UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 September 30, 1999: 13,697,698
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
NEW FRONTIER MEDIA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheet at September 30, 1999 3-4
Consolidated Statements of Operations for the three and six
months ended September 30, 1999 and September 30, 1998 5
Consolidated Statements of Cash Flows for the six months
ended September 30, 1999 and September 30, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Part II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
Part III. EXHIBITS
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 3,839,316
Accounts receivable 1,933,571
Prepaid distribution rights 2,289,646
Prepaid expenses 253,171
Deposits 114,729
Other 313,883
-----------
Total current assets 8,744,316
-----------
FURNITURE AND EQUIPMENT
Furniture and equipment, cost 3,530,850
Less: Accumulated depreciation (653,435)
-----------
Net Furniture and equipment 2,877,415
OTHER ASSETS
Goodwill, net of accumulated amortization of $1,027,359 5,333,532
Prepaid distribution rights 5,249,437
Deposits 224,239
Available for Sale Securities 437,500
-----------
Total other assets 11,244,708
-----------
Total Assets $22,866,439
===========
See notes to unaudited consolidated financial statements
-3-
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 908,498
Current Portion of capital lease obligations 325,014
Deferred revenue 3,293,606
Other accrued liabilities 516,263
Note Payable 1,700,000
Reserve for chargebacks/credits 17,697
----------
Total current liabilities 6,761,078
----------
LONG-TERM DEBT
Obligations under capital leases 512,480
----------
Total liabilities 7,273,558
----------
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
13,697,698 shares issued and outstanding 1,368
Additional paid-in capital 28,442,998
Other Comprehensive Income (187,500)
Accumulated deficit (12,663,985)
-----------
Total stockholders' equity 15,592,881
-----------
Total liabilities and stockholders' equity $22,866,439
===========
See notes to unaudited consolidated financial statements
-4-
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
3 months ended 6 months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES, net $ 4,081,814 $ 2,233,331 $ 7,248,320 $ 4,097,274
COST OF SALES 2,573,683 2,021,888 5,119,624 3,862,122
----------- ----------- ----------- -----------
GROSS MARGIN 1,508,131 211,443 2,128,696 235,152
----------- ----------- ----------- -----------
OPERATING EXPENSES
Occupancy and equipment 138,597 104,606 262,526 213,442
Legal and Professional 123,137 24,390 274,167 83,416
Advertising and promotion 612,040 842,480 1,573,027 1,661,190
Salaries, wages and benefits 607,582 390,380 1,121,191 677,099
Communications 59,951 37,582 110,728 66,196
General and administrative 273,281 148,115 519,959 293,113
Goodwill amortization 159,022 159,021 317,476 318,615
Consulting 99,870 85,150 253,674 163,357
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 2,073,480 1,791,724 4,432,748 3,476,428
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain (Loss) on trading securities -- (10,973) 5,949 (30,822)
Interest Income 9,781 3,214 23,802 7,907
Interest Expense (79,229) (67,577) (111,488) (99,638)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (69,448) (75,336) (81,737) (122,553)
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (634,797) (1,655,617) (2,385,789) (3,363,829)
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS
Loss from operations of discountinued
subsidiaries -- (94,797) -- (125,200)
----------- ----------- ----------- -----------
NET LOSS $ (634,797) $(1,750,414) $(2,385,789) $(3,489,029)
=========== =========== =========== ===========
BASIC LOSS PER SHARE $ (0.05) $ (0.27) $ (0.19) $ (0.53)
=========== =========== =========== ===========
DILUTED LOSS PER SHARE $ (0.05) $ (0.27) $ (0.19) $ (0.53)
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING 13,000,442 6,542,000 12,781,188 6,542,000
=========== =========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
-5-
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $(2,385,788) $(3,489,029)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and Amortization 1,452,686 681,838
Increase (decrease) in accounts payable (938,375) 1,007,821
(Increase) decrease in inventories -- 97,904
(Increase) decrease in accounts receivable (1,192,648) 360
(Gain) Loss on sale of trading securities (5,949) 30,822
(Increase) decrease in prepaid distribution rights (907,340) (626,580)
Increase (decrease) in deferred revenue (230,125) 970,285
Increase (decrease) in other accrued liabilities (144,340) (483,774)
Increase (decrease) in reserve for chargebacks 17,697 --
(Increase) decrease in other assets 363,127 79,572
----------- -----------
Net cash used in operating activities (3,971,055) (1,730,781)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture & equipment (502,530) (33,989)
Proceeds from sale of trading securities 56,099 152,877
