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: June 30, 1997
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
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(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:
[ ] YES [X] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
4,192,511 common shares, including 189,000 Unit Shares, were outstanding as of
June 30, 1997.
1
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Form 10-QSB
================================================================================
NEW FRONTIER MEDIA, INC.
Form 10-QSB for the Quarter ended June 30, 1997
Table of Contents
Page of Report
--------------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited condensed consolidated Balance Sheets as of
June 30, 1997 and March 31, 1997 3-4
Unaudited condensed consolidated Statements of Operations
for the three months ended June 30, 1997 and 1996 5
Unaudited condensed consolidated Statements of Cash Flows
for the three months ended June 30, 1997 and 1996 6
Notes to unaudited condensed consolidated financial statements
for the three months ended June 30, 1997 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
2
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PART I. Item 1. Unaudited Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
June 30, March 31,
1997 1997
------- --------
<S> <C> <C>
CURRENT ASSETS
Cash (Note 4) ....................................................... $ 104,386 $ 109,387
Investment in certificates of deposit (Notes 4 and 7) ............... 550,895 750,000
Accounts receivable (Notes 1 and 3) ................................. 84,514 212,370
Inventories (Note 1) ................................................ 753,211 659,503
Prepaid distrubution rights (Note 1) ................................ 69,000 82,250
Other ............................................................... 108,869 68,225
------------ ------------
Total Current Assets ........................................... 1,670,875 1,881,735
------------ ------------
FURNITURE AND EQUIPMENT, at cost (Note 1) ................................ 81,931 65,552
Less: accumulated depreciation and amortization ..................... (26,264) (22,661)
Net furniture and equipment .................................... 55,667 42,891
------------ ------------
OTHER ASSETS
Note receivable - officer (Note 3) .................................. 38,000 38,000
Accounts receivable - retainage (Note 1) ............................ 95,235 88,844
Other ............................................................... 108,209 135,001
------------ ------------
Total other assets ............................................. 241,444 261,845
------------ ------------
TOTAL ASSETS ............................................................. $ 1,967,986 $ 2,186,471
============ ============
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
June 30, March 31,
1997 1997
------- --------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable .................................................... $ 114,155 $ 125,928
Current portion of long term debt (Note 2) .......................... 139,573 139,573
Current portion of obligations under capital lease (Note 6).......... 5,856 5,139
Lines of credit (Note 7) ............................................ 348,616 341,274
Other accrued liabilities ........................................... 48,159 45,416
------------ ------------
Total current liabilities ...................................... 656,359 657,330
------------ ------------
LONG TERM DEBT -
Obligations under capital leases (Note 6) ........................... 10,848 12,926
Total liabilities .............................................. 667,207 670,256
------------ ------------
MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4) .......................... 283,635 305,433
------------ ------------
COMITMENTS AND CONTINGENCIES (Notes 4 and 6)
SHAREHOLDERS' EQUITY (Notes 1 and 4)
Common stock, $.0001 par value, 50,000,000
shares authorized, 4,192,511 and 4,189,000 shares issued and
outstanding, respectively ................................................ 419 419
Preferred stock, $.10 par value, 5,000,000 shares authorized:
Class A, 10,000 shares issued and outstanding ....................... 1,000 1,000
Class B, 5,000 shares issued and outstanding ........................ 500 500
Additional paid in capital .......................................... 1,779,019 1,768,661
Deficit ............................................................. (763,793) (559,808)
Total shareholders' equity ..................................... 1,017,144 1,210,772
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 1,967,986 $ 2,186,471
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
SALES, net ............................................... $ 479,330 $ 625,094
COST OF SALES ............................................ 451,783 521,525
---------- ----------
GROSS PROFIT ............................................. 27,547 103,569
---------- ----------
OPERATING EXPENSES
Occupancy and equipment ............................. 36,030 40,092
