AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1998.
REGISTRATION NO. 333-59289.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------
NEW FRONTIER MEDIA, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C> <C>
COLORADO 5190 84-1084061
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
1050 WALNUT STREET, SUITE 301
BOULDER, COLORADO 80302
(303) 444-0632
(Address, including zip code, and telephone number,
including area code, of registrant's principal place of business)
-----------
MICHAEL WEINER
1050 WALNUT STREET, SUITE 301
BOULDER, COLORADO 80302
(303) 444-0632
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------
Copies of all communications to:
HANK GRACIN, ESQ.
Lehman & Eilen
50 Charles Lindbergh Blvd.
Uniondale, New York 11553
Telephone: (516) 222-0888
Facsimile: (516) 222-0948
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS
REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
-----------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title Of Each Maximum Proposed Maximum
Class Of Amount Aggregate Aggregate Amount Of
Securities To To Be Price Per Offering Registration
Be Registered Registered Share (1) Price (1) Fee (5)
- ------------- ---------- --------- --------- -------
<S> <C> <C> <C> <C>
Common Stock,
$.0001 par value (2) 7,058,824 $2.50 $17,647,060.00 $5,205.88
Common Stock,
$.0001 par value (3) 175,000 $2.50 $ 437,500.50 $ 129.06
Common Stock,
$.0001 par value 50,000 $2.50 $ 125,000.00 $ 36.88
Total 7,283,824 $2.50 $18,209,560.50 $5,371.82
<FN>
- --------------
(1) Estimated solely for the purpose of calculating the registration fee. The
Proposed Maximum Aggregate Offering Price was calculated pursuant to Rule 457(c)
under the Securities Act of 1933, as amended, on the basis of the closing price
reported in the NASDAQ SmallCap Market system on August 25, 1998.
(2) Issuable upon the conversion of the 8% Convertible Debentures (the
"Debentures"), which is estimated based on conversion terms of the Debentures
and is subject to adjustment and could be materially more or less than such
estimated amount depending upon factors that cannot be predicted by the Company
at this time, including, among others, the future market price of the Common
Stock. This is not intended to constitute a prediction as to the number of
shares of Common Stock into which the Debentures will be converted.
(3) Issuable upon exercise of warrants evidencing the right to purchase shares
of Common Stock.
</FN>
</TABLE>
-----------
Pursuant to Rule 416, there are also registered hereby such additional
indeterminate number of shares as may become issuable as dividends or to
prevent dilution resulting from stock splits, stock dividends or similar
transactions or to provide for changes in the number of shares of Common Stock
as are issuable upon conversion of the Debentures.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8 of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8, may determine.
<PAGE>
PROSPECTUS
7,283,824 SHARES
NEW FRONTIER MEDIA, INC.
The shares of Common Stock ("Common Stock") offered hereby are offered
by the holders of 8% Convertible Debentures (the "Debentures") of New Frontier
Media, Inc. (the "Company"), the holders of warrants to purchase 175,000 shares
of the Company's Common Stock (the "Warrants") and the holder of 50,000
restricted shares of the Company's Common Stock (the "Restricted Shares").
Except for the Restricted Shares, the shares of Common Stock so offered are
issuable upon the conversion of the Debentures, the exercise of the Warrants and
the payment of interest on the Debentures in shares of Common Stock. See
"Selling Securityholders." The Common Stock is currently quoted on the under the
symbol "NOOF." On August 25, 1998, the closing price on the Nasdaq SmallCap
Market of the Common Stock was $2.50 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
THIS PROSPECTUS RELATES TO AN AGGREGATE OF 7,283,824 SHARES OF COMMON STOCK,
$.0001 PAR VALUE PER SHARE, WHICH IS BASED ON THE SHARES ISSUABLE IF
$12,150,000 PRINCIPAL AMOUNT OF DEBENTURES HAD BEEN OUTSTANDING ON AUGUST 25,
1998 AND ALL THE DEBENTURES HAD BEEN CONVERTED ON THAT DATE AT AN 10% DISCOUNT
TO THE MARKET PRICE (AS DEFINED IN THE DEBENTURES) OF THE COMMON STOCK. SEE
"SELLING SECURITYHOLDERS." THE EXACT NUMBER OF SHARES THAT WILL BE ISSUED ON THE
CONVERSION OF THE DEBENTURES WILL DEPEND ON THE MARKET PRICE OF THE COMMON STOCK
ON THE DATE OF CONVERSION) AND IS NOT NOW KNOWN. SEE "DESCRIPTION OF SECURITIES
- - 8% CONVERTIBLE DEBENTURES." ALL THE COMMON STOCK OFFERED HEREBY IS BEING SOLD
BY THE SELLING SECURITYHOLDERS AND MAY BE OFFERED TO THE PUBLIC FROM TIME TO
TIME BY THE SELLING SECURITYHOLDERS. THE COMPANY WILL NOT RECEIVE ANY OF THE
PROCEEDS RECEIVED BY THE SELLING SECURITYHOLDERS FROM THE COMMON STOCK SOLD.
THE COMPANY WILL PAY ALL REASONABLE EXPENSES OF THIS OFFERING ESTIMATED AT
$45,000. THE SELLING SECURITYHOLDERS, HOWEVER, WILL BEAR THE COST OF ALL
BROKERAGE COMMISSIONS AND DISCOUNTS INCURRED IN CONNECTION WITH THE SALE OF
THEIR COMMON STOCK. THE COMMON STOCK MAY BE SOLD BY THE SELLING SECURITYHOLDERS
DIRECTLY OR THROUGH UNDERWRITERS, DEALERS OR AGENTS IN MARKET TRANSACTIONS OR
PRIVATELY NEGOTIATED TRANSACTIONS. SEE "SELLING SECURITYHOLDERS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 28, 1998.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements found elsewhere in this Prospectus, and the
information incorporated herein by reference. As used in this Prospectus, the
term "New Frontier Media" and the "Company" refer to New Frontier Media, Inc.
and its subsidiaries, unless otherwise stated or indicated by the context.
Investors should carefully consider the information set forth in "RISK FACTORS."
This Prospectus contains certain forward-looking statements which may involve
certain risks and uncertainties. The Company's actual results may differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors set forth under "RISK FACTORS" and elsewhere in this
Prospectus.
THE COMPANY
On February 18, 1998, pursuant to Asset Purchase Agreements with Fifth
Dimension Communications (Barbados), Inc., a Barbados corporation, 1043133
Ontario Inc., an Ontario (Canada) corporation, 1248663 Ontario Inc., an Ontario
(Canada) corporation, and Merlin Sierra, Inc., a California corporation
(hereinafter referred to collectively as "Fifth Dimension"), simultaneous with
the closing of the Company's secondary public offering, the Company acquired the
adult satellite television business of Fifth Dimension, a leading provider of
subscriber-based premium television channels and transaction-based television
networks.
The Company, through its Colorado Satellite Broadcasting, Inc. ("CSB")
subsidiary, and by reason of its consummation of its Asset Purchase Agreements
with Fifth Dimension, is a leading provider of subscriber-based premium
television channels and transaction-based ("pay-per-view") television networks.
CSB currently owns, operates, and distributes the three leading C-band adult
programming networks: Extasy, True Blue, and Exotica (collectively referred to
hereinafter as the "Extasy Networks"). CSB, through the Extasy Networks, is a
leading provider of unedited adult programming via direct to home ("DTH") C-band
satellite. To a lesser extent, CSB provides its services through cable
television and wireless cable television multiple system operators ("MSOs") and
Ku-band (small dish or digital satellite) satellite providers. As of March 31,
1998, the Extasy Networks were available to an estimated 2.0 million C-band DTH
subscribers, and approximately 100,000 cable television subscribers. The Extasy
Networks have maintain distribution agreements with nearly every major
distributor of C-band satellite programming in the United States.
Extasy, True Blue, and Exotica each feature approximately 36 movie
titles per week, or 100 to 150 movies each month, with at least 15 first-time
exhibitions per month. All channels are available 24 hours per day, featuring a
mix of standard industry format 90 minute feature films and special 30-minute
and 60-minute features and interviews. Staggered movie start times occur three
times daily, allowing for maximum viewing flexibility. Currently, the Extasy
Networks deliver unedited adult programming exclusively.
On August 15, 1998, CSB plans to launch TeN: The Erotic Network, a new,
24-hour adult network targeted specifically to cable television systems and
medium to high-powered satellite service providers ("DBS"). CSB plans to
position TeN as cable television's and DBS satellites' alternative to the
traditional fully edited adult movie services offered by Playboy and Spice. In
order to further increase the attractiveness and initial market share of TeN,
CSB is offering extremely competitive revenue sharing terms to those cable and
satellite distribution affiliates who agree to carry the service.
Based on the recent developments described below, Management believes
that CSB has an unique opportunity to successfully launch a new adult network
exclusively programmed with adult films and videos that mirror the editing
standards of Spice Hot, a more liberally programmed sister network of Spice.
* Playboy's recent $100 million acquisition of Spice, Inc. (at a
valuation of 4.5 times trailing 1997 revenue of $22 million), which
effectively reduces the cable and DBS adult network industry to a
single player;
* Playboy's corporate policy to offer only fully edited adult
programming on its networks;
* the quality and number of cable operators now willing to carry
partially edited, more explicit services and the momentum toward
broader market acceptance of unedited and partially edited adult
programming by cable system operators and their subscribers;
* the recent success of Spice Hot, a partially edited, more explicit
version of Spice Channel in terms of the buy rates it has achieved (3
to 4 times greater than fully edited adult programming); and
* the Company's success in head-to-head competition with Spice in
C-Band satellite.
2
<PAGE>
THE OFFERING
Common Stock Offered ............. 7,283,824 shares (based upon the
7,058,824 shares issuable upon the
conversion of 8% Convertible
Debentures, based on 90% of the Market
Price (as defined in the
Debentures) of $1.9125 per share on
August 25, 1998, or $1.72125), 175,000
shares issuable upon exercise of the
Warrants and 50,000 shares held by a Selling
Securityholder
Common Stock Outstanding
Prior to Offering ................ 6,542,000 shares
Common Stock to be Outstanding
Immediately After Offering ....... 13,775,824 shares based on all
shares offered under this Prospectus
Use of Proceeds .................. None of the proceeds of the sale of
the Common Stock registered
hereunder will accrue to the
Company. See "Use of Proceeds."
Risk Factors ..................... The Securities offered hereby involve
a high degree of risk. Investors should
purchase the securities offered hereby only
if they can afford the loss of their entire
investment.
NASD SmallCap Market Symbol ...... "NOOF"
The Company was incorporated under the laws of the State of Colorado on
February 23, 1988, under the name "Strategic Acquisitions Inc.". The Company
changed its name to "New Frontier Media, Inc." on September 15, 1995. Its
executive offices are located at 1050 Walnut Street, Suite 301, Boulder,
Colorado 80302 and its telephone numbers is (303) 444-0632.
CURRENT FINANCING
In June 1998, pursuant to a private placement, the Company (a) sold to two
investors $1,750,000 principal amount of 8% Convertible Debentures (the
"Debentures") and (b) received a commitment from the investors, subject to
various conditions, to purchase additional Debentures in the aggregate principal
amount of $10,400,000. The investors may convert the Debentures into Common
Stock (the "Conversion Shares"). In connection with such private placement, the
Company issued warrants to purchase up to 175,000 shares of its Common Stock
(the "Warrant Shares"). The Conversion Shares, Warrant Shares, and 50,000
currently issued and outstanding Restricted Shares of Common Stock and the
shares of Common Stock, if any, which may be issued by the Company in lieu
of cash interest payments on the Debentures constitute the Selling
Securityholders' Common Stock being offered and sold by the Selling
Securityholders pursuant to this Prospectus. See "Description of Securities,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Selling Securityholders and
Plan of Distribution."
3
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors relating to the Company and this offering should be considered
carefully when evaluating an investment in the shares of Common Stock offered
hereby. This Prospectus includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements, other than statements of historical facts, included in this
Prospectus that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as business strategies, expansion and growth of the Company's operations
and other such matters are forward-looking statements. These statements are
based on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks and
uncertainties, including the risk factors discussed below, general economic and
business conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the Company. Prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward-looking statements.
LIMITED OPERATING HISTORY; LOSSES FROM INCEPTION; SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT
The Company was organized in July, 1995 and has incurred losses from
inception. The Company incurred a net loss of $3,258,343, or $.73 per share, on
revenues of $1,645,192 for the fiscal year ended March 31, 1998 and a net loss
of $386,030, or $.09 per share, on revenues of $2,515,802 for the fiscal year
ended March 31, 1997. As of June 30, 1998 the Company had an accumulated
deficit of $4,385,834. See "FINANCIAL STATEMENTS." The Company has had a limited
operating history and has generated only limited revenues and earnings from
operations. The Company has no significant financial resources and limited
assets. The ability of the Company to operate profitably is dependent upon
successful execution of the business plans of each of its subsidiaries. See
"BUSINESS." The Company is in the early operational stage and there is no
assurance the Company's intended activities will be successful or result in
significant revenue or generate profits for the Company. The Company faces all
risks which are associated with any new business, such as under-capitalization,
cash flow problems, and personnel, financial and resource limitations, as well
as special risks associated with its proposed operations. Management cannot
assure when or if the Company may generate substantial revenues. The likelihood
of the success of the Company must be considered in light of the problems,
expenses, difficulties, complications and delays frequently encountered in
connection with the formation of a new business. See "BUSINESS" and "FINANCIAL
STATEMENTS."
PURCHASE OF FIFTH DIMENSION ASSETS; NO EXPERIENCE IN SATELLITE BROADCASTING
BUSINESS
On February 18, 1998, the Company, through its subsidiary CSB, acquired
certain assets related to the adult satellite network broadcasting business of
Fifth Dimension. The Company has had no prior experience in the satellite
broadcasting business. There can be no assurance given that the Company will be
successful in managing the assets acquired from Fifth Dimension.
PROVISION OF ADULT CONTENT
The Company, through its subsidiary CSB, is engaged in the business of
providing partially edited and unedited adult programming. Certain investors,
investment banking entities, market makers, lenders and others in the investment
community may decline to participate in the Company's public market, finance or
other activities due to the nature of the Company's business, which, in turn,
may negatively impact the value of the Company's stock, and its opportunities to
attract market support. See "BUSINESS."
RELIANCE ON FIFTH DIMENSION
As part of the Fifth Dimension Assets Acquisition, the Company and Fifth
Dimension entered into an Uplink Management Services Agreement ("UMSA"). Under
the UMSA, Fifth Dimension operates, maintains and manages the Company's uplink
and playback facility which is capable of providing continual uninterrupted
services for CSB's networks of a substantially similar nature and quality as
those services currently being provided by Fifth Dimension to its current
subscribers. Should Fifth Dimension fail to provide the services contracted for
under the UMSA, or otherwise improperly manage the Uplink Facility, such actions
could result in loss of customers, signal disruptions, and quality problems
that, if not immediately addressed, could negatively impact the Company's
subscriber base and revenues. In the event that Fifth Dimension fail to perform
as required under the UMSA, CSB's operations would in all likelihood be
suspended, resulting in loss of substantial revenues to the Company. See
"BUSINESS-Fifth Dimension Assets Acquisition."
4
<PAGE>
SATELLITE SERVICE AGREEMENTS; REFUSAL OF SERVICE OR TERMINATION OF
AGREEMENTS
The Company currently provides its satellite programming to subscribers
via a sublease with Fifth Dimension under its satellite transponder agreements
with Loral SpaceCom Corporation d/b/a Loral Skynet (the "transponder
agreement"). The transponder agreement runs for a period of five years from the
date the Telstar 5 satellite was placed in service (approximately June, 1997).
The transponder agreement provides for a subsequent five-year extension.
The transponder agreement contains provisions that allow Loral Skynet to
refuse to provide its transponder service on Telstar 5 if the material being
transmitted is deemed harmful to the service provider's name or business, or if
the Company is indicted or is otherwise charged as a defendant in a criminal
proceeding, or is convicted under any obscenity law, or has been found by any
governmental authority to have violated such law. Fifth Dimension has operated
its unedited adult satellite programming under these terms for several years
without disruption or refusal of service; nonetheless, the Company, as subleasee
of the transponders under the transponder agreement, is subject to arbitrary
refusal of service by the service provider if that service provider determines
that the content being transmitted by the Company is harmful to the service
provider's name or business. Although the Company believes that the risk of any
disruption in service on that basis to be remote, at best, any such service
disruption would substantially and adversely affect the financial condition of
the Company. See "BUSINESS."
RELUCTANCE OF SOME CABLE COMPANIES TO CARRY UNEDITED OR PARTIALLY EDITED
ADULT PROGRAMMING
The Company believes that Fifth Dimension had been not able to
successfully expand its base of distribution, for two principal reasons: (1)
C-Band (large dish) satellite system sales have plateaued, and small dish
systems are beginning to dominate the market; and (2) some cable system
operators have, to date, been reluctant to carry unedited or partially edited
adult programming on their systems. Most major cable and small-dish systems
carry fully edited adult programming, such as the Playboy Channel, and the
Company believes that the SPICE HOT network's partially edited programming is
available to approximately 4.5 million addressable small dish and cable
television subscribers. The Company believes that by reason of its contacts in
the cable industry (as well as the success of SPICE HOT's partially edited
programming) it may be more successful than Fifth Dimension has been in
convincing cable operators to carry its programming. In this regard, on August
15, 1998, CSB plans to launch TeN: The Erotic Network, a new, 24-hour adult
network targeted specifically to cable television systems and small dish
satellite service providers ("DBS"). CSB plans to position TeN (a partially
edited adult programming service) as cable television's and DBS satellites'
alternative to the traditional fully edited adult movie services offered by
Playboy and Spice. In order to further increase the attractiveness and initial
market share of TeN, CSB is offering extremely competitive revenue sharing terms
to those cable and satellite distribution affiliates who agree to carry the
service. There can be no assurance that the Company will be able to expand on
the current Fifth Dimension programming base by convincing cable and small-dish
operators to carry one or more unedited explicit networks or by establishing TeN
as a viable alternative to the Playboy Channel. See "BUSINESS."
GOVERNMENT REGULATION-GENERAL
By virtue of the Fifth Dimension Assets Acquisition, the Company, through
its wholly owned subsidiary CSB, has become a leading provider of unedited and
partially edited adult programming via direct-to-home C-band satellites. As
disclosed above, CSB intends to expand its C-band subscriber base, market its
programming to multiple-system operators and small dish satellite providers and
launch a new partially edited network, TeN, that mirrors the editing standards
of Spice Hot, to compete with the Playboy Channel and Spice. During the 1980s,
the availability of adult movies on videocassette and on cable television helped
to legitimize the consumption of adult material by putting it in the home
setting. The result, in the opinion of Management, has been the legitimization
of adult industry products by other businesses not traditionally associated with
the adult entertainment industry. Video stores (video rentals), long distance
telephone carriers (adult conversation lines, internet adult services),
satellite providers (transponder leases, adult networks), cable companies (adult
channels and networks), hotel chains (pay-per-view adult programming), and even
mutual funds (investments in publicly-traded adult entertainment companies) earn
significant returns by supplying or investing in adult entertainment either
directly or indirectly.
On the other hand, Federal and state governments, along with various
religious and children's advocacy groups, have in the past been able to propose
and pass legislation aimed at restricting provision of, access to, and content
of "adult entertainment." These groups also have filed lawsuits against
providers of adult entertainment, encouraged boycotts against such providers and
mounted negative publicity campaigns against companies whose businesses involve
adult entertainment. There can be no assurance given that the Company will not
be subjected to such adverse publicity, litigation and legislation, although the
believes that the likelihood that such actions could occur to be remote.
Nonetheless, the Company may incur substantial costs defending themselves
against such actions, which may negatively impact the Company's finances.
Negative publicity, boycotts and litigation could also discourage institutional
and other investors from investing in the Company, to the detriment of the
Company's shareholders. The Company may not be able to attract as large a base
of investors as a similarly situated company in a business not involving "adult
entertainment." Negative publicity concerning unedited programming provided by
the Company through CSB may cause the service providers to refuse to provide
service under the terms of the transponder agreements, the Company, however,
believes that the likelihood that such refusal could occur to be remote, at
best. See "BUSINESS-Overview-Adult Entertainment Industry and -The Company's
Adult Programming Networks."
5
<PAGE>
Recently, federal and state government officials have targeted "sin
industries," such as tobacco, alcohol, and adult entertainment for special tax
treatment and legislation. In 1996, Congress passed the Communications Decency
Act of 1996 (the "CDA"). Section 505 of the CDA required full audio and video
scrambling. If the multi-channel video program distributor (including cable
system operators) could not comply with the full scrambling requirement, it was
prohibited from carrying sexually explicit programming between the hours of 6:00
a.m. and 10:00 p.m. Recently, the U.S. Supreme Court, in ACLU v. Reno, held
certain substantive provisions of the CDA unconstitutional. Businesses in the
adult entertainment and programming industries expended millions of dollars in
legal and other fees in overturning the CDA. Investors in this Offering should
understand that the adult entertainment industry may continue to be a target for
legislation. In the event the Company must defend itself and/or join with other
companies in the adult programming business to protect its rights, the Company
may incur significant expenses that could have a material adverse effect on the
Company's business and operating results. See "BUSINESS-Overview-Adult
Entertainment Industry and -The Company's Adult Programming Networks."
