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 JUNE 30, 1999
[ ] 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 BLVD., 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 June 30, 1999: 12,579,517
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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NEW FRONTIER MEDIA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION......................................... 3
Item 1. Financial Statements.......................................... 3
Condensed Consolidated Balance Sheet at June 30, 1999......... 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1999 and June 30, 1998............ 5
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1999 and 1998..................... 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis or Plan of Operation.... 9
Part II. OTHER INFORMATION............................................. 14
Item 1. Legal Proceedings............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 15
SIGNATURES
Part III. EXHIBITS
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 1,956,738
Accounts receivable, net of reserve 849,863
Prepaid distribution rights 1,119,796
Prepaid expenses 285,479
Deposits 114,929
Other 403,341
------------
Total current assets 4,730,146
------------
FURNITURE AND EQUIPMENT
Furniture and equipment, cost 3,178,055
Less: Accumulated depreciation (483,904)
------------
Net Furniture and equipment 2,694,151
OTHER ASSETS
Goodwill, net of accumulated amortization of $868,337 5,492,554
Prepaid distribution rights 2,203,592
Deposits 218,715
------------
Total other assets 7,914,861
------------
Total Assets $ 15,339,158
============
</TABLE>
See notes to unaudited condensed consolidated financial statements
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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C>
Accounts payable $ 663,081
Current Portion of capital lease obligations 279,805
Deferred revenue 2,897,476
Other accrued liabilities 844,573
Note Payable 1,490,000
------------
Total current liabilities 6,174,935
------------
LONG-TERM DEBT
Obligations under capital leases 493,975
------------
Total liabilities 6,668,910
------------
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
12,579,517 shares issued and outstanding 1,258
Additional paid-in capital 20,698,180
Accumulated deficit (12,029,190)
------------
Total stockholders' equity 8,670,248
------------
Total liabilities and stockholders' equity $ 15,339,518
============
</TABLE>
See notes to unaudited condensed consolidated financial statements
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NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
SALES, net $ 3,166,506 $ 1,863,943
COST OF SALES 2,545,941 1,840,234
-------------- --------------
GROSS MARGIN 620,565 23,709
-------------- --------------
OPERATING EXPENSES
Occupancy and equipment 123,929 108,836
Legal and Professional 151,030 59,026
Advertising and promotion 960,987 818,709
Salaries, wages and benefits 513,609 286,719
Communications 50,777 28,614
General and administrative 246,678 144,998
Goodwill amortization 158,454 159,594
Consulting 153,804 78,207
-------------- --------------
TOTAL OPERATING EXPENSES 2,359,268 1,684,703
-------------- --------------
OTHER INCOME (EXPENSE):
Gain (Loss) on trading securities 5,949 (19,850)
Interest Income 14,020 4,693
Interest Expense (32,259) (32,061)
-------------- --------------
TOTAL OTHER INCOME (EXPENSE) (12,290) (47,218)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS $ (1,750,993) $ (1,708,212)
DISCONTINUED OPERATIONS
Loss from operations of discontinued subsidiaries -- (30,403)
-------------- --------------
NET LOSS (1,750,993) (1,738,615)
============== ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.14) $ (0.26)
FROM CONTINUING OPERATIONS
BASIC AND DILUTED NET LOSS PER COMMON SHARE (0) $ (0.01)
FROM DISCONTINUED OPERATIONS
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.14) $ (0.27)
WEIGHTED AVERAGE SHARES OUTSTANDING $ 12,561,739 $ 6,542,000
============== ==============
</TABLE>
See notes to unaudited condensed consolidated financial statements
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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------- --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss (1,750,993) (1,738,615)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and Amortization 660,427 339,755
Increase(decrease) in accounts payable (1,183,792) 2,523
(Increase) decrease in inventories -- (44,190)
(Increase)decrease in accounts receivable (108,940) (33,362)
(Gain) Loss on sale of trading securities (5,949) 19,850
Gain on disposal of subsidiary -- (14,313)
(Increase) decrease in prepaid distribution rights (165,440) (278,607)
Increase (decrease) in deferred revenue (1,255) 471,328
Increase (decrease) in other accrued liabilities 183,970 (59,544)
(Increase) decrease in other assets 246,685 197,023
--------- ----------
Net cash used in operating activities (2,125,287) (1,138,152)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture & equipment (282,966) (43,010)
Proceeds from sale of trading securities 56,099 152,877
Purchase of trading securities -- (88,557)
Disposal of subsidiary, net of cash paid -- (40,313)
--------- ----------
Net cash provided by (used in) investing activities (226,867) (19,003)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in related party notes receivable -- (8,006)
Issuance of convertible debentures, net of offering costs -- 1,656,740
Payments on capital lease obligations (49,504) --
Increase in notes payable 1,490,000 --
Warrant exercise 132,210 --
--------- ----------
Net cash provided by financing activities 1,572,706 1,648,734
--------- ----------
Net increase (decrease) in cash (779,448) 491,579
Cash, beginning of period 2,736,186 253,123
--------- ----------
Cash, end of period 1,956,738 744,702
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ITEMS
Interest Paid 28,551 213
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of Equipment via capital lease obligations 116,011 --
</TABLE>
See notes to unaudited condensed consolidated financial statements
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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS, AND CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of New Frontier Media, Inc. ("the Company" or "New Frontier Media")
and its wholly owned subsidiaries Colorado Satellite Broadcasting, Inc. ("CSB"),
Boulder Interactive Group ("BIG"), Fuzzy Entertainment, Inc. ("Fuzzy") and David
Entertainment, Inc. ("David"). The Company sold its 70% interest in BIG in June
1998, discontinued the operations of Fuzzy during the year ended March 31, 1998,
and discontinued the operations of David during the year ended March 31, 1999.
