SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended March 31, 1997
Commission File Number: 33-27494-FW
NEW FRONTIER MEDIA, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1084061
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(State of Incorporation) (I.R.S. Employer I.D. Number)
1050 Walnut St., Suite 301, Boulder, CO 80302
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(Address of principal executive offices and Zip Code)
(303) 444-0632
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock.
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]
Registrant's revenues for its most recent fiscal year (ended March 31, 1997):
$2,515,802
Aggregate market value of voting stock held by non-affiliates, and method of
computation:
$6,666,500, based on approximately 1,333,300 Common Shares held by
non-affiliates and an average bid/ask price of $5.00 per Share (NASDAQ Bulletin
Board) during the 90 days prior to date of this report.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
4,189,000 common shares were outstanding as of March 31, 1997.
Documents incorporated by reference: None.
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Form 10-KSB
- --------------------------------------------------------------------------------
NEW FRONTIER MEDIA, INC.
Form 10-KSB for the Fiscal Year ended March 31, 1997
Table of Contents
Page of Report
PART I.
Item 1. Description of Business. 3
Item 2. Description of Property. 5
Item 3. Legal Proceedings. 5
Item 4. Submission of Matters to a Vote of Security Holders. 6
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 6
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 6
Item 7. Financial Statements. F-1 to
F-17
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure. 9
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 10
Item 10. Executive Compensation. 11
Item 11. Security Ownership of Certain Beneficial Owners and
Management. 11
Item 12. Certain Relationships and Related Transactions. 12
Item 13. Exhibits and Reports on Form 8-K. 12
SIGNATURES 13
2
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PART I.
Item 1. Description of Business.
(a) Business Development. 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. Strategic acquired National Securities
Network, Inc. in September, 1989, and the Company changed its name to National
Securities Holding Corporation ("NSHC"). NSHC sold its underlying business in
October, 1990, and had no operations until September 15, 1995, when it completed
the reverse acquisition of Old Frontier Media, Inc., and changed its name to New
Frontier Media, Inc.
In September, 1996, the Company sold 30 percent of its Boulder Interactive
Group, Inc. Subsidiary to Quarto Holdings, Inc., a Delaware corporation, for
$1,250,000 in cash and $525,000 of digital material. For accounting purposes,
the digital material was valued at $ 0 . The Company has two other wholly-owned
subsidiaries: DaViD Entertainment, Inc., and Fuzzy Entertainment, Inc.
All of the Company's revenues are derived from operations of its wholly-
and majority-owned subsidiaries. The Company's corporate headquarters is located
at 1050 Walnut Street, Suite 301, Boulder, Colorado 80302. The Company's
telephone number is (303) 444-0632.
(b) Business of the Registrant. New Frontier Media, Inc. (the "Company") is
a publicly-traded holding company, doing business through Old Frontier Media,
Inc. ("Old Frontier"), its wholly-owned subsidiary. Old Frontier is a
diversified entertainment , publishing, and computer software production and
distribution company, consisting of two wholly-owned and one majority- owned
subsidiaries: (1) Boulder Interactive Group, Inc. ("BIG"); (2) DaViD
Entertainment, Inc. ("DaViD"); and, (3) Fuzzy Entertainment, Inc. ("Fuzzy").
(1) Principal products or services and their markets. BIG is a CD-ROM
software publishing company, designing and developing CD-ROM titles and
licensing third party-developed titles. BIG has developed and released eight
CD-ROM titles to date. Other titles are under development. All of BIG's CD-ROM
titles contain video, still photography, audio, original music and text. DaViD
is in the business of acquiring content rights to existing rated and unrated
motion picture titles for distribution on laserdisc and digital video disc
("DVD") by third-party distributors. DaViD currently owns content rights to
approximately 500 rated and unrated motion picture titles. Fuzzy acquires,
produces, and distributes fine art images and decorative posters.
(2) Distribution methods. BIG has entered into an exclusive software
distribution agreement (for North America only) with Broderbund Software, Inc.
("Broderbund"), a publicly-traded (NASDAQ, symbol "BROD") distribution company
considered to be one of the premier software publishers in the industry. BIG
expects to release one in-house developed CD-ROM title per quarter and one
third-party developed title per quarter. Through a distribution arrangement with
Disc Replication International, an entity related to a principal shareholder of
3
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the Company, DaViD's titles are distributed in the 8" and 12" LaserDisc formats,
and will be distributed in the 5 1/4" Digital Video Disc format, once
implementation of DVD hardware reaches a critical mass in the marketplace. The
distribution terms for these titles range from seven years to perpetuity. DaViD
releases 5 to 8 titles per month for distribution.
(3) Status of any publicly announced new products. None.
(4) Competition, the Company's competitive position in the industry,
and methods of competition. The domestic and international markets for the
products developed, licensed, and marketed by the Company's wholly-owned
subsidiaries are highly competitive. Many of the Company's competitors have
longer operating histories, greater name recognition, greater market acceptance
of their products, and significantly greater financial, technical, sales,
marketing and other resources to devote to the development, promotion, and sale
of their products. Many large companies with sophisticated product marketing and
technical abilities and financial resources that do not currently compete with
the Company may enter the PC software market and quickly become significant
competitors, particularly to BIG. To the extent such competitors establish a
performance, price or distribution advantage, the Company could be adversely
affected.
