April 14, 1997
To: 1043133 Ontario Inc.
Fifth Dimension (Barbados) Inc.
Merlin Sierra, Inc.
Fifth Dimension Communications (1996) Corporation
c/o Douglas Duncan
2500 Dan Reid Drive
Ottawa, Ontario
K1H SP5
Dear Mr Duncan:
This letter sets forth certain terms upon which New Frontier Media, Inc., a
Colorado Corporation, ("New Frontier") is interested in acquiring certain assets
and services from the above-noted companies. Such assets shall be acquired by a
wholly-owned subsidiary company to be formed by New Frontier for such purpose,
which company will be a Nevada corporation tentatively named "Nevada Satellite
Broadcasting, Inc. (the "Purchaser"). The Purchaser shall not acquire any stock
or shares of any of the above-noted companies.
Definitions
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In this letter:
"5DB" means Fifth Dimension (Barbados) Inc., a Barbados corporation;
"Adult Companies" means 5DB, Merlin and XTC;
"Adult Movies Business" means all any present or contemplated satellite
broadcast services on television or any other medium, including cable and
the Internet, which broadcasts, replays, and/or otherwise exploits feature
length adult programming and all related promotional content and other
programming of a non-rated or X-rated nature and whose main theme embodies
nudity and sexually explicit material between consenting adults and such
other related business assets as are necessary for the operation thereof as
are as set forth in the Valuation. This shall include the services and
advertising and promotional materials for broadcast services currently
operating under the trade names "Exxxtasy", "True Blue", and "Venus" and
any other similar contemplated services;
page 2 of 9
"Closing" means the closing of the Transaction and "Closing Date" means the
date on which the Closing takes place;
"Communications," means Fifth Dimension Communication (1996) Corporation, a
Canadian company;
"Merlin" means Marlin Sierra, Inc., a California corporation;
"Ottawa Call Center" means the subscription arid pay-per-view call center
at Ottawa now operated by the Adult Companies;
"Subject Assets" means:
(a) any and all trademarks, proprietary rights and other intellectual
property rights owned by the Adult Companies or any of them and
associated with the Adult Movies Business Assets. These include, but
are not necessarily limited, to trade names, trademarks and/or service
marks. Without limiting the generality of the foregoing, it is
understood that the trade names and marks "Venus" and "Venus TV" are
not owned by the Adult Companies and will not be available for use at
the Closing;
(b) (subject to the provisions related thereto below in this letter)
equipment and necessary technology (the "Uplink Equipment") for the
operation of a satellite operation uplink facility (the "Uplink
Facility") at a suitable location in Nevada to be chosen by New
Frontier. The Uplink Equipment shall be in operating order and shall
be substantially similar in condition and function to the equipment
and technology (the "Ottawa Uplink Equipment") currently being used by
the Adult Companies at its uplink facility in Ottawa, Ontario (the
"Ottawa Uplink Facility");
(c) all hardware and equipment now used at the Ottawa Call Center (which
shall be delivered to the Purchaser forthwith after the Purchaser
ceases to make use of the Ottawa Call Center) a fully paid, royalty
free license to use one copy of the "First Link" subscription
management software now used at the Ottawa Call Center, and an
assignment of licenses for any third party software used in connection
with the Ottawa Call Center.
(d) any and all rights the Adult Companies may have in adult programming
in any format (including master tapes) including feature length films
and other films that contain motion picture material that is non-rated
or X-rated and whose main theme embodies sexually explicit material
between consent adults, and all promotional materials and programming
related thereto. No representation or warranty is made with respect to
the transferability or assignability of such programming to New
Frontier.
(e) all programming developed by or on behalf of the Adult Companies to
market and advertise the Adult Movie Business. No representation or
warranty is made with respect to the transferability or assignability
of such programming to New Frontier;
page 3 of 9
(f) all subscriptions for Adult Movie services at Closing, all subscriber
lists, past and present, and any other marketing data related thereto,
which is in the possession of the Adult Companies;
(g) a complete list of all advertisers, marketing partners and vendors
used by the Adult Companies in relation to the Adult Movies Business
and related services, with contact names, mailing addresses, and phone
and fax number; and
(h) all rights the Adult Companies have in 1-800 phone numbers used in the
Adult Business and in any World Wide Web addresses and websites used
in the Adult Business;
"Transaction" means the transaction(s) contemplated in this letter;
"Uplink Moving/Installation costs" means the sum of all costs of equipment
to be included in the Uplink Equipment, all labor costs and related
expenses necessary for the installation of the Uplink Equipment (including
incurred travel, long-distance, accommodation, and meal costs), and all
customs, duties, taxes, and tariffs relating to the importation of
equipment and technology in the United States;
"Valuation" means the Valuation of Adult Companies as of March 31, 1997
previously provided by the Adult Companies to New Frontier; and
"XTC" means 1043133 Ontario Inc., an Ontario corporation.
