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SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended March 31, 1999
Commission File Number: 33-27494-FW
NEW FRONTIER MEDIA, INC.
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(Exact name of small business issuer in its charter)
Colorado 84-1084061
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(State of Incorporation) (I.R.S. Employer I.D. Number)
5435 Airport Boulevard, Suite 100,
Boulder, CO 80301
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(Address of principal executive offices and Zip Code)
(303) 444-0632
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]
Registrant's revenues for its most recent fiscal year (ended March 31, 1999):
$9,452,432
Aggregate market value of voting stock held by non-affiliates: $88,271,442 based
on 10,947,717 shares at June 23, 1999 held by non-affiliates and the closing
price on the Nasdaq SmallCap Market on that date which was $8.03.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
12,539,517 common shares were outstanding as of March 31, 1999.
Documents Incorporated by Reference: Not Applicable
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FORM 10-KSB
Form 10-KSB for the Fiscal Year ended March 31, 1999
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Table of Contents
PAGE
PART I
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Item 1 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4 Submission of Matters to a Vote of Securities Holders. . . . . . . . . . . . . . 17
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 7 Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . 22
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART III
Item 9 Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . 23
Item 10 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 11 Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . 25
Item 12 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . 26
Item 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . 26
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORY OF THE COMPANY
New Frontier Media, Inc. ("New Frontier Media" or "the Company") was
originally incorporated in the State of Colorado on February 23, 1988. On
September 15, 1995, the Company consummated the acquisition of New Frontier
Media, Inc. in a stock-for-stock exchange. The Company first effected a
2,034.66:1 reverse split of all 569,706,000 shares of its common stock then
issued and outstanding, resulting in 280,000 shares of Common Stock being issued
and outstanding prior to the New Frontier Media, Inc. acquisition. The Company
also approved a change of the Company's name to New Frontier Media, Inc.
The Company became engaged in reference CD-ROM publishing through a
70%-owned subsidiary, Boulder Interactive Group, Inc. d/b/a Inroads Interactive
("Inroads" or "BIG"), and in the distribution of adult feature films in the
digital disc format through a wholly owned subsidiary, David Entertainment, Inc.
("David").
On February 18, 1998, the Company consummated an underwritten public
offering of 1,500,000 units, each consisting of one share of common stock and
one redeemable common stock purchase warrant, raising $7,087,000 in net proceeds
after underwriting fees (excluding related offering expenses). 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,
New Frontier Media through its wholly owned subsidiary, Colorado Satellite
Broadcasting, Inc. ("CSB") became a leading provider of adult programming to
low-powered ("C-Band") direct-to-home ("DTH") households.
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.
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 June 1, 1999, New Frontier Media received additional
launch commitments for Pleasure which bring its total addressable subscriber
universe to an estimated 3.0 million cable television and DBS subscribers.
On March 23, 1999, New Frontier Media announced that it had signed a
Letter of Intent to acquire Interactive Gallery, Inc. ("IGallery"), one of the
largest aggregators and distributors of adult content via the Internet. On May
24, 1999, New Frontier Media announced that it had expanded its Letter of Intent
with IGallery to include its Interactive Telecom Network, Inc. ("ITN") and Card
Transactions, Inc. ("CTI") affiliates. Through these proposed acquisitions, New
Frontier Media intends to position itself as the leading provider of adult
content on the Internet as well as a leading Internet technology and e-commerce
provider.
The Company's executive offices are located at 5435 Airport Blvd.,
Suite 100, Boulder, Colorado 80301. The telephone number is (303) 444-0632.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-KSB 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.
INDUSTRY OVERVIEW
ADULT ENTERTAINMENT DISTRIBUTION VIA ELECTRONIC MEDIA
New Frontier Media, through its wholly owned subsidiary CSB, is solely
focused on the distribution of adult entertainment programming through
electronic technologies including cable television and C-band/DBS satellite.
Adult entertainment content distribution has evolved over the past twenty-five
years from home video platforms (video cassette) to cable television systems and
DBS providers, and most recently to the Internet. In the early 1980's, cable
television operators began offering subscription and pay-per-view ("PPV")
availability of adult programming from network providers such as Playboy. In the
1990's, adult programming became widely available with nearly every cable MSO
and DBS provider in the U.S. offering subscription or PPV availability. Paul
Kagan Associates ("Kagan"), a leading media research organization, estimates
that adult PPV and subscription revenue will grow from $263 million in 1998 to
$349 million in 2000. Datamonitor Plc, a leading technology based research
organization, estimates that adult programming via the Internet represented $1.0
billion in revenue in 1998 and that it will grow to $3.0 billion by the year
2003.
PPV television enables a cable television or satellite delivered
television subscriber with an addressable television set-top receiver to
purchase a block of programming, an individual movie, or an event for a set fee.
PPV also permits subscribers to purchase the Company's programming on a monthly,
quarterly, semiannual and annual basis and view programming according to their
own schedule. PPV allows subscribers to control the availability of the
programming within their households. In addition, PPV programming competes well
with other forms of entertainment because of its relatively low point price.
PPV programming is delivered through any number of delivery methods,
including: (a) cable television; (b) DTH to households with large satellite
dishes receiving a C-band low-power analog or digital signal or with small
dishes receiving a Ku-band medium or high-power digital signal (such as those
currently offered by EchoStar and DirecTV); (c) wireless cable systems; and (d)
low speed (dial-up) or broadband (cable modem) Internet connections. In the past
year, New Frontier Media has added a significant number of viewers through the
DBS market, which is the fastest-growing segment of the PPV/subscription
television business. As of June 15, 1999, New Frontier Media's cable/DBS
networks, Pleasure and TeN, were available to approximately 5.8 million
cable/DBS addressable households.
As of June 15, 1999, the Company had arrangements with six of the
eleven largest domestic MSO/DBS providers (based on pending acquisitions). These
six multi-channel providers, through their affiliated cable or DBS distribution
systems ("Affiliates"), control access to approximately 34.6 million, or 48.1%,
of the estimated 72 million total U.S. multi-channel households. Once
arrangements are made with an MSO or DBS provider, the Company is able to
negotiate channel space for TeN and Pleasure with the Affiliates owned, operated
or otherwise controlled by that MSO or DBS provider. Acceptance by Affiliates
provides the basis for expanding the Company's access to individual
multi-channel households. The performance of TeN and Pleasure in individual
multi-channel television environments varies based principally on the PPV
ordering technology and the quantity and quality of marketing done by the
Affiliates. Individual Affiliates determine the retail price of the PPV service
and determine the retail price of the monthly subscription service.