Legal and professional .............................. 30,264 7,287
Advertising and promotion ........................... 67,676 23,601
Salaries, wages and benefits ........................ 68,812 44,696
Communications ...................................... 7,785 8,058
Research and development ............................ 7,048 --
Consulting .......................................... 18,256 13,866
General and administrative .......................... 41,241 27,686
---------- ----------
Total operating expenses ....................... 277,112 165,286
---------- ----------
OTHER INCOME (EXPENSE)
Licensing fees and royalties ........................ 27,537 62,571
Licensing commissions ............................... (4,955) (12,312)
Interest income ..................................... 12,068 640
Interest expense .................................... (10,878) (179)
---------- ----------
Total other income ............................. 23,772 50,720
---------- ----------
Net income (loss) before income taxes
and minority interest (Notes 1 and 5).......... (225,793) (13,451)
---------- ----------
INCOME TAXES (Notes 1 and 5) ............................. -- (2,454)
---------- ----------
Minority interest in loss of subsidiary .................. $ 21,808 $ --
---------- ----------
NET LOSS ................................................. $ (203,985) $ (13,451)
========== ==========
NET LOSS PER COMMON SHARE (Note 1) ....................... $ (0.05) $ *
========== ==========
WEIGHTED AVG. SHARES OUTSTANDING ......................... 4,192,511 4,181,917
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .............................................................. ($203,985) ($ 13,451)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................................... 3,603 --
Issuance of common stock for services ............................ 15,000 --
Increase (decrease) in accounts payable .......................... (11,773) (68,171)
Increase in accounts receivable .................................. 121,465 51,317
Increase in inventories .......................................... (93,708) (99,962)
(Increase) decrease in income tax receivable ..................... -- --
(Increase) decrease in prepaid distribution rights ............... 13,250 9,830
(Increase) decrease in other assets .............................. 11,148 624
Increase in other accrued liabilities ............................ 2,743 --
Minority interest in loss of subsidiary .......................... (21,808) --
Net cash used in operating activities ....................... (164,065) (119,813)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture ................................... (16,379) (4,470)
(Purchase) redemption of certificates of deposit ...................... 199,105 --
--------- ---------
Net cash used in investing activities ....................... 182,726 (4,470)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation .................................. (1,361) --
Proceeds from line of credit .......................................... 7,341 --
Issuance of common stock, net of offering costs ....................... 7,533 100,000
Retirement of common stock ............................................ (37,175) --
Net cash provided by financing activities ........................ (23,662) 100,000
--------- ---------
NET INCREASE (DECREASE) IN CASH ............................................ (5,001) (24,283)
CASH, BEGINNING OF PERIOD .................................................. 109,387 48,523
--------- ---------
CASH, END OF PERIOD ........................................................ $ 104,386 $ 24,240
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements
6
<PAGE>
NEW FRONTIER MEDIA, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business, and Consolidation
- -----------------------------------------
The Company was incorporated on July 26, 1995 as New Frontier Media, Inc. and
subsequently changed its name to Old Frontier Media, Inc. ("OFMI"). On July 31,
1995, OFMI acquired 100% of the outstanding common stock of Boulder Interactive
Group, Inc. ("BIG") (a developer and publisher of entertainment and educational
computer software on CD-ROM), incorporated on June 3, 1994, for 100% of OFMI's
outstanding common stock. In addition, on July 31, 1995 OFMI capitalized two
subsidiaries, David Entertainment, Inc. ("DVD") (distributor of adult laserdisc
and digital video disc format titles) and FUZZY Entertainment, Inc. ("FUZZY")
(developer and distributor of fine art posters and decorative art posters).
On September 15, 1995, the shareholders of National Securities Holding
Corporation ("NSHC") approved an exchange of common stock of NSHC for the
outstanding common stock of Old Frontier Media, Inc. ("OFMI") and a name change
from NSHC to New Frontier Media, Inc. ("NFMI"). As a result of this transaction,
NFMI owns OFMI as a wholly owned subsidiary. OFMI is presently the only
operating subsidiary (through its subsidiaries BIG, DVD, and FUZZY) of NFMI. The
stock exchange between NSHC and OFMI has been considered a reverse acquisition.
