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Sample Business Contracts

Letter of Understanding - Private Media Group Inc. and Max's Film AB

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May 5, 1998

Jimmy Lundgren
Max's Film AB
Box 30018
10425 Stockholm, Sweden


Re:  Letter of Understanding

Dear Mr. Lundgren:

     Private Media Group, Inc. (hereinafter referred to as "PRVT" wishes to
express its intention to make an offer to acquire all of the issued and
outstanding share of Max's Film AB (hereinafter referred to as "Max's"), as
detailed on Exhibit A attached hereto.

     It is intended that the offer to purchase (the "Formal Agreement") or the
"Agreement") shall substantially contain the following terms:

     1.   The closing of the transaction contemplated hereby shall take place on
          or before July 20, 1998 or such other date as may be mutually
          acceptable to PRVT and Max's (hereinafter referred to as the "Closing"
          or "Close").
 
     2.   PRVT wishes to acquire all of the outstanding shares of Max's in
          exchange for Common Shares of PRVT to be issued at various dates.

     3.   The Agreement to be negotiated and executed between PRVT and Max's
          based upon further negotiations between the parties, will contain a
          set purchase price of USD 2.6 million (two million six hundred
          thousand United States Dollars) detailed as follows:
 
          (a)  USD 1,300,000 in value of common stock of PRVT at closing in
               exchange for 100 percent of the outstanding shares of Max's.

          (b)  An additional USD 650,000 in value of common stock of PRVT if
               Max's nets 5,000,000 SEK within one year of its acquisition by
               PRVT.

          (c)  An additional USD 650,000 in value of common stock of PRVT if
               Max's nets 5,000,000 SEK during the second year after its
               acquisition by PRVT.

          (d)  Warrants to purchase up to 50,000 shares of PRVT at anytime
               during the three year period after closing at the price
               determined by 3(g) below.
<PAGE>
 
          (e)  For the purpose of this paragraph "net" means profit before
               taxes.

          (f)  For the purposes of this paragraph "SEK" is hereby defined as
               Swedish Kroner.
 
          (g)  For the purposes of this paragraph, the USD value of each share
               of PRVT shall be determined as being the average closing price
               for the twenty business days prior to the Closing.

          (h)  All shares to be issued to the shareholders of Max's shall be
               restricted shares as such is commonly known under the United
               States Securities Act of 1933 and will bear the appropriate
               restrictive legend thereon. As such, there will be limitations on
               their transferability and saleability, within the United States
               of America, unless a registration is in effect or an exemption
               from registration is in effect. PRVT agrees to file an
               appropriate re-sale Registration Statement covering any of these
               shares within twelve (12) months from their issue date.

          (i)  In the event that Max's does not net the aforementioned 5,000,000
               SEK within one year after acquisition and/or during the second
               year after acquisition as referred to 3(b) and 3(c) above, the
               number of shares referred to in 3(b) and/or 3(c) above shall be
               reduced on a pro-rata basis for the year that said goal was not
               reached. For example, should Max's only net 2,500,000 SEK during
               the first year after its acquisition, only an additional USD
               325,000 in value of common stock of PRVT will be issued.

     4.   A Formal Agreement shall be negotiated and executed between PRVT and
          Max's and shall include such reasonable representations, warranties
          and conditions as are normally made in connection with such a
          transaction and in such form as is mutually agreeable to the parties.
          Such representations and warranties shall survive the closing of the
          transaction for a period of two (2) years and shall be true and
          correct as of the date they are made or will be true and correct by
          the time of Closing. Such representations shall be made by the parties
          to the best of their knowledge, information and belief after having
          made reasonable inquiry. Such representations and warranties shall
          include but are not limited to the following:

          (a)  Representations by PRVT:

               i.    PRVT is a valid and existing Nevada corporation;
 
               ii.   PRVT owns all right, title, estate and interest in and to
                     its assets free and clear of all liens, encumbrances,
                     charges or claims, save and except for those liabilities
                     which a list of which will be provided to Max's; and
<PAGE>
 
               iii.  PRVT has not granted nor entered into any other agreement,
                     option or understanding, or commitment or any encumbrance
                     of or disposal of its assets or any interest therein, or
                     any right of privilege capable of becoming an agreement or
                     option with respect to the assets, with the exception of an
                     earlier agreement to acquire all of the outstanding shares
                     of an subsidiaries of Milcap Media Limited and Cinecraft
                     Limited.

               iv.   The authorized capital of PRVT consists of 50,000,000
                     Common Shares with a par value of $.001, of which 8,081,669
                     are presently outstanding and 10,000,000 preferred shares
                     with a par value of $.001, of which 7,000,000 have been
                     designated as $4.00 series "a" convertible preferred stock
                     and are outstanding. In addition to the Common Shares,
                     there are currently 875,000 common stock purchase warrants
                     outstanding having an exercise price of $4.00 per share and
                     an expiration date of December 31, 2000.
 