The PC consumer software industry is intensely competitive. The market for
CD-ROM products has increased dramatically the past two years. CD-ROM software
is quickly replacing the floppy disc as the most popular personal computer
format for programs, games, and information. The fluid nature of the consumer
software industry and rapidly changing demand for products make it difficult to
predict the future success of the Company in the business of producing packaged
software products for the retail market. Numerous large, well-funded software
developing and publishing competitors exist. These competitors have greater
capital, marketing resources and brand recognition than the Company. BIG's
success is dependent upon the ability of its staff to continue to develop CD-ROM
titles and products that are commercially viable. BIG will face significant
competition for the foreseeable future.
The management of DaViD intends to complete the acquisition of content
rights to approximately 1,000 rated and unrated motion picture titles, and
releasing those titles gradually over time, as the market dictates. DaViD relies
on one or more third-party distributors to market its titles. Competition in the
distribution of rated and unrated motion pictures has become intense in the past
five years. There is no assurance that the distributor(s) of DaViD's titles are
the best in the industry. DaViD is subject to the competition that its
distributor(s) will face.
Fuzzy faces significant competition from large, well-funded decorative art
producers and distributors. Many of Fuzzy's competitors have significant
financial resources and contacts in the industry, including distribution
channels, superior to the Company's.
(5) Sources of raw materials. Raw materials for all of the Company's
products are readily available from many sources worldwide.
(6) Dependence on one or a few major customers. DaViD distributes
its titles through various distributors, who then sell the titles to buyers
worldwide. BIG sells a portion of its CD-ROM products to and through Broderbund.
BIG has reduced its reliance on Broderbund as it has expanded sales of its
CD-ROM products; however, loss of this relationship would have an adverse affect
on the Company's operations.
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(7) Patents, trademarks, licenses, and royalty agreements. BIG
licenses its titles to publishers via republishing agreements and licenses,
primarily for distribution and sale of the titles in Europe and Asia. The
publisher licensees then translate the titles, and arrange for repackaging,
marketing and distribution in their designated areas. Typically, licensees pay
an up-front licensing fee, as well as ongoing royalties to the Company, based on
sales of the titles.
(8) Government approval. No government approval is required for the
Company's products.
(9) Effect of government regulations on the business. None.
(10) Research and development expenses. BIG's business is particularly
dependent upon development of new CD-ROM products, which for most companies in
BIG's business necessarily entails expenditures for research and development by
the Company. Partially in response to this need to continue to develop new
products, the Company sold a 30 percent interest in BIG to Quarto Holdings,
Inc., a subsidiary of The Quarto Group, Inc. ("Quarto") in September, 1996.
Quarto is one of the largest co-edition book publishers in the world. The terms
of the agreement between the Company and Quarto allow BIG to commercially
exploit Quarto text and other material on digital formats. The Company believes
this agreement with Quarto will provide a substantial base of material for
CD-ROM title development in the future. To date, BIG has commercially developed
and released one Quarto title, and development of two other titles is ongoing.
(11) Costs of environmental compliance. None.
(12) Employees. As of March 31, 1997, the Company had nine full time
employees.
Item 2. Description of Property.
The Company does not own any real property. The Company leases office space
via an entity controlled by an officer and shareholder of the Company. Under the
terms of the lease agreement, the Company pays $ 5,898 per month for 3,497
square feet of office space. The Company's office is located at 1050 Walnut
Street, Suite 301, Boulder, Colorado 80302. The telephone number is (303)
444-0632; the facsimile number is (303) 444-0734.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted for shareholder approval during the fourth
quarter of the fiscal year covered by this report.
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PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market information. The Company's Common Stock is traded on the NASDAQ
Bulletin Board under the symbol NOOF.
Quarter Ended Low Bid High Bid
- ------------- ------- --------
June 30, 1996 $ 3.50 $ 4.00
September 30, 1996 3.50 4.50
December 31, 1996 4.25 5.00
March 31, 1997 5.00 6.00
The foregoing high and low bid information was obtained from various
over-the-counter brokers that have effected trades in the Company's securities.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
(b) Holders. As of March 31, 1997 there were approximately 305 shareholders
of record of the Company.
(c) Dividends. As of March 31, 1997, the Company had not declared any
dividends on its Common Stock since inception. The Company does not intend to
pay any cash dividends on its common stock in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General.
New Frontier Media, Inc. is a publicly-traded holding company with two
operating wholly- owned and one operating majority-owned subsidiaries: Boulder
Interactive Group, Inc. ("BIG") and DaViD Entertainment, Inc. ("DaViD"), and
Fuzzy Entertainment, Inc. ("Fuzzy").
