SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended: September 30, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ______________ to _______________.
Commission File Number: 33-27494-FW
New Frontier Media, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1084061
(State of Incorporation) (I.R.S. Employer I.D. Number)
1050 Walnut, Suite 301, Boulder, Colorado 80302
(Address of principal executive offices and Zip Code)
(303) 444-0632
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
X YES NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes
of common stock:
4,195,200 common shares, including 195,200 Unit Shares, were outstanding as
of September 30, 1996.
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Form 10-QSB
NEW FRONTIER MEDIA, INC.
Form 10-QSB for the Quarter ended September 30, 1996
Table of Contents
Page of Report
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited condensed consolidated Balance Sheets as of
September 30, 1996 and March 31, 1996 3-4
Unaudited condensed consolidated Statements of Operations
for the six months ended September 30, 1996 and 1995 and for
the three months ended September 30, 1996 and 1995 5
Unaudited condensed consolidated Statements of Cash Flows
for the six months ended September 30, 1996 and 1995 6
Notes to unaudited condensed consolidated financial statements
for the six months ended September 30, 1996 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
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PART I. Item 1. Unaudited Condensed Consolidated Financial Statements.
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, 1996 March 31, 1996
CURRENT ASSETS
Cash $1,165,103 $48,523
Accounts Receivable 215,174 222,276
Inventories 586,466 354,089
Prepaid distribution rights 117,890 109,763
Common stock subscribed 0 20,000
Income tax receivable 12,500 72,500
Other 31,069 33,727
Total Current Assets 2,128,202 860,878
FURNITURE AND EQUIPMENT, at cost 43,784 39,314
Less: Accumulated depreciation (10,479) (10,479)
Net Furniture and Equipment 33,305 28,835
OTHER ASSETS
Note receivable - officer 38,000 38,000
Accounts receivable - retainage 80,151 77,053
Other 14,277 12,583
Total Other Assets 132,428 127,636
TOTAL ASSETS $ 2,293,935 $ 1,017,349
See notes to unaudited condensed consolidated financial statements.
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NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 1996 March 31, 1996
CURRENT LIABILITIES
Accounts payable $ 175,266 $ 186,742
Current portion of long term debt 143,574 139,573
Other accrued liabilities 21,083 15,562
Total Current Liabilities 339,923 341,877
LONG TERM DEBT - Related Parties 0 0
MINORITY INTEREST 370,249 0
SHAREHOLDERS' EQUITY (Notes 1 & 2)
Common stock, $.0001 par value, 50,000,000
shares authorized, 4,195,250 and 4,175,250
shares issued and outstanding, respectively 420 418
Preferred stock, $.10 par value, 5,000,000
shares authorized, 10,000 shares issued and
outstanding 1,000 1,000
Additional paid in capital 1,791,745 847,832
Deficit (209,402) (173,778)
Total Shareholders' Equity 1,583,763 675,472
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,293,935 $ 1,017,349
See notes to unaudited condensed consolidated financial statements.
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NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
September 30 September 30
1996 1995 1996 1995
SALES, net $ 1,322,094 $ 812,433 $ 697,000 $ 648,183
COST OF SALES 844,626 503,354 433,101 396,594
GROSS PROFIT 477,468 309,079 263,899 261,589
OPERATING EXPENSES
Occupancy and equipment 75,488 43,813 35,396 21,080
Legal and professional 21,764 24,300 14,477 8,393
Distribution expense 230,000 52,500 120,000 52,500
Advertising and promotion 77,018 83,009 53,417 55,187
Salaries, wages and benefits 87,246 38,972 42,550 24,456
Communications 14,560 11,480 6,502 5,393
Research and Development 0 31,481 0 29,639
General and Administrative 98,429 49,355 56,877 33,455
Total Operating Expenses 604,505 334,910 329,219 230,103
OTHER INCOME (EXPENSE)
Licensing fees and royalties 117,812 51,735 55,241 55,685
Licensing commissions (22,104) 0 (9,783) 0
Interest income 4,116 346 3,467 346
Interest expense (5,958) 0 (5,779) 0
Total Other Income (Expense) 93,866 52,081 43,146 56,031
Net Income (Loss) before
Income Taxes (33,171) 26,250 (22,174) 77,517
INCOME TAXES (2,454) 0 0 0
NET INCOME (LOSS) $ (35,625) $ 26,250 $ (22,174) $ 77,517
NET LOSS PER COMMON SHARE
(Note 1) $ (0.01) $ 0.01 $ (0.01) $ 0.02
WEIGHTED AVG. SHARES
OUTSTANDING 4,195,250 4,000,000 4,181,917 4,000,000
See notes to unaudited condensed consolidated financial statements.
