<PAGE>
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, 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
-----------------------------------------------------
(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:
4,195,368 common shares, including 189,000 Unit Shares, were outstanding as of
September 30, 1997.
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 296,015 $ 109,387
Investment in certificates of deposit 237,441 750,000
Accounts receivable 213,271 212,370
Inventories 739,258 659,503
Prepaid distribution rights 66,750 82,250
Other 124,890 68,225
---------- ----------
TOTAL CURRENT ASSETS 1,677,625 1,881,735
---------- ----------
FURNITURE & EQUIPMENT, AT COST 86,740 65,552
Less: Accumulated depreciation (30,882) (22,661)
---------- ----------
NET FURNITURE & EQUIPMENT 55,858 42,891
---------- ----------
OTHER ASSETS
Note receivable - officer 38,000 38,000
Accounts receivable - retainage 96,635 88,844
Deferred acquisition costs 50,782 0
Deferred stock offering costs 277,151 0
Other 107,466 135,001
---------- ----------
TOTAL OTHER ASSETS 570,034 261,845
---------- ----------
TOTAL ASSETS $ 2,303,517 $ 2,186,471
---------- ----------
---------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
- 3 -
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 256,533 $ 125,928
Accounts payable - related parties 79,733 0
Leases payable 6,091 5,139
Bank credit Line 170,000 341,274
Notes payable 550,000 0
Current portion of long term debt 139,573 139,573
Other accrued liabilities 39,766 45,416
---------- ----------
TOTAL CURRENT LIABILITIES 1,241,696 657,330
---------- ----------
LONG TERM DEBT - Leases Payable 9,349 12,926
---------- ----------
TOTAL LIABILITIES 1,251,045 670,256
---------- ----------
MINORITY INTEREST 262,664 305,443
---------- ----------
SHAREHOLDERS' EQUITY (NOTES 1 & 2)
Common stock, $.0001 par value, 50,000,000 shares
authorized, 4,195,368 and 4,189,000, shares issued
and outstanding, respectively 420 419
Preferred stock, $.10 par value, 5,000,000 shares
authorized:
Class A, zero and 10,000 shares issued
and outstanding, respectively 0 1,000
Class B, zero and 5,000 shares issued and outstanding
and outstanding, respectively 0 500
Additional paid in capital 1,780,519 1,768,661
Deficit (991,131) (559,808)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 789,808 1,210,772
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,303,517 $2,186,471
---------- ----------
---------- ----------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
- 4 -
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
SALES, NET $ 727,775 $ 1,322,094 $ 248,445 $ 697,000
COST OF SALES 507,053 844,626 175,270 433,101
---------- ------------ ---------- ----------
GROSS PROFIT 220,722 477,468 73,175 263,899
---------- ------------ ---------- ----------
OPERATING EXPENSES
Occupancy and equipment 88,728 75,488 52,698 35,396
Legal and professional 39,907 21,764 9,643 14,477
Distribution expense 120,000 230,000 0 120,000
Advertising and promotion 145,981 77,018 78,305 53,417
Salaries, wages and benefits 222,597 87,246 153,785 42,550
Communications 21,350 14,560 13,565 6,502
Research and Development 7,048 0 0 0
Consulting 31,009 25,591 12,753 13,866
General and administrative 93,948 72,838 52,707 43,011
---------- ------------ ---------- ----------
TOTAL OPERATING EXPENSES 770,568 604,505 373,456 329,219
---------- ------------ ---------- ----------
OTHER INCOME (EXPENSE)
Licensing Fees and royalties 95,283 117,812 67,746 55,241
Licensing commissions (15,398) (22,104) (10,443) (9,783)
Interest income 21,265 4,116 9,197 3,467
Interest expense (25,403) (5,958 (14,525) (5,779)
---------- ------------ ---------- ----------
TOTAL OTHER INCOME 75,747 93,866 51,975 43,146
---------- ------------ ---------- ----------
NET LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (474,099) (33,171) (248,306) (22,174)
---------- ------------ ---------- ----------
INCOME TAXES 0 (2,454) 0 0
---------- ------------ ---------- ----------
NET LOSS BEFORE MINORITY INTEREST (474,099) (35,625) (248,306) (22,174)
MINORITY INTEREST IN LOSS OF SUBSIDIARY 42,779 0 20,971 0
---------- ------------ ---------- ----------
NET LOSS $ (431,320) $ (35,625) $ (227,335) $ (22,174)
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
NET LOSS PER COMMON SHARE (NOTE 1) $ (0.10) $ (0.01) $ (0.05) $ (0.01)
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 4,195,321 4,188,583 4,193,463 4,195,250
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
</TABLE>
* less than 1 cent per share
See notes to unaudited condensed consolidated financial statements.