Purchase of trading securities -- (88,557)
Redemption of certificates of deposits -- 250,000
Other -- (71,786)
Repayment of note receivable-related party -- 38,000
----------- -----------
Net cash provided by (used in) investing activities (446,431) 246,545
----------- -----------
CASH FLOWS FROM FINANCIAL ACTIVITIES
Issuance of convertible debentures, net of offering costs -- 1,646,739
Payments on capital lease obligations (119,021) (12,757)
Increase in notes payable 1,700,000 --
Issuance of common stock 3,939,638 --
----------- -----------
Net cash provided by financing activities 5,520,617 1,633,982
----------- -----------
Net increase (decrease) in cash 1,103,131 149,746
Cash, beginning of period 2,736,186 253,123
----------- -----------
Cash, end of period $ 3,839,317 $ 402,869
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ITEMS
Interest Paid $ 57,772 $ 44
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCIAL ACTIVITIES:
Purchase of Equipment via capital lease obligations $ 249,242 --
Common stock issued for prepaid distribution right
license agreement $ 3,937,500 --
Receipt of available for sale securities in exchange
for services to be provided over a five year period $ 625,000 --
</TABLE>
See notes to unaudited consolidated financial statements
-6-
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO 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 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.
In June 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 providers
and multiple system cable operators. 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 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 September 30, 1999, New
Frontier had drawn $1,700,000 on this line of credit. The line of credit bears
interest at 10 % per annum and is secured by all of the assets of New Frontier
Media. The line of credit had a due date for repayment of September 20, 1999.
This repayment date was extended until October 20, 1999. See Note 8 "Subsequent
Events".
-7-
<PAGE>
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.
In July 1999, New Frontier Media issued 500,000 shares of its common stock to an
unrelated entity at $7.875 per share as consideration in obtaining a license
agreement for the rights to distribute the entity's 3,000 title adult film and
video library and multi-million still image archive. In addition, the Company
issued 100,000 warrants to purchase its common stock at an exercise price equal
to the market value of the stock on the date the warrants were issued.
In August 1999, the Company raised $3,901,177 less redemption costs of
$43,749 through the exercise of 600,181 of its 1,500,000 publicly traded
warrants to purchase common stock. These warrants had been called by the Company
in June 1999 with a redemption date of August 13, 1999. The remaining
886,619 warrants were redeemed at five cents per share.
NOTE 4 LICENSE AGREEMENT
In July 1999, New Frontier Media executed a definitive license agreement to
acquire exclusive rights to Metro Global Media, Inc.'s ("Metro") 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, the Company entered into a
multi-year production agreement with Metro which calls for the delivery of at
least three new adult feature titles per month over the next five years.
NOTE 5 STOCK OPTIONS AND WARRANTS
The Company granted options and 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
July 2004 100,000 7.875
August 2009 5,000 6.38
September 2002 100,000 6.00
September 2002 50,000 5.00
September 2002 75,000 8.00
NOTE 6 COMPREHENSIVE INCOME/(LOSS)
The components of comprehensive income (loss), net of tax, are as follows:
<TABLE>
<CAPTION>
3 months ended 6 months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss $ (634,797) $(1,750,414) $(2,385,789) $(3,489,029)
Unrealized loss on available-for-sale
securities $ (187,500) $ -- $ (187,500) $ --
----------- ----------- ----------- -----------
Comprehensive net loss $ (822,297) $(1,750,414) $(2,573,289) $(3,489,029)
=========== =========== =========== ===========
</TABLE>
Unrealized losses on available-for-sale securities are the result of a net loss
of $187,500 for the three and six months ended September 30, 1999 from an
investment in Metro. The company received 250,000 shares of Metro's common stock
in exchange for services to be provided to Metro by CSB over a five year period.
Accumulated other comprehensive loss consists of the unrealized losses on
available-for-sale securities, net of tax, as presented on the accompanying
consolidated balance sheets. At September 30, 1999, the unrealized loss included
in accumulated other comprehensive income is a result of a $187,500 decrease in
the Company's investment in Metro.
-8-
<PAGE>
NOTE 7 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 8 SUBSEQUENT EVENTS
On October 14, 1999, the Company issued 600 shares of 7% Series C Convertible
Preferred Stock at $10,000 per share to a single institutional investor.