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The distribution of adult entertainment via electronic media has
continued to grow as technological advances allow easier and more private access
to programming. Most major hotel chains, including Marriott, Hyatt, and Hilton,
offer in-room adult programming through services such as On Command. The
Internet represents the fastest growing distribution means for adult
programming. It is estimated that over thirty-thousand web sites presently exist
of which 10% provide adult content through subscriptions or memberships. The
tremendous growth of the Internet, including web sites dedicated to adult
entertainment, has resulted in millions of customers accessing such sites
through their computers. Management believes that the adult entertainment
industry in general, and the electronic distribution of adult programming via
cable, satellite and the Internet, specifically, will continue to grow. In
particular, as advances in technology such as broadband (high speed) Internet
access and Video-On-Demand programming are made, it will enable adult content
viewers complete flexibility in terms of start times and movie selection.
The distribution of adult entertainment via electronic media is highly
competitive. In the multi-channel subscription and PPV markets, the Company
competes with Playboy (Playboy TV, Spice and Spice 2), Califa Entertainment,
(The Hot Network) and Emerald Media, Inc. (SXTV).
BUSINESS
SUBSCRIPTION AND PPV TELEVISION DISTRIBUTION
Growth in the PPV market is expected to result in part from cable
system upgrades utilizing fiber-optic, compression technologies or other
bandwidth expansion methods that provide cable operators additional channel
capacity. When implemented, compression technology is expected to increase MSOs'
channel capacity. Industry analysts expect a large percentage of this additional
channel capacity to be dedicated to PPV programming. The timing and extent of
these developments and their impact on the Company cannot yet be determined.
LOW-POWERED SATELLITE DTH (C-BAND)
New Frontier Media is a leading provider of subscriber-based and PPV
premium television networks to C-band DTH households. The Company currently
owns, operates, and distributes three leading adult programming networks:
Extasy, True Blue, and GonzoX (collectively referred to as the "Extasy
Networks"). C-band DTH subscribers receive the Extasy Networks through a
satellite television receiver/decoder box. Subscribers have the option of
subscribing to programming on a monthly, quarterly, semi-annual or annual basis
or purchasing single movies or events on a PPV basis. As of June 15, 1999, the
Extasy Networks were available to an estimated 2.0 million C-band DTH
subscribers. The Company maintains distribution agreements with nearly every
major distributor of C-band satellite programming in the United States.
New Frontier Media aggressively promotes its networks with bold
logotypes and high-quality interstitial programming between feature films.
Extasy, True Blue, and GonzoX each feature 50 movie titles per month
on average, with at least 15 first-time broadcasts ("premieres") and four
network specials per month with no cross-over programming between channels. All
channels are available 24-hours per day, presenting a mix of adult programming
including feature films. Staggered movie start times allow for maximum viewing
flexibility. Currently, the Extasy Networks deliver the least edited adult
programming available to satellite and cable television households.
CABLE TELEVISION OPERATORS AND DBS PROVIDERS (KU-BAND)
The Company provides two 24-hour adult programming networks which are
edited to meet the standards of cable television operators and DBS providers. As
of June 15, 1999, the networks, TeN and Pleasure reached an estimated combined
5.8 million addressable television households.
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As of June 15, 1999, the Company had arrangements with six of the
eleven largest domestic MSO/DBS providers (based on pending acquisitions). These
six multi-channel providers, through their Affiliates, control access to
approximately 34.633 million or 48.1%, of the estimated 72 million total U.S.
multichannel households. Once arrangements are made with an MSO or DBS provider,
the Company is able to negotiate channel space for TeN and Pleasure with the
Affiliates owned, managed, or otherwise controlled by that MSO or DBS provider.
Acceptance by Affiliates provides the basis for expanding the Company's access
to individual multi-channel households. The performance of TeN and Pleasure in
individual multi-channel television environments varies based principally on the
PPV ordering technology and the quantity and quality of marketing done by the
Affiliates. Individual Affiliates determine the retail price of the PPV service
and determine the retail price of the monthly subscription service.
The DBS market is the fastest-growing segment of New Frontier Media's
network programming distribution, with the Company's DBS revenues exceeding its
cable revenues. As of June 1, 1999, New Frontier Media's adult networks were
available on a PPV and/or monthly subscription basis to approximately 5.0
million DBS households in the U.S.
New Frontier Media's cable/DBS networks (TeN and Pleasure) are carried
by EchoStar Communications Corporation's DISH Network, the second largest
high-powered DTH provider (DBS) in the U.S. This service provides exceptional
improvements in program delivery and consumer interface to households equipped
with digital satellite system receiving units, consisting of an 18-inch
satellite antenna, a digital receiver box and a remote control.
NETWORKS DESCRIPTION
The Company provides five 24-hour adult programming networks: TeN: the erotic
network, Pleasure, Extasy, True Blue and GonzoX. The following table outlines
the editing standard for the adult programming category and the current
distribution environment for each service:
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TABLE 1
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SUMMARY OF NETWORKS
ESTIMATED ADDRESSABLE
NETWORK LAUNCHED/ EDITING SUBSCRIBER UNIVERSE AS OF
JUNE 15, 1999 ACQUIRED STANDARD DISTRIBUTION JUNE 15, 1999
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TeN 8/15/98 Partially Cable/DBS 3.0 million
Pleasure 6/1/99 Most Cable/DBS 3.0 million
Extasy 2/18/98 Least Cable/DBS/C-band 2.0 million
True Blue 2/18/98 Least C-band 2.0 million
Gonzo X 2/18/98 Least C-band 2.0 million
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TEN: THE EROTIC NETWORK (TEN)
On August 15, 1998, the Company launched TeN, a 24-hour adult network
which incorporates a partial editing standard targeted to cable television
system operators and DBS providers. The Company has programmed TeN as a feature
driven network that incorporates less editing than traditional adult premium
networks such as those offered by Playboy (Playboy TV, Spice and Spice 2). As of
June 15, 1999, TeN reached an estimated 3.0 million addressable multi-channel
households. TeN offers a diverse programming mix within the adult genre, with
movies and specials that appeal to a wide variety of tastes and interests. TeN's
programming is partially edited and, as such, incorporates more editing than the
editing standard available in the adult home video markets. TeN offers
subscription and PPV households 18 premiere adult movies and four network
specials per month and a minimum of 60 adult movies per month. TeN was developed
to capitalize on the quality and number of cable operators/DBS providers now
willing to carry partially-edited adult network services and the momentum toward
broader market acceptance of partially edited adult programming by their
subscribers. New Frontier Media believes the growing market acceptance of
partially edited programming is due, in large part, to the higher subscriber buy
rates (the theoretical percentage of addressable households ordering one PPV
movie, program or event in a month) achieved for cable system operators/DBS
providers as compared to network programming that incorporates the most edited
adult programming. Since its launch on August 15, 1998, TeN has averaged a
monthly buy rate of approximately 12% compared to most edited adult network
programming (such as those services offered by Playboy) averaging monthly buy
rates of approximately 3% to 7%.