Proposed Acquisition
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General. The Purchaser proposes to acquire the Subject Assets from the Adult
Companies. In addition, the Purchaser shall acquire subleases for certain
satellite transponders (as described below) and certain services to be provided
by the Adult Companies (as described below). The Purchaser shall honor all
unfulfilled customer subscriptions in existence at Closing (without credit from
the Adult Companies for unearned, prepaid subscription revenue), provided that
no subscriptions shall extend for a period of more than 12 months after Closing.
Closing. The Closing shall be 30 June 1997 or sixty (60) days after the
execution of a definitive asset purchase agreement and any ancillary agreements,
whichever last occurs. The parties will cooperate in establishing a schedule of
important dates and deadlines related to the completion of the Transaction.
Uplink. As part of the acquisition and the purchase price to be paid therefor,
the Adult Companies shall provide and install (in operating order) the Uplink
Equipment at the Uplink Facility. It is anticipated that the location of the
Uplink Facility will be near Las Vegas, Nevada. The Adult Companies shall be
responsible for all Uplink Moving/Installation Costs. All costs associated with
the acquisition, preparation and necessary approvals and licenses for the Uplink
Facility (excluding the Uplink Equipment and Uplink Moving/Installation Costs)
shall be borne by the Purchaser. A complete list of the Uplink Equipment shall
be included as a schedule to the definitive asset purchase agreement. To the
extent that the Purchaser wants equipment and technology at the Uplink Facility
that is not similar to the Ottawa Uplink Equipment, the Purchaser shall be
responsible for all costs related to the acquisition and installation thereof.
page 4 of 9
Communications and the Purchaser shall enter into an "Uplink Services
Agreement" pursuant to which Communications will provide the services to
supervise the installation of the Uplink Equipment at the Uplink Facility and to
assist in acquiring the licenses and approvals necessary for operation of the
Uplink Facility. In addition, an employee of Communications will be made
available, at the Purchaser's expense (but with mark-up by Communications), on a
full-time basis to manage the Uplink Facility during its first month of
operations and for a one-week period during each of the following six months.
All travel, living and other incidental costs associated with such services
shall be paid for by the Purchaser. The uplink Services Agreement shall be
terminable at the option of the Purchaser at any time and shall include a
provision that requires the Purchaser to pay $100,000 to Communications if the
Purchaser or a related entity hires any employee or ex-employee of
Communications on or before the 2nd anniversary date of the Closing Date.
Call Center. The Adult Companies agree to receive and process subscriber calls
from the Ottawa Call Center for a period of up to nine (9) months from the
Closing, at a flat, prepaid monthly rental of US$275,000 and on other terms to
be negotiated in a "Call Center Agreement". The Purchaser shall give the Adult
Companies sixty (60) days prior written notice of its intention to terminate its
use of the Ottawa Call Center prior to the end of the said nine (9) month
period.
Transponders. Communications and Barbados agree, as set forth below, to provide
the Purchaser with sublease rights (pursuant to "Transponder Sublease
Agreements") for four (4) satellite transponders to be used for the Adult Movie
Business after Closing. Three (3) of the transponders will be suitable for adult
movie channels and one (1) will be suitable for advertising or "barker"
programming. The amounts to be paid by the Purchaser for such rights shall not
exceed the actual costs paid or required to be paid by the sublessor therefor,
with the exception that the Purchaser shall bear any additional costs or
expenses associated with upgrading the rights and interests in the particular
transponders (for example, to a "Silver Service"). Provided that they are
operation, the transponders to be provided shall include two (2) T5 transponders
(supplied by Barbados), one (1) additional T5 transponder (if rights thereto can
be acquired for such purpose by Barbados) or one suitable replacement therefor
(if such T5 transponder cannot be so acquired), and one (1) T4 transponder
(supplied by Barbados). Until the successful launch of the T5 satellite or a
replacement therefor, the Purchaser shall be entitled to sublease the
transponders now used in relation to the Adult Movie Business.