                     Of the common shares outstanding all, except for 581,669
                     shares, together with all of the preferred shares, and all
                     of the common stock warrants are being held in escrow until
                     the close of the transactions between PRVT and Milcap Media
                     Limited and Cinecraft Limited.

               v.    PRVT warrants that it will use its best efforts to
                     negotiate a three year consultancy contract with a company
                     to be designated by Jimmy Lundgren on or before Closing.
                     Said contract will contain, in general, fir Jimmy Lundgren
                     or other members of said company, to provide all services
                     that may be, in good faith, required by PRVT in connection
                     with the needs of Max's, PRVT, or any of its subsidiaries.
                     In addition, PRVT warrants that it will use its best
                     efforts to enter into a three year employment agreement
                     between Jimmy Lundgren, employing him as Chief Financial
                     Officer of Max's, with all powers and time requirement,
                     normally associated with such position. In consideration
                     for said services, said company and/or Jimmy Lundgren shall
                     receive a gross combined monthly income and/or Jimmy
                     Lundgren shall receive a gross combined monthly consulting
                     fee and/or salary if a total of 70,000 SEK and shall be
                     responsible for all its own expenses, with the exception of
                     travel expenses required to perform its obligation under
                     the contract and such other expenses as may be agreed upon
                     between the parties. Said consultancy agreement shall be
                     between the company designated by Jimmy Lundgren and the
                     entity designated by PRVT.

               vi.   PRVT warrants and represents that, for the three years
                     after the Closing, Max's will have access to at least the
                     same level of
<PAGE>
 
                     working capital as it has had access to for the past two
                     years and that the territory within which it has had access
                     to for the past two years and that the territory within
                     which it operates shall not be reduced. In addition, no
                     changes shall be made with respect to Max's operating
                     practices, except as necessary to conform with the
                     operations of PRVT or its subsidiaries.
 
          (b)  Representations by Max's:

               i.    Max's is a valid and existing corporation under the laws of
                     Sweden.

               ii.   The unaudited financial information provided by Max's to
                     PRVT is true and correct in all material respects and does
                     not fail to state any material facts, the omission of which
                     would be materially misleading.

               iii.  Max's owns all right, title, estate and interest in and to
                     its assets free and clear of all liens, encumbrances,
                     charges or claims, save and except for liabilities to be
                     disclosed to PRVT.

               iv.   The Audited financial statements of Max's will be made
                     available promptly.

               v.    EXHIBIT A attached hereto accurately describes the current
                     Stockholders, Officers and Director of Max's. It also
                     indicates the irrevocable allocations for the individual
                     pro rata share of the purchase price described under
                     Section 3 a) b) and c) of this Letter of Understanding. The
                     equity structure and the Shareholders of Max's will remain
                     unchanged, and the same as described on Exhibit A until the
                     Closing Date.

          (c)  Representations by PRVT and Max's:

               i.    There are no actions, suits or proceedings pending against
                     the parties which could involve the possibility of any
                     materially adverse judgment or ruling against or liability
                     of the parties which could affect the assets or the
                     business of either party;

               ii.   By the Closing, all Boards of Directors, Shareholders, and
                     regulatory approval that may be required by either party to
                     effect the closing of the transaction will have been
                     obtained;

               iii.  The parties and their Officers, Directors, Shareholders
                     have the right to enter into this Letter of Understanding
                     without requiring
<PAGE>
 
                     the consent of any person (other than those that have
                     already been acquired and regulator approval) and the
                     entering into this Letter of Understanding doe not and will
                     not violate any agreement to which either party may be
                     bound; and

               iv.   At the Closing, the parties will not have any outstanding
                     tax liability including, without limiting the generality of
                     the foregoing, federal, national or state corporate tax..

               v.    No finders fee is due to any person or entity.

               vi.   Until a formal agreement is reached between the parties,
                     each of the parties shall be totally responsible for all
                     legal, administrative, and other expenses necessary to
                     implement this Letter of Understanding, prepare the formal
                     agreement discussed herein, and take all necessary actions
                     to consummate the transactions contemplated herein.

               vii.  None of the parties herein shall have any obligation to pay
                     nor the right to claim compensation from any other party if
                     no formal agreement is reached.
     