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PLEASURE
On June 1, 1999, the Company launched Pleasure, a 24-hour adult network
that incorporates the most edited standard available in the category, which is
targeted to cable television operators and DBS providers. Pleasure is a feature
driven adult network service and is programmed to deliver subscription and PPV
households 21 premiere adult movies and four network specials per month with a
total of 60 adult movies per month. As of June 1, 1999, Pleasure reached an
estimated 3.0 million addressable multi-channel households. Pleasure was
developed as a competitive service to Playboy (Playboy TV, Spice and Spice 2)
and offers a highly favorable revenue split for a cable television operator or
DBS provider. Pleasure was specifically designed to provide adult content
programming to operators that have not yet embraced a partially-edited
programming philosophy and for those operators that wish to use the service to
"upsell" subscription or PPV households to a less edited network such as TeN.
EXTASY
Extasy was acquired from Fifth Dimension on February 18, 1998. Extasy
is a feature driven adult network service that is programmed with 15 premiere
adult movies per month and a total of approximately 50 adult movies per month.
Extasy is the least-edited programming service available to multi-channel
households and is principally distributed via the C-band DTH market and, to a
lesser extent, cable television operators and DBS providers. Extasy's editing
standard is similar to the editing standard employed in the home video markets.
As of June 15, 1999, Extasy had 54,026 active subscriptions. Extasy offers a
diverse programming mix within the adult genre, with movies and specials that
appeal to a wide variety of tastes and interests. Extasy is available on a PPV
basis as well as on a monthly, quarterly, semiannual and annual subscription
basis.
TRUE BLUE
True Blue was acquired from Fifth Dimension on February 18, 1998. True
Blue incorporates the same editing standard as Extasy and is programmed with
adult movies that feature "no-name" or "amateur" talent. True Blue is programmed
to deliver 50 amateur adult movies per month. True Blue is presently only
distributed via the C-band DTH market. As of June 15, 1999, True Blue had 48,355
active subscriptions. True Blue is available on a PPV basis as well as on a
monthly, quarterly, semiannual and annual subscription basis.
GONZOX
GonzoX, formerly Exotica, was acquired from Fifth Dimension on February
18, 1998. GonzoX incorporates the same editing standard as Extasy and is
programmed with the "best of" scenes from adult feature films. GonzoX is
programmed to deliver 50 "best of" adult features per month. GonzoX is presently
only distributed via the C-band DTH market. As of June 15, 1999, GonzoX had
44,033 active subscriptions. GonzoX is available on a PPV basis as well as on a
monthly, quarterly, semiannual and annual subscription basis.
INTERNET DISTRIBUTION
On March 23, 1999, the Company entered into a Letter of Intent to
acquire IGallery, one of the largest aggregators/distributors of adult content
via the Internet. On May 24, 1999, New Frontier Media announced that it had
expanded its proposed acquisition of IGallery to include its affiliates, ITN
and CTI.
ITN, CTI and IGallery (collectively the "acquisition entities")
together provide the technological infrastructure, content acquisition and
organization, consumer level and web-master level marketing, merchant account
management and electronic credit card transaction processing necessary to
provide adult content via the Internet. The acquisition entities accomplish this
through the sale of subscriptions or memberships to consumers and the sale of
turn-key content and/or financial processing to adult web-masters. The
acquisition is expected to be effected as a "pooling of interests" transaction
and will be affected through a stock for stock exchange by and between the
Company and the "acquisition entities". The Company has not yet entered into a
definitive purchase agreement with respect to this proposed transaction.
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INTERACTIVE TELECOM NETWORK, INC.
ITN is a leading Internet technology and e-commerce solutions company
that provides turn-key Internet software engineering, bandwidth, merchant
account management, and credit card processing systems. ITN is based in Sherman
Oaks, California and employs approximately 50 people.
ITN provides a variety of connectivity solutions, including dedicated
Internet access, hardware and software implementation, and system and security
consulting that provide businesses high-speed continuous access to the Internet.
ITN provides shared server web hosting and offers a variety of shared server web
hosting services that enable its customers to efficiently, reliably and
cost-effectively establish a sophisticated web presence and distribute
information over the Internet without purchasing, configuring, maintaining and
administering the necessary Internet hardware and software.
ITN's dedicated server web hosting solutions are provided to larger
customers that require substantially more server and network capacity than
provided under the shared hosting plans. The dedicated web hosting solutions
provide the customer with an NT or UNIX-based dedicated server that is owned and
maintained by ITN within its Internet data center facility. This solution
enables customers to host complex web sites and applications without the need to
incur significant infrastructure and overhead costs. ITN offers dedicated server
service at various price levels, depending on customers' hardware, data transfer
and service requirements.
ITN offers co-location services for customers who prefer to own and
have physical access to their servers, but require the high performance,
reliability and security of an Internet data center. Co-location customers are
typically larger enterprises employing more sophisticated Internet hardware and
software, and having the expertise to maintain their web sites and related
equipment. ITN's Internet data center facility features uninterruptable power
supplies with a back-up generator, a fire suppression system, fault tolerant
environmental controls, 24 X 7 monitoring and high levels of security.
ITN provides integration services including local and wide-area network
configuration, web and database server integration and application-specific
software solutions. ITN utilizes its expertise across multiple platforms
utilizing leading networking hardware, high-end web and database servers and
computer software to more effectively address its customers' diverse systems and
network integration needs.