Under reverse acquisition accounting, OFMI was considered the acquiror for
accounting and financial reporting purposes, and acquired the assets and assumed
the liabilities of NSHC. The acquisition was accomplished through the exchange
of all the outstanding common stock of OFMI for 3,720,000 shares of common stock
and 40,000 shares of preferred stock (after giving effect to the conversion of
the preferred stock to common stock and then giving effect to a 1-for 2,034.66
reverse stock split of NSHC's common stock) representing a controlling interest
in NSHC. On September 20, 1996, Quarto Holdings, Inc. ("Quarto") purchased 1,714
newly issued common shares of BIG for a 30% minority interest (see Note 4).
The accompanying consolidated financial statements include the historical
accounts of BIG for all periods and the accounts of NFMI since September 15,
1995 and OFMI, DVD and FUZZY since inception. As a result of the issuance of the
common stock of BIG as mentioned above the accompanying financial statements
include 100% of the operations of BIG through September 20, 1996, and the
minority interest in net loss of subsidiary represents 30% of the operations of
BIG after that date. All intercompany accounts and transactions, have been
eliminated in consolidation. The June 30, 1997 and 1996 amounts included herein
are unaudited. In the opinion of management, all adjustments (which include only
normal recurring adjustments ) necessary to present fairly, the financial
position, results of operations, cash flows and changes in shareholders equity
at June 30, 1997 and 1996 have been made.
7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable
- -------------------
In connection with BIG's sales and distribution of its products, BIG's major
distributor withholds 10% of its sales for returns from retailers. Per the
agreement dated December 23, 1994 with the distributor, these funds will be
retained until the agreement is terminated, but at no time shall the reserve
exceed the lesser of $150,000, or 10% of the total net receipts for the previous
twelve months. The agreement automatically renews after its three year term on a
year to year basis unless terminated by either party upon 180 days written
notice. At June 30, 1997, March 31, 1997 and 1996, retention amounts were
$95,235, $88,844 and $77,053, respectively. In addition, included in accounts
receivable at June 30, 1997 and March 31, 1997 is $11,962 and $17,141 from this
distributor.
Inventories
- -----------
Inventories consist of CD-ROM and laserdisc products which are acquired or
internally developed. These costs include acquisition, production, duplication
and the physical packaging of the products and are charged to cost of sales as
sales are made over the number of units estimated to be sold. It is the
Company's policy to evaluate these products for net realizable value on a
product-by-product basis.
Furniture and equipment
- -----------------------
Furniture and equipment are stated at cost. The cost of maintenance and repairs
is charged to operations as incurred; significant additions and betterments are
capitalized. Depreciation is computed using accelerated and straight-line
methods over the estimated useful lives of three to five years.
Income Taxes
- ------------
Concurrent with the stock exchange discussed above, BIG terminated its
subchapter S election effective July 31, 1995. The Company files a consolidated
income tax return with its subsidiaries in which the Company has an 80% or
greater interest.
Cash Flows
- ----------
For purposes of reporting cash flows, cash includes those investments which are
short-term in nature (three months or less to original maturity), are readily
convertible to cash, and represent insignificant risk of changes in value.
8
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Prepaid Distribution Rights
- ---------------------------
Prepaid distribution rights include laserdisc and digital disc format title
rights purchased under agreements with related (see Note 3) and non-related
entities for replication and distribution.
Research and Development Costs
- ------------------------------
All costs incurred to establish technological feasibility of the Company's
CD-ROM products are expensed as incurred. The majority of these costs are
contract services.