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NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (35,625) $ 26,250
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 0 820
Increase (decrease) in accounts payable (11,476) 81,750
(Increase) decrease accounts receivable 4,004 (119,017)
(Increase) decrease in inventories (232,377) (91,625)
(Increase) decrease in income tax receivable 60,000 0
(Increase) decrease in distribution rights (8,127) (46,500)
(Increase) decrease in other assets 964 (36,859)
Increase in accrued liabilities 9,523 0
Net cash used in operating activities (213,114) (185,181)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (4,470) (14,455)
Increase in note receivable - officer 0 (38,000)
Net cash used in investing activities (4,470) (52,455)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2 0
Issuance of preferred stock 0 65,000
Contribution of capital 1,334,162 2,471
Proceeds from notes payable 0 180,900
Net cash provided by financing activities 1,334,164 248,371
NET INCREASE (DECREASE) IN CASH 1,116,580 10,735
CASH, BEGINNING OF PERIOD 48,523 677
CASH, END OF PERIOD $ 1,165,103 $ 11,412
See notes to unaudited condensed consolidated financial statements.
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NEW FRONTIER MEDIA, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996
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 acquirer 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) and representing a controlling interest in NSHC.
The accompanying unaudited condensed consolidated financial statements
include the accounts of NFMI and its wholly-owned subsidiary, OFMI. All
adjustments consisting of normal accruals and elimination of intercompany
accounts and transactions, which in the opinion of management, are necessary for
this presentation, have been reflected in the accompanying financial statements.
On September 20, 1996, Quarto Holdings, Inc. a Delaware corporation,
purchased 30% of the common stock of BIG for $1,250,000 in cash. In
addition, Quarto purchased a warrant from NFMI for $400 cash which allows the
right to purchase up to 400,000 shares of NFMI common stock at an exercise
price of $6.00 per share.
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.
NOTE 2 SHAREHOLDERS' EQUITY
Net income (loss) per share is based on the weighted average number of
shares of common stock outstanding, giving effect to the reverse acquisition
and the reverse stock split discussed in Note 1 above.
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PART I. Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(1) Overview
New Frontier Media, Inc. was originally incorporated as Strategic
Acquisitions, Inc.("Strategic") on February 23, 1988 in the State of
Colorado. Strategic undertook a public offering of its stock in May, 1989,
as a "blind pool" company. The Strategic initial public offering was
successfully closed in July, 1989 on the sale of 49,650,000 Units (each unit
consisting of one Common Share and two purchase Warrants) at an offering
price of $.01 per Unit. No Warrants were exercised, and as of August 31,
1989 there were 99,650,000 common shares of Strategic issued and outstanding.
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.
NSHC had no operations between October 8, 1990 and September 15, 1995.
On September 15, 1995, NSHC consummated the acquisition of Old Frontier
Media, Inc.("Old Frontier") in a stock-for-stock exchange. Old Frontier is
a Colorado corporation formed July 26, 1995. NSHC first effected a 2034.66:1
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 Old
Frontier acquisition. Old Frontier then issued 3,720,000 restricted Common
Shares to Old Frontier shareholders, in return for all of the Old Frontier
Common Stock issued and outstanding. NSHC shareholders also approved a change
of the Company's name to New Frontier Media, Inc. Currently, the Company has
4,195,250 Common Shares and 10,000 Preferred Shares issued and outstanding. The
Company is authorized to issue and 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 wholly-owned
subsidiary Old Frontier, and through Old Frontier's wholly-owned subsidiaries:
Boulder Interactive Group, Inc. ("BIG"); DaViD Entertainment, Inc. ("DaViD");
and Fuzzy Entertainment, Inc. ("Fuzzy"). The Company's offices are located at
1050 Walnut Street, Suite 301, Boulder,olorado 80302. The telephone number is
(303) 444-0632.
(2) Results of Operations
The Company currently consists of a publicly-traded holding company
(New Frontier Media, Inc.), and four subsidiaries: Old Frontier Media, the
administrative arm of the Company; Boulder Interactive Group, Inc. (CD-ROM
software); DaViD Entertainment, Inc. (Digital Video Disc/Laserdisc content
rights); and Fuzzy Entertainment, Inc. (developer and distributor of fine art
posters and decorative art posters).