ITN's system administration and web site management solutions support
its customers' Internet operations by providing the customer with detailed
monitoring, reporting and management systems to control their Internet-related
hardware, software and network applications. Implementation of these scalable
solutions is often delivered in phases to allow customers to outsource an
increasing amount of their Internet operations. ITN's comprehensive system
administration and web management solutions enable it to identify and begin to
resolve hardware, software, network and application problems almost immediately.
Web site development and implementation services range from basic
informational sites to complex interactive sites featuring sophisticated
graphics, animation, sound and other multimedia content. ITN works with content
providers, end users and production companies to provide technical, design and
production services.
Commerce-enabling solutions for its web-hosting and co-location
customers include a "shopping cart" program for customers looking to sell
products, where, as in a retail store, their clients browse through several
products and choose to put some in their "shopping cart" for purchase. This
database driven technology is very flexible, allowing ITN's customers to change
products and prices easily and cost-effectively. Credit card authorization and
processing solutions is a key service enabling customers to accept payment
directly over the Internet.
The development of streaming media products from companies such as
RealNetworks and Microsoft enables the simultaneous transmission and playback of
continuous streams of audio and video content over the Internet. ITN has emerged
as one of the leading providers of streaming media services, offering complete
integrated, in-house services, including production, encoding, and hosting of
live or pre-recorded events. ITN believes that it is one of the few providers
which offers expertise in all three components of streaming media technology,
combined with an established customer base for Internet products and services
and access to low cost, scalable, bandwidth.
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The nature of business Internet traffic demands protection from
unauthorized access. ITN designs and integrates customized security solutions
which ensure network integrity while enabling users to perform business tasks in
a secure, yet unhindered, environment. ITN's firewall solutions provide users
with secure access to the Internet as well as segregate a customer's public
servers from its internal network and restrict access between departments as
well as track communications to ensure that these communications follow a
customer's established security procedures.
Domain Domain is the trade name for ITN's Web address registration
service. ITN's site design and application architecture allows the fastest,
easiest way to find and register a .com, .net and .org top-level domain name.
Domain Domain is very focused on the Internet identity business and intends to
be a leader and innovator as the market expands. ITN intends to expand its "dot
com" suite of products and services, enhance its distribution channels to reach
more customers and build brand awareness as the "dot com specialists". ITN
further intends to continue to offer services that complement a Web address and
help businesses build online identities.
INTERACTIVE GALLERY, INC.
IGallery is a leading aggregator and reseller of adult content via the
Internet. IGallery maintains a consumer membership base of nearly 100,000
monthly revenue generating consumer subscribers to its owned and operated web
sites.
IGallery aggregates adult recorded video, live feed video and still
photography all of which is licensed from adult content studios. The content is
organized thematically and, if necessary, converted into digital media for
Internet distribution. One-third of IGallery's revenue comes from the resale of
aggregated content to third-party web masters on either a flat monthly-rate
basis or a revenue sharing basis. IGallery has become one of the leading
resellers of adult content to web masters and presently sells its aggregated
content to a database of over 7,600 webmasters.
IGallery designs, creates and implements company owned
subscription/membership-based web sites for the adult Internet consumer markets.
In addition, IGallery creates web sites that are targeted to the community of
adult web-masters who resell IGallery's content to their own members or
subscribers. Each month, IGallery publishes VaVoom, an Internet-based magazine
filled with over 300 pages of adult-themed content.
Internet commerce begins with the successful generation of Internet
traffic to a web site. IGallery is actively engaged in the generation of
Internet traffic to its consumer and webmaster sites. Internet traffic is
generated through the purchase of traffic from third-party adult web sites or
Internet domain owners and the purchase of banner advertisements or "key word"
searches from search engines such as Yahoo or Lycos and through publicity for
IGallery's web sites. As a result of these activities, IGallery receives over
700,000 to 800,000 unique Internet visitors each day to its consumer and
webmaster sites, or over 23 million unique visits per month. IGallery typically
achieves a conversion rate of better than 1 membership for each 400 unique
visits.
GOVERNMENT REGULATION
In 1996, the United States Congress passed the Telecommunications Act
of 1996 ("the Act"), a comprehensive overhaul of the Federal Communication Act
of 1934. Section 641 of the Act requires full audio and video scrambling of
channels which are primarily dedicated to "sexually explicit" programming. If a
multi-channel video programming distributor, including a cable television
operator, cannot comply with the full scrambling requirement, then the channel
must be blocked during the hours when children are likely to be watching
television, i.e., from 6:00 a.m. to 10:00 p.m. Programming providers offering
the most edited adult services (such as Playboy) and programming providers
offering partially-edited adult services (such as TeN), feature "sexually
explicit" programming as contemplated by Section 641 of the Act. Although all
adult programming companies fully scramble their signals for security purposes,
several cable television MSO's lack the technical capability to fully scramble
the audio portion of the signal. These cable systems are required to block adult
broadcasts between 6:00 a.m. and 10:00 p.m. Section 641 of the Act affects the
Company to the extent its programming is offered by cable television MSO's
without such technical scrambling ability.
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In February 1996, the leading adult network providers including Playboy
challenged Section 505 of the Act which, among other things, regulates the cable
transmission of adult programming such as New Frontier Media's domestic pay
television networks. Enforcement of Section 505 of the Act commenced May
18,1997. The case was heard by the United States District Court in Wilmington,
Delaware (the "Delaware District Court") in March 1998. In December 1998, the
Delaware District Court unanimously declared Section 505 of the Act
unconstitutional. Even though the defendants have appealed this judgment, the
ruling gives cable systems the right to resume 24-hour broadcast of adult
services as long as cable systems comply with, and consumers are made aware of,
the "blocking on request" requirement of Section 504 of the Act . On June 22,
1999, the U.S. Supreme Court agreed to hear the defendants' appeal of this
judgment.
NETWORK PROGRAMMING
All of the broadcast programming for each network is acquired from
third party adult content studios. In most cases, New Frontier Media pays
approximately $5,000 to $6,000 for a Premiere and $500 for a title that has
previously been exhibited via satellite broadcast ("Encore") for unlimited
broadcast rights in North America for a specified period of time (usually one to
five years). The Company maintains relationships with eight of the top ten major
adult movie studios, and purchases a wide variety of programming from each on a
monthly basis. Dubbed copies of the programming are sent to playout facilities
in Ottawa, Ontario (Canada) and Boulder, Colorado, where they are screened for
quality control purposes and to comply with run time requirements.
