Sample Business Contracts

Letter of Understanding - New Frontier Media Inc., 1043133 Ontario Inc., Fifth Dimension (Barbados) Inc., Merlin Sierra Inc. and Fifth Dimension Communications (1996) Corp.

Sponsored Links

                       LETTER OF UNDERSTANDING OF 14 APRIL 1997



April 14, 1997

To: 1043133 Ontario Inc.
    Fifth Dimension (Barbados) Inc.
    Merlin Sierra, Inc.
    Fifth Dimension Communications (1996) Corporation

    c/o Douglas Duncan
    2500 Don Reid Drive
    Ottawa, Ontario
    K1H 8P5

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.


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;

    "Closing" means the closing of the Transaction and "Closing Date" means the
    date on which the Closing takes place;


                                                                     PAGE 2 OF 9

    "Communications"  means Fifth Dimension Communication (1996) Corporation, a
    Canadian company;

    "Merlin" means Merlin Sierra, Inc., a California corporation;

    "Ottawa Call Center" means the subscription and 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 consenting 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

         (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


                                                                     PAGE 3 OF 9

              programming to New Frontier;

         (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

         (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 numbers; 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.


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.


                                                                    PAGE 4 OF 9

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.

    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

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
operational, 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 sublessor may


                                                                    PAGE 5 OF 9

have.  New Frontier will guarantee all obligations of the Purchaser under the
Transponder Sublease Agreements. The Transponder Sublease Agreements 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.

To the extent that Communications may obtain rights in any transponders on
Nahuel, AsiaSat and Intelsat 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.


In consideration for the Transaction, the Adult Companies shall receive the

    (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 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) 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


                                                                    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


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 by 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
deceases 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

    (d)  add-back of amounts paid to VTV and expenses in the accounts of an
         Adult Company;

    (e)  add-back of amounts paid to lawyer 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;

    (n)  add-back of AT&T telephone penalty for not meeting contractual

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


                                                                    PAGE 8 OF 9

secured by a charge against New Frontier's assets that ranks subordinate only to
a charge, if any, in favor of New Frontier's principal bankers.


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.


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

    (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 contents 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.


                                       New Frontier Media, Inc.

                                       /s/ Mark H. Kreloff
                                       Mark H. Kreloff

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
                                       Douglas Duncan

                                       /s/ Stuart Duncan
                                       Stuart Duncan

                                       Daniel Bender