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Second Quarter 1996 Compared to Second Quarter 1995
A summary of the results of operations of the Company as a percentage of
revenue for the two quarters is shown below.
Three Months Ended
Sept. 30, 1996 Sept. 30, 1995
Sales, net 92.2% 92.0%
Other Income 7.8 8.0
Total Revenue 100.0% 100.0%
Costs and Expenses:
Cost of Sales 57.3 56.3
Occupancy and Equipment 4.7 3.0
Legal and Professional 1.9 1.2
Distribution Expense 15.9 7.4
Advertising and Promotion 7.1 7.8
Salaries, wages and benefits 5.6 3.5
Communications 0.9 0.8
Research and Development 0.0 4.2
General and Administrative 7.5 4.8
Other Expense 2.1 0.0
103.0% 89.0%
Income Before Income Taxes ( 3.0)% 11.0%
Income Tax Expense 0.0% 0.0%
Net Income (Loss) ( 3.0)% 11.0%
Revenues
Net sales increased to $697,000 in the second quarter of 1996 from
$648,183, despite disappointing sales from the Boulder Interactive Group ("BIG")
subsidiary. The BIG sales decline was offset by continuing revenue increases
reported by the DaViD Entertainment subsidiary. Total revenues, which consists
of net sales, licensing fees and royalties, and interest income, increased to
$755,708 from $704,214.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 103.0% in the
second quarter of 1996 from 89.0% in the second quarter of 1995, primarily due
to an increase in distribution expense, salaries, wages and benefits, and
general and administrative expenses. These expenses increased due to the
Company's transition from development to operating stage, and the correspondent
ramping-up of staff. Licensing commissions have been accounted for as "other
expense" for the first time in this report. Previously, these commissions were
accounted for as part of the cost of sales.
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Net Income
Although the Company realized a 7.5% increase in net sales for the three-
month period ended September 30, 1996 as compared to the same period the prior
year, gross margin on sales per unit declined, and total operating expenses
increased, resulting in a net loss for the quarter of $(22,174), or $(.01) per
share. This compares with a net profit of $77,517, or $.02 per share, for the
same period in 1995. Management believes CD-ROM prices, particularly in the
"edutainment" lines developed by the Company, have stabilized; this will result
in more predictable margins in the future. In addition, the industry generally
experiences most CD-ROM discounting in the Summer and early Fall months,
negatively impacting second quarter earnings. Finally, management believes
second quarter 1996 results were negatively impacted by the increase in
operating expenses experienced as the Company made its transition from
development to operating-stage company.
First Six Months of 1996 Compared to First Six Months of 1995
A summary of the results of operations of the Company as a percentage of
revenue for the respective six-month periods is shown below.
Six Months Ended
Sept. 30, 1996 Sept. 30, 1995
Sales, net 91.6% 94.0%
Other Income 8.4 6.0
Total Revenue 100.0% 100.0%
Costs and Expenses:
Cost of Sales 58.5 58.2
Occupancy and Equipment 5.2 5.6
Legal and Professional 1.5 2.8
Distribution Expense 15.9 6.1
Advertising and Promotion 5.3 9.6
Salaries, wages and benefits 6.0 4.5
Communications 1.0 1.3
Research and Development 0.0 3.6
General and Administrative 6.8 5.7
Other Expense 1.9 0.0
102.1% 97.4%
Income Before Income Taxes ( 2.1)% 2.6%
Income Tax Expense ( 0.2)% 0.0%
Net Income (Loss) ( 2.3)% 2.6%
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Revenues
Net sales increased by $509,661, or 62.7%, to $1,322,094 for the six months
ended September 30, 1996 from $812,433 for the same period the prior year, as a
result of the continued expansion of DaViD revenues. BIG reported substantially
decreased sales of $135,452 for the six-month period ended September 30, 1996,
as compared to sales of $526,251 for the same period the prior year. In
addition, BIG reported significantly increased returns of $51,300, compared with
$11,278 for the comparable period in 1995. As a result, the Company's BIG
subsidiary reported a decline in total revenue for the six month period ending
September 30, 1996 of $443,330, or 84.0%, from the same period in 1995.
Management attributes these significant declines to three major factors:
decline in the market strength of the Company's major distributor, Broderbund;
serious price pressures in the CD-ROM industry, including retail discounting and
tighter inventory controls; and the need to develop or acquire new titles for
distribution more rapidly. To address these factors, management entered into
agreements with Quarto Holdings, Ltd. ("Quarto"), the world's largest book
packager, whereby Quarto acquired a 30% stake in BIG for $1,750,000, and BIG
acquired the right to develop and exploit Quarto's non-digital material.