In February 1999, New Frontier Media acquired all of the broadcast and
electronic distribution rights to 4,000 adult films under a Content License
Agreement with Pleasure Productions LLC. The Company believes that as a result
of this acquisition it is one of the largest owners of adult video content in
the world.
SATELLITE TRANSMISSION
New Frontier Media delivers its video programming via satellite
transmission. Satellite delivery of video programming is accomplished as
follows:
Video programming is played directly from a playout or uplink facility.
The program signal is then scrambled (encrypted) so that the signal is
unintelligible unless it is passed through the proper decoding devices. The
signal is then transmitted (uplinked) by an earth station to a designated
transponder on a communications satellite. The transponder receives the program
signal uplinked by the earth station, amplifies the program signal and
broadcasts (downlinks) it to satellite dishes located within the satellite's
area of signal coverage. The signal coverage of the domestic satellite used by
New Frontier Media is the continental United States, Hawaii, portions of the
Caribbean, Mexico, and Canada. Each analog transponder can retransmit one
complete analog color television video signal and two digital television video
signals, together with associated audio and data sidebands.
Programming is received by C-Band subscribers, cable operators and DBS
providers. This programming is received in the form of a scrambled signal. In
order for subscribers to receive the programming the signal must be unscrambled.
C-Band subscribers purchase programming directly from the Company or
its distributors. The satellite receivers of C-Band subscribers contain
unscrambling equipment that is authorized to unscramble the Company's satellite
services. Each set top box or satellite receiver must have an electronic
"address". This "address" is activated for the requisite services purchased from
either the Company or the distributor.
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Cable system operators or DBS providers receive their programming in
the same manner as a C-Band subscriber, however these customers provide the
received programming to their captive subscriber audience. The equipment
utilized by cable operators and DBS providers is similar to that utilized by
C-Band subscribers but manufactured to an industrial grade specification. The
cable system operators and DBS providers are able to remotely control each
subscriber's set-top box or satellite receiver on their network, and cause it to
unscramble the television signal for a specific period of time after the
subscriber has made a purchase of a premium service or PPV movie or event.
TRANSPONDER AGREEMENTS
New Frontier Media maintains satellite transponder sub-lease agreements
for four full-time analog transponders with Fifth Dimension. Prior to June 1,
1999, the Company maintained a non-cancelable sublease agreement with Fifth
Dimension which provided usage of three analog transponders located on Loral
Skynet's Telstar 5 satellite. These transponders provided the satellite
transmission necessary to broadcast the Extasy Networks (Extasy, True Blue,
GonzoX).
As of June 1, 1999, the Company switched its three full-time analog
transponders which were located on Loral Skynet's Telstar 5 to Loral Skynet's
Telstar 4. The Company's 24-hour promotional channel ("Barker") is also
broadcast on Loral Skynet's Telstar 4, which enables it to promote the Extasy
Networks on the same satellite where most of its C-band competitors' services
are offered.
PLAYOUT FACILITY
On April 1, 1999, the Company completed the installation, and began
operation of, its Boulder, Colorado playout facility. The playout facility
provides the broadcast playout for TeN, Pleasure and the C-Band Barker. This
facility consists of state-of-the art digital encoding and automated playout
equipment which the Company believes to be the only system of its kind in North
America. Uplinking services for the Boulder, Colorado playout facility are
managed by Williams Communications Vyvx Services ("Vyvx").
Playout and uplink services for the Extasy Networks are contracted to
Fifth Dimension, whose facilities are located in Ottawa, Ontario (Canada). Fifth
Dimension's uplink facility is equipped with satellite equipment, editing
equipment, power supplies and other equipment necessary to provide 24-hour
programming for the three C-Band networks. This equipment is owned by New
Frontier Media.
CALL SERVICE CENTER
Fifth Dimension had maintained a call service center in Ottawa,
Ontario. Following the Fifth Dimension acquisition, New Frontier Media
contracted with TurnerVision, Inc. to provide these services and, as such,
relocated its call center service function to the United States. The call
service center receives incoming calls from customers wishing to order network
programming, or having questions about service or billing. The call service
center is accessible from anywhere in the U.S. or Canada via toll-free "800"
numbers. It is equipped with approximately 30 workstations, each of which
contain a networked computer workstation, Company-owned proprietary order
processing software, and telephone equipment. These components are tied into a
computer telephony integrated switch which routes incoming calls and enables
orders to be processed and subscriber information to be updated "on-line." The
call center functions currently contracted with Turnervision, Inc. are scheduled
to be moved to Boulder, Colorado under the Company's management by August 1,
1999.
The call service center is operational 24-hours per day, seven days a
week, and staffed according to call traffic patterns, which take into account
time of day, day of the week, seasonal variances, holidays, and special
promotions. Customers pay for their order with credit cards, which are
authorized and charged before the order is sent electronically to General
Instrument's Access Control Center in San Diego, California for processing.
General Instrument receives the subscriber order and the subscriber's
identification information, and sends a signal to the appropriate satellite,
which "unlocks" the service ordered for the applicable period of time.
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<PAGE>
COMPETITION
New Frontier Media principally competes with Playboy in the
subscription and PPV markets. Playboy has significantly greater financial,
sales, marketing and other resources to devote to the development, promotion and
sale of its cable programming products, as well as a longer operating history
and broader name recognition than New Frontier Media. Playboy's size and market
position makes it a more formidable competitor than if it did not have the
resources and name recognition that it has. New Frontier Media competes directly
with Playboy in editing standards of its programming, network performance in
terms of subscriber buy rates and the license fees that New Frontier Media
offers to cable and DBS providers. However, New Frontier Media cannot and does
not compete with Playboy in the area of money spent on promoting its products.
New Frontier Media believes that the quality of its programming, as well as the
attractive revenue splits and subscriber buy rates for such programming, are the
critical factors which will influence cable operators to choose its programming
over Playboy's.
On June 1, 1999, New Frontier Media launched Pleasure, a new 24-hour
adult network which competes directly with Playboy in the most edited adult
programming category. With the addition of Pleasure, New Frontier Media expects
its overall performance in the cable and DBS markets to improve because of its
unique ability to offer a full range of quality adult programming in all three
current editing standards, namely the most edited (Pleasure), partially-edited
(TeN) and least edited (Extasy Networks) formats.
The Company competes with other adult networks in the multi-channel and
PPV markets including Califa Entertainment (The Hot Network) and Emerald Media,
Inc. (SXTV).