     5.   Each party shall provide the other party and its duly appointed
          representatives with reasonable access to the assets and all
          corresponding books, records, files, technical reports and data, legal
          opinions and other particulars in possession of each party, prior to
          the Closing, in order that each party may satisfy itself as to the
          title of the other party to the assets and all matters relating to the
          use and application thereof , to otherwise determine the accuracy of
          the matter set forth herein and to provide the parties with the
          necessary information to make full, true and plain disclosure to the
          public markets and its Shareholders to such extent as required by law
          and applicable regulation.

     6.   All relevant information about PRVT and Max's, including backgrounds
          of the Officers and Directors and major Stockholders, financial
          statements, minute books, records, material contracts, etc., shall be
          exchanged between the parties as part of the due diligence review.

     7.   The data and information coming the possession of any party to this
          Letter of Understanding which is otherwise not publicly known shall be
          deemed strictly confidential and shall not be disclosed to any third
          person whether orally or in writing, including the media, without the
          prior written consent of the parties to this Letter of Understanding.
          This prohibition shall not prevent any party to this Letter of
          Understanding from making such disclosures as are required by virtue
          of any law to which it is subject or by regulatory bodies having
          jurisdiction and specifically does not apply to news releases that any
          party wishes or it is required
<PAGE>
 
          to make. A copy of a news release that contains information about the
          intentions set out herein shall be provided to all parties
          concurrently with the issue of the news release. Nothing in this
          paragraph shall prevent any party from furnishing to any entity with
          which it is in good faith negotiating in furtherance of its
          obligations contemplated herein such information as may reasonably be
          required to give a written confidentiality commitment prior to
          receiving any such information. The confidentiality commitment shall
          prohibit the party to whom disclosure is made from disseminating any
          information received by it to any third parties.

     8.   The transaction as contemplated herein shall be subject to the
          following conditions precedent being satisfied:
 
          (a)  Approval of the terms and conditions by all of the Boards of
               Directors and Shareholders, if necessary or recommended by
               counsel, of the respective parties;

          (b)  Completion of the usual due diligence review of all aspects of
               the transaction by PRVT and Max's, respectively;

          (c)  The negotiations and execution of a Formal Agreement between PRVT
               and Max's upon terms and conditions mutually satisfactory to the
               parties hereto and their counsel; and

          (d)  The negotiation and execution of a consultancy contract with a
               company to be designated by Jimmy Lundgren as provided for in
               4(a)(v).

          (e)  Such other conditions precedent as are normally provided for in
               connection with a transaction of this nature and which are
               mutually agreeable to the parties.

     9.   Between the date of acceptance hereof by Max's and the date the Formal
          Agreement is executed, Max's shall into enter into nor continue
          negotiations with any other third party for the sale of the stock or
          assets of Max's or any one thereof, nor any negotiations that would
          conflict with, or otherwise affect this Letter of Understanding.

     10.  At the appropriate time after the execution of this Letter of
          Understanding, a comprehensive press release shall be issued by PRVT
          with respect to the entire transaction. Said press release will
          specifically indicate that the transaction is subject to numerous
          contingencies and conditions precedent any one of which would cause
          the failure of the transaction.

     11.  If a formal agreement between the parties has not been formalized and
          executed on or before July 13, 1998, unless otherwise extended through
          the written consent
<PAGE>
 
          of all parties hereto, this Letter of Understanding shall terminate
          automatically. In addition, either party may terminate this Letter of
          Understanding, for any reason, upon thirty (30) days written notice to
          the other party.

     12.  All requirements for notice contained herein shall be deemed effective
          upon delivery to the addresses of the respective parties contained
          herein by certified mail, courier, facsimile delivery, or personal
          delivery.

     13.  Each of the parties specifically agrees that this Letter of
          Understanding shall be governed by the laws of the Country of the
          United States of America and specifically the State of Nevada, and
          that any dispute that may arise, including those under Paragraph 7 or
          9 of this Letter of Understanding, shall be settled exclusively by the
          Courts of Nevada.

