<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-23697
(Commission file number)
NEW FRONTIER MEDIA, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1084061
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5435 AIRPORT ROAD, SUITE 100, BOULDER, CO 80301
(Address of principal executive offices)
(303) 444-0900
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of December 31, 1998: 6,737,072
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
NEW FRONTIER MEDIA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at December 31, 1998 2-3
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Operations for the
nine months ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Change in Securities 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
Part III. EXHIBITS 19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
ASSETS
Current assets
Cash $ 375,433
Trading securities, at market 98,208
Accounts receivable 1,324,613
Inventories 84,604
Prepaid distribution rights 1,371,020
Prepaid expenses 114,760
Note receivable - related parties 100,000
Other 429,237
-----------
Total current assets 3,897,875
Furniture and equipment, net 1,404,075
Debt issuance costs 74,391
Goodwill, net 5,810,029
Other 82,900
-----------
Total assets $11,269,270
===========
See the accompanying notes
2
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 1,175,000
Accounts payable 1,809,178
Accounts payable - related parties 108,465
Deferred revenue 1,545,371
Other accrued liabilities 648,263
-----------
Total current liabilities 5,286,277
8% convertible debentures 1,650,000
-----------
Total liabilities 6,936,277
Commitments and contingencies
Stockholders' equity
Preferred stock, $.10 par value
5,000,000 shares authorized
0 shares issued and outstanding -
Common stock, $.0001 par value
50,000,000 shares authorized
6,737,072 shares issued and outstanding 674
Additional paid-in capital 11,244,151
Accumulated deficit (6,911,832)
-----------
Total stockholders' equity 4,332,993
-----------
Total liabilities and stockholders' equity $11,269,270
===========
See the accompanying notes
3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---------- ----------
Revenues, net $3,456,645 $ 435,717
Cost of sales 2,772,093 192,951
---------- ----------
Gross profit (loss) 684,552 242,766
Operating expenses
Marketing and advertising 214,444 89,402
Depreciation and amortization 287,182 4,336
General and administrative 895,587 319,962
---------- ----------
Total operating expenses 1,397,213 413,700
---------- ----------
Loss from operations (712,661) (170,934)
---------- ----------
Other income (expenses)
Interest income 2,093 10,692
Interest expense (64,523) 7,917
Other (492) (17,182)
---------- ----------
Total other income (expenses) (62,922) 1,427
---------- ----------
Loss before minority interest (775,583) (169,507)
Minority interest in loss of subsidiary - 28,985
---------- ----------
Net loss $ (775,583) $ (140,522)
========== ==========
Basic loss per share $ (0.12) $ (0.03)
========== ==========
Diluted loss per share $ (0.12) $ (0.03)
========== ==========
Weighted-average shares outstanding 6,575,918 4,193,235
========== ==========
See the accompanying notes
4
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONDOLIATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- ----------
Revenues, net $ 7,755,185 $1,163,492
Cost of sales 8,110,447 700,004
----------- ----------
Gross profit (loss) (355,262) 463,488
Operating expenses
Marketing and advertising 670,544 235,383
Depreciation and amortization 969,020 12,557
General and administrative 2,099,532 936,328
----------- ----------
Total operating expenses 3,739,096 1,184,268
----------- ----------
Loss from operations (4,094,358) (720,780)
----------- ----------
Other income (expenses)
Interest income 10,911 90,577
Interest expense (164,164) 29,182
Other (17,001) (42,585)
----------- ----------
Total other income (expenses) (170,254) 77,174
----------- ----------
Loss before minority interest (4,264,612) (643,606)
Minority interest in loss of subsidiary - 71,764
----------- ----------
Net loss $(4,264,612) $ (571,842)
=========== ==========
Basic loss per share $ (0.65) $ (0.14)
=========== ==========
Diluted loss per share $ (0.65) $ (0.14)
=========== ==========
Weighted-average shares outstanding 6,553,347 4,195,025
=========== ==========
See the accompanying notes
5
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- ----------
Cash flows from operating activities
Net loss $(4,264,612) $ (571,842)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 969,020 12,557
Issuance of common stock for services - 15,000
Minority interest - (71,764)
Loss on sale of trading securities 30,822 -
(Increase) decrease in operating assets (1,092,036) (150,025)
Increase (decrease) in operating liabilities 2,373,690 352,298
----------- ----------
Net cash used in operating activities (1,983,116) (413,776)
----------- ----------
Cash flows from investing activities
Purchases of furniture and equipment (484,090) (57,843)
Repayment of note receivable - related party 38,000 -
Increase in deferred acquisition costs - (174,712)
Proceeds from sale of trading securities 152,877 -
Purchase of trading securities (88,557) -
Redemption of certificates of deposit 250,000 500,000
Other (71,786) -
----------- ----------
Net cash provided by (used in) investing
activities (203,556) 267,445
----------- ----------
Cash flows from financing activities
Retirement of common stock - (81,648)
Issuance of common stock - 7,534
Increase in deferred stock offering costs - (451,363)
Increase in notes payable 675,000 750,000
Net proceeds from line of credit - (94,275)
Issuance of convertible debentures, net of costs 1,646,739 -
Payments on capital lease obligations (12,757) (3,941)
----------- ----------
Net cash provided by financing activities 2,308,982 126,307
----------- ----------
Net increase (decrease) in cash 122,310 (20,024)
Cash, beginning of period 253,123 109,387
----------- ----------
Cash, end of period $ 375,433 $ 89,363
=========== ==========
See the accompanying notes
6
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been prepared by
the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. The results of the nine months ended December 31, 1998 are not
necessarily indicative of the results to be expected for the full year ending
March 31, 1999.