The Company also faces general competition from other forms of
non-adult entertainment, including sporting and cultural events, other
television networks, feature films, and other programming. In addition, the
Company will face competition in the adult entertainment arena from other
providers of adult programming, adult video rentals and sales, newspaper and
magazines aimed at adult consumers, telephone adult chat lines, and
adult-oriented Internet services.
MARKETING
New Frontier Media markets its C-band networks primarily through an
open-air, 24-hour Barker channel which promotes the programming featured on the
Extasy Networks. This channel uses edited movie clips and interstitial
programming to entice viewers who are "channel surfing" to subscribe to one of
the Extasy Networks channels (periodic subscription), or to purchase the
Company's programming on a PPV basis. To a lesser extent, New Frontier Media
advertises in print publications such as satellite channel guides. New Frontier
Media also aggressively markets its programming directly to satellite program
packagers or distributors, through direct marketing campaigns, face-to-face
meetings, trade show exhibits and industry gatherings. The Company's marketing
department has developed numerous programs and promotions to support its
networks. These have included the development of detailed monthly program
guides, glossy promotional pieces, and celebrity appearances at industry trade
shows. New Frontier Media also maintains a sales force of five full-time
employees to promote carriage of its programming on cable television, DBS and
alternative platform systems.
The Company exhibits at three to four major industry trade shows per
year, including the National Cable Television Association (NCTA) shows (Western
and National) and the Satellite Broadcasting and Communications Association
(SBCA) show. In addition, the Company attends a variety of other industry trade
shows and conferences, including the Cable Television Advertising and Marketing
(CTAM) and the DBS Summit.
YEAR 2000 COMPLIANCE
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
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. New Frontier Media expenses these costs as it incurs them.
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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.
EMPLOYEES
As of the date of this report, New Frontier Media and its subsidiaries
had 43 full-time and 2 part-time employees. Five employees are employed in
executive positions; three employees are employed in administrative and clerical
positions; the remainder of New Frontier Media and its subsidiaries' employees
are employed in sales or technical capacities. New Frontier Media employees are
not members of a union, and New Frontier Media has never suffered a work
stoppage. The Company believes that it maintains a satisfactory relationship
with its employees.
RISK FACTORS
NEW FRONTIER MEDIA HAS INCURRED LOSSES FROM INCEPTION AND MAY NEVER GENERATE
SUBSTANTIAL PROFITS.
We were organized in July, 1995 and have incurred losses from
inception. We may never generate substantial profits. We incurred a net loss of
$7,581,124, or $1.04 per share, on revenues of $9,452,432 for the fiscal year
ended March 31, 1999 and a net loss of $3,258,343, or $.73 per share, on
revenues of $712,581 for the fiscal year ended March 31, 1998. As of March 31,
1999 we had an accumulated deficit of $10,278,197. Our ability to operate
profitably is dependent upon successful execution of our business plan.
LIMITS ON THE COMPANY'S ACCESS TO DISTRIBUTION CHANNELS COULD ADVERSELY AFFECT
ITS BUSINESS.
Our satellite uplink providers' services are critical to us. If our
satellite uplink providers fail to provide the services contracted for with
them, our satellite programming operations would in all likelihood be suspended,
resulting in a loss of substantial revenues to the Company. If our satellite
uplink providers improperly manage their uplink facilities, we could experience
signal disruptions and other quality problems that, if not immediately
addressed, could cause us to lose subscribers and subscriber revenues.
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Our continued access to satellite transponders is critical to us. Our
satellite programming operations require continued access to satellite
transponders to transmit programming to our subscribers. We also use satellite
transponders to transmit programming to cable operators. Material limitations to
satellite transponder capacity could materially adversely affect our operating
performance. Access to transponders may be restricted or denied if:
* we or the satellite owner is indicted or otherwise charged as a
defendant in a criminal proceeding;
* the FCC issues an order initiating a proceeding to revoke the
satellite owner's authorization to operate the satellite;
* the satellite owner is ordered by a court or governmental authority
to deny us access to the transponder;
* we are deemed by a governmental authority to have violated any
obscenity law; or
* our satellite transponder provider determines that the content of our
programming is harmful to its name or business.
In addition to the above, the access of our networks to transponders
may be restricted or denied if a governmental authority commences an
investigation concerning the content of the transmissions.
Our ability to convince cable operators to carry our programming is
critical to us. The primary way for us to expand our cable subscriber base is to
convince additional cable operators to carry our programming. We can give no
assurance, however, that our efforts to increase our base of cable subscribers
will be successful.
THE COMPANY'S PRIMARY COMPETITOR HAS SIGNIFICANTLY GREATER RESOURCES THAN THE
COMPANY.
Our principal competitor, Playboy, has significantly greater financial,
sales, marketing and other resources to devote to the development, promotion and
sale of its cable programming products, as well as a longer operating history
and broader name recognition, than we do. We compete with Playboy as to the
editing standards of its programming, network performance in terms of subscriber
buy rates and the license fees that we offer to cable and DBS system providers.
THE COMPANY ALSO FACES GENERAL COMPETITION FROM OTHER FORMS OF ADULT AND
NON-ADULT ENTERTAINMENT.
The Company faces competition in the adult entertainment industry from
other providers of adult programming, adult video rentals and sales, newspapers
and magazines aimed at adult consumers, adult oriented telephone chat lines, and
adult oriented Internet services. To a lesser extent, we also face general
competition from other forms of non-adult entertainment, including sporting and
cultural events, other television networks, feature films and other programming.
NEW FRONTIER MEDIA MAY NOT BE ABLE TO RETAIN ITS KEY EXECUTIVES.
As a small company with approximately 45 employees, our success depends
upon the contributions of our executive officers and its other key technical
personnel. The loss of the services of any of our executive officers or other
key personnel could have a significant adverse effect on our business and
operating results. We cannot assure that New Frontier Media will be successful
in attracting and retaining such personnel.
RAPID TECHNOLOGICAL CHANGE WILL CONTINUE TO OCCUR IN OUR INDUSTRY.
We are engaged in a business that has experienced tremendous
technological change over the past two years. As a result, we face all the risks
inherent in businesses that are subject to rapid technological advancement, such
as the possibility that a technology that we have invested in may become
obsolete. In that event, we may be required to invest in new technology. Our
inability to identify, fund the investment in, and commercially exploit such new
technology could have an adverse impact on our financial condition. Our ability
to implement our business plan and to achieve the results projected by
management will be dependent upon management's ability to predict technological
advances and implement strategies to take advantage of such changes.