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Warrants
- --------------
The Company follows the intrinsic value based method of accounting as prescribed
by APB 25, Accounting for Stock Issued to Employees, for its stock-based
compensation. Under the Company's stock warrant issuances, the exercise price is
in excess of the fair value of the warrants at the grant date and no
compensation cost is recognized.
Net Loss Per Share of Common Stock
- ----------------------------------
Net loss per share of common stock is based on the weighted average number of
shares of common stock outstanding, giving effect to the reverse acquisition and
reverse stock split of NFMI discussed above. Common stock equivalents are not
included in the weighted average calculation since their effect would be
anti-dillutive. Preferred dividends of $1,213, $813, $3,417 and $1,718 have been
added back to the net loss to arrive at net loss per common share for the three
months ended June 30, 1997 and 1996 and years ended March 31, 1997 and 1996,
respectively.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
NOTE 2 - LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, March 31,
------- -----------------
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Notes payable to officers and shareholders
bearing interest at 8.5%, unsecured and
due on demand anytime after December 31, 1996 ........................ $ 85,000 $ 85,000 $ 85,000
Notes payable to entities, controlled by
officers and shareholders, bearing interest at 8.5%,
unsecured and due on demand
anytime after December 31, 1996 ...................................... 54,573 54,573 54,573
-------- ------- -------
139,573 139,573 139,573
Less current portion .................................... (139,573) (139,573) (139,573)
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>
Included in other liabilities at June 30, 1997, March 31, 1997 and 1996 are
$29,320, $11,012 and $15,562 of accrued interest relating to the above notes,
respectively.
10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company purchased $65,000 of adult laserdisc format titles from a related
entity through the issuance of preferred stock (see Note 4). In addition, the
Company has an agreement with another related entity to sell, package, handle,
replicate, and ship these adult laserdisc format titles at the Company's expense
for a management fee of $35,000 per month through May 31, 1996 and $40,000 per
month thereafter. During the three months ended June 30, 1997 and 1996 and the
years ended March 31, 1997 and 1996 this related entity withheld from sales of
$378,049, $631,742, $2,236,143 and $1,592,856, replicating costs of $324,887,
$451,035, $1,646,364 and $939,622 and management fees of $120,000, $110,000,
$470,000 and $262,500, respectively. Included in accounts receivable at June 30,
1997, March 31, 1997 and 1996 was $25,173, $141,585 and $222,276 from the
related entity, respectively.
In June 1995, the Company issued a three year note receivable to one of its
officers in the amount of $38,000. The note requires interest only payments at a
rate of 6.1%, payable on a quarterly basis with the principal due on August 31,
1998. Interest earned on this note for the three months ended June 30, 1997 and
1996 and the years ended March 31, 1997 and 1996 was $578, $578, $2,318 and
$1,346, respectively.
The Company leases certain equipment and office space via entities controlled by
an officer and shareholder on a month to month basis (see Note 6). During the
three months ended June 30, 1997 and 1996 and the years ended March 31, 1997 and
1996 the Company paid $18,339, $21,080, $116,549 and $98,212 to these entities
relating to these leases, respectively.
NOTE 4 - SHAREHOLDERS' EQUITY
Common Stock
- ------------
The Company issued 195,250 units (one share of common stock and one Class A
warrant to purchase one share of common stock at an exercise price of $5.50
expiring December 13, 1997) through a private placement memorandum at a price of
$4.00 per unit. In December, 1996, 6,250 units were retired at the original
subscription price. For the three months ended June 30, 1997 the Company issued
10,511 shares of common stock in prepayment of services to be rendered and for
services rendered. In addition, the Company purchased and retired 7000 shares of
common stock during the three months ended June 30, 1997.
Preferred Stock
- ---------------
On September 20, 1995, the Company issued 10,000 shares of Class A preferred, 5%
cumulative stock in exchange for adult laserdisc format content titles from a
related entity (see Note 3).