BIG is a CD-ROM software publishing company, designing and developing
CD-ROM titles and licensing third party-developed titles. DaViD is in the
business of acquiring content rights to existing rated and unrated motion
picture titles for distribution on laserdisc and digital video disc ("DVD") by
third-party distributors. DaViD currently owns content rights to approximately
500 unrated adult motion picture titles. Fuzzy acquires, produces, and
distributes fine art images and decorative posters.
The results of operations discussed herein pertain to the fiscal year ended
March 31, for the years discussed.
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Results of Operations
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Year Ended March 31,
-----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Sales, net ................................... $ 2,515,802 $ 2,565,671
Cost of Sales ................................ $ 2,217,812 $ 1,843,765
----------- -----------
Gross Profit ................................. $ 297,990 $ 721,906
Total Operating Expenses ..................... $ 931,342 $ 782,345
Other Income (Expense) ....................... $ 182,516 $ 65,716
----------- -----------
Net Income (Loss) Before Income Taxes
and Minority Interest ....................... ($ 450,836) $ 5,277
Income Taxes ................................. -- ($ 12,147)
Minority Interest in Loss of Subsidiary ...... $ 64,806 --
----------- -----------
Net Profit (Loss) ............................ ($ 386,030) ($ 6,870)
=========== ===========
</TABLE>
1997 versus 1996
New Frontier Media, Inc. ("NOOF" or the "Company")
NOOF is a publicly-traded holding company, consisting of three
subsidiaries: Boulder Interactive Group, Inc. ("BIG"), 70 percent owned by NOOF;
and DaViD Entertainment, Inc. ("DaViD") and Fuzzy Entertainment, Inc. ("Fuzzy"),
both wholly-owned subsidiaries of NOOF.
The Company's total revenue for 1997 was $2,515,802, down $ 49,869 (1.9%)
from 1996. Cost of sales increased to $2,217,812 from $1,843,765 the prior year,
resulting in a $ 423,916 (58.7%) decrease in gross profit for the fiscal year
ended March 31, 1997 from the same period the prior year. Total operating
expenses increased $ 148,997 (19.0%), from $ 782,345 for the year ended March
31, 1996 to $ 931,342 for the year ended March 31, 1997, resulting in a net loss
operations of $ 450,836 for the fiscal year ended March 31, 1997. Operating
expenses for NOOF and BIG remained relatively constant for the year ($277,600
and $510,715, respectively), while operating expenses for DaViD increased to $
71,216, from $6,801 for the same period the prior year (please see Management's
discussion concerning BIG and DaViD, below). NOOF performs many administrative
functions for BIG, DaViD, and Fuzzy, and generates little or no revenue
separately. As a result, NOOF reported total revenue of $400, total operating
expenses of $277,600, and a net loss from operations of $277,200 for the fiscal
year ended March 31, 1997, compared with a net loss from operations of $206,858
for the same period the prior year. Management attributes the higher net loss
for the year ended March 31, 1997 to increased travel and lodging expenses,
office expenses, employee benefits (health plan), and rent expense. NOOF will
continue to show net operating losses in the future, as it continues to function
as the administrative holding company for its subsidiaries.
7
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Boulder Interactive Group, Inc. ("BIG")
In September, 1996, the Company sold a 30 percent of interest in BIG to
Quarto Holdings, Inc. ("Quarto") for $1,250,000 in cash and other $525,000 worth
of digital material. For accounting purposes, the digital material is valued at
$ 0. BIG also acquired the rights to develop and commercially exploit Quarto
materials in digital formats as a result of this transaction. Since the date of
the Quarto transaction, BIG has allocated significant corporate resources to
identifying, developing, and commercially exploiting its first Quarto-based
products. BIG reported total revenue of $ 290,994 for the fiscal year ended
March 31, 1997, compared with $ 971,370 for the same period the prior year.
Management attributes this 70 percent revenue decline to several factors,
including diversion of the BIG resources to the Ralston Purina project (as
reported by the Company in its Form 8-K dated September 16, 1996), normal delays
in developing products under the Quarto agreement (as reported by the Company in
its Form 8-K dated September 27, 1996), and BIG's evolving market focus from
"edutainment" products to alternative and specialty products. In addition,
management attributes lower revenue figures to the underperformance of its
distributors, and the transition of BIG's distribution strategy away from
software retail outlets and toward direct sales.
BIG's latest CD-ROM products are targeted at enthusiasts and hobbyists,
primarily as a result of the titles that BIG is developing and commercially
exploiting under the Quarto agreement. BIG dedicated a major portion of its
resources over the past several months to development of its Cigar Companion
interactive CD-ROM, which was released to the market on July 1, 1997. Management
believes that BIG and the Company will realize revenues from Cigar Companion,
based upon the surging popularity of cigars and cigar-related products in the
United States. In the first quarter of 1997, consumers in the United States
purchased over 500 million cigars, a 96 percent increase over 1996 and a 300
percent increase over 1995.