The Preferred Stock is initially convertible into the Company's common stock at
a price of $7.87 per share. The Company has the right to redeem the Preferred
Stock at any time, in whole or in part, at a price equal to the amount the
investor would have received if the investor had then converted its shares of
Preferred Stock into common stock, or, if greater, 115% of the amount paid by
the investor for the Preferred Stock.
On the six-month anniversary of the date of closing, the conversion price will
be reset to 95% of the average of the five lowest daily volume-weighted average
prices for the Company's common stock during the ten trading days immediately
preceding such anniversary date, if such price is lower than $7.87. Until the
Preferred Stock is converted or redeemed, the conversion price will similarly
reset on every following three-month anniversary.
In connection with this transaction, the Company also issued to its investor
60,000 warrants dated September 30, 1999, exercisable at $7.87 per share, to
purchase common stock of the Company for each $1 million invested with the
Company.
On October 19, 1999, the Company repaid the balance of $1,700,000 in principal
plus interest due on its outstanding line of credit.
On October 27, 1999, the Company completed its acquisition of Interactive
Telecom Network, Inc. and Interactive Gallery, Inc., and 90% of Card
Transactions, Inc. (collectively referred to as the "IGallery Companies"). Under
the terms of the Stock Purchase Agreement, New Frontier Media issued 6,000,000
shares of the Company's restricted common stock to the Sellers of the IGallery
Companies. This acquisition will be accounted for as a pooling of interests.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS QUARTERLY REPORT ON FORM 10QSB 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.
-9-
<PAGE>
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 September 30, 1999, the Company had the
following number of subscribers to its three C-Band networks: Extasy 58,340 True
Blue 52,049, and GonzoX 45,944. In addition, Extasy is available to
approximately 104,000 cable households as of September 30, 1999.
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 September 30, 1999, TeN was
available to approximately 3.7 million cable/DBS households.
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 ("Playboy") adult
network services (Playboy TV, Spice and Spice 2) in the most-edited adult
programming category. As of September 30, 1999, Pleasure was available to
approximately 3.1 million cable/DBS households.
-10-
<PAGE>
RESULT OF OPERATIONS
<TABLE>
<CAPTION>
3 months ended 6 months ended
September 30, September 30,
1999 1998 1999 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SALES, net $4,081,814 100% $ 2,233,331 100% $ 7,248,320 100% $ 4,097,274 100%
COST OF SALES 2,573,683 63% 2,021,888 91% 5,119,624 71% 3,862,122 94%
---------- ----------- ----------- -----------
GROSS MARGIN 1,508,131 37% 211,443 9% 2,128,696 29% 235,152 6%
---------- ---------- ----------- -----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSE 1,914,458 47% 1,632,703 73% 4,115,272 57% 3,157,813 77%
AMORTIZATION OF GOODWILL 159,022 4% 159,021 7% 317,476 4% 318,615 8%
OTHER INCOME (EXPENSE):
Gain (loss) on trading securities -- (10,972) 0% 5,949 0% (30,822) -1%
Interest Income 9,781 0% 3,214 0% 23,802 0% 7,907 0%
Interest Expense (79,229) -2% (67,577) -3% (111,488) -2% (99,638) -2%
---------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (69,448) -2% (75,336) -3% (81,737) -1% (122,553) -3%
---------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (634,797) -16% (1,655,617) -74% (2,385,789) -33% (3,363,829) -82%
---------- ----------- ----------- -----------
DISCONTINUED OPERATIONS
Loss from operations of discontinued
subsidiaries -- (94,797) -4% -- (125,200) -3%
---------- ----------- ----------- -----------
NET LOSS $ (634,797) -16% $(1,750,414) -78% $(2,385,789) -33% $(3,489,029) -85%
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
NET REVENUES
Net revenues were $4,081,814 for the quarter ended September 30, 1999, an 83%
increase from $2,233,331 for the quarter ended September 30, 1998. C-Band net
revenue was $2,650,866 for the quarter ended September 30, 1999 compared to
$2,212,807 for the quarter ended September 30, 1998, an increase of 20%.
Revenues from TeN and Pleasure for the quarter ended September 30, 1999 were
$1,345,370 compared to $0 for the quarter ended September 30, 1998. Revenues
for the Company's cable/DBS products are responsible for approximately 33% of
total net revenues for the quarter ended September 30, 1999.
Net revenues for the six months ended September 30, 1999 were $7,248,320 a 77%
increase from $4,097,274 for the 6 months ended September 30, 1998. C-Band net
revenue was $5,345,888 for the six months ended September 30, 1999 compared to
$4,076,750 for the six months ended September 30, 1998, an increase of 31%.
Additionally, revenues from the Company's cable/DBS networks, TeN and Pleasure,
were $1,816,853 for the six months ended September 30, 1999, up from $0 for the
six months ended September 30, 1998.
C-Band revenue increases for both the quarter ended and six months ended
September 30, 1999 were due to an increase in the number of total subscribers.
Total C-Band subscribers as of September 30, 1999 were 156,333, an increase of
29% from 121,024 as of September 30, 1998.
The Company historically experiences higher buy rates during the winter months.
Therefore, the Company expects that its C-Band revenue will increase in future
quarters of this fiscal year.
Increases in the Company's cable/DBS revenue for both the quarter ended and six
months ended September 30, 1999 are a result of the successful launch of its TeN
and Pleasure networks. As of September 30, 1999, TeN and Pleasure were available
to approximately 6.8 million addressable households. In addition TeN is
available on a monthly and annual subscription basis to DBS households via
Echostar Communications Corporation's DISH Network ("DISH"). As of September 30,
1999, TeN had approximately 75,000 DISH subscribers. The Company has also begun
to successfully market its Extasy network to MSO's. As of September 30, 1999,
Extasy was available to approximately 104,000 addressable cable households.
The Company experienced several positive changes with respect to its
distribution of Ten and Pleasure on DISH during the quarter ended September 30,
1999. With its initial launch on DISH in June 1999 Pleasure was only available
on a pay-per-view ("PPV") basis to approximately 40,000 addressable DISH
households. In late July 1999 Pleasure became available to all addressable DISH
households (approximately 3.0 million as of September 30, 1999). This change
resulted in an approximately 180% increase in monthly revenues for Pleasure.
-11-
<PAGE>
Upon its initial launch, TeN was only available to DISH households on a monthly
and annual subscription basis. As of September 1999, TeN became available to
DISH households on both a subscription and PPV basis. In conjunction with the
availability of TeN on a PPV basis, the Company increased the price of a monthly
subscription by $5.00 during August 1999. These two changes have resulted in an
approximately 110% increase in monthly revenues for TeN.
Management expects that growth in the number of addressable households will
continue to increase in future periods as it aggressively promotes TeN and
Pleasure to additional MSO's and DBS providers. In addition, the Company expects
its cable/DBS revenues from Extasy to increase due to additional launch
commitments of this network during the next quarter.
COST OF SALES
Cost of Sales were $2,573,683 for the quarter ended September 30, 1999 as
compared to $2,021,888 for the quarter ended September 30, 1998, an increase of
27%. Cost of sales for the six months ended September 30, 1999 were $5,119,624
as compared to $3,862,122 for the six months ended September 30, 1998, an
increase of 33%. 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 for both the quarter
ended and six months ended September 30, 1999 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.
GROSS MARGIN
Gross margin as a percentage of revenue was 37% for the quarter ended September
30, 1999 compared to 9% for the quarter ended September 30, 1998. Gross margin
as a percentage of revenue was 29% for the six months ended September 30, 1999
compared to 6% for the six months ended September 30, 1998. This increase in
gross margin as a percentage of revenue is due to the increase in both C-Band
and cable/DBS revenues. For the quarter ended September 30, 1999 the C-Band
gross margin as a percentage of revenue was 32% and the cable/DBS gross margin
as a percentage of revenue was 42% for the same period. For the six months
ended September 30, 1999 C-Band gross margin as a percentage of revenue was 35%
and the cable/DBS gross margin for the same period was 11%. Due to the
relatively fixed nature of its cost of goods sold and the anticipated increases
in revenue, the Company expects its gross margin percentage to increase in
future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SGA)
The Company's SGA expenses as a percentage of revenue declined from 73% to 47%
as of the quarter ended September 30, 1999 and from 77% to 57% as of the six
months ended September 30, 1999. This decrease in SGA expenses as a percentage
of revenue for both the quarter ended and six months ended September 30, 1999
was due primarily to a decrease in the company's advertising and promotional
expenses. Advertising and promotional expenses consist of on-air barker costs,
print advertising, sales commissions, expenses incurred with respect to trade
shows, travel, and meals/entertainment expenses. The decrease in these costs is
attributable to a decline in the Company's transponder and uplinking costs for
its on-air barker, as well as to a decline in print advertising. Print
advertising costs were higher during the quarter ended and six months ended
September 30, 1998 as the Company was aggressively promoting its launch of TeN
during this period.