11
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
In February, 1997 the Company issued 5,000 shares of Series B, 8% cumulative,
convertible preferred stock at $4.00 per share. Each Series B preferred share is
convertible into one share of the Company's common stock subject to certain
conditions.
As of June 30, 1997, cumulative dividends in arrears on Class A and B preferred
stock totalled $6,348.
Subsidiary Sale of Stock
- ------------------------
On September 20, 1996 Quarto Holdings, Inc., a Delaware Corporation, purchased
30% of newly issued common stock of BIG for $1,250,000 in cash and rights to
develop and exploit digital material owned by Quarto. The Company placed a $-0-
value on the rights received from Quarto. The Company recorded 70% of the
$1,250,000 in proceeds as equity on a consolidated basis and 30% of this amount
as a minority interest, (see Note 1).
In connection with the purchase, NFMI entered into a stockholder agreement with
Quarto whereby at least 75% of stockholder approval is necessary to approve
certain actions taken on behalf of BIG. The agreement enumerates various actions
and restrictions as it relates to the operations of BIG, specifically (1) that
the funding proceeds can only be used to fund BIG's development and
commercialization of CD-ROM titles and (2) 75% shareholder approval is required
before encumbering any assets of BIG. Therefore, cash and certificates of
deposit of $687,773 and $841,568 at June 30, 1997 and March 31, 1997 was
restricted to BIG's operations and can not be used for the operations of NFMI or
its affiliates. On November 4, 1996 and February 11, 1997 NFMI opened lines of
credit with a banking institution (see Note 7) and secured these lines of credit
with BIG's certificates of deposit. Under (2) above NFMI breached the terms of
the stockholder agreement by not obtaining 75% stockholder approval before
encumbering the assets of BIG. On July 2, 1997, the Company unencumbered the
certificates of deposits. Actions, if any, that Quarto may take against NFMI
regarding the breach of the stockholder agreement cannot be determined at the
present time.
Warrants
- --------
In connection with the above transaction, Quarto purchased a warrant from NFMI
for $400 cash which allows the right to purchase up to 400,000 common shares of
NFMI at an exercise price of $6.00 per share expiring on September 20, 2001.
On October, 12, 1995, the Company issued 20,000 warrants at an exercise price of
$4.00, expiring October 12, 1998, to an investment banker in connection with a
financial advisor agreement.
12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
NOTE 5 - INCOME TAXES
The Company has an unused net operating loss carry forward of approximately
$240,000 for income tax purposes, which principally expires in 2012. This net
operating loss carryforward may result in future income tax benefits; however,
because realization is uncertain at this time, a valuation reserve in the same
amount has been established. Temporary differences arise from the recording of
depreciation. Significant components of the Company's deferred tax liabilities
and assets as of March 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax liabilities ............................... $ -- $ --
======== ========
Deferred tax assets
Net operating loss carry forwards .................... 78,544 2,421
Valuation allowance for deferred tax assets .......... (78,544) (2,421)
-------- --------
$ -- $ --
======== ========
The income tax provision reflected on the statement of operations of $12,147 in
1996 was due to filing a short period return to coincide the respective
entities' tax year end. This provision is not recoverable from the utilization
of the above net operating loss.
NOTE 6 - COMMITMENTS AND AGREEMENTS
The Company has leases for office space and equipment under various operating
and capital leases. Included in furniture and equipment at March 31, 1997 is
$19,310 of equipment under capital lease and accumulated depreciation relating
to this lease of $3,862.
Future minimum lease payments under these leases as of March 31, 1997 are as
follows:
Principal
Year ended Due
March 31, Operating Capital Capital Lease
- ---------- --------- ------- -------------
1998 ........................... $56,000 $ 7,606 $ 5,139
1999 ........................... -- 7,606 5,814
2000 ........................... -- 6,473 6,102
2001 ........................... -- 1,414 1,010
------- ------- -------
$56,000 $23,099 $18,065
======= =======
Less amount
representing interest .......... 5,034
-------
Present value of net
minimum lease payments ......... $18,065
=======
Total rent expense for the three months ended June 30, 1997 and 1996 and the
years ended March 31, 1997 and 1996, were $18,339, $21,080, $136,013 and
$100,441, respectively.