     The foregoing will serve as a basis for entering into detailed negotiations
with all the individual corporations belonging to Max's with the intent of
entering into a definitive Formal Agreement, which agreement shall contain such
other or expanded terms and conditions as are appropriate to the subject
transaction and agreed to between the parties hereto and shall be in a forma
satisfactory to each of the parties hereto and their respective counsels.
Notwithstanding anything herein to the contrary, this Letter of Understanding
does not constitute an agreement between the parties but is meant to express the
intentions of the parties and their basic understandings so that further
negotiations may take place for the creation of a formal agreement. None of the
provisions of this Letter of Understanding are binding between the parties until
a formal agreement is reached, with the exception of Paragraph 7 dealing with
confidentiality and Paragraph 9 dealing with negotiations with other third
parties, which shall be binding upon the parties until the termination of this
Letter of Understanding by its own terms or by notice according to the
provisions contained herein.

     In the event this Letter of Understanding sets forth your basis
understanding of the matters related hereto, please execute the attached copy of
the enclosed letter and return a copy to the undersigned no later than the end
of business on May 15, 1998.

     Sincerely,

     PRIVATE MEDIA GROUP, INC.

     Alfredo M. Villa
     President


     _________________________________

     Corso Elvezia 4
     CH-6900 Lugano, Switzerland
<PAGE>
 
     THE UNDERSIGNED acknowledges that the foregoing Letter of Understanding
sets out the basic terms pursuant to which the undersigned is prepared to
negotiate a Formal Agreement with Private Media Group, Inc.

     DATED this 5 day of May, 1998


     MAX'S FILM AB ON BEHALF OF ITSELF
     AND ITS SHAREHOLDERS


     By:  Jimmy Lundgren

          Title:  President
                  ------------------

          __________________________

          Box 30018
          10425 Stockholm, Sweden
<PAGE>
 
                                MAX'S ADDENDUM

     This Addendum is dated this 20/th/ day of August, 1998 and is executed by
and among Private Media Group, Inc, a Nevada, U.S.A. corporation (hereinafter
referred to as "PRVT") and Max's Film A.B., a Swedish corporation (hereinafter
referred to as "Max's").

     WHEREAS, on May 5, 1998 the parties entered into a Letter of Understanding
(LOU); and

     WHEREAS, said agreement contemplated the closing of the transaction
provided for in said LOU to occur on or before July 20, 1998; and

     WHEREAS, all of the terms and conditions of the LOU were not satisfied by
July 20, 1998 and no closing had taken place by that date; and

     WHEREAS, the parties desire to continue the LOU in full force and effect
and extend the time periods for compliance of the terms thereof,

     NOW, THEREFORE, the parties agree as follows:

1.   Paragraph 1 of the LOU shall be and hereby is modified to change the date
     contained therein for closing from July 20, 1998 to October 1, 1998.

2.   Paragraph 11 of the LOU shall be and hereby is modified to change the date
     for a formal agreement from July 13, 1998 to October 1, 1998.

3.   All other terms and conditions of the aforementioned LOU or any previous
     addendums thereto shall remain in full force and effect.


Private Media Group, Inc.                    Max's Film A.B.


By:___________________________               By:_____________________________
     Alfredo M. Villa                             Jimmy Lundgren
     President & Secretary                        President
<PAGE>
 
                             SECOND MAX'S ADDENDUM

     This Second Addendum is dated this 12/th/ day of October, 1998 and is
executed by and among Private Media Group, Inc, a Nevada, U.S.A. corporation
(hereinafter referred to as "PRVT") and Max's Film A.B., a Swedish corporation
(hereinafter referred to as "Max's").

     WHEREAS, on May 5, 1998 the parties entered into a Letter of Understanding
(LOU); and

     WHEREAS, said agreement contemplated the closing of the transaction
provided for in said LOU to occur on or before July 20, 1998; and

     WHEREAS, all of the terms and conditions of the LOU were not satisfied by
July 20, 1998 and no closing had taken place by that date; and

     WHEREAS, the parties entered into an addendum extending the period for
closing to October 1, 1998; and

     WHEREAS, the parties desire to continue the LOU in full force and effect
and extend the time periods for compliance of the terms thereof,

     NOW, THEREFORE, the parties agree as follows:

1.   Paragraph 1 of the LOU shall be and hereby is modified to change the date
     contained therein for closing from July 20, 1998 to December 31, 1998.

2.   Paragraph 11 of the LOU shall be and hereby is modified to change the date
     for a formal agreement from July 13, 1998 to December 31, 1998.

3.   All other terms and conditions of the aforementioned LOU or any previous
     addendums thereto shall remain in full force and effect.


Private Media Group, Inc.                    Max's Film A.B.


By:___________________________               By:___________________________
     Alfredo M. Villa                             Jimmy Lundgren
     President & Secretary                        President