Management believes the Quarto transaction will provide BIG with sufficient
capital and material to re-establish sales.
Revenues in the Company's DaViD Entertainment subsidiary dramatically
increased for the six-month period ended September 30, 1996 to $1,242,439, from
$296,653 for the same period the prior year. This 318.8% increase in sales was
commensurate with management's expectations, as DaViD continues to release 4 to
6 titles for distribution each month.
Licensing fees and royalties increased $66,077, or 127.7%, to $117,812 for
the six month period ended September 30, 1996, as compared to $51,735 for the
same period the prior year. $50,000 of this increase is attributable to the
Company's license and promotion agreements with Ralston Purina, as reported in
the Company's Form 8-K filed with the Securities and Exchange Commission on
September 16, 1996.
Costs and Expenses
The only significant increase in costs and expenses for the six month
period ended September 30, 1996 (as compared to the same period the prior year),
as a percentage of net sales, was in the distribution expenses component,
primarily attributable to DaViD's increased sales. BIG reported total operating
expenses of $242,407 for the six-month period ended September 30, 1996, as
compared to $282,099 for the same period the prior year. DaViD reported total
operating expenses of $289,802 for the six-month period, as compared with $160
for the same period the prior year. Other increases in salaries and wages, as
Well as general and administrative expenses, were the result of the Company
staffing up to meet its needs as an operating stage company, as opposed to its
status as a development-stage Company during the same period in 1995. Licensing
commissions have been accounted for as "other expense" for the first time in
this report. Previously, these commissions were accounted for as part of the
cost of sales.
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Net Income
Although the Company realized a 62.7% increase in net sales for the six-
month period ended September 30, 1996 as compared to the same period the prior
year, gross margin on sales per unit in the CD-ROM subsidiary declined, and
total operating expenses increased, resulting in a net loss for the six-month
period of $(35,625), or $(.01) per share. This compares with a net profit of
$26,250, or $.01 per share, for the same period in 1995. Management believes
CD-ROM prices, particularly in the "edutainment" lines developed by the Company,
have stabilized; this will result in more predictable margins in the future. In
addition, the industry generally experiences most CD-ROM discounting in the
Summer and early Fall months, negatively impacting first and second quarter
earnings. Finally, management believes second quarter 1996 results were
negatively impacted by the increase in operating expenses experienced as the
Company made its transition from development to operating-stage company.
Management also believes that profit margins will increase and stabilize as the
Company streamlines its operations in BIG and places more emphasis on its
burgeoning DaViD operation.
Financial Condition, Liquidity and Capital Resources
The Company reported an increase in negative net cash flow from operating
activities, from $185,181 for the six-month period ended September 30, 1995 to
$213,114 for the same period in 1996. Cash outflows from investing activities
were $4,470 for the six-month period ended September 30, 1996, compared to
$52,455 for the same period in 1995. Most importantly, net cash provided by
financing activities increased significantly for the period ended September 30,
1996 to $1,334,164, from $248,371 for the comparable period the prior year,
primarily as a result of the purchase of 30 percent of the Company's Boulder
Interactive Group subsidiary by Quarto Holdings, Inc., as reported in the
Company's Form 8-K filed with the Securities and Exchange Commission on
September 27, 1996. As a direct result of that transaction, the Company had
cash of $1,165,103 at the close of the six-month period ended September 30,
1996, compared to $11,412 for the same period in 1995. Management believes the
Company has the ability to satisfy its cash expenditure requirements from cash
provided by financing activities. In addition, management believes the Company
will realize positive net cash flows from operating activities in the near
future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently aware of no legal proceedings against it, or any
legal proceedings to which it is a party.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The Company filed reports on Form 8-K with the Securities and Exchange
Commission on September 16, 1996 (Ralston Purina agreements) and September 27,
1996 (Quarto Holdings' acquisition of 30 percent of Boulder Interactive Group
subsidiary).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEW FRONTIER MEDIA, INC.
November 14, 1996 By: /S/ MARK H. KRELOFF
Mark H. Kreloff, President
November 14, 1996 By: /S/ MICHAEL WEINER
Michael Weiner, Secretary and Treasurer
November 14, 1996 By: /S/ SCOTT WUSSOW
Scott Wussow, Chief Financial Officer
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