13
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
NOTE 6 - COMMITMENTS AND AGREEMENTS (continued)
On November 11, 1996 the Company entered into a two year financial advisory and
consulting agreement requiring annual payments of $50,000 and warrants to
purchase 150,000 shares of NFMI's common stock at an exercise price of the
market value of the common stock at the date of issuance.
As of March 31, 1997 none of the above warrants were issued.
The Company's subsidiary FUZZY has entered into an agreement with an individual
to find images, negotiate artist contracts, finalize prints and proofs and the
marketing and selling of the prints. The agreement is for a term of seven years
and the Company has agreed to advance the venture as a line of credit up to
$250,000. Net profits will be split on a 50%/50% basis; however, in the event
advances are drawn by this individual, profits will be split on a 60%/40% basis
until the advances have been paid in full. Included in other assets as of June
30, 1997 and March 31, 1997 is approximately $78,716 and $70,000 of advances to
this individual under the agreement.
NOTE 7 - LINES OF CREDIT
The Company has lines of credit with a banking institution as follows:
June 30, March 31,
1997 1997
-------- --------
$250,000 line of credit, dated November 4, 1996,
bearing interest at 7.950%, due November 4, 1997
secured by certificate of deposit ....................... $ 248,934 $ 247,241
$100,000 line of credit, dated February 11, 1997,
bearing interest at 8.280%, due November 4, 1997
secured by certificate of deposit ....................... 99,682 94,033
-------- -------
348,616 $ 341,274
======== =======
The two certificates of deposit securing the above lines of credit are held in
the name of the Company's subsidiary BIG. The certificates bear interest ranging
from 6% to 7% and mature in November and December of 1997 (see Note 4).
NOTE 8 - STOCK WARRANTS
The Company has no formal stock option plan; however, it has granted warrants to
officers and employees allowing them to purchase common stock of the Company in
excess of the market value of the stock at date of grant. Warrants granted are
for a three-year term.
14
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(continued)
NOTE 8 - STOCK WARRANTS (continued)
In addition, common stock warrants have been issued in connection with certain
offerings of stock,and in connection with a financial advisory agreement (see
Note 4). At March 31, 1997, warrants to purchase common stock at various prices
were outstanding which expire as follows:
Expiration Exercise
Date Warrants Price
---------- -------- --------
December, 1997 ................................. 189,000 $ 5.50
October, 1998 .................................. 20,000 4.00
September, 2001 ................................ 400,000 6.00
-------
609,000
=======
The following table describes certain information related to the Company's
compensatory stock warrant activity for the year ending March 31, 1997.
Number Weighted Average
of Warrants Exercise Price
----------- ----------------
Outstanding, March 31, 1996 ........... -- $ --
Grants during year-
Exercise price > market price ..... 146,666 6.00
Exercised, forfeited and
expired during year ........... -- --
-------
Outstanding and exercisable,
March 31, 1997 ....................... 146,666 6.00
=======
The weighted average grant date fair value of the warrants granted in 1997 was
as follows:
Exercise price > market price .5329
=====
The fair value of each option warrant is estimated using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest rate of
6.50%; dividend yield of -0-%; expected life three years; and volatility of
16.71%.