The Transponder Sublease Agreements shall be on the same terms and conditions as
the sublessor thereof has leased the applicable transponders, except that
payments shall be due five (5) working days before the date on which the
sublessor is required to pay the same. The Purchaser shall be entitled to the
same renewal rights in respect thereof as the sub lessor may have. New Frontier
will guarantee all obligations of the Purchaser under the Transponder Sublease
Agreements. The Transponder Sublease Agreement shall require the Purchaser to
provide to the sublessor a security deposit equal to (and on the same terms as)
the security deposit paid by the sublessor to the lessor of the applicable
transponder or (if the sublessor has not then made a security deposit) in an
amount equal to the monthly lease rate for the transponder under the applicable
sublease.
page 5 of 9
To the extent that Communications may obtain rights in any transponders on
Nahuel, AsiaSat and Intersat satellites and desire to sublease all or a portion
thereof for use in adult movie programming, Communications shall give the
Purchaser a right of first refusal to obtain such sublease on terms typically
offered by Communications to its customers, which right must be exercised by the
Purchaser within seven (7) days after notice of such opportunity is given to the
Purchaser by Communications.
Key Payment Terms
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In consideration for the Transaction, the Adult Companies shall receive the
following:
(a) US$3,500,000 on Closing, including a US$100,000 deposit which shall be
paid to the Adult Companies upon execution of the definitive asset
purchase agreement (which deposit shall be held in escrow by a
mutually agreed upon third party lawyer in Ottawa, Ontario and shall
be non-refundable if the Transaction does not close, unless the
failure to close is solely attributable to breach of the definitive
asset purchase agreement by the Adult Companies);
(b) the greater of (i) shares in the stock of New Frontier having a value
of US$3,400,000 (calculated on the basis of the weighted-average
trading price of the stock on the last dy stock was traded by
arms-length third parties (excluding New Frontier and its directors,
officers, and employees, and their relatives) prior to the Closing
Date) and (ii) 840,000 such shares. It is understood that these shares
of stock and the warrants (describe in paragraph (c) below) and
issuable shares therefrom have not been or will not have be registered
under the Securities Act of 1933 or applicable state securities laws
and shall not be sold, pledged, hypothecated, donated or otherwise
transferred (whether or not for consideration) by the holder except on
the issuance to New Frontier of a favorable opinion of counsel, in
each such case, to the effect that any such transfer shall not be in
violation of the Securities Act of 1933 or the applicable state
securities laws:
(c) warrants to purchase sufficient shares in the stock of New Frontier so
that if all warrants were exercised the total stock owned by the Adult
Companies would represent 20% of the issued stock of New Frontier.
Such warrants shall be exercisable at the weighted-average trading
price of the stock on the last day stock was traded by arms-length
third parties (excluding New Frontier and its directors, officers, and
employees, and their relatives) prior to the Closing Date, which
warrants shall not be assignable without the prior consent of New
Frontier;
page 6 of 9
(d) a promissory note from the Purchaser, guaranteed by New Frontier, for
a face value of US$1,000,000, and secured by a second charge against
the assets of the Purchaser and guaranteed by New Frontier. The term
of the note shall be three (3) years, at the end of which the full
principal amount of the Promissory Note shall be payable. Interest
shall be paid at the end of the first year and thereafter shall be
payable on a monthly basis until the Promissory Note is paid in full.
Interest shall be calculated at the rate of prime plus one percent
(1%), based on the prime rate of Bank One, but in no event shall be
greater than nine percent (9%) per annum or less than six percent (6%)
per annum; and
(e) the Adult Companies shall be entitled to the any and all Formula
Profits of the Purchaser exceeding US$ 2 million in the first 12
months of the Purchaser's operations after the Closing. "Formula
Profits" shall equal the total revenue derived from operations less
the actual operating costs, provided the actual operating costs
related to the Adult Movie Business do not exceed 125% of the
projected costs set forth in the Valuation. The Formula Profits shall
be payable by not later than 90 days after the end of such 12 month
period.
Other Provisions
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Directors. The Adult Companies shall be entitled to appoint at least one member
of the Board of Directors for New Frontier. In addition to the appointed board
member, the Adult Companies shall be entitled to have one additional non-voting
representative receive notice of and attend and participate at New Frontier
board meetings; such representative shall enjoy all the rights and privileges of
board members except for the right to vote and shall have all of his reasonable
travel and lodging costs (related to attendance at board meetings) paid for by
New Frontier.
Non-Competition. The Adult Companies, their directors, officers and shareholders
(including Douglas Duncan, Stuart Duncan and Daniel Bender) agree to enter into
"Non-Competition Agreements" in which they agree not to directly or indirectly
engage or participate in any business that directly or indirectly will compete
or otherwise participate in the distribution production or broadcasting of Adult
Programming in any geographic being served be the Purchaser. Adult programming
shall be defined as the motion picture material in any format that is of a
non-rated or X-rated nature and whose main theme embodies sexually explicit
material between consenting adults.