GOVERNMENT REGULATION-ADULT PROGRAMMING
CSB's unedited and partially edited adult programming directly competes
with the partially edited adult programming broadcast by Spice Hot and the fully
edited programming broadcast by Playboy Channel and Spice. On August 15, 1998,
CSB plans to launch TeN: The Erotic Network, a new, 24-hour adult network
targeted specifically to cable television systems and small dish satellite
service providers. CSB plans to position TeN as cable television's and small
dish satellites' alternative to the traditional fully edited adult movie
services offered by Playboy and Spice. In 1996, the United States Congress
passed the Telecommunications Act of 1996 (for this paragraph only, the "Act"),
a comprehensive overhaul of the Federal Communications Act of 1934. Section 641
of the Act requires full audio and video scrambling of channels which are
primarily dedicated to "sexually explicit" programming. Both fully edited
programming providers (such as Playboy) and partially edited or unedited
programming providers (such as Spice and CSB's Extasy Networks) feature
"sexually explicit" programming within the contemplation of Section 641 of the
Act. If a multi-channel video programming distributor, including a cable
television operator, cannot comply with the full scrambling requirement, then
the channel must be blocked during the hours when children are likely to be
watching television, i.e., from 6:00 a.m. to 10:00 p.m. Although all adult
programming companies fully scramble their signals for security purposes,
several cable television multiple-system operators ("MSOs") lack the technical
capability to fully scramble the audio portion of the signal. These cable
systems would be required to block adult broadcasts between 6:00 a.m. and 10:00
p.m. Both Spice and Playboy predict that revenues from cable television
distribution sources could be negatively affected by as much as 25% as a result
of this provision, until new equipment can be installed. Compliance with the Act
therefore could have a material adverse effect on the Company's business and
operating results. See "BUSINESS."
ADDITIONAL FINANCING MAY BE REQUIRED
The Company anticipates that its capital resources will be sufficient to
satisfy its capital requirements for at least the next twelve months. There can
be no assurance, however, that the Company's cash requirements during this
period will not exceed its available resources. The Company's future capital
requirements will depend on many factors, including the Company's ability to
operate its subsidiaries successfully, as well as market developments and cash
flow from operations. In the event that the Company's capital resources and cash
generated from operations are insufficient to fund the Company's activities, the
Company will be required to raise additional funds through bank or other
borrowings, or equity or debt financings. There can be no assurance that
additional financing, if required, will be available at all or in amounts or on
terms acceptable to the Company. In addition, any equity financing could result
in dilution to the Company's existing stockholders. 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
and could cause the Company to amend or delay its expansion plans. See
"BUSINESS" and the Financial Statements of the Company included elsewhere
herein.
COMPETITION
The domestic and international markets for the products developed,
licensed, and marketed by the Company's 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 market
and quickly become significant competitors. To the extent such competitors
establish a performance, price or distribution advantage, the Company could be
adversely affected. See "BUSINESS-Competition."
6
<PAGE>
COLORADO SATELLITE BROADCASTING, INC.
The market for adult premium channel and pay-per-view programming is
divided into two separate and distinct types of programming: unedited adult
programming networks, and partially or fully edited programming networks.
Unedited and partially edited adult programming, like that offered by the Extasy
Networks, TeN and Spice, consists of movies and other programming that contains
sexually explicit film and video. Fully edited adult programming, like that
offered by Playboy, is edited so as to remove most of the explicit elements
which make up a typical adult film. Fully edited programming, while generally
not rated by the Motion Picture Association of America, would receive an "R" or
"NC-17" rating if submitted for review.
The Company also faces general competition from other forms of non-adult
entertainment, including sporting and cultural events, television, feature
films, and other programming. In addition, the Company will face competition in
the adult entertainment arena from other providers of adult programming, adult
video rentals and sales, adult film theaters, newspapers and magazines aimed at
adult consumers, telephone talk lines ("telephone sex" services), and
adult-oriented Internet services.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the
contributions of its executive officers and its other key technical personnel,
and upon its ability to continue to attract and retain highly talented
personnel. Competition for such personnel, particularly software development
technical personnel (as utilized and relied upon by Inroads) is intense. The
Company currently has only one employment agreement, with Andrew Brandt, in
effect, and only Mr. Brandt is subject to a noncompetition agreement. The loss
of the services of any of its executive officers or other key personnel could
have a material adverse effect on the Company's business and operating results,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. See "BUSINESS" and "MANAGEMENT."
EFFECT OF DEBENTURE CONVERSION
Upon conversion of the Debentures and exercise of the Warrants there will
be not less than 13,775,824 shares of Common Stock outstanding, consisting of
6,542,000 shares currently outstanding and an estimated 7,058,824 shares (and
potentially substantially more depending upon the Market Price at the time of
conversion) issuable upon conversion by the Debentures and 175,000 shares
issuable upon exercise of the Warrants available for offer by the Selling
Securityholders, which shares will be tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), as long as the Prospectus covering such sales remains current and
effective. No prediction can be made as to the effect, if any, that future sales
of shares of Common Stock, whether offered by the Selling Securityholders or
others, will have on the market price of the shares of Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock, or the
perception that these sales could occur, could adversely affect prevailing
market prices for the Common Stock and could impair the ability of the Company
to raise additional capital through the sale of its equity securities or through
debt financing. See "Market for Common Equity and Related Stockholder Matters."
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.
7
<PAGE>
CONTROL BY PRINCIPALS OF THE COMPANY
The Company's executive officers, directors, and their affiliates
beneficially own 2,331,400 restricted Common Shares of the Company. This
represents approximately 35.64% of the 6,542,000 Common Shares issued and
outstanding. As a result, the current shareholders will continue to have
significant influence over the affairs of the Company. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company.
In addition, the Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of such stock
without further shareholder approval. The rights of the holders of Common Stock
will be subjected to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. Issuance of
Preferred Stock could have the effect of delaying, deferring or preventing a
change in control of the Company. See "DESCRIPTION OF SECURITIES."
CONTINUED NASDAQ LISTING; POTENTIAL ADVERSE EFFECTS OF DELISTING
There can be no assurance that the Company will be able to maintain the
standards for continued listing of the Common Stock on The Nasdaq SmallCap
Market. Delisting of the Common Stock would adversely affect the price of the
Common Stock and the ability of holders to sell their shares. In addition, in
order to be relisted on Nasdaq, the Company would be required to comply with the
initial listing requirements, which are substantially more onerous than the
maintenance standards.
If the Company were unable to satisfy the maintenance requirements for
continued listing on the Nasdaq SmallCap Market and the share price for Common
Stock were to remain below $5.00 per share, unless the Company satisfies certain
asset or revenue tests (at least $5,000,000 in net tangible assets if in
business less than three years, at least $2,000,000 in net tangible assets if in
business at least three years, or average revenues of at least $6,000,000 for
the last three years), the Common Stock would become subject to the so-called
"penny stock" rules promulgated by the Securities and Exchange Commission (the
"Commission"). Under the penny stock rules, a broker or dealer selling penny
stock to anyone other than an established customer or "accredited investor"
(generally, an individual with net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with his or her spouse) must
make a special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the broker
or dealer or the transaction otherwise is exempt. In addition, the penny stock
rules require the broker or dealer to deliver, prior to any transaction, a
disclosure schedule prepared by the Commission relating to the penny stock
market, unless the broker or dealer or the transaction otherwise is exempt. A
broker or dealer also is required to disclose commissions payable thereto and to
the registered representative and current quotations for the securities. In
addition, a broker or dealer is required to send monthly statements disclosing
recent price information with respect to the penny stock held in a customer's
account and information with respect to the limited market in penny stocks.
These additional sales practice and disclosure requirements could adversely
effect the level of trading activity in the secondary market and could impede
the sale of the Company's Common Stock in that market, with a concomitant
adverse effect on the price of the Common Stock in the secondary market.
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES.
Future sales of shares of Common Stock by the Company and its
stockholders could adversely affect the prevailing market price of the Common
Stock. There are currently 840,000 restricted shares and 5,702,000 shares of
Common Stock which are freely tradeable or eligible to have the restrictive
legend removed pursuant to Rule 144(k) promulgated under the Securities Act. Of
the 840,000 restricted shares, none of such shares are currently eligible for
resale under Rule 144. Of the restricted and Rule 144(k) shares, 1,856,400
shares held by certain of the Company's officers and directors are subject to
certain lock-up agreements through February 18, 1999. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
may occur, could have a material adverse effect on the market price of the
Common Stock. Pursuant to its Certificate of Incorporation, the Company has the
authority to issue additional shares of Common Stock and Preferred Stock. The
issuance of such shares could result in the dilution of the voting power of
Common Stock purchased in this Offering. See "Description of Securities,"
"Shares Eligible for Future Sale," and "Principal Shareholders."
DILUTION TO SHAREHOLDERS BY ISSUANCE OF PREFERRED SHARES
The Company's Articles of Incorporation and First Amended and Restated
Bylaws provide that the Company may issue shares of Preferred Stock without
approval of the Company's shareholders. The terms and preferences of any class
of Preferred Stock, including conversion of Preferred Shares into shares of the
Company's common stock and preferred rights to the assets of the Company upon
liquidation, may be determined by the Company's Board of Directors. Such terms
and preferences may result in more shares of the Company's common stock being
issued, which would have a dilutive effect on any common shares or warrants not
protected by anti-dilution provisions. Such terms and preferences may otherwise
adversely affect holders of the Company's common stock. See "DESCRIPTION OF
SECURITIES."
8
<PAGE>
RAPID TECHNOLOGICAL CHANGE
CSB and DaViD are engaged in businesses (satellite programming and
digital versatile disc content) that have experienced tremendous technological
change over the past two years. The Company and its investors face all risks
inherent in businesses that are subject to rapid technological advancement, such
as the possibility that a technology that the Company has invested heavily in
may become obsolete. In that event, the Company may be required to invest in new
technology. The inability of the Company to identify, fund the investment in,
and commercially exploit such new technology could have an adverse impact on the
financial condition of the Company. See "BUSINESS." In addition, DaViD has
invested heavily in DVD technology, which technology is relatively new, and, as
such, has yet to gain broad market acceptance. In the event, and to the extent,
DVD technology does not gain broad acceptance in the consumer marketplace,
DaViD's operations will be materially and adversely affected. No assurance can
be given if and when DVD technology will gain such market acceptance. The
Company's ability to implement its business plan and to achieve the results
projected by management will be dependent, to some extent, upon management's
ability to predict technological advances and implement strategies to take
advantage of such changes.
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends in the foreseeable future. See "DIVIDEND POLICY."
LIMITATIONS ON LIABILITY OF DIRECTORS
The Company's Bylaws substantially limit the liability of the Company's
directors to the Company and its shareholders for breach of fiduciary or other
duties. See "DESCRIPTION OF SECURITIES-Limitation on Liabilities."
POSSIBLE VOLATILITY OF SECURITIES PRICES
The trading price for the Common Stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
the Company's quarterly operating results, general conditions in the adult
entertainment industry or the general economy, and other factors. In addition,
the stock market is subject to price and volume fluctuations affecting the
market price for public companies generally, or within broad industry groups,
which fluctuations may be unrelated to the operating results or other
circumstances of a particular company. Such fluctuations may adversely affect
the liquidity of the Common Stock, as well as the price that holders may achieve
for their shares upon any future sale.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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.
The following table sets forth the range of high and low close prices for
the Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
Quarter Ended High Low
------------- ----- -----
September 30, 1997 5 1/2 5
December 31, 1997 5 3/4 4 3/4
March 31, 1998 5 1/4 2 7/8
June 30, 1998 4 1/4 2 7/8
As of July 31, 1998, there were approximately 200 record holders of the
Company's Common Stock.
9
<PAGE>
REGISTRATION RIGHTS
In connection with the Company's private placement of $1,750,000 principal
amount of 8% Convertible Debentures on June 3, 1998, the Company is obligated to
use its best efforts to cause this registration statement to become effective by
October 1, 1998 and to keep the registration statement effective for two years
or until the Selling Securityholders may sell all registerable securities under
Rule 144 or until the Selling Securityholders no longer own any registerable
securities, whichever occurs first. The Company is further obligated to register
and qualify the registerable shares under such state securities laws as the
Selling Securityholders may request subject to specified limitations. The
Company will bear the reasonable expenses of the registration and qualification
of the shares under the Securities Act and state securities laws other than any
underwriting discounts and commissions and the expenses of counsel for the
Selling Securityholders.
If the Registration Statement is not effective by October 1, 1998 (the
"Initial Date"), then the Company must make payments to the Selling
Securityholders in such amounts and at such times as determined pursuant to
Section 2(c) of the Registration Rights Agreement, which states that the amount
to be paid by the Company to the Selling Securityholder shall be determined as
of each Computation Date, and such amount shall be equal to two percent (2%) of
the purchase price paid by the Selling Securityholder for the Debenture for the
period from the Initial Date to the first Computation Date, and three and
one-half percent (3 1/2%) of the purchase price for each Computation Date
thereafter, to the date the Registration Statement is declared effective by the
SEC, except to the extent any delay in the effectiveness of the Registration
Statement occurs because of an act of, or a failure to act or to act timely, by
the Selling Securityholder or its counsel. "Computation Date" means the date
which is the earlier of (a) five days after the Company is notified by the SEC
that the Registration Statement may be declared effective or (b) October 1,
1998, and, if the Registration Statement has not theretofore been declared
effective by the SEC, each date which is thirty (30) days after the previous
Computation Date until such Registration Statement is so declared effective.
Thus, if the registration statement is not effective by October 1, 1998, and
such delay is not related to an act, or a failure to act or to act timely, by
the Selling Securityholders or their counsel, then for the period from October
1, 1998 to October 31, 1998, the Company must pay to the Selling Securityholders
a penalty of $35,000. If the registration statement still is not effective on
November 1, 1998, and such delay is not related to an act, or a failure to act
or to act timely, by the Selling Securityholders or their counsel, then for the
period from November 1, 1998 to December 1, 1998, the Company must pay to the
Selling Securityholder an additional penalty of $61,250, and so on.
In connection with the Company's private placement of Debentures, the
Company also issued to the Selling Securityholders Warrants to purchase 175,000
shares of Common Stock exercisable at 110% of the Market Price on June 3, 1998,
or $3.47875, for a period of three (3) years. The Company is required to prepare
and file a registration statement under the Securities Act for the number of
shares of Common Stock issuable upon the exercise of the above Warrants. Timely
filing of the registration statement has been made.
USE OF PROCEEDS FROM SALE OF DEBENTURES
None of the proceeds from the sale of the Common Stock registered hereunder
will accrue to the Company.
Through private placement, the Company has obtained $1,750,000 of financing
in the form of 8% Convertible Debentures. The Company has a call option (herein
"Call"), for a period of 24 months following the June 3, 1998 date of such
private placement, to cause one of such Selling Securityholders to purchase up
to an additional $10,000,000 principal amount of Debentures and the other to
purchase up to an additional $400,000 principal amount of Debentures
(collectively, the "Additional Debentures") upon three (3) business days'
written notice, subject to the following conditions:
(i) This Registration Statement to which this Prospectus relates
shall have been declared effective, and no stop order shall
have been issued with respect thereto;
(ii) The dollar amount of each Call shall be $500,000 with respect
to the first investor, The Augustine Fund, and $133,333 with
respect to the second investor, Pro Futures Special Equities
Fund, L.P.;
(iii) There must be at least 30 business days between each Call;
(iv) No Call may be delivered to the extent that it will result in
the issuance of common shares in excess of 19.9% of the shares
of Company's Common Stock outstanding on the date thereof , or
to the extent that the common shares subject to the Call are
not then reserved and authorized to be issued by the Company;
and
(v) The Company's share price on the date of the Call must be at
least $2.50 per share. In addition, if the share price is
below $3.00, the average volume of the Company's Common Stock
for the sixty days preceding the date of the Call must be at
least 25,000 shares per day.
The Company intends to apply the net proceeds of the Debentures to launch
TeN: The Erotic Network, its new, 24-hour adult network targeted specifically to
cable television systems and medium to high-powered satellite service providers,
as well as for working capital purposes.
10
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Selling Securityholders whose Conversion Shares and 175,000 of Warrant
Shares are being registered hereby are The Augustine Fund and Pro Futures
Special Equities Fund, L.P ("The ProFutures Fund"). The Augustine Fund is an
Illinois limited partnership with a principal place of business at 144 W.
Jackson Street, Chicago, Illinois 60604. Pro Futures Special Equities Fund, L.P.
is a Delaware limited partnership with a principal place of business located at
1310 Highway 620 South, Suite 200, Austin, Texas 78734.
As of the date of this Prospectus, The Augustine Fund owned $1,350,000
principal amount of 8% Convertible Debentures, and had committed, under the
circumstances described above, to purchase an additional $10,000,000 of
Debentures. Upon conversion of the outstanding Debentures, The Augustine Fund
will acquire shares on the basis set forth in the second following paragraph,
provided however, that The Augustine Fund can never own more than 4.9% of the
outstanding shares. (See note(1), in Common Stock Ownership of Certain
Beneficial Owners and Management.)
As of the date of this Prospectus, The ProFutures Fund owned $400,000
principal amount of 8% Convertible Debentures, and had committed, under the
circumstances described above, to purchase an additional $400,000 of
Debentures. Upon conversion of the outstanding Debentures, The ProFutures Fund
will acquire shares on the basis set forth in the following paragraph, provided
however, that The ProFutures Fund can never own more than 4.9% of the
outstanding shares. (See note(1), in Common Stock Ownership of Certain
Beneficial Owners and Management.)
The Company has agreed to register the public offering of the Selling
Securityholders shares of Common Stock under the Securities Act and to pay all
expenses in connection therewith other than brokerage commissions and discounts
in connection with the sale of the Conversion Shares and the expenses of
counsel. The aggregate number of Conversion Shares that may be offered and sold
pursuant to this Prospectus by the Selling Securityholders will be determined by
how many shares are issued upon conversion of the Debentures, which will be
determined by the conversion price applicable to the Conversion Shares. See
"Description of Securities." The conversion price for a Conversion Share will be
the lesser of 125% of the Closing Price (as defined in the Debentures) on June
3, 1998, which was $3.96875, or 90% of the Market Price on the Conversion Date.
Assuming that the Market Price on the date of Conversion is $1.9125 (which is
the Market Price calculated as of August 25, 1998) with respect to all the
Debentures, and that all the Debentures are converted at 90% of the Market
Price, or $1.72125, the aggregate number of Conversion Shares issued would be
7,058,824 (excluding any Conversion Shares issued with respect to accrued
interest on the Debentures at the time of conversion).
This Prospectus also relates to the resale of 135,000 Warrant Shares by The
Augustine Fund, the resale of 40,000 Warrant Shares by The Pro Futures Fund,
which may be acquired upon the exercise of the Warrants respectively held by
them. This Prospectus further relates to the resale of 50,000 restricted shares
of Common Stock previously acquired by the Augustine Fund from a shareholder of
the Company.
The following table sets forth the names of the Selling Securityholders, the
number of shares of Common Stock owned beneficially by each of the Selling
Securityholders as of August 25, 1998, and the number of shares which may be
offered for resale pursuant to this Prospectus. For the purpose of calculating
the number of shares of Common Stock beneficially owned by the Selling
Securityholders, the number of shares of Common Stock calculated to be issuable
in connection with the conversion of the 8% Convertible Debentures is based on a
conversion price that is derived from the average of the five lowest closing
bid prices of the Common Stock for the twenty trading days preceding August 25,
1998 (which was $1.9125). The calculation of the total number of shares of
Common Stock to be offered by the holders of such Convertible Debentures,
however, is a hypothetical estimate based upon the shares of Common Stock
issuable upon conversion of $12,150,000 principal amount of 8% Convertible
Debentures at a 10% discount to the average of the five lowest closing bid
prices of the Common Stock on the five trading days preceding August 25, 1998
(or $1.72125). The actual number of shares issuable upon conversion of the
Debentures cannot be predicted at this time insofar as it will be based, among
other things, on the future market price of the Common Stock. The use of such
hypothetical number of shares of Common Stock is not intended to constitute a
prediction as to the number of shares of Common Stock into which the Debentures
will be converted.
The information included below is based upon information provided by the
Selling Securityholders. Because the Selling Securityholders may offer all, some
or none of their Common Stock, no definitive estimate as to the number of shares
thereof that will be held by the Selling Securityholders after such offering can
be provided and the following table has been prepared on the assumption that all
shares of Common Stock offered under this Prospectus will be sold.