15
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996 AND
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(concluded)
NOTE 8 - STOCK WARRANTS (continued)
A summary of the Company's outstanding and exercisable stock warrants as of
March 31, 1997 are as follows:
Weighted Average
Number
Remaining Contractual Exercise prices of Warrants Life (months)
- --------------------- --------------- ---------------- -------------
Outstanding and exercisable $6.00 546,666 48
Outstanding and exercisable $4.00 20,000 18
Outstanding and exercisable $5.50 189,000 9
As previously described, the Company applies APB 25 and related Interpretations
in accounting for its stock warrants. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's warrants been determined
based on the fair value at the grant dates for awards consistent with the method
of SFAS 123, the Company's net loss and loss per share would have increased to
the pro-forma amounts indicated below:
March 31,
1997
---------
Net loss ................... $ (464,189)
=========
Net loss per share ......... $ (.11)
=========
NOTE 9 - RISKS AND UNCERTAINTIES
As previously discussed in Note 3, the Company distributes, through a related
entity, its adult laserdisc format titles. This related entity generates
substantially all of its sales from two distributors in California.
The Company sells the majority of its CD-Rom products through a distributor in
California. For the periods ended March 31, 1997 and 1996, 6% and 35% of total
sales were received from this distributor (see Note 1). The loss of this
distributor or the loss of the related entity's distributors mentioned above
could have an adverse effect on the Company's operations.
The Company also uses one major vendor to replicate all of its laserdisc
products; management believes that other vendors could be substituted on
materially the same terms if the loss of this vendor occurred.
The Company has deposits in a bank in excess of the FDIC insured amounts of
$100,000. The amounts in excess of the $100,000 is subject to loss should the
bank cease business.
15
<PAGE>
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. 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. 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 New Frontier
Media, Inc. in a stock-for-stock exchange. 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 New
Frontier acquisition. NSHC shareholders also approved a change of the Company's
name to New Frontier Media, Inc. Currently, the Company has 4,207,511 Common
Shares and -0- 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 subsidiaries:
Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads"); DaViD
Entertainment, Inc. ("DaViD"); and Fuzzy Entertainment, Inc. d/b/a In-Sight
Editions ("In-Sight"). The Company's offices are located at 1050 Walnut Street,
Suite 301, Boulder, Colorado 80302. The telephone number is (303) 444-0632.
(2) Results of Operations
First Quarter 1997 Compared to First Quarter 1996
-------------------------------------------------
New Frontier Media, Inc. ("NOOF" or the "Company")
-------------------------------------------------
The Company functions as a holding company for its subsidiaries, and as
such generates no independent income. The Company incurs administrative expenses
relating to operation of its subsidiaries, particularly concerning market
making, public relations, and investment banking activities. The Company incurs
expenses related to operation of the Company and its subsidiaries as a public
entity, such as legal, accounting, and public relations costs.
For the three-month period ended June 30, 1997, the Company reported no
income and total operating expenses of $121,904, compared with total operating
expenses of $62,355 for the same period the prior year. This increase of $59,549
for the period was directly attributable to increases in legal fees (from $2,494
for the period in 1996 to $27,401 for the same period in 1997), public/investor
relations ($0 in 1996 compared to $33,055 in 1997), and travel and lodging
expenses ($2,587 in 1996 compared to $17,361 in 1997). These expenses increased
primarily due to the Fifth Dimension transaction, and the undertaking of this
public offering of stock by the Company.
16
<PAGE>
Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads")
--------------------------------------------------------------------
Inroads reported sales of $99,250 for the three-month period ended June 30,
1997, up from $53,764 for the same period the prior year. Management attributes
this sales growth to the introduction of new titles to the market, as a result
of the strategic alliance with Quarto. Inroads' total operating expenses for the
period increased to $145,777, up from $108,434 for the same period the prior
year, as Inroads hired more personnel and incurred development expenses relating
to commercial exploitation of the Quarto titles. Inroads' net loss for the
period, $50,855, was slightly larger than the net loss of $42,372 for the same
period the prior year. Management believes Inroads has stabilized its operating
expenses, and will report sales increases in the coming quarters as the Quarto
titles reach the retail market and as new Quarto-related titles are developed
and introduced.
