UNITED STATES
SECURITIES AND 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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-23697
(Commission file number)
NEW FRONTIER MEDIA, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1084061
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5435 Airport Road, Suite 100, Boulder, CO 80301
(Address of principal executive offices)
(303) 444-0900
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 13, 1998: (6,542,000)
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
NEW FRONTIER MEDIA, INC.
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 1998 2-3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Operations for the
six months ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
Part III. EXHIBITS 17
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1998
(unaudited)
ASSETS
Current assets
Cash $ 402,868
Trading securities, at market 98,208
Accounts receivable 921,400
Inventories 84,604
Prepaid distribution rights 1,076,362
Prepaid expenses 142,873
Note receivable - related parties 100,000
Other 515,703
------------
Total current assets 3,342,018
Furniture and equipment, net 1,009,737
Debt issuance costs 86,790
Goodwill, net 5,969,050
Other 82,900
------------
Total assets $ 10,490,495
============
See the accompanying notes
2
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (continued)
September 30, 1998
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 500,000
Accounts payable 1,590,822
Accounts payable - related parties 108,465
Deferred revenue 1,417,229
Other accrued liabilities 115,403
------------
Total current liabilities 3,731,919
8% convertible debentures 1,750,000
------------
Total liabilities 5,481,919
------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.10 par value
5,000,000 shares authorized
0 shares issued and outstanding -
Common stock, $.0001 par value
50,000,000 shares authorized
6,542,000 shares issued and outstanding 654
Additional paid-in capital 11,144,171
Accumulated deficit (6,136,249)
------------
Total stockholders' equity 5,008,576
------------
Total liabilities and stockholders' equity $ 10,490,495
============
See the accompanying notes
3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1998 and 1997
(unaudited)
1998 1997
----------- -----------
Revenues, net $ 2,318,871 $ 248,445
Cost of sales 2,869,428 175,270
----------- -----------
Gross profit (loss) (550,557) 73,175
Operating expenses
Marketing and advertising 169,347 78,305
Depreciation and amortization 458,068 3,603
General and administrative 493,559 291,548
----------- -----------
Total operating expenses 1,120,974 373,456
----------- -----------
Loss from operations (1,671,531) (300,281)
----------- -----------
Other income (expenses)
Interest income 3,552 9,197
Interest expense (71,463) (14,525)
Other (10,972) 57,303
----------- -----------
Total other income (expenses) (78,883) 51,975
----------- -----------
Loss before minority interest (1,750,414) (248,306)
Minority interest in loss of subsidiary - 20,971
----------- -----------
Net loss $(1,750,414) $ (227,335)
=========== ===========
Basic loss per share $ (0.27) $ (0.05)
=========== ===========
Diluted loss per share $ (0.27) $ (0.05)
=========== ===========
Weighted-average shares outstanding 6,542,000 4,193,463
=========== ===========
See the accompanying notes
4
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONDOLIATED STATEMENTS OF OPERATIONS
For the Six Months Ended September 30, 1998 and 1997
(unaudited)
1998 1997
----------- -----------
Revenues, net $ 4,298,540 $ 727,775
Cost of sales 5,338,354 627,053
----------- -----------
Gross profit (loss) (1,039,814) 100,722
Operating expenses
Marketing and advertising 456,100 145,981
Depreciation and amortization 681,838 8,221
General and administrative 1,203,945 496,366
----------- -----------
Total operating expenses 2,341,883 650,568
----------- -----------
Loss from operations (3,381,697) (549,846)
----------- -----------
Other income (expenses)
Interest income 8,818 21,265
Interest expense (99,641) (25,403)
Other (16,509) 79,885
----------- -----------
Total other income (expenses) (107,332) 75,747
----------- -----------
Loss before minority interest (3,489,029) (474,099)
Minority interest in loss of subsidiary - 42,779
----------- -----------
Net loss $(3,489,029) $ (431,320)
=========== ===========
Basic loss per share $ (0.53) $ (0.10)
=========== ===========
Diluted loss per share $ (0.53) $ (0.10)
=========== ===========
Weighted-average shares outstanding 6,542,000 4,195,321
=========== ===========