Financial Statements. The Adult Companies will provide audited financial
statements for the 12 month period ending 30 June 1997 (including a balance
sheet at such date and statements of earnings for the years ended on 30 June
1996 and 1997 as required for SEC filings). The definitive asset purchase
agreement shall contain a price adjustment clause to deal with increases or
decreased in the consideration payable in respect of the Transaction if the
audited pre-tax profits for the period ending 30 June 1997 are more or less than
US$2,000,000 after the following adjustments thereto are made:
page 7 of 9
(a) add-back of salaries and benefits paid to Douglas Duncan and his
assistant Nina Frid, Stuart Duncan and Dan Bender, which in the
aggregate are in excess of $200,000;
(b) add-back of salaries and benefits, and termination costs, related to
Judith Christou, Richard Latham, and Nina Frid, and termination costs
related to other employees;
(c) an adjustment so that the average monthly cost of movies is reduced to
US$75,000;
(d) add-back of amounts paid to VTV and expenses in the accounts of an
Adult Company;
(e) add-back of amounts paid to lawyers in connection with this and
previous acquisitions and proposed acquisitions of or by the Adult
Companies or any of them (including the acquisition of Merlin Sierra);
(f) add-back of the amount (if any) by which the transponder costs
incurred in January 1997 exceeded the average monthly transponder
costs over the preceding 3 months;
(g) add-back of promotional and entertainment costs related to the
corporate suite at the Corel Centre in Ottawa;
(h) add-back of payments made to Jeff Gold, Galaxy Communications
International Inc. and Surmount Inc. which payments have been expensed
in the accounts of 5DB;
(i) add-back of all costs related to the Valley Center office, including
rent paid to Dan Bender and salaries and termination allowances paid
to staff of such office;
(j) add-back of automobile lease payments made on behalf of Douglas Duncan
and Stuart Duncan;
(k) add-back of payments made to RocketSoft, Inc. for services provided by
Denis Dagernais;
(l) add-back of interest paid on Best Bank loan (regarding Merlin Sierra);
(m) add-back of payments made to On-line Enterprises and Jack Michaelson;
and
(n) add-back of AT&T telephone penalty for not meeting contractual
commitment.
New Frontier will guarantee all payments to be made by the Purchaser under the
terms of the definitive asset purchase agreement and other ancillary agreements
and such guarantee shall be secured by a charge against New Frontier's assets
that ranks subordinate only to a charge, if any, in favour of New Frontier's
principal bankers.
page 8 of 9
Ancillary Agreements
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The parties acknowledge and agree that the anticipated acquisition will require
several ancillary agreements, including without limitation the Call Center
Agreement, the Transponder Sublease Agreements, the Uplink Service Agreement,
and Non-Competition Agreements (referred to above).
In addition, the Purchaser will enter into a one year employment contract with
Daniel Bender. The total compensation (salary, benefits and other compensation)
to be paid under that employment contract shall be US$100,000.00. Mr. Bender
will not be required to relocate to provide services under such contract.
In addition, the Purchaser will enter into an "Audio/Visual Production
Agreement" with Diorio Productions Inc., in which the Purchaser agrees to
purchase Cdn$30,000 per month worth of interstitial programming for its adult
channels for the period of nine (9) months following the Closing.
General
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This letter is intended to outline and clarify what we believe to be our mutual
understandings concerning the general terms and conditions of this proposed
transaction. Additional issues will need to be discussed and negotiated. The
willingness and ability of the parties to complete the proposed transaction
depend upon:
(a) the ability of New Frontier to successfully finance the proposed
acquisition;
(b) the successful completion of a pre-closing due diligence review by all
parties (and, in that regard, the parties agree to execute
confidentially agreements prohibiting the use of any confidential
information obtained during the due diligence investigation or
otherwise from being used in any manner except for the limited purpose
of due diligence investigation and evaluating the Transaction). The
definitive asset purchase agreement will require the parties to
represent and warrant that all information and materials provided
during the due diligence process is true and accurate; and
(c) the entering into of a definitive asset purchase agreement and other
ancillary agreements to be negotiated between the applicable parties.
page 9 of 9
Assuming you find the consents of this letter to be acceptable, please sign
and acknowledge the same below on or before 15 April 1997.
This letter and the acknowledgement and acceptance below may be signed in
one or more counterparts.
Sincerely,
New Frontier Media, Inc.
/s/ Mark H. Kreloff
Mark H. Kreloff
President
Acknowledged and accepted this 14th day of April, 1997 on behalf of 1043133
Ontario Inc., Fifth Dimension (Barbados) Inc., Merlin Sierra, Inc., and Fifth
Dimension Communications (1996) Corporation.
/s/ Douglas Duncan
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Douglas Duncan
/s/ Stuart Duncan
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Stuart Duncan