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GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS.
Telecommunications Act of 1996. The Telecommunications Act of 1996
appears to have slowed growth in cable access for domestic pay television
businesses. For example, Federal Communications Commission regulation,
including the "going-forward rules," provides cable operators with incentives to
add basic services. Competition for channel space has increased as cable
operators have utilized available channel space to comply with "must-carry"
provisions, mandated retransmission consent agreements and "leased access"
provisions. In addition, we believe that growth will continue to be slow in the
next two to three years as the cable television industry responds to the FCC's
rules and subsequent modifications. We cannot assure you that the growth will
not slow further in the future.
Section 505 of the Telecommunications Act. Section 505 of the
Telecommunications Act effectively requires each cable system that offers adult
programming either to (1) install additional blocking technology in each
household to prevent any momentary fragments of our content from accidentally
becoming available to non-subscribing cable customers or (2) restrict the period
during which adult programming is transmitted to the hours between 10:00 p.m.
and 6:00 a.m. Although a United States District Court has unanimously declared
this law unconstitutional and blocked its implementation, the decision has been
appealed and accepted for review by the U.S. Supreme Court. The results of our
operations could be adversely affected if Section 505 is found constitutional in
a reversal of the court decision or if cable operators restrict the hours of
transmission of our programming until all appeals have been exhausted.
NEGATIVE PUBLICITY, LAWSUITS OR BOYCOTTS BY OPPONENTS OF ADULT CONTENT COULD
ADVERSELY AFFECT OUR BUSINESS.
We could become a target of negative publicity, lawsuits or boycotts by
one or more advocacy groups who oppose the distribution of "adult
entertainment." These groups have mounted negative publicity campaigns, filed
lawsuits and encouraged boycotts against companies whose businesses involve
adult entertainment. The costs of defending against any such negative publicity,
lawsuits or boycotts could be significant, could hurt our finances and could
discourage investors from investing in our publicly traded securities. To date,
we have not been a target of any of these advocacy groups. As a leading provider
of adult entertainment, we can not assure you that we may not become a target in
the future.
NEW FRONTIER MEDIA WILL NEED ADDITIONAL FUNDS TO FINANCE ITS FUTURE GROWTH.
We anticipate that our capital resources will be sufficient to satisfy
our capital requirements for our current operations for the next 12 months. We
will need, however, additional funds to upgrade and expand our playout facility
to incorporate the Extasy Networks at our Boulder, Colorado facility and to
aggressively market TeN and our new Pleasure channel to increase carriage among
the MSO community. We expect to receive as much as $9.75 million through the
exercise of our 1,500,000 publicly traded warrants, which are currently
"in-the-money". In the event that we do not receive at least $5.0 million
through the exercise of our public warrants, we will need to raise additional
funds. If we are unable to obtain additional funds in a timely manner or on
acceptable terms, we may have to curtail or, as a last resort, suspend the
planned expansion of our playout facility and the planned marketing effort for
TeN and Pleasure, which could have a significant adverse effect on our business
relationships, financial results and prospects, which in turn could lead to
lower overall revenues.
BECAUSE THE COMPANY IS INVOLVED IN THE ADULT PROGRAMMING BUSINESS, IT MAY BE
MORE DIFFICULT FOR IT TO RAISE MONEY OR ATTRACT MARKET SUPPORT FOR OUR STOCK.
Some investors, investment banking entities, market makers, lenders and
others in the investment community may decide not to provide financing to us, or
to participate in our public market or other activities due to the nature of our
business, which, in turn, may hurt the value of our stock, and our ability to
attract market support.
IT MAY BE DIFFICULT TO EFFECT A CHANGE IN CONTROL OF NEW FRONTIER MEDIA.
Issuance of preferred stock could have the effect of delaying,
deferring or preventing a change in control of New Frontier Media. New Frontier
Media's board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of such stock without further shareholder
approval. The rights of the holders of common stock will be subjected to, and
may also be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future.
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FUTURE SALES OF COMMON STOCK MAY CAUSE THE MARKET PRICE OF THE COMMON STOCK TO
DROP.
Future sales of shares of common stock by New Frontier Media and/or its
stockholders could cause the market price of the common stock to drop. There are
currently 5,377,433 restricted shares and 7,162,084 shares of common stock which
are freely tradable or eligible to have the restrictive legend removed pursuant
to Rule 144(k) promulgated under the Securities Act. Of the 5,377,433 restricted
shares, 1,988,800 of such shares are currently eligible for resale under Rule
144. Sales of substantial amounts of common stock in the public market, or the
perception that such sales may occur, could have a significant adverse effect on
the market price of the common stock.
THE COMPANY IS SUBJECT TO A COUNTER-CLAIM FOR UNSPECIFIED DAMAGES IN A SUIT WITH
A FORMER FINANCIAL ADVISOR.
On October 3, 1997, we filed a complaint in District Court in Boulder,
Colorado (Case No. 97 CV 1428) against Sands Brothers & Co. Ltd. alleging breach
by Sands Brothers of the terms of a financial consulting agreement with us. We
also alleged fraud in the inducement, and are seeking return of our initial
payment of $25,000 to Sands Brothers and rescission of the agreement. Sands
Brothers has filed an answer and counter-claim to our complaint seeking
unspecified damages, and we have filed an answer to the Sands Brothers
counter-claim. We intend to vigorously pursue our claim against, and defend the
counter-claim from, Sands Brothers.
THE COMPANY HAS BEEN SUED BY A PROSPECTIVE INVESTOR SEEKING TO ENFORCE AN
ALLEGED AGREEMENT TO CONVEY A 70% EQUITY INTEREST IN NEW FRONTIER MEDIA.
In a January 25, 1999 amended complaint (Case No. 99CV30), J.P. Lipson
seeks to enforce an alleged agreement by New Frontier Media to convey to Lipson
a 70% equity interest in New Frontier Media. Lipson is also seeking large and/or
unspecified damages. We dispute that there exists a binding and enforceable
agreement to transfer any equity interest in New Frontier Media to Lipson 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 our motion for a
hearing. We will continue to vigorously defend against Lipson's claims.
THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS.
We recognize that we, like all other businesses, are at risk if key
suppliers in utilities, communications, transportation, banking and government
are not ready for the year 2000. It is also possible that our 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. If any of this were to happen, we may
suffer business interruptions or shutdown, reputational harm or legal liability
and, as a result, material financial loss.