-12-
<PAGE>
In future periods, the Company expects to see its advertising and promotional
expenses increase as a percentage of revenue due to the airing of a second
barker during the winter months to promote its C-Band networks, the anticipated
aggressive promotion of its networks on DISH, the promotion of its Broadband
product which is in development at this time, and the increase in expenses
associated with attending trade shows.
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.
OTHER EXPENSE
Net total other expenses were $69,448 for the quarter ended September 30, 1999
compared to $75,336 for the quarter ended September 30, 1998, a decrease of 8%.
Net total other expenses were $81,737 for the six months ended September 30,
1999 compared to $122,553 for the six months ended September 30, 1998. Net total
other expense 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 during the six months ended September
30, 1999 compared to a loss on trading securities of ($30,822) for the six
months ended September 30, 1998, as well as to increase in interest income
earned during the six months ended September 30, 1999 on the Company's cash
balances.
The Company expects to experience an increase in its interest expense in future
periods due to the issuance of its 7% Series C Preferred Stock as discussed
above in the footnotes to the financial statements. In addition, the Company
expects to experience in increase in its interest income in future periods due
to the maintenance of higher cash balances.
LOSS FROM OPERATIONS OF DISCONTINUED SUBSIDIARIES
Loss from operations of discontinued subsidiaries was $0 for the quarter ended
September 30, 1999 compared with a loss of $94,797 for the quarter ended
September 30, 1998. Loss from operations of discontinued subsidiaries was $0
for the six months ended September 30, 1999 compared to a loss of $125,200 for
the six months ended September 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.
NET LOSS
The Company recorded a net loss from operations of $634,797 for the quarter
ended September 30, 1999 compared to $1,750,414 for the quarter ended September
30, 1998. The Company recorded a net loss from operations of $2,385,789 for the
six months ended September 30, 1999 down from a loss of $3,489,029 for the six
months ended September 30, 1998. Management expects that the Company will be
profitable in future periods due to the merger on October 27, 1999 with the
IGallery Companies, which will be accounted for as a pooling of interests.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999 the Company had cash and cash equivalents of
$3,839,316. The Company has primarily financed its operations for the six
months ended September 30, 1999 through a line of credit and the exercise of
its publicly traded warrants. As of September 30, 1999 the Company had
available an additional $300,000 of its $2,000,000 line of credit.
For the six months ended September 30, 1999 and 1998 cash used in operating
activities was $3,971,055 and $1,730,781, respectively. The increase in cash
used in operating activities is primarily due to a net loss of $2,385,788, an
increase in accounts receivable of $1,192,648 related to an increase in the
Company's cable/DBS revenue, an increase in prepaid distribution rights of
$907,340 related to the purchase of the Company's license agreements for its
content, and a decrease in accounts payable of $938,375 related to a decrease
in days in accounts payable.
Cash provided by (used in) investing activities was ($446,431) for the six
months ended September 30, 1999 compared to $246,545 for the six months ended
September 30, 1998. This use of cash for the six months ended September 30,
1999 is primarily due to capital expenditures related to purchases of
furniture, computers, additions made to the trade show booth, and purchases of
receiver/decoder equipment.
For the six months ended September 30, 1999 and 1998 net cash provided by
financing activities was $5,520,617 and $1,633,982, respectively. This increase
in net cash from financing activities is due primarily to the Company's use of
$1,700,000 of its $2,000,000 line of credit as well as the net proceeds
received from the exercise of its publicly traded warrants.
The Company's material commitments include the repayment of its line of credit
due in October 1999 and the payments required 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 has
plans to expand its Colorado-based Broadcast Playout Operations facility, at an
estimated cost of $1.5 million, to accommodate the broadcast of its three
C-Band networks which are currently played-out in Ottawa, Canada; 2) The
Company will purchase approximately $400,000 of receiver/decoder equipment as
additional cable carriage is obtained for its TeN, Pleasure and Extasy networks
during the next 12 months.
-14-
<PAGE>
As discussed above, the Company issued 600 shares of 7% Series C Convertible
Preferred Stock at $10,000 per share to a single institutional investor on
October 14, 1999. The interest due on this stock is payable in either shares of
the Company's common stock or cash. The Company anticipates paying this interest
with shares of its common stock.
Per the terms of the agreement, the Preferred Stock may be redeemed in cash by
the Holder upon the occurrence of the following triggering events: 1) failure
of an underlying shares registration statement to be declared effective by the
Commission on or prior to the 180th day after the issue date; 2) lapsing of the
effectiveness of the underlying shares registration statement for more than
three trading days; 3) failure of the Company's Common Stock to be listed for
trading on the NASDAQ or on a subsequent market or the suspension of the Common
Stock from trading on the NASDAQ or on a subsequent market for more than three
trading days; 4) failure of the Company to deliver certificates representing
the underlying shares issuable upon a conversion within ten days of a
Conversion Date; 5) the Company is a party to any Change of Control transaction
as defined in the agreement; 6) failure to cure a breach of any material term
of the agreement within the time frame specified in the agreement; 7) failure
to pay in full the amount of cash due pursuant to a Buy-In within seven days
after notice is delivered; 8) the Company fails to have available a sufficient
number of authorized and unreserved shares of Common stock to issue upon a
conversion; 9) the Company fails to obtain shareholder approval of the IGallery
Companies acquisition; and 10) failure of the Company to execute a lock-up
agreement with each recipient of the shares of Common Stock received as
consideration for the IGallery Companies acquisition.
If the Company were required to redeem the Series C Preferred Stock its
liquidity and capital resources would be significantly and adversely affected.
Due both to the subsequent issuance of its Series C Preferred Stock and the
acquisition of the IGallery Companies, New Frontier Media believes that its
existing cash and cash generated from operations will be sufficient to satisfy
its short term and long term operating requirements.
By letter dated August 20, 1999, the Company has been informed that the Nasdaq
Listing and Hearing and Review Council has called for review of the Nasdaq
Listing Qualifications Panel's decision of July 7, 1999 to continue the listing
of the shares of the Company's common stock on the Nasdaq SmallCap Market, to
determine "whether the Panel's decision...was appropriate given that the Panel
found that the Company had twice violated the shareholder approval requirement
and that the Company had not remedied the violations."
The two transactions at issue involved the issuance and sale of securities
authorized by the Board of Directors at prices less than market value and each
exceeding 20% of the outstanding shares prior to the issuance and sale. The two
transactions were approved by the Board of Directors and did not require
shareholder approval under Colorado law.
-15-
<PAGE>
At the time of the transactions, in view of the time constraints then involved,
the Company determined to follow an informal procedure recommended by special
Nasdaq counsel of obtaining documentation from a relatively few, large
shareholders that these holders of a majority of its outstanding shares would
have approved the two transactions if their proxies had been solicited. The
Nasdaq staff subsequently objected to the use of this informal procedure
indicating, among other things, that the Company should have given prior notice
of its use of the procedure to the Company's stockholders.
On October 5, 1999, the Company made a written submission urging the Council to
affirm the Panel's determination to continue the listing of the Company's
shares. On October 27, 1999, in excess of 90 percent of the shares represented
in person or by proxy at the Company's Annual Meeting of Shareholders were voted
in favor of the ratification of the two transactions at issue.
In a further effort to demonstrate the Company's commitment to future compliance
with applicable Nasdaq listing requirements, the Company's Board of Directors
has formed a special committee of its independent directors, called the Nasdaq
Compliance Committee. This Committee will review all future corporate
transactions to assure their compliance with Nasdaq listing requirements. For
assistance in this regard, the Committee has retained Harvey L. Pitt, former
General Counsel of the Securities and Exchange Commission, and now a partner at
the law firm of Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C. In
addition, the Company has resolved to consult with the staff of the Nasdaq Stock
Market, Inc. in the event that the Company proposes to act contrary to the
advice of the Special Committee's legal counsel on any of these matters.
While the Company has urged the Council to affirm the Panel's determination to
continue the listing of its shares, there can be no assurance as to what action
the Council will decide to take. In the event the Company's shares of common
stock were to be delisted from the Nasdaq SmallCap Market, the Company's
liquidity and capital resources would be materially and adversely affected as
the Company's future access to the capital markets would be significantly
impaired. In addition, upon any such delisting, the holder of the Company's 7%
Series C convertible preferred stock would have the right to require the
redemption of its $6 million investment in the Company.
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 exist 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.
-16-
<PAGE>
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.
All of New Frontier Media's major systems have either been identified as Year
2000 compliant, or remediation has been completed to ensure Year 2000
compliance. These major systems include financial applications and key operating
systems of the Company.
New Frontier Media is currently evaluating less critical systems, such as
desktop applications, with plans for all systems to be in compliance by
December 31, 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 September 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.
-17-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company previously reported the legal proceeding in process with Scott
Wussow as part of its filing of Form 10QSB for the period ended June 30, 1999
and as such it is incorporated herein by reference.
On August 3, 1999 the Company filed a lawsuit in District Court for the City and
County of Denver, (Colorado Satellite Broadcasting, Inc. vs. Pleasure Licensing
LLC, et al. Case No. 99 CV 4652) against Pleasure Licensing L.L.C and Pleasure
Productions Inc. alleging, breach of contract, breach of express and implied
warranty, breach of implied warrant of fitness for a particular purpose and
declaratory judgement for the return of 700,000 New Frontier Media shares and
warrants for another 700,000 New Frontier Media shares issued to such entities.
Defendants removed the Denver District Court action to Federal District Court
Colorado, (Case No. 99 WM 1753) and have filed their first amended answer,
affirmative defenses and counter claims against the Company and are seeking
damages in excess of $700,000. The Company intends to vigorously pursue its
rights against Pleasure Licensing L.L.C and Pleasure Productions Inc. and to
vigorously defend against the counterclaims filed against it. The Company
believes that Pleasure has breached its license agreement with the Company by,
among other things, failing to deliver to the Company 4,000 beta masters for the
films licensed by it as required by the agreement and delivering to the Company
as "New Releases" films that were produced as early as 1997.
On August 23, 1999, Generation Capital Associates ("GCA") and Greenwood Partners
filed a motion for a temporary restraining order and preliminary injunction in
Federal District Court, New York (File No. 99 Civ. 9099 (WK) seeking to enjoin
the Company's redemption of its publicly outstanding warrants. The Company filed
a response to this action and on August 31, 1999 the court issued an order
denying GCA and Greenwood Partner's motion for a temporary restraining order and
a preliminary injunction. The case is now continuing as a damages action by GCA
and Greenwood Partners against the Company in the amount of $4.00 per warrant
held by them, or approximately $1 million. The Company intends to vigorously
defend this action and has moved for the action to be transferred to Colorado.
On or about September 17, 1999, the Company filed a complaint seeking a
declaratory judgment in the District Court for Arapahoe County, (New Frontier
Media, Inc. v. Khan et al. Case No. 99 CV 3239) seeking to confirm that it was
not obliged to issue warrants to purchase 250,000 shares of its common stock to
EBI Securities, Inc. (formerly known as Cohig & Assoc.), under a consulting
agreement with EBI Securities, Inc. ("EBI") which was terminated by the Company
in June 1998. Separately, the person who introduced the Company to EBI,
instituted an action in the United States District Court, Central District of
California, (Kahn vs. New Frontier Media, Inc. et al., Case No. CV 99-09730
R[RZx]), seeking to require the Company to issue 90% of the subject warrants to
him, alleging that, under a separate agreement allegedly entered into by him
with EBI, he was entitled to 90% of any compensation received by EBI under its
consulting agreement with the Company. The Company intends to vigorously defend
itself against this action insofar as, among other things, it did not issue any
warrants to EBI, EBI did not perform any services for the Company, EBI has not
demanded these warrants from the Company and the Company never agreed to issue
any warrants to Kahn.
The Company's subsidiary, CSB, was recently named in a lawsuit brought by Image
Entertainment, Inc. in 1997 to enforce two promissory notes, dated December 31,
1990, in the principal amount of $3,528,600 issued by LEI Partners, L.P, a laser
disc home video distribution company in which Mark Kreloff, a director of the
Company, had an ownership interest. Neither CSB nor the Company was in existence
at the time these notes were executed. In fact, CSB did not commence operations
until February 1998, and the Company did not commence operations until July
1995. The Company intends to vigorously defend against this lawsuit which it
considers to be frivolous. While LEI has advised the Company that it believes
that it has meritorious defenses to Image's claim, even if LEI is not successful
in this lawsuit, the Company believes that it can not in any way be held liable
to Image under LEI's December 31, 1990 note.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
The Company did not file any Form 8-K Reports during this quarter.
-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/ Karyn L. Miller
------------------------
Karyn L. Miller
Chief Financial Officer (Principal
Accounting Officer)
-19-
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