In addition to Cigar Companion, BIG has developed and recently released a
photography CD-ROM, In Focus, utilizing the material acquired from Quarto. BIG
recently signed agreements for distribution of In Focus in Spain and Italy. In
Focus is co-branded by Olympus America, which includes a free roll of film from
Kodak for every person who registers the In Focus software with BIG.
BIG's Multimedia Guns CD-ROM title was listed as the 17th-highest selling
software title on PC Data's top-selling software list for April, 1997.
Multimedia Guns reached number 15 on the PC Data list for June, 1997. Currently,
BIG only sells the Multimedia Guns title through Wal-Mart at full retail. Due to
the success of Multimedia Guns in this limited distribution channel, CompUSA has
agreed to carry the title. Management of BIG anticipates sales of Multimedia
Guns by CompUSA to meet or exceed sales of the title at Wal-Mart.
The Company believes that BIG will successfully develop and commercially
exploit several Quarto-based titles in the fiscal year ending March 31, 1998,
and that revenues will rebound accordingly. In addition, Management believes
that BIG and the Company will begin to realize revenue from the Ralston Purina
project in the next two quarters.
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DaViD Entertainment, Inc. ("DaViD")
DaViD is a wholly-owned subsidiary of the Company. DaVid reported a $
618,532 (38.8%) increase in revenue for the fiscal year ended March 31, 1997, to
$2,211,388 from $1,592,856 for the same period the prior year; however, revenue
and other financial results for DaviD for the fiscal year ended March 31, 1996
represent only six months' of operations for that year. DaViD reported total
cost of sales of $1,961,933, operating expenses of $ 71,216, and pre-tax
earnings of $179,039 for the year ended March 31, 1997, compared with total cost
of sales of $1,215,543, operating expenses of $ 6,801, and pre-tax profit of $
353,895 for the same period the prior year. Management attributes the higher
operating expenses for the year ended March 31, 1997 to increased legal costs,
printing costs, and distribution expenses being allocated away from cost of
sales to operating expense. Management anticipates continued revenue growth from
DaViD, as Digital Virtual Disc technology advances in 1997 and 1998.
Fuzzy Entertainment, Inc. ("Fuzzy")
The Company capitalized Fuzzy in November and December, 1996. Fuzzy
reported total revenue of $13,020, cost of goods of $10,290, operating expenses
of $71,812, and a net loss of $69,082 for the fiscal year ended March 31, 1997.
Fuzzy has not yet transitioned into the fully-operational stage. Most of Fuzzy's
operating expenses were attributable to consulting expense of $40,187.
Management anticipates moderate revenue growth for Fuzzy during the fiscal year
ending March 31, 1998.
Liquidity and Capital Resources
The Company's net increase in cash and certificates of deposit for the
fiscal year ended March 31, 1997 was $ 810,864 (1,671.1%), up from $ 48,523 to $
859,387. This increase was primarily the result of the Company's sale of 30
percent of BIG to Quarto for $1,250,000 cash, and digital material which for
accounting purposes has been valued at $ 0. $840,184 of the Company's cash and
cash equivalents are held in BIG's bank accounts, and are restricted from
transfer to or use by NOOF or its other subsidiaries by the terms of the Quarto
agreements. NOOF has cash and cash equivalents of $1,384 at March 31, 1997.
DaViD has cash and cash equivalents of $18,441 at March 31, 1997. Fuzzy has cash
and cash equivalents of $ (622) at March 31, 1997. NOOF retains some operating
revenue from its share of the net income of DaViD, and by assessing operating
costs to its subsidiaries on a pro rata basis.
Business Development and Outlook
BIG continues to develop new CD-ROM products, and Management believes it
has secured a source of future titles by virtue of the Quarto agreements.
Although CD-ROM software publishing remains a highly competitive business,
Management believes BIG has demonstrated its ability to create demand for its
products through conventional (e.g., Wal-Mart and CompUSA) and alternative
(e.g., Ralston Purina and Time Warner licensing agreements) retail channels
Digital Versatile Disc ("DVD") Players are quickly becoming part of the
consumer electronic landscape in the United States and abroad. Dataquest
estimates that approximately 2.0 million DVD players will be sold in the United
States by the end of December, 1997. Management believes that the low
replication price of DVD (and the correspondingly low retail price of titles on
DVD) will result in a software to hardware purchase ratio of 5:1. Management
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expects that approximately 5 percent of the total forecasted 10 million units of
DVD software sold in 1997, or 500,000 units, will be in the adult entertainment
category. DaViD expects to capture 50 percent of the adult DVD software segment
in 1997. DaViD continues to acquire content rights to unrated motion pictures,
and to release 4 to 8 titles per month, primarily on laserdisc. Management
believes DaViD revenues and net income will continue to grow as DVD technology
is introduced to the consumer market.
Fuzzy is in the early development stages, and Management anticipates
reaching break-even by March 31, 1998.
Item 7. Financial Statements.
The following pages F-1 through F-17 contain the audited financial
statements of the Company for the fiscal years ended March 31, 1997 and 1996.
These statements were audited by Spicer, Jeffries & Co., Certified Public
Accountants, Denver, Colorado.
Item 8. Changes In and Disagreements With Accountants.
None.
(The remainder of this page is intentionally left blank)
10
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PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons.
(a) Directors and executive officers of the Company (as of the date of this
Report):
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark H. Kreloff 35 Chairman of the Board, President and Chief Executive
Officer, New Frontier Media, Inc.; Director, BIG; Vice
Director, DaViD; Director, Fuzzy.
Andrew V. Brandt 28 Director, New Frontier; President and Director, BIG.
Michael Weiner 55 Executive Vice President, Secretary-Treasurer and
Director, New Frontier Media, Inc.; Director, BIG;
President and Director, DaViD; President and Director, Fuzzy.
Scott D. Wussow 41 Chief Financial Officer, New Frontier Media, Inc.
- ---------------
</TABLE>
Mark H. Kreloff. Mr. Kreloff has been actively involved in the
entertainment and computer software industries since 1990. Prior to joining OFMI
and during the last five years, he was the President and Chairman of the Board
for LEI Partners, L.P., a LaserDisc publishing, entertainment production and
distribution company; and California Software Partners, L.P., a computer
software development and publishing company. Previously, Mr. Kreloff held the
title Vice President, Mergers and Acquisitions, with the wall street firms
Kidder Peabody & Co. and Drexel Burnham Lambert where he was involved in
transactions totaling over one billion dollars, including the sale of certain
assets relating to KKR's acquisition of R. J. Reynolds/Nabisco, and numerous
cable TV transactions. Mr. Kreloff is an honors graduate of Syracuse University
with a B.S. degree in Finance/Public Communications and is 35 years old.
Andrew V. Brandt. Mr. Brandt has extensive experience in 3-D computer
graphics, user interface design, and software engineering. Prior to joining
OFMI, Mr. Brandt spent two years developing numerous 3-D graphics libraries and
graphical user interfaces for a variety of platforms. Mr. Brandt developed a
system for medical applications utilizing real-time, three-dimensional
ultrasound acquisition and a video see-through head-mounted display. He also
helped prototype the first digital video interactive system and led the port of
Pixar's RenderMan to a supercomputer. Commercial work experience includes work
with General Electric Aerospace, San Diego Supercomputer Center, General
Atomics, and Numerical Design Limited. Educational work experience includes
work-study positions with the University of North Carolina, University of
California and Rutgers University. Mr. Brandt has published works with ACM
Siggraph and North Carolina Conference on Volume Visualization. Mr. Brandt
graduated Magna Cum Laude from the University of California, San Diego with a
B.S. in Computer Engineering and holds an M.S. in Computer Science from the
University of North Carolina at Chapel Hill. Mr. Brandt is 28 years old.
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Michael Weiner. Mr. Weiner has been actively involved in creative
businesses for the past 25 years. His background includes 25 years in real
estate development and syndication as well as ownership in various publishing
companies. Mr. Weiner is a partner in the investment firm Maxim Financial
Corporation, a multi-million dollar trading and investment banking concern based
in Boulder, Colorado. He is 55 years old.
Scott D. Wussow. Mr. Wussow has eighteen years of accounting and finance
experience, and is a Certified Public Accountant. He joined New Frontier as
Chief Financial Officer on April 1, 1996. For the past five years before joining
the Company, Mr. Wussow was Chief Financial Officer for Hart Bornhoft Group, an
investment firm. Previous to that, Mr. Wussow was Controller at Neodata
Services, a publisher services company, and was Accounting Manager for a
division of MCI Communications. Mr. Wussow graduated Magna Cum Laude from the
University of Wisconsin at Eau Claire with a B.A. degree in Accounting. He is 41
years old.
(b) Other significant employees. None.
(c) Family relationships. None.
(d) Involvement in certain legal proceedings. None.
Item 10. Executive Compensation.
<TABLE>
<CAPTION>
Name and principal Year Salary Bonus Other annual Restricted Options/ LTIP All other
position ($) ($) compensation stock awards SARs payouts compensation
------------------ ---- ------ ----- ------------ ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark H. Kreloff, CEO, 1997 0 15,000 0 0 0 0 36,028
COO, Pres., and
Chairman
Michael Weiner, Sr. 1997 0 15,828 0 0 0 0
V.P., Sec.-Treas. and
Director
Andrew V. Brandt, 1997 75,695 3,125 0 0 0 0 5,053
President, BIG
Scott D. Wussow, CFO 1997 46,333 2,083 0 0 0 0 0
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners other than management.
All persons, including groups, known to the Company to be the beneficial owner
of more than five percent (5%) of any class of the Company's voting securities
(other than management), as of March 31, 1997:
Stephen Cherner (individually and through Maxim Profit Sharing), 595,000
shares (14.2%).
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(b) Security ownership of management. The table below sets forth the number
of shares of each class of the Company's equity securities, or any of its
parents or subsidiaries, beneficially owned by all executive officers and
directors of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Amount and Nature Percent of
Owner of Beneficial Owner Class
-------------- ------------------------------ ------------------- ---------
<S> <C> <C> <C>
Common Stock Andrew Brandt 279,500 6.67%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Common Stock Mark H. Kreloff 1,014,000 24.21%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Common Stock Michael Weiner 615,000 14.68%
1050 Walnut Street, Suite 301
Boulder, CO 80302
</TABLE>
(c) Changes in control. None.
Item 12. Certain Relationships and Related Transactions.
The Company purchased $65,000 of adult laserdisc format titles from a
related entity through the issuance of preferred stock (see Notes 3 and 4 to the
financial statements filed herewith). 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 mangement fee of
$40,000 per month. During the year ended March 31, 1997 and 1996, this related
entity withheld from sales of $2,236,143 and $1,592,856 replicating costs of
$1,646,364 and $ 939,622 and management fees of $470,000 and $262,500,
respectively. Included in accounts receivable at March 31, 1997 and 1996 were
$141,585 and $222,276, respectively, from the related entity.
In June, 1995, the Company issued a three year note receivable in the
amount of $38,000 to one of its officers. The note requires quarterly interest
only payments at a rate of 6.1 percent per annum. The principal is due on June
19, 1998.
The Company leases certain equipment and office space via entities
controlled by a shareholder on a month to month basis. During the years ended
March 31, 1997 and 1996 the Company paid $116,549 and $98,212, respectively, to
these entities relating to these leases.
Item 13. Exhibits and Reports on Form 8-K.
None.
13
<PAGE>
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.
July 8, 1997 By: /S/ MARK H. KRELOFF
--------------------------
Mark H. Kreloff, CEO and Chairman
July 8, 1997 By: /S/ SCOTT D. WUSSOW
----------------------------
Scott D. Wussow, CFO
July 8, 1997 By: /S/ MICHAEL WEINER
----------------------------
Michael Weiner, Sr. V.P.,
Secretary-Treasurer and
Director
14
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Independent Auditors' Report F-2
Balance Sheets F-3 - F-4
Statements of Operations F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-17
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
New Frontier Media, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of New Frontier
Media, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Frontier Media,
Inc. and Subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Spicer, Jeffries & Co.
SPICER, JEFFRIES & CO.
Denver, Colorado
July 3, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
ASSETS
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash (Note 4) .................................................................$ 109 387 $ 48 523
Investment in certificates of deposit (Notes 4 and 7) ......................... 750 000 --
Accounts receivable (Notes 1 and 3) ........................................... 212 370 222 276
Inventories (Note 1) .......................................................... 659 503 354 089
Prepaid distribution rights (Note 1) .......................................... 82 250 94 500
Common stock subscribed ....................................................... -- 20 000
Income tax receivable ......................................................... -- 72 500
Other ......................................................................... 68 225 48 990
--------- --------
Total current assets ................................................... 1 881 735 860 878
--------- --------
FURNITURE AND EQUIPMENT, at cost (Note 1) ........................................ 65 552 39 314
Less: accumulated depreciation and amortization ............................... (22 661) (10 479)
--------- --------
Net furniture and equipment ............................................ 42 891 28 835
--------- --------
OTHER ASSETS
Notes receivable - officer (Note 3) ........................................... 38 000 38 000
Accounts receivable - retainage (Note 1) ...................................... 88 844 77 053
Other ......................................................................... 135 001 12 583
--------- ---------
Total other assets ..................................................... 261 845 127 636
--------- --------
$2 186 471 $1 017 349
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable ............................................................................... $125 928 $186 742
Current portion of long-term debt (Note 2) ..................................................... 139 573 139 573
Current portion of obligations under capital lease (Note 6) .................................... 5 139 --
Lines of credit (Note 7) ....................................................................... 341 274 --
Other accrued liabilities ...................................................................... 45 416 15 562
--------- --------
Total current liabilities .............................................................. 657 330 341 877
LONG-TERM DEBT - Obligations under capital leases (Note 6) ....................................... 12 926 --
--------- --------
Total liabilities ...................................................................... 670 256 341 877
--------- --------
MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4) .................................................. 305 443 --
--------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
SHAREHOLDERS' EQUITY (Notes 1 and 4):
Common stock, $.0001 par value, 50,000,000
shares authorized, 4,189,000 and 4,175,250,
shares issued and outstanding, respectively ................................................. 419 418
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 --
Additional paid-in capital .................................................................... 1 768 661 847 832
Deficit ....................................................................................... (559 808) (173 778)
--------- --------
Total shareholders' equity ............................................................. 1 210 772 675 472
--------- --------
$2 186 471 $1 017 349
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
SALES, net ................................................................. $2 515 802 $2 565 671
COST OF SALES .............................................................. 2 217 812 1 843 765
--------- ---------
GROSS PROFIT ............................................................... 297 990 721 906
--------- ---------
OPERATING EXPENSES
Occupancy and equipment ................................................. 190 675 118 960
Legal and professional .................................................. 67 625 96 101
Advertising and promotion ............................................... 199 238 225 319
Salaries wages and benefits ............................................. 236 017 184 282
Communications .......................................................... 32 137 22 609
General and administrative .............................................. 129 615 60 942
Research and development ................................................ -- 8 851
Consulting .............................................................. 76 035 65 281
--------- ---------
Total operating expenses .............................................. 931 342 782 345
--------- ---------
OTHER INCOME (EXPENSE)
Licensing fees and royalties ........................................... 191 995 157 106
Licensing commissions .................................................. (27 193) (54 665)
Interest income ........................................................ 37 736 4 152
Interest expense ....................................................... (20 022) (15 561)
Abandoned project costs ................................................ -- (25 316)
--------- ---------
Total other income .................................................... 182 516 65 716
--------- ---------
Net income (loss) before income taxes and minority interest ........... (450 836) 5 277
INCOME TAXES (Notes 1 and 5) ............................................... -- (12 147)
--------- ---------
Net loss before minority interest ..................................... (450 836) (6 870)
Minority interest in loss of subsidiary .................................... 64 806 --
--------- ---------
NET LOSS ................................................................... $(386 030) $ (6 870)
========= =========
NET LOSS PER COMMON SHARE (Note 1) ......................................... $ (.09) $ *
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1) .............................. 4 188 459 4 051 896
========= ==========
</TABLE>
* less than 1(cent) per share
F-5
<PAGE>
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997 AND 1996
Common Stock
----------------------------------------
No Par Value $0.01 Par Value
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCES, March 31, 1995 ................................. 4 000 $ 80 000 -- $ --
Contribution of capital ................................. -- 3 250 -- --
Reverse acquisition of National
Securities Holding Corporation
(Note 1) ............................................... (4 000) (83 250) 4 000 000 400
Issuance of Class A preferred stock ..................... -- -- -- --
Issuance of common stock ................................ -- -- 175 250 18
Net loss ................................................ -- -- -- --
-------- -------- --------- -------
BALANCES, March 31, 1996 ................................. -- -- 4 175 250 418
Issuance of subsidiary's common
stock, less offering costs
of $11,085 ............................................ -- -- -- --
Issuance of Class B preferred
stock, less offering costs of $6,663 ................... -- -- -- --
Issuance of common stock, less
offering costs of $10,922 .............................. -- -- 20 000 2
Retirement of common stock .............................. -- -- (6 250) (1)
Net loss ................................................ -- -- -- --
-------- -------- --------- ------
BALANCES, March 31, 1997 ................................. -- $ -- 4 189 000 $ 419
======== ======== ========= =======
<PAGE>
<CAPTION>
Class A Preferred Stock Class B Preferred Stock
----------------------- ----------------------- Additional
$0.10 Par Value $0.10 Par Value Paid-In
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, March 31, 1995 ................................. -- $ -- -- $ -- $ -- $ (166 908)
Contribution of capital ................................. -- -- -- -- -- --
Reverse acquisition of National
Securities Holding Corporation
(Note 1) ............................................... -- -- -- -- 82 850 --
Issuance of Class A preferred stock ..................... 10 000 1 000 -- -- 64 000 --
Issuance of common stock ................................ -- -- -- -- 700 982 --
Net loss ................................................ -- -- -- -- -- (6 870)
-------- -------- --------- ------ -------- --------
BALANCES, March 31, 1996 ................................. 10 000 1 000 -- -- 847 832 (173 778)
Issuance of subsidiary's common
stock, less offering costs
of $11,085 ............................................ -- -- -- -- 863 915 --
Issuance of Class B preferred
stock, less offering costs of $6,663 ................... -- -- 5 000 500 12 837 -
Issuance of common stock, less
offering costs of $10,922 .............................. -- -- -- -- 69 076 --
Retirement of common stock .............................. -- -- -- -- (24 999) --
Net loss ................................................ -- -- -- -- -- (386 030)
------- -------- --------- ------ --------- --------
BALANCES, March 31, 1997 ................................. 10 000 $ 1 000 5 000 $ 500 $1 768 661 $ (559 808)
======= ======== ========= ====== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
-------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss.............................................................................. $ (386 030) $ (6 870)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................................. 12 244 7 807
Increase (decrease) in accounts payable ........................................ (60 814) 170 491
Increase in accounts receivable ................................................ (1 885) (233 997)
Increase in inventories ........................................................ (305 414) (326 929)
(Increase) decrease in prepaid distribution rights ............................. 12 250 (94 500)
Increase in other assets ....................................................... (141 715) (59 309)
(Increase) decrease in income tax receivable ................................... 72 500 (72 500)
Increase in other accrued liabilities .......................................... 29 854 15 562
Minority interest in loss of subsidiary ........................................ (64 806) --
--------- --------
Net cash used in operating activities ......................................... (833 816) (600 245)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture .................................................. (6 928) (17 732)
Increase in notes receivable - officer ............................................... -- (38 000)
Purchase of certificates of deposit .................................................. (750 000) --
--------- --------
Net cash used in investing activities ......................................... (756 928) (55 732)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation ................................................. (1 245) --
Proceeds from line of credit ......................................................... 341 274 --
Payments of notes payable ............................................................ -- (45 427)
Issuance of common stock, net of offering costs ...................................... 89 978 681,000
Retirement of common stock ........................................................... (25 000) --
Issuance of preferred stock, net of offering costs ................................... 13 337 65 000
Contribution of capital .............................................................. -- 3 250
Issuance of subsidiary's common stock, net of offering costs ......................... 863 915 --
Increase in minority interest, net of offering costs of $4,751 ....................... 370 249 --
--------- --------
Net cash provided by financing activities ..................................... 1 651 608 703 823
NET INCREASE IN CASH .................................................................... 60 864 47 846
CASH, BEGINNING OF YEAR.................................................................. 48 523 677
--------- --------
CASH, END OF YEAR........................................................................ $ 109 387 $ 48 523
========= ========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<CAPTION>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
Years Ended March 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid........................................................................ $ 5 487 $ --
========= ========
Income taxes paid.................................................................... $ -- $ 12 147
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Common stock subscribed.............................................................. $ -- $ 20 000
========= ========
Purchase of equipment via capital lease obligation................................... $ 19 310 $ --
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 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 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.
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 March 31, 1997 and 1996, retention amounts included in trade accounts
receivable were $88,844 and $77,053. In addition, included in accounts
receivable at March 31, 1997 is $17,141 from this distributor.
F-9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories are stated at the lower of cost (first in, first out) or market.
These costs include acquisition, duplication, production and the physical
packaging of the products for distribution on a unit-specific basis and are
charged to cost of sales when revenue from the sale of the units is recognized.
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 through September 30, 1996 when a 30%
minority interest was sold.
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.
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
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.
F-10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $3,417 and $1,718 have been added back to
the net loss to arrive at net loss per common share for the years ended March
31, 1997 and 1996, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 2 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <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
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
-------------- --------------
139 573 139 573
Less current portion (139 573) (139 573)
-------------- --------------
$ - $ -
============== ==============
</TABLE>
Included in other liabilities at March 31, 1997 and 1996 are $11,012 and $15,562
of accrued interest relating to the above notes, respectively.
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
F-11
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(continued)
NOTE 3 - RELATED PARTY TRANSACTIONS (continued)
for a management fee of $35,000 per month through May 31, 1996 and $40,000 per
month thereafter. During the year ended March 31, 1997 and 1996 this related
entity withheld from sales of $2,236,143 and $1,592,856, replicating costs of
$1,646,364 and $939,622 and management fees of $470,000 and $262,500,
respectively. Included in accounts receivable at March 31, 1997 and 1996 was
$141,585 and $222,276 from the related entity.
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 June 19,
1998. Interest earned on this note for the years ended March 31, 1997 and 1996
was $2,318 and $1,346.
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
years ended March 31, 1997 and 1996 the Company paid $116,549 and $98,212 to
these entities relating to these leases.
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.
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).
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 March 31, 1997, cumulative dividends in arrears on Class A and B preferred
stock totalled $5,135.
F-12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(continued)
NOTE 4 - SHAREHOLDERS' EQUITY (continued)
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 $841,568 at 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.
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.
F-13
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(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:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
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)
-------------- --------------
$ - $ -
============== ==============
</TABLE>
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 years ended March 31, 1997 and 1996, was $136,013 and
$100,441, respectively.
F-14
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(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 March
31, 1997 is approximately $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:
<TABLE>
<CAPTION>
1997 1996
----------------- -------------
<S> <C> <C>
$250,000 line of credit, dated November 4, 1996,
bearing interest at 7.950%, due November 4, 1997
secured by certificate of deposit $ 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 94 033 -
---------------- --------------
$ 341 274 $ -
================ ==============
</TABLE>
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.
F-15
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(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%.
F-17
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997 AND 1996
(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)
--------------- ----------- ---------------------
$6.00
Outstanding and exercisable 546 666 48
$4.00
Outstanding and exercisable 20 000 18
$5.50
Outstanding and exercisable 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:
1997
-----------------
Net loss $ (464 189)
=================
Net loss per share $ (.11)
=================
NOTE 10 - 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 ($650,000) is subject to loss
should the bank cease business.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 859,387
<SECURITIES> 0
<RECEIVABLES> 212,370
<ALLOWANCES> 0
<INVENTORY> 659,503
<CURRENT-ASSETS> 1,881,735
<PP&E> 65,552
<DEPRECIATION> 22,661
<TOTAL-ASSETS> 2,186,471
<CURRENT-LIABILITIES> 657,330
<BONDS> 0
0
1,500
<COMMON> 419
<OTHER-SE> 1,768,661
<TOTAL-LIABILITY-AND-EQUITY> 2,186,471
<SALES> 2,515,802
<TOTAL-REVENUES> 2,515,802
<CGS> 2,217,812
<TOTAL-COSTS> 931,342
<OTHER-EXPENSES> 47,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,022
<INCOME-PRETAX> (450,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> (450,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 64,806
<CHANGES> 0
<NET-INCOME> (386,030)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