NOTE 2 - LOSS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. Net loss per share amounts for all periods have
been restated to conform to SFAS No. 128 requirements.
NOTE 3 - STOCKHOLDERS' EQUITY
Prior to February 11, 1998, a limited public market for the Company's Common
Stock existed on the NASDAQ Bulletin Board under the symbol NOOF. Commencing on
February 11, 1998, the Company's Common Stock and Units (each consisting of one
share of Common Stock and one redeemable common stock purchase warrant) were
quoted on the Nasdaq SmallCap Market under the symbols NOOF and NOOFU,
respectively. As of the close of business on May 18, 1998, the Company split the
Units into their component parts. Commencing on May 19, 1998, the Company's
warrants were quoted on the Nasdaq SmallCap Market under the symbol NOOFW.
In November 1998, the Company issued warrants to purchase the its common stock
as follows:
Number of Warrants Exercise Price
------------------ --------------
100,000 $1.30
25,000 $2.50
In addition, in November 1998, the Company issued 750,000 options to employees
under the Company's incentive stock option plan at a weighted average price of
$1.00.
7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CONVERTIBLE DEBENTURES
In June 1998, pursuant to a private placement, the Company sold to two investors
$1,750,000 principal amount of 8% Convertible Debentures. In connection with
such private placement, the Company issued warrants to purchase up to 175,000
shares of its Common Stock. Interest on the debentures is payable quarterly with
any unpaid interest and principal due on June 3, 2000.
In December 1998, $100,000 of such Debentures were converted into Common Stock.
Subsequent to December 31, 1998, the remaining $1,650,000 of such Debentures
were converted into Common Stock.
NOTE 5 - CONTINGENCIES
On November 11, 1996, the Company entered into a financial consulting agreement
(the "Sands Agreement"), with Sands Brothers & Co., Ltd. ("Sands Brothers"), a
broker-dealer headquartered in New York City under which Sands Brothers agreed
to provide financial advisory services to the Company. The Sands Agreement also
contained a provision granting Sands Brothers the exclusive right to underwrite
or place any private or public financing undertaken by the Company during the
two-year term of the Sands Agreement. On May 20, 1997, the Company terminated
the Sands Agreement based, among other things, on the Company's allegation of
non-performance on the part of Sands Brothers. On September 26, 1997, counsel
for Sands Brothers sent a letter to Mark Kreloff, the Company's Chairman,
alleging that the Sands Agreement was still in force, alleging breach of the
Sands Agreement by the Company and demanding that the Company comply with its
terms. On October 3, 1997, the Company filed a Complaint in District Court in
Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers, alleging breach
of the terms of the Sands Agreement by Sands Brothers. The Company also alleged
fraud in the inducement, and is seeking return of its initial payment of $25,000
to Sands Brothers and rescission of the Sands Agreement. Sands Brothers has
filed an answer and counter-claim to the Company's complaint, and the Company
has filed an answer to Sands Brothers counter-claim. The Company intends to
vigorously pursue its claim against Sands Brothers and believes that Sands
Brothers' counter-claim against the Company is wholly without merit.