DaViD Entertainment, Inc. ("DaViD")
----------------------------------
DaViD reported sales of $390,794 for the three-month period ended June 30,
1997, compared with $634,879 for the same period the prior year. Management
attributes this decrease to DaViD's move from exclusively LaserDisc content and
distribution to primary emphasis on the DVD market. Total operating expenses
remained constant ($123,835 for the three-month period in 1997 compared to
$116,817 for the same period the prior year). DaViD reported a net loss of
$14.050 for the period, compared to a net profit of $93,650 for the same period
the prior year. Management of DaViD believes the lower costs of DVD replication,
combined with increasing sales as DVD hardware is introduced into the retail
market, will translate into a return to profitablility by DaViD in the coming
quarters.
Fuzzy Entertainment, Inc. d/b/a In-Sight Editions ("In-Sight")
-------------------------------------------------------------
In-Sight reported total revenue of $1,987 for the quarter ended June 30,
1997, along with operating expenses of $10,661 and a net loss of $9,828. The
Company is not currently allocating significant resources to In-Sight, and is
exploring the possiblity of selling In-Sight in order to focus on the satellite
network, digital versatile disc, and CD-ROM publishing components of its
business.
Financial Condition, Liquidity and Capital Resources
The Company reported an increase in negative net cash flow from operating
activities, from ($119,813) for the three-month period ended June 30, 1996 to
($164,065) for the same period in 1997. Cash flow from investing activities was
$182,726 for the three-month period ended June 30, 1997, compared to ($4,470)
for the same period in 1996. Net cash provided by financing activities decreased
for the period ended June 30, 1997 to $($23,662), from $100,000 for the
comparable period the prior year, primarily as a result of the redemption of
common stock by the Company. Management believes the Company has the ability to
satisfy its cash expenditure requirements from cash provided by investing
activities. In addition, management believes the Company will realize positive
net cash flows from operating activities in the near future. On June 26, 1997,
the Company signed a letter of intent with Centex Securities, Inc., La Jolla,
California ("Centex"), where by Centex agreed to serve as the managing
underwriter of a proposed firm commitment underwriting of a public offering of
the Company's common stock. On September 11, 1997, the Company filed a
registration statement on Form SB-2 with the U.S. Securities and Exchange
Commission in connection with the Centex undertaking. If the Company and Centex
successfully complete the public offering of stock as set forth in the
registration statement, management believes the Company will have sufficient
liquidity and financial resources for at least the next 12 months.
17
<PAGE>
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.
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 a report on Form 8-K with the Securities and Exchange
Commission on July 24, 1997, disclosing the execution of a letter of intent to
acquire certain assets of Fifth Dimension (Barbados) Inc., 1043133 Ontario Inc.,
Merlin Sierra, Inc. and Fifth Dimension Communitcations (1996) Corporation.
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.
September 16, 1997 By: /S/ MARK H. KRELOFF
----------------------------------------
Mark H. Kreloff, President
September 16, 1997 By: /S/ MICHAEL WEINER
----------------------------------------
Michael Weiner, Secretary and Treasurer
September 16, 1997 By: /S/ SCOTT WUSSOW
----------------------------------------
Scott Wussow, Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS CONTAINED IN FILER'S REGISTRATION STATEMENT ON FORM SB-2 DATED
SEPTEMBER 10, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 655,281
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<RECEIVABLES> 84,514
<ALLOWANCES> 0
<INVENTORY> 753,211
<CURRENT-ASSETS> 1,670,875
<PP&E> 81,931
<DEPRECIATION> (26,264)
<TOTAL-ASSETS> 1,967,986
<CURRENT-LIABILITIES> 656,359
<BONDS> 0
0
1,500
<COMMON> 419
<OTHER-SE> 1,779,018
<TOTAL-LIABILITY-AND-EQUITY> 1,967,986
<SALES> 479,330
<TOTAL-REVENUES> 479,330
<CGS> 451,783
<TOTAL-COSTS> 277,112
<OTHER-EXPENSES> 22,582
<LOSS-PROVISION> 0
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