See the accompanying notes
5
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,489,029) $ (431,320)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 681,838 8,221
Issuance of common stock for services - 15,000
Minority interest - (42,779)
Loss on sale of trading securities 30,822 -
(Increase) decrease in operating assets (448,744) (165,921)
Increase (decrease) in operating liabilities 1,494,332 204,688
----------- -----------
Net cash used in operating activities (1,730,781) (412,111)
----------- -----------
Cash flows from investing activities
Purchases of furniture and equipment (33,990) (21,188)
Increase in deferred acquisition costs - (50,782)
Proceeds from sale of trading securities 152,877 -
Purchase of trading securities (88,557) -
Redemption of certificates of deposit 250,000 512,559
Other (71,786) -
----------- -----------
Net cash provided by investing activities 208,544 440,589
----------- -----------
Cash flows from financing activities
Retirement of common stock - (37,177)
Issuance of common stock - 7,534
Increase in deferred stock offering costs - (277,151)
Increase in notes payable 38,000 550,000
Net proceeds from line of credit - (171,275)
Issuance of convertible debentures, net of costs 1,646,739 -
Payments on capital lease obligations (12,757) (2,625)
----------- -----------
Net cash provided by financing activities 1,671,982 69,306
----------- -----------
Net increase in cash 149,745 97,784
Cash, beginning of period 253,123 109,387
----------- -----------
Cash, end of period $ 402,868 $ 207,171
=========== ===========
</TABLE>
See the accompanying notes
6
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Financial Statements have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The results
of the six months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year ending March 31, 1999.
NOTE 2 - LOSS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. Net loss per share amounts for all periods have
been restated to conform to SFAS No. 128 requirements.
NOTE 3 - STOCKHOLDERS' EQUITY
Prior to February 11, 1998, a limited public market for the Company's Common
Stock existed on the NASDAQ Bulletin Board under the symbol NOOF. Commencing on
February 11, 1998, the Company's Common Stock and Units (each consisting of one
share of Common Stock and one redeemable common stock purchase warrant) were
quoted on the Nasdaq SmallCap Market under the symbols NOOF and NOOFU,
respectively. As of the close of business on May 18, 1998, the Company split the
Units into their component parts. Commencing on May 19, 1998, the Company's
warrants were quoted on the Nasdaq SmallCap Market under the symbol NOOFW.
NOTE 4 - CONVERTIBLE DEBENTURES
In June 1998, pursuant to a private placement, the Company (a) sold to two
investors $1,750,000 principal amount of 8% Convertible Debentures and (b)
received a commitment from the investors, subject to various conditions, to
purchase additional Debentures in the aggregate principal amount of $10,000,000.
Due to market conditions the Company has been unable to draw down any additional
amounts under such debenture. Interest on the debentures is payable quarterly
with any unpaid interest and principal due on June 3, 2000. The investors may
convert the Debentures into Common Stock. In connection with such private
placement, the Company issued warrants to purchase up to 175,000 shares of its
Common Stock.
7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - CONTINGENCIES
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 Chairman,
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 rescission of the Sands Agreement. Sands Brothers
has filed an answer and counter-claim to the Company's complaint, and the
Company has filed an answer to Sands Brothers counter-claim. The Company intends
to vigorously pursue its claim against Sands Brothers and believes that Sands
Brothers' counter-claim against the Company is wholly without merit.
NOTE 6 - SUBSEQUENT EVENT
In October 1998, the Company received $1,156,000 of temporary financing from a
third party of which $675,000 is evidenced by a secured demand promissory note.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-QSB.
Overview
The Company was incorporated in the State of Colorado on February 23, 1988. The
Company was engaged in reference CD-ROM publishing, through its 70% owned
subsidiary, Boulder Interactive Group, Inc. ("BIG") and in distribution of
unrated and adult feature films in the digital versatile disc ("DVD") format
through its wholly-owned subsidiary, DaViD Entertainment, Inc. ("DaViD").
On February 18, 1998, the Company consummated an underwritten public offering of
1,500,000 units, each consisting of one share of common stock and one redeemable
common stock purchase warrant, raising $7,087,500 in net proceeds after
underwriting fees (excluding related offering expenses). Simultaneous with the
closing of the Company's public offering, pursuant to an Asset Purchase
Agreement with Fifth Dimension Communications (Barbados), Inc. and related
companies ("Fifth Dimension"), the Company acquired the adult satellite
television business of Fifth Dimension.
By reason of its 1998 acquisition of Fifth Dimension, the Company, through it
wholly owned subsidiary, Colorado Satellite Broadcasting, Inc. owns and is
engaged in the operation and distribution of adult programming.
As of March 31, 1998, the Company made the decision to sell its remaining 70%
interest in BIG to focus it attention on its adult satellite television
business. BIG was eventually sold in June 1998. As a result of the Company's
change in focus, for the six months ended September 30, 1998, the operations of
DaViD have been insignificant since substantially all the Company's resources
have been directed toward its adult satellite television business and the launch
of The Erotic Network ("TeN") in August 1998.
9
<PAGE>
Results of Operations
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
<TABLE>
<CAPTION>
Three Months Ended Percentage of Revenue
---------------------------------- ---------------------
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ------- -------
<S> <C> <C> <C> <C>
Revenue, net $ 2,318,871 $ 248,445 100.0% 100.0%
Cost of sales 2,869,428 175,270 123.7% 70.5%
----------- ----------- ------- -------
Gross Profit (550,557) 73,175 -23.7% 29.5%
----------- ----------- ------- -------
Operating expenses
Marketing and advertising 169,347 78,305 7.3% 31.5%
Depreciation and amortization 458,068 3,603 19.8% 1.5%
General and administrative 493,559 291,548 21.3% 117.3%
----------- ----------- ------- -------
Total operating costs 1,120,974 373,456 48.3% 150.3%
----------- ----------- ------- -------
Interest income 3,552 9,197 0.2% 3.7%
Interest expense (71,463) (14,525) -3.1% -5.8%
Other (10,972) 57,303 -0.5% 23.1%
----------- ----------- ------- -------
Loss before minority interest (1,750,414) (248,306) -75.5% -99.9%
Minority interest - 20,971 0.0% 8.4%
----------- ----------- ------- -------
Net loss $(1,750,414) $ (227,335) -75.5% -91.5%
=========== =========== ======= =======
</TABLE>
Revenue for the three months ended September 30, 1998 increased $2,070,426 or
833% from $248,445 for the three months ended September 30, 1997 to $2,318,871
for the same period in 1998. The increase in revenue is principally due to
revenue of $2,212,807 generated from the Company's adult satellite business that
was acquired in February 1998. As of September 30, 1998, the Company has 121,024
active subscriptions and the Company's programming networks were available to
approximately 4.5 million cable, DBS and DTH C-band addressable households.
Revenue for the three months ended September 30, 1997 was principally from the
sale of DVDs through the Company's DaViD subsidiary. Revenue from the sale of
DVDs for the three months ended September 30, 1997 was $203,420 compared to
$85,539 for the same period in 1998.
Cost of sales for the three months ended September 30, 1998 increased $2,694,158
or 1,537% from $175,270 for the three months ended September 30, 1997 to
$2,869,428 for the same period in 1998. Cost of sales for the three months ended
September 30, 1998 included the cost of providing the Company's programming such
as uplink and satellite costs. The gross profit (loss) percentage for the three
months ended September was (23.7%). A significant portion of the cost of sales
is fixed in mature; accordingly, as the Company's revenue base continues to
increase, the gross profit percentage will also increase. The gross profit
percentage for the three months ended September 30, 1997 was 29%.
Marketing and advertising for the three months ended September 30, 1998
increased $91,042 or 116% from $78,305 for the three months ended September 30,
1997 to $169,347 for the same period in 1998. The increase in marketing and
advertising is due to the promotion of the Company's adult satellite business.
Depreciation and amortization for the three months ended September 30, 1998
increased $454,465 or 12,614% from $3,603 for the three months ended September
30, 1997 to $458,068 for the same period in 1998. The significant increase in
10
<PAGE>
depreciation and amortization is due to the amortization of the goodwill
generated from the acquisition of Fifth Dimension, the depreciation of the
assets acquired from the acquisition of Fifth Dimension and the amortization of
the film distribution rights.
General and administrative for the three months ended September 30, 1998
increased $202,011 or 69% from $291,548 for the three months ended September 30,
1997 to $493,559 for the same period in 1998. The increase in general and
administrative is principally due to an increase in salary and benefits of
$241,450. The Company has increased the number of employees as a result of the
acquisition of Fifth Dimension.
Interest income for the three months ended September 30, 1998 decreased $5,645
or 61% from $9,197 for the three months ended September 30, 1997 to $3,552 for
the same period in 1998. The decrease is due to less available cash to invest.
Interest expense for the three months ended September 30, 1998 increased $56,938
or 392% from $14,525 for the three months ended September 30, 1997 to $71,463
for the same period in 1998. The increase is principally due to the interest
accrued in the 8% convertible debentures.
Other income (expense) for the three months ended September 30, 1998 decreased
$68,275 or 119% from other income of $57,303 for the three months ended
September 30, 1997 to other expense of $10,972 for the same period in 1998. The
decrease is due to $67,746 of royalties received for the three months ended
September 30, 1997. No such royalties were received for the three months ended
September 30, 1998.
Minority interest for the three months ended September 30, 1998 decreased
$20,971 or 100% from $20,971 for the three months ended September 30, 1997 to $0
for the same period in 1998. In 1998 there is no minority interest due to the
Company selling its 70% interest in BIG in June 1998.
Net loss for the three months ended September 30, 1998 increased $1,523,079 or
670% from $227,335 for the three months ended September 30, 1997 to $1,750,414
for the same period in 1998. The increase in net loss is principally due to the
high fixed cost of operating the Company's adult satellite business and the
depreciation and amortization of assets acquired from Fifth Dimension.
11
<PAGE>
Six Months Ended September 30, 1998 Compared to the Six Months Ended
September 30, 1997
<TABLE>
<CAPTION>
Three Months Ended Percentage of Revenue
---------------------------------- ---------------------
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ------- -------
<S> <C> <C> <C> <C>
Revenue, net $ 4,298,540 $ 727,775 100.0% 100.0%
Cost of sales 5,338,354 627,053 124.2% 86.2%
----------- ----------- ------- -------
Gross Profit (1,039,814) 100,722 -24.2% 13.8%
----------- ----------- ------- -------
Operating expenses
Marketing and advertising 456,100 145,981 10.6% 20.1%
Depreciation and amortization 681,838 8,221 15.9% 1.1%
General and administrative 1,203,945 496,336 28.0% 68.2%
----------- ----------- ------- -------
Total operating costs 2,341,883 650,538 54.5% 89.4%
----------- ----------- ------- -------
Interest income 8,818 21,265 0.2% 2.9%
Interest expense (99,641) (25,403) -2.3% -3.5%
Other (16,509) 79,885 -0.4% 11.0%
----------- ----------- ------- -------
Loss before minority interest (3,489,029) (474,099) -81.2% -65.1%
Minority interest - 42,779 0.0% 5.9%
----------- ----------- ------- -------
Net loss $(3,489,029) $ (431,290) -81.2% -59.3%
=========== =========== ======= =======
</TABLE>
Revenue for the six months ended September 30, 1998 increased $3,570,765 or 491%
from $727,775 for the six months ended September 30, 1997 to $4,298,540 for the
same period in 1998. The increase in revenue is principally due to revenue of
$4,076,750 generated from the Company's adult satellite business that was
acquired in February 1998. Revenue for the six months ended September 30, 1997
was principally from the sale of DVDs through the Company's DaViD subsidiary.
Revenue from the sale of DVDs for the six months ended September 30, 1997 was
$581,469 compared to $201,265 for the same period in 1998.
Cost of sales for the six months ended September 30, 1998 increased $4,711,301
or 751% from $627,053 for the six months ended September 30, 1997 to $5,338,354
for the same period in 1998. Cost of sales for the six months ended September
30, 1998 included the cost of providing the Company's programming such as uplink
and satellite costs. The gross profit (loss) percentage for the six months ended
September was (24.2%). A significant portion of the cost of sales is fixed in
mature; accordingly, as the Company's revenue base continues to increase, the
gross profit percentage will also increase. The gross profit percentage for the
six months ended September 30, 1997 was 14%.
Marketing and advertising for the six months ended September 30, 1998 increased
$310,119 or 212% from $145,981 for the six months ended September 30, 1997 to
$456,100 for the same period in 1998. The increase in marketing and advertising
is due to the promotion of the Company's adult satellite business.
Depreciation and amortization for the six months ended September 30, 1998
increased $673,617 or 8,194% from $8,221 for the six months ended September 30,
1997 to $681,838 for the same period in 1998. The significant increase in
depreciation and amortization is due to the amortization of the goodwill
12
<PAGE>
generated from the acquisition of Fifth Dimension, the depreciation of the
assets acquired from the acquisition of Fifth Dimension and the amortization of
the film distribution rights.
General and administrative for the six months ended September 30, 1998 increased
$707,609 or 143% from $496,336 for the six months ended September 30, 1997 to
$1,203,945 for the same period in 1998. The increase in general and
administrative is principally due to an increase in salary and benefits of
$513,528, shareholder relations of $56,583 and legal and professional fees of
$43,509. The Company has increased the number of employees as a result of the
acquisition of Fifth Dimension and incurred additional professional and
shareholder relation expenses as a result of the Company being publicly traded.
Interest income for the six months ended September 30, 1998 decreased $12,447 or
59% from $21,265 for the six months ended September 30, 1997 to $8,818 for the
same period in 1998. The decrease is due to less available cash to invest.
Interest expense for the six months ended September 30, 1998 increased $74,238
or 292% from $25,403 for the six months ended September 30, 1997 to $99,641 for
the same period in 1998. The increase is principally due to the interest accrued
in the 8% convertible debentures.
Other income (expense) for the six months ended September 30, 1998 decreased
$96,394 or 121% from other income of $79,885 for the six months ended September
30, 1997 to other expense of $16,509 for the same period in 1998. The decrease
is due to $95,283 of royalties received for the six months ended September 30,
1997. No such royalties were received for the six months ended September 30,
1998.
Minority interest for the six months ended September 30, 1998 decreased $42,779
or 100% from $42,779 for the six months ended September 30, 1997 to $0 for the
same period in 1998. In 1998 there is no minority interest due to the Company
discontinuing the operations of BIG in fiscal 1999.
Net loss for the six months ended September 30, 1998 increased $3,057,739 or
709% from $431,290 for the six months ended September 30, 1997 to $3,489,029 for
the same period in 1998. The increase in net loss is principally due to the high
fixed cost of operating the Company's adult satellite business and the
depreciation and amortization of assets acquired from Fifth Dimension.
Liquidity and Capital Resources
During the six months ended September 30, 1998 the Company used, rather than
provided, cash from operations in the amount of $1,730,781. The Company has
funded this operating deficit from proceeds from a public offering and the
issuance of debt.
On February 18, 1998,the Company completed its initial public offering by
selling 1,500,00 units (each unit consisting of one share of common stock and
one redeemable common stock purchase warrant. The Company received net proceeds
of $6,184,626 after deducting underwriter's commissions of $682,500,
non-accountable expense allowance of $236,250 and other offering expenses of
$666,624. $3,500,000 of the net proceeds was used to acquire Fifth Dimension.
13
<PAGE>
In June 1998, pursuant to a private placement, the Company (a) sold to two
investors $1,750,000 principal amount of 8% Convertible Debentures and (b)
received a commitment from the investors, subject to various conditions, to
purchase additional Debentures in the aggregate principal amount of $10,000,000.
The investors may convert the Debentures into Common Stock. In connection with
such private placement, the Company issued warrants to purchase up to 175,000
shares of its Common Stock. The Company has been unable to purchase additional
debentures from these two investors because the Company has not met certain
condition called for in the agreement.
The Company does not anticipate any significant capital expenditures during the
next twelve months. However, satellite costs will continue to be a major
expenditure for the Company. The cost of providing its adult programming
networks to the Company's customers is principally satellite costs and related
expenses, which are generally fixed in nature. The Company believes that in the
quarter ended December 31, 1998, the Company will breakeven from operations.
Due to adverse market conditions beyond the Company's control in the Nasdaq
Small Cap Market in general and the market of the Company's common stock in
particular, the Company has not been able to draw additional funds under its
recently registered $10,000,000 Convertible Debenture equity line of credit. The
Company is actively seeking additional funds to satisfy its immediate and
near-term capital requirements, and, in this regard, has obtained $1,131,000 in
temporary financing.
The Company is also seriously considering, and is in discussions with third
parties regarding, entering into a strategic partnership and/or joint venture
involving its adult programming networks in order to raise additional working
capital, cut expenses and increase its promotion of its networks. Failure to
obtain additional working capital in a timely manner or on acceptable terms
could have a material adverse effect on the Company, its operations, financial
results and prospects.
Impact of inflation
To date inflation has not had a material impact on the Company's operations.
Year 2000
The Company has not made a formal assessment of Year 2000 issues. Generally,
"Year 2000 issues" refers to problems that may arise due to the inability of
some computer software to distinguish between the early part of the present
century and the early part of the next because the software only uses two digits
to identify the year. Thus, 2001 would be indistinguishable from 1901. The
Company believes that there are three possible ways that it could be impacted by
this problem.
First, the Company's internal software could fail. If the Company's software
should fail it might disrupt accounting and similar tasks. The Company believes
that even if its software should fail, remediation would not create a material
expense. The second concern posed by Year 2000 issues is the impact that such
software failure would have on the Company's suppliers. The Company does not
believe that its suppliers could not continue to conduct business even in the
14
<PAGE>
face of Year 2000 problems. The Company relies on its suppliers to provide
satellites to broadcast its programs and also relies on the telephone system for
customers to order its products. To the extent the Company may experience a
material interruption in satellite or telephone service, it could be materially
and adversely affected. The Company, however, believes that its suppliers are
sufficiently sophisticated computer users that they will not experience
problems, either by remediation or because they are already using software which
can make the distinction between centuries ("Year 2000 compliant"). The third
possible threat posed to the Company by Year 2000 issues is one of a general
downturn in the economy due to software failures. The Company believes that this
is a remote possibility.
Although the Company believes that it will not suffer any material adverse
effects as a result of Year 2000 issues, it has not made a formal assessment of
the problem and it cannot be certain its judgment regarding Year 2000 is
correct. In the event that the Company or its suppliers experience a software
failure such a failure could have a material adverse impact on the Company's
business financial condition and results of operations. Similarly, if the
economy as a whole should be adversely impacted by Year 2000 problems, it could
have a material adverse effect on the Company's business financial condition and
results of operations.
Forward looking statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, competition and pricing. Although the Company believes the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements contained in the report will
prove to be accurate.
15
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
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 Chairman,
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 rescission of the Sands Agreement. Sands Brothers has
filed an answer and counter-claim to the Company's complaint, and the Company
has filed an answer to Sands Brothers counter-claim. The Company intends to
vigorously pursue its claim against Sands Brothers and believes that Sands
Brothers' counter-claim against the Company is wholly without merit.
Item 2. Change in Securities
The Company completed its initial public offering by selling 1,500,00 units
(each unit consisting of one share of common stock and one redeemable common
stock purchase warrant pursuant to a registration statement (commission file no.
333-35337) dated February 18, 1998. The managing underwriter for this offering
was Centex Securities, Incorporated. The Company received net proceeds of
$6,184,626 after deducting underwriter's commissions of $682,500,
non-accountable expense allowance of $236,250 and other offering expenses of
$666,624.
The following table sets forth the Company's use of proceeds from its initial
public offering, from the closing of the offering until September 30, 1998.
Acquisition of Fifth Dimension $3,500,000
Purchase of equipment and materials related to the business 1,441,854
Working capital 1,242,772
----------
Total net proceeds $6,184,626
==========
16
<PAGE>
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
NEW FRONTIER MEDIA, INC.
/s/ Mark H. Kreloff
--------------------------------------
Chairman and Chief Executive
Officer (Principal Accounting Officer)
17
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
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