During the quarter ended June 30, 1999, New Frontier Media, through its
subsidiary CSB, launched Pleasure, a new 24-hour adult network that incorporates
the most edited standard available in the category. Pleasure is available to
direct broadcast satellite and multiple system cable providers. Pleasure
competes directly with Playboy Enterprises, Inc.'s ("Playboy") adult network
services (Playboy TV, Spice and Spice 2) in the most edited adult programming
category.
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments, which, in the opinion of management are necessary for a fair
presentation of the results of operations for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or any future period.
These financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-KSB, as amended on August 10, 1999, for the year ended March 31,
1999.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2 NOTE PAYABLE
On June 15, 1999, the Company entered into an agreement for a $2,000,000 line of
credit available from an unrelated entity. As of June 30, 1999, New Frontier
Media had drawn $1,490,000 on this line of credit. The line of credit bears
interest at 10% per annum and is secured by assets of New Frontier Media. The
line of credit must be repaid by September 20, 1999.
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NOTE 3 SHAREHOLDERS' EQUITY
In May of 1999, the remaining 40,000 warrants of a total of 175,000 warrants to
purchase common stock in the Company at $3.4785 per share were exercised by
previous debenture holders.
NOTE 4 STOCK OPTIONS AND WARRANTS
The Company granted warrants to employees, consultants and unrelated third
parties for services provided allowing them to purchase common stock of New
Frontier Media at a price equal to or in excess of the current market price of
the Company's common stock on the date of grant. The following information
describes certain information relating to these warrants:
Expiration Date Warrants Exercise Price
--------------- -------- --------------
April 2002 75,000 4.75
May 2002 1,309 6.875
May 2002 1,333 9.00
May 2002 100,000 6.30
May 2009 1,000 7.00
May 2009 5,000 5.00
June 2002 10,000 9.50
NOTE 5 CONTINGENCIES
The Company is a defendant in a lawsuit filed on January 25, 1999, in which the
plaintiff seeks to enforce an alleged agreement by the Company to convey to the
plaintiff a 70% equity interest in the Company. The plaintiff is also seeking
$10 million in liquidated damages and/or unspecified damages. The Company
disputes that there exists a binding and enforceable agreement to transfer any
equity interest in New Frontier Media to the plaintiff and filed on February 10,
1999 a motion for partial summary judgement directed to this issue. To date, the
court has neither ruled on nor set the Company's motion for a hearing. The
Company will continue to vigorously defend itself against the plaintiff's
claims. The loss, if any, cannot be estimated at the present time.
NOTE 6 SUBSEQUENT EVENTS
On July 21, 1999, New Frontier Media executed a definitive license agreement to
acquire exclusive rights to Metro Global Media, Inc.'s 3,000 title adult film
and video library and multi-million still image archive for a period of seven
years with renewal provisions. In addition, New Frontier Media entered into a
multi-year production agreement with Metro Global Media, Inc. ("Metro") which
calls for the development of an additional 400 new adult feature titles over the
next five years.
Under the agreement, New Frontier Media will issue 500,000 restricted shares of
its common stock to Metro in exchange for distribution rights to its 3,000 adult
film and video library and its multi-million still image archive. In addition,
over a five-year period Metro will receive 500,000 warrants to purchase common
stock of New Frontier Media at an exercise price equal to the market value of
the stock on the date the warrants are issued. Metro will also receive cash
consideration for the production of over 400 new titles and the exclusive
electronic distribution rights to those titles over the next five years.
Pursuant to the agreement, New Frontier Media will receive 250,000 restricted
shares of Metro's common stock and, over a five-year period, warrants to
purchase 250,000 restricted shares of Metro's common stock at an exercise price
equal to the market value of the stock on the date the warrants are issued.
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The licensing agreement provides New Frontier Media the right to utilize Metro's
adult film and video library for all formats of electronic delivery, including
dial-up internet, broadband internet, video-on-demand, subscription and pay
television, and other video delivery mechanisms.
In connection with the above licensing agreement, New Frontier Media issued
500,000 shares of restricted stock on July 21, 1999 to Metro. In addition,
100,000 warrants to purchase common stock of the Company were issued on July 21,
1999, to Metro, with an exercise price of $7.875.
Item 2. Management's Discussion and Analysis or Plan of Operation
This Quarterly Report on Form 10-QSB and the information incorporated
by reference may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. The
Company intends the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements. All statements regarding the
Company's expected financial position and operating results, its business
strategy, its financing plans and the outcome of any contingencies are
forward-looking statements. The forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those set forth or implied by any forward looking statements.
OVERVIEW
New Frontier Media was originally incorporated in the State of Colorado on
February 23, 1988. The Company was engaged in the reference CD-ROM publishing
business through its 70% ownership of BIG and in the distribution of adult
feature films in the digital video disc format through its wholly owned
subsidiary David. New Frontier sold its 70% interest in BIG in June 1998. In
addition, the Company discontinued the operations of David during its fiscal
year ended March 31, 1999.
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 warrant, raising $7,087,000 in net proceeds after underwriting
fees. Simultaneous with the public offering, New Frontier Media acquired the
adult satellite television assets of Fifth Dimension Communications (Barbados),
Inc. and its related entities ("Fifth Dimension"). As a result of the Fifth
Dimension acquisition, the Company through its wholly owned subsidiary CSB,
became a leading provider of adult programming to low-powered ("C-Band")
direct-to-home ("DTH") households. As of June 30, 1999, the Company had the
following number of subscribers to its three C-Band networks: EXTASY 54,956,
TRUE BLUE 49,648, AND GONZOX 42,267.
In August 1998, New Frontier Media launched TeN: THE EROTIC NETWORK ("TeN") as a
new adult network targeted specifically to cable television system operators and
medium-to-high powered DTH satellite service providers (Direct Broadcast
Satellite, or "DBS"). Unlike New Frontier Media's C-Band networks, TeN offers
partially-edited adult programming which is intended to appeal to cable
operators and DBS providers while delivering more of the editing style adult
network subscribers expect to receive. As of June 30, 1999, TeN was available to
approximately 3.4 million cable/DBS households.
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On June 1, 1999, New Frontier Media launched Pleasure, a 24-hour adult network
that incorporates the most edited standard available in the category, on
EchoStar Communications Corporation's DISH Network and on cable television
systems owned by a leading multiple cable television system operator ("MSO").
Pleasure competes directly with Playboy Enterprises, Inc.'s adult network
services (Playboy TV, Spice and Spice 2) in the most-edited adult programming
category. As of June 30, 1999, Pleasure was available to approximately 3.0
million cable/DBS households.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $3,166,506 for the quarter ended June 30, 1999, a 70% increase
from $1,863,943 for the quarter ended June 30, 1998. The increase was due
primarily to an increase in C-Band revenue of approximately 45%. C-Band
subscribers increased from 126,263 as of June 30, 1998 to 146,871 as of June 30,
1999. This increase in revenue and subscriber counts for the C-Band business is
due primarily to the Company's increased expertise with its C-Band business,
increased advertising and on-air barker promotions, increased training of the
Company's call center representatives and the introduction of a monthly sales
incentive program for these representatives. No assurances can be given that
this level of growth will be sustained in future periods due to the mature
C-Band market.
Additionally, the increase in net revenues is due to the launch of the Company's
cable/DBS networks, TeN and Pleasure which did not exist as of June 30, 1998.
Approximately 15% of the Company's revenues for the quarter ended June 30, 1999
were derived from these two networks. The Company added approximately 865,000
TeN and 3.0 million Pleasure cable/DBS addressable households through launches
and on-line growth (i.e., growth in addressable subscribers for existing
affiliates) during the quarter ended June 30, 1999. Management expects that
growth in the number of addressable households will continue to increase in
future periods as it continues to aggressively promote TeN and Pleasure to
additional cable and DBS providers.
COST OF SALES
Cost of Sales were $2,545,941 for the quarter ended June 30, 1999 as compared to
$1,840,234 for the quarter ended June 30, 1998, an increase of 38%. Cost of
sales consists of expenses associated with playout, uplinking, satellite
transponder space, program acquisition amortization, and call center operations.
The increase in cost of sales is primarily due to the increase in program
acquisition costs, uplinking, playout, and transponder space costs all
associated with the addition of TeN and Pleasure. Due to the fact that
approximately 70% of the Company's cost of sales are fixed in nature, management
does not anticipate any significant increases in cost of sales in future
periods.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment expenses were $123,929 for the quarter ended June 30,
1999 compared to $108,836 as of June 30, 1998, an increase of 14%. Occupancy and
equipment expenses relate primarily to rent and depreciation expense. The
increase in expenses is primarily attributable to the fact that the Company now
occupies approximately three times the amount of space compared with the space
it occupied as of June 30, 1998. The increase in the Company's space needs are
due to the additional staff hired to support the operations of two new networks
and due to its Broadcast Operations Playout facility which began its operations
as of April 1999. Management expects that additional space will be needed in the
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future as it expands its Broadcast facility to accommodate the playout of its
C-Band networks.
LEGAL AND PROFESSIONAL
Legal and professional expenses were $151,030 for the quarter ended June 30,
1999 compared to $59,026 as of June 30, 1998, an increase of 156%. The increase
is primarily attributable to the Company's policy to vigorously defend itself
against all claims.
ADVERTISING AND PROMOTION
Advertising and promotion expenses were $960,987 for the quarter ended June 30,
1999 compared to $818,709 as of June 30, 1998, an increase of 17%. Advertising
and promotion expenses consist of on-air barker costs, print advertising,
expenses incurred with respect to trade shows, travel and meals/entertainment
expenses. The increase is primarily due to an increase in trade show expenses.
The Company attended one of the largest cable shows in June 1999, NCTA, and
expanded its trade show booth resulting in larger set-up fees than last year.
Additionally, the Company's print advertising expenditures increased due to the
additional advertising necessary to promote TeN and Pleasure. The Company
believes that advertising and promotion expenditures will increase in future
periods as it continues its commitment to the promotion through trade shows and
advertising of its TeN and Pleasure networks.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits were $513,609 for the quarter ended June 30, 1999
compared to $286,719 for the quarter ended June 30, 1998, an increase of 79%.
This increase is due to the hiring of additional sales, marketing, and creative
staff to support the Company's two new networks, TeN and Pleasure. As of June
30, 1999 the Company employed approximately 45 people as compared to 21
employees as of June 30, 1998. The Company expects that salaries, wages and
benefits will increase in future periods as it hires additional sales,
marketing, and creative staff to support its networks.
COMMUNICATIONS
Communications expense was $50,777 for the quarter ended June 30, 1999 compared
to $28,614 for the quarter ended June 30, 1998, an increase of 78%.
Communication expense relates primarily to telephone expenses incurred for the
call center operations, wide area network services, Internet service providers,
and long distance and local phone service. The increase in this expense is
related to the addition of T-1 lines, remote links to the Company's Los Angeles
office, additional employees, and internet web hosting services.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $246,678 for the quarter ended June 30,
1999 compared to $144,998 for the quarter ended June 30, 1998, an increase of
70%. General and administrative expenses consist primarily of bank charges,
insurance, outside services, office supplies, postage, printing, and
registration filing fees. The increase is due to an increase in bank charges
related to the additional revenue processed through our merchant accounts, an
increase in health insurance expense due to the additional staff hired, and in
increase in printing costs related to promotional material necessary for the
Company's two new networks. The Company expects that its general and
administrative expenses will increase as it hires additional employees.
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GOODWILL AMORTIZATION
As part of the February 1998 acquisition of Fifth Dimension the Company recorded
goodwill in the amount of $6,360,891 which is being amortized over 120 months.
CONSULTING
Consulting expenses were $153,804 for the quarter ended June 30, 1999 compared
to $78,207 for the quarter ended June 30, 1998, an increase of 97%. Consulting
expenses consist of payments made to outside consultants in various capacities
such as program content acquisition, broadcast operations, marketing and sales.
The increase is due to the addition of consultants used in the capacity of
marketing, sales, broadcast operations, and program content acquisition. The
Company expects that its consulting expense will decrease in future periods as
it hires full-time employees to provide these services.
OTHER EXPENSE
Net total other expenses were $12,290 for the quarter ended June 30,1999
compared to $47,218 for the quarter ended June 30, 1998, a decrease of 74%. Net
total other expenses consist of interest expense, interest income, and gain/loss
on trading securities. The decrease is primarily due to the Company incurring a
gain on its trading securities of $5,949 as of June 30, 1999 compared to a loss
on trading securities of ($19,850) as of June 30, 1998, as well as an increase
in interest income earned during the June 30, 1999 quarter on the Company's cash
balances.
LOSS FROM OPERATIONS OF DISCONTINUED SUBSIDIARIES
Loss from operations of discontinued subsidiaries was $0 for the quarter ended
June 30, 1999 compared with a loss of $30,403 for the quarter ended June 30,
1998. As of March 31, 1999, the Company had discontinued the operations of its
operating subsidiary, David. As of March 31, 1998, New Frontier Media had
formalized its plan to discontinue operations of its operating subsidiaries
Fuzzy and BIG. On June 26, 1998, the Company finalized its sale of its 70%
interest in BIG. As of June 30, 1998, the Company had a gain on operations from
discontinued subsidiaries of $14,314 related to BIG and a loss on operations
from discontinued subsidiaries of ($44,717)related to David.
NET LOSS
The Company recorded a net loss from continuing operations of $1,750,993 for the
quarter ended June 30, 1999 compared to $1,708,212 for the quarter ended June
30, 1998, an increase of 3%. Management believes that the Company's net loss
will decrease in future periods and that the Company will become profitable
within the next two quarters based on the following: 1) the inclusion on
EchoStar Communications Corporation's DISH network's impulse PPV system should
dramatically increase revenue for TeN; 2) an increase in carriage for both TeN
and Pleasure combined with the expiration of launch incentive programs; and 3)
the proposed acquisition of Interactive Gallery, Inc. ("IGallery"), Interactive
Telecom Networks, Inc.("ITN"), and Card Transactions, Inc. which may occur and
are collectively cash flow positive.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999 the Company had cash and cash equivalents of $1,956,738
compared to $744,702 as of June 30, 1998.
For the three months ended June 30, 1999 cash used in operating activities of
$2,125,287 was primarily due to a net loss of $1,750,993, a decrease in accounts
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payable of $1,183,792, an increase in accounts receivable of $108,940 and an
increase in prepaid distribution rights of $165,440. For the quarter ended June
30, 1998, the cash used in operating activities of $1,138,152 was primarily due
to a net loss of $1,738,615 and an increase in prepaid distribution rights of
$278,607.
Cash used in investing activities was $226,867 for the quarter ended June 30,
1999. This is primarily due to capital expenditures of $282,966 related to
purchases of furniture, computers, additions made to the trade show booth, and
purchases of receiver/decoder equipment. Cash used in investing activities for
the quarter ended June 30, 1998 was $19,003 and was primarily related to the
sale of BIG and capital expenditures.
For the three months ended June 30, 1999 net cash provided by financing
activities was $1,572,706 and related primarily to the funding of $1,490,000 on
the Company's line of credit. Net cash provided by financing activities for the
three months ended June 30, 1998 was $1,648,734 and was primarily related to the
issuance of convertible debentures of $1,656,740.
The Company currently has no material commitments other than its line of
credit and those under its operating and capital lease agreements. The
Company anticipates that capital expenditures will increase during future
periods with respect to the following planned investments: 1) The Company plans
to bring its call center operations in-house to Boulder, Colorado from
Bluefield, West Virginia where it is currently outsourced to TurnerVision. This
move is planned for August 1999 and will result in the purchase of additional
furniture and fixtures, computers, and phone system of approximately $300,000;
2) The Company has plans to expand its Broadcast Playout Operations facility, at
an estimated cost of $1 million, to accommodate the broadcast of its three
C-Band networks which are currently played-out in Ottawa, Canada; 3) The Company
will purchase approximately $400,000 of receiver/decoder equipment as additional
cable carriage is obtained for its TeN and Pleasure networks during the next 12
months.
New Frontier Media believes that its existing cash will be sufficient to satisfy
its operating requirements for its current operations for the next three months.
The Company expects to receive as much as $9.75 million through the exercise of
its 1,500,000 publicly traded warrants that are exercisable at $6.50. In the
event that the Company does not receive at least $5 million through the exercise
of its public warrants or does not complete its acquisition of ITN and IGallery,
it will need to raise additional funds through the sale of additional equity or
debt securities to finance its future growth plans.
The Company is a defendant in a lawsuit filed on January 25, 1999, in which the
plaintiff seeks to enforce an alleged agreement by the Company to convey to the
plaintiff a 70% equity interest in the Company. The plaintiff is also seeking
$10 million in liquidated damages and/or unspecified damages. The Company
disputes that there exists a binding and enforceable agreement to transfer any
equity interest in the Company to the plaintiff and filed on February 10, 1999 a
motion for partial summary judgement directed to this issue. To date, the court
has neither ruled on nor set the Company's motion for a hearing. The Company
will continue vigorously to defend itself against the plaintiff's claims. The
loss, if any, cannot be estimated at the present time. If the Company were not
to prevail in this lawsuit, its liquidity and capital resources could be
materially adversely effected.
YEAR 2000 IMPLICATIONS
In response to the Year 2000 problem, New Frontier Media has identified and is
implementing changes to its existing computerized business systems. New Frontier
Media is addressing the issue through a combination of modifications to existing
programs and conversions to Year 2000 compliant software. In addition, New
Frontier Media has communicated with its vendors and other service providers to
ensure that their products and business systems are or will be Year 2000
compliant. If modifications and conversions by New Frontier Media and those with
which New Frontier Media conducts business are not made in a timely manner, the
Year 2000 problem could have a material adverse effect on New Frontier Media's
business, financial condition and results of operations.
Substantially all of New Frontier Media's major systems have been identified as
Year 2000 compliant. These major systems include financial applications and key
operating systems of the Company. New Frontier Media is currently assessing the
Year 2000 compliance of its equipment used in the Ottawa, Canada uplinking
facility. The Company expects to complete this assessment by the end of its
second quarter.
13
<PAGE>
New Frontier Media is currently evaluating less critical systems, such as
desktop applications, with plans for all systems to be in compliance by
September 30, 1999. New Frontier Media is also reviewing its non-information
technology systems to determine the extent of any modifications and believe that
there will be minimal changes necessary for compliance. Although New Frontier
Media is still quantifying the impact, the current estimate of the total costs
associated with the required modifications and conversions are expected to be
slightly in excess of $35,000, of which approximately $15,000 was expensed in
fiscal year 1999. No additional expenditures were incurred during the quarter
ended June 30, 1999. New Frontier Media expenses these costs as it incurs them.
New Frontier Media believes that its technology systems will be ready
for the year 2000 and, therefore, has not developed a comprehensive contingency
plan. High-risk vendors will be examined throughout the year with contingency
plans developed on a case-by-case basis where needed. Additionally, New Frontier
Media is aware that it may experience other isolated incidences of
non-compliance and plans to allocate internal resources and retain dedicated
consultants and vendor representatives to be ready to take action if necessary.
Although New Frontier Media values its established relationships with key
vendors and other service providers, if some vendors are unable to perform on a
timely basis due to their own Year 2000 issues, New Frontier Media believes that
substitute products or services are available from other vendors. New Frontier
Media also recognizes that it, like all other businesses, is at risk if other
key suppliers in utilities, communications, transportation, banking and
government are not ready for the year 2000.
If New Frontier Media's computer software applications, internal accounting,
customer billing and other business systems, working either alone or in
conjunction with those of third parties who do business with us, will not accept
input of, store, manipulate, and output dates in the year 2000 or after without
error, we may suffer business interruptions or shutdown, reputational harm or
legal liability and, as a result, material financial loss.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In a June 2, 1999 complaint filed in District Court in Boulder, Colorado (Case
No. 99CV913), Scott Wussow, the Company's former chief financial officer, seeks
to enforce an alleged oral agreement to increase his salary, bonus, and car
allowance, and issue to him warrants to purchase up to 300,000 shares of New
Frontier common stock, following the Company's public offering of February 1998.
We dispute that there was any promise or agreement, oral or otherwise, made to
or with Mr. Wussow to increase his compensation and intend to vigorously defend
against this claim.
EXHIBITS
27.01 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Form 8-K Reports during this quarter.
14
<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/ Karyn L. Miller
----------------------------------
Karyn L. Miller
Chief Financial Officer (Principal
Accounting Officer)
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