11
<PAGE>
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY SHARES OF BENEFICIALLY
OWNED PRIOR TO COMMON STOCK OWNED AFTER
NAME OFFERING (1) (2) BEING OFFERED OFFERING (3)
---- ---------------- ------------- ------------
<S> <C> <C> <C>
The Augustine Fund (4) 185,000 6,779,049 0
Pro Futures Special
Equities Fund, L.P. (5) 44,000 508,779 4,000
<FN>
-----------------------
(1) Each of the parties listed has sole voting and investment power with
respect to all shares of Common Stock indicated.
(2) As required by regulations of the Securities and Exchange Commission,
the number of shares shown as beneficially owned includes shares which can be
purchased within 60 days after July 14, 1998. The actual number of shares shown
as beneficially owned is subject to adjustment and could be materially less or
more than the estimated amount indicated depending upon factors which cannot be
predicted by the Company at this time, including, among others, the market price
of the Common Stock prevailing at the actual date of conversion of the
Debentures.
(3) Assumes the sale of all shares offered hereby.
(4) The listed Selling Securityholder holds outstanding Warrants to purchase
135,000 shares of Common Stock at a price of $3.47875 per share, $1,350,000
principal amount of Debentures and 50,000 previously acquired Restricted Shares.
The Company has the right, under certain conditions, to require the
Selling Securityholder to purchase an additional $10,000,000 principal amount
of Debentures under certain conditions. The Debentures are convertible
into convertible into Common Stock at a conversion price per share equal to
the lesser of (a) 125% of the Closing Price of the Common Stock (as defined
in the Debenture) or, (b) 90% of the Market Price of the Common Stock
(as defined in the Debenture). The "Closing Price" as used in the
Debenture means the average closing bid price of the Common Stock on the
five (5) trading days immediately preceding June 3, 1998, as reported by
the National Association of Securities Dealers. The "Market Price" as used in
the Debenture means the average of five lowest closing bid prices for the Common
Stock for the twenty consecutive trading days preceding the Conversion Date, as
reported as stated above. The number of shares shown as being offered in the
table is a hypothetical amount based upon the shares of Common Stock issuable
upon conversion of $11,350,000 of Debentures at a 10% discount to the Market
Price, as defined, on August 25, 1998, i.e., 90% of the average of the five
lowest closing bid prices of the Common Stock on the twenty trading days
proceeding August 25, 1998 (or $1.72125). Notwithstanding the foregoing, the
Selling Securityholder can convert Debentures into Common Stock only to the
extent the number of shares issued thereby, combined with the number of
shares already held by it and its affiliates, would not exceed 4.9% of the
outstanding Common Stock.
(5) The listed Selling Securityholder holds 4,000 shares of Common Stock
purchased in the open market, outstanding Warrants to purchase 40,000 shares of
Common Stock at a price of $3.47875 per share and $400,000 principal amount of
Debentures. The Company has the right, under certain conditions, to require the
Selling Securityholder to purchase an additional $400,000 principal amount of
Debentures under certain conditions. The Debentures are convertible into
convertible into Common Stock at a conversion price per share equal to the
lesser of (a) 125% of the Closing Price of the Common Stock (as defined in the
Debenture) or, (b) 90% of the Market Price of the Common Stock (as defined in
the Debenture). The number of shares shown as being offered in the table is a
hypothetical amount based upon the shares of Common Stock issuable upon
conversion of $800,000 of Debentures at a 10% discount to the Market Price, as
defined, on August 25, 1998, i.e., 90% of the average of the five lowest closing
market prices of the Common Stock on the twenty trading days proceeding August
25, 1998 (or $1.72125). Notwithstanding the foregoing, the Selling
Securityholder can convert Debentures into Common Stock only to the extent the
number of shares issued thereby, combined with the number of shares already held
by it and its affiliates, would not exceed 4.9% of the outstanding Common Stock.
</FN>
</TABLE>
The Selling Securityholders' Shares may be offered and sold from time to
time as market conditions permit, provided that a registration statement
covering such Shares is effective at the time of such offer and/or sale. Under
Section 10(a)(3) of the Securities Act of 1933, as amended, when a prospectus is
used more than nine months after the effective date of the registration
statement, the information contained therein must be as of a date not more than
16 months prior to such use.
The Selling Securityholders' Shares may be offered and sold in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then-current market price, or in negotiated transactions.
The Selling Securityholders' Shares may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer so
engaged will attempt to sell the share as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (ii) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
accounts pursuant to this Prospectus; (iii) ordinary brokerage transactions and
transactions in which the broker solicits purchases; and (iv) transactions
between sellers and purchasers without a broker or dealer. In effecting sales,
brokers or dealers engaged by the Selling Securityholders may arrange for other
brokers or dealers to participate. Such brokers or dealers may receive
commissions or discounts from Selling Securityholders in amounts to be
negotiated. Such brokers and dealers and any other participating brokers and
dealers may be deemed to be "underwriters" within the meaning of the Securities
Act, in connection with such sales.
12
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
June 30, 1998, as adjusted to reflect the sale of $10,400,000 principal amount
of additional Debentures and as further adjusted to reflect the conversion
of all of the Debentures assuming that 90% of the Market Price (as defined in
the Debentures) of the Common Stock on the date of the conversion was $1.72125,
which is equivalent to 90% of the average of five lowest closing bid prices for
the Common Stock for the twenty consecutive trading days ended August 25, 1998.
This table should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1998
(unaudited)
Proforma Assuming
Proforma Assuming Conversion of
Actual Sale of Debentures Debentures
------ ------------------ -----------------
<S> <C> <C> <C>
8% Convertible Debentures......................................... 1,750,000 12,150,000 - 0 -
Long term debt and other liabilities (excluding current
portion)........................................................ - 0 - - 0 - - 0 -
Common Stock, $.0001 par value; 50,000,000 shares authorized,
6,542,000 shares issued and outstanding, actual; 13,825,824
shares outstanding, as adjusted................................. 654 654 1,378
Deficit........................................................... (4,385,834) (4,385,834) (4,385,834)
Total shareholders equity......................................... 6,758,991 6,758,991 18,908,991
Total capitalization.............................................. 6,758,991 6,758,991 18,908,991
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the expansion of its business. See "Risk
Factors -- No Dividends."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this document. The discussion of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
13
<PAGE>
SELECTED FINANCIAL DATA
New Frontier Media, Inc.
The following table sets forth selected operating data for the periods
and upon the basis indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues, net............................................. $1,979,669 $ 479,330 $1,645,192 $2,515,802
---------- ---------- ---------- ----------
Total Operating Expenses.................................. 3,689,855 728,895 3,436,406 3,149,154
Other Income (Expense).................................... (28,449) 23,772 (159,454) 182,516
---------- ---------- ---------- ----------
Loss from Continuing Operations........................... (1,738,615) (225,793) (1,950,668) (450,836)
Discontinued Operations................................... 0 0 (1,595,548) -0-
---------- ---------- ---------- ----------
Net Income (Loss) Before Income Taxes and Minority
Interest................................................ (1,738,615) (225,793) (3,546,216) (450,836)
Minority Interest in Loss of Subsidiary................... 0 21,808 287,873 64,806
---------- ---------- ---------- ----------
Net Income (Loss)......................................... (1,738,615) (203,985) (3,258,343) $(386,030)
========== ========== ========== ==========
</TABLE>
SEGMENT INFORMATION
The Financial Accounting Standards Board released statement #131
"Disclosures about Segments of an Enterprise and Related Information" which will
be effective for all financial reporting periods subsequent to December 15,
1997. This statement requires the reporting of certain information about
operating segments. The following table reflects certain information as
promulgated by the statement for the years ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
BOULDER FUZZY
CORPORATE AND DAVID INTERACTIVE ENTERTAINMENT,
ELIMINATIONS ENTERTAINMENT, INC. GROUP, INC. INC. TOTALS
------------- ------------------- ----------- -------------- ------
<S> <C> <C> <C> <C> <C>
Net Sales $400 $2,211,388 $290,994 $13,020 $2,515,802
Other Income (loss) (5,882) 800 187,598 -- 182,516
Net Income (loss) (245,779) 141,736 (212,905) (69,082) (386,030)
Segment assets 52,729 535,132 1,432,541 166,069 2,186,471
Segment liabilities (63,090) 178,845 321,744 232,757 670,256
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
COLORADO
CORPORATE AND DAVID BROADCASTING, DISCONTINUED
ELIMINATIONS ENTERTAINMENT, INC. INC. OPERATIONS TOTALS
------------- ------------------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $932,611 $712,581 $353,128 $1,998,320
Other Income (loss) (94,705) -- (64,749) 121,866 (37,588)
Net Income (loss) (1,108,787) (100,456) (1,200,475) (848,625) (3,258,343)
Segment assets 524,598 395,388 9,409,797 418,166 10,747,949
Segment liabilities (112,920) 139,557 2,207,990 48,000 2,282,627
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Corporate
New Frontier Media, Inc.'s corporate office ("Corporate") functions as
a holding company for its subsidiaries, and as such generates no independent
income. Corporate incurs administrative expenses relating to the operation of
its subsidiaries, particularly concerning financial, public relations, and
capital raising activities. Corporate also incurs expenses related to the
operation of the Company and its subsidiaries as a public entity, such as legal,
accounting and public relations.
COMPARISON OF FIRST QUARTER 1998 TO FIRST QUARTER 1997
New Frontier Media, Inc.
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).
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.
15
<PAGE>
DaVid Entertainment, Inc. ("DaViD")
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.
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.
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.
COMPARISON OF YEARS ENDED MARCH 31, 1998 AND 1997
New Frontier Media, Inc.
The Company's total revenue for 1998 was $1,645,192, down $870,610
(34.6%) from 1997. Giving full recognition to collected revenue arising from the
sale of quarterly, semi-annual and annual subscriptions resulting from the
Company's Colorado Satellite Broadcasting, Inc. subsidiary, revenue for 1998 was
$2,092,136 as compared to $2,515,802 the prior year, down approximately 16.8%.
The decrease in total revenue is largely attributable to a dramatic
reduction in the demand for the Company's 12 inch laser disc home video
products. Beginning in June, 1997, the Company's traditional video disc customer
16
<PAGE>
began to migrate to the new Digital Versatile Disc (DVD) format. As a result of
the migration away from laser disc and toward DVD by the Company's wholesale and
retail customers, the Company's David Entertainment, Inc. subsidiary generated
revenue of $932,611 in 1998 as compared to $2,211,388 in 1997 (a reduction of
58%). As of January, 1998, the Company's David Entertainment, Inc. subsidiary
has fully transitioned to providing feature films utilizing the DVD format
exclusively. In June, 1998, the Company agreed to sell Boulder Interactive
Group, Inc., its CD-ROM software publishing subsidiary, to Quarto Holdings, Inc.
("Quarto") and thus did not include approximately $348,261 in 1998 subsidiary
revenue from continuing operations. The revenue shortfalls experienced by the
transition from laser disc to DVD and the discontinued status of Boulder
Interactive Group, Inc. were nearly entirely made up by the Company's Colorado
Satellite Broadcasting, Inc. ("CSB") subsidiary which reported revenue of
$712,581 and adjusted revenue (including full recognition of deferred revenue
related to quarterly, semi-annual and annual subscriptions) of $1,159,525. CSB
completed its acquisition of three subscription and pay-per-view based
television networks on February 18, 1998 and began recording revenue generated
from this acquisition on this date. The year ending March 31, 1998 represents
approximately 41 days of revenue from the Company's CSB subsidiary.
Cost of goods sold decreased to $2,021,404 for the 1998 year from
$2,217,812 (a decrease of 8.9 percent) due to the Company's decision to
discontinue the manufacture and sale of laser disc home video products resulting
from a dramatic drop-off in demand for this product line.
For the 1998 year, the Company generated a negative gross profit of
$376,212 compared with gross profit of $297,990 for the prior year. The negative
gross profit for the 1998 year was attributable to two factors: 1) the
non-recognition of $446,944 in revenue actually collected related to quarterly,
semi-annual and annual subscriptions sold by the Company's CSB subsidiary and 2)
the dramatic drop-off in laser disc sales recorded by the Company's David
Entertainment, Inc. subsidiary.
Company operating expenses for the 1998 year were $1,415,002 up form
the prior year number of $931,342. The increase of $483,660 (52%) was largely
attributable to increased salary, wages, benefits and general and administrative
expenses associated with the Company's Colorado Satellite Broadcasting, Inc.
subsidiary. Specifically, the Company increased its number of personnel to
operate this subsidiary's subscription and pay-per-view business. In addition,
goodwill amortization increased to $73,226, up from $0 the prior year also due
to the acquisition.
For the 1998 year, the Company's net loss from continuing operations
widened to $1,950,668 from a total loss of $450,836 for the prior year. The
increase in year-to-year net losses was due to the following: 1) the integration
of the acquired subscription and pay-per-view television services into the
Company and the costs incurred to adequately staff, upgrade systems and promote
and market these services, 2) the increase travel expenditures associated with
the Company's acquisition financing of $7.08 million and 3) the inability to
recognize $446,944 of revenue generated from Colorado Satellite Broadcasting's
sale of quarterly, semi-annual and annual subscriptions.
In June, 1998, the Company completed a private placement of $1.75
million in convertible debentures and may, if certain conditions are met,
require an additional $1.75 million of debentures to be purchased by the same
institutional investors after 90 days from the placement date. Proceeds of this
offering will be utilized to launch a fourth network called TeN: The Erotic
Network. TeN will be targeted to a much broader distribution base including
cable television system operators and DBS providers.
17
<PAGE>
Management believes that the Company will become profitable in the next
two quarters based on the following: 1) the elimination, either through the sale
or discontinuation of the Company's Boulder Interactive Group, Inc. and Fuzzy
Entertainment, Inc. subsidiaries which collectively generated $1,595,548 in net
losses for 1998, 2) the decision by Management to focus solely on the electronic
distribution of adult entertainment content, 3) the full integration of the
subscription and pay-per-view television acquisition and the resulting cost
savings expected to be generated by the Company's absorption of this business,
and 3) the launch of the Company's new network, TeN, which employs a more
broadly accepted editing standard for adult programming.
Colorado Satellite Broadcasting
Colorado Satellite Broadcasting reported sales of $712,581 up from $0
for the prior year. Giving full credit for unrealized revenue attributable to
the sale of quarterly, semi-annual and annual subscriptions, sales (adjusted for
unrealized subscriptions longer than one month) were $1,159,525, up from $0 the
prior year. The increase in sales are entirely attributable to the CSB's
February 18, 1998 acquisition of the subscription and pay-per-view television
assets of Fifth Dimension. As a result of the acquisition date, only 41 days of
revenue are attributable to the 1998 year.
Operating expenses, largely consisting of play-back, broadcasting and
transponder costs for the 1998 year were $1,227,150 up from $0. Gross profit for
the year was a negative $514,569 without giving effect to unrealized revenue
from non-monthly subscriptions. After fully crediting CSB for collected
subscription longer than one month, gross profit, adjusted for non-monthly
revenue realization, was negative $67,625. Management attributes the negative
gross profit to 1) one-time integration costs associated with the broadcasting
and play-out operation, 2) a temporary loss of continuity on subscription
renewals due to a major overhaul and transfer of the call center function to
Turnervision, Inc. in West Virginia and 3) transitional malaise associated with
the predecessor company and its effect on advertising, marketing,
distributor/dealer relations and confusion in the marketplace about the transfer
of ownership.
Management believes that the vast majority of the transition issues
related to the acquisition and associated integration of assets are behind it
and CSB should generate strong cash flow from its newly acquired subscription
and pay-per-view television business in the coming quarters.
David Entertainment, Inc.
David had net sales of $932,611 for the year compared to $2,211,388 for
the prior year or a decrease of 58%. The decrease in sales is largely
attributable to a dramatic reduction in the demand for David's 12 inch laser
disc home video products. Beginning in June, 1997, the Company's traditional
video disc customers began to migrate to the new Digital Versatile Disc (DVD)
format. As of January, 1998, David has fully transitioned to providing feature
films on the DVD format exclusively. Management believes that the DVD format
should achieve critical mass in the U.S. within the next two quarters and that
the Company's sales of DVD products should be equal to or higher than previous
years' sales generated from laser disc products.
Cost of goods sold for the David were $757,928 versus $1,961,933 or a
decrease of 61% due to the Company's decision to discontinue the manufacture and
sale of laser disc titles resulting from a dramatic drop-of in demand for these
products. Operating expenses were $324,998 versus $71,216 for the prior year or
an increase of 356%. This increase was due to a complete transition from
third-party contracted distribution services to in-house personnel to handle all
aspects of film licensing, replication, sales, marketing and distribution. In
addition, David Entertainment, Inc. expended nearly $23,000 on the
development of a direct-sales web site.
For the 1998 year, David generated a net loss from operations $150,315
versus net income of $178,239. Management anticipates revenue growth from David
for the following reasons: 1) DVD technology has advanced considerably in terms
of acceptance among US hardware purchasers, 2) The Company plans to aggressively
cross promote David's DVD product line on its subscription and pay-per-view
television networks and 3) David's web site, completed in April, 1998, gives
David a direct sales capability with DVD consumers.
Inroads
In June, 1998, the Company sold its remaining interest in Inroads to
Quarto Holdings, Inc. Inroads reported a 19.5% increase in sales for the 1998
year. Sales were $348,261 versus $290,994 for the prior year. Cost of goods sold
increased to $683,555 from $245,589 the prior year resulting in a negative gross
profit of $335,294 versus gross profit of $45,405. Operating expenses were
$727,645 versus $510,715 for the prior year. Net losses from operations widened
to $1,062,939 from $465,310 the prior year. Management attributes the increased
year-to-year net loss to a declining market for reference CD-ROM software and a
ramp-up in title development associated with the Quarto partnership.
18
<PAGE>
Insight
In March, 1998, the Company elected to discontinue Insight. Insight
reported revenue of $4,867 versus $13,020 for the prior year. Cost of goods sold
increased to $86,199 from $10,290 due to inventory write-downs associated with
the Company's decision to discontinue operations. Operating expenses were
$95,813 versus $71,812 for the prior year. Net loss was $177,144 versus a net
loss of $69,082 for the prior year. Management elected to discontinue Insight
because of poor financial results and a decision to focus on its core
subscription and pay-per-view television business.
COMPARISON OF YEARS ENDED MARCH 31, 1997 AND 1996
New Frontier Media, Inc.
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. The small
decrease in total revenue for 1997, as compared with 1996, is directly
attributable to the normal new product development and introduction timeline
experienced by Inroads as it develops and commercially exploits new titles under
the agreement with Quarto. 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 from operations of $450,836 for the
fiscal year ended March 31, 1997. This increase was also due to Inroads
beginning to develop and commercially exploit Quarto-based titles. In
particular, Inroads dedicated significant resources to developing the IN FOCUS
and CIGAR COMPANION titles, both of which were released after the end of the
fiscal year. Operating expenses for NOOF and Inroads 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 (see Management's discussion concerning Inroads and DaViD, below).
NOOF performs many administrative functions for Inroads, 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.
DaViD
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 in 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 revenue
growth from DaViD, as Digital Versatile Disc (DVD) technology advances in
acceptance in the consumer computer marketplace.
Inroads
In September, 1996, the Company sold 30 percent of its interest in
Inroads to Quarto Holdings, Inc. ("Quarto") for $1,250,000 in cash and $525,000
worth of digital material. For accounting purposes, the digital material was
valued at $0. Inroads 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, Inroads has allocated significant
corporate resources to identifying, developing, and commercially exploiting its
first Quarto-based products. Inroads 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 Inroads resources to the Ralston Purina
project, normal delays in developing products under the Quarto agreement, and
Inroad's evolving market focus from "edutainment" products to alternative and
specialty products. See "BUSINESS." In addition, management attributes lower
revenue figures to the underperformance of its distributors, and the transition
of Inroads distribution strategy away from software retail outlets and toward
direct sales.
19
<PAGE>
Inroad's latest CD-ROM products are targeted at enthusiasts and
hobbyists, primarily as a result of the titles that Inroads is developing and
commercially exploiting under the Quarto agreement. The Company is currently
engaged in a dispute with Quarto. See "BUSINESS-Legal Proceedings." Inroads
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 Inroads and the Company will
realize revenues from CIGAR COMPANION, based upon the surging popularity of
cigars and cigar-related products in the United States. Cigar Afficianado
magazine reports that 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, Inroads has developed and recently
released a photography CD-ROM, IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY,
utilizing the material acquired from Quarto. Inroads 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 Inroads.
Inroad'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,
Inroads 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 Inroads anticipates sales
of MULTIMEDIA GUNS by CompUSA to meet or exceed sales of the title at Wal-Mart.
In-Sight
The Company capitalized In-Sight in November and December, 1996.
In-Sight 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. In-Sight has not yet transitioned into the fully-operational stage.
Most of In-Sight's operating expenses were attributable to consulting expense of
$40,187.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported an increase in negative cash flow from operating
activities from ($1,138,152) for the quarter ended June 30, 1998 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 Inroads subsidiary.
Net cash flow from financing activities increased to $1,648,734 from
$(23,662) due to the issuance of Convertible Debentures in the June 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 $10,400,000 of Convertible Debentures that may, under certain
conditions, be drawn upon will provide sufficient liquidity and capital for the
next twelve months.
20
<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.
BUSINESS
HISTORY OF THE COMPANY
The Company was originally incorporated in the State of Colorado on
February 23, 1988.
On September 15, 1995, the Company consummated the acquisition of New
Frontier Media, Inc. in a stock-for-stock exchange. The Company first effected a
2,034.66:1 reverse split of all 569,706,000 of its common stock then issued and
outstanding, resulting in 280,000 shares of Common Stock being issued and
outstanding prior to the New Frontier acquisition. The Company also approved a
change of the Company's name to New Frontier Media, Inc. For a period of five
years preceding this acquisition, the Company had not conducted any significant
business operations.
By reason of its 1995 acquisition of New Frontier's operations, the
Company became engaged in reference CD-ROM publishing, through a 70%-owned
subsidiary, Boulder Interactive Group, Inc. d/b/a Inroads Interactive
("Inroads"), and in the acquisition and distribution of unrated and adult
feature films in the digital versatile disc format through a 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 Asset Purchase
Agreements with Fifth Dimension Communications (Barbados), Inc., a Barbados
corporation, 1043133 Ontario Inc., an Ontario (Canada) corporation, 1248663
Ontario Inc., an Ontario (Canada) corporation, and Merlin Sierra, Inc., a
California corporation (hereinafter referred to collectively as "Fifth
Dimension"), the Company acquired the adult satellite television business of
Fifth Dimension, a leading provider of subscriber-based premium television
channels and transaction-based television networks.
21
<PAGE>
By reason of its 1998 acquisition of the adult satellite television
business of Fifth Dimension, the Company, through its wholly owned subsidiary,
Colorado Satellite Broadcasting, Inc. ("CSB"), owns and is engaged in the
operation and distribution of, the three leading C-band adult programming
networks in the United States, and is a leading provider of adult programming
via direct to home ("DTH") C-band satellite.
On June 26, 1998, the Company sold its 70% interest in Inroads.
See "DESCRIPTION OF BUSINESS -- INROADS."
The Company's executive offices are located at 1050 Walnut Street,
Suite 301, Boulder, Colorado 80302. The telephone number is (303) 444-0632.
OVERVIEW-ADULT ENTERTAINMENT INDUSTRY
During the 1980s, the availability of adult movies on videocassette and
on cable television helped to legitimize the consumption of adult material by
putting it in the home setting. The result, in the opinion of Management, has
been the legitimization of adult industry products by other businesses not
traditionally associated with the adult entertainment industry. Video stores
(video rentals), long distance telephone carriers (adult conversation lines,
internet adult services), satellite providers (transponder leases, adult
networks), cable companies (adult channels and networks), hotel chains
(pay-per-view adult programming), and even mutual funds (investments in
publicly-traded adult entertainment companies) earn significant returns by
supplying or investing in adult entertainment either directly or indirectly.
The distribution of adult entertainment materials is intensely
competitive. Hundreds of companies now produce and distribute films to
wholesalers and retailers, as well as directly to the consumer. The low cost of
videotape and the introduction of low cost video tape recorders, along with the
minimal production budgets of many adult films, has resulted in much lower
barriers to entry in the adult entertainment industry. The availability of adult
films on videocassette has virtually eliminated the adult theater business.
Management believes that fully edited and partially edited adult
material routinely available on a variety of cable television systems and
satellite providers acts to reinforce consumer demand. Americans spent over $190
million on adult pay-per-view in 1997, according to Paul Kagan Associates, Inc.
Cable companies such as Time Warner, TeleCommunications, Inc., and Cablevision
Systems offer fully edited services like the Playboy Channel. Other cable
companies such as Jones Intercable, Verto Communications and Greater Media offer
partially-edited or fully-edited adult programming, such as that available from
Spice and the Company. According to public documents, the Playboy and Spice
channels generate as much as $200 million in revenue from cable and DTH
satellite services. Both companies have launched overseas services.
The adult entertainment industry has continued to grow as technological
advances allow easier and more private access to products. Most major hotel
chains, including Marriott, Hyatt, and Hilton, offer in-room fully-edited adult
programming through services such as On Command. The tremendous growth of the
Internet, including chat rooms and web sites dedicated to adult entertainment,
has resulted in millions of potential customers accessing these sites through
the privacy of their personal computers. In a recent ruling, ACLU v. Reno, the
Supreme Court struck down portions of the Communications Decency Act. Management
believes that the adult entertainment industry in general, and the private
viewing segment of that industry in particular, will continue to experience
significant growth in the coming years, particularly as advances in technology
allow more private and secure adult access to adult themed material.
OVERVIEW-THE COMPANY'S ADULT PROGRAMMING NETWORKS
The Company, through its Colorado Satellite Broadcasting, Inc. ("CSB")
subsidiary, and by reason of its consummation of its Asset Purchase Agreements
with Fifth Dimension, is a leading provider of subscriber-based premium
television channels ("premium channels" or "pay television") and
transaction-based television networks ("pay-per-view"). CSB currently owns,
operates, and distributes the three leading C-band adult programming networks:
Extasy, True Blue, and Exotica (collectively referred to hereinafter as the
"Extasy Networks"). CSB, through the Extasy Networks, is a leading provider of
unedited adult programming via direct to home ("DTH") C-band satellite. To a
lesser extent, CSB provides its services through cable television and wireless
cable television multiple system operators ("MSOs") and Ku-band (small dish or
digital satellite) satellite providers. CSB sells its network programming on a
subscription basis and on a pay-per-view basis. The Company's subscribers
receive the Extasy Networks through a television set-top decoder box.
Subscribers have the option of purchasing block programming (e.g., one day, one
month, one year), or single movies or events for a flat fee. As of March 31,
1998, the Extasy Networks were available to an estimated 2.0 million C-band DTH
subscribers, and approximately 100,000 cable television subscribers. The Extasy
Networks have maintain distribution agreements with nearly every major
distributor of C-band satellite programming in the United States.
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CSB aggressively promotes its networks' brand names with bold logotypes
and high-quality interstitial programming between feature films and special
programming. The Extasy Networks also feature advertising which promotes
adult-oriented entertainment and information through pay-per-call telephone
lines.
Extasy, True Blue, and Exotica each feature approximately 36 movie
titles per week, or 100 to 150 movies each month, with at least 15 first-time
exhibitions per month. There is little cross-over programming between channels.
All channels are available 24 hours per day, featuring a mix of standard
industry format 90 minute feature films and special 30-minute and 60-minute
features and interviews. Staggered movie start times occur three times daily,
allowing for maximum viewing flexibility. Currently, the Extasy Networks deliver
unedited adult programming exclusively.
Extasy (Telstar T-405, Channel 19)
Extasy is the premium channel of the three channels that make up the
Extasy Networks. As of March 31, 1998, Extasy had 50,472 active subscriptions.
Extasy offers a diverse programming mix within the adult genre, consisting of
movies and specials that appeal to a wide variety of tastes and interests. Each
day of the broadcast week is specially constructed to deliver the widest variety
of unedited adult programming in addition to special thematic segments and
features. Extasy is available on an all-day pay-per-view basis ($8.95), as well
as periodic 1-month ($29.95), 3-month ($49.95), 6-month ($79.95), and 1-year
($139.95) subscriptions.
True Blue (Telstar T-405, Channel 05)
True Blue is the budget service in the Extasy Networks family. As of
March 31, 1998, True Blue had 44,130 active subscriptions. True Blue is a leader
in "classic" adult programming (professionally produced titles more than 5 years
old), and features a mix of amateur adult movies and classic adult feature
films. True Blue is available on an all-day pay-per-view basis ($8.95), as well
as periodic 1-month ($16.95), 3-month ($37.95), 6-month ($59.95), and 1-year
($99.00) subscriptions.
Exotica (Telstar T-405, Channel 22)
Exotica is the internationally programmed service in the Extasy
Networks family. As of March 31, 1998, Exotica had 35,130 active subscriptions.
Exotica offers a mix of recent adult feature film hits, new adult features,
European adult films, and classic adult features. Exotica is available on an
all-day pay-per-view basis ($8.95), as well as periodic 1-month ($19.95),
3-month ($41.95), 6-month ($69.95), and 1-year ($129.95) subscriptions.
TeN: The Erotic Network (Telstar T02R, Test Broad cast on Channel 19)
On August 15, 1998, CSB plans to launch TeN: The Erotic Network, a new,
24-hour adult network targeted specifically to cable television systems and
medium to high-powered satellite service providers ("DBS"). CSB plans to
position TeN as cable television's and DBS satellites' alternative to the
traditional fully edited adult movie services offered by Playboy and Spice. In
order to further increase the attractiveness and initial market share of TeN,
CSB is offering extremely competitive revenue sharing terms to those cable and
satellite distribution affiliates who agree to carry the service.
Based on the recent developments described below, Management believes
that CSB has an unique opportunity to successfully launch a new adult network
exclusively programmed with adult films and videos that mirror the editing
standards of Spice Hot, a more liberally programmed sister network of Spice.
* Playboy's recent $100 million acquisition of Spice, Inc. (at a
valuation of 4.5 times trailing 1997 revenue of $22 million), which
effectively reduces the cable and DBS adult network industry to a
single player;
* Playboy's corporate policy to offer only fully edited adult
programming on its networks;
* the quality and number of cable operators now willing to carry
partially edited, more explicit services and the momentum toward
broader market acceptance of unedited and partially edited adult
programming by cable system operators and their subscribers;
* the recent success of Spice Hot, a partially edited, more
explicit version of Spice Channel in terms of the buy rates it has
achieved (3 to 4 times greater than fully edited adult programming);
and
* the Company's success in head-to-head competition with Spice in
C-Band satellite.
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GOVERNMENT REGULATION
In 1996, the United States Congress passed the Telecommunications Act
of 1996 (for this paragraph only, the "Act"), a comprehensive overhaul of the
Federal Communications Act of 1934. Section 641 of the Act requires full audio
and video scrambling of channels which are primarily dedicated to "sexually
explicit" programming. If a multi-channel video programming distributor,
including a cable television operator, cannot comply with the full scrambling
requirement, then the channel must be blocked during the hours when children are
likely to be watching television, i.e., from 6:00 a.m. to 10:00 p.m. Both fully
edited programming providers (such as Playboy) and partially edited programming
providers (such as Spice and the Extasy Networks) feature "sexually explicit"
programming within the contemplation of Section 641 of the Act. Although all
adult programming companies fully scramble their signals for security purposes,
several cable television MSOs lack the technical capability to fully scramble
the audio portion of the signal. These cable systems would be required to block
adult broadcasts between 6:00 a.m. and 10:00 p.m. The Company does not expect to
be impacted by this provision insofar as it broadcasts only a fully scrambled
signal. Section 641 of the Act would only affect the Company if it decided to
pursue cable television MSOs without technical scrambling ability as a source of
distribution for its programming.
NETWORK PROGRAMMING
All of the Extasy Networks' broadcast programming is acquired from
third party adult content studios. In most cases, CSB pays a flat rate ranging
from $200 to $2,000 for unlimited broadcast rights to a feature film for a
specified period of time (usually one to four years). CSB has relationships with
nearly all of the major adult movie studios, and purchases a wide variety of
programming from each on a monthly basis. These studios send Betacam SP, 1" or
3/4" master tapes to a dubbing facility in Los Angeles, California. Dubbed
copies of the programming are then forwarded to the uplink facility, where they
are screened and edited, if necessary, for quality control purposes and to
comply with running time requirements.
NETWORK DELIVERY
The C-band Satellite Business
Currently there are approximately 2.0 million C-band "big dish"
satellite systems in place in the United States. These systems feature receivers
which are larger (one meter) in diameter than digital satellite systems. C-band
systems, with their ability to scan different satellites, offer owners an
enormous variety of programming, significantly more than any other service or
delivery system (such as cable or digital satellite, which locks on only one
satellite). C-band satellite owners incur no cable charges or program supplier
fees for a vast majority of received programming. In the past several years, the
market for C-band satellites has declined significantly, as small digital
satellite services (Ku-band) have flourished. These 18-inch digital satellite
dishes are much less expensive than the large C-band satellite hardware ($200
versus approximately $3,000 for C-band), are relatively easy to mount in
unobtrusive locations, and offer digital channels. C-band satellite equipment is
also negatively affected by stricter zoning regulations and covenant
restrictions.
Approximately 90,000 C-band system owners replaced their big dishes
with the smaller Direct Broadcast Satellite ("DBS") dish systems in the last
year, according to General Instruments Access Control Center. Management
believes the C-band equipment base will remain in the 2.0 million range for the
next several years.
The introduction and rapid growth of the number of digital channels,
due to introduction of DBS and reduced transponder costs, affects C-band
satellite, which is broadcast in analog format. Management believes digital and
analog formats will co-exist for several years, and that new technologies will
allow C-band systems to receive digital channels. For example, General
Instruments' new 4DTV technology enables C-band users to watch programming
transmitted via DigiCipher II format. C-band continues to be the "work horse" of
the satellite entertainment industry. Every major cable system in the United
States is C-band based, delivering dozens of C-band channels to more than 65
million subscribers. Hundreds of government, corporate, education, and network
broadcasters use C-band. C-band is also the preferred method of transmitting
sports backhauls, satellite news gathering, international broadcasts, and
syndicated program and wild feeds.
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Management believes that C-band also offers a more stable delivery
source, particularly concerning satellite lifespan. Most satellites have a
service life of approximately 15 years; however, when cosmic accidents occur, as
in the case of the Telstar 401 in January, 1997, all channel occupants on that
satellite must find immediate replacement residency. In the case of the Telstar
401, all channels were switched to other satellites that C-band customers could
access within a matter of hours. DBS customers, who are locked on one satellite,
could suffer significant delays in service if their satellite experienced a
problem similar to the Telstar 401 accident. It is unlikely the DBS provider
would be able to find an empty, viable "spare" satellite already in orbit to
switch to. Such a switch would involve re-programming every DBS dish to the new
satellite location. A more likely scenario would involve launch of a replacement
satellite, which could take weeks or months.
The future of C-band is, in the opinion of management, far less
volatile. The gradual changeover from analog to digital satellites will proceed
as the market dictates. This slow, deliberate change could take as long as 15
years to fully implement. In the meantime, the introduction of digital receivers
to the C-band market has resulted in the transition of nearly 40,000 households
from C-band analogue to C-band analogue/digital receiving capability.
Cable Television Systems and DBS Providers
According to Paul Kagan Associates ("Kagan"), a leading media industry
analyst, as of January, 1998, there were 98 million television households in the
U.S. of which approximately 65 million households receive cable television
service, 7 million households receive DBS (high-powered) satellite service and
2.0 million households receive C-band (large dish) satellite service.
Of the 65 million cable television households, approximately 51.5
million subscribers have the capacity to receive one or more adult channels and
100% of the DBS and C-band satellite households (total of 9 million households)
have the capacity to receive at lease one adult channel.
According to Kagan, the market for adult pay-per-view and subscription
television is expected to grow from $200 million in 1998 to over $300 million in
2001.
In an effort to greatly broaden its reach into the cable television and
DBS markets, the Company has announced that it will be launching TeN:The Erotic
Network on August 15, 1998 (see TeN:The Erotic Network, above).
Satellite Transmission
CSB delivers its video programming to its C-band customers (and to a
lesser extent to cable television customers) via satellite transmission.
Satellite delivery of video programming is accomplished as follows:
Video programming is played directly from an uplink facility. The
program signal is then scrambled (encrypted) so that the signal is
unintelligible unless it is passed through the proper decoding devices. The
signal is then transmitted (uplinked) by the earth station to a designated
transponder on a communications satellite. The transponder receives the program
signal uplinked by the earth station, amplifies the program signal and
broadcasts (downlinks) it to satellite dishes located within the satellite's
area of signal coverage. The signal coverage of the domestic satellite used by
CSB is the continental United States, Hawaii, portions of the Caribbean, Mexico,
and Canada. Each transponder can retransmit one complete analog color television
signal, together with associated audio and data sidebands.
For cable systems, the scrambled signal received by the cable system's
satellite dish is then descrambled. The cable system then rescrambles the signal
using rescrambling technology that is compatible with the addressable set top
decoders deployed in its system, and then distributes the signal throughout its
cable system. The satellite receivers of DTH and Digital Satellite customers
contain descrambling equipment. To offer pay-per-view services, the set top
boxes or satellite receivers must have an electronic "address" and the cable
system or satellite service provider must be able to remotely control each
customer's set-top box or satellite receiver, and cause it to descramble the
television signal for a specific period of time after the customer has made a
purchase of a premium service or pay-per-view movie or event. The ability to
control the scrambling and descrambling of a signal from a cable system's
facilities is essential for marketing and delivery of pay-per-view programming
services.
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Transponder Agreements
In 1992, Fifth Dimension entered into contracts with AT&T's satellite
division to lease four channels on Telstar 401. Fifth Dimension delivered
Exxxtasy Network broadcasts utilizing Telstar 401 until January 11, 1997, when
Telstar 401 experienced an irreversible equipment failure. Fifth Dimension
immediately moved its transponders to AnikE2(2) and Telstar 402R(2), and
delivered its Extasy Networks programming since January, 1997 via these two
satellites. Fifth Dimension then entered into an agreement to lease three
transponders on Telstar 405, a new AT&T satellite that was placed in service in
June, 1997. CSB maintains a sub-lease with Fifth Dimension under its
non-cancelable sublease agreement on the three transponder slots on the Telstar
405 satellite, and is currently broadcasting its three Extasy Networks channels
on this satellite. CSB's 24-hour "barker" or promotional channel is currently
broadcasting Telstar 402R, which enables it to promote the Extasy Networks on
the same satellite where most of its competitors' services are offered.
Uplink Facility
CSB has engaged Fifth Dimension to maintain a fully operational uplink
facility in Ottawa, Canada, dedicated exclusively to the Extasy Networks. An
uplink facility is the means by which a video signal can be sent to a designated
satellite transponder so that it can be broadcast back to the earth to reach a
large geographic territory. The Ottawa uplink facility is equipped with the
necessary satellite equipment, editing equipment, power supplies and other
equipment necessary to provide 24-hour programming for its three networks, plus
a barker channel.
Call Service Center
Fifth Dimension had maintained a call service center in Ottawa, Canada.
Following the Fifth Dimension acquisition, CSB out-sourced these operations to
Turnervision, Inc. and relocated its call service function to the United States.
The call service center receives incoming calls from customers wishing to order
network programming, or having questions about service or billing. The call
service center is accessed from anywhere in the U.S. or Canada via a toll-free
"800" number. It is equipped with approximately 30 work stations, each of which
contains a networked computer work station, proprietary order processing
software, and telephone equipment. These components are tied into a master
switch which routes incoming calls and enables orders to be processed and
subscriber information to be updated "on-line."
The call service center is operational 24 hours each day, and staffed
according to call traffic patterns which take into account time of day, day of
the week, seasonal variances, holidays, and special promotions. Customers pay
for their orders with credit cards, which are authorized and charged before the
order is sent electronically to General Instrument's satellite operations
facility in San Diego, California for processing. General Instrument receives
the subscriber order and the subscriber's identification information, and sends
a signal up to the appropriate satellite, which "unlocks" the service ordered
for the applicable period of time.
Competition
The market for adult premium channel and pay-per-view programming is
divided into two separate and distinct types of programming: unedited adult
programming networks, and partially or fully edited programming networks.
Unedited and partially edited adult programming, like that offered by the Extasy
Networks, TeN and Spice, consists of movies and other programming that contains
sexually explicit film and video. Fully edited adult programming, like that
offered by Playboy, is edited so as to remove most of the explicit elements
which make up a typical adult film. Fully edited programming, while generally
not rated by the Motion Picture Association of America, would receive an "R" or
"NC-17" rating if submitted for review.
The Company also faces general competition from other forms of
non-adult entertainment, including sporting and cultural events, television,
feature films, and other programming. In addition, the Company will face
competition in the adult entertainment arena from other providers of adult
programming, adult video rentals and sales, adult film theaters, newspapers and
magazines aimed at adult consumers, telephone talk lines ("telephone sex"
services), and adult-oriented Internet services.
Marketing
CSB markets its services primarily through an open-air, 24-hour,
broadcast on a channel which promotes the programming featured on the Extasy
Networks. This channel, known as a "barker" channel, uses fully edited movie
clips and interstitial programming to entice viewers who are "channel surfing"
to subscribe to one of the Extasy Networks channels (periodic subscription), or
the purchase a "block" of programming (a single pay-per-view movie or event, or
an all-day purchase). To a lesser extent, CSB advertises in print publications
such as satellite channel guides or adult themed magazines. CSB also
aggressively markets its Extasy Network programming directly to satellite
program packagers or distributors, through direct marketing campaigns,
face-to-face meetings, trade show exhibits and industry gatherings. CSB's
marketing department has developed numerous programs and promotions to support
the Extasy Networks. These have included the development of detailed monthly
program guides, glossy promotional pieces, and celebrity appearances at industry
trade shows. CSB also maintains a salesforce of four (4) full-time employees to
promote carriage of its programming on cable television, DBS and alternative
platform systems.
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The Company exhibits at two to three industry trade shows per year,
including the national Cable Television Association (NCTA) shows (Western and
National) and the Satellite Broadcasting and Communications Association (SBCA)
shows. In addition, the Company attends a variety of other industry trade shows,
including the Cable Television Advertising and Marketing (CTAM) and the DBS
Summit.
With the planned August 15, 1998 launch of TeN, the Company's marketing
efforts have been enhanced to include cable television and DBS trade
advertisements, marketing binders, and air checks/test broadcasts.
DaViD
DaViD is a leading content owner of feature-length adult and unrated
motion pictures for the Digital Versatile Disc ("DVD") market.
Content Licensing
DaViD is primarily engaged in the licensing of existing feature-length
adult and unrated motion picture content for periods ranging from seven years to
perpetuity, for distribution on DVD media. DaViD licenses its motion picture
programming from approximately ten motion picture studios and/or licensors.
DaViD has purchased approximately 90% of its titles for single licensing fees,
ranging from $2,000 to $5,000 per title. Prior to March 1997, DaViD had been
primarily engaged in the licensing of existing feature-length adult and unrated
motion picture content on Laser Disc media. DaViD no longer releases any titles
on Laser Disc media.
DaViD's typical exclusive distribution term ranges from seven years to
perpetuity. Exclusive distribution territory ranges from North America
(approximately 80% of DaViD's titles) to worldwide (approximately 20% of DaViD's
titles). For a few, high-quality titles in DaViD's library (approximately five
percent of total library titles), DaViD pays royalties ranging from ten to
twenty percent of collected wholesale revenues.
DaViD's contracted acquisition library includes classic and new release
adult features such as Hidden Obsessions and Japanese animation titles such as
Urotsukidoji: The Legend of the Overfiend.
DaViD acquires video disc rights to approximately 100 feature films
each year, and historically has released four to five new titles per month. As
awareness and acceptance of DVD technology grows, DaViD intends to release up to
10 titles per month.
Jacket Printing
DaViD maintains an in-house art department which designs and produces
the electronic art necessary to print DVD jewel case inserts. Jewel case inserts
are printed and inserted by the replication company.
Disc Replication
DaViD contracts out the replication for its DVD titles to third-party
manufacturers. The replication companies receive masters from DaViD in the form
of digital "one- off" discs (DVD). Glass masters and stampers are created from
the one-off masters. Jacket printing and disc assembly (insertion into a jewel
case) is handled by the replication company.
FIFTH DIMENSION ASSETS ACQUISITION
On February 18, 1998, the Company, through its wholly owned subsidiary
CSB, acquired the assets relating to the subscription-based and
transaction-based adult satellite television business of Fifth Dimension.
Pursuant to the terms of the Asset Purchase Agreements between the Company and
Fifth Dimension, the Company acquired Fifth Dimension's satellite uplink
facility equipment, call center facility equipment, satellite transponder
subleases, film inventories, intangible assets (including trade names,
trademarks, service marks, copyrights, licenses, brand names, trade secrets,
trade dress, technical know-how, good will, and other intangibles), subscriber
base and lists, vendor lists, books and records, permits and licenses, and all
other property of Fifth Dimension used in connection with Fifth Dimension's
adult programming business. The Company also entered into an Uplink Management
Services Agreement with Fifth Dimension, pursuant to which Fifth Dimension will
operate, maintain, manage, and sustain the satellite uplink facility and will
receive and process subscriber calls for a period of nine months following the
acquisition.
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The assets acquired from Fifth Dimension generated sales of $15,044,139
and pre-tax income of $999,148 (pre-tax income, as adjusted for non-recurring
expenses and related party transactions, would have been $2,755,297) for the
year ended March 31, 1997. The Company acquired the Fifth Dimension assets for a
total purchase price of $7,700,000, consisting of $3,500,000 in cash and Common
Stock of the Company valued at $4,200,000. The original purchase price for the
Fifth Dimension assets had been $8,700,000, however, on January 16, 1998, Fifth
Dimension waived the requirement that the Company issue a promissory note for
$1,000,000, reducing the purchase price by $1,000,000. The Company also issued
840,000 shares of Common Stock and warrants to purchase up to an additional
400,000 shares of the Company's Common Stock at $5.00 per share, to Fifth
Dimension as part of the purchase price. The Company also agreed to pay Fifth
Dimension "formula profits" exceeding $2,000,000 for the first 12 months after
closing. "Formula Profits" is defined in the Asset Purchase Agreements as the
total revenue from operations minus actual operating costs. Maximum operating
costs under this provision are limited to an amount not greater than 125% of the
projected costs set forth in Schedule 2.1(f) to the Asset Purchase Agreements.
Schedule 2.1(f) details projected costs of $12,294,444, and maximum operating
costs of $15,368,055.
The Company intends to enhance shareholder value by:
* Integrating the Fifth Dimension Assets into the Company;
* Substantially reducing operating costs associated with the
Fifth Dimension assets by, among other things, outsourcing the
Call Center's operations to a third party provider in the
United States;
* Eliminating related-party leases and payments that were
previously made by Fifth Dimension;
* Reducing licensing fees by combining the purchasing power of
DaViD and CSB; and
* The implementation of simultaneous "web casting" of CSB
programming via the Internet.
In the Asset Purchase Agreements, Fifth Dimension agreed to indemnify,
defend, and hold harmless the Company against claims and losses that arise,
result from or relate to any breach of, or failure by Fifth Dimension to
perform, any of its representations, warranties, covenants or agreements under
the Agreements. The Asset Purchase Agreements do not contain standard
indemnification language particularly relating to claims, losses, costs, damages
and liabilities that may arise after closing as a result of acts that occurred
prior to closing. The Company, however, has retained the right to set off
against the Formula Profits any claim it may have against Fifth Dimension
following the acquisition.
INROADS
Inroads is a vertically integrated CD-ROM software publishing company.
As of December 31, 1997, the Company owned seventy percent (70%) of Inroads;
thirty percent (30%) of Inroads is owned by Quarto Holdings, Inc. ("Quarto"), a
subsidiary of the Quarto Group, Inc. On June 16, 1998, the Company sold its 70%
interest in Inroads to Quarto in exchange for, among other things, the
cancellation of Quarto's warrant to purchase up to 480,000 shares of Common
Stock of the Company, at an exercise price of $5.00 per share.
CD-ROM Development
Inroads' in-house developed titles are produced, designed, and
developed directly by the Inroads' twelve-person staff. Inroads' licensed titles
(developed outside of the Company's offices) are localized, packaged, and, if
necessary, enhanced with new graphics or interface design/operating elements by
Inroads. Inroads' staff consists of producers, writers, software engineers,
artists, and management personnel. All of Inroads' CD-ROM titles, whether
developed in-house or licensed, contain video, still photography, audio,
original music, and text. These elements are combined with custom-designed
interfaces and computer code to deliver high-quality, easy-to-use, original
CD-ROM titles. Utilizing state-of-the-art technology, Inroads has developed and
released nine titles since its inception in June, 1994: (1) MULTIMEDIA DOGS: THE
COMPLETE INTERACTIVE GUIDE TO DOGS; (2) MULTIMEDIA DOGS VERSION 2.0; (3)
MULTIMEDIA CATS: THE COMPLETE INTERACTIVE GUIDE TO CATS; (4) MULTIMEDIA EXOTIC
PETS: HORSES, BIRDS, AQUATICS & POCKET PETS; (5) MULTIMEDIA BUGS: THE COMPLETE
INTERACTIVE GUIDE TO INSECTS; (6) MULTIMEDIA GUNS: THE ENTHUSIAST'S GUIDE TO
FIREARMS; (7) MULTIMEDIA HORSES: THE COMPLETE INTERACTIVE GUIDE TO HORSES; (8)
CIGAR COMPANION INTERACTIVE; and, (9) IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY.
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CD-ROM Content Licensing and Creation
Inroads has licensed most of the still photography contained in its
titles from third party photographers and stock photography companies. Most of
the video contained in Inroads' titles is shot with Inroads' equipment and by
Inroads' personnel. All text is either licensed from Quarto's library of books
or written by Inroads' in-house staff. All voices (narrative) and music used in
Inroads' titles are developed and owned by Inroads. Royalty arrangements for
licensed video and photography are negotiated on a title by title basis and
typically range from 2% to 5% of collected wholesale dollars.
CD-ROM Title Licensing
In September 1996, the Company completed agreements with Quarto whereby
Quarto acquired 30 percent of Inroads for $1,250,000 in cash and digital
material valued by the Company at $-0-, and valued at $525,000 by Quarto. The
Quarto agreement granted Inroads the right to commercially exploit Quarto
titles. Inroads has completed and released two Quarto-based titles to date:
CIGAR COMPANION INTERACTIVE, based on the best-selling Quarto title The Complete
Cigar Companion, and IN FOCUS, THE GUIDE TO BETTER PHOTOGRAPHY, based on
best-selling Quarto books by Michael Freeman. On June 16, 1998, the Company
agreed to sell its 70% interest in Inroads to Quarto in exchange for, among
other things, the cancellation of Quarto's warrant to purchase up to 480,000
shares of Common Stock of the Company, at an exercise price of $5.00 per share.
CD-ROM Mastering
CD-ROM titles are programmed, designed, developed, and tested by
Inroads. Once an optical disc master ("Gold Master") has been approved for
release, the Gold Master is then submitted to a replication company for
manufacture. Box and jewel case art is developed simultaneously with the
development of the software, and submitted for printing approximately three to
four weeks prior to disc replication.
CD-ROM Jewel Case Insert and Box Design and Printing
The Company maintains an in-house art department which designs and
produces the electronic art necessary to print boxes and jewel case inserts.
Jewel case inserts are printed by the replication company, while boxes are
printed by third-party printers and shipped to the replication company for jewel
case insertion.
CD-ROM Disc Replication
Inroads contracts out all CD-ROM replication to third-party
manufacturers, including Pioneer Video Manufacturing, Inc., a wholly-owned
subsidiary of Japan- based Pioneer Electronics. The replication companies
receive masters from Inroads in the form of a digital disc "one-off" master.
Glass masters and stampers are then created from the "one-off" master. CD-ROM
replication, jewel- case insert printing and insertion, and jewel-case packaging
are all handled by the replication companies. Inroads receives finished CD-ROM
goods from its manufacturers in boxes containing 200 units each.
MARKETS FOR PRODUCTS
The Extasy Networks/TeN
According to Paul Kagan Associates, a leading media industry analyst,
as of January, 1998, their were 98 million television households in the U.S. of
which approximately 65 million households receive cable television, 7 million
households receive DBS (high-powered) satellite services and 2.0 million
households receive C-band (large dish) satellite services.
Of the 65 million cable television households, approximately 51.5
million subscribers have the capacity to receive one or more adult channels and
100% of the DBS and C-band satellite households (total of 9 million households)
have the capacity to receive at least one adult channel.
According to Kagan, the market for adult pay-per-view and subscription
television is expected to grow from $200 million in 1998 to over $300 million in
2001.
On August 15, 1998, CSB plans to launch TeN: The Erotic Network, a new,
24-hour adult network targeted specifically to cable television systems and DBS
satellite service providers. CSB plans to position TeN as cable television's and
DBS satellites' alternative to the traditional fully edited adult movie services
offered by Playboy and Spice. In order to further increase the attractiveness
and initial market share of TeN, CSB is offering extremely competitive revenue
sharing terms to those cable and satellite distribution affiliates who agree to
carry the service.
29
<PAGE>
Based on the recent developments described under "Overview-The
Company's Adult Programming Networks-TeN: The Erotic Network (Telstar T02R, Test
Broad cast on Channel 19)" above, Management believes that CSB has an unique
opportunity to successfully launch a new adult network exclusively programmed
with adult films and videos that mirror the editing standards of Spice Hot.
Digital Versatile Disc Markets
The market for Digital Versatile Disc ("DVD") is expected to grow
dramatically. Up until September, 1995, two competing technologies existed for
DVD video playback: Time Warner/Toshiba's technology and SONY/Philips'
technology. In September, 1995 these companies agreed upon a unified format for
DVD. In October, 1996 a unified, single standard was finalized for the mastering
(with copy protection) and replication of DVDs. It is widely believed that this
unified DVD format will make serious inroads into the market shares currently
held by LaserDisc and, to a much greater extent, the Video Cassette Recorder
("VCR"). DVD has several major advantages over competing home video delivery
technologies: 1) A single 5 1/4" DVD can hold up to 135 minutes per side of high
resolution digital full-motion video and audio. DVD discs contain information on
both sides; 2) Instant access is available to a favorite scene; 3) DVD contains
significantly higher image and audio quality than LaserDisc and Video Tape; 4)
Multiple language tracks can be incorporated on one disc; 5) Since DVD is 100%
digital (video and sound), the cost of replication will be comparable to CD-ROM
or audio CD at under $1.00 per unit in small press runs; and 6) A relatively low
replication cost will translate to a retail price for a motion picture of under
$20.00, giving this medium tremendous mass-market potential.
Experts at Toshiba estimate that the market for DVD software could
exceed $20 billion by the year 2005. Domestic hardware sales estimates made by
Panasonic range from 800,000 to 1 million DVD households by the calendar year
ending 1997, and 5 million to 10 million domestic DVD households by the calendar
year ending 1999.
The earliest hardware segment to adapt to DVD will most likely be the
computer hardware industry. The next evolution of the CD-ROM drive, now standard
equipment for all multimedia computer systems, will be the DVD-ROM. Similar to a
CD-ROM in most respects, the DVD-ROM will be capable of holding more than ten
times more information than a CD-ROM. Management believes that the market for
feature-film software on DVD will initially consist of computer users with
DVD-ROM drives. Dataquest estimates that nearly five million multimedia computer
households will be equipped with a DVD-ROM drive by the year 2000.
EMPLOYEES AND OFFICE SPACE
As of the date of this Report, the Company has 19 full-time and no
part-time employees. Five full-time employees are employed in executive
positions; seven part-time employees are employed in administrative and clerical
positions; the remainder of the Company's employees are employed in sales or
software development. The Company's employees are not members of a union, and
the Company has never suffered a work stoppage. The Company leases approximately
3,500 square feet of office space at 1050 Walnut Street, Suite 301, Boulder,
Colorado 80302. The Company's lease on this office space runs through January,
1998, at a rate of approximately $3,400 per month. The Company also sub-leases
approximately 6,000 square feet of space in Marina Del Rey, California.
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.
30
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the name, age and position with the
Company of each officer and director of the Company as of the date of this
Prospectus.
NAME AGE POSITION
Mark H. Kreloff 36 Chairman of the Board, President and
Chief Executive Officer, New
Frontier Media, Inc.; Vice President
and Director, DaViD; President
and Director, CSB.
Andrew V. Brandt 29 Senior Vice President and Director,
New Frontier Media, Inc.
Michael Weiner 56 Executive Vice President,
Secretary-Treasurer and Director,
New Frontier Media, Inc.; President,
Secretary-Treasurer and Director,
DaViD; Vice President,
Secretary-Treasurer and Director,
CSB.
Scott D. Wussow 42 Chief Financial Officer, New
Frontier Media, Inc.
Clive Ng 36 Director, New Frontier Media, Inc.
Koung Y. Wong 45 Director, New Frontier Media, Inc.
MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief
Executive Officer of New Frontier Media, Inc. since the Company's inception in
September, 1995. Mr. Kreloff has been actively involved in the cable television,
entertainment and computer software industries since 1977. Prior to founding the
Company and during the four years immediately preceding his employment with the
Company, he was the President and Chairman of the Board for LEI Partners, L.P.,
a LaserDisc publishing company; Elmfield IV, Inc., an 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 Kidder Peabody & Co. and
Drexel Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by
Butcher & Singer, Inc., a Philadelphia-based investment bank, in the Cable
Television and Broadcast Media Group. From 1977 through 1983, Mr. Kreloff held a
variety of positions, including Marketing Director, in his family's cable
television system based in New Jersey. Mr. Kreloff is an honors graduate of
Syracuse University and holds B.S. degrees in Finance and Public Communications.
ANDREW V. BRANDT. Mr. Brandt has held the title of Senior Vice President
of New Frontier Media since the Company's inception. Mr. Brandt has extensive
experience in software company management, 3-D computer graphics, user interface
design, and software engineering. Prior to joining New Frontier Media, Inc., 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. 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.
MICHAEL WEINER. Mr. Weiner has been the Executive Vice President and a
director of New Frontier Media, Inc. since the Company's inception. Prior to
founding the Company, Mr. Weiner was actively involved as a principal and
director in a variety of publishing businesses, including a fine art poster
company. Mr. Weiner has been actively involved in creative businesses for the
past 25 years. His background includes 15 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 private
portfolio management company based in Boulder, Colorado. From June, 1995 to the
present, Mr. Weiner has been Executive Vice President of the Company. For the 15
years prior to June, 1995, Mr. Weiner was self-employed as a real estate and
business consultant.
31
<PAGE>
SCOTT D. WUSSOW. Mr. Wussow has eighteen years of accounting and finance
experience, and is a Certified Public Accountant. He joined the Company 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. He was responsible for financial reporting, systems
development, operations, compliance, and risk management. Previous to that, Mr.
Wussow was Controller at Neodata Services, a publisher services company, and was
Accounting Manager for a division of MCI Communications. While at MCI, Mr.
Wussow was department head for general accounting and special projects for the
Western Division start-up. Among his responsibilities was fixed asset accounting
for the network system and the establishment of the customer service call
center. Mr. Wussow graduated Magna Cum Laude from the University of Wisconsin at
Eau Claire with a B.A. degree in Accounting.
CLIVE C.N. NG. Mr. Ng is Deputy Chairman of Pacific Media PLC, a
publicly-listed UK company. Pacific Media PLC owns the United Artists Theaters
Asia with United Artists Theaters of the US and with TVB of Hongkong, the
Chinese Channel in Europe. Mr. Ng co-founded UIH Asia Holdings, a regional
partnership to develop Asian cable television markets, as well as Spectradyne
Asia, then the leader in the TV settop box business for hotels. In 1995 he led
Pacific Media's purchase of a key share in one of Hongkong's leading ISP's,
Hongkong Supernet. Mr. Ng earned a Bachelor of Arts degree from Syracuse
University's School of Management in 1983, and earned a Master's Degree in
Business Administration from New York University in 1985.
KOUNG Y. WONG. Mr. Wong was born in Canton, China in 1952 and immigrated
to the United States in 1969 with his family. He earned a Bachelor of Arts
degree from City College of San Francisco in 1975, and studied Architecture at
the University of California at Berkeley for one year. In 1976, Mr. Wong opened
a stereo store, Wong's Hi-Fi, in San Francisco. For the last 21 years, Mr. Wong
has been the president and sole shareholder of Wong's Audio-Visual, Inc. a
leading commerce electronics hardware and software distribution company based in
South San Francisco, California. Wong's Audio-Visual, Inc. includes a 20,000
square-foot corporate headquarters and distribution center and an 8,500
square-foot retail superstore in San Francisco.
No director or executive officer of the Company is related to any other
director or executive officer. None of the Company's officers or directors hold
any directorships in any other public company. There are currently two outside
directors on the Company's Board of Directors. The Company's compensation
committee is comprised of Messrs. Kreloff, Weiner, and Wong. The Company's audit
committee is comprised of Messrs. Kreloff, Ng and Wong. Fifth Dimension is
entitled to name one nominee to the Company's Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During the fiscal year ended March 31, 1998, Messrs. Kreloff, Weiner
and Brandt each inadvertently failed to file on a timely basis a Form 4 Report
with respect to private gift transactions effected in March 1998. With respect
to Mr. Kreloff, the late filing related to one (1) gift transaction, with
respect to Mr. Weiner, the late filing related to three (3) gift transactions,
and with respect to Mr. Brandt, the late filing related to four (4) gift
transactions. In none of the above transactions did any of such executive
officers receive any compensation for the disposed shares.
DIRECTOR COMPENSATION
None of the Company's directors received any compensation during the
most recent fiscal year for serving in his position as a director. No plans have
been adopted to compensate directors in the future; however, it is likely that
during fiscal 1998 the Board of Directors will adopt an employee stock option
plan which includes provision for stock options to be issued to directors.
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid to
executive officers of the Company for the fiscal year ended March 31, 1998. No
executive officer received annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL RESTRICTED OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION STOCK AWARDS SAR PAYOUTS COMPENSATION
- ------------------ ---- --------- -------- ------------ ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark H. Kreloff, CEO, COO, 1998 39,167 75,000 0 0 0 0 3,053
Pres., and Chairman
Michael Weiner, Sr. V.P., 1998 39,167 75,000 0 0 0 6,229
Sec.-Treas. and Director
Andrew V. Brandt, Sr. V.P. 1998 80,627 0 0 0 0 0 6,511
and Director
Scott D. Wussow, CFO 1998 55,108 0 0 0 0 0 0
</TABLE>
32
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Brandt. Such agreement
will continue through August, 2000, unless earlier terminated for cause, and
provides for annual compensation of $75,695. Mr. Brandt also has agreed not to
solicit the Company's customers for a period of 5 years after his employment
ends; however, courts frequently find noncompetition clauses in employment
agreements to be unenforceable, or restrict the duration or geographic scope of
such agreements. Accordingly, there can be no assurance that Mr. Brandt's
agreement not to solicit would be enforced by a court if challenged.
LIMITS ON LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation eliminate the personal
liability of its directors to the Company and its shareholders for monetary
damages for breach of the directors' fiduciary duties in certain circumstances.
The Articles of Incorporation further provide that the Company will indemnify
its officers and directors to the fullest extent permitted by law. The Company
believes that such indemnification covers at least negligence and gross
negligence on the part of the indemnified parties. Insofar as indemnification
for liabilities under the Securities Act may be permitted to directors,
officers, and controlling persons of the Company pursuant to the foregoing
provisions or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
As of March 31, 1998, the Company has notes payable to officers and
shareholders bearing interest at 8.5%, unsecured and due on demand anytime after
December 31, 1996 in the amount of $106,465.
On March 2, 1998, the Company loaned an entity owned by two major
shareholders of the Company $100,000 in the form of a promissory note
receivable. The note bears interest at 8% per annum, is due on demand after
April 30, 1998 and is secured by common stock of the Company.
The Company had an agreement with an entity related to a major shareholder
to sell, package, handle, replicate and his adult video disc titles at the
Company's expense for a management fee of $35,000 per month through May 31, 1996
and $40,000 per month through July 1, 1997. As of July 1, 1997 this agreement
was terminated and the Company assumed all responsibilities associated with the
titles. During the years ended March 31, 1998 and 1997 this related entity
withheld from sales of $353,293 and $2,236,143. Replicating costs of $286,361
and $1,646,364 and management fees of $120,000 and $470,000, respectively.
Included in accounts payable at March 31, 1998 is $22,332 due to the related
entity. Included in accounts receivable at March 31, 1998 is $141,585 due 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 August 31, 1998. Interest earned on this note for the years
ended March 31, 1998 and 1997 was $2,318 and $2,318.
The Company leases certain equipment and office space via entities
controlled by an officer and shareholder on a month to month basis (see note G).
During the years ended March 31, 1998 and 1997 the Company paid $87,033 and
$116,549 to these entities relating to these leases.
Any ongoing or future transactions between the Company and its officers,
directors, principal shareholders, or other affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
on an arms-length basis and will be approved by a majority of the Company's
independent and disinterested directors. Any future loans to officers,
directors, principal shareholders, or affiliates will be made for a bonafide
business purpose, on terms no less favorable than could be obtained from
unaffiliated third parties and will be approved by a majority of the Company's
independent and disinterested directors.
33
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, the
number and percentage of shares of outstanding Common Stock owned by each person
owning at least 5% of the Company's Common Stock, each officer and director
owning stock, and all officers and directors as a group:
<TABLE>
<CAPTION>
NAME OF NUMBER
BENEFICIAL OWNER(1) SHARES BENEFICIALLY OWNED PERCENT
------------------- ------------------------- -------
<S> <C> <C>
Mark H. Kreloff....................................................... 1,014,000 15.50%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Michael Weiner........................................................ 595,400 9.10%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Andrew V. Brandt...................................................... 224,500 3.43%
1050 Walnut Street, Suite 301
Boulder, CO 80302
Maxim Corporation(2).................................................. 475,000 7.26%
1035 Pearl Street
Boulder, CO 80302
All officers and directors as a group (10 persons) 1,856,400 28.38%
<FN>
-----------
(1) Except as otherwise indicated, each of the parties listed has sole
voting and investment power with respect to all shares of Common Stock
indicated. Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
under the Exchange Act. The ownership of the shares deemed to be held by the
Selling Securityholders, due to their ownership of $1,750,000 principal amount
of Debentures is not reflected due to their contractual obligations to the
Company pursuant to which they are not entitled to convert any Debenture to the
extent that after such conversion the number of shares of Common Stock
beneficially owned by them and their respective affiliates (excluding any shares
deemed beneficially owned through any continuing ownership of Debentures)
exceeds 4.9% of the outstanding Common Stock. The conversion price will be
adjusted and the number of shares beneficially owned and being offered by the
Selling Securityholders will vary in accordance with the terms of the Debentures
to reflect changes in the market price of common stock, stock dividends, stock
splits, and certain other circumstances. See "Description of Securities."
(2) 195,000 Common Shares owned by Stephen P. Cherner; 80,000 Common
Shares owned by Maxim Profit Sharing Plan; 200,000 Common Shares owned by Maxim
Corporation. Mr. Cherner is the owner of Maxim Corporation.
</FN>
</TABLE>
DESCRIPTION OF SECURITIES
Prior to this Offering there were approximately 200 holders of record
of the Company's Common Stock. The Company is currently authorized to issue
50,000,000 shares of its Common Stock, par value $.0001 per share, and 5,000,000
shares of its Preferred Stock, par value $.10 per share. As of the date of this
Prospectus, and prior to issuance of any shares of Common Stock to investors,
the Company has 6,542,000 shares of its Common Stock, and no shares of its
Preferred Stock, issued and outstanding. There are also warrants to purchase an
additional 1,796,666 shares of the Company's common stock issued and
outstanding.
COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote per share
on all matters to be voted on by shareholders. The holders of Common Stock are
entitled to receive dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor and, in the event
of liquidation, dissolution or winding-up of the Company, to share ratably in
all assets available for distribution, subject to the rights of the holders of
any Preferred Stock as described below.
Upon the liquidation, dissolution or winding up of the Company, the
holders of shares of Common Stock would be entitled to share pro rata in the
distribution of all of the Company's assets remaining available for distribution
after satisfaction of all its liabilities and the payment of the liquidation
preference of any outstanding Preferred Stock. The holders of Common Stock have
no preemptive or conversion rights. All shares of Common Stock outstanding
immediately following the Offering will be fully paid and are not subject to
further calls or assessments by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock.
34
<PAGE>
PREFERRED STOCK
The Company's Articles of Incorporation, as amended, authorize the
issuance of up to 5,000,000 shares of Preferred Stock. The Board of Directors is
authorized, without further shareholder action, to issue such shares in one or
more series, and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, amounts payable upon liquidation and the number
of shares constituting any series or the designation of such series. If such
Preferred Stock is issued, it will rank senior to the Company's Common Stock in
respect of rights to receive dividends and to participate in distributions or
payments in the event of any liquidation, dissolution or winding up of the
Company. The issuance of Preferred Stock may have the effect of delaying,
deferring, discouraging or preventing a third party from acquiring a majority of
the outstanding voting stock of the Company or other change in control of the
Company without further action by the shareholders, and may adversely affect the
voting and other rights of the holders of the common Stock, including the loss
of voting control to others. The Board of Directors does not at present intend
to seek shareholder approval prior to issuing any such Preferred Stock, unless
required to do so by law.
8% CONVERTIBLE DEBENTURES
The Company's 8% Convertible Debentures ("Debentures") bear an interest rate
of eight percent (8%) per annum and mature on June 3, 2000 as to the $1,750,000
principal amount of Debentures currently outstanding and as of the end of the
first anniversary month of the issuance of the additional $10,400,000 of
Additional Debentures that the Selling Securityholders have agreed to purchase.
See "Use of Proceeds from Sale of Debentures." The Debentures are issuable in
denominations of $100,000 and integral multiples thereof and, at the holder's
request, are exchangeable for an equal aggregate principal amount of debentures
of different authorized denominations. Upon maturity of the Debentures, payment
for principal and accrued interest will be made either in currency or in
shares of the Company's Common Stock, at the option of the holder.
The conversion price for a Conversion Share will be the lesser of 125% of
the Closing Price on June 3, 1998, which was $3.96875, or 90% of the Market
Price on the Conversion Date. Assuming that the Market Price on the date of
Conversion is $1.9125 (which is the Market Price calculated as of August 25,
1998) with respect to all the Debentures, and that all the Debentures are
converted at 90% of the Market Price, or $1.72125, the aggregate number of
Conversion Shares issued would be 7,058,824 (excluding any Conversion Shares
issued with respect to accrued interest on the Debentures at the time of
conversion). The "Closing Price" as used in the Debenture means the average
closing bid price of the Common Stock on the five (5) trading days immediately
preceding June 3, 1998, as reported by the National Association of Securities
Dealers. The "Market Price" as used in the Debenture means the average of five
lowest closing bid prices for the Common Stock for the twenty consecutive
trading days preceding the Conversion Date, as reported as stated above.
The Company has the option to pay the interest accrued from the date of
issuance to the date of conversion either in cash or in shares of Common Stock.
The Company may redeem any Debentures for which a Notice of Conversion has
not been submitted by delivering a Notice of Redemption to the holder.
The redemption price will be calculated so that the Holder will realize the
full economic benefit that the Holder would derive from converting the
securities into Common Stock and immediately selling same on the date of the
Notice of Redemption. The Company must pay the redemption price to the holder
within ten days from the date of the Notice of Redemption. If the Company fails
to make the redemption payment within these ten days, the Company forfeits its
right to redeem those Debentures.
If the Company merges or consolidates with another corporation or sells or
transfers all or substantially all of its assets to another person and, as a
condition of such merger, consolidation or sale, the holders of the Company's
Common Stock are entitled to receive stock or securities in another corporation
or to receive property in exchange for the Company's Common Stock, then the
Debenture may be converted into the kind and amount of stock, securities or
property receivable by the holders of the Company's Common Stock pursuant to the
transaction. If, within fifteen (15) days of the holder's receipt of a notice
from the Company advising of a proposed merger, consolidation or sale, the
holder has not submitted a Notice of Conversion, then the Company may prepay all
outstanding principal and accrued interest and thereby terminate the holder's
conversion rights.
PUBLICLY TRADED WARRANTS
In connection with the Company's February 1998 secondary public
offering, the Company issued 1,500,000 warrants in registered form under,
governed by, and subject to the terms of a warrant agreement between the Company
and Corporate Stock Transfer, Inc. as warrant agent. The warrants are currently
listed on the Nasdaq SmallCap Market under the symbol "NOOFW."
Each such warrant entitles the holder thereof to purchase at any time
one share of Common Stock at an exercise price of $6.50 until February 10, 2003.
The right to exercise the warrants will terminate at the close of business on
February 10 , 2003. The warrants contain provisions that protect the warrant
holders against dilution by adjustment of the exercise price in certain events,
including but not limited to stock dividends, stock splits, reclassification, or
mergers.
35
<PAGE>
Commencing August 11, 1998, the Company may redeem some or all of the
warrants at a call price of $0.05 per warrant, upon thirty (30) days' prior
written notice if the closing sale price of the Common Stock on the Nasdaq
SmallCap Market has equaled or exceeded $8.00 for ten (10) consecutive days.
The warrants may be exercised only if a current prospectus relating to
the underlying Common Stock is then in effect and only if the shares are
qualified for sale or exempt from registration under the securities laws of the
state or states in which the purchaser resides. So long as the warrants are
outstanding, the Company has undertaken to file all post-effective amendments to
its February 1998 Registration Statement required to be filed under the
Securities Act, and to take appropriate action under federal law and the
securities laws of those states where the warrants were initially offered to
permit the issuance and resale of the Common Stock issuable upon exercise of the
warrants.
UNDERWRITER'S WARRANTS
In connection with the Company's February 1998 secondary public
offering, the Company granted to the managing underwriter, underwriters warrants
(the "Underwriter's Warrants") to purchase Underwriters' Warrants to purchase
150,000 shares of Common Stock of the Company. The Underwriters' Warrants have
an exercise price equal to $6.75 per share of Common Stock, and are exercisable
beginning on February 18, 1999 and for a period of four years thereafter. The
shares of Common Stock issuable upon exercise of the Underwriter's Warrants are
identical to the Shares being registered by this Prospectus. The Underwriter's
Warrants contain anti-dilution provisions providing for adjustment in the number
of Warrants and the exercise price thereof under certain circumstances.
At any time the Underwriters' Warrants are likely to be exercised, the
Company would probably be able to obtain additional equity capital on more
favorable terms. The Company has registered the Common Stock underlying the
Underwriters' Warrants under the 1933 Act. If the Company files a registration
statement relating to an equity offering under the provisions of the 1933 Act at
any time during the five-year period ending February 17, 2003, the holders of
the Underwriters' Warrants or underlying Common Stock will have the right,
subject to certain conditions, to include in such registration statement, at the
Company's expense, all or part of the underlying Common Stock at the request of
the holders. Additionally, the Company has agreed, for a period of five years
commencing on the date of this Prospectus, on demand of the holders of a
majority of the Underwriters' Warrants or the Common Stock issued or issuable
thereunder, to register the Common Stock underlying the Underwriters' Warrants
one time at the Company's expense. The registration of securities pursuant to
the Underwriters' Warrants may result in substantial expense to the Company at a
time when it may not be able to afford such expense, and may impede future
financing. The Company may find that the terms on which it could obtain
additional capital may be adversely affected while the Underwriters' Warrants
are outstanding.
LIMITATION OF LIABILITY; INDEMNIFICATION MATTERS AND DIRECTORS' AND
OFFICERS' INSURANCE
The Company's Bylaws require the Company, to the fullest extent
permitted or required by Colorado law, to (i) indemnify its directors against
any and all liabilities and (ii) advance any and all reasonable expenses,
incurred in any proceeding to which any such director is a party or in which
such director is deposed or called to testify as a witness because he or she is
or was a director of the Company. Generally, Colorado statutory law permits
indemnification of a director upon a determination that he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The right to indemnification granted in the Company's Bylaws is not
exclusive of any other rights to indemnification against liabilities or the
advancement of expenses which a director may be entitled to under any written
agreement, Board resolution, vote of stockholders, Colorado law or otherwise.
At present, the Company is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of the
Company in which indemnification would be required or permitted under the
Company's Bylaws, any indemnification agreement, or Colorado law.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the Warrant Agent for the
warrants is Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350,
Denver, Colorado 80202, telephone (303) 595-3300.
36
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by the Company and its stockholders
could adversely affect the prevailing market price of the Common Stock. There
are currently 840,000 restricted shares and 5,702,000 shares of Common Stock
which are freely tradeable or eligible to have the restrictive legend removed
pursuant to Rule 144(k) promulgated under the Securities Act. Of the 840,000
restricted shares, none of such shares are currently eligible for resale under
Rule 144. Of the restricted shares and Rule 144(k) shares, 1,856,400 shares held
by certain of the Company's officers and directors are subject to certain
lock-up agreements through February 18, 1999. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales may occur,
could have a material adverse effect on the market price of the Common Stock.
Pursuant to its Certificate of Incorporation, the Company has the authority to
issue additional shares of Common Stock and Preferred Stock. The issuance of
such shares could result in the dilution of the voting power of Common Stock
purchased in this Offering. See "Description of Securities" and "Principal
Shareholders."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been
passed upon for the Company by Combs & Associates, Boulder, Colorado.
EXPERTS
The financial statements of the Company for the fiscal years ended
March 31, 1998 and 1997 included in this Prospectus have been included in
reliance on the report of Spicer, Jeffries & Co., Denver, Colorado, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock offered hereby. This Prospectus omits
certain information contained in the Registration Statement and the exhibits and
schedules thereto. Statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661; 7 World Trade Center, New York, NY 10048; and 5670 Wilshire
Boulevard, Los Angeles, CA 90036. Copies of such materials may be obtained from
the public reference section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 upon payment of the prescribed fees.
The Commission maintains a web site that contains such reports and other
information regarding the Company at http://www.sec.gov.
37
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-19
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, 1998 and 1997, 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
SPICER, JEFFRIES & CO.
Denver, Colorado
June 11, 1998, except for Note 13, as
to which the date is June 26, 1998
F-2
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997 AND JUNE 30, 1998 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31,
June 30, ----------------------------
1998 1998 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash - restricted (Note 4) $ 744,702 $ 253,123 $ 109,387
Investment in certificates of deposit - restricted (Notes 4 and 7) - 250,000 750,000
Accounts receivable (Note 3) 925,028 813,456 212,370
Inventories (Note 1) 226,698 182,508 659,503
Prepaid distribution and film exhibition rights (Note 1) 883,684 721,062 82,250
Trading securities, at market value 109,180 193,350 -
Transponder deposit -0- 495,000 _
Notes receivable - related parties (Note 3) 100,000 138,000 _
Other 506,511 243,148 68,225
----------- ----------- -----------
Total current assets 3,495,803 3,289,647 1 881,735
----------- ----------- -----------
FURNITURE AND EQUIPMENT, at cost (Note 1) 1,074,547 1,113,428 65,552
Less: accumulated depreciation and amortization (85,282) (62,209) (22,661)
----------- ----------- -----------
Net furniture and equipment 989,265 1,051,219 42,891
----------- ----------- -----------
OTHER ASSETS:
Deferred debt offering costs, net 89,375 - -
Notes receivable - related parties (Note 3) - - 38,000
Accounts receivable - retainage (Note 1) - 108,304 88,844
Other 5,818 11,114 135,001
Goodwill, less accumulated amortization of $232,820 and $73,226
(Note 1) 6,128,071 6,287,665 -
----------- ----------- -----------
Total other assets 6,223,264 6,407,083 261,845
----------- ----------- -----------
$10,708,332 $10,747,949 $ 2,186,471
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997 AND JUNE 30, 1998 (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
----------------------------
June 30, 1998 1998 1997
-------------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 586,070 $ 585,001 $ 125,928
Note payable (Note 2) 500,000 500,000 -
Notes payable related parties (Note 3) 106,465 106,465 139,573
Current portion of obligations under capital lease (Note 6) - 6,041 5,139
Lines of credit (Note 7) - - 341,274
Other accrued liabilities 88,534 172,410 45,416
Accrued disposal costs (Note 9) - 459,050 -
Deferred revenue (Note 1) 918,272 446,944 -
----------- ----------- -----------
Total current liabilities 2,199,341 2,275,911 657,330
----------- ----------- -----------
LONG TERM DEBT
8% convertible debentures 1,750,000 0 0
Capital leases payable 0 6,716 12,926
----------- ----------- -----------
Total Long Term Debt 1,750,000 6,716 12,926
----------- ----------- -----------
TOTAL LIABILITIES 3,949,341 2,282,627 670,256
----------- ----------- -----------
MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4) - 17,570 305,443
----------- ----------- -----------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Notes 1, 4 and 8):
Common stock, $.0001 par value, 50,000,000
shares authorized, 6,542,000, 6,542,000, and 4,189,000,
shares issued and outstanding, respectively 654 654 419
Preferred stock, $.10 par value, 5,000,000 shares authorized:
Class A, 0, 0, and 10,000 shares issued and outstanding,
respectively - 1,000
Class B, 0, 0, and 5,000 shares issued and outstanding,
respectively - 500
Additional paid-in capital 12,115,495 12,265,249 1,768,661
Deficit (5,357,158) (3,818,151) (559,808)
----------- ----------- -----------
Total shareholders' equity 6,758,991 8,447,752 1,210,772
----------- ----------- -----------
$10,708,332 $10,747,949 $ 2,186,471
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30, Year ended March 31.
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unauditd) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Broadcasting $ 1,863,943 $ -- $ 712,581 $ --
Product sales, net 115,726 479,330 932,611 2,515,802
----------- ----------- ----------- -----------
Total revenues, net 1,979,669 479,330 1,645,192 2,515,802
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Programming and broadcasting 1,629,463 -- 740,887 --
Call center expense 252,847 -- 335,330 --
Subscriber acquisition marketing
and advertising 513,823 -- 187,259 --
Cost of goods sold 72,793 451,783 757,928 2,217,812
Occupancy and equipment 61,260 32,427 137,786 190,675
Depreciation & amortization 223,770 3,603 97,323 --
Legal and professional 59,026 30,264 117,466 67,625
Advertising and promotion 286,753 67,676 204,061 199,238
Salaries, wages and benefits 340,890 68,812 574,546 236,017
Communications 30,986 7,785 22,854 32,137
Consulting 78,307 18,256 55,895 76,035
General and administrative 139,917 48,289 205,071 129,615
----------- ----------- ----------- -----------
Total operating expenses 3,689,835 728,895 3,436,406 3,149,154
----------- ----------- ----------- -----------
NET LOSS FROM OPERATIONS: (1,710,166) (249,565) (1,791,214) (633,352)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Licensing fees, net of commissions -- 22,582 -- 164,802
Gain on disposal of operations 14,313 -- -- --
Loss on trading securities (19,850) -- (31,785) --
Interest income 5,266 12,068 3,427 37,736
Interest expense (28,178) (10,878) (131,096) (20,022)
----------- ----------- ----------- -----------
Total other income (expense) (28,449) 23,772 (159,454) 182,516
----------- ----------- ----------- -----------
Loss from continuing operations (1,738,615) (225,793) (1,950,668) (450,836)
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS (Note 9):
Loss from operations of discontinued
subsidiaries -- -- (1,136,498) --
Loss on disposal of discontinued
subsidiaries, including provision
of $35,000 for operating losses
during the phase out period -- -- (459,050) --
----------- ----------- ----------- -----------
-- -- (1,595,548) --
----------- ----------- ----------- -----------
Net loss before minority interest (1,738,615) (225,793) (3,546,216) (450,836)
Minority interest in loss of
Subsidiary -- 21,808 287,873 64,806
----------- ----------- ----------- -----------
NET LOSS $(1,738,615) (203,985) $(3,258,343) $ (386,030)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE FROM
CONTINUING OPERATIONS (Note 1) ($0.27) ($0.05) ($0.44) ($0.09)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE FROM
DISCONTINUED OPERTIONS (Note 1) $0.00 $0.00 ($0.29) $0.00
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE (Note 1) ($0.27) ($0.05) ($0.73) ($0.09)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING
(Note 1) 6,542,000 4,192,511 4,460,744 4,188,459
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998 AND 1997 AND THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Preferred Stock Preferred Stock
--------------------- ------------------ ------------------ Additional
$0.0001 Par Value $0.10 Par Value $0.10 Par Value Paid-In
Shares Amount Shares Amount Shares Amount Capital Deficit
---------- ------ ------- -------- ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, March 31, 1996 4,175,250 $ 418 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 20,000 2 - - - - 69,076 -
Retirement of common stock (6,250) (1) - - - - - -
Net loss - - - - - - - (386,030)
---------- ------ ------- -------- ------ ------ ----------- -----------
BALANCES, March 31, 1997 4,189,000 419 10,000 1,000 5,000 500 1,768,661 (559,808)
Issuance of common stock for
services 8,000 1 - - - - 39,999 -
Conversion of preferred stock
to common stock 5,000 - (10,000) (1,000) (5,000) (500) 1,500 -
Issuance of common stock,
less offering costs of
$1,585,374 1,500,000 150 - - - - 6,184,476 -
Issuance of common stock for
acquisition of assets 840,000 84 - - - - 4,199,916 -
Related party notes and
accrued interest contributed
as capital - _ - - - - 70,697 -
Net loss - - - - - - - (3,258,343)
---------- ------ ------- -------- ------ ------ ----------- -----------
BALANCES, March 31, 1998 6,542,000 654 - - - - 12,265,249 (3,818,151)
---------- ------ ------- -------- ------ ------ ----------- -----------
Sale of discontinued subsidiary - - - - - - (149,754) 199,608
Net loss - - - - - - - (1,738,615)
---------- ------ ------- -------- ------ ------ ----------- -----------
BALANCES, June 30, 1998 $6,542,000 $ 654 - $ - - $ - $12,115,495 $(5,357,158)
========== ====== ======= ======== ====== ====== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
June 30, Year ended March 31.
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,738,615) $ (203,985) $(3,258,343) $ (386,030)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 339,755 3,603 112,959 12,244
Unrealized loss on securities 19,850 -- 31,785 -
Increase (decrease) in accounts payable 2,523 (11,773) 459,073 (60,814)
Increase in accounts receivable (33,362) 121,465 (620,546) (1,885)
Decrease (increase) in inventories (44,190) (93,708) 476,995 (305,414)
Decrease in prepaid distribution rights (278,607) 13,250 8,126 12,250
Decrease (increase) in other assets (114,790) 11,148 457,372 (141,715)
Decrease in income tax receivable -- -- -- 72,500
Increase in other accrued liabilities (59,544) 2,743 126,994 29,854
Minority interest in loss of subsidiary -- (21,808) (287,873) (64,806)
Increase in transponder deposit -- -- (495,000) --
Increase in accrued disposal costs -- -- 459,050 --
Increase in deferred revenue 471,328 -- 446,944 --
Stock issued for services -- 15,000 40,000 --
Gain on disposal of subsidiary (14,313) -- -- --
(Increase) decrease in prepaid expense 311,813 -- -- --
----------- ----------- ----------- -----------
Net cash used in operating activities (1,138,152) (164,065) (2,042,464) (833,816)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (43,010) (16,379) (77,210) (6,928)
Increase in notes receivable - related party -- -- (100,000) --
Sale (purchase) of certificates of deposit -- -- 500,000 (750,000)
Increase in trading securities 64,320 199,105 (193,350) --
Acquisition of Fifth Dimension assets -- -- (4,281,284) --
Disposal of subsidiary, net of cash paid (40,313) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (19,003) 182,726 (4,151,844) (756,928)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation -- (1,361) (5,308) (1,245)
Proceeds from line of credit -- 7,341 -- 341,274
Payments on line of credit -- -- (341,274) --
Proceeds from note payable -- -- 500,000 --
Issuance of common stock, net of offering costs -- 7,533 6,184,626 89,078
Retirement of common stock -- (37,175) -- (25,000)
Issuance of preferred stock, net of offering costs 1,656,740 -- -- 13,337
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
Decrease in related party notes receiveable (8,006) -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities 1,648,734 (23,662) 6,338,044 1,651,608
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
<TABLE>
<CAPTION>
Three Months Ended
June 30, Year ended March 31.
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET INCREASE IN CASH 491,579 (5,001) 143,736 60,864
CASH, beginning of period 253,123 109,387 109,387 48,523
----------- ----------- ----------- -----------
CASH, end of period $ 744,702 $ 104,386 $ 253,123 $ 109,387
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 213 $ - $ 93,508 $ 5,487
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment via capital lease obligation $ - $ - $ - $ 19,310
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Common stock issued for services $ - $ - $ 40,000 $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Common stock issued for acquisition of Fifth
Dimension assets $ - $ - $ 4,200,000 $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Related party notes payable and accrued interest
contributed as capital $ - $ - $ 70,697 $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Reclassification of accrued interest payable to
related party notes payable $ - $ - $ 21,465 $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business, and Consolidation
The Company was originally incorporated in the state of Colorado on February 23,
1988. On September 15, 1995 the Company acquired New Frontier Media, Inc. in a
stock for stock exchange and changed the Company's name to New Frontier Media,
Inc. ("NFMI" or the "Company"). For a period of five years preceding this
acquisition the Company had not conducted any significant business operations.
As of March 31, 1996 the Company had three wholly owned subsidiaries; Boulder
Interactive Group, Inc. ("BIG") (a developer and publisher of entertainment and
educational computer software on CD-ROM), 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 20, 1996 Quarto Holdings, Inc. ("Quarto") purchased 1,714 newly
issued common shares of BIG for a 30% minority interest (see Note 4).
On February 18, 1998 the Company purchased certain assets of Fifth Dimension
Communications (Barbados) Inc. and its related entities ("Fifth Dimension")
pursuant to an asset purchase agreement dated September 18, 1997. The Company
subsequently contributed these assets to its newly formed wholly owned
subsidiary Colorado Satellite Broadcasting, Inc. ("CSB"). The acquisition was
completed through the issuance of 840,000 shares of the Company's common stock
valued at $5.00 per share, warrants to purchase an additional 400,000 shares of
the Company's common stock at $5.00 per share and the payment of $4,281,284 in
cash. The acquisition was accounted for using the purchase method of accounting.
The excess of the cost of the acquisition over the fair value of the assets
acquired was recorded as goodwill. The acquisition was funded from the proceeds
of a public offering of the Company's common stock which also closed on February
18, 1998. The Company raised approximately $6,184,000 net of offering costs, by
selling 1,500,000 shares of the Company's common stock.
The Company, through its subsidiary CSB, and by reason of its consummation of
its Asset Purchase Agreements with Fifth Dimension, is a provider of
subscriber-based premium television channels ("premium channels" or "pay
television") and transaction-based television networks ("pay-per-view"). CSB
currently owns, operates and distributes three C-band adult programming
networks: Extasy, True Blue, and Exotica. CSB is a provider of unedited adult
programming via direct to home ("DTH") C-band satellite. CSB also provides its
services through cable television and wireless cable television multiple system
operators.
The accompanying consolidated financial statements include the historical
accounts of NFMI, BIG DVD and FUZZY for all periods presented and CSB 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.
F-9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Accounts Receivable
In connection with BIG's sales and distribution of its products, BIG's major
distributor withholds 10% of its sales for returns from retailers. Per the
agreement dated December 23, 1994 with the distributor, these funds will be
retained until the agreement is terminated, but at no time shall the reserve
exceed the lesser of $150,000, or 10% of the total net receipts for the previous
twelve months. The agreement automatically renews after its three year term on a
year to year basis unless terminated by either party upon 180 days written
notice. At March 31, 1998 and 1997, retention amounts included in trade accounts
receivable were $108,304 and $88,844.
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 filed a consolidated
income tax return with its subsidiaries through September 30, 1996 when a 30%
minority interest was sold. Subsequent to September 30, 1996 the Company files a
consolidated income tax return with its subsidiaries excluding BIG.
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 for replication and distribution.
F-10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Film Exhibition Rights
Rights to exhibit films are recorded at cost and are amortized on a
straight-line basis over the period of the contract, which is normally
twenty-four months.
Revenue Recognition
Revenue from sales of television movie subscriptions from three to twelve months
is recognized on a monthly basis over the term of the subscription.
Fair Value of Financial Instruments
The carrying amount of cash, certificates of deposit, accounts receivable,
accounts payable and notes receivable and payable approximates fair value.
Long-Lived Assets
The Company adopted the provisions of SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in its financial
statements for the year ended March 31, 1998. The adoption of SFAS 121 had no
material affect on the Company's financial statements. The Company reviews its
long-lived assets for impairment to determine if the carrying amount of the
asset is recoverable.
Goodwill
Goodwill, which resulted from the acquisition of assets from Fifth Dimension, as
described above, is being amortized over a period of 120 months.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Warrants
The Company follows the intrinsic value based method of accounting as prescribed
by APB 25, Accounting for Stock Issued to Employees, for its stock-based
compensation. Under the Company's stock warrant issuances, the exercise price is
in excess of the fair value of the warrants at the grant date and no
compensation cost is recognized.
F-11
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
Preferred dividends of $3,417 have been added back to the net loss to arrive at
net loss per common share for the year ended March 31, 1997. Net loss per common
share from discontinued operations includes the minority interest in loss of
discontinued subsidiary.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 2 - NOTE PAYABLE
$500,000 note payable to an unrelated entity, dated August 29, 1997, secured by
all of the assets of the Company and the common stock of the Company owned by
the majority shareholders of the Company, bearing interest at 12% per annum and
due on August 29, 1998.
NOTE 3 - RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
June 30, March 31,
1998 ------------------------------
(Unaudited) 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Notes payable to officers and shareholders bearing interest at 8.5%,
unsecured and due on demand anytime after December 31, 1996 $ 99,981 $ 99,981 $ 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 6,484 6,484 54,573
------------- ------------- -------------
$ 106,465 $ 106,465 $ 139,573
============= ============= =============
</TABLE>
On March 31, 1998, in connection with the discontinuance of the Company's
subsidiary BIG, $54,573 of the above related party notes payable, plus accrued
interest of $16,124 were forgiven and credited to additional paid in capital. In
addition at March 31, 1998, $21,465 of accrued interest on the remaining note
balances of $85,000 was credited to the notes. Included in other liabilities at
March 31, 1997 was $26,574 of accrued interest relating to these notes.
On March 2, 1998, the Company loaned an entity owned by two major shareholders
of the Company $100,000 in the form of a promissory note receivable. The note
bears interest at 8% per annum, is due on demand after April 30, 1998 and is
secured by common stock of the Company.
The Company had an agreement with an entity related to a major shareholder to
sell, package, handle, replicate and ship adult video disc titles at the
Company's expense for a management fee of $35,000 per month through May 31, 1996
and $40,000 per month through July 1, 1997. As of July 1, 1997
F-12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 3 - RELATED PARTY TRANSACTIONS (continued)
this agreement was terminated and the Company assumed all responsibilities
associated with the titles. During the years ended March 31, 1998 and 1997 this
related entity withheld from sales of $353,293 and $2,236,143, replicating costs
of $286,361 and $1,646,364 and management fees of $120,000 and $470,000,
respectively. Included in accounts receivable at March 31, 1997 was $141,585 due
from the related entity. Included in accounts payable at March 31, 1998 is
$22,332 due to 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 August 31, 1998. Interest earned on this note for the
years ended March 31, 1998 and 1997 was $2,318 and $2,318.
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, 1998 and 1997 the Company paid $87,033 and $116,549 to
these entities relating to these leases.
NOTE 4 - SHAREHOLDERS' EQUITY
Common Stock
For the year ended March 31, 1996 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.
On February 18, 1998 the Company issued 1,500,000 units (one share of common
stock and one warrant to purchase one share of common stock at an exercise price
of $6.50 expiring February 18, 2003) in a public offering for cash of $7,770,000
less offering costs of $1,585,374. A portion of these proceeds along with the
issuance of 840,000 shares of common stock valued at $5.00 per share were used
to acquire certain assets of Fifth Dimension (see Note 1).
In addition, in connection with the public offering, 150,000 warrants to
purchase one share of common stock at an exercise price of $6.75 expiring
February 18, 2003 were issued to the underwriter .
Preferred Stock
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 September 30, 1997, each share of Class A preferred stock was given back
to the Company and the shares were retired. In addition the Class B preferred
stock was converted into 5,000 shares of common stock. The dividends in arrears
on both the Class A and B preferred stock were forgiven in the above
transactions.
F-13
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(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 $250,000 and $841,568 at March 31, 1998 and 1997 were restricted to
BIG's operations and could not be used for the operations of NFMI or its
affiliates (see Note 7).
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.
As mentioned in Note 13, the above warrants were retired.
NOTE 5 - INCOME TAXES
The Company has an unused net operating loss carry forward of approximately
$2,400,000 for income tax purposes, of which approximately $240,000 expires in
2012 and the remainder in 2013. In addition, the Company's 70% owned subsidiary
BIG, which is not part of the consolidated income tax return, has a net
operating loss of approximately $1,160,000 of which approximately $216,000
expires in 2012 and the remainder in 2013. 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. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of March 31,
1998 and 1997 are as follows:
F-14
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 5 - INCOME TAXES (continued)
<TABLE>
<CAPTION>
1998 1997
---------------- ------------
<S> <C> <C>
Deferred tax liabilities $ - $ -
================ =============
Deferred tax assets:
Net operating loss carry forwards $ 898,206 $ 78,544
Deferred revenue 167,604 -
---------------- -------------
Total deferred tax assets 1,065,810 78,544
Valuation allowance for deferred tax assets (1,065,810) (78,544)
---------------- -------------
$ - $ -
================ =============
</TABLE>
The valuation allowance for deferred tax assets was increased by $987,266 and
$76,123 during 1998 and 1997 respectively.
As a result of the disposition of BIG and FUZZY as discussed in Note 9,
approximately $1,400,000 of the above NOL will not be available to the Company.
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, 1998 is
$19,310 of equipment under capital lease and accumulated depreciation relating
to this lease of $11,586. In addition, CSB has entered into sub-lease agreements
with Fifth Dimension for the use of transponders to broadcast CSB's channels on
satellites.
Future minimum lease payments under these leases as of March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Year ended Principal Due
March 31, Operating Capital Capital Lease
- ---------- ------------ --------- -------------
<S> <C> <C> <C>
1999 $ 6,889,968 $ 7,609 $ 6,041
2000 4,729,968 6,473 5,706
2001 929,968 1,065 1,010
2002 8,328 - -
------------ --------- --------
$ 12,558,232 15,147 $ 12,757
============ ========
Less amount representing interest 2,390
---------
Present value of net minimum lease payments $ 12,757
=========
</TABLE>
Total rent expense for the years ended March 31, 1998 and 1997, was $810,602,
which includes transponder payments, and $136,013, respectively. Total rent
expense for the three month period ended June 30, 1998 and 1997 was $1,527,635,
which includes transponder payments, and $18,339, respectively.
In connection with the asset purchase agreement with Fifth Dimension (see Note
1), CSB has entered into a three year uplink service agreement requiring monthly
payments of $80,000. The agreement can be terminated upon 30 days written notice
for a termination fee of $21,800 and one half of the remaining payments or
$200,000, whichever is greater.
The Company has agreed to pay Fifth Dimension "formula profits" (total revenue
from CSB's operations less actual operating costs) exceeding $2,000,000 for the
first twelve months after closing.
F-15
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 7 - LINES OF CREDIT
The Company had lines of credit with a banking institution as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1998 ------------------------------
(Unaudited) 1998 1997
--------- --------- ---------
<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 were held in
the name of the Company's subsidiary BIG.
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 at
a price in excess of the market value of the stock at date of grant. Warrants
granted are for a three-year term.
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 June 30, 1998 and March 31, 1998, warrants to purchase common stock
at various prices were outstanding which expire as follows:
Expiration Date Warrants Exercise Price
--------------- --------- --------------
September, 2001 400,000* 6.00
February, 2003 1,500,000 6.50
February, 2003 150,000 6.75
---------
2,050,000
=========
*As discussed in Note 13, these warrants were retired in connection with the
sale of BIG.
The following table describes certain information related to the Company's
compensatory stock warrant activity for the year ending March 31, 1997. There
were no compensatory stock warrants granted, exercised, forfeited or expired for
the three months ended June 30, 1998 and the year ending March 31, 1998.
<TABLE>
<CAPTION>
Number Weighted Average
of Warrants Exercise Price
------------ ----------------
<S> <C> <C>
Outstanding, March 31, 1996 - $ -
Grants during 1997 - Exercise price > market price 146,666 6.00
Exercised, forfeited and expired during 1997 - -
------------
Outstanding and exercisable, June 30, 1998, March 31, 1997 and 1998 146,666 6.00
============
</TABLE>
F-16
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 8 - STOCK WARRANTS (continued)
The weighted average grant date fair value of the warrants granted in 1997 was
as follows:
Exercise price > market price $ .9052
=======
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%.
A summary of the Company's outstanding and exercisable stock warrants as of
June 30, 1998 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Remaining Contractual
Exercise prices of Warrants Life (months)
- --------------- ----------- ---------------------
<S> <C> <C>
$6.00
Outstanding and exercisable 546,666 36
$6.50
Outstanding and exercisable 1,500,000 59
$6.75
Outstanding and exercisable 150,000 59
</TABLE>
As previously described, the Company applies APB 25 and related Interpretations
in accounting for its stock warrants. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's warrants been determined
based on the fair value at the grant dates for awards consistent with the method
of SFAS 123, the Company's net loss and loss per share would have increased to
the pro-forma amounts indicated below:
March 31,
1997
----------
Net loss $ (518,805)
==========
Net loss per share $ (.12)
==========
NOTE 9 - DISCONTINUED OPERATIONS
As of March 31, 1998, the Company formalized its plan to discontinue the
operations of its subsidiaries BIG and FUZZY. Accordingly, operating results
have been reclassified and reported in discontinued operations. The Company has
sold its interest in BIG to Quarto (see Note 13) and is in the process of
discontinuing FUZZY and expects the transaction to be completed in fiscal 1999.
Management has accrued a $459,050 anticipated loss on the disposition of these
subsidiaries. Operating results of discontinued operations are as follows:
1998 1997
------------ ----------
Revenues $ 474,994 $ 491,612
Loss before minority interest (1,136,498) (346,794)
Net loss (848,625) (281,987)
F-17
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Continued)
NOTE 9 - DISCONTINUED OPERATIONS (continued)
Assets and liabilities of discontinued operations are as follows at March 31:
1998 1997
---------- ----------
Current assets $ 259,893 $1,598,610
Noncurrent assets 158,273 3,186
---------- ----------
$ 418,166 $1,601,796
========== ==========
Current liabilities $ 41,284 $ 554,501
Long-term debt 6,716 12,926
---------- ----------
$ 48,000 $ 567,427
========== ==========
NOTE 10 - SEGMENT INFORMATION
The Financial Accounting Standards Board has released statement #131
"Disclosures about Segments of an Enterprise and Related Information" which will
be effective for all financial reporting periods subsequent to December 15,
1997. This statement requires the reporting of certain information about
operating segments. The following table reflects certain information as
promulgated by the statement for the years ended March 31, 1997 and 1998 and
the three months June 30, 1998:
March 31, 1997
<TABLE>
<CAPTION>
Corporate
and
DVD BIG FUZZY Eliminations Totals
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,211,388 $ 290,994 $ 13,020 $ 400 $ 2,515,802
Other income (loss) 800 187,598 - (5,882) 182,516
Net income (loss) 141,736 (212,905) (69,082) (245,779) (386,030)
Segment assets 535,132 1,432,541 166,069 52,729 2 186,471
Segment liabilities 178,845 321,744 232,757 (63,090) 670,256
</TABLE>
March 31, 1998
<TABLE>
<CAPTION>
Corporate
Discontinued and
DVD CSB Operations Eliminations Totals
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 932,611 $ 712,581 $ 353,128 $ - $ 1,998,320
Other income (loss) - (64,749) 121,866 (94,705) (37,588)
Net income (loss) (100,456) (1,200,475) (848,625) (1,108,787) (3,258,343)
Segment assets 395,388 9,409,797 418,166 524,598 10,747,949
Segment liabilities 139,557 2,207,990 48,000 (112,920) 2,282,627
</TABLE>
<TABLE>
<CAPTION>
June 30, 1988
Corporate
Discontinued and
DVD CSB Operations Eliminations Totals
-------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Sales 115,726 1,863,943 0 0 1,979,669
Other income (loss) 570 (3,053) 0 (25,966) (28,449)
Net income (loss) (44,717) (1,504,653) 0 (189,245) (1,738,615)
Segment assets 410,140 9,373,760 2,725 921,707 10,708,332
Segment liabilities 199,025 3,676,603 5,320 68,391 3,949,339
</TABLE>
F-18
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997
AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(Concluded)
NOTE 11 - RISKS AND UNCERTAINTIES
CSB, as sublessee of the transponders under the transponder agreements, is
subject to arbitrary refusal of service by the service provider if that service
provider determines that the content being transmitted by the Company is harmful
to the service provider's name or business. Any such service disruption would
substantially and adversely affect the financial condition of the Company (see
Notes 1 and 6).
The Company has deposits in a bank in excess of the FDIC insured amounts of
$100,000. The amount in excess of the $100,000 is subject to loss should the
bank cease business.
NOTE 12 - SUBSEQUENT EVENT
On June 3, 1998, pursuant to a private placement, the Company sold $1,750,000 of
8% convertible debentures, interest due quarterly and due on June 3, 2000. The
debentures are convertible into shares of common stock of the Company at a
conversion price for each share of common stock equal to the lesser of : (a)
125% of the closing price or (b) 90% of the market price on the conversion date.
NOTE 13 - EVENT SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT
On June 26, 1998, the Company finalized the sale of it's 70% interest in BIG to
Quarto. In connection with the settlement, any and all claims arising from its
business with Quarto were settled. In addition, Quarto's warrant to purchase
400,000 shares of common stock of the Company was returned to the Company for
cancellation.
F-19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than contained in this
Prospectus in connection with the Offering described herein, and if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell,
or the solicitation of an offer to buy, the securities offered hereby to any
person in any state or other jurisdiction in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale hereunder shall,
under any circumstances, create any implication that there has been no change in
the affairs of the Company since the date hereof.
-----------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.............................................. 2
Risk Factors.................................................... 4
Market for Common Equity and Related Stockholder Matters........ 9
Registration Rights............................................. 10
Use of Proceeds from Sale of Debentures......................... 10
Selling Securityholders and Plan of Distribution................ 11
Capitalization.................................................. 13
Dividend Policy................................................. 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13
Business........................................................ 21
Management...................................................... 31
Principal Shareholders.......................................... 34
Description of Securities....................................... 34
Shares Eligible for Future Sale................................. 37
Legal Matters................................................... 37
Experts......................................................... 37
Available Information........................................... 37
Index to Financial Statements................................... F-1
Until September 22, 1998 (25 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether
or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to obligation of dealers to deliver a Prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
7,283,824 Shares of Common Stock
NEW FRONTIER MEDIA, INC.
-----------
PROSPECTUS
-----------
August 28, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(i) Article 3, Section 3.17 of the Company's First Amended and Restated
Bylaws provides as follows:
"SECTION 3.17
LIMITATIONS ON LIABILITY
To the fullest extent permitted by the Colorado Business Corporation Act
as the same exists or may hereafter be amended, a director of the corporation
shall not be liable to the corporation or its stockholders for monetary damages
for any action taken or any failure to take any action as a director.
Notwithstanding the foregoing, a director will have liability for monetary
damages for a breach or failure which involves: (i) a violation of criminal law;
(ii) a transaction from which the director derived an improper personal benefit,
either directly or indirectly; (iii) distributions in violation of the Colorado
Business Corporation Act or the Articles of the corporation (but only to the
extent provided by law); (iv) willful misconduct or disregard for the best
interests of the corporation concerning any acts or omissions concerning any
proceeding other than in the right of the corporation or a shareholder; or, (v)
reckless, malicious or wanton acts or omissions concerning any proceeding other
than in the right of the corporation or of a shareholder. No repeal, amendment
or modification of this Article, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director of the
corporation occurring prior to such repeal, amendment or modification."
(ii) Article 3, Section 3.18 of the Company's First Amended and Restated
Bylaws provides as follows:
"SECTION 3.18
INDEMNIFICATION
Subject to and in accordance with the Colorado Business Corporation Act,
and except as may be expressly limited by the Articles of Incorporation and any
amendments thereto, the corporation shall indemnify any person:
(i) made a party to any proceeding (other than an action by,
or in the right of, the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is
or was serving at the corporation's request, as a director, officer,
employee or agent of another corporation, or other enterprise; or,
(ii) who was or is a party to any proceeding by or in the
right of the corporation, to procure a judgment in its favor by reason
of the fact that his is or was a director, officer, employee, or agent
of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise.
This indemnification shall be mandatory in all circumstances in which
indemnification is permitted by law.
The corporation may maintain indemnification insurance regardless of
its power to indemnify under the Colorado Business Corporation Act.
The corporation may make any other or further indemnification or
advancement of expenses of any of the directors, officers, employees or agents
under any bylaw, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in his or her official capacity and to action in
another capacity while holding such office, except an indemnification against
material criminal or unlawful misconduct as set forth by statute, or as to any
transaction wherein the director derived an improper personal benefit.
Except to the extent reimbursement shall be mandatory in accordance
herewith, the corporation shall have the right to refuse indemnification, in
whole or in part, in any instance in which the person to whom indemnification
would otherwise have been applicable, if he or she unreasonable refused to
permit the corporation, at its own expense and through counsel of its own
choosing, to defend him or her in the action, or unreasonably refused to
cooperate in the defense of such action."
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
SEC Registration Fee......................... 5,372
Printing Expenses............................ 5,000
Legal Fees and Expenses...................... 25,000
Accounting Fees.............................. 3,500
Miscellaneous Expenses....................... 6,128
---------
TOTAL................................ 45,000
=========
-----------
All expenses, except the SEC registration fees are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years, the Company has sold the following shares
of its Common Stock which were not registered under the 1933 Act, as amended:
(i) From time to time, the Company has issued a total of
146,666 non-qualified stock options to employees. Each option allows
the holder to purchase one share of the Company's Common Stock, at an
exercise price of $6.00 per share. The options are exercisable through
December 31, 1997.
(ii) In February and March, 1997, the Company issued a total
of 5,000 shares of its Preferred Series B stock to one accredited
investor for total consideration of $20,000. In July, 1997, the
investor converted his Preferred Series B shares into 20,000 shares of
the Company's restricted Common Stock, pursuant to the Statement of
Series B Preferred Shares.
(iii) On May 31, 1997, the Company issued 2,511 shares of
restricted Common Stock to Krausman, L.L.C. for services valued at
$7,533.12.
(iv) On June 3, 1998, pursuant to a private placement, the
Company sold to two investors $1,750,000 principal amount of 8%
Convertible Debentures.
With respect to the sales made, the Company relied on Sections 4(2) and
4(6) of the Securities Act of 1933, as amended (the "1933 Act"). The Company
employed no advertising or general solicitation in offering the securities. The
securities were offered to a limited number of persons, all of whom were
business associates of the Company or its executive officers and directors, and
the transfer thereof was appropriately restricted by the Company and its
transfer agent. All shareholders were accredited investors as that term is
defined in Rule 501 of Regulation D under the 1933 Act, and were capable of
analyzing the merits and risks of their investment and acknowledged in writing
that they were acquiring the securities for investment purposes only, and not
with a view toward distribution or resale. Each investor represented in writing
that he or she understood the speculative nature of his or her investment.
ITEM 27. EXHIBITS.
EXHIBIT
NO. TITLE
3.01 Articles of Incorporation of Company, with Amendment (incorporated by
reference to Exhibit 3.01 of the Company's Registration Statement on
Form SB-2 (File No. 333-35337) as amended (the "Registration
Statement")).
3.02 First Amended Bylaws of Company (incorporated by reference to Exhibit
3.02 of the Company's Registration Statement).
II-2
<PAGE>
4.01 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.01 of the Company's Registration Statement).
4.02 Form of 8% Debenture issued to the Selling Securityholders.**
4.03 Form of Warrant issued to the Selling Securityholders.**
5.01 Opinion of Combs & Associates.*
10.01 Asset Purchase Agreement Among the Company, CSB, Fifth Dimension
Communications (Barbados) Inc., and Merlin Sierra, Inc.(incorporated
by reference to Exhibit 10.01 of the Company's Registration
Statement).
10.02 Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario
Inc.(incorporated by reference to Exhibit 10.02 of the Company's
Registration Statement).
10.03 Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario
Inc.(incorporated by reference to Exhibit 10.03 of the Company's
Registration Statement).
10.04 Revocable Line of Credit Agreement (incorporated by reference to
Exhibit 10.04 of the Company's Registration Statement).
10.05 Promissory Note (incorporated by reference to Exhibit 10.05 of the
Company's Registration Statement).
10.06 Call Center Interim Service Agreement between the Company and
1248663 Ontario Inc.(incorporated by reference to Exhibit 10.07 of
the Company's Registration Statement).
10.07 Settlement and Stock and Warrant Transfer Agreement, dated June 16,
1998, by and among the Company, BIG, Quarto Holdings, Inc., Old
Frontier Media, Inc., Mark Kreloff, Michael Weiner, Andrew Brandt and
Scott Wussow (incorporated by reference to Exhibit 10.8 of the
Company's Annual Report or Form 10-KSB for the year ended March 31,
1998).
10.08 Securities Purchase Agreement, dated June 3, 1998, by and between
the Company and The Augustine Fund.**
10.09 Securities Purchase Agreement, dated June 3, 1998, by and between
the Company and Pro Futures Special Equities Fund, L.P.**
10.10 Registration Rights Agreement, dated June 3, 1998, by and among the
Company, The Augustine Fund and Pro Futures Special Equities Fund,
L.P.**
10.11 Amendment, dated August 25, 1998, to Securities Purchase Agreement,
dated June 3, 1998, by and between the Company and The Augustine
Fund.*
21.01 Subsidiaries of the Company (incorporated by reference to Exhibit
21.01 of the Company's Annual Report or Form 10-KSB for the year
ended March 31, 1998).
23.01 Consent of Spicer, Jefferies & Co.*
23.02 Consent of Combs & Associates (included in Exhibit 5.1).
27.01 Financial Data Schedule.**
- --------------
* Filed herewith.
** Previously filed.
ITEM 28. UNDERTAKINGS.
The Company hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the 1933 Act, and will be governed by
the final adjudication of such issue.
(b) That, subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the
applicable form, rules and regulations of the Commission in effect at the time
such post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
1933 Act;
II-3
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
this offering.
SIGNATURES
Pursuant to the requirements of the 1933 Act, as amended, the Company
certifies that it has reasonable grounds to believe that it meets the
requirements of filing on Form SB-2 and has caused this Registration Statement
on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Boulder, Colorado on August 27, 1998.
NEW FRONTIER MEDIA, INC.
By: /s/ Mark H. Kreloff
------------------------
Mark H. Kreloff
President
Pursuant to the requirements of the 1933 Act, as amended, this
Registration Statement has been signed below by the following persons on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mark H. Kreloff Chairman, Chief Executive Officer, August 27, 1998
- ----------------------------- President
Mark H. Kreloff
/s/ Michael Weiner Executive Vice President, Secretary, August 27, 1998
- ----------------------------- Treasurer and Director
Michael Weiner
/s/ Scott Wusson Chief Financial Officer August 27, 1998
- -----------------------------
Scott Wussow
/s/ Andrew V. Brandt Senior Vice President, Director August 27, 1998
- -----------------------------
Andrew V. Brandt
/s/ Clive Ng Director August 27, 1998
- ------------------------------
Clive Ng
/s/ Koung Y. Wong Director August 27, 1998
- -----------------------------
Koung Y. Wong
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. TITLE
- ---------- -----
3.01 Articles of Incorporation of Company, with Amendment (incorporated by
reference to Exhibit 3.01 of the Company's Registration Statement on
Form SB-2 (File No. 333-35337) as amended (the "Registration
Statement")).
3.02 First Amended Bylaws of Company (incorporated by reference to Exhibit
3.02 of the Company's Registration Statement).
4.01 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.01 of the Company's Registration Statement).
4.02 Form of 8% Debenture issued to the Selling Securityholders.**
4.03 Form of Warrant issued to the Selling Securityholders.**
5.01 Opinion of Combs & Associates.**
10.01 Asset Purchase Agreement Among the Company, CSB, Fifth Dimension
Communications (Barbados) Inc., and Merlin Sierra, Inc.(incorporated
by reference to Exhibit 10.01 of the Company's Registration
Statement).
10.02 Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario
Inc.(incorporated by reference to Exhibit 10.02 of the Company's
Registration Statement).
10.03 Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario
Inc.(incorporated by reference to Exhibit 10.03 of the Company's
Registration Statement).
10.04 Revocable Line of Credit Agreement (incorporated by reference to
Exhibit 10.04 of the Company's Registration Statement).
10.05 Promissory Note (incorporated by reference to Exhibit 10.05 of the
Company's Registration Statement).
10.06 Call Center Interim Service Agreement between the Company and
1248663 Ontario Inc.(incorporated by reference to Exhibit 10.07 of
the Company's Registration Statement).
10.07 Settlement and Stock and Warrant Transfer Agreement, dated June 16,
1998, by and among the Company, BIG, Quarto Holdings, Inc., Old
Frontier Media, Inc., Mark Kreloff, Michael Weiner, Andrew Brandt and
Scott Wussow (incorporated by reference to Exhibit 10.8 of the
Company's Annual Report or Form 10-KSB for the year ended March 31,
1998).
10.08 Securities Purchase Agreement, dated June 3, 1998, by and between
the Company and The Augustine Fund.**
10.09 Securities Purchase Agreement, dated June 3, 1998, by and between the
Company and Pro Futures Special Equities Fund, L.P.**
10.10 Registration Rights Agreement, dated June 3, 1998, by and among the
Company, The Augustine Fund and Pro Futures Special Equities Fund,
L.P.**
10.11 Amendment, dated August 25, 1998, to Securities Purchase Agreement,
dated June 3, 1998, by and between the Company and The Augustine
Fund.*
21.01 Subsidiaries of the Company (incorporated by reference to Exhibit
21.01 of the Company's Annual Report or Form 10-KSB for the year
ended March 31, 1998).
23.01 Consent of Spicer, Jeffries & Co.*
23.02 Consent of Combs & Associates (included in Exhibit 5.1).
27.01 Financial Data Schedule.**
- ---------------
* Filed herewith.
** Previously filed.
II-5
AMENDMENT TO SECURITIES PURCHASE AGREEMENT
This Amendment to the Securities Purchase Agreement, dated June 3, 1998
(the "Securities Purchase Agreement"), is made and entered into as of August 25,
1998 by and between THE AUGUSTINE FUND ("Buyer") and NEW FRONTIER MEDIA, INC.
(the "Company"). Capital ized terms used herein shall have same meanings
assigned to such terms in the Securities Purchase Agreement, unless otherwise
defined herein.
W I T N E S S E T H:
WHEREAS, Buyer and the Company desire to amend the Securities Purchase
Agreement to increase the amount of the call option set forth in Section 4(g)
thereof from $1,350,000 to $10,000,000.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Section 4(g) of the Securities Purchase Agreement is hereby
deleted in its entirety and replaced with the following:
" G. CALL OPTION. At the option of the Company, for a period of 24
months following the date of this Agreement, the Buyer agrees to purchase up to
an additional $10,000,000 principal amount of Debentures (the "Additional
Debentures") upon three (3) business days' written notice (which may be given
after the close of the market but prior to 5:30 P.M. New York time) to the
Buyer, subject to the following conditions:
(i) The Registration Statement required to be filed under the
Registration Rights Agreement shall have been declared
effective, and no stop order shall have been issued with
respect thereto;
(ii) The dollar amount of each Call shall be $500,000;
(iii) There must be at least 30 days between each Call;
(iv) No Call may be delivered to the extent that it will result in
the issuance of common shares in excess of the Common Share
Limit, or to the extent that the common shares subject to the
Call are not then reserved and authorized to be issued by the
Company;
(v) The Company's share price on the date of the Call must be at
least $2.50 per share. In addition, if the share price is
below $3.00, the average volume of the Company's Common Stock
for the sixty days preceding the date of the Call must be at
least 25,000 shares per day; and
(vi) If the conditions in subsection (v) above are not satisfied
for any period of six (6)
<PAGE>
consecutive months following the effective date of the
above-referenced Registration Statement, the Call shall be
deemed to have expired pursuant to its own terms.
Each such additional Closing will occur on or before the third business
day following the Call notice from the Company."
2. The Securities Purchase Agreement is further amended by the
addition of the following new Section 4(k):
"k. Right of Approval of Other Private Financings. In consideration of
the Buyer's agreement to increase the size of the Call option set forth in
Section 4(g) above to $10,000,000, the Company agrees not to seek or otherwise
secure any other private financings during the term of the Call option, whether
in the form of debt or equity, other than the $400,000 Call option provided by
Pro Futures Special Equities Fund, L.P. under its Securities Purchase Agreement
with the Company, dated June 3, 1998, without first obtaining Buyer's consent to
such proposed financing."
3. The Securities Purchase Agreement, as amended by this Amendment, and
the Exhibits and Schedules thereto, contains the entire agreement between the
parties hereto and there are no agreements, warranties or representations which
are not set forth therein or herein. This Amendment may not be modified or
amended except by an instrument in writing duly signed by or on behalf of the
parties hereto.
4. This Amendment shall be governed by and construed and enforced in
accordance with the local laws of the State of Illinois applicable to agreements
made and to be performed entirely within the State, without regard to conflict
of laws principles.
5. This Amendment may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
EXECUTED THE DATE FIRST ABOVE WRITTEN.
THE AUGUSTINE FUND NEW FRONTIER MEDIA, INC.
By: /s/ Thomas Duzynski By: /s/ Michael Weiner
---------------------- ---------------------
Thomas Duzynski Michael Weiner
COMBS & ASSOCIATES
Suite 301
1050 Walnut Street
Boulder, Colorado 80302
303-444-0632
August 28, 1998
New Frontier Media, Inc.
Suite 301
1050 Walnut Street
Boulder, Colorado 80302
We are members of the bar of the State of Colorado. For that reason,
you have requested our opinion for the use of New Frontier Media, Inc. (the
"Company"), in connection with your Registration Statement under the Securities
Act of 1933, as amended, and the Rules and Regulations promulgated thereunder.
Your Registration Statement is intended to register an estimated 7,283,824
shares of the common stock of the Company issuable upon the conversion of up to
$12,150,000 principal amount of its 8% convertible debentures, 175,000 shares of
common stock of the Company issuable upon the exercise of its common stock
purchase warrants, 50,000 shares of common stock of the Company which are
currently outstanding and shares of common stock issuable by the Company in lieu
of cash dividends on the debentures.
We have examined the Company's Registration Statement on Form SB-2 in
the form to be filed with the Securities and Exchange Commission on or about
July 17, 1998, and as amended on August 28, 1998 (the "Registration
Statement"). We further have examined such corporate records of the Company
as we deemed relevant to the opinion hereafter expressed.
Based on the foregoing examination, we are of the opinion that, under
Colorado law, upon issuance and receipt by the Company of the consideration in
the amount and in the manner described in the Registration Statement will be
legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Combs & Associates
By: /s/ John Combs
JOHN COMBS
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the New Frontier Media, Inc. registration
statement, on Form SB-2 (Amendment No. 1), of our report dated June 11, 1998,
except for Note 13, as to which the date is June 26, 1998, accompanying the
consolidated financial statements of New Frontier Media, Inc. for the years
ended March 31, 1998 and 1997 which is part of the registration statement and to
the reference to us under the heading "Experts" in such registration statement.
SPICER, JEFFRIES & CO.
Denver, Colorado
August 28, 1998