On January 7, 1999, Mr. J.P. Lipson filed a Complaint in District Court in
Boulder, Colorado (Case No. 99 CV 30) against the Company, Mark Kreloff and
Michael Weiner, seeking unspecified damages, alleging among other things, fraud
and breach of contract, in connection with a letter of intent dated October 5,
1998, relating to a proposed convertible debenture financing of between $2.5
million and $10 million with the Company. In October 1998, Mr. Lipson advanced
$675,000 to the Company under a secured note, which amount has since been
repaid. Mr. Lipson also paid $481,000 to a vendor at neither the request or
direction of the Company which $481,000 has been recorded as a contingent
liability in the accompanying financial statements. The Company believes that
Mr. Lipson's suit is entirely without merit and intends to vigorously defend
itself against same. In this regard, on February 5, 1999 the Company filed its
answer to Mr. Lipson's suit, together with various counterclaims against Mr.
Lipson, including fraud in the inducement, fraudulent concealment, conspiracy
and two counts of tortious interference.
8
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SUBSEQUENT EVENT
On January 20, 1999, the Company issued a promissory note in the amount of
$500,000. The proceeds from this note were used to repay the $675,000 note
described in Note 5 above. In connection therewith, the Company also issued
100,000 warrants to purchase the Company's common stock at an exercise price of
$1.00.
In addition to the above mentioned warrants, in January 1999, the Company issued
the following warrants to purchase its common stock:
Number of Warrants Exercise Price
------------------ --------------
50,000 $1.50
50,000 $2.00
50,000 $1.00
40,000 $1.00
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-QSB.
OVERVIEW
The Company was incorporated in the State of Colorado on February 23, 1988. The
Company was engaged in reference CD-ROM publishing, through its 70% owned
subsidiary, Boulder Interactive Group, Inc. ("BIG") and in distribution of
unrated and adult feature films in the digital versatile disc ("DVD") format
through its wholly owned subsidiary, DaViD Entertainment, Inc. ("DaViD").
On February 18, 1998, the Company consummated an underwritten public offering of
1,500,000 units, each consisting of one share of common stock and one redeemable
common stock purchase warrant, raising $7,087,500 in net proceeds after
underwriting fees (excluding related offering expenses). Simultaneous with the
closing of the Company's public offering, pursuant to an Asset Purchase
Agreement with Fifth Dimension Communications (Barbados), Inc. and related
companies ("Fifth Dimension"), the Company acquired the adult satellite
television business of Fifth Dimension.
By reason of its 1998 acquisition of Fifth Dimension, the Company, through its
wholly owned subsidiary, Colorado Satellite Broadcasting, Inc. owns and is
engaged in the operation and distribution of adult programming.
As of March 31, 1998, the Company made the decision to sell its remaining 70%
interest in BIG to focus it attention on its adult satellite television
business. BIG was eventually sold in June 1998. As a result of the Company's
change in focus, for the nine months ended December 31, 1998, the operations of
DaViD have been insignificant since substantially all the Company's resources
have been directed toward its adult satellite television business and the launch
of The Erotic Network ("TeN") in August 1998.
The Company has spent approximately $4 million on the launch of TeN. The
creation of this new network required the Company to purchase a film library
that was edited to the standards required by potential cable television and DBS
affiliates of this new network. In addition, the Company was required to
establish and pay for the uplink and satellite costs to carry its programming
before it was able to generate revenue from subscribers. A majority of the $4.3
million loss reported for the nine months ended December 31, 1998, is a result
of the expenses incurred to launch TeN. In the future, the Company does not
expect to incur the magnitude of losses that resulted during the start up phase
of TeN.
The programming costs for the Company's networks are fixed in nature which
requires a minimum number of subscribers to cover these fixed costs. However,
once this minimum number of subscribers is achieved, the cost of adding an
additional subscriber is insignificant. The Company's subscriber base for its
networks continues to grow and the Company expects to generate an operating
profit for the quarter ended March 31, 1999.
10
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended December 31, 1998 Compared to the Three Months Ended
December 31, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
DECEMBER 31, DECEMBER 31, PERCENTAGE OF REVENUE
--------------------------
1998 1997 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue, net $3,456,645 $ 435,717 100.0% 100.0%
Cost of sales 2,772,093 192,951 80.2% 44.3%
---------- --------- ------- -------
Gross Profit 684,552 242,766 19.8% 55.7%
---------- --------- ------- -------
Operating expenses
Marketing and advertising 214,444 89,402 6.2% 20.5%
Depreciation and amortization 287,182 4,336 8.3% 1.0%
General and administrative 895,587 319,962 25.9% 73.4%
---------- --------- ------- -------
Total operating costs 1,397,213 413,700 40.4% 94.9%
---------- --------- ------- -------
Interest income 2,093 7,917 0.1% 1.8%
Interest expense (64,523) (17,182) -1.9% -3.9%
Other (492) 10,692 0.0% 2.5%
---------- --------- ------- -------
Loss before minority interest (775,583) (169,507) -22.4% -38.9%
Minority interest - 28,985 0.0% 6.7%
---------- --------- ------- -------
Net loss $ (775,583) $(140,522) -22.4% -32.3%
========== ========= ======= =======
</TABLE>
Revenue for the three months ended December 31, 1998 increased $3,020,928 or
693% from $435,717 for the three months ended December 31, 1997 to $3,456,645
for the same period in 1998. The increase in revenue is principally due to
revenue of $3,456,308 generated from the Company's adult satellite business that
was acquired in February 1998. As of December 31, 1998, the Company had 128,997
active subscriptions on its three C-band networks and the Company's programming
networks were available in approximately 4.5 million cable, DBS and DTH C-band
addressable households. Revenue for the three months ended December 31, 1997 was
principally from the sale of DVDs through the Company's DaViD subsidiary.
Revenue from the sale of DVDs for the three months ended December 31, 1997 was
$210,266 compared to $0 for the same period in 1998.
Cost of sales for the three months ended December 31, 1998 increased $2,579,142
or 1,337% from $192,951 for the three months ended December 31, 1997 to
$2,772,093 for the same period in 1998. Cost of sales for the three months ended
December 31, 1998 included the cost of providing the Company's programming such
as uplink and satellite costs. The gross profit percentage for the three months
ended December 31, 1998 was 19.8%. A significant portion of the cost of sales is
fixed in nature; accordingly, as the Company's revenue base continues to
increase, the gross profit percentage will also increase. The gross profit
percentage for the three months ended December 31, 1997 was 56%.
11
<PAGE>
Marketing and advertising for the three months ended December 31, 1998 increased
$135,042 or 140% from $89,402 for the three months ended December 31, 1997 to
$214,444 for the same period in 1998. The increase in marketing and advertising
is due to the promotion of the Company's adult satellite business.
Depreciation and amortization for the three months ended December 31, 1998
increased $282846 or 6,523% from $4,336 for the three months ended December 31,
1997 to $287,182 for the same period in 1998. The significant increase in
depreciation and amortization is due to the amortization of the goodwill
generated from the acquisition of Fifth Dimension, the depreciation of the
assets acquired from the acquisition of Fifth Dimension and the amortization of
the film distribution rights.
General and administrative for the three months ended December 31, 1998
increased $575,625 or 180% from $319,962 for the three months ended December 31,
1997 to $895,587 for the same period in 1998. The increase in general and
administrative is principally due to an increase in salary and benefits of
$160,306 and an increase in professional fees of $169,656. The Company has
increased the number of employees as a result of the acquisition of Fifth
Dimension and incurred higher legal fees as result of the Company being publicly
held.
Interest income for the three months ended December 31, 1998 decreased $5,824 or
74% from $7,917 for the three months ended December 31, 1997 to $2,093 for the
same period in 1998. The decrease is due to less available cash to invest.
Interest expense for the three months ended December 31, 1998 increased $47,341
or 276% from $17,182 for the three months ended December 31, 1997 to $64,523 for
the same period in 1998. The increase is principally due to the interest accrued
on the 8% convertible debentures issued in June 1998.
Other income (expense) for the three months ended December 31, 1998 decreased
$11,184 or 105% from other income of $10,692 for the three months ended December
31, 1997 to other expense of $492 for the same period in 1998. The decrease is
due to $14,547 of royalties received for the three months ended December 31,
1997. No such royalties were received for the three months ended December 31,
1998.
Minority interest for the three months ended December 31, 1998 decreased $28,985
or 100% from $28,985 for the three months ended December 31, 1997 to $0 for the
same period in 1998. In 1998 there is no minority interest due to the Company
selling its 70% interest in BIG in June 1998.
Net loss for the three months ended December 31, 1998 increased $635,061 or 452%
from $140,522 for the three months ended December 31, 1997 to $775,583 for the
same period in 1998. The increase in net loss is principally due to higher
depreciation and amortization of assets acquired from Fifth Dimension and higher
personnel and legal costs.
12
<PAGE>
Nine Months Ended December 31, 1998 Compared to the Nine Months Ended
December 31, 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------
DECEMBER 31, DECEMBER 31, PERCENTAGE OF REVENUE
--------------------------
1998 1997 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue, net $ 7,755,185 $1,163,492 100.0% 267.0%
Cost of sales 8,110,447 700,004 104.6% 160.7%
----------- ---------- -------- --------
Gross Profit (355,262) 463,488 -4.6% %
----------- ---------- -------- --------
Operating expenses
Marketing and advertising 670,544 235,383 8.6% 54.0%
Depreciation and amortization 969,020 12,557 12.5% 2.9%
General and administrative 2,099,532 936,328 27.1% 214.9%
----------- ---------- -------- --------
Total operating costs 3,739,096 1,184,268 48.2% 271.8%
----------- ---------- -------- --------
Interest income 10,911 29,182 0.1% 6.7%
Interest expense (164,164) (42,585) -2.1% -9.8%
Other (17,001) 90,577 -0.2% 20.8%
----------- ---------- -------- --------
Loss before minority interest (4,264,612) (643,606) -55.0% -147.7%
Minority interest - 71,764 0.0% 16.5%
=========== ========== ======== ========
Net loss $(4,264,612) $ (571,842) -55.0% -131.2%
=========== ========== ======== ========
</TABLE>
Revenue for the nine months ended December 31, 1998 increased $6,591,693 or 567%
from $1,163,492 for the nine months ended December 31, 1997 to $7,755,185 for
the same period in 1998. The increase in revenue is principally due to revenue
of $7,533,058 generated from the Company's adult satellite business that was
acquired in February 1998. Revenue for the nine months ended December 31, 1997
was principally from the sale of DVDs through the Company's DaViD subsidiary.
Revenue from the sale of DVDs for the nine months ended December 31, 1997 was
$806,766 compared to $201,265 for the same period in 1998.
Cost of sales for the nine months ended December 31, 1998 increased $7,410,443
or 1,059% from $700,004 for the nine months ended December 31, 1997 to
$8,110,447 for the same period in 1998. Cost of sales for the nine months ended
December 31, 1998 included the cost of providing the Company's programming such
as uplink and satellite costs. The gross profit (loss) percentage for the nine
months ended December 31, 1998 was (4.6%). A significant portion of the cost of
sales is fixed in nature; accordingly, as the Company's revenue base continues
to increase, the gross profit percentage will also increase. The Company showed
a gross profit percentage of 19.8% for the three months ended December 31, 1998.
However, the negative gross profit percentage for the nine months ended December
31, 1998 is attributed to the higher negative margins experienced by the Company
during the quarterly periods ended June 30, 1998 and September 30, 1998. The
gross profit percentage for the nine months ended December 31, 1997 was 40%.
13
<PAGE>
Marketing and advertising for the nine months ended December 31, 1998 increased
$435,161 or 185% from $235,383 for the nine months ended December 31, 1997 to
$670,544 for the same period in 1998. The increase in marketing and advertising
is due to the promotion of the Company's adult satellite business.
Depreciation and amortization for the nine months ended December 31, 1998
increased $956,463 or 7,617% from $12,557 for the nine months ended December 31,
1997 to $969,020 for the same period in 1998. The significant increase in
depreciation and amortization is due to the amortization of the goodwill
generated from the acquisition of Fifth Dimension, the depreciation of the
assets acquired from the acquisition of Fifth Dimension and the amortization of
the film distribution rights.
General and administrative for the nine months ended December 31, 1998 increased
$1,163,204 or 124% from $936,328 for the nine months ended December 31, 1997 to
$2,099,532 for the same period in 1998. The increase in general and
administrative is principally due to an increase in salary and benefits of
$673,834, shareholder relations of $58,377 and legal and professional fees of
$213,165. The Company has increased the number of employees as a result of the
acquisition of Fifth Dimension and incurred additional professional and
shareholder relation expenses as a result of the Company being publicly traded.
Interest income for the nine months ended December 31, 1998 decreased $18,271 or
63% from $29,182 for the nine months ended December 31, 1997 to $10,911 for the
same period in 1998. The decrease is due to less available cash to invest.
Interest expense for the nine months ended December 31, 1998 increased $121,579
or 285% from $42,585 for the nine months ended December 31, 1997 to $164,164 for
the same period in 1998. The increase is principally due to the interest accrued
on the 8% convertible debentures issued in June 1998.
Other income (expense) for the nine months ended December 31, 1998 decreased
$107,578 or 119% from other income of $90,577 for the nine months ended December
31, 1997 to other expense of $17,001 for the same period in 1998. The decrease
is due to $109,830 of royalties received for the nine months ended December 31,
1997. No such royalties were received for the nine months ended December 31,
1998.
Minority interest for the nine months ended December 31, 1998 decreased $71,764
or 100% from $71,764 for the nine months ended December 31, 1997 to $0 for the
same period in 1998. In 1998 there is no minority interest due to the Company
selling BIG in fiscal 1999.
Net loss for the nine months ended December 31, 1998 increased $3,692,770 or
646% from $571,842 for the nine months ended December 31, 1997 to $4,264,612 for
the same period in 1998. The increase in net loss is principally due to the high
fixed cost of operating the Company's adult satellite business and the
depreciation and amortization of assets acquired from Fifth Dimension.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 1998 the Company used, rather than
provided, cash from operations in the amount of $1,983,116. The Company has
funded this operating deficit from proceeds from a public offering and the
issuance of debt.
On February 18, 1998, the Company completed its initial public offering by
selling 1,500,00 units, each unit consisting of one share of common stock and
one redeemable common stock purchase warrant. The Company received net proceeds
of $6,184,626 after deducting underwriter's commissions of $682,500,
non-accountable expense allowance of $236,250 and
14
<PAGE>
other offering expenses of $666,624. $3,500,000 of the net proceeds was used to
acquire Fifth Dimension.
In June 1998, pursuant to a private placement, the Company sold to two investors
$1,750,000 principal amount of 8% Convertible Debentures. The investors have
since converted the Debentures into Common Stock. In connection with such
private placement, the Company issued warrants to purchase up to 175,000 shares
of its Common Stock.
In October 1998, the Company received $675,000 from a private investor, which
has since been repaid.
In January 1999, the Company issued a promissory note in the amount of $500,000.
The proceeds from this note were used to repay the $675,000 promissory note
mentioned in the above paragraph.
Satellite costs will continue to be a major expenditure for the Company. The
cost of providing its adult programming networks to the Company's customers is
principally satellite costs and related expenses, which are generally fixed in
nature.
The Company is actively seeking additional funds to satisfy its immediate and
near-term capital requirements, and is highly confident that it will secure such
financing.
The Company is also seriously considering, and is in discussions with third
parties regarding, entering into a strategic partnership and/or joint venture
involving its adult programming networks in order to raise additional working
capital, cut expenses and increase its promotion of its networks. Failure to
obtain additional working capital in a timely manner or on acceptable terms
could have a material adverse effect on the Company, its operations, financial
results and prospects.
The Company has received notice from The Nasdaq Stock Market that it fails to
meet Nasdaq's $2 million in net tangible assets standard for continued listing
on the Nasdaq Small Cap Market. The Company has requested a hearing to review
that determination. In the event the Company's securities are delisted from
Nasdaq, such delisting is likely to have an adverse effect on the Company's
ability to raise additional financing. On the other hand, the Company believes
it will be able to raise the additional equity financing required to maintain
its Nasdaq listing before any such delisting.
IMPACT OF INFLATION
To date inflation has not had a material impact on the Company's operations.
YEAR 2000
The Company has not made a formal assessment of Year 2000 issues. Generally,
"Year 2000 issues" refers to problems that may arise due to the inability of
some computer software to distinguish between the early part of the present
century and the early part of the next because the software only uses two digits
to identify the year. Thus, 2001 would be indistinguishable from 1901. The
Company believes that there are three possible ways that it could be impacted by
this problem.
First, the Company's internal software could fail. If the Company's software
should fail it might disrupt accounting and similar tasks. The Company believes
that even if its software should fail, remediation would not create a material
expense. The second concern posed by Year 2000 issues is the impact that such
software failure would have on the Company's suppliers. The Company does not
believe that its suppliers could not continue to conduct business even in the
15
<PAGE>
face of Year 2000 problems. The Company relies on its suppliers to provide
satellites to broadcast its programs and also relies on the telephone system for
customers to order its products. To the extent the Company may experience a
material interruption in satellite or telephone service, it could be materially
and adversely affected. The Company, however, believes that its suppliers are
sufficiently sophisticated computer users that they will not experience
problems, either by remediation or because they are already using software that
can make the distinction between centuries ("Year 2000 compliant"). The third
possible threat posed to the Company by Year 2000 issues is one of a general
downturn in the economy due to software failures. The Company believes that this
is a remote possibility.
Although the Company believes that it will not suffer any material adverse
effects as a result of Year 2000 issues, it has not made a formal assessment of
the problem and it cannot be certain its judgment regarding Year 2000 is
correct. In the event that the Company or its suppliers experience a software
failure such a failure could have a material adverse impact on the Company's
business financial condition and results of operations. Similarly, if the
economy as a whole should be adversely impacted by Year 2000 problems, it could
have a material adverse effect on the Company's business financial condition and
results of operations.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, general market conditions, competition and pricing. Although the
Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.
16
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 11, 1996, the Company entered into a financial consulting agreement
(the "Sands Agreement"), with Sands Brothers & Co., Ltd. ("Sands Brothers"), a
broker-dealer headquartered in New York City under which Sands Brothers agreed
to provide financial advisory services to the Company. The Sands Agreement also
contained a provision granting Sands Brothers the exclusive right to underwrite
or place any private or public financing undertaken by the Company during the
two-year term of the Sands Agreement. On May 20, 1997, the Company terminated
the Sands Agreement based, among other things, on the Company's allegation of
non-performance on the part of Sands Brothers. On September 26, 1997, counsel
for Sands Brothers sent a letter to Mark Kreloff, the Company's Chairman,
alleging that the Sands Agreement was still in force, alleging breach of the
Sands Agreement by the Company and demanding that the Company comply with its
terms. On October 3, 1997, the Company filed a Complaint in District Court in
Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers, alleging breach
of the terms of the Sands Agreement by Sands Brothers. The Company also alleged
fraud in the inducement, and is seeking return of its initial payment of $25,000
to Sands Brothers and rescission of the Sands Agreement. Sands Brothers has
filed an answer and counter-claim to the Company's complaint, and the Company
has filed an answer to Sands Brothers counter-claim. The Company intends to
vigorously pursue its claim against Sands Brothers and believes that Sands
Brothers' counter-claim against the Company is wholly without merit.
On January 7, 1999, Mr. J.P. Lipson filed a Complaint in District Court in
Boulder, Colorado (Case No. 99 CV 30) against the Company, Mark Kreloff and
Michael Weiner, seeking unspecified damages, alleging among other things, fraud
and breach of contract, in connection with a letter of intent dated October 5,
1998, relating to a proposed convertible debenture financing of between $2.5
million and $10 million with the Company. In October 1998, Mr. Lipson advanced
$675,000 to the Company under a secured note, which amount has since been
repaid. Mr. Lipson also paid $481,000 to a vendor at neither the request or
direction of the Company which $481,000 has been recorded as a contingent
liability in the accompanying financial statements. The Company believes that
Mr. Lipson's suit is entirely without merit and intends to vigorously defend
itself against same. In this regard, on February 5, 1999 the Company filed its
answer to Mr. Lipson's suit, together with various counterclaims against Mr.
Lipson, including fraud in the inducement, fraudulent concealment, conspiracy
and two counts of tortious interference.
Item 2. Change in Securities
The Company completed its initial public offering by selling 1,500,00 units
(each unit consisting of one share of common stock and one redeemable common
stock purchase warrant pursuant to a registration statement (commission file no.
333-35337) dated February 18, 1998. The managing underwriter for this offering
was Centex Securities, Incorporated. The Company received net proceeds of
$6,184,626 after deducting underwriter's commissions of $682,500,
non-accountable expense allowance of $236,250 and other offering expenses of
$666,624.
17
<PAGE>
The following table sets forth the Company's use of proceeds from its initial
public offering, from the closing of the offering until December 31, 1998.
Acquisition of Fifth Dimension $ 3,500,000
Purchase of equipment and materials related to the business 1,465,328
Working capital 1,219,298
-----------
Total net proceeds $ 6,184,626
===========
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
NEW FRONTIER MEDIA, INC.
/s/ Mark H. Kreloff
------------------------
Mark H. Kreloff
Chairman and Chief Executive
Officer (Principal Accounting Officer)
19
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