings Inc. was repaid and the funds used in part to pay a dividend of $550,000 to the shareholders of Fifth Dimension Communications (Barbados) Inc. (B) TRANSACTIONS Related party transactions are measured at exchange values which correspond to the amount established and agreed upon by both parties. F-32 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 6. RELATED COMPANY INFORMATION (CONTINUED) The significant transactions entered into by 1043133 Ontario Inc. with related companies are as follows:
SEPTEMBER 30 MARCH 31 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- $ $ $ $ Rented offices from Fifth Dimension Capital Corporation............... 23,913 23,913 47,826 47,826 Rented satellite uplink from 841161 Ontario Limited................... 31,409 31,066 62,000 62,000 Rented space for broadcasting facilities from 841161 Ontario Limited............................................................. 20,259 21,268 41,526 18,141 Prepaid expenses include prepaid rent to 841161 Ontario Limited....... 94,349 138,175 118,000 -- Purchased accounting and administrative services from Fifth Dimension Capital Corporation................................................. 82,519 85,321 166,423 142,140 Purchased engineering services from Fifth Dimension SatCom Inc........ 152,973 189,740 365,836 374,177 Purchased full period satellite space segment from Fifth Dimension Communications (1996) Corporation................................... 459,080 -- -- 377,570 Purchased occasional use satellite space segment from Fifth Dimension Communications (1996) Corporation................................... 37,841 -- 53,934 -- Rented broadcasting equipment from Fifth Dimension Communications (1996) Corporation.................................................. 51,391 63,913 113,000 117,174 Management fee to Fifth Dimension Communications (1996) Corporation... -- -- -- 81,500 Purchased subscriber activation services from FirstLink Communications Inc................................................................. 9,362 130,231 224,275 181,017 Rented a hospitality suite from Fifth Dimension Technologies Inc...... 37,663 37,591 75,938 18,750 Purchased computer equipment from Fifth Dimension Technologies Inc.... 42,952 16,498 30,605 38,287 Wrote down amounts receivable from NA Microsat Corporation............ -- -- 20,141 91,217 Transferred equipment to Fifth Dimension Communications (1996) Corporation......................................................... -- -- 564,161 --
F-33 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 6. RELATED COMPANY INFORMATION (CONTINUED) The significant transactions entered into by Fifth Dimension Communications (Barbados) Inc. with related companies are as follows:
SEPTEMBER 30 MARCH 31 ---------------------- --------------------- 1997 1996 1997 1996 --------- ----- ---------- --------- $ $ $ $ Rented broadcasting equipment from Fifth Dimension Communications (1996) Corporation........................................................... 34,261 -- 25,700 -- Purchased occasional use satellite space segment from Fifth Dimension Communications (1996) Corporation..................................... 25,227 -- 80,900 -- Purchased full period use satellite space segment from Fifth Dimension Communications (1996) Corporation..................................... 306,053 -- -- -- Purchased engineering services from Fifth Dimension Satcom Inc.......... 118,721 -- 92,000 --
The significant transactions entered into by Merlin Sierra Inc. with related companies are as follows: Purchase of satellite space segment from Fifth Dimension Communications (1996) Corporation....................... -- -- 1,188,000 132,000
(C) COMMITMENTS Commitments by 1043133 Ontario Inc. to related companies are as follows: The minimum amounts of future lease payments to 841161 Ontario Limited for office accommodation are $40,000 for each of 1998 and 1999. The minimum amounts of future lease payments to 841161 Ontario Limited for a satellite uplink facility are $62,000 for 1998 and $31,000 for 1999. The minimum amounts of future lease payments to Fifth Dimension Capital Corporation for office facilities are $48,000 for 1998 and 1999. The minimum amount of future lease payments to Fifth Dimension Communications (1996) Corporation are $128,070 for 1998. A commitment to Fifth Dimension SatCom Inc. for the purchase of engineering services in amounts which are based on usage. 7. THIRD PARTY COMMITMENTS AND CONTINGENT LIABILITIES Commitments of Fifth Dimension Communications (Barbados) Inc. The Company has committed as of July 1, 1997 to the purchases of full period space segment on three additional satellite transponders totalling $22.5 million during the estimated five year life of the contracts. F-34 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 7. THIRD PARTY COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) The Company has committed as of March 31, 1997 to purchase full period space segment totalling $5.4 million to December 31, 1999. Under the asset purchase agreement dated September 5, 1997, New Frontier Media, Inc. will assume the above noted commitments of Fifth Communications (Barbados) Inc. Fifth Dimension Communications (Barbados) Inc. and 1043133 Ontario Inc. have given a guarantee to the vendor in regard to the unpaid purchase price for the acquisition of the business of Merlin Sierra Inc. for a total amount of $850,000. The balance owing as at March 31, 1997 was $643,830 (1996 Nil). 1043133 Ontario Inc. has a commitment to purchase promotional video services of $217,000 in each of 1998 and 1999. 8. CAPITAL STOCK AUTHORIZED Fifth Dimension Communications (Barbados) Inc. is authorized to issue an unlimited number of common shares and redeemable non-voting preference shares. Non-cumulative dividends on both classes of shares may be declared at the discretion of the directors. 1043133 Ontario Inc. is authorized to issue an unlimited number of common shares Merlin Sierra Inc. is authorized to issue 100 common shares. MARCH 31 AND MARCH 31 AND SEPTEMBER 30 SEPTEMBER 30 1997 1996 --------------- --------------- $ $ ISSUED Fifth Dimension Communications (Barbados) Inc. 100 Common shares................................................. 100 100 1043133 Ontario Inc. 100 Common shares................................................. 72 72 Merlin Sierra Inc. 100 Common shares................................................. 100 100 --- --- 272 272 --- --- --- ---
9. FAIR MARKET VALUE The carrying amounts of the current assets and liabilities, restricted investments and investment in shares approximate fair market values. F-35 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 10. INCOME TAXES The Companies have accumulated timing differences relating to a write down of accounts receivable which, if recognized, would have resulted in a deferred income tax debit of $365,000 as of March 31, 1997 and September 30, 1997 (1996 $351,000). A valuation allowance for deferred tax assets was booked for $365,000 (1996 $351,000). 11. NET CHANGE IN WORKING CAPITAL
SIX MONTHS ENDED YEAR ENDED ---------------------------- ---------------------- SEPTEMBER 30, SEPTEMBER 30, MARCH 31, MARCH 31, 1997 1996 1997 1996 ------------- ------------- ---------- ---------- (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) Cash (used in) provided by: Accounts receivable......................................... $ 994,785 121,570 (961,844) (233,525) Inventory................................................... -- 11,410 11,409 (6,545) Transponder deposits........................................ -- (45,121) (50,000) (150,000) Prepaid expenses............................................ 45,864 (54,243) 340,873 10,509 Accounts payable and accrued liabilities.................... (340,135) 996,557 104,091 459,304 Income taxes payable........................................ 12,435 (309,391) (26,662) (186,023) Deferred subscription revenue............................... 80,040 120,844 (354,527) (714,901) ------------- ------------- ---------- ---------- $ 792,989 841,626 (936,660) (821,184) ------------- ------------- ---------- ---------- ------------- ------------- ---------- ----------
F-36 FIFTH DIMENSION COMMUNICATIONS (BARBADOS) INC. 1043133 ONTARIO INC., MERLIN SIERRA INC. COMBINED SCHEDULE OF EXPENSES (U.S. DOLLARS)
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ---------------------- ---------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED) Advertising................................................ 222,714 177,272 360,304 425,996 Amortization of capital assets............................. 60,217 70,234 120,347 144,398 Bank and credit card charges............................... 68,425 120,401 209,824 115,061 Bad debts.................................................. 3,267 5,025 68,000 162,095 Business development....................................... 139 2,702 3,361 15,369 Commissions................................................ 24,799 38,716 363,457 375,924 Computer................................................... 6,079 7,889 9,970 25,809 Consulting fees............................................ 2,523 11,718 11,718 8,166 Employee benefits.......................................... 65,571 53,633 104,959 114,100 Interest................................................... 4,053 106,890 158,749 161,305 Insurance.................................................. 537 4,560 10,186 12,133 Maintenance................................................ 13,649 12,648 24,868 28,381 Marketing fees............................................. 21,621 -- -- -- Office..................................................... 142,081 114,669 265,761 233,149 Professional fees.......................................... 150,417 179,895 346,329 230,752 Rent....................................................... 96,311 101,804 202,171 96,890 Salaries................................................... 645,453 830,466 1,545,755 1,282,237 Sales expense.............................................. 33,861 1,885 2,500 556 Security................................................... 467 4,307 4,655 945 Taxes other than income.................................... 5,874 3,040 4,053 604 Travel..................................................... 71,095 66,836 164,136 153,260 Telephone.................................................. 95,456 137,011 254,398 289,436 Utilities.................................................. 12,708 14,483 28,643 22,087 ---------- ---------- ---------- ---------- 1,747,317 2,066,084 4,264,144 3,898,653 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
F-37 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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........................................................ 3 Risk Factors.............................................................. 8 Use of Proceeds........................................................... 20 Dividend Policy........................................................... 21 Dilution.................................................................. 21 Capitalization............................................................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 24 Business.................................................................. 31 Management................................................................ 51 Certain Transactions...................................................... 53 Principal Shareholders.................................................... 55 Description of Securities................................................. 56 Underwriting.............................................................. 59 Legal Matters............................................................. 61 Experts................................................................... 61 Available Information..................................................... 61 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 TO OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. [LOGO] 1,500,000 SHARES NEW FRONTIER MEDIA, INC. --------------------- PROSPECTUS --------------------- CENTEX SECURITIES INCORPORATED December , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (i) Article 3, Section 3.17 of the Company's First Amended and Restated Bylaws provides as follows: "SECTION 3.17 LIMITATIONS ON LIABILITY To the fullest extent permitted by the Colorado Business Corporation Act as the same exists or may hereafter be amended, a director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for any action taken or any failure to take any action as a director. Notwithstanding the foregoing, a director will have liability for monetary damages for a breach or failure which involves: (i) a violation of criminal law; (ii) a transaction from which the director derived an improper personal benefit, either directly or indirectly; (iii) destributions in violation of the Colorado Business Corporation Act or the Articles of the corporation (but only to the extent provided by law); (iv) willful misconduct or disregard for the best interests of the corporation concerning any acts or omissions concerning any proceeding other than in the right of the corporation or a shareholder; or, (v) reckless, malicious or wanton acts or omissions concerning any proceeding other than in the right of the corporation or of a shareholder. No repeal, amendment or modiffication of this Article, whether direct or indirect, shall eliminate or reduce its effect with respect to any act or omission of a director of the corporation occurring prior to such repeal, amendment or modification." (ii) Article 3, Section 3.18 of the Company's First Amended and Restated Bylaws provides as follows: "SECTION 3.18 INDEMNIFICATION Subject to and in accordance with the Colorado Business Corporation Act, and except as may be expressly limited by the Articles of Incorporation and any amendments thereto, the corporation shall indemnify any person: (i) made a party to any proceeding (other than an action by, or in the right of, the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the corporation's request, as a director, officer, employee or agent of another corporation, or other enterprise; or, (ii) who was or is a party to any proceeding by or in the right of the corporation, to procure a judgment in its favor by reason of the fact that his is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise. This indemnification shall be mandatory in all circumstances in which indemnification is permitted by law. The corporation may maintain indemnification insurance regardless of its power to indemnify under the Colorado Business Corporation Act. The corporation may make any other or further indemnification or advancement of expenses of any of the directors, officers, employees or agents under any bylaw, agreement, vote of shareholders or disinteredsted directors or otherwise, both as to action in his or her official capacity and to action in another capacity while holding such office, except an indemnification against material criminal or unlawful misconduct as set forth by statute, or as to any transaction wherein the director derived an improper personal benefit. II-1 Except to the extent reimbursement shall be mandatory in accordance herewith, the corporation shall have the right to refuse indemnification, in whole or in part, in any instance in which the person to whom indemnification would otherwise have been applicable, if he or she unreasonable refused to permit the corporation, at its own expense and through counsel of its own choosing, to defend him or her in the action, or unreasonably refused to cooperate in the defense of such action." ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1) SEC Registration Fee............................................... 6,279 NASD Filing Fee.................................................... 2,628 Blue Sky Filing Fees............................................... 10,000 Blue Sky Legal Fees................................................ 20,000 Printing Expenses.................................................. 80,000 Legal Fees and Expenses............................................ 100,000 Accounting Fees.................................................... 30,000 Transfer Agent..................................................... 3,000 NASDAQ SmallCap Application Fee.................................... 5,000 Miscellaneous Expenses............................................. 18,093 ----------- TOTAL............................................................ 275,000(1) ----------- -----------
- ------------------------ (1) Does not include the Managing Underwriter's commission and nonaccountable expenses of $1,023,750 ($1,177,313 if the Overallotment Option is exercised). All expenses, except the SEC registration fee, the NASD filing fee, and the NASDAQ SmallCap application fee are estimated. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. During the last three years, the Company has sold the following shares of its Common Stock which were not registered under the 1933 Act, as amended: (i) Between March 1, 1996 and June 30, 1996, the Company sold 195,200 Units in an exempt private placement to accredited investors only. Each Unit consisted of one share of Common Stock and one Warrant (the "Unit Warrant") to purchase an additional share of Common Stock. On or about December 15, 1996, the Company's Board of Directors extended the exercise date for the Unit Warrant to December 31, 1997. The exercise price for each Unit Warrant is $5.50. (ii) From time to time, the Company has issued a total of 146,666 non-qualified stock options to employees. Each option allows the holder to purchase one share of the Company's Common Stock, at an exercise price of $6.00 per share. The options are exercisable through December 31, 1997. (iii) In February and March, 1997, the Company issued a total of 5,000 shares of its Preferred Series B stock to one accredited investor for total consideration of $20,000. In July, 1997, the investor converted his Preferred Series B shares into 20,000 shares of the Company's restricted Common Stock, pursuant to the Statement of Series B Preferred Shares. (iv) On May 31, 1997, the Company issued 2,511 shares of restricted Common Stock to Krausman, L.L.C. for services valued at $7,533.12. With respect to the sales made, the Company relied on Sections 4(2) and 4(6) of the Securities Act of 1933, as amended (the "1933 Act"). The Company employed no advertising or general solicitation in offering the securities. The securities were offered to a limited number of persons, all of whom were business associates of the Company or its executive officers and directors, and the tranfer thereof was appropriately restricted by the Company and its transfer agent. All shareholders were accredited investors as that term is defined in Rule 501 of Regulation D under the 1933 Act, and were capable of analyzing the II-2 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 - --------- --------------------------------------------------------------------------------------------- 1.01* Form of Underwriting Agreement 1.02* Form of Agreement Among Underwriters 1.03* Form of Selected Dealer Agreement 1.04* Form of Underwriter's Warrant 1.05+ Form of Lock-up Agreement 3.01+ Articles of Incorporation of Company, with Amendment 3.02+ Articles of Incorporation--Inroads 3.03+ Articles of Incorporation--David 3.04+ Articles of Incorporation--In-Sight 3.05+ Articles of Incorporation--CSB 3.06+ First Amended Bylaws of Company 4.01+ Form of Common Stock Certificate 5.01* Opinion of Krausman, L.L.C., regarding legality of the Common Stock (includes consent) 5.02+ Opinion of Combs & Associates re: Quarto claims 10.01+ Asset Purchase Agreement Among the Company, CSB, Fifth Dimension Communications (Barbados) Inc., and Merlin Sierra, Inc. (Agreement previously filed; Agreement and Schedules thereto filed herewith) 10.02+ Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario Inc. (Agreement previously filed; Agreement and Schedules thereto filed herewith) 10.03+ Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario Inc. (Agreement previously filed; Agreement and Schedules thereto filed herewith) 10.04+ Revocable Line of Credit Agreemenet 10.05+ Promissory Note 10.06* Form of Warrant Agreement 11.01+ Computation of Earnings Per Share 23.01* Consent of Spicer, Jeffries & Co. 23.02+ Consent of Ernst & Young 23.03* Consent of Krausman, L.L.C. (See 5.01, above) 23.04+ Consent of Combs & Associates 27.01* Financial Data Schedule
- ------------------------ * Filed herewith. + Previously filed. II-3 ITEM 28. UNDERTAKINGS. The Company hereby undertakes: (a) That insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of approprate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the 1933 Act, and will be governed by the final adjudication of such issue. (b) That, subject to the terms and conditions of Section 13(a) of the Securities Exchange Act of 1934, it will file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. (c) That any post-effective amendment filed will comply with the applicable form, rules and regulations of the Commission in effect at the time such post-effective amendment is filed. (d) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the 1933 Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (e) That, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (f) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of this offering. (g) To provide to the Managing Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the 1933 Act, as amended, the Company certifies that it has reasonable grounds to believe that it meets the requirements of filing on Form SB-2 and has caused this Amendment No. 3 to the Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in Boulder, Colorado on December 4, 1997. 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 December 4, 1997 Mark H. Kreloff Officer, President /s/ MICHAEL WEINER Executive Vice President, - ------------------------------ Secretary, Treasurer and December 4, 1997 Michael Weiner Director /s/ SCOTT WUSSOW Chief Financial Officer - ------------------------------ (Principal Accounting December 4, 1997 Scott Wussow Officer) /s/ CLIVE NG - ------------------------------ Director December 4, 1997 Clive Ng /s/ KOUNG Y. WONG - ------------------------------ Director December 4, 1997 Koung Y. Wong II-5 EXHIBIT INDEX
EXHIBIT PAGE NO. TITLE NO. - --------- ----------------------------------------------------------------------------------------------- --------- 1.01* Form of Underwriting Agreement 1.02* Form of Agreement Among Underwriters 1.03* Form of Selected Dealer Agreement 1.04* Form of Underwriter's Warrant 1.05+ Form of Lock-up Agreement 3.01+ Articles of Incorporation of Company 3.02+ Articles of Incorporation--Inroads 3.03+ Articles of Incorporation--David 3.04+ Articles of Incorporation--In-Sight 3.05+ Articles of Incorporation--CSB 3.06+ First Amended Bylaws of Company 4.01+ Form of Common Stock Certificate 5.01* Opinion of Krausman, L.L.C., regarding legality of the Common Stock (incudes consent) 5.02+ Opinion of Combs & Associates re: Quarto claims. 10.01+ Asset Purchase Agreement Among the Company, CSB, Fifth Dimension Communications (Barbados) Inc., and Merlin Sierra, Inc. 10.02+ Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario Inc. 10.03+ Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario Inc. 10.04+ Revocable Line of Credit Agreemenet 10.05+ Promissory Note 10.06* Form of Warrant Agreement 11.01+ Computation of Earnings Per Share 23.01* Consent of Spicer, Jeffries & Co. 23.02+ Consent of Ernst & Young 23.03* Consent of Krausman, L.L.C. (See 5.01, above) 23.04+ Consent of Combs & Associates 27.01* Financial Data Schedule
- ------------------------ * Filed Herewith. + Previously Filed. EX-1.01 2 UNDERWRITING AGREEMENT NEW FRONTIER MEDIA, INC. 1,500,000 Units UNDERWRITING AGREEMENT ______________, 1997 Centex Securities Incorporated (As Representative of the Several Underwriters Named in Schedule 1 hereto) 1020 Prospect Street, Suite 200 La Jolla, CA 92037 Dear Sirs: New Frontier Media, Inc., a Colorado corporation (the "Company"), hereby confirms its agreement (this "Agreement") with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom Centex Securities Incorporated has been duly authorized to act as representative (in such capacity, the "Representative"), as set forth below: SECTION 1. DESCRIPTION OF TRANSACTION The Company proposes to issue and sell to the Underwriters on the Closing Date (as defined below), pursuant to the terms and conditions of this Agreement, an aggregate of 1,500,000 units ("Firm Units") each consisting of one share of the Company's Common Stock ("Common Stock") and one Redeemable Common Stock Purchase Warrant ("Warrant") exercisable to purchase one share of Common Stock at an exercise price of $6.25 per share for a period of five years, at a price of $5.25 per Unit on the terms as hereinafter set forth. The Company also proposes to issue and sell to the several Underwriters on or after the Closing Date not more than 225,000 additional Units if requested by the Representative as provided in Section 3.2 of this Agreement (the "Option Units"). The Firm Units and any Option Units are collectively referred to herein as the "Units." SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY In order to induce the Underwriters to enter into this Agreement, the Company hereby represents and warrants to and agrees with the Underwriters that: 2.1 REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on Form SB-2 (File No. 333-35337) with respect to the Units, including the related prospectus, copies of which have heretofore been delivered by the Company to the Underwriters, has been filed by the Company in conformity with the requirements of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement have been so filed. After the execution of this Agreement, the Company will file with the Commission either (a) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Representative prior to the execution of this Agreement, or (b) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representative prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement on Form SB-2 and all amendments thereto, including the prospectus, all exhibits and financial statements, as it becomes effective; the term "Preliminary Prospectus" means each prospectus included in said Registration Statement before it becomes effective; and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be filed pursuant to said Rule 424(b), such term means the prospectus included in the Registration Statement when it becomes effective. 2.2 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. Neither the Commission nor the "blue sky" or securities authority of any jurisdiction has issued any order preventing or suspending the use of any Preliminary Prospectus. When (a) any Preliminary Prospectus was filed with the Commission, (b) the Registration Statement or any amendment thereto was or is declared effective, and (c) the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date the Prospectus, as amended or supplemented at any such time, such filing (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission promulgated thereunder (the "Rules and Regulations") and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make 2 the statements therein not misleading in light of the circumstances under which they were made. The foregoing representation does not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative specifically for use therein. 2.3 INCORPORATION AND STANDING. The Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of the State of Colorado and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their properties or the conduct of their business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company or any of its subsidiaries. 2.4 DUE POWER AND AUTHORITY. The Company and each of its subsidiaries has full corporate power to own or lease their properties and conduct their business as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and the Company and each of its subsidiaries has full corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. The execution and delivery of this Agreement and consummation of the transactions contemplated herein have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with the terms thereof, except as may be limited by applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and by general equitable principles, and as rights to indemnity and contribution hereunder may be limited by applicable law. 2.5 CONSENTS; NO DEFAULTS. The issuance, offering and sale of the Units to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (a) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, or as may be required under the Act or under the securities or blue sky laws of any jurisdiction, or (b) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its properties is bound, or the charter documents or bylaws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or any of its subsidiaries. 2.6 NO BREACH OR DEFAULT. Neither the Company nor any of its subsidiaries is in breach of any term or provision of their Articles of Incorporation or Bylaws; no default exists, and 3 no event has occurred which with notice or lapse of time or both, would constitute a default, in the Company's or any of its subsidiaries' due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease, note, bank loan or credit agreement or any other material agreement or instrument to which the Company, its subsidiaries or their properties may be bound or affected in any respect which would have a material adverse effect on the condition (financial or otherwise), business, properties, prospects, net worth or results of operations of the Company. 2.7 LICENSES. The Company and each of its subsidiaries possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary for the conduct of their business, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Registration Statement. Each approval, registration, qualification, license, permit, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body or agency necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated (except such additional actions as may be required by the National Association of Securities Dealers, Inc. or may be necessary to qualify the Common Stock and Warrants for public offering under state securities or blue sky laws) has been obtained or made and each is in full force and effect. 2.8 COMPLIANCE WITH LAWS. Except as disclosed in the Registration Statement and in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor any of its subsidiaries is in violation of any laws, ordinances, governmental rules or regulations to which it is subject, which would have a material adverse effect on the condition (financial or otherwise), business, properties, prospects, net worth or results of operations of the Company. 2.9 EXISTING CAPITAL STRUCTURE AND SHAREHOLDER RIGHTS. The Company has an authorized, issued and outstanding capitalization as set forth in, and capital stock conforms in all material respects to the description contained in, the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. Except as described in the Registration Statement and in the Prospectus there are no outstanding (a) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (b) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations, or (c) obligations of the Company to issue such Units, any such convertible or exchangeable securities or obligations, or any such warrants, rights or obligations. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and have been issued in compliance with all federal and state securities laws. No preemptive rights of shareholders exist with respect to any capital stock of the Company. No shareholder of the Company has any right pursuant to any 4 agreement which has not been waived or honored to require the Company to register the sale of any securities owned by such shareholder under the Act in the public offering contemplated herein except as disclosed in the Registration Statement. Other than Boulder Interactive Group, Inc. (dba Inroads Interactive), a Colorado corporation, DaViD Entertainment, Inc., a Colorado corporation, Fuzzy Entertainment, Inc. (dba In-Sight Editions), a Colorado corporation and Colorado Satellite Broadcasting, Inc., a Colorado corporation, the Company has no subsidiaries, and does not own any shares of stock or any other equity interest in any firm, partnership, association or other entity. 2.10 AUTHORITY FOR ISSUANCE OF UNITS. The issuance of the Common Stock (including Common Stock issuable upon the exercise of the Warrants) and Warrants issuable in connection with the Units has been duly authorized and at any Firm or Option Closing Date as defined herein after payment therefor in accordance herewith (and, in the case of the Common Stock issuable upon exercise of the Warrants in accordance with the terms of the Warrants), such Common Stock will be validly issued, fully paid and nonassessable. The Units will conform in all material respects with all statements with regard thereto in the Registration Statement and the Prospectus. 2.11 TITLE TO TANGIBLE PROPERTY. Except as otherwise set forth in or contemplated by the Registration Statement and Prospectus, the Company and each of its subsidiaries has good and marketable title to all items of personal property owned by the Company and each such subsidiary, free and clear of any security interest, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or its subsidiaries, and any real property and buildings held under lease by the Company and its subsidiaries are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such property and buildings by the Company and its subsidiaries. 2.12 TITLE TO INTELLECTUAL PROPERTY. Except as described in the Prospectus, the Company and its subsidiaries does not own any patents or trademarks. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by it in connection with its business, and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing intellectual property rights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Prospectus. 2.13 CONTRACT RIGHTS. The agreements to which the Company and each of its subsidiaries is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company and its subsidiaries, as appropriate, in accordance with their terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, 5 reorganization, moratorium or other similar laws relating to or affecting creditor's rights generally or by equitable principles, and, to the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements. 2.14 NO MARKET MANIPULATION. The Company has not taken nor will it take, directly or indirectly, any action designed to cause or result, or which might reasonably be expected to cause or result, in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Stock or the Warrants. 2.15 NO OTHER SALES OR COMMISSIONS. The Company has not since the filing of the Registration Statement (i) sold, bid for, purchased, attempted to induce any person to purchase, or paid anyone any compensation for soliciting purchases of, its capital stock or (ii) paid or agreed to pay to any person any compensation for soliciting another to purchase any securities of the Company except for the sale of Units by the Company under this Agreement. 2.16 ACCURACY OF FINANCIAL STATEMENTS. The financial statements and schedules of the Company included in the Registration Statement and the Prospectus, or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, fairly present in all material respects the financial position of the Company and the results of operations and changes in financial condition as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as otherwise noted therein and include all financial information required to be included by the Act. The selected financial data set forth under the captions "PROSPECTUS SUMMARY--Summary Financial Data" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Prospectus, or, if the Prospectus is not in existence the most recent Preliminary Prospectus, fairly present in all material respects, on the basis stated in the Prospectus or such Preliminary Prospectus, the information included therein. 2.17 INDEPENDENT PUBLIC ACCOUNTANT. Spicer, Jeffries & Company and Ernst & Young which have certified or shall certify certain of the financial statements of the Company filed or to be filed as part of the Registration Statement and the Prospectus, are independent certified public accountants within the meaning of the Act and the Rules and Regulations. 2.18 INTERNAL ACCOUNTING. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (a) transactions are executed in accordance with management's general or specific authorization; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 6 2.19 LITIGATION. Except as set forth in the Registration Statement and Prospectus, there is and at the Closing Date there will be no action, suit or proceeding before any court or governmental agency, authority or body pending or to the knowledge of the Company threatened which might result in judgments against the Company or any of its subsidiaries not adequately covered by insurance or which collectively might result in any material adverse change in the condition (financial or otherwise), the business or the prospects of the Company, or would have a material adverse effect on the properties or assets of the Company. Neither the Company nor its subsidiaries is subject to the provisions of any injunction, judgement, decree or order of any court, regulatory body, administrative agency or other governmental body or arbitral forum, which might result in a material adverse change in the business, assets or condition of the Company. 2.20 NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (a) the Company has not incurred any material adverse change in or affecting the condition, financial or otherwise, of the Company or any of its subsidiaries or the earnings, business affairs, management, or business prospects of the Company or any of its subsidiaries, whether or not occurring in the ordinary course of business, (b) there has not been any material transaction entered into by the Company or any of its subsidiaries, other than transactions in the ordinary course of business or transactions specifically described in the Registration Statement as it may be amended or supplemented, (c) neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, (d) neither the Company nor any of its subsidiaries has paid or declared any dividends or other distribution with respect to its capital stock and neither the Company nor any of its subsidiaries is in default in the payment of principal or interest on any outstanding debt obligations, and (e) there has not been any change in the capital stock (other than the sale of the Common Stock and Warrants hereunder or the exercise of outstanding stock options or warrants as described in the Registration Statement) or material increase in indebtedness of the Company. The Company does not have any known material contingent obligation which is not disclosed in the Registration Statement (or contained in the financial statements or related notes thereto), as such may be amended or supplemented. 2.21 TRANSACTIONS WITH AFFILIATES. Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus or if the Prospectus is not in existence the most recent Preliminary Prospectus, and except as may otherwise be indicated or contemplated herein or therein, (a) neither the Company nor any of its subsidiaries has entered into any transaction with an "affiliate" of the Company or any of its subsidiaries, as defined in the Act and the Rules and Regulations, or (b) declared, paid or made any dividend or distribution of any kind on or in connection with any class of its capital stock, and (c) the Company has no knowledge of any transaction between any affiliate of the Company or one of its subsidiaries and any significant customer or supplier of the Company or one of its subsidiaries, except in its ordinary course of business. 7 2.22 INSURANCE. Except as otherwise set forth in or contemplated by the Registration Statement and Prospectus, the Company and each of its subsidiaries is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which it is engaged; neither the Company nor any of its subsidiaries has been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), business prospects, net worth or results of operations of the Company. 2.23 TAX RETURNS. The Company and each of its subsidiaries has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable or adequate accruals have been set up to cover any such unpaid taxes, except for any such assessment, fine or penalty that is currently being contested in good faith. 2.24 POLITICAL CONTRIBUTIONS. Neither the Company nor any of its subsidiaries has directly or indirectly, (a) made any unlawful contribution to any candidate for public office, or failed to disclose fully any contribution in violation of law, or (b) made any payment to any federal, state, local, or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any other such jurisdiction. 2.25 INVESTMENT COMPANY ACT. The Company and each of its subsidiaries conducts their operations in a manner that does not subject them to registration as an investment company under the Investment Company Act of 1940, as amended, and the transactions contemplated by this Agreement will not cause the Company to become an investment company subject to registration under the Investment Company Act of 1940, as amended. 2.26 ASSET PURCHASE AGREEMENT. The execution and delivery of the Asset Purchase Agreements between the Company and Fifth Dimension Communications, Inc. ("Fifth Dimension") and its affiliates and the consummation of the transactions contemplated therein have been duly authorized by the Company and the Asset Purchase Agreements have been duly executed and delivered by the Company into escrow and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with the terms thereof, except as may be limited by applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and by general equitable principles, and as rights to indemnity and contribution hereunder may be limited by applicable law. 2.27 FIFTH DIMENSION FINANCIAL STATEMENTS. To the knowledge of the Company, the financial statements and schedules of Fifth Dimension included in the Registration Statement and the Prospectus, or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, 8 fairly present in all material respects the financial position of Fifth Dimension and the results of operations and changes in financial condition as of the dates and periods therein specified. To the knowledge of the Company, such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as otherwise noted therein and include all financial information required to be included by the Act. To the knowledge of the Company, the selected financial data set forth under the captions "PROSPECTUS SUMMARY--Summary Financial Data," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Prospectus, or, if the Prospectus is not in existence the most recent Preliminary Prospectus, fairly present in all material respects, on the basis stated in the Prospectus or such Preliminary Prospectus, the information included therein. 2.28 CHANGES IN FIFTH DIMENSION FINANCIAL CONDITION. Except as set forth in the Registration Statement and Prospectus, to the knowledge of the Company, there is and at the Closing Date there will be no action, suit or proceeding before any court or governmental agency, authority or body pending or threatened which might result in judgments against Fifth Dimension or any of its subsidiaries not adequately covered by insurance or which collectively might result in any material adverse change in the condition (financial or otherwise), the business or the prospects of Fifth Dimension, or would have a material adverse effect on the properties or assets of Fifth Dimension. To the knowledge of the Company, Fifth Dimension is not subject to the provisions of any injunction, judgement, decree or order of any court, regulatory body, administrative agency or other governmental body or arbitral forum, which might result in a material adverse change in the business, assets or condition of Fifth Dimension. To the knowledge of the Company, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (a) Fifth Dimension has not incurred any material adverse change in or affecting the condition, financial or otherwise, of Fifth Dimension or any of its subsidiaries or the earnings, business affairs, management, or business prospects of Fifth Dimension, whether or not occurring in the ordinary course of business, (b) there has not been any material transaction entered into by Fifth Dimension any of its subsidiaries, other than transactions in the ordinary course of business or transactions specifically described in the Registration Statement as it may be amended or supplemented, (c) Fifth Dimension has not sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, (d) Fifth Dimension has not paid or declared any dividends or other distribution with respect to its capital stock and Fifth Dimension is not in default in the payment of principal or interest on any outstanding debt obligations to be assumed by the Company, and (e) there has not been any material increase in indebtedness of Fifth Dimension to be assumed by the Company. SECTION 3. PURCHASE, SALE AND DELIVERY OF THE UNITS 9 3.1 PURCHASE OF FIRM UNITS. On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each of the Underwriters named in Schedule I hereto, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of $____ per Unit, the number of Firm Units set forth opposite the name of such Underwriter in Schedule 1 hereto. The Company will make one or more certificates for Common Stock and Warrants constituting the Firm Units, in definitive form and in such denomination or denominations and registered in such name or names as the Representative shall request upon notice to the Company at least 48 hours prior to the Firm Closing Date, available for checking and packaging by the Representative at the offices of the Company's transfer agent or registrar (or the correspondent or the agent of the Company's transfer agent or registrar) at least 24 hours prior to the Firm Closing Date. Payment for the Firm Units shall be made by bank wire payable in same day funds to the order of the Company drawn to the order of the Company for the Firm Units, against delivery of certificates therefor to the Representative. Delivery of the documents, certificates and opinions described in Section 6 of this Agreement, the Firm Units and payment for the Firm Units and the Option Units shall be made at the offices of Centex Securities Incorporated, 1020 Prospect Street, Suite 200, La Jolla, California 92037, at 9:00 a.m., California time, on the third full business day following the date hereof (on the fourth full business day if this Agreement is executed after 12:30 p.m., California time), or at such other places, time or date as the Representative and the Company may agree upon or as the Representative may determine pursuant to Section 9 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date." 3.2 OVER-ALLOTMENTS; OPTION UNITS. For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Units as contemplated by the Prospectus, the Company hereby grants to you on behalf of the several Underwriters an option to purchase, severally and not jointly, the Option Units. The purchase price to be paid for any Option Units shall be the same price per share as the price per Unit for the Firm Units set forth above in Section 3.1, plus, if the purchase and sale of any Option Share takes place after the Firm Closing Date and after the Common Stock is trading "ex-dividend," an amount equal to the dividends payable on the Common Stock contained in such Option Units. The option granted hereby may be exercised in the manner described below as to all or any part of the Option Units from time to time within forty-five days after the date of the Prospectus. The Underwriters shall not be under any obligation to purchase any of the Option Units prior to the exercise of such option. The Representative may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company setting forth the aggregate number of Option Units as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Units. Any such date of delivery shall be determined by the Representative but shall not be earlier than two business days or later than seven business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representative and the Company may agree upon or as the Representative may determine pursuant to Section 9 hereof, is herein called the "Option Closing 10 Date" with respect to such Option Units. Upon each exercise of the option as provided herein, subject to the terms and conditions herein set forth, the Company shall become obligated to sell to each of the several Underwriters, and each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company, the same percentage of the total number of the Option Units as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Units, as adjusted by the Representative in such manner as it deems advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Units, one or more certificates for the Common Stock and Warrants contained in such Option Units, in definitive form, and payment therefore, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in Section 3.1, except that reference therein to the Firm Units and the Firm Closing Date shall be deemed, for purposes of this Section 3.2, to refer to such Option Units and Option Closing Date, respectively. No Option Units shall be required to be, or be, sold and delivered unless the Firm Units have been, or simultaneously are, sold and delivered as provided in this Agreement. 3.3 DEFAULT BY AN UNDERWRITER. It is understood that you, individually and not as the Representative, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Units to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. SECTION 4. OFFERING BY THE UNDERWRITERS Upon payment by the Underwriters of the purchase price of $5.25 per Unit and the Company's authorization of the release of the Firm Units, the several Underwriters shall offer the Firm Units for sale to the public upon the terms set forth in the Prospectus. The Representative may from time to time thereafter change the public offering prices and other selling terms. If the option set forth in Section 3.2 of this Agreement is exercised, then upon the Company's authorization of the release of the Option Units the several Underwriters shall offer such Units for sale to the public upon the foregoing terms. SECTION 5. COVENANTS OF THE COMPANY Except as otherwise stated below, the Company covenants and agrees with each of the Underwriters that: 5.1 COMPANY'S BEST EFFORTS TO CAUSE REGISTRATION STATEMENT TO BECOME EFFECTIVE. The Company will use its best efforts to cause the Registration Statement, if not effective at the time 11 of execution of this Agreement, and any amendments thereto, to become effective as promptly as possible. If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) under the Act. During any time when a prospectus relating to the Common Stock is required to be delivered under the Act, the Company (a) will comply with all requirements imposed upon it by the Act and the Rules and Regulations to the extent necessary to permit the continuance of sales of or dealings in the Common Stock and Warrants in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (b) will not file with the Commission the prospectus or the amendment referred to in the second sentence of Section 2.1 hereof, any amendment or supplement to such prospectus or any amendment to the Registration Statement unless and until the Representative has been advised of such proposed filing, has been furnished with a copy for a reasonable period of time prior to the proposed filing, and has given its consent to such filing, which shall not be unreasonably withheld or delayed. 5.2 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company will prepare and file with the Commission, in accordance with the Rules and Regulations of the Commission, promptly upon written request by the Representative or counsel for the Representative, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be reasonably necessary or advisable in connection with the distribution of the Units by the several Underwriters, and the Company will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representative, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representative of each such filing or effectiveness. 5.3 NOTICE OF STOP ORDERS. The Company will advise the Representative promptly after receiving notice or obtaining knowledge of: (a) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any amendment thereto, or any order preventing or suspending the use of any Preliminary Prospectus of the Prospectus or any amendment or supplement thereto; (b) the suspension of the qualification of the Units, Common Stock or Warrants for offering or sale in any jurisdiction; (c) the institution, threatening or contemplation of any proceeding for any such purpose; or (d) any request made by the Commission for amending the Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued to obtain the withdrawal thereof as promptly as possible. 5.4 BLUE SKY QUALIFICATION. The Company will arrange and cooperate with counsel to the Representative for the qualification of the Units for offering and sale under the securities or blue sky laws of such jurisdictions as the Representative may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Units; provided, however, that in connection therewith the Company shall not be 12 required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. 5.5 POST-EFFECTIVE AMENDMENTS. If, at any time when a prospectus relating to the Units is required to be delivered under the Act, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading, in the light of the circumstances under which they were made, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the Rules or Regulations, the Company will promptly notify the Representative thereof and, subject to Section 3 hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. 5.6 DELIVERY OF PROSPECTUSES. The Company will, without charge, provide (a) to the Representative and to counsel for the Representative a signed copy of the Registration Statement originally filed with respect to the Units and each amendment thereto (in each case including exhibits thereto), (b) to each other Underwriter so requesting in writing, a conformed copy of such Registration Statement and each amendment thereto (in each case without exhibits thereto) and (c) so long as a prospectus relating to the Units is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representative may reasonably request. 5.7 SECTION 11(A) FINANCIALS. The Company will, as soon as practicable but in any event not later than 90 days after the period covered thereby, make generally available to its security holders and to the Representative a consolidated earnings statement of the Company and its subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. 5.8 APPLICATION OF PROCEEDS. The Company will apply the net proceeds from the sale of the Units as set forth in the Prospectus and Registration Statement and will not take any action that would cause it to become an investment company under the Investment Company Act of 1940, as amended. 5.9 SALES OF SECURITIES. The Company will not, directly or indirectly, without ten (10) days prior written notice to the Representative, offer, sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of one year after the date hereof, except (a) to the Underwriters pursuant to this Agreement; (b) up to _____ options to be granted pursuant a stock option plan to be adopted by the Company; and (c) up to 675,250 shares of Common Stock reserved for issuance upon exercise of warrants outstanding as of June 30, 1997, including 400,000 shares 13 reserved for issuance to Quarto Holdings, Inc.; provided that such persons have delivered to the Representative the agreement described in Section 7.7 of this Agreement. 5.10 APPLICATION TO NASDAQ. The Company will cause the Common Stock and Warrants to be duly included for quotation on the Nasdaq SmallCap Market prior to the Closing Date. If requested by the Representative, the Company will also cause the Common Stock and Warrants to be duly included for listing on the Pacific Stock Exchange. The Company will use its best efforts to ensure that the Common Stock and Warrants remain included for quotation on the Nasdaq SmallCap Market and the Pacific Stock Exchange (if applicable) following the Closing Date for a period of not less than three years. 5.11 APPLICATION FOR SECONDARY MARKET EXEMPTIONS. To the extent necessary or appropriate, the Company will make such applications, file such documents, and furnish such information as may be necessary to list the Common Stock and Warrants in the securities listing manuals of Standard & Poor's Corporation or Moody's Industrial Services contemporaneous with the filing of the Prospectus with the Commission, and shall maintain listing in such manuals thereafter for a period of no less than five years. As of the first date that the Company and its securities are eligible, the Company will apply with the Department of Corporations in the State of California to have the Units listed as an "Eligible Security" for purposes of secondary market exemptions in the State of California. The Company will take such other similar steps as are reasonably necessary to obtain exemptions for secondary trading of the Company's Common Stock and Warrants in various United States jurisdictions. 5.12 REPORTS TO SHAREHOLDERS. So long as any Common Stock is outstanding until five years after the Closing Date, the Company will furnish to the Representative (a) as soon as available a copy of each report of the Company mailed to shareholders and filed with the Commission and (b) from time to time such other information concerning the Company as the Representative may reasonably request. 5.13 DELIVERY OF DOCUMENTS. At or prior to the Closing, the Company will deliver to the Representative true and correct copies of the certificate of incorporation of the Company and all amendments thereto, all such copies to be certified by the Secretary of State of the State of Colorado, a good standing certificate from the Secretary of State of Colorado, dated no more than five business days prior to the Closing Date; true and correct copies of the bylaws of the Company, as amended, certified by the Secretary of the Company and true and correct copies of the minutes of all meetings of the directors and shareholders of the Company held prior to the Closing Date which in any way relate to the subject matter of this Agreement. 5.14 UNDERWRITERS' WARRANT. On or prior to the Closing Date, the Company shall deliver to the Representative warrants (the "Underwriter's Warrants"), at an aggregate purchase price of $100, to purchase Shares equal to 10% of the Firm Shares sold in the Offering, which Underwriter's Warrants shall be exercisable for a per Share exercise price equal to 135% of the per Unit public offering price of the Firm Units. 14 5.15 COOPERATION WITH REPRESENTATIVE' DUE DILIGENCE. At all times prior to the Closing Date, the Company will cooperate with the Representative in such investigation as the Representative may make or cause to be made of all the properties, business and operations of the Company and its subsidiaries in connection with the purchase and public offering of the Units and the Company will make available to the Representative in connection therewith such information in its possession and the possession of its subsidiaries as the Representative may reasonably request. 5.16 STOCK TRANSFER AGENT. The Company has appointed Corporate Stock Transfer, Inc., Denver, Colorado, as Transfer Agent for the Common Stock. The Company will not change or terminate such appointment for a period of two years from the effective date without first obtaining the written consent of the Representative, which consent shall not be unreasonably withheld. 5.17 PUBLICITY. Prior to the Firm Closing Date, or the Option Closing Date, as the case may be, the Company shall not issue any press release or other communication directly or indirectly and shall hold no press conference with respect to the Company, its financial condition, results of operations, business, properties, assets, liabilities and any of them, or this offering, without the prior written consent of the Representative. If at any time during the 90 day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in the opinion of the Representative the market price of the Common Stock has been or is likely to be materially affected, regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus, the Company will, after written notice from the Representative, evaluate the propriety of disseminating a press release or other public statement reasonably acceptable to the Representative and its counsel, commenting on such rumor, publication or event. 5.18 BOARD OF DIRECTORS MEETINGS. The Company shall notify the Representative of all meetings of the Board of Directors and shareholders of the Company and shall have the right, for a period of three (3) years from the date of the Prospectus, to have an observer at such meetings. Such designee shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including, but not limited to, food, lodging, and transportation. 5.19 FORECASTS AND PROJECTIONS. For a period of two years from the effective date of the Registration Statement, the Company shall provide the Representative with routine internal forecasts if any such reports are prepared by the Company for dissemination to the public. 5.20 KEY MAN INSURANCE. The Company will maintain for a period of at least two (2) years, Key Man Insurance on each of Mark Kreloff and Daniel Bender in the amount of $1,000,000. 15 SECTION 6. EXPENSES 6.1 OFFERING EXPENSES. The Company will pay upon demand all costs and expenses incident to the performance of the Company's obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 11 hereof, including all costs and expenses incident to (a) the printing or other production of documents with respect to the transactions, including any costs of printing the Registration Statement originally filed with respect to the Units and any amendment thereto, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, and any blue sky memoranda, (b) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (c) the fees and disbursements of counsel, accountants and any other experts or advisors retained by the Company, (d) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Common Stock and Warrants, including transfer agent's and registrar's fees, (e) the qualification of the Units under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Representative relating thereto, (f) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Units, (g) any listing fees for the quotation of the Common Stock and Warrants on the Nasdaq SmallCap Market or listing on the Pacific Stock Exchange (if applicable), (h) one-half the cost of placing "tombstone advertisements" in any publications which may be selected by the Representative (provided that any such cost in excess of $5,000 shall require the consent of both the Company and the Representative), and (i) all other advertising that has been approved in advance by the Company relating to the offering of the Units (other than as shall have been specifically approved in writing by the Representative to be paid for by the Underwriters). In addition to the foregoing, the Company agrees to pay to the Representative a non-accountable expense allowance of 3% of the gross amount to be raised from the sale of the Units hereunder, payable at the Closing(s), of which $70,000 has already been paid by the Company in connection with this offering. If the sale of the Units provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 (other than Section 7.5) hereof is not satisfied, because this Agreement is terminated pursuant to Section 11 hereof or because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been reasonably incurred by them in connection with the proposed purchase and sale of the Units. The Company shall in no event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 6.2 INTERIM INDEMNIFICATION. The Company agrees that as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8.1 hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination 16 as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in THE WALL STREET JOURNAL which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. The Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8.2 hereof, they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. SECTION 7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS The obligations of the several Underwriters to purchase and pay for the Firm Units shall be subject, unless waived by the Representative in its sole discretion, to the accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its covenants and agreements hereunder and to the following additional conditions: 7.1 EFFECTIVENESS OF REGISTRATION STATEMENT. If the Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Registration Statement or such amendment shall have been declared effective not later than 11 a.m., California time, on the date on which the amendment to the Registration Statement originally filed with respect to the Units or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Units has been filed with the Commission, or such later time and date as shall have been consented to by the Representative; if required, the Prospectus and any amendment or supplement 17 thereto shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representative, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) to the reasonable satisfaction of counsel for the underwriters. 7.2 OPINION OF COUNSEL. The Representative shall have received an opinion, dated the Firm Closing Date, of Lehman & Eilen, counsel for the Company, and from the Company's Federal Communications Commission counsel, substantially to the effect that: (a) the Company and each of its subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of the State of Colorado, and duly qualified to transact business as a foreign corporation and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their properties or the conduct of their business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company; (b) the Company and each of its subsidiaries has the corporate power to own or lease their properties; to conduct their business as described in the Registration Statement and the Prospectus; to enter into this Agreement and to carry out all of the terms and provisions hereof to be carried out by them; (c) the Company has an authorized capital stock as set forth under the heading "CAPITALIZATION" in the Prospectus; effective upon the Closing all of the Company's all of the shares have been duly authorized and validly issued and are fully paid and nonassessable; the Common Stock and Warrants have been duly authorized by all necessary corporate action of the Company, and, when issued and delivered to and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the Common Stock and Warrants have been duly authorized for quotation on the Nasdaq SmallCap Market; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Units; and no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (d) the capital stock of the Company conforms, as to legal matters, to the statements set forth under the heading "DESCRIPTION OF SECURITIES" in the Prospectus in all material respects; (e) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement is a valid and binding obligation of the Company except as rights to indemnity and contribution thereunder may be limited by applicable federal or state securities laws and except as such enforceability may be 18 limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforceability of creditors' rights generally and subject to general principles of equity. (e) the execution and delivery of the Asset Purchase Agreements between the Company and Fifth Dimension and its affiliates and the consummation of the transactions contemplated therein have been duly authorized by the Company and such Asset Purchase Agreements have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with the terms thereof, except as may be limited by applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and by general equitable principles, and as rights to indemnity and contribution hereunder may be limited by applicable law. (f) no legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and, to the best knowledge of such counsel, no such proceedings have been threatened against the Company, its subsidiaries or with respect to any of their properties that can reasonably be expected to, or, if determined adversely to the Company or any of its subsidiaries, would, in any individual case or in the aggregate, result in any material adverse change in the business, financial condition or results of operations of the Company; (g) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (h) the issuance, offering and sale of the Units by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company or any of its subsidiaries is a party or by which the Company, its subsidiaries or any of their properties are bound, or the Articles of Incorporation or Bylaws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company or any of its subsidiaries; (i) the Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued by the Commission, and no proceedings for 19 that purpose have been instituted or, to the knowledge of such counsel, are threatened or contemplated by the Commission; (j) the Registration Statement and the Prospectus and each amendment or supplement thereto (in each case, other than the financial statements and other financial and statistical information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the Rules and Regulations; (k) neither the Company nor any of its subsidiaries is required, and, if the Company uses the proceeds of the sale of the Firm Units and the Option Units solely as described in the Prospectus, will not be required as a result of the sale of such Units to be registered as an investment company within the meaning of the Investment Company Act of 1940, as amended; and (l) such counsel shall also state that they have no reason to believe that the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that in each case such counsel need not express any opinion as to the financial statements and other financial and statistical information contained therein. In rendering any such opinion, such counsel may rely as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. The foregoing opinion may be limited to the laws of the United States, the laws of the State or Colorado and the General Corporation Law of the State of Colorado. References to the Registration Statement and the Prospectus in this Section 7.2 shall include any amendment or supplement thereto at the date of such opinion. Such counsel shall permit Luce, Forward, Hamilton & Scripps LLP to rely upon such opinion in rendering its opinion in Section 7.3. 7.3 REVIEW BY AND OPINION OF REPRESENTATIVE'S COUNSEL. The Representative shall have received an opinion, dated the Firm Closing Date, of Luce, Forward, Hamilton & Scripps LLP, counsel for the Representative, with respect to certain matters as the Representative may reasonably require, and the Company shall have furnished to such counsel such documents and certificates as they may reasonably request for the purpose of enabling them to pass upon such matters. 7.4 ACCOUNTANT'S LETTER. The Representative shall have received from Spicer, Jeffries & Company with respect to the Company and from Ernst & Young, L.L.P., with respect to Fifth Dimension Communications, Inc. and its affiliates ("Fifth Dimension"), a letter or letters dated, 20 respectively, the date hereof and the Closing Date, in form and substance reasonably satisfactory to the Representative, substantially to the effect that: (a) they are independent accountants with respect to the Company or Fifth Dimension as appropriate, within the meaning of the Act and the Rules and Regulations; (b) in their opinion, the financial statements audited by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (c) on the basis of a reading of the audited financial statements of the Company, for the years ended March 31, 1997 and March 31, 1996 and the unaudited financial statements of the Company for the period ended September 30, 1997 and the notes thereto, carrying out certain specified procedures (which do not constitute an audit made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph, a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters and on the basis of a reading of the audited financial statements of Fifth Dimension, for the years ended March 31, 1997, March 31, 1996 and March 31, 1995 and the unaudited financial statements of Fifth Dimension for the period ended September 30, 1997 and the notes thereto, carrying out certain specified procedures (which do not constitute an audit made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph, a reading of the minute books of the shareholders, the board of directors and any committees thereof of Fifth Dimension, and inquiries of certain officials of Fifth Dimension who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that: (i) the unaudited condensed financial statements of the Company and the Fifth Dimension, as appropriate, included in the Registration Statement and the Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and the Prospectus; and (ii) at a specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or long-term debt of the Company or the Fifth Dimension, as appropriate, or any decreases in net current assets or shareholders' equity of the Company or the Fifth Dimension, as appropriate, in each case compared with amounts shown on the September 30, 1997 balance sheet included in the Registration Statement and the Prospectus, or for the period from September 30, 1997 to such specified date there were any 21 decreases, as compared with the corresponding period in the preceding year, in net sales, gross profit, selling, general and administrative expenses, employee plans and bonuses, income (loss) from operations, interest expenses, income (loss) before income taxes, provision (benefit) for income taxes, net income (loss) or net income (loss) per share of the Company, except in all instances for changes, decreases or increases set forth in such letter; and (e) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company or the Fifth Dimension, as appropriate, and are included in the Registration Statement and the Prospectus, and have compared such amounts, percentages and financial information with such records of the Company or the Fifth Dimension, as appropriate, and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation. In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that such letters shall be accompanied by a written explanation of the Company or the Fifth Dimension, as appropriate, as to the significance thereof, unless the Representative deems such explanation unnecessary, and such changes, decreases or increases do not, in the sole judgment of the Representative, make it impractical or inadvisable to proceed with the purchase and delivery of the Units as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this Section 7.4 with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. 7.5 OFFICER'S CERTIFICATE. The Representative shall have received a certificate, dated the Firm Closing Date, of the president and the principal financial or accounting officer of the Company to the effect that: (a) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, in light of the circumstances in which they were made and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein not misleading, in the light of the circumstances under which they were made; and the Company has in all material respects performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; 22 (b) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of their knowledge, are contemplated by the Commission; and (c) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). 7.6 NASD REVIEW. The NASD, upon review of the terms of the public offering of the Firm Units and Option Units, shall not have objected to the Underwriters' participation in such offering. 7.7 LOCKUPS. The Representatives shall have received from each person who owns Common Stock, or securities convertible into Common Stock, an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of the Representative, offer, sell or grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of an option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock for a period of twelve months. 7.8 CONDITIONS TO CLOSING OF FIFTH DIMENSION TRANSACTION. On the Firm Closing Date, the sole remaining condition to closing the acquisition of Fifth Dimension by the Company shall be the raising funds in this Offering to pay the cash portion of the consideration in the transaction. 7.9 DUE DILIGENCE EXAMINATION. The counsel to the Representative and other persons retained by the Representative to conduct a due diligence investigation with respect to the offering, shall be reasonably satisfied with the results of their respective due diligence investigations. 7.10 BLUE SKY QUALIFICATION. The Units shall be qualified in such states as the Representative may reasonably request pursuant to Section 5.4, and each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date or Option Closing Date, as the case may be. 7.10 OTHER DOCUMENTS. On or before the Firm Closing Date, the Representative and counsel for the Representative shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. 23 All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representative. The Company shall furnish to the Representative such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representative and the counsel to the Representative shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Units shall be subject, in the Representative' discretion, to each of the foregoing conditions to purchase the Firm Units, except that all references to the Firm Units and the Firm Closing Date shall be deemed to refer to such Option Units and the related Option Closing Date, respectively. SECTION 8. INDEMNIFICATION AND CONTRIBUTION 8.1 INDEMNIFICATION BY COMPANY. The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act") against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (a) any untrue statement or alleged untrue statement made by the Company in Section 2 of this Agreement; (b) any untrue statement or alleged untrue statement of any material fact contained in (i) the Registration Statement or any amendment thereto or any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (ii) any application or other document, or any amendment or supplement thereto, executed by the Company and based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Units under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"); or (c) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they are made, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the 24 Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative specifically for use therein; and provided further, that the Company will not be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Units from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented), other than the documents incorporated by reference therein at or prior to the written confirmation of the sale of such Units to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5.5 of this Agreement. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 8.2 INDEMNIFICATION BY UNDERWRITERS. Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company, any such director or officer of the Company or any such controlling person of the Company may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (b) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading in light of the circumstances in which they are made, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any director, officer or controlling person of the Company 25 in connection with investigation or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or any action in respect thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. No Underwriter will, without the prior written consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Company, any of its directors, any of its officers who signed the Registration Statement or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company and each such director, officer and controlling person from all liability arising out of such claim, action, suit or proceeding. 8.3 NOTICE OF DEFENSE. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party (which may not be unreasonably withheld or delayed) under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (a) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel at any one time in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representative in the case of Section 8.1, representing the indemnified parties under such Section 8.1 who are parties to such action or actions) or (b) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party, unless such indemnified party waived its rights under this Section 8 in which case the indemnified party may effect such a settlement without such consent. 26 8.4 CONTRIBUTION. In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liability (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (a) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Units or (b) if the allocation provided by the foregoing clause (a) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liability (or action in respect thereof). The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (after deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable consideration referred to in the first sentence of this Section 8.4. Notwithstanding any other provision of this Section 8.4, no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the underwriter discount on the Units purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Agreement Among Underwriters. For purposes of this Section 8.4, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same right to contribution as the Company as the case may be. 27 SECTION 9. DEFAULT OF UNDERWRITERS If one or more Underwriters default in their obligations to purchase Firm Units, or Option Units hereunder and the aggregate number of such Units that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Units or Option Units to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representative for the purchase of such Units by other persons (who may include one or more of the non-defaulting Underwriters, including the Representative), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Units, or Option Units that such defaulting Underwriter or Underwriters agreed but failed to purchase. In the event of any default by one or more Underwriters as described in this Section 9, the Representative shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purpose and delivery of the Firm Units or Option Units, as the case may be. As used in this Agreement, the term "Underwriter" includes any persons substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. SECTION 10. SURVIVAL The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and directors and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (a) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (b) delivery of and payment for the Units. The respective agreements, covenants, indemnities and other statements set forth in Sections 5 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. SECTION 11. TERMINATION 11.1 BY REPRESENTATIVE. This Agreement may be terminated with respect to the Firm Units or any Option Units in the sole discretion of the Representative by notice to the Company given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company shall have failed, refused or been unable to perform all 28 obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing date or such Option Closing Date, respectively: (a) the Company shall have sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including financial or otherwise), in the business prospects, net worth or results of operations of the Company, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (b) trading in the Common Stock and Warrants shall have been suspended by the Commission or the National Association of Securities Dealers Automated Quotation SmallCap Market or trading in securities generally on the New York Stock Exchange or the American Stock Exchange shall have been suspended or minimum or maximum prices shall have been established on any such exchange or market system; (c) a banking moratorium shall have been declared by New York, California, or United States authorities; or (d) there shall have been (i) an outbreak or escalation of hostilities between the United States and any foreign power, (ii) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (iii) any other calamity or crisis having an effect on the financial markets that, in the reasonable judgment of the Representative, makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Units as contemplated by the Registration Statement, as amended as of the date hereof. 11.2 EFFECT OF TERMINATION HEREUNDER. Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party, except as provided in Section 10 hereof. 29 SECTION 12. INFORMATION SUPPLIED BY UNDERWRITERS The statements set forth in the last paragraph on the front cover page and under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus, to the extent such statements relate to the Underwriters constitute the only information furnished by any Underwriter through the Representative to the Company for the purposes of Section 8 and 10 hereof. The Underwriters represent and warrant to the Company that such statements, to such extent, are correct as of the date hereof and at each Closing Date. SECTION 13. NOTICES All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed (certified or registered mail, postage prepaid, return receipt requested) or delivered or sent by facsimile transmission and confirmed in writing to Centex Securities Incorporated, 1020 Prospect Street, Suite 200, La Jolla, California 92037, Attention: Mr. Bruce A. Biddick (with a copy to Dennis J. Doucette, Esq., Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway, Suite 2600, San Diego, CA 92101), if sent to the Company, shall be mailed (certified or registered mail, postage prepaid, return receipt requested), delivered or telegraphed and confirmed in writing to the Company at 1050 Walnut St., Suite 301, Boulder, Colorado 80302, Attention: Mr. Mark H. Kreloff (with a copy to Hank Gracin, Esq., Lehman & Eilen, 50 Charles Lindbergh Blvd., Uniondale, New York 11553). Notices shall be effective if mailed, 48 hours after deposit in the mail properly addressed, sent by facsimile, upon receipt and in any other instance, when delivered. SECTION 14. SUCCESSORS This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company and their respective successors and legal Representative, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (a) the indemnities of the Company contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (b) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Units from any Underwriter shall be deemed a successor because of such purchase. 30 SECTION 15. APPLICABLE LAW The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of California without giving effect to any provisions relating to conflicts of laws. SECTION 16. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company, and each of the several Underwriters. Very truly yours, NEW FRONTIER MEDIA, INC. By: ---------------------------------- Mark H. Kreloff President The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Centex Securities Incorporated (As Representative of the several Underwriters named in Schedule 1 hereto) By: --------------------------------------- Bruce Biddick, President 31 SCHEDULE 1 UNDERWRITERS Number of Firm Units Underwriter to be purchased - ----------- --------------- Centex Securities Incorporated Total ---------- EX-1.02 3 AGREEMENT AMONG UNDERWRITERS NEW FRONTIER MEDIA, INC. 1,500,000 Units AGREEMENT AMONG UNDERWRITERS ___________, 1997 Centex Securities Incorporated (As Representative of the several Underwriters Named in Schedule I to Exhibit A annexed hereto) 1020 Prospect Street, Suite 200 La Jolla, CA 92037 Gentlemen: We understand that New Frontier Media, Inc., a Colorado corporation (the "Company"), desires to enter into an agreement, substantially in the form of Exhibit A hereto (the "Underwriting Agreement"). The Underwriting Agreement provides for the sale by the Company to you and the other prospective Underwriters named in Schedule I to the Underwriting Agreement, severally and not jointly, of an aggregate of 1,500,000 units (the "Firm Units") consisting of one share of common stock ("Common Stock") of the Company and one redeemable common stock purchasae warrant ("Warrants"). In addition, the Company, pursuant to the Underwriting Agreement, will grant to the Underwriters an option to purchase up to an additional 225,000 Units underwritten (the "Option Units") for the purpose of covering over-allotments in connection with the sale of the Firm Units. The Firm Units and any Option Units purchased pursuant to the Underwriting Agreement are herein called the"Units." We understand that changes may be made in those who are to be Underwriters and in the respective number of Units to be purchased by them, but that the number of Units to be purchased by us as set forth in said Schedule I will not be changed without our consent except as provided herein or in the Underwriting Agreement. The parties on whose behalf you execute the Underwriting Agreement are herein called the "Underwriters." We desire to confirm the agreement among you, the undersigned and the other Underwriters with respect to the purchase of the Units by the Underwriters, severally and not jointly, from the Company. The aggregate number of Units which any Underwriter will be obligated to purchase from the Company pursuant to the terms of the Underwriting Agreement is herein called the "Underwriting Obligation" of that Underwriter. 1. AUTHORITY AND COMPENSATION OF REPRESENTATIVE. We hereby authorize you, as our representative (the "Representative") and on our behalf, (a) to enter into an agreement with the Company, in substantially the form attached hereto as Exhibit A, but with such changes therein as in your judgement will not be materially adverse to the Underwriters, (b) to exercise all the authority and discretion vested in the Underwriters and in you by the provisions of the Underwriting Agreement, (c) to take all such action as you in your discretion may deem necessary or advisable in order to carry out the provisions of the Underwriting Agreement and of this Agreement, and the sale and distribution of the Units and (d) to determine all matters relating to the public advertisement of the Units. We authorize you, in executing the Underwriting Agreement on our behalf, to set forth in Schedule I of the Underwriting Agreement as our commitment to purchase the number of Units (which shall not be substantially in excess of the number of Units included in your invitation to participate unless we have agreed otherwise) included in a wire, telex, or similar means of communication transmitted by you to us at least 24 hours prior to the commencement of the offering as our finalized Underwriting Obligation. As our share of the compensation, you have agreed to pay us $_________ per unit net of selling syndicate expenses, in respect of the aggregate number of Firm Units and Option Units, respectively, which we shall agree to purchase pursuant to the Underwriting Agreement. Such compensation shall constitute our sole compensation hereunder and we shall be responsible for our own expenses incurred in connection with the offering, including without limitation, all reallowance charges as set forth in the Underwriting Agreement. 2. PUBLIC OFFERING OF UNITS. A public offering of the Units is to be made, as herein provided, as soon after the Registration Statement relating hereto becomes effective as in your judgement is advisable. The Units shall be initially offered to the public at the public offering price as determined by you and the Company. You will advise us by telegraph, facsimile or telephone when the Units shall be released for offering, when the registration statement relating to the Units shall become effective and the price at which the Units is initially to be offered. We authorize you as Representative of the Underwriters after the initial public offering, to change the public offering price, the concession and the re-allowance if, in your sole discretion, such action becomes desirable by reason of changes in general market conditions or otherwise. The public offering price at the time in effect is herein called the "Offering Price." After notice from you that the Units are released for public sale, we will offer to the public in conformity with the provisions hereof and with the terms of offering set forth in the Prospectus such Units as you advise us are not reserved. We agree not to offer or sell any of the Units to persons over whose accounts we exercise investment discretion without their specific advance consent. 3. OFFERING TO DEALERS AND RETAIL SALES. We authorize you to reserve for offering and sale, and on our behalf to sell to retail purchasers (such sales being herein called "Retail Sales") and to dealers selected by you (such dealers, among whom any Underwriter may be included, being herein called "Selected Dealers") all or any part of our Units as you, in your sole discretion, shall determine. Such sales, if any, shall be made (a) in the case of Retail Sales, at the Offering Price, and (b) in the case of sales to Selected Dealers at the Offering Price less such concession or concessions as you, in your sole discretion, shall determine. 2 Any Retail Sales shall be as nearly as practicable in proportion to the Underwriting Obligations of the respective Underwriters. Any sales to Selected Dealers made for our account shall be as nearly as practicable in the ratio that the Units reserved for our account for offering to Dealers bears to the aggregate of all Units of all Underwriters including you so reserved. The over-allotment option to the extent exercised, shall be exercised by you as a Representative of the Underwriters, and shall be exercised only for the purpose of making Retail Sales or sales to Selected Dealers by you. Such sales for our account of the over-allotment option shall as nearly as practicable be in proportion to the Underwriting Obligations of the respective Underwriters. On any Retail Sales or sales to Selected Dealers, including those pertaining to the overallotment option, made by you on our behalf we shall be entitled to receive only the Underwriter's concession. We agree that, from time to time prior to the termination of the provisions referred to in Section 13 hereof, we shall furnish to you such information as you may request in order to determine the number of Units purchased by us under the Underwriting Agreement which then remain unsold, and we shall upon your request sell to you for the account of any Underwriter as many of such unsold Units as you may designate at the Offering Price, less all or any part of the concession to Selected Dealers as you, in your sole discretion, shall determine. The provisions of Section 4 hereof shall not be applicable in respect of any such sale. We authorize you to determine the form and manner of any communications or agreements with the Selected Dealers. In the event that there shall be any agreements with Selected Dealers, you are authorized to act as manager thereunder and we agree, in such event, to be governed by the terms and conditions of such agreements. The form of Selected Dealer Agreement attached hereto as Exhibit B is satisfactory to us. Sales to Dealers shall be made under a Selected Dealers Agreement, attached hereto as Exhibit B, attached hereto and by this reference incorporated herein. Each Underwriter agrees that it will not offer any of the Units for sale at a price below the Offering Price or allow any concession therefrom except as herein otherwise provided. We as to our Units may enter into agreements with dealers, but any reallowance concession shall not exceed half of the Dealer's Concession. It is understood that any Selected Dealer to whom an offer may be made as hereinbefore provided shall be actually engaged in the investment banking or securities business and shall be either (a) a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or (b) a dealer with its principal place of business located outside the United States, its territories and its possessions and not registered as a broker or dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act"), who agrees not to make any sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein. Each Selected Dealer shall agree to comply with the provisions of Rule 2740 of the Conduct Rules of the NASD, and each foreign Selected Dealer who is not a member of the NASD also shall agree to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though it were a member of the NASD, with the provisions of Rules 2730 and 2750 of the Conduct Rules, and to comply with Rule 2420 of the Conduct Rules thereof as that Rule applies to a non-member foreign dealer. The several Underwriters may allow, and the Selected Dealers, if any, 3 may re-allow such concession or concessions as you may determine from time to time on sales of Units to any qualified dealer, all subject to the Conduct Rules of the NASD. Nothing contained in this Agreement shall be deemed to restrict our right, subject to the provisions of this Section 3, to offer our Units prior to the effective date of the Registration Statement, provided that any such offer shall be made in compliance with any applicable requirements of the Securities Act of 1933 (the "1933 Act") and the 1934 Act and the rules and regulations of the Securities and Exchange Commission thereunder and of any applicable state securities laws. 4. REPURCHASES IN THE OPEN MARKET. Any Units, Common Stock or Warrants sold by us (otherwise than through you) which shall be contracted for or purchased in the open market by you on behalf of any Underwriter or Underwriters shall be repurchased by us on demand at a price equal to the cost of such purchase plus commissions and taxes on redelivery. Any Units, Common Stock or Warrants delivered on such repurchase need not be the identical Units, Common Stock or Warrants originally sold by us. In lieu of delivery of such Units, Common Stock or Warrants to us, you may sell such Units, Common Stock or Warrants in any manner for our account and charge us with the amount of any loss or expense or credit us with the amount of any profit, less any expense, resulting from such sale, or charge our account with an amount not in excess of the concession to Selected Dealers. 5. DELIVERY AND PAYMENT. We agree to deliver to you at or before 6:00 a.m. California time on the Closing Date referred to in the Underwriting Agreement payment for the Units to be purchased by us under the Underwriting Agreement in an amount equal to the Offering Price for such Units less the concession to Selected Dealers for Units which we retained for direct sale by us, against delivery of certificates for the Units for our account hereunder. If we are a member of or clear through a member of The Depository Trust Company ("DTC"), you may, in your discretion, deliver our Units through the facilities of DTC. You shall remit to us, as promptly as practicable, the amounts received by you from Selected Dealers and retail purchasers as payment in respect of Units sold by you for our account pursuant to Section 3 hereof for which payment has been received. Units purchased by us under the Underwriting Agreement and not reserved or sold by you for our account pursuant to Section 3 hereof shall be delivered to us as promptly as practicable after receipt by you. Any Units purchased by us and so reserved which remains unsold at any time prior to the settlement of accounts hereunder may, in your discretion, and shall, upon your request, be delivered to us, but, until termination of the first three paragraphs of Section 7 of the Selected Dealer Agreements pursuant to Section 8 thereof and of other selling arrangements, such delivery shall be for carrying purposes only. In case any Units reserved for sale in Retail Sales or to Selected Dealers shall not be purchased and paid for in due course as contemplated hereby, we agree (a) to accept delivery when tendered by you of any Units so reserved for our account and not so purchased and paid for, and (b) in case we shall have received payment from you in respect of any such Units, to reimburse you on demand for the full amount which you shall have paid us in respect for such Units. 4 In the event of our failure to tender payment for Units as provided in the Underwriting Agreement, you shall have the right under the provisions thereof to arrange for other persons, who may include you and any other Underwriter, to purchase such Units which we had agreed to purchase, but without relieving us from liability for our default. 6. AUTHORITY TO BORROW. We authorize you to advance your funds for our account (charging current interest rates) and to arrange loans for our account or the account of the Underwriters for the purpose of carrying out this Agreement, and in connection therewith to execute and deliver any notes or other instruments and to hold or pledge as security therefor all or any part of our Units or other Units purchased hereunder for our account. Any lender is hereby authorized to accept your instructions in all matters relating to such loans. Any part of our Units or of such other Units so held by you may be delivered to us for carrying purposes and, if so delivered, will be redelivered to you upon demand. 7. ALLOCATION OF EXPENSES AND LIABILITY. We authorize you to charge our account with and we agree to pay (a) all transfer taxes on sales made by you for our account, except as herein otherwise provided, and (b) our proportionate share (based on our Underwriting Obligation) of all expenses incurred by you in connection with the purchase, carrying, sale and distribution of the Units and all other expenses arising under the terms of the Underwriting Agreement or this Agreement. Your determination of all such expenses and your allocation thereof shall be final and conclusive. You may at any time make partial distributions of credit balances or call for payment of debit balances. Funds for our account at any time in your hands may be held in your general funds without accountability for interest. As soon as practicable after the termination of this Agreement, the net credit or debit balance in our account, after proper charge and credit for all interim payments and receipts, shall be paid to or paid by us, provided that you may establish such reserves as you, in your sole discretion, shall deem advisable to cover possible additional expenses chargeable to the several Underwriters. Notwithstanding any settlement, we will remain liable for any taxes on transfers for our account and for our proportionate share (based on our Underwriting Obligation) of all expenses and liabilities that may be incurred for the accounts of the Underwriters. 8. LIABILITY FOR FUTURE CLAIMS. Neither any statement by you of any credit or debit balance in our account nor any reservation from distribution to cover possible additional expenses relating to the Units shall constitute any representation by you as to the existence or non-existence of possible unforeseen expenses or liabilities of or charges against the several Underwriters. Notwithstanding the distribution of any net credit balance to us or the termination of this Agreement or both, we shall be and remain liable for, and will pay on demand, (a) our proportionate share (based on our Underwriting Obligation) of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters, or any of them, including any liability which may be incurred by or for the accounts of the underwriters, or any of them, based on the claim that the Underwriters constitute an association, unincorporated business, partnership or any separate entity, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account. 5 9. STABILIZATION AND OVER-ALLOTMENT. We authorize you (a) to make purchases and sales of Units, Common Stock and Warrants in the open market or otherwise, for long or short account, and on such terms and at such prices as you, in your sole discretion, shall deem advisable, (b) in arranging for sales of the Units, to over-allot, and (c) either before or after the termination of this Agreement, to cover any short position or liquidate any long position incurred pursuant to this Section 9; subject, however, to the applicable rules and regulations of the Securities and Exchange Commission (the "Commission") under the 1934 Act. All such purchases and sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective Underwriting Obligations; provided, however, that our net position resulting from such purchases and sales and over-allotments shall not at the time of each such purchase or sale or over-allotment exceed, for either long or short account, 15% of the aggregate amount which we shall become obligated to pay in respect of the total number of Firm Units and Option Units purchased for our account. If you engage in any stabilizing transactions as Representative of the Underwriters, you shall notify us of that fact. Each of us agrees to file with you, within five business days following the date of termination of such transactions, triplicate originals of a report "not as manager" on Form X-17A-1 in accordance with the requirements of Rule 17a-2(e) under the Securities Exchange Act of 1934. You shall, as such Representative, file such reports with, and make the requisite reports on such transactions as required by, the Securities and Exchange Commission in accordance with Rule 17a-2 under the 1934 Act. 10. OPEN MARKET TRANSACTIONS. We agree that we will not make bids or offers, or make or induce purchases or sales for our own account or the accounts of customers, in the open market or otherwise, either before or after the purchase of the Units and for either long or short account, of any shares of Common Stock or any security of the same class and series, or any right to purchase any such security except: (a) as provided in this Agreement, the Underwriting Agreement and the Selected Dealer Agreements or otherwise approved by you, (b) in brokerage transactions not involving solicitation of the customer's order and otherwise consistent with the provisions of Regulation M promulgated by the SEC, and (c) in connection with option and option-related transactions that are consistent with the "no-action" position set forth in Release No. 17609, as amended in Release No. 19565, of the Commission under the 1934 Act. We further agree that we will not lend, either before or after the purchase of the Units, to any customer, Underwriter, Selected Dealer or to any other securities broker or dealer any shares of Common Stock. Prior to the completion (as defined in Rule 10b-6 under the 1934 Act) of our participation in the distribution, we will otherwise comply with Rule 10b-6. 11. BLUE SKY. Prior to the initial offering by the Underwriters, you will inform us as to the states and other jurisdictions under the respective securities or blue sky laws of which it is believed that the Units have been qualified for sale or is exempt from such qualification, but you do not assume any responsibility or obligation as to the accuracy of such information or as to the right of any Underwriter or dealer to offer or sell the Units in any state or other jurisdiction. 12. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters in respect of their obligations under the Underwriting Agreement shall not release us from any of our obligations. In 6 the event of such default by one or more Underwriters, you are authorized to increase, pro rata with the other non-defaulting Underwriters, the number of Units which we shall be obligated to purchase from the Company; provided, however, that the aggregate amount of all such increases for all non-defaulting Underwriters shall not exceed 10% of the Units and, if the aggregate amount of the Units not taken up by such defaulting Underwriters exceeds such 10%, you are further authorized, but shall not be obligated, to arrange for the purchase by other persons, who may include you and other non-defaulting Underwriters, of all or a portion of the Units not taken up by such Underwriters. In the event any such increases or arrangements are made, the respective amounts of the Units to be purchased by the non-defaulting Underwriters and by any such other person or persons shall be taken as the basis for the Underwriter's obligations under this Agreement, but this shall not in any way affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from such default. In the event of default by one or more Underwriters in respect of their obligations under this Agreement to take up and pay for any Units purchased by you for their respective accounts pursuant to Section 9 hereof, or to deliver any Units sold or over-allotted by you for their respective accounts pursuant to any provision of this Agreement, and to the extent that arrangements shall not have been made by you for other persons to assume the obligations of such defaulting Underwriter or Underwriters, each non-defaulting Underwriter shall assume its proportionate share of the aforesaid obligations of each such defaulting Underwriter without relieving any such defaulting Underwriter of its liability therefor. 13. TERMINATION. Unless earlier terminated by you, the provisions of Section 2, 3, 4, 6, 9 and 10 of this Agreement shall, except as otherwise provided herein, terminate thirty full business days after the effective date of the Registration Statement herein referred to, but may be extended by you for an additional period or periods not exceeding thirty full business days in the aggregate. You may, however, terminate this Agreement or any provisions hereof at any time by written or telegraphic notice to us. 14. GENERAL POSITION OF THE REPRESENTATIVE. In taking action under this Agreement, you shall act only as agent of the several Underwriters. Your authority shall include the taking of such action as you may deem advisable in respect of all matters pertaining to any and all offers and sales of the Units, including the right to make any modifications which you consider necessary or desirable in the arrangements with Selected Dealers or others. You shall be under no liability for or in respect of the value of the Units or the validity or the form thereof, the Registration Statement, the Prospectus or agreements or other instruments executed by the Company or others; or for or in respect of the delivery of the Units; or for the performance by the Company or others of any agreement on its or their part; nor shall you as Representative or otherwise be liable under any of the provisions hereof or for any matters connected herewith, except for want of good faith, and except for any liability arising under the 1933 Act; and only obligations expressly assumed by you as Representative herein shall be implied from this Agreement. In representing the Underwriters hereunder, you shall act as Representative of each of them respectively. Nothing herein contained shall constitute the several Underwriters partners with you or with each other, or render any Underwriter liable for the commitments of any other Underwriter, except as otherwise provided in Section 12 hereof and in Section 7 of the Underwriting Agreement. If the Underwriters shall be 7 deemed to constitute a partnership for Federal income tax purposes, it is the intent of each Underwriter to be excluded from the application of Subchapter x, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended. Each Underwriter elects to be so excluded and agrees not to take any position inconsistent with such election. Each Underwriter authorizes you, in your discretion, to execute and file on behalf of the Underwriters such evidence of election as may be required by the Internal Revenue Service. The commitments and liabilities of each of the several Underwriters are several in accordance with their respective Underwriting Obligations and are not joint. 15. ACKNOWLEDGMENT OF RECEIPT OF REGISTRATION STATEMENT, ETC. We hereby confirm that we have examined the Registration Statement relating to the Units as heretofore filed by the Company with the Commission and each amendment thereto, if any, filed through the date hereof, including any documents filed under the 1934 Act through the date hereof and incorporated by reference into the Prospectus, that we are willing to be named as an underwriter therein and to accept the responsibilities of an underwriter thereunder, and that we are willing to proceed as therein contemplated. We confirm that we have authorized you to advise the Company on our behalf (a) as to the statements to be included in any Preliminary Prospectus and in the Prospectus under the heading "Underwriting" insofar as they relate to us, and (b) that there is no other information about us required to be stated in the Registration Statement or Prospectus. We understand that the aforementioned documents are subject to further change and that we will be supplied with copies of any further amendments or supplements to the Registration Statement, of any document filed under the 1934 Act after the effective date of the Registration Statement and before termination of the offering of the Units by the Underwriters if such document is deemed to be incorporated by reference into the Prospectus and of any amended or supplemented Prospectus promptly, if and when received by you, but the making of such changes, amendments and supplements shall not release us or affect our obligations hereunder or under the Underwriting Agreement. 16. INDEMNITY. We agree to indemnify and hold harmless each other Underwriter and any person who controls any such Underwriter within the meaning of Section 15 of the 1933 Act, to the extent that, and upon the terms on which, we agree to indemnify and hold harmless the Company and other specified persons as set forth in the Underwriting Agreement. Our indemnity agreement contained in this Section 16 shall remain in full force and effect regardless of any investigation made by or on behalf of such other Underwriter or controlling person and shall survive the delivery of and payment for the Units and the termination of this Agreement and the similar agreements entered into with the other Underwriters. Each Underwriter (including you) will pay, upon your request, as contribution, its proportionate share, based upon its Underwriting Obligation, of any loss, claim damage or liability, joint or several, paid or incurred by any Underwriter (including you) to any person other than an Underwriter, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus, any amendment or supplement thereto or any preliminary Prospectus or any other selling or advertising material approved by you for use by the Underwriters in connection with the sale of the Units, or the omission or alleged 8 omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with written information furnished to the Company through you by or on behalf of an Underwriter expressly for use therein) or relating to any transaction contemplated by this Agreement; and will pay such proportionate share of any legal or other expense reasonably incurred by you or with your consent in connection with investigating or defending against any such loss, claim, damage or liability, or any action in respect thereof. In determining the amount of our obligation under this paragraph, appropriate adjustment may be made by you to reflect any amounts received by any one or more Underwriters in respect of such claim from the Company pursuant to Section 6 of the Underwriting Agreement or otherwise. There shall be credited against any amount paid or payable by us pursuant to this paragraph any loss, claim, damage, liability or expense which is incurred by us as a result of any such claim asserted against us, and if such loss, claim, damage, liability or expense is incurred by us subsequent to any payment by us pursuant to this paragraph, appropriate provision shall be made to effect such credit, by refund or otherwise. If any such claim is asserted, you may take such action in connection therewith as you deem necessary or desirable, including retention of counsel for the Underwriters, and in your discretion separate counsel for any particular Underwriter or group of Underwriters, and the fees and disbursements of any counsel so retained by you shall be included in the amounts payable pursuant to this paragraph. In determining amounts payable pursuant to this paragraph, any loss, claim, damage, liability or expense incurred by any person who controls any Underwriter within the meaning of Section 15 of the 1933 Act which has been incurred by reason of such control relationship shall be deemed to have been incurred by such Underwriter. Any Underwriter may elect to retain, at its own expense, its own counsel. You may settle or consent to the settlement of any such claim on advice of counsel retained by you. Whenever you receive notice of the assertion of any claim to which the provisions of this paragraph would be applicable, you will give prompt notice thereof to each Underwriter. If any Underwriter or Underwriters defaults in its or their obligation to make any payments under this paragraph, each non-defaulting Underwriter shall be obligated to pay its proportionate share of all defaulted payments, based upon the proportion such non-defaulting Underwriter's Underwriting Obligation bears to the Underwriting Obligations of all non-defaulting Underwriters. Nothing therein shall relieve a defaulting Underwriter from liability for its default. 17. CAPITAL REQUIREMENTS. We confirm that the incurrence by us of our obligations under this Agreement and under the Underwriting Agreement will not place us in violation of the net capital requirements of Rule 15c3-1 under the 1934 Act or of any applicable rules relating to capital requirements of any securities exchange to which we are subject. 18. UNDERTAKING TO MAIL PROSPECTUSES. We represent to you that we have taken all action on our part required to have been taken to satisfy the policy set forth in Release No. 4968 of the Commission under the 1933 Act, including the distribution in the manner and at or prior to the time set forth in such Release, of copies of the Preliminary Prospectus relating to the Units (or, if you have so requested, copies of any revised Preliminary Prospectus) to all persons to whom we expect to mail confirmation of sale. As contemplated by Rule 15c2-8 under the 1934 Act, you agree to mail a copy of the Prospectus mentioned in the Underwriting Agreement to any person making a 9 written request therefor during the period referred to in said Rule, the mailing to be made to the address given in the request. We confirm that we have delivered all Preliminary Prospectuses and revised Preliminary Prospectuses, if any, required to be delivered under the provisions of Rule 15c2-8 and agree to deliver all Prospectuses required to be delivered thereunder. We acknowledge that the copies of the Preliminary Prospectus furnished to us have been distributed to dealers who have been notified of the foregoing requirements pertaining to the delivery of Preliminary Prospectuses and Prospectuses. You have heretofore delivered to us such number of copies of Preliminary Prospectuses as have been reasonably requested by us, receipt of which is hereby acknowledged, and will deliver such number of copies of Prospectuses as will be reasonably requested by us. 19. MISCELLANEOUS. We have transmitted herewith a completed Underwriters' Questionnaire on the form thereof supplied by you. Any notice hereunder from you to us or from us to you shall be deemed to have been duly given if sent by registered mail, telegram or teletype, to us at our address as set forth in our Underwriters' Questionnaire previously delivered to you, or to you at 1020 Prospect Street, Suite 200, La Jolla, California 92037, Attention: Mr. Bruce A. Biddick. We understand that you are a member in good standing of the NASD. We hereby confirm that we are actually engaged in the investment banking or securities business and are either (a) a member in good standing of the NASD or (b) a dealer with its principal place of business located outside the United States, its territories and its possessions and not registered as a broker or dealer under the 1934 Act who agrees not to make any sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein (except that we may participate in sales to Selected Dealers and others under Section 3 of this Agreement). We hereby agree to comply with the provisions of Rule 2740 of the Conduct Rules of the NASD, and, if we are a foreign dealer and not a member of the NASD, we also hereby agree to comply with the NASD's interpretation with respect to free-riding and withholding and to comply, as though we were a member of the NASD, with the provisions of Rules 2730 and 2750 of the Conduct Rules, and to comply with Rule 2720 of the Conduct Rules as that Rule applies to a non-member foreign dealer. In connection with sales and offers to sell Units made by us outside the United States, its territories and possessions (i) we will either furnish to each person to whom any such sale or offer is made a copy of the then current Preliminary Prospectus or the Prospectus, as the case may be, or inform such person that such Preliminary Prospectus or Prospectus will be available upon request, and (ii) we will furnish to each person to whom any such sale or offer is made such prospectus, advertisement or other offering document containing information relating to the Units or the Company as may be required under the law of the jurisdiction in which such sale or offer is made. Any prospectus, advertisement or other offering document furnished by us to any person in accordance with the preceding sentence and any such addition offering material as we may furnish to any person (x) shall comply in all respects with the law of the jurisdiction in which it is so furnished, (y) shall be prepared and so furnished at our sole risk and expense and (z) shall not contain information relating to the Units or the Company which is inconsistent in any respect with the information contained in the then current Preliminary Prospectus or in the Prospectus, as the case may be. 10 This instrument may be signed by or on behalf of the Underwriters in one or more counterparts each of which shall constitute an original and all of which together shall constitute one and the same agreement among all the Underwriters and shall become effective at such time as all the Underwriters shall have signed or have had signed on their behalf such counterparts and you shall have confirmed all such counterparts. You may confirm such counterparts by facsimile signature. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to the choice of law or conflicts of laws principles thereof. Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart hereof. Very truly yours, ------------------------------------------- As Attorney-in-Fact for each of the several Underwriters named in Schedule I to the Underwriting Agreement Confirmed as of the date first above written: Centex Securities Incorporated As Representative By: ----------------------------- 11 EXHIBIT A UNDERWRITING AGREEMENT EXHIBIT B SELECTED DEALER AGREEMENT NEW FRONTIER MEDIA, INC. 1,500,000 Units UNDERWRITERS' QUESTIONNAIRE Each prospective Underwriter must deliver executed a copy to the Representative not later than ____________________, 1997 at the following address: Mr. Bruce A. Biddick Centex Securities Incorporated 1020 Prospect Street, Suite 200 La Jolla, CA 92037 Dear Mr. Biddick: In connection with the proposed offering of 1,500,000 newly issued units ("Units") consisting of one share of common stock and one redeemable common stock purchase warrant of New Frontier Media, Inc. (the "Company") and for use in the Registration Statement (Form SB-2) relating thereto filed with the Securities and Exchange Commission and the Prospectus included therein, the undersigned, as a prospective Underwriter, advises you as follows: 1. Our exact name (as it should appear in the Prospectus) and our address are as follows: 2. Except as indicated below: (a) neither we nor any of our directors, officers or partners have a "material" (as defined in the Rules and Regulations under the Securities Act of 1933) relationship with the Company or any of its officers or directors; (b) during the last three years, neither we nor any of our officers, directors or partners have been an officer or director of the Company or an "associate" (as defined in such Rules and Regulations) of any of the officers or directors of the Company or of any person who, to our knowledge, now owns of record or beneficially more than 10% of any class of voting securities of the Company; (c) neither we nor any of our directors, officers or partners, separately or as a group, now owns of record or beneficially more than 1% of any class of voting securities of the Company; (d) other than as may be stated in the Agreement Among Underwriters, the Underwriting Agreement, the Selected Dealer Agreement or in the Registration Statement, we do not know of any arrangements to limit or restrict the sale of the Units for the period of distribution, to stabilize the market for the Units, for withholding commissions, or otherwise to hold each prospective Underwriter or dealer responsible for the distribution of his participation in the Units, or for any discounts or commissions to be allowed or paid to dealers; (e) other than as set forth in the Preliminary Prospectus we have no knowledge that more than 5% of any class of voting securities of the Company is or is to be held subject to any voting trust or any similar agreement; (f) our proposed commitment to purchase the Units will not result in a violation of the financial responsibility requirements of Rule 15c3-1 under the Securities Exchange Act of 1934; (g) none of us, any of our directors, officers, partners or "persons associated with" us (as defined in the Bylaws of the National Association of Securities Dealers, Inc. "NASD"), or, to our knowledge, any "related person" (defined by the NASD to include counsel, financial consultants and advisors, finders, members of the selling or distribution groups and any other persons associated with or related to any of the foregoing), or any other broker-dealer (i) within the last 18 months has purchased in private transactions, or intend before, at or within six months after the commencement of the public offering to purchase in private transactions, any securities of the Company or any parent or subsidiary thereof or (ii) within the last 12 months had any dealings with the Company, or any parent, subsidiary or controlling stockholder thereof (other than relating to the proposed Agreement Among Underwriters and Selected Dealer Agreement), as to which documents or information are required to be filed with the NASD pursuant to its Statement of Policy Concerning Venture Capital and Other Investments or its Interpretation with Respect to Review of Corporate Financing, dated March 10, 1970, as amended; (h) we do not intend to confirm sales of Units to any accounts over which we exercise discretionary authority. (State exceptions, if any, or state "No Exceptions.") 3. Set forth below or attached separately is a list of the states under the laws of which we are registered as a dealer in securities: 4. Except an indicated below, we have not within the past 12 months prepared or had prepared for us any investment research reports or memoranda relating to the Company, engineering, management or report or memorandum relating to broad aspects of the business, operations or products of the Company, and no report or memorandum has been prepared for external use by us in connection with the proposed offering. (State "No Exceptions" or list and enclose three copies of each report or memorandum and describe distribution.) The undersigned understands that a court has held that it would be against the public policy manifested by the federal securities laws to permit an underwriter which has been found to have actual knowledge of false or misleading statements or omissions contained in a prospectus or an offering circular, to enforce against the issuer of the indemnity provisions customarily contained in an underwriting agreement. In this connection, the undersigned represents that it has no actual knowledge 2 of false and misleading statements in or omissions from the Registration Statement and that, in accordance with the next paragraph, it will advise you if it becomes aware of any such statements or omissions. We agree to keep an accurate record of the distribution by us of copies of the Registration Statement and of each amendment thereto, and of each preliminary prospectus, and we also agree promptly upon request by the Company or by Centex Securities Incorporated to furnish to each person who received copies of the above, copies of any subsequent amendment or revised preliminary prospectus or of any memorandum furnished to us outlining changes in the Registration Statement or Prospectus. We agree to deliver a copy of the final form of Prospectus to each person who purchases any of the Units from us and shall otherwise comply with the provisions of Rule 15c2-8 under the 1934 Act and Release No. 4968 under the 1933 Act. The answers to the foregoing questions are correctly stated and are to the best knowledge, information and belief of the undersigned. The undersigned agrees to notify the Company promptly of any material changes in the foregoing information which may occur prior to the effective date of the Registration Statement covering the Units. In the event of a summary or cursory review by the Securities and Exchange Commission in accordance with Release No. 4934 under the Securities Act of 1933, as amended (the "1933 Act"), you are authorized on our behalf to acknowledge our awareness thereof and of our statutory responsibilities under the 1933 Act. Very truly yours, [For Corporate Signature] -------------------------------------- Corporate Name By: ----------------------------------- Title: -------------------------------- [For Partnership Signature] -------------------------------------- Partnership Name Dated:_____________, 1997 By: ----------------------------------- Partner 3 NEW FRONTIER MEDIA, INC. 1,500,000 Units POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby irrevocably constitute and appoint Bruce A. Biddick and Phil Hanna of Centex Securities Incorporated, 1020 Prospect Street, Suite 200, La Jolla, California 92037, or any one of them, the true and lawful agent and attorney-in-fact of the undersigned, with full power to appoint a substitute or substitutes to act hereunder with the same power and authority as said agent and attorney-in-fact would have if personally acting, with respect to all matters arising in connection with the undersigned's acting as one of the Underwriters of the proposed offering of the above-captioned securities, with full power and authority to execute and deliver for and on behalf of the undersigned all such agreements, consents and documents in connection therewith as said agent and attorney-in-fact may deem advisable. The undersigned hereby gives to said agent and attorney-in-fact full power and authority to act in the premises, including, without limiting the generality of the foregoing, the power and authority to execute and deliver in such form as said agent and attorney-in-fact may determine the Agreement Among Underwriters with respect to such securities, authorizing the Representative(s) named in such Agreement in turn to execute and deliver the Underwriting Agreement relating to the purchase of such securities and any Selected Dealer Agreement. The undersigned hereby ratifies and confirms all that said agent and attorney-in-fact, or any substitute or substitutes, may do by virtue hereof. WITNESS the due execution hereof at _______________________, this ____ day of _________, 1997. -------------------------------------- (Name of Corporation or Firm) [SEAL] -------------------------------------- Officer or Partner EX-1.03 4 SELECTED DEALER AGREEMENT NEW FRONTIER MEDIA, INC. 1,500,000 Units SELECTED DEALER AGREEMENT ____________, 1997 Dear Sirs: Centex Securities Incorporated, and the other Underwriters named in the Prospectus relating to the above units (the "Underwriters"), acting through us as Representative, is severally offering for sale an aggregate of 1,500,000 Units (the "Firm Units") each consisting of one share of common stock ("Common Stock") of New Frontier Media, Inc. (the "Company") and one redeemable common stock purchase warrant ("Warrant") at a price of $5.25 per Unit. In addition, the several Underwriters have been granted an option to purchase from the Company up to an additional 225,000 Units (the "Option Units") to cover over-allotments in connection with the sale of the Firm Units. The Firm Units and any Option Units purchased are herein called the "Units". The Units and the terms under which they are to be offered for sale by the several Underwriters are more particularly described in the Prospectus. The Underwriters are offering the Units pursuant to a Registration Statement (the "Registration Statement") under the Securities Act of 1933, as amended, subject to the terms of (a) their Underwriting Agreement with the Company, (b) this Agreement, and (c) the Representative's instructions which may be forwarded to the Selected Dealers from time to time. This invitation is made by the Representative only if the Units may be lawfully offered by dealers in your state. The terms and conditions of this invitation are as follows: 1. OFFER TO SELECTED DEALERS. The Representative is hereby soliciting offers to buy, upon the terms and conditions hereof, a portion of the Units from Selected Dealers who are to act as principal. Units are to be offered to the public at a price of $5.25 per Unit (the "Offering Price"). Selected Dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") will be allowed, on all Units sold by them, a concession of $______ payable as hereinafter provided. Selected Dealers may reallow other dealers who are members of the NASD a portion of that concession up to the amount of $_____ per Unit with respect to Units sold by or through them. No NASD member may reallow commissions to any non-member broker-dealer including foreign broker-dealers registered pursuant to the Securities Exchange Act of 1934. This offer is solicited subject to the Company's issuance and delivery of certificates and other documents evidencing its Units and the acceptance thereof by the Representative, to the approval of legal matters by counsel, and to the terms and conditions set forth herein. 2. REVOCATION OF OFFER. The Selected Dealer's offer to purchase, if made prior to the effective date of the Registration Statement, may be revoked in whole or in part without obligation or commitment of any kind by it any time prior to acceptance and no offer may be accepted by the Representative and no sale can be made until after the Registration Statement covering the Units has become effective with the Securities and Exchange Commission. Subject to the foregoing, upon execution by the Selected Dealer of the Offer to Purchase below and the return of same to the Representative, the Selected Dealer shall be deemed to have offered to purchase the number of Units set forth in its offer on the basis set forth in Section 1 above. Any oral offer to purchase made by the Selected Dealer shall be deemed subject to this Agreement and shall be confirmed by the Representative by the subsequent execution and return of this Agreement. Any oral notice by the Representative of acceptance of the Selected Dealer's offer shall be followed by written or telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If a contractual commitment arises hereunder, all the terms of this Selected Dealer Agreement shall be applicable. The Representative may also make available to the Selected Dealer an allotment to purchase Units, but such allotment shall be subject to modification or termination upon notice from the Representative any time prior to an exchange of confirmations reflecting completed transactions. All references hereafter in this Agreement to the purchase and sale of Units assume and are applicable only if contractual commitments to purchase are completed in accordance with the foregoing. 3. SELECTED DEALER SALES. Any Units purchased by a Selected Dealer under the terms of this Agreement may be immediately re-offered to the public at the Offering Price in accordance with the terms of the offering thereof set forth herein and in the Prospectus, subject to the securities or blue sky laws of the various states or other jurisdictions. Units shall not be offered or sold by the Selected Dealers below the Offering Price. The Selected Dealer agrees to advise the Representative, upon request, of any Units purchased by it remaining unsold and, the Representative has the right to purchase all or a portion of such Units, at the Public Offering Price less the selling concession or such part thereof as the Representative shall determine. 4. PAYMENT FOR UNITS. Payment for Units which the Selected Dealer purchases hereunder shall be made by the Selected Dealer on or before three (3) business days after the date of each confirmation by certified or bank cashier's check payable to the Representative. Certificates for the securities shall be delivered as soon as practicable after delivery instructions are received by the Representative. 5. OPEN MARKET TRANSACTIONS; STABILIZATION. 5.1 For the purpose of stabilizing the market in the Units, the Representative has been authorized to make purchases and sales of the Company's Units in the open market or otherwise, and, in arranging for sales, to overallot. If, in connection with such stabilization, the Representative contracts for or purchases in the open market any Units, Common Stock or Warrants sold to the Selected Dealer hereunder and not effectively placed by the Selected Dealer, the Representative may charge the Selected Dealer for the accounts of the several Underwriters an amount equal to the Selected Dealer concession on such Units, Common Stock or Warrants, together with any applicable transfer taxes, and the Selected Dealer agrees to pay such amount to the Representative on demand. Certificates for Units, Common Stock or Warrants delivered on such repurchases need not be the identical certificates originally purchased. 5.2 The Selected Dealer will not, until advised by the Representative that the entire offering has been distributed and closed, bid for or purchase Units, Common Stock or Warrants in the open market or otherwise make a market in the Units or otherwise attempt to induce others to purchase Units, Common Stock or Warrants in the open market. Nothing contained in this section shall prohibit the Selected Dealer from acting as an agent in the execution of unsolicited orders of customers in transactions effectuated for them through a market maker. 6. ALLOTMENTS. The Representative reserves the right to reject all subscriptions, in whole or in part, to make allotments and to close the subscription books at any time without notice. If an order from a Selected Dealer is rejected or if a payment is received which proves insufficient, any compensation paid to the Selected Dealer shall be returned by the Selected Dealer either in cash or by a charge against the account of the Selected Dealer, as the Representative may elect. 7. RELIANCE ON PROSPECTUS. The Selected Dealer agrees not to use any supplemental sales literature of any kind without prior written approval of the Representative unless it is furnished by the Representative for such purpose. In offering and selling the Company's Units, the Selected Dealer will rely solely on the representations contained in the Prospectus. Additional copies of the current Prospectus will be supplied by the Representative in reasonable quantities upon request. 8. REPRESENTATIONS OF SELECTED DEALER. By accepting this Agreement, the Selected Dealer represents that it: (a) is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended; (b) is qualified to act as a Dealer in the States or other jurisdictions in which it offers the Units; (c) is a member in good standing with the NASD; (d) will maintain all such registrations, qualifications, and memberships throughout the term of this Agreement; (e) will comply with all applicable Federal laws relating to the offering, including, but not limited to, Rule 15c2-8 under the Securities Exchange Act of 1934 and Release No. 4968 under the Securities Act of 1933 relating to delivery of preliminary and final prospectuses, and Regulation M governing the activities of participants in a distribution of securities; (f) will comply with the laws of the state or other jurisdictions concerned; (g) will comply the rules and regulations of the NASD including, but not limited to, full compliance with Rules 2100, 2730 2740, 2720 and 2750 of the Conduct Rules of the NASD and the interpretations of such sections promulgated by the Board of Governors of the NASD including an interpretation with respect to "Free-Riding and Withholding" dated November 1, 1970, and as thereafter amended; and (h) confirms that the purchase of the number of Units it has subscribed for and may be obligated to purchase will not cause it to violate the net capital requirements of Rule 15c3-1 under the Exchange Act. 9. BLUE SKY QUALIFICATION. The Selected Dealer agrees that it will offer to sell the Units only (a) in states or jurisdictions in which it is licensed as a broker-dealer under the laws of such states, and (b) in which the Representative has been advised by counsel that the Units have been qualified for sale under the respective securities or Blue Sky laws of such states. The Representative assumes no obligation or responsibility as to the right of any Selected Dealer to sell the Units in any state or as to any sale therein. 10. EXPENSES. No expenses will be charged to Selected Dealers. A single transfer tax, if any, on the sale of the Units by the Selected Dealer to its customers will be paid when such Units are delivered to the Selected Dealer for delivery to its customers. However, the Selected Dealer will pay its proportionate share of any transfer tax or any other tax (other than the single transfer tax described above) if any such tax shall be from time to time assessed against the Underwriters and other Selected Dealers. 11. NO JOINT VENTURE. No Selected Dealer is authorized to act as the Underwriters' agent, or otherwise to act on our behalf, in the offering or selling of Units to the public or otherwise. Nothing contained herein will constitute the Selected Dealers as an association or other separate entity or partners with the Underwriters, or with each other, but each Selected Dealer will be responsible for its share of any liability or expense based on any claim to the contrary. 12. COMMUNICATIONS. This Agreement and all communications to the Underwriters shall be sent to the Representative at the following address or, if sent by facsimile, to the number set forth below: Mr. Bruce A. Biddick Centex Securities Incorporated 1020 Prospect Street, Suite 200 La Jolla, CA 92037 Fax No. (619) 456-8211 Any notice to the Selected Dealer shall be properly given if mailed, telephoned, or transmitted by facsimile to the Selected Dealer at its address or number set forth below its signature to this Agreement. All communications and notices initially transmitted by facsimile shall be confirmed in writing. 13. GOVERNING LAW. This Agreement shall be governed by and construed according to the laws of the State of California. 14. REPRESENTATIVE'S AUTHORITY AND OBLIGATIONS. The Representative shall have full authority to take such actions as it may deem advisable in respect of all matters pertaining to the offering or arising thereunder. The Representative shall not be under any liability to the Selected Dealer, except such as may be incurred under the Securities Act of 1933 and the rules and regulations thereunder, except for lack of good faith and except for obligations assumed by it in this Agreement, and no obligation on its part shall be implied or inferred herefrom. 15. ASSIGNMENT. This Agreement may not be assigned by the Selected Dealer without the Representative's prior written consent. 16. TERMINATION. The Selected Dealer will be governed by the terms and conditions of this Agreement until it is terminated. This Agreement will terminate upon the termination of the Offering. 17. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument. A copy of an executed counterpart of this Agreement may be sent via facsimile by any party to the other party, and the other party may deem such facsimile copy of the executed counterpart to be an original. 18. APPLICATION. If you desire to purchase any of the Units, please confirm your application by signing and returning to us your confirmation on the duplicate copy of this letter, even though you may have previously advised us thereof by telephone or telegraph. Our signature hereon may be by facsimile. CENTEX SECURITIES INCORPORATED Dated: _____________, 1997 By: -------------------------------- Bruce A. Biddick, President OFFER TO PURCHASE The undersigned does hereby offer to purchase (subject to the right to revoke set forth in Section 2) _______ Units in accordance with the terms and conditions set forth above. -------------------------------------- By: ----------------------------------- Its: ---------------------------------- Address: ------------------------------ Facsimile Number: --------------------- Telephone Number: --------------------- ("Selected Dealer") Date of Acceptance: ------------------- Accepted By: -------------------------- IRS Employer Identification No.: ------ Unit Allocation: ---------------------- EX-1.04 5 FORM OF UNDERWRITERS WARRANT THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE COMPANY SUCH OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT. WARRANT For the Purchase of Shares of Common Stock of NEW FRONTIER MEDIA, INC. Void After 5 P.M., __________, 2002 No. 1 Warrant to Purchase One Hundred Fifty Thousand (150,000) Shares of Common Stock THIS IS TO CERTIFY, that, for value received, Centex Securities Incorporated (the "Underwriter") or registered assigns, is entitled, subject to the terms and conditions hereinafter set forth, on or after __________, 1998 and at any time prior to 5 P.M., Pacific Standard Time ("PST"), on __________, 2002, but not thereafter, to purchase such number of shares of Common Stock (the "Shares") of New Frontier Media, Inc., a Colorado corporation (the "Company"), from the Company as is set forth above and upon payment to the Company of $____ per Share (the "Purchase Price"), if and to the extent this Warrant is exercised, in whole or in part, during the period this Warrant remains in force, subject in all cases to adjustment as provided in Section 2 hereof, and to receive a certificate or certificates representing the Shares so purchased, upon presentation and surrender to the Company of this Warrant, with the form of subscription attached hereto, including changes thereto reasonably requested by the Company, duly executed, and accompanied by payment of the Purchase Price of each Share. SECTION 1. TERMS OF THIS WARRANT 1.1 TIME OF EXERCISE. Subject to the provisions of Sections 1.5 and 3.1 hereof, this Warrant may be exercised at any time and from time to time after 9:00 A.M., PST, on ___________, 1998 (the "Exercise Commencement Date"), but no later than 5:00 P.M., ___________, 2002 (the "Expiration Time") at which it shall become void, and all rights hereunder shall thereupon cease. 1.2 MANNER OF EXERCISE. 1.2.1 The holder of this Warrant (the "Holder") may exercise this Warrant, in whole or in part, upon surrender of this Warrant with the form of subscription attached hereto duly executed, to the Company at its corporate office in Boulder, Colorado, together with the full Purchase Price for each Share to be purchased in lawful money of the United States, or by certified check, bank draft or postal or express money order payable in United States dollars to the order of the Company, and upon compliance with and subject to the conditions set forth herein. 1.2.2 Upon receipt of this Warrant with the form of subscription duly executed and accompanied by payment of the aggregate Purchase Price for the Shares for which this Warrant is then being exercised, the Company shall cause to be issued certificates for the total number of whole Shares for which this Warrant is being exercised in such denominations as are required for delivery to the Holder, and the Company shall thereupon deliver such certificates to the Holder or its nominee. Such payment shall be made either by check payable to the order of the Company or the holder may elect to receive that number of Warrant Shares equal to the value (as determined below) of this Warrant, in which event the Company shall issue to the holder of this Warrant the number of shares of Common Stock determined by using the following formula: Y (A - B) X = ----------- A where X = the number of shares of Common Stock (or Warrant Shares) to be issued to the holder; Y = the number of Warrant Shares subject to this Warrant; A = the Fair Market Value of one (1) Warrant Share; B = the Exercise Price per Warrant Share. Certificates for the Warrant Shares so purchased shall be delivered to the Warrantholders, at their respective addresses designated in the completed Exercise Forms, within a reasonable time, in no event exceeding 10 days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired or been exercised in full, a new Warrant representing the number of shares (if any) with respect to which this Warrant shall not then have been exercised shall also be issued to the Warrantholders within such time. 1.2.3 In case the Holder shall exercise this Warrant with respect to less than all of the Shares that may be purchased under this Warrant, the Company shall execute a new Warrant for the balance of the Shares that may be purchased upon exercise of this Warrant and deliver such new Warrant to the Holder. 1.2.4 The Company covenants and agrees that it will pay when due and payable any and all taxes which may be payable in respect of the issue of this Warrant, or the issue of any Shares upon the exercise of this Warrant. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of this Warrant or of the Shares in a name other than that of the Holder at the time of surrender, and until the payment of such tax the Company shall not be required to issue such Shares. 2 1.3 EXCHANGE OF WARRANT. This Warrant may be split-up, combined or exchanged for another Warrant or Warrants of like tenor to purchase a like aggregate number of Shares. If the Holder desires to split-up, combine or exchange this Warrant, he shall make such request in writing delivered to the Company at its corporate office and shall surrender this Warrant and any other Warrants to be so split-up, combined or exchanged, the Company shall execute and deliver to the person entitled thereto a Warrant or Warrants, as the case may be, as so requested. The Company shall not be required to effect any split-up, combination or exchange which will result in the issuance of a Warrant entitling the Holder to purchase upon exercise a fraction of a Share. The Company may require the Holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split-up, combination or exchange of Warrants. 1.4 HOLDER AS OWNER. Prior to due presentment for registration of transfer of this Warrant, the Company may deem and treat the Holder as the absolute owner of this Warrant (notwithstanding any notation of ownership or other writing hereon) for the purpose of any exercise hereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. 1.5 TRANSFER AND ASSIGNMENT. Prior to one year from the date hereof, this Warrant may not be sold, hypothecated, exercised, assigned or transferred, except to individuals who are officers of the Underwriter or any successor to its business or pursuant to the laws of descent and distribution, and thereafter and until its expiration shall be assignable and transferable in accordance with and subject to the provisions of the Securities Act of 1933 and applicable state securities laws; provided, however, that if not exercised immediately upon such transfer, this Warrant shall lapse. 1.6 METHOD OF ASSIGNMENT. Any assignment permitted hereunder shall be made by surrender of this Warrant to the Company at its principal office with the form of assignment attached hereto duly executed and funds sufficient to pay any transfer tax. In such event, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants which carry the same rights upon presentation thereof at the corporate office of the Company together with a written notice signed by the Holder, specifying the names and denominations in which such new Warrants are to be issued. 1.7 RIGHTS OF HOLDER. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of this Warrant and prior to its exercise, any of the following shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or 3 retained earnings; as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) there shall be proposed any capital reorganization or reclassification of the Common Stock, or a sale of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another entity; or (d) there shall be proposed a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall cause to be mailed to the Holder, at the earliest practicable time (and, in any event, not less than twenty (20) days before any record date or other date set for definitive action), written notice of the date on which the books of the Company shall close or a record shall be taken to determine the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the Shares and other securities and property deliverable upon exercise of this Warrant. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be (on which date, in the event of voluntary or involuntary dissolution, liquidation or winding up of the Company, the right to exercise this Warrant shall terminate) Without limiting the obligation of the Company to provide notice to the holder of actions hereunder, it is agreed that failure of the Company to give notice shall not invalidate such action of the Company. 1.8 LOST CERTIFICATES. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on such reasonable terms as to indemnity or otherwise as it may impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as, and in substitution for, this Warrant, which shall thereupon become void. Any such new Warrant shall constitute an additional contractual obligation of the Company, whether or not the Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. 4 1.9 COVENANTS OF THE COMPANY. The Company covenants and agrees as follows: 1.9.1 At all times it shall reserve and keep available for the exercise of this Warrant such number of authorized shares of Common Stock as are sufficient to permit the exercise in full of this Warrant. 1.9.2 Prior to the issuance of any Shares upon exercise of this Warrant, the Company shall secure the listing of such Shares upon any securities exchange or automated quotation system upon which the Company's Common Stock is listed for trading. 1.9.3 The Company covenants that all Shares when issued upon the exercise of this Warrant will be validly issued, fully paid, non-assessable and free of preemptive rights. SECTION 2. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES PURCHASABLE UPON EXERCISE 2.1 STOCK SPLITS. If the Company at any time or from time to time after the issuance date of this Warrant effects a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased and the number of shares purchasable hereunder shall be proportionately increased, and conversely, if the Company at any time or from time to time after the issuance date of this Warrant combines the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased and the number of shares purchasable hereunder shall be proportionately decreased. Any adjustment under this subsection 2.1 shall become effective at the close of business on the date the subdivision or combination becomes effective. 2.2 DIVIDENDS AND DISTRIBUTIONS. In the event the Company at any time, or from time to time after the issuance date of this Warrant makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this subsection 2.2 as of the time of actual payment of such dividends or distributions. 5 2.3 RECAPITALIZATION OR RECLASSIFICATION. If the Shares issuable upon the exercise of the Warrant are changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section 2), then and in any such event each holder of Warrants shall have the right thereafter to exercise such Warrant as to the kind and amount of stock and/or other securities and property receivable upon such reclassification or other change, by the holder of the number of Shares as to which such Warrant might have been exercised immediately prior to such reclassification or exchange, all subject to further adjustment as provided herein. 2.4 SALE OF THE COMPANY. If at any time or from time to time there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 2) or a merger or consolidation of the Company with or into another Company, or the sale of all or substantially all of the Company's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Warrants shall thereafter be entitled to receive upon exercise of the Warrants, the number of shares of stock or other securities or property of the Company, or of the successor Company resulting from such merger or consolidation or sale, to which a holder of Shares deliverable upon exercise would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 2 with respect to the rights of the holders of the Warrants after the reorganization, merger, consolidation or sale to the end that the provisions of this Section (including adjustment of the Purchase Price then in effect and number of shares purchasable upon exercise of the Warrants) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. 2.5 OBSERVANCE OF DUTIES. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this section 2 and in the taking of all such action as may be necessary or appropriate in order to protect the Exercise Rights of the holders of the Warrants against dilution or other impairment. SECTION 3. REGISTRATION UNDER THE SECURITIES ACT OF 1933 3.1 REGISTRATION AND LEGENDS. This Warrant and the Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended ("the Act"). Upon exercise, in part or in whole, of this Warrant, the certificates representing the Shares shall bear the following legend: 6 THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY NOT BE OFFERED AND SOLD UNLESS REGISTERED AND/OR QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION APPLICABLE. THEREFORE, NO SALE OR TRANSFER OF THIS SECURITY SHALL BE MADE, NO ATTEMPTED SALE OR TRANSFER SHALL BE VALID, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE ANY EFFECT TO ANY SUCH TRANSACTION UNLESS (A) SUCH TRANSACTION SHALL HAVE BEEN DULY REGISTERED UNDER THE ACT AND QUALIFIED OR APPROVED UNDER APPROPRIATE STATE OR BLUE SKY LAWS, OR (B) THE ISSUER SHALL HAVE FIRST RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH REGISTRATION, QUALIFICATION OR APPROVAL IS NOT REQUIRED. 3.2 NO ACTION LETTER. The Company agrees that it shall be satisfied that no post-effective amendment or new registration is required for the public sale of the Shares if it shall be presented with a letter from the Staff of the Securities and Exchange Commission (the "Commission") stating in effect that, based upon stated facts which the Company shall have no reason to believe are not true in any material respect, the Staff will not recommend any action to the Commission if such shares are offered and sold without delivery of a prospectus, and that, therefore, no post-effective amendment to the Registration Statement under which such Shares are to be registered or new registration statement is required to be filed. 3.3 DEMAND REGISTRATION RIGHTS. The Company has agreed, upon the Underwriter's demand, to register the Shares, to file a new Registration Statement, and to file all necessary undertakings with the Commission so as to permit the Underwriter, or any assignee of the Underwriter, the right to sell publicly the Shares issued on exercise of this Warrant on two occasions at any time within five (5) years from the effective date of the Company's Form SB-2 Registration Statement as filed in 1997. In connection with the first request, the Company will bear all expenses attendant to registering the securities (subject to Section 3.5(e)), and in connection with the second request, the holders of the securities will bear all expenses. 3.4 PIGGYBACK REGISTRATION RIGHTS. In the event that the Underwriter does not exercise its right to demand that the Shares be registered, the Company agrees to include any appropriate Shares issuable upon exercise of the Warrants in any Registration Statement filed by the Company at any time within seven (7) years from the effective date of the Company's Form SB-2 Registration Statement as filed in 1997 (except for any registration on Forms S-4 or S-8 or similar forms). 3.5 COVENANTS REGARDING REGISTRATION. In connection with any registration under Section 3.3 or 3.4 hereof, the Company covenants and agrees as follows: 7 (a) The Company will, within twenty days after written request from the Representative, take all steps necessary to effectuate preparation and filing with the Securities and Exchange Commission of the registration statement as required by and in compliance with the Act. (b) The Company shall keep such registration statement effective for the lesser of (i) one hundred twenty (120) days, or (ii) the period of time in which the Holders of such securities have effected the distribution of their Shares. During such period the Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) The Company shall notify each Holder of Shares covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. (d) The Company shall furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Shares owned by them. (e) The Company shall pay all costs, fees, and expenses in connection with new registration statements under Section 3.3 (excluding the costs attendant to a second demand registration) and Section 3.4 hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses, except that the Company shall not pay for any of the following costs and expenses: (i) underwriting discounts and commissions allocable to the Shares, (ii) state transfer taxes, (iii) brokerage commissions, (iv) fees and expenses of counsel and accountants for the holders of this Warrant or the Shares. (f) The Company will take all necessary action which may be required in qualifying or registering the Shares included in any Registration Statement or post-effective amendment or new registration statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the holders of such Shares, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (g) The Holder shall be entitled to pay the Purchase Price for the Shares purchasable upon the exercise of this Warrant out of the proceeds of any sale of the Shares purchasable upon its exercise. 8 3.6 INDEMNITY. 3.6.1 The Company shall indemnify and hold harmless each person registering securities pursuant to this Section (the "Seller") and each underwriter, within the meaning of the Act, who may purchase from or sell for any Seller any of the Common Stock from and against any and all losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any new registration statement or any supplemented prospectus under the Act included therein required to be filed or furnished by reason of this Section, or caused by any omission or alleged omission to state therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by such Seller or underwriter within the meaning of such Act; provided, however, that the indemnity agreement set forth in this Section 3.6 with respect to any prospectus which shall be subsequently amended prior to the written confirmation of sale of any Shares shall not inure to the benefit of any Seller or underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased such Shares which are the subject thereof (or to the benefit of any person controlling such Seller or underwriter), if such Seller or underwriter failed to send or give a copy of the prospectus as amended to such person at or prior to the written confirmation of the sale of such Shares and if such amended prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, or liability. 3.6.2 Each Seller which avails itself of the procedures under this Section 3 shall indemnify and secure the agreement of any underwriter which the Seller employs to indemnify the Company, its directors, each officer signing the related post-effective amendment or registration statement and each person, if any, who controls the Company, within the meaning of the Act from and against any losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or registration statement or any prospectus required to be filed or furnished by reason of this Section 3 or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages, or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished in writing to the Company by any such Seller or underwriter expressly for use therein. 3.7 SURVIVAL OF OBLIGATIONS. The agreements in this Section 3 shall continue in effect regardless of the exercise and surrender of this Warrant. SECTION 4. OTHER MATTERS 4.1 PAYMENT OF TAXES. The Company will from time to time promptly pay, subject to the provisions of paragraph (4) of Section 1.2 hereof, all taxes and charges that may be imposed upon 9 the Company in respect of the issuance or delivery of this Warrant or the Shares purchasable upon the exercise of this Warrant. 4.2 BINDING EFFECT. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns hereunder. 4.3 NOTICES. Notices or demands pursuant to this Warrant to be given or made by the Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, or facsimile and addressed, until another address is designated in writing by the Company, as follows: New Frontier Media, Inc. 1050 Walnut St., Ste. 301 Boulder, Colorado 80302 Notices to the Holder provided for in this Warrant shall be deemed given or made by the Company if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed to the Holder at his last known address as it shall appear on the books of the Company. 4.4 GOVERNING LAW. The validity, interpretation and performance of this Warrant shall be governed by the laws of the State of California. 4.5 PARTIES BOUND AND BENEFITTED. Nothing in this Warrant expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company and the Holder any right, remedy or claim under promise or agreement hereof, and all covenants, conditions, stipulations, promises and agreements contained in this Warrant shall be for the sole and exclusive benefit of the Company and its successors and of the Holder, its successors and, if permitted, its assignees. 4.6 HEADINGS. The Section headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under its corporate seal as of the ___ day of _________, 1997. NEW FRONTIER MEDIA, INC. By: -------------------------------- Mark H. Kreloff, President 10 NEW FRONTIER MEDIA, INC. Assignment of Warrant FOR VALUE RECEIVED, Centex Securities Incorporation hereby sells, assigns and transfers unto ____________________________________________ the within Warrant and the rights represented thereby, and does hereby irrevocably constitute and appoint _______________________________ Attorney, to transfer said Warrant on the books of the Company, with full power of substitution. Dated: ---------------------------- Signed: ------------------------------- Signature guaranteed: - ---------------------------------- 11 New Frontier Media, Inc. 1050 Walnut St., Ste. 301 Boulder, Colorado 80302 Subscription Agreement for the Exercise of Warrants The undersigned hereby irrevocably subscribes for the purchase of _____________ Shares pursuant to and in accordance with the terms and conditions of this Warrant, and herewith makes payment, covering such Shares which should be delivered to the undersigned at the address stated below, and, if said number of Shares shall not be all of the Shares purchasable hereunder, that a new Warrant of like tenor for the balance of the remaining Shares purchasable hereunder be delivered to the undersigned at the address stated below. The undersigned agrees that: (1) the undersigned will not offer, sell, transfer or otherwise dispose of any Shares unless either (a) a registration statement, or post-effective amendment thereto, covering the Shares has been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), such sale, transfer or other disposition is accompanied by a prospectus meeting the requirements of Section 10 of the Act forming a part of such registration statement, or post-effective amendment thereto, which is in effect under the Act covering the Shares to be so sold, transferred or otherwise disposed of, and all applicable state securities laws have been complied with, or (b) counsel to New Frontier Media, Inc. satisfactory to the undersigned has rendered an opinion in writing and addressed to New Frontier Media, Inc. that such proposed offer, sale, transfer or other disposition of the Shares is exempt from the provisions of Section 5 of the Act in view of the circumstances of such proposed offer, sale, transfer or other disposition; (2) New Frontier Media, Inc. may notify the transfer agent for the Shares that the certificates for the Shares acquired by the undersigned are not to be transferred unless the transfer agent receives advice from New Frontier Media, Inc. that one or both of the conditions referred to in (1)(a) and (1)(b) above have been satisfied; and (3) New Frontier Media, Inc. may affix the legend set forth in Section 3.1 of this Warrant to the certificates for the Shares hereby subscribed for, if such legend is applicable. Dated: Signed: ------------------------- ---------------------------- Signature guaranteed: Address: --------------------------- ----------------------------------- - ------------------------------- 12 EX-5.01 6 EXHIBIT 5.01 [LETTERHEAD] December 2, 1997 Board of Directors New Frontier Media, Inc. 1050 Walnut Street Suite 301 Boulder, CO 80302 RE: LEGALITY OF SECURITIES BEING OFFERED PURSUANT TO REGISTRATION STATEMENT ON FORM SB-2 Gentlemen: This firm has acted as corporate counsel to you (the "Company") in connection with the Registration Statement on Form SB-2 (Registration No. 333-35337, hereinafter the "Registration Statement") pertaining to the registration of up to 1,725,000 units (the "Units"), each Unit consisting of one share (the "Shares") of the Company's common stock, $.001 par value (the "Common Stock") and one Redeemable Common Stock Purchase Warrant (the "Warrants"), being offered by the Company, up to 225,000 additional Units being registered for sale pursuant to an overallotment option (the "Overallotment Option"), and an additional 150,000 shares of Common Stock to be issued upon exercise of the underwriter's warrant (the "Underwriter's Warrant"), the terms of which are set forth in an exhibit to the Registration Statement. In that connection, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary for the purposes of this opinion and consent. For purposes of this opinion and consent, we have assumed the authenticity of all documents submitted to us as copies, and the authenticity of the originals of all documents submitted to us as copies. We have also assumed the genuineness of the signatures of persons signing all documents in connection with which this opinion is rendered, the authority of such persons signing on behalf of the parties thereto other than the Company, and the due authorization, execution and delivery of all documents by the parties thereto other than the Company. Board of Directors New Frontier Media, Inc. December 2, 1997 Page 2 Based on the foregoing, we are of the opinion that: (1) The Company is a corporation validly existing and in good standing under the laws of the State of Colorado. (2) The Shares and the shares of Common Stock issuable upon exercise of the Warrants, the Underwriter's Warrant and the additional Warrants included in the Overallotment Option, have been duly authorized and when they are issued pursuant to the terms set forth in the Registration Statement will be validly issued, fully paid and non-assessable. We hereby consent to the reference to this firm in the Registration Statement, under the heading "LEGAL MATTERS," and further consent to the filing of this option and consent as Exhibits 5.01 and 23.03 thereto. Yours truly, KRAUSMAN, L.L.C. /s/ Kent D. Krausman Kent D. Krausman EX-10.06 7 EXHIBIT 10.06 NEW FRONTIER MEDIA, INC. and CORPORATE STOCK TRANSFER, INC. Warrant Agent WARRANT AGREEMENT Dated as of __________, 1997 WARRANT AGREEMENT - Page 1 TABLE OF CONTENTS Section Page 1. Appointment of Warrant Agent.................................... 2 2. Form of Warrant................................................. 2 3. Countersignature and Registration............................... 2 4. Transfers and Exchanges......................................... 2 5. Exercise of Warrants............................................ 3 6. Mutilated or Missing Warrants................................... 3 7. Reservation and Registration of Common Stock.................... 4 8. Warrant Price; Adjustments...................................... 4 9. No Fractional Interests......................................... 8 10. Notice to Warrantholders........................................ 9 11. Disposition of Proceeds on Exercise of Warrants................. 10 12. Redemption of Warrants.......................................... 10 13. Merger or Consolidation or Change of Name of Warrant Agent...... 11 14. Duties of Warrant Agent......................................... 11 15. Change of Warrant Agent......................................... 13 16. Identity of Transfer Agent...................................... 13 17. Notices......................................................... 13 18. Supplements and Amendments...................................... 14 19. Successors...................................................... 14 20. Merger or Consolidation of the Company.......................... 14 21. Texas Contract.................................................. 14 22. Benefits of This Agreement...................................... 14 23. Counterparts.................................................... 14 WARRANT AGREEMENT, dated as of __________, 1997, between New Frontier Media, Inc., a Colorado corporation (hereinafter called the "Company"), and Corporate Stock Transfer, Inc., as warrant agent (hereinafter called the "Warrant Agent"); WHEREAS, the Company proposes to issue 1,500,000 Redeemable Common Stock Purchase Warrants (hereinafter called the "Warrants"), entitling the holders thereof to purchase one share of Common Stock, $.0001 par value (hereinafter called the "Common Stock") for each Warrant, in connection with the proposed issuance by the Company of 1,500,000 Units, each Unit consisting of one share of Common Stock and one Warrant; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the registration, transfer, exchange and exercise of Warrants; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions hereinafter in this Agreement set forth, and the Warrant Agent hereby accepts such appointment. 2. Form of Warrant. The text of the Warrant and of the form of election to purchase shares to be printed on the reverse thereof shall be substantially as set forth in Exhibit A attached hereto. The Warrant Price to purchase one share of Common Stock shall be as provided and defined in ss.8. The Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman of the Board or President or Vice President of the Company, under its corporate seal, affixed or in facsimile, attested by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrants shall be dated as of the date of issuance thereof by the Warrant Agent either upon initial issuance or upon transfer or exchange. 3. Countersignature and Registration. The Warrant Agent shall maintain books for the transfer and registration of the Warrants. The Warrants shall be countersigned by the Warrant Agent (or by any successor to the Warrant Agent then acting as warrant agent under this Agreement) and shall not be valid for any purpose unless so countersigned. Warrants may be so countersigned, however, by the Warrant Agent (or by its successor as warrant agent) and be delivered by the Warrant Agent, notwithstanding that the persons whose manual or facsimile signatures appear thereon as proper officers of the Company shall have ceased to be such officers at the time of such countersignature or delivery. 4. Transfers and Exchanges. The Warrant Agent shall transfer, from time to time after the sale of the Units, any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender thereof for transfer properly endorsed or accompanied by appropriate instructions for transfer. Upon any such transfer, a new Warrant shall be issued to the transferee and the surrendered Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be delivered by the Warrant Agent to the Company from time to time. The Warrants may be exchanged at the option of the holder thereof, when surrendered at the office of the Warrant Agent, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of shares of Common Stock. The Warrant Agent is hereby irrevocably authorized to countersign in accordance with ss.3 of this Agreement the new Warrants required pursuant to the provisions of this Section, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrants duly executed on behalf of the Company for such purpose. 5. Exercise of Warrants. Subject to the provisions of this Agreement, each registered holder of Warrants shall have the right, which may be exercised as in such Warrants expressed, to purchase from the Company (and the Company shall issue and sell to such registered holder of Warrants) the number of fully paid and nonassessable shares of Common Stock specified in such Warrants, upon surrender of such Warrants to the Company at the office of the Warrant Agent, with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Warrant Agent for the account of the Company of the Warrant Price for the number of shares of Common Stock in respect of which such Warrants are then exercised. Payment of such Warrant Price may be made in cash, or by certified or official bank check, payable in United States dollars, to the order of the Warrant Agent. No adjustment shall be made for any dividends on any shares of Common Stock issuable upon exercise of a Warrant. Upon such surrender of Warrants, and payment of the Warrant Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the registered holder of such Warrants and in such name or names as such registered holder may designate, a certificate or certificates for the number of full shares of Common Stock so purchased upon the exercise of such Warrants. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such shares as of the date of the surrender of such Warrants and payment of the Warrant Price as aforesaid; provided, however, that if, at the date of surrender of such Warrants and payment of the Warrant Price, the transfer books for the Common Stock or other class of stock purchasable upon the exercise of such Warrants shall be closed, the certificates for the shares in respect of which such Warrants are then exercised shall be issuable as of the date on which such books shall next be opened and until such date the Company shall be under no duty to deliver any certificate for such shares; provided further, however, that the transfer books aforesaid, unless otherwise required by law, shall not be closed at any one time for a period longer than 20 days. The rights of purchase represented by the Warrants shall be exercisable, at the election of the registered holders thereof, either as an entirety or from time to time for part only of the shares specified therein, and in the event that any Warrant is exercised in respect of less than all of the shares specified therein, a new Warrant or Warrants will be issued for the remaining number of shares specified in the Warrant so surrendered, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Warrants pursuant to the provisions of this Section and of ss.3 of this Agreement and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrants duly executed on behalf of the Company for such purpose. 6. Mutilated or Missing Warrants. In case any of the Warrants shall be mutilated, lost, stolen or destroyed, the Company will issue and the Warrant Agent will countersign and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest; but only upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction of such Warrant and indemnity, if requested, also satisfactory to them. Applicants for such substitute Warrants shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company or the Warrant Agent may prescribe. 7. Reservation and Registration of Common Stock. A. There have been reserved, and the Company shall at all times keep reserved, out of the authorized and unissued shares of Common Stock, a number of shares sufficient to provide for the exercise of the rights of purchase represented by the Warrants, and the Transfer Agent for the Common Stock and every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid are hereby irrevocably authorized and directed at all times to reserve such number of authorized and unissued shares as shall be requisite for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent for the Common Stock and with every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is hereby irrevocably authorized to requisition from time to time such Transfer Agent for stock certificates required to honor outstanding Warrants. The Company will supply such Transfer Agents with duly executed stock certificates for such purpose and will itself provide or otherwise make available any cash which may be issuable as provided in ss.9 of this Agreement. All Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company, and such cancelled Warrants shall constitute sufficient evidence of the number of shares of stock which have been issued upon the exercise of such Warrants. B. The Company represents that it has registered under the Securities Act of 1933 the shares of Common Stock issuable upon exercise of the Warrants and will use its best efforts to maintain the effectiveness of such registration by post-effective amendment during the entire period in which the Warrants are exercisable, and that it will use its best efforts to qualify such Common Stock for sale under the securities laws of such states of the United States as may be necessary to permit the exercise of the Warrants in the states in which the Units are initially qualified and to maintain such qualifications during the entire period in which the Warrants are exercisable. 8. Warrant Price; Adjustments. A. The price at which Common Stock shall be purchasable upon exercise of Warrants at any time after the Common Stock and Warrants become separately tradable until __________, 2002 (hereinafter called the "Warrant Price") shall be $6.50 per share of Common Stock or, if adjusted as provided in this Section, shall be such price as so adjusted. B. The Warrant Price shall be subject to adjustment from time to time as follows: (1) Except as hereinafter provided, in case the Company shall at any time or from time to time after the date hereof issue any additional shares of Common Stock for a consideration per share less than the Warrant Price in effect immediately prior to the issuance of such additional shares, or without consideration, then, upon each such issuance, the Warrant Price in effect immediately prior to the issuance of such additional shares shall forthwith be reduced to a price (calculated to the nearest full cent) determined by dividing: (a) An amount equal to (i) the total number of shares of Common Stock outstanding immediately prior to such issuance multiplied by the Warrant Price in effect immediately prior to such issuance, plus (ii) the consideration, if any, received by the Company upon such issuance, by (b) The total number of shares of Common Stock outstanding immediately after the issuance of such additional shares. (2) The Company shall not be required to make any such adjustment of the Warrant Price in accordance with the foregoing if the amount of such adjustment shall be less than $.25 (adjustment will be made when cumulative adjustment equals or exceeds $0.25) but in such case the Company shall maintain a cumulative record of the Warrant Price as it would have been in the absence of this provision (the "Constructive Warrant Price"), and for the purpose of computing a new Warrant Price after the next subsequent issuance of additional shares (but not for the purpose of determining whether an adjustment thereof is required under the terms of this paragraph) the constructive Warrant Price shall be deemed to be the Warrant Price in effect immediately prior to such issuance. (3) For the purpose of this ss.8 the following provisions shall also be applicable: (a) In the case of the issuance of additional shares of Common Stock for cash, the consideration received by the Company therefor shall be deemed to be the net cash proceeds received by the Company for such shares before deducting any commissions or other expenses paid or incurred by the Company for any underwriting of, or otherwise in connection with, the issuance of such shares. (b) In case of the issuance (otherwise than upon conversion or exchange of shares of Common Stock) of additional shares of Common Stock for a consideration other than cash or a consideration a part of which shall be other than cash, the amount of the consideration other than cash received by the Company for such shares shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Company, as of the date of the adoption of the resolution of said Board, providing for the issuance of such shares for consideration other than cash or for consideration a part of which shall be other than cash, such fair value to include goodwill and other intangibles to the extent determined in good faith by the Board. (c) In case of the issuance by the Company after the date hereof of any security (other than the Warrants) that is convertible into shares of Common Stock or of any warrants, rights or options to purchase shares of Common Stock (except the options and warrants referred to in subsection H of this ss.8), (i) the Company shall be deemed (as provided in subparagraph (e) below) to have issued the maximum number of shares of Common Stock deliverable upon the exercise of such conversion privileges or warrants, rights or options, and (ii) the consideration therefor shall be deemed to be the consideration received by the Company for such convertible securities or for such warrants, rights or options, as the case may be, before deducting therefrom any expenses or commissions incurred or paid by the Company for any underwriting of, or otherwise in connection with, the issuance of such convertible security or warrants, rights or options, plus (A) the minimum consideration or adjustment payment to be received by the Company in connection with such conversion, or (B) the minimum price at which shares of Common Stock are to be delivered upon exercise of such warrants, rights or options or, if no minimum price is specified and such shares are to be delivered at an option price related to the market value of the subject shares, an option price bearing the same relation to the market value of the subject shares at the time such warrants, rights or options were granted; provided that as to such options such further adjustment as shall be necessary on the basis of the actual option price at the time of exercise shall be made at such time if the actual option price is less than the aforesaid assumed option price. No further adjustment of the Warrant Price shall be made as a result of the actual issuance of the shares of Common Stock referred to in this subparagraph (c). On the expiration of such warrants, rights or options, or the termination of such right to convert, the Warrant Price shall be readjusted to such Warrant Price as would have pertained had the adjustments made upon the issuance of such warrants, rights, options or convertible securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered upon the exercise of such warrants, rights or options or upon the conversion of such securities. (d) For the purposes hereof, any additional shares of Common Stock issued as a stock dividend shall be deemed to have been issued for no consideration. (e) The number of shares of Common Stock at any time outstanding shall include the aggregate number of shares deliverable in respect of the convertible securities, rights and options referred to in subparagraph (c) of this paragraph; provided that with respect to shares referred to in clause (i) of subparagraph (c), to the extent that such warrants, options, rights or conversion privileges are not exercised, such shares shall be deemed to be outstanding only until the expiration dates of the warrants, rights, options or conversion privileges or the prior cancellation thereof. C. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall be proportionately reduced and, in case the outstanding shares of the Common Stock of the Company shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall be proportionately increased. D . Upon each adjustment of the Warrant Price pursuant to the provisions of this ss.8, the number of shares issuable upon the exercise of each Warrant shall be adjusted by multiplying the Warrant Price in effect prior to the adjustment by the number of shares of Common Stock covered by the Warrant and dividing the product so obtained by the adjusted Warrant Price. E. Except upon consolidation or reclassification of the shares of Common Stock of the Company as provided for in subsection (C) hereof and except for readjustment of the Warrant Price upon expiration of warrants, rights or options as provided for in subparagraph (c) of paragraph 3 of subsection (B) hereof, the Warrant Price in effect at any time may not be adjusted upward or increased in any manner whatsoever. F. Irrespective of any adjustment or change in the Warrant Price or the number of shares of Common Stock actually purchasable under the several Warrants, the Warrants theretofore and thereafter issued may continue to express the Warrant Price per share and the number of shares purchasable thereunder as the Warrant Price per share and the number of shares purchasable were expressed in the Warrants when initially issued. G. If any capital reorganization or reclassification of the capital stock of the Company (other than a distribution of stock in accordance with ss.10(B)) or consolidation or merger of the Company with another corporation or the sale of all or substantially all of its assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holder of each Warrant then outstanding shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified herein and in the Warrants and in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented by each such Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by each such Warrant had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interest of the holder of each Warrant then outstanding to the end that the provisions thereof (including without limitation provisions for adjustment of the Warrant Price and of the number of shares purchasable upon the exercise of each Warrant then outstanding) shall thereafter be applicable as nearly as may be in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of each Warrant. H . No adjustment of the Warrant Price shall be made in connection with the issuance or sale of shares of Common Stock issuable pursuant to currently outstanding options and warrants granted to officers, directors, employees, advisory directors, or affiliates of the Company. I. Whenever the Warrant Price is adjusted as herein provided, the Company shall (a) forthwith file with the Warrant Agent a certificate signed by the Chairman of the Board or the President or a Vice President of the Company and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, showing in detail the facts requiring such adjustment and the Warrant Price and the number of shares of Common Stock purchasable upon exercise of the Warrants after such adjustment and (b) cause a notice stating that such adjustment has been effected and stating the adjusted Warrant Price and the number of shares of Common Stock purchasable upon exercise of the Warrants to be published at least once a week for two consecutive weeks in a newspaper of general circulation in Denver, Colorado and in New York, New York. The Company, at its option, may cause a copy of such notice to be sent by first class mail, postage prepaid, to each registered holder of Warrants at his address appearing on the Warrant register. The Warrant Agent shall have no duty with respect to any such certificate filed with it except to keep the same on file and available for inspection by holders of Warrants during reasonable business hours. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of a Warrant to determine whether any facts exist which may require any adjustment of the Warrant Price, or with respect to the nature or extent of any adjustment of the Warrant Price when made, or with respect to the method employed in making such adjustment. J. The Company may retain a firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) selected by the Board of Directors of the Company or the Executive Committee of said Board and approved by the Warrant Agent, to make any computation required under this ss.8, and a certificate signed by such firm shall be conclusive evidence of the correctness of any computation made under this ss.8. K. In case at any time conditions shall arise by reason of action taken by the Company which, in the opinion of the Board of Directors of the Company, are not adequately covered by the other provisions of this Agreement and which might materially and adversely affect the rights of the holders of the Warrants, or in case at any time any such conditions are expected to arise by reason of any action contemplated by the Company, the Board of Directors of the Company shall appoint a firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company), who shall give their opinion as to the adjustment, if any (not inconsistent with the standards established in this ss.8), of the Warrant Price and the number of shares of Common Stock purchasable pursuant hereto (including, if necessary, any adjustment as to the property which may be purchasable in lieu thereof upon exercise of the Warrants) which is, or would be, required to preserve without dilution the rights of the holders of the Warrants. The Board of Directors of the Company shall make the adjustment recommended forthwith upon the receipt of such opinion or the taking of any such action contemplated, as the case may be; provided, however, that no adjustment of the Warrant Price shall be made which in the opinion of the accountant or firm of accountants giving the aforesaid opinion would result in an increase of the Warrant Price to more than the Warrant Price then in effect except as otherwise provided in subsection E of this ss.8. 9. No Fractional Interests. The Company shall not be required to issue fractions of shares of Common Stock on the exercise of Warrants. If any fraction of a share of Common Stock would, except for the provisions of this Section, be issuable on the exercise of any Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the current value of such fraction (a) computed, if the Common Stock shall be listed or admitted to unlisted trading privileges on any national or regional securities exchange, on the basis of the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of exercise upon which such a sale shall have been effected (or, if the Common Stock shall be listed or admitted to unlisted trading privileges on more than one such exchange, on the basis of such price on the exchange designated from time to time for such purpose by the Board of Directors of the Company) or (b) computed, if the Common Stock shall not be listed or admitted to unlisted trading privileges, on the basis of the average of the high and low bid prices of the Common Stock in the Nasdaq Stock Market, on the last business day prior to the date of exercise. 10. Notice to Warrantholders. A. Nothing contained in this Agreement or in any of the Warrants shall be construed as conferring upon the holders thereof the right to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders for the election of directors of the Company or any other matters, or any rights whatsoever as stockholders of the Company; provided, however, that in the event that a meeting of stockholders shall be called to consider and take action on a proposal for the voluntary dissolution of the Company, other than in connection with a consolidation, merger or sale of all, or substantially all, of its property, assets, business and goodwill as an entirety, then and in that event the Company shall cause a notice thereof to be published at least once a week for two consecutive weeks in a newspaper of general circulation in Denver, Colorado and New York, New York, such publication to be completed at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stock holders entitled to vote at such meeting. The Company shall also cause a copy of such notice to be sent by first class mail, postage prepaid, at least 20 days prior to said date fixed as a record date or said date of closing the transfer books, to each registered holder of Warrants at his address appearing on the Warrant register; but failure to mail or receive such notice or any defect therein or in the mailing thereof shall not affect the validity of any action taken in connection with such voluntary dissolution. If such notice shall have been so given and if such a voluntary dissolution shall be authorized at such meeting or any adjournment thereof, then for and after the date on which such voluntary dissolution shall have been duly authorized by the stockholders, the purchase rights represented by the Warrants and other rights with respect thereto shall cease and terminate. B. If the Company shall make any distribution on, or to holders of, its Common Stock (or other property which may be purchasable in lieu thereof upon the exercise of Warrants) of any property (other than a cash dividend), the Company shall cause a notice of its intention to make such distribution to be published at least once a week for two consecutive weeks in a newspaper of general circulation in Denver, Colorado and New York, New York, such publication to be completed at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to receive such distribution. The Company shall also cause a copy of such notice to be sent by first class mail, postage prepaid, at least 20 days prior to said date fixed as a record date or said date of closing the transfer books, to each registered holder of Warrants at his address appearing on the Warrant register; but failure to mail or to receive such notice or any defect therein or in the mailing thereof shall not affect the validity of any action taken in connection with such distribution. 11. Disposition of Proceeds on Exercise of Warrants. A. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all monies received by the Warrant Agent for the purchase of shares of the Company's stock through the exercise of such Warrants. B. The Warrant Agent shall keep copies of this Agreement available for inspection by holders of Warrants during normal business hours at its principal office. 12. Redemption of Warrants. A. At any time on or after __________, 1998, the Company may, at its option, redeem some or all of the outstanding Warrants at $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 or any other national securities exchange, has equaled or exceeded $8.00 for ten (10) consecutive trading days within the 10 day period immediately preceding the date notice of redemption is given (the "Redemption Price"). In the event of an adjustment in the Warrant Price pursuant to ss.8, the Redemption Price shall also be automatically adjusted. B. The election of the Company to redeem some or all of the Warrants shall be evidenced by a resolution of the Board of Directors of the Company. C. Warrants may be exercised at any time on or before the date fixed for redemption (the "Redemption Date"). D. Notice of redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each holder of Warrants, at his address appearing in the Warrant register. All notices of redemption shall state: (1) The Redemption Date; (2) That on the Redemption Date the Redemption Price will become due and payable upon each Warrant; (3) The place where such Warrants are to be surrendered for redemption and payment of the Redemption Price; and (4) The current Warrant Price of the Warrants, the place or places where such Warrants may be surrendered for exercise, and the time at which the right to exercise the Warrants will terminate in accordance with this Agreement. E. Notice of redemption of Warrants at the election of the Company shall be given by the Company or, at the Company's request, by the Warrant Agent in the name and at the expense of the Company. F. Prior to any Redemption Date, the Company shall deposit with the Warrant Agent an amount of money sufficient to pay the Redemption Price of all the Warrants which are to be redeemed on that date. If any Warrant is exercised pursuant to ss.5, any money so deposited with the Warrant Agent for the redemption of such Warrant shall be paid to the Company. G. Notice of redemption having been given as aforesaid, the Warrants so to be redeemed shall, on the Redemption Date, become redeemable at the Redemption Price therein specified and on such date (unless the Company shall default in the payment of the Redemption Price), such Warrants shall cease to be exercisable and thereafter represent only the right to receive the Redemption Price. Upon surrender of such Warrants for redemption in accordance with said notice, such Warrants shall be redeemed by the Company for the Redemption Price. 13. Merger or Consolidation or Change of Name of Warrant Agent. Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor warrant agent under the provisions of ss.15 of this Agreement. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement and at such time any of the Warrants shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the Warrant Agent and deliver such Warrants so countersigned; and in case at the time any of the Warrants shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrants either in the name of the predecessor Warrant Agent or in the name of the successor warrant agent; and in all such cases such Warrants shall have the full force provided in the Warrant and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrants shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrants so countersigned; and in case at that time any of the Warrants shall not have been countersigned, the Warrant Agent may countersign such Warrants whether in its prior name or in its changed name; and in all such cases such Warrants shall have the full force provided in the Warrants and in this Agreement. 14. Duties of Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrants, by their acceptance thereof, shall be bound: A. The statements contained herein and in the Warrants shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or action taken or to be taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrants except as herein otherwise provided. B. The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrants to be complied with by the Company. C. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it to perform any duty hereunder either itself or by or through its attorneys, agents or employees. D. The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel, provided the Warrant Agent shall have exercised reasonable care in the selection and continued employment of such counsel. E. The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. F. The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence or bad faith. G. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more registered holders of Warrants shall furnish the Warrant Agent with reasonable security and indemnity for any cost and expense which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights or interests may appear. H. The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become peculiarly interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. I. The Warrant Agent shall act hereunder solely as agent and not in a ministerial capacity, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence or bad faith. 15. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company notice in writing, and to the holders of the Warrants notice by publication, of such resignation, specifying a date when such resignation shall take effect, which notice shall be published at least once a week for two consecutive weeks in a newspaper of general circulation in Denver, Colorado and New York, New York, prior to the date so specified. The Warrant Agent may be removed by like notice to the Warrant Agent from the Company and by like publication. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by the registered holder of a Warrant (who shall, with such notice, submit his Warrant for inspection by the Company), then the registered holder of a Warrant may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Any successor warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having its principal office, and having capital and surplus as shown by its last published report to its stockholders, of at least $1,000,000. After appointment, the successor warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor warrant agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to file or publish any notice provided for in this Section, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. 16. Identify of Transfer Agent. Forthwith upon the appointment of any Transfer Agent for the Common Stock or of any subsequent Transfer Agent for shares of the Common Stock or other shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants, the Company will file with the Warrant Agent a statement setting forth the name and address of such Transfer Agent. 17. Notices. Any notice pursuant to this Agreement to be given or made by the Warrant Agent or the registered holder of any Warrant to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: New Frontier Media, Inc. 1050 Walnut Street, Suite 301 Boulder, Colorado 80302 Any notice pursuant to this Agreement to be given or made by the Company or the registered holder of any Warrant to or on the Warrant Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: Corporate Stock Transfer, Inc. 370 17th Street, Suite 2350 Denver, Colorado 80202 18. Supplements and Amendments. The Company and the Warrant Agent may from time to supplement or amend this Agreement without the approval of any holders of Warrants in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not adversely affect the interests of the holders of Warrants. 19. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 20. Merger or Consolidation of the Company. The Company shall not effect any consolidation or merger with, or sale of substantially all its property to, any other corporation unless the corporation resulting from such merger (if not the Company) or consolidation or the corporation purchasing such property shall expressly assume, by supplemental agreement satisfactory in form to the Warrant Agent and executed and delivered to the Warrant Agent, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company. 21. Governing Law. This Agreement and each Warrant issued hereunder shall be deemed to be a contract made under the laws of the State of Colorado and for all purposes shall be construed in accordance with the laws of said State. 22. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of the Warrants any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrants. 23. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes by deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. NEW FRONTIER MEDIA, INC. By:__________________________________ , President CORPORATE STOCK TRANSFER, INC. By:__________________________________ EXHIBIT A [FORM OF WARRANT] No. _____ For the Purchase of ___ Shares of Common Stock __________, 1997 NEW FRONTIER MEDIA, INC. REDEEMABLE COMMON STOCK PURCHASE WARRANT EXERCISABLE ON OR BEFORE 5:00 P. M. , New York City Time 2002 This Warrant Certifies that ________________________________, or registered assigns, is the holder of __________________Warrants expiring ___________, 2002, to purchase Common Stock, $.01 par value per share (the "Common Stock"), of New Frontier Media, Inc., a Colorado corporation (the "Company"). Each Warrant entitles the holder to purchase from the Company on or before 5:00 P. M. New York City time, on _________2002, (subject to extensions in the sole discretion of the Company, the "Expiration Date") on fully-paid and non-assessable share of Common Stock of the Company at the exercise price (the "Exercise Price") of $6.50 per share upon surrender of this Warrant Certificate and payment of the Exercise Price at the office or agency of the Warrant Agent in New York, New York, but only subject to the conditions set forth herein and in the Warrant Agreement. Payment of the Exercise Price may be made in cash or by certified check payable to the order of the Company. As used herein "shares" refers to the Common Stock of the Company and, where appropriate, to the other securities or property issuable upon exercise of a Warrant as provided for in the Warrant Agreement upon the happening of certain events set forth in the Warrant Agreement. No Warrant may be exercised after 5:00 P. M., New York City time, on the Expiration Date. To the extent not exercised by such time, the Warrants shall be cancelled and retired notwithstanding delivery of the related Warrant Certificate. All Warrants evidenced hereby shall thereafter be void. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse in hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent Dated: NEW FRONTIER MEDIA, INC. By: President By: Warrant Agent Secretary By: Authorized Officer [ FORM OF ] ELECTION TO PURCHASE NEW FRONTIER MEDIA, INC. c/o _______________________ The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant for, and to purchase thereunder, shares of the stock provided for therein, and requests that certificates for such shares shall be issued in the name of ( Please Print ) and be delivered to at and, if said number of shares shall not be all of the shares purchasable thereunder, that a new Warrant for the balance remaining of the shares purchasable under the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: , Name of Warrantholder: ( Please Print ) Address: Signature: Note: The above signature must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. [ FORM OF ] ASSIGNMENT For value received does hereby sell, assign and transfer unto the within Warrant, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint attorney, to transfer said Warrant on the books of the within-named Corporation, with full power of substitution in the premises. Date: , Signature: Note: The above signature must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-23.01 8 EXHIBIT 23.01 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in the New Frontier Media, Inc. registration statement, on Form SB-2 Amendment No. 3, of our report dated July 3, 1997, accompanying the consolidated financial statements of New Frontier Media, Inc. for the years ended March 31, 1997 and 1996 which is part of the registration statement and to the reference to us under the heading "Experts" in such registration statement. SPICER, JEFFRIES & CO. December 3, 1997 EX-27.01 9 EXHIBIT 27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENT CONTAINED IN FILER'S REGISTRATION STATEMENT ON FORM SB-2 DATED SEPTEMBER 10, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR YEAR 6-MOS MAR-31-1996 MAR-31-1997 MAR-31-1997 MAR-31-1996 MAR-31-1997 SEP-30-1997 48,523 859,387 296,015 0 0 0 222,276 212,370 213,271 0 0 0 354,089 659,503 739,258 860,878 1,881,735 1,677,625 39,314 65,552 86,740 (10,479) (22,661) 30,882 1,017,349 2,186,471 2,303,517 341,877 657,330 1,241,696 0 0 0 0 0 0 1,000 1,500 0 418 419 420 847,832 1,768,661 1,780,519 1,017,349 2,186,471 2,303,517 2,565,671 2,515,802 727,775 2,565,671 2,515,802 727,775 1,843,765 2,217,812 507,053 782,345 931,342 1,277,621 102,441 164,802 0 0 0 0 (15,561) 10,543 25,403 5,277 (386,030) (431,320) (12,147) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (6,870) (386,030) (431,320) (.01) (.09) (.10) (.01) (.09) (.10)
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