THE COMPANY RECEIVED A NOTICE FROM NASDAQ IN EARLY 1999 STATING THAT IT MAY BE
DELISTED FROM NASDAQ.
Delisting of New Frontier Media's common stock from The Nasdaq SmallCap Market
would cause the price of the common stock to drop and impair the ability of
holders to sell their shares. In addition, in order to be relisted on Nasdaq, we
would be required to comply with the initial listing requirements, which are
substantially more onerous than the maintenance standards. In the event the
Company's securities are delisted from Nasdaq, such delisting would also be
likely to have an adverse effect on our ability to raise additional financing.
In early 1999, we received a notice from The Nasdaq Stock Market that we failed
to meet Nasdaq's $2 million in net tangible assets standard for continued
listing on the Nasdaq Small Cap Market. We attended a hearing to review that
determination on April 9, 1999. We have not yet heard any decision from Nasdaq.
At and before the hearing, we presented financial information to establish that
we exceeded Nasdaq's net tangible assets standard. We also discussed Nasdaq's
concerns regarding the written consent process used by us, upon the advice of
our counsel, to obtain shareholder approval for the issuance of more than 20% of
our outstanding shares under their corporate governance rules.
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THE LIABILITY OF OUR DIRECTORS IS LIMITED.
Our Bylaws substantially limit the liability of our directors to us and
our shareholders for breach of fiduciary or other duties.
THE PRICE OF THE COMMON STOCK MAY CONTINUE TO BE HIGHLY VOLATILE.
The trading price for the common stock has been highly volatile and
could continue to be subject to significant fluctuations in response to
variations in our quarterly operating results, general conditions in the adult
entertainment industry or the general economy, and other factors. In addition,
the stock market is subject to price and volume fluctuations affecting the
market price for public companies generally, or within broad industry groups,
which fluctuations may be unrelated to the operating results or other
circumstances of a particular company. Such fluctuations may adversely affect
the liquidity of the common stock, as well as the price that holders may achieve
for their shares upon any future sale.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real property. The Company leases
approximately 11,744 square feet of office space at its headquarters located at
5435 Airport Blvd., Suite 100, Boulder, Colorado 80301. The Company's lease on
this office space runs through October 2003 at a rate of approximately $11,800
per month with a five-year optional renewal period. The lease also requires that
the Company pay its pro-rata portion of real estate taxes and operating
expenses.
New Frontier Media also leases approximately 1,500 square feet of
office space at 20061 Saticoy Street, Suite 203, Winnetka, California at a base
rate of $1,663.75 per month for its content acquisition and programming
operations. This lease expires on August 31, 2000.
ITEM 3. LEGAL PROCEEDINGS.
On October 3, 1997, New Frontier Media filed a complaint in District
Court in Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers & Co.,
Ltd. alleging breach by Sands Brothers of the terms of a financial consulting
agreement with us. New Frontier Media also alleged fraud in the inducement, and
is seeking return of its initial payment of $25,000 to Sands Brothers and
rescission of the agreement. Sands Brothers has filed an answer and
counter-claim to New Frontier Media's complaint seeking unspecified damages, and
New Frontier Media has filed an answer to the Sands Brothers counter-claim. New
Frontier Media intends to vigorously pursue its claim against, and defend the
counter-claim from, Sands Brothers.
In a January 25, 1999 amended complaint (Case No. 99CV30), J.P. Lipson
seeks to enforce an alleged agreement by New Frontier Media to convey to Lipson
a 70% equity interest in New Frontier Media. Lipson is also seeking large and/or
unspecified damages. New Frontier Media disputes that there exists a binding and
enforceable agreement to transfer any equity interest in New Frontier Media to
Lipson and filed on February 10, 1999 a motion for partial summary judgment
directed to this issue. To date the Court has neither ruled on nor set the
motion for a hearing. New Frontier Media will continue to vigorously defend
against Lipson's claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a formal vote of the shareholders during
the fourth quarter of the fiscal year covered by this Report.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION.
Prior to February 11, 1998, a limited public market for New Frontier
Media's Common Stock existed on the NASDAQ Bulletin Board under the symbol NOOF.
Commencing on February 11, 1998, New Frontier Media'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 Small Cap Market under the symbols
NOOF and NOOFU, respectively. As of the close of business on May 18, 1998, New
Frontier Media split the Units into their component parts. Commencing on May 19,
1998, New Frontier Media's warrants were quoted on the Nasdaq Small Cap Market.
The following table sets forth the range of high and low closing prices
for the Company's Common Stock for each quarterly period indicated, as reported
by brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW
------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
June 30, 1997......... 5-3/8 5 June 30, 1998 4-1/4 2-3/4
September 30, 1997.... 5-1/2 5 September 30, 1998 3-11/16 1-9/32
December 31, 1997..... 5-3/4 4-3/4 December 31, 1998 1-5/8 13/16
March 31, 1998........ 5-1/4 2-7/8 March 31, 1999 5-3/8 14/16
</TABLE>
As of March 31, 1999, there were approximately 340 record holders of
New Frontier Media's Common Stock.
New Frontier Media has not paid any cash or other dividends on its
Common Stock since its inception and does not anticipate paying any such
dividends in the foreseeable future. New Frontier Media intends to retain any
earnings for use in New Frontier Media operations and to finance the expansion
of its business.
In March 1999, New Frontier Media issued 2,610,000 common shares at
$2.00 per share pursuant to a private placement less offering costs of $514,323.
The net proceeds from this issuance were used to repay approximately $1.5
million of short-term debt. The balance will be used to fund working capital
requirements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this document. The discussion of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
18
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected operating data for the periods
and upon the basis indicated:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998
---------------------------------
<S> <C> <C>
Sales, net........................................... $ 9,452,432 $ 712,581
Cost of Sales........................................ 8,800,203 1,041,925
----------- -------------
Gross Profit......................................... 652,229 329,344
Total Operating Expenses............................. 7,708,346 1,310,642
Other Income (Expense)............................... (208,061) (159,454)
----------- ------------
Loss from continuing operations...................... (7,264,178) (1,799,440)
Discontinued Operations.............................. (316,946) (1,458,903)
----------- -------------
Net Income (Loss).................................... $(7,581,124) $ (3,258,343)
=========== =============
</TABLE>
COMPARISON OF YEARS ENDED MