<PAGE>
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the Quarterly Period Ended: June 30, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to .
Commission File Number: 33-27494-FM
New Frontier Media, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1064061
------------------------ -----------------------------
(State of Incorporation) (I.R.S. Employer I.D. Number)
1050 Walnut, Suite 301, Boulder, Colorado 80302
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(Address of principal executive offices and Zip Code
(303) 444-0632
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
[ ] YES [X] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes
of common stock;
6,542,000 common shares, were outstanding as of June 30, 1998.
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, March 31,
1998 1998
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 744,702 $ 253,123
Investment in certificate of deposit 0 250,000
Trading securities, at market value 109,180 193,350
Accounts receivable 925,028 813,456
Inventories 226,698 182,508
Prepaid distribution rights 883,684 721,062
Prepaid expenses 183,187 495,000
Note receivable - related parties 100,000 138,000
Other 323,324 243,148
---------------- ----------------
Total Current Assets 3,495,803 3,289,647
---------------- ----------------
FURNITURE & EQUIPMENT, at cost 1,074,547 1,113,428
Less: Accumulated depreciation (85,282) (62,209)
---------------- ----------------
Net Furniture & Equipment 989,265 1,051,219
---------------- ----------------
OTHER ASSETS
Other 5,818 11,114
Deferred debt offering costs, net 89,375 0
Accounts receivable - retainage 0 108,304
Goodwill, net 6,128,071 6,287,665
---------------- ----------------
Total Other Assets 6,223,264 6,407,083
---------------- ----------------
TOTAL ASSETS $ 10,708,332 $ 10,747,949
================ ================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
- 3 -
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
---------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 569,744 $ 585,001
Accounts payable - related parties 122,791 106,465
Current portion of capital leases 0 6,041
Accrued disposal costs 0 459,050
Deferred revenue 918,272 446,944
Notes payable 500,000 500,000
Other accrued liabilities 88,534 172,410
---------------- ----------------
Total Current Liabilities 2,199,341 2,275,911
---------------- ----------------
LONG TERM DEBT Capital leases payable 0 6,716
---------------- ----------------
Total Liabilities 2,199,341 2,282,627
---------------- ----------------
MINORITY INTEREST 0 17,570
---------------- ----------------
Common stock, $.0001 par value 654 654
8% Convertible Debentures 1,750,000 0
Additional paid in capital 11,144,171 12,265,249
Deficit (4,385,834) (3,818,151)
---------------- ----------------
Total Shareholders' Equity 8,508,991 8,447,752
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,708,332 $ 10,747,949
================ ================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
- 4 -
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
REVENUES, net $ 1,979,669 $ 479,330
OPERATING EXPENSES
Programming and broadcasting 1,629,463 0
Call center expense 252,847 0
Subscriber acquisition marketing and advertising 513,823 0
Cost of goods sold 72,793 451,783
Occupancy and equipment 61,260 32,427
Depreciation & amortization 223,770 3,603
Legal and professional 59,026 30,264
Advertising and promotion 286,753 67,676
Salaries, wages and benefits 340,890 68,812
Communications 30,986 7,785
Research and Development 0 7,048
Consulting 78,307 18,256
General and administrative 139,917 41,241
---------------- ----------------
Total Operating Expenses 3,689,835 728,895
---------------- ----------------
NET LOSS FROM OPERATIONS (1,710,166) (249,565)
OTHER INCOME (EXPENSE)
Licensing fees, net of commissions 0 22,582
Gain on disposal of operations 14,313 0
Loss on trading securities (19,850)
Interest income 5,266 12,068
Interest expense (28,178) (10,878)
---------------- ----------------
Total Other Income (28,449) 23,772
---------------- ----------------
Net Loss before income taxes and Minority Interest (1,738,615) (225,793)
---------------- ----------------
INCOME TAXES 0 0
---------------- ----------------
Net Loss before Minority Interest (1,738,615) (225,793)
Minority Interest in Loss of Subsidiary 0 21,808
---------------- ----------------
NET LOSS $ (1,738,615) $ (203,985)
================ ================
NET LOSS PER COMMON SHARE ($0.27) ($0.05)
================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 6,542,000 4,192,511
================ ================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
- 5 -
<PAGE>
NEW FRONTIER MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (1,738,615) $ (203,985)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 339,755 3,603
Gain on disposal of subsidiary (14,313) 0
Loss on trading on securities 19,850 0
Issuance of common stock for services 0 15,000
Increase (decrease) in accounts payable 2,523 (11,773)
(Increase) decrease in accounts receivable (33,362) 121,465
(Increase) decrease in inventories (44,190) (93,708)
(Increase) decrease in prepaid distribution rights (278,607) 13,250
(Increase) decrease in prepaid expenses 311,813 0
(Increase) decrease in other assets (114,790) 11,148
Decrease in minority interest 0 (21,808)
Increase in deferred revenue 471,328 0
Increase (decrease) in other accrued liabilities (59,544) 2,743
---------------- ----------------
Net cash used in operating activities (1,138,152) (164,065)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (43,010) (16,379)
Proceeds from sale of trading securities 152,877 0
Purchase of trading securities (88,557) 0
Disposal of subsidiary, net of cash paid (40,313) 0
Redemption of certificates of deposit 0 199,105
---------------- ----------------
Net cash used in investing activities (19,003) 182,726
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations 0 (1,361)
Proceeds from line of credit 0 7,341
Issuance of common stock, net of offering costs 0 7,533
Decrease in related party notes receivable (8,006) 0
Retirement of common stock 0 (37,175)
Issuance of convertible debentures, net of offering costs 1,656,740 0
---------------- ----------------
Net cash provided by financing activities 1,648,734 (23,662)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH 491,579 (5,001)
CASH, BEGINNING OF PERIOD 253,123 109,387
---------------- ----------------
CASH, END OF PERIOD $ 744,702 $ 104,386
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ITEMS
Interest Paid 213 0
Income Taxes Paid 0 0
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Common stock issued for services 0 15,000
</TABLE>
See notes to unaudited condensed consolidated financial statements.
- 6 -
<PAGE>
NEW FRONTIER MEDIA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business, and Consolidation
The accompanying unaudited condensed consolidated financial statements
include the accounts of NFMI and its wholly owned subsidiaries David
Entertainment, Inc. ("DAVID") and Fuzzy Entertainment, Inc. ("FUZZY") and
Colorado Satellite Broadcasting, Inc. ("CSB").
Its 70% interest in Boulder Interactive Group, Inc. ("BIG") was sold on
June 26, 1998. All adjustments consisting of normal accruals and elimination
of intercompany accounts and transactions, which in the opinion of management,
are necessary for a fair presentation, have been reflected in the accompanying
financial statements.
Net Loss Per Share of Common Stock
Net loss per share of common stock is based on the weighted average number
of shares of common stock outstanding. Common stock equivalents are not
included in the weighted average calculation since their effect would be
anti-dilutive.
PART 1 ITEM 2 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1) Overview
All of the Company's current revenues are derived through its wholly owned
subsidiaries David Entertainment, Inc., Fuzzy Entertainment, Inc., and
Colorado Satellite Broadcasting, Inc. The Company's offices are located at
1050 Walnut Street, Suite 301, Boulder, CO 80302. The telephone number is
(303) 444-0632.
2) Results of Operations
First Quarter 1998 Compared to First Quarter 1997
New Frontier Media, Inc. ("NOOF" or the "Company")
The Company functions as a holding company for its subsidiaries, and such
generates no independent income. The Company incurs administrative expenses
such as accounting, auditing, public relations, investor relations and legal.
For the three month period ended June 30, 1998, the Company reported no
income and an operating loss of $168,896, compared with an operating loss of
$129,222 for the same period the prior year. The increase of $39,674 for the
period was due primarily to increased interest expense ($25,096 in 1998 versus
$7,318 in 1997) from the issuance of 8% Convertible Debentures and note payable
issuance, and increased legal expense ($40,126 in 1998 versus $27,401 in 1997).
Boulder Interactive Group, Inc. dba Inroads Interactive ("Inroads")
In June 1998 the Company sold its remaining interest in Inroads to Quarto
Holdings, Inc. The Company had discontinued operations for reporting purposes
as of March 31, 1998. The disposal of the business resulted in a $14,313 gain
during the current quarter. Sales, cost of sales, and operating expenses have
been eliminated in the results of operations for the current quarter.
DaVid Entertainment, Inc. ("DaViD")
<PAGE>
DaViD had sales of $115,726 for the period, down from $378,049 in the prior
year period. Sales were limited by the advent of the DVD format and resulting
consumer slow down in laser disc purchases. Operating expenses were $87,992
versus $123,835 last year due primarily to elimination of the distribution
agreement with ELM Releasing, LP. and lower corresponding expenses associated
with direct management of the distribution function. Net loss was $44,717
compared to a loss of $14,050 for the prior year period. Management expects
that profitability will return in the following quarters as the DVD format
gains acceptance.
Fuzzy Entertainment, Inc. dba In-Sight Editions ("In-Sight")
In March 1998 the company elected to discontinue In-Sight. There was no
operating loss in the current quarter versus the prior year quarter of $1,967 in
sales and an operating loss of $9,828.
Colorado Satellite Braodcasting, Inc. ("CSB")
CSB reported sales of $1,863,943 up from $0 in the prior year, due solely
to the acquisition of the broadcasting business from Fifth Dimension effective
February 18, 1998. Giving full credit for unearned sales, consisting of
subscriptions with a term of more than one month, sales were $2,335,271 for the
quarter.
Subscriber counts at quarter end were 126,263, which is up 11,858
subscribers during the quarter, an increase of 10.3%.
Operating Costs
Operating costs were $3,689,835 for the quarter. CSB experienced
significant non-recurring expenses during the transition and integration of
operations after its purchase of the business from Fifth Dimension
in February 1998. Additionally, various costs relating to the TeN channel
launch in August 1998 were expensed during the quarter.
Programming and broadcasting was $1,629,463 for the quarter and includes
expenses for playback, uplink, transponders, and amortization of movie rights.
Call center expense was $252,847 for the quarter.
Subscriber acquisition marketing and advertising was $513,823 for the
quarter and is comprised of costs that are related to acquiring the
subscription base such as directory ads, barker channel time, and direct
marketing. These subscriber acquision costs are expensed as incurred, although
there may be future benefit for such advertising and promotion.
Depreciation and amortization was $217,876 for the quarter and was
comprised of $159,594 in goodwill amortization and $58,282 in equipment
depreciation.
Advertising and promotion was $253,752 for the quarter and represents
expenditures for marketing materials, customer presentations, and trade shows.
Included in this amount was $144,950 relating to the upcoming launch of the new
channel "TeN -- The Erotic Network."
Salaries, wages, and benefits were $282,224 for the quarter. Employment
headcount increased from nine to twenty-three during the quarter as operations
of the broadcast business were integrated and as work began to prepare for the
launch of "TeN."
Net loss was $1,504,653 for the quarter due to lower than expected revenues
resulting from a temporary loss of subscriber renewals due to relocating the
call center, transitional advertising and marketing issues and increased costs
as described above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
First Three Months of 1998 Compared to First Three Months of 1997
The Company reported an increase in negative cash flow from operating
activities from ($1,138,152) for the current period from ($164,065) during the
same period last year. Cash flow from investing activities declined to
($19,003) from $182,726 due primarily to increased equipment purchases and the
disposal of the BIG subsidiary.
Net cash flow from financing activities increased to $1,648,734 from
$(23,662) due to the issuance of Convertible Debentures in the current
quarter. Management expects that cash flow from operating activities will
turn positive in the near future and that cash flow from operating activities
combined with the up to $1,750,000 of Convertible Debentures that may, under
certain conditions, be drawn upon will provide sufficient liquidity and capital
for the next twelve months.
<PAGE>
INPACT 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, the call center 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 and
cable and small dish system operators. The Company does not believe that its
suppliers and cable and small dish system operators could not continue to
conduct business even in the face of Year 2000 problems. In addition, the
Company believes that its suppliers and cable and small dish system operators
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"). In the event
that its suppliers and cable and small dish system operators should experience
software failure, the Company believes that the impact would not be material.
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 and cable and small
dish system operators 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 218 of the
Securities Exchange Act of 1934, amended. Stockholders are cautioned that all
forward-looking statements involve significant risks and uncertainty. 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.
<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 president, alleging that the Sands
Agreement was still in force, alleging breach of the Sands Agreement by the
Company and demanding that the Company comply with its terms.
On October 3, 1997, the Company filed a Complaint in District Court in
Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers, alleging breach
of the terms of the Sands Agreement by Sands Brothers. The Company also alleged
fraud in the inducement, and is seeking return of its initial payment of $25,000
to Sands Brothers and 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 Changes in Securities
On June 3, 1998 the Company issued $1,750,000 of 8% Convertible
Debentures Due June 3, 2000 in a private placement conducted under Rule 506 of
Regulation D with two institutional investors. In connection therewith the
Company issued warrants to purchase up to 175,000 shares of its Common Stock to
such investors having an exercise price of $3.47875 per share. The Company also
paid a placement fee of $87,500 to Brookstreet Securities, an NASD member firm.
The Convertible Debentures are convertible into Common Stock of the Company at
the lesser of: (a) $3.96875 or (b) 90% of the average closing bid price of the
Common Stock for the five days preceding the conversion date.
Item 3 Defaults upon Senior Securities
None.
Item 4 Submission of Matters to Vote of Security Holders
None.
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of 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.
August 14, 1998 By: /S/ MARK H. KRELOFF
----------------------------------------
Mark H. Kreloff, President and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statement of New Frontier Media, Inc. included in the Company's Form
10-QSB for the period ended June 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
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<INVENTORY> 226698
<CURRENT-ASSETS> 3495803
<PP&E> 1074547
<DEPRECIATION> 85282
<TOTAL-ASSETS> 10708332
<CURRENT-LIABILITIES> 2199341
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0
0
<COMMON> 654
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<TOTAL-LIABILITY-AND-EQUITY> 10708332
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<CGS> 72793
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<INCOME-PRETAX> (1738615)
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</TABLE>