- 5 -
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (431,320) $ (35,625)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 8,221 0
Issuance of common stock for services 15,000 0
Increase (decrease) in accounts payable 210,338 (11,476)
(Increase) decrease accounts receivable (8,692) 4,004
(Increase) decrease in inventories (79,755) (232,377)
(Increase) decrease in income tax receivable 0 60,000
(Increase) decrease in distribution rights 15,500 (8,127)
(Increase) decrease in other assets (4,130) 964
Decrease in minority interest (42,779) 0
Increase (decrease) in other accrued liabilities (5,650) 9,523
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (323,267) (213,114)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (21,188) (4,470)
Increase in deferred acquisition costs (50,782) 0
Redemption of certificates of deposit 512,559 0
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES 440,589 (4,470)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of common stock (37,177) 0
Issuance of common stock 7,534 100,002
Increase in deferred stock offering costs (277,151) 0
Contribution of capital 0 1,234,162
Increase in notes payable 550,000 0
Proceeds from line of credit (171,275) 0
Payments on capital lease obligation (2,625) 0
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 69,306 1,334,164
------------ -----------
NET INCREASE (DECREASE) IN CASH 186,628 1,116,580
CASH, BEGINNING OF PERIOD 109,387 48,523
------------ -----------
CASH, END OF PERIOD $ 296,015 $ 1,165,103
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Retirement of Preferred A Stock (1,000) 0
Conversion of Preferred B Stock (500) 0
</TABLE>
See notes to unaudited condensed consolidated financial statements.
- 6 -
<PAGE>
NEW FRONTIER MEDIA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS, AND CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of NFMI and its wholly owned subsidiaries David
Entertainment, Inc. ("DAVID") and Fuzzy Entertainment, Inc. ("FUZZY"), and its
70% owned subsidiary, Boulder Interactive Group, Inc. ("BIG"). All adjustments
consisting of normal accruals and elimination of intercompany accounts and
transactions, which in the opinion of management, are necessary for a fair
presentation, have been reflected in the accompanying financial statements.
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. Common stock equivalents are
not included in the weighted average calculation since their effect would be
anti-dilutive.
PART 1 ITEM 2 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1) OVERVIEW
All of the Company's current revenues are derived through its wholly
owned subsidiaries David Entertainment, Inc., Fuzzy Entertainment, Inc. and
its 70% owned subsidiary Boulder Interactive Group, Inc. The Company's
offices are located at 1050 Walnut Street, Suite 301, Boulder, CO 80302. The
telephone number is (303) 444-0632.
2) RESULTS OF OPERATIONS
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
NEW FRONTIER MEDIA, INC. ("NOOF" OR THE "COMPANY")
The company functions as a holding company for its subsidiaries, and such
generates no independent income. The Company incurs administrative expenses
such as accounting, auditing, public relations, investor relations and legal.
For the three month period ended September 30, 1997, the Company reported
no income and total operating expenses of $135,530, compared with total
operating expenses of $49,865 for the same period the prior year. The
increase of $85,665 for the period was due to increases in travel expense
($36,899 in 1997 versus $8,988 in 1996), and payroll costs ($49,220 in 1997
versus $8,471 in 1996). These cost increases are primarily due to the planned
public offering and acquisition of Fifth Dimension.
BOULDER INTERACTIVE GROUP, INC. DBA INROADS INTERACTIVE ("INROADS")
Inroads reported quarterly sales of $43,624 for the period, down from
$90,800 the prior period last year. This decline in sales is due to no new
titles released during the quarter. Operating expenses were $161,274, up from
133,973, as Inroads has hired more personnel and spent more on advertising and
on development of new product. Net loss of $69,904 increased from the $19,319
loss in the prior period last year. Management believes its investment in
product development and advertising will produce increased sales in the coming
quarters.
- 7 -
<PAGE>
DAVID ENTERTAINMENT, INC. ("DAVID")
DaViD had sales of $203,420 for the period, down from $605,800 in the
prior year period. Sales were limited by the advent of the DVD format and
resulting consumer slow down in laser disc purchases. Operating expenses were
$96,859 versus $148,439 last year due primarily to elimination of the
distribution agreement with ELM Releasing, LP. and lower corresponding
expenses associated with direct management of the distribution function. Net
loss was $42,848 compared to a gain of $52,554 for the prior year period.
Management believes that profitability will return in the following quarters
as the DVD format gains acceptance.
FUZZY ENTERTAINMENT, INC. DBA IN-SIGHT EDITIONS ("IN-SIGHT")
In-Sight reported total revenue of $1,402 for the period, along with
operating expenses of $947 and a net loss of $24. The Company is focused on
its public offering and pending acquisition and is not devoting significant
resources to In-Sight.
FIRST SIX MONTHS OF 1997 COMPARED TO FIRST SIX MONTHS OF 1996
NEW FRONTIER MEDIA, INC. ("NOOF" OR THE "COMPANY")
For the six month period ended September 30, 1997, the Company reported
no income and total operating expenses of $264,752, compared with total
operating expenses of $112,140 for the same period the prior year. The
increase of $152,612 for the period was due to increases in travel expense
($54,260 in 1997 versus $11,575 in 1996), payroll costs ($57,884 in 1997
versus $16,893 in 1996), legal ($33,230 in 1997 versus $8,490 in 1996), and
investor relations ($33,055 in 1997 verus $0 in 1996). These cost increases
are primarily due to the planned public offering and acquisition of Fifth
Dimension.
BOULDER INTERACTIVE GROUP, INC. DBA INROADS INTERACTIVE ("INROADS")
Inroads reported sales of $142,937 for the period, down from $84,152 the
prior period last year. This decline in sales is due to no new titles
released during the period. Operating expenses were $307,051, up from
$242,407, as Inroads has hired more personnel and spent more on advertising
and on development of new product. Net loss of $142,597 increased from the
$61,691 loss in the prior period last year. Management believes its
investment in product development and advertising will produce increased sales
in the coming quarters.
DAVID ENTERTAINMENT, INC. ("DAVID")
DaViD had sales of $581,469 for the period, down from $1,237,542 in the
prior year period. Sales were limited by the advent of the DVD format and
resulting consumer slow down in laser disc purchases. Operating expenses were
$220,694 versus $265,256 last year due primarily to elimination of the
distribution agreement with ELM Releasing, LP. and lower corresponding
expenses associated with direct management of the distribution function. Net
loss was $56,898 compared to a gain of $146,204 for the prior year period.
Management believes that profitability will return in the following quarters
as the DVD format gains acceptance.
FUZZY ENTERTAINMENT, INC. DBA IN-SIGHT EDITIONS ("IN-SIGHT")
In-Sight reported total revenue of $3,369 for the period, along with
operating expenses of $11,498 and a net loss of $9,852. The Company is focused
on its public offering and pending acquisition and is not devoting significant
resources to In-Sight.
- 8 -
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
FIRST SIX MONTHS OF 1997 COMPARED TO FIRST SIX MONTHS OF 1996
The Company reported an increase in negative cash flow from operating
activities from ($323,267) for the current period from ($213,114) during the
same period last year. Cash flow from investing activities increased to
$440,589 from ($4,470) due primarily to the redemption of certificates of
deposit. Net cash flow from financing activities declined to $69,306 from
$1,334,164 due to the one time selling of a 30% interest in BIG last year.
Management believes that cash flow from operating activities will turn
positive in the near future.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
SANDS BROTHERS
On November 11, 1996, the Company entered into a financial consulting
agreement (the "Sands Agreement"), with Sands Brothers & Co., Ltd. ("Sands
Brothers"), a broker-dealer headquartered in New York City under which Sands
Brothers agreed to provide financial advisory services to the Company. The
Sands Agreement also contained a provision granting Sands Brothers the
exclusive right to underwrite or place any private or public financing
undertaken by the Company during the two-year term of the Sands Agreement.
On May 20, 1997, the Company terminated the Sands Agreement based, among
other things, on the Company's allegation of non-performance on the part of
Sands Brothers. On September 26, 1997, counsel for Sands Brothers sent a
letter to Mark Kreloff, the Company's president, alleging that the Sands
Agreement was still in force, alleging breach of the Sands Agreement by the
Company and demanding that the Company comply with its terms.
On October 3, 1997, the Company filed a Complaint in District Court in
Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers, alleging
breach of the terms of the Sands Agreement by Sands Brothers. The Company also
alleged fraud in the inducement, and is seeking return of its initial payment
of $25,000 to Sands Brothers and recission of the Sands Agreement. As of the
date of this prospectus, Sands Brothers has not filed an Answer to the
Company's Complaint. The Company intends to vigorously defend any allegations
made by Sands Brothers in such Answer.
QUARTO
On October 7, 1997, Quarto's counsel notified the Company of Quarto's
claim that the Company had breached the Quarto Stockholder Agreement dated
September 20, 1996. Counsel for Quarto demanded rescission of the Purchase
Agreement between the Company and Quarto dated September 20, 1996, and a
return of all amounts Quarto paid for its 30 percent interest in Inroads.
Counsel for Quarto generally alleged fraud in the inducement,
misrepresentation, violation of federal and state securities laws, and failure
of consideration as basis for its demand for rescission and return of all
amounts paid. The Company has obtained an opinion from J. John Combs III, its
litigation counsel, stating that there is no basis for rescission of the
Quarto agreements under the facts or under Colorado law, that any breach
alleged by Quarto is not "material," and that Quarto has suffered no damages
as the result of any alleged breach of the Quarto Purchase Agreement by the
Company.
On October 16, 1997, Quarto's counsel demanded that the Board of
Directors of Inroads take all actions necessary to restore certain Inroads'
certificates of deposit that had been encumbered by or for the benefit of the
Company, and to obtain repayment of any funds loaned to the Company for the
benefit of the Company. Counsel for Quarto also demanded that the Board of
Directors of Inroads institute an action for misappropriation of assets,
mismanagement, and breach of fiduciary duties against those members of
Inroads' management who participated in the acts that Quarto's counsel alleges
constituted a misappropriation of Inroads' assets. Counsel for Quarto has
notified the Board of Directors of Inroads of Quarto's intent to institute a
derivative action on behalf of Inroads against certain managers and directors
of Inroads who allegedly participated in the claimed misappropriation of
Inroads' assets, should Inroads' Board of Directors fail or refuse to initiate
such an action on its own.
On October 23, 1997, Quarto filed an action in the United States District
Court for the District of Colorado (Civil Action No. 97-WM-2290) seeking,
among other things, rescission of the purchase agreement, a temporary
restraining order and preliminary injunction against Inroads and the Company,
preventing them from transferring or encumbering the assets of Inroads. On
October 28, 1997, the Company and Quarto entered into a Stipulation for Entry
of Preliminary Injunction (the "Stipulation"). Pursuant to the terms of the
Stipulation, Inroads and the Company agreed to not make any draws on any line
or lines of credit extended to them from the Bank of Boulder, Boulder,
Colorado, in which any assets of Inroads, including any certificates of
deposit, are used as security, without the prior written consent of Quarto.
Inroads and the Company further agreed to not encumber any additional assets
of Inroads or any assets transferred by Inroads to the Company or used by
Inroads for the benefit of the Company as part of any loan transaction,
without the written consent of Quarto, and pending further order of the Court.
Inroads also agreed to not transfer any assets or monies to or for the benefit
of the Company for any purpose whatsoever, pending further order of the Court.
The Court denied Quarto's motion for entry of a temporary restraining order
and preliminary injunction which would have frozen Inroads' assets or imposed
a constructive trust over those assets and the operations of Inroads. As of
the date of this prospectus, Quarto had not instituted an action in
arbitration against the Company.
ITEM 2 CHANGES IN SECURITIES
On September 1, 1997 the Class A preferred stock was given back to the
Company and the shares were returned. In addition the Class B preferred stock
was converted into 2,857 shares of common stock. The dividends in arrears on
both the Class A and Class B preferred stock was forgiven.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
None.
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 26, 1997 By: /S/ MARK H. KRELOFF
---------------------------------------
Mark H. Kreloff, President
November 26, 1997 By: /S/ MICHAEL WEINER
---------------------------------------
Michael Weiner, Secretary and Treasurer
November 26, 1997 By: /S/ SCOTT WUSSOW
---------------------------------------
Scott Wussow, Chief Financial Officer
- 9 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> APR-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 296,015 296,015
<SECURITIES> 0 0
<RECEIVABLES> 213,271 213,271
<ALLOWANCES> 0 0
<INVENTORY> 739,258 739,258
<CURRENT-ASSETS> 1,677,625 1,677,625
<PP&E> 86,740 86,740
<DEPRECIATION> 30,882 30,882
<TOTAL-ASSETS> 2,303,517 2,203,517
<CURRENT-LIABILITIES> 1,241,696 1,241,696
<BONDS> 0 0
0 0
0 0
<COMMON> 420 420
<OTHER-SE> 1,780,519 1,780,519
<TOTAL-LIABILITY-AND-EQUITY> 2,303,517 2,303,517
<SALES> 727,775 248,445
<TOTAL-REVENUES> 727,775 248,445
<CGS> 507,053 175,270
<TOTAL-COSTS> 1,277,621 548,726
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 25,403 14,525
<INCOME-PRETAX> (431,320) (227,335)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (431,320) (227,335)
<EPS-PRIMARY> (.10) (.05)
<EPS-DILUTED> (.10) (.05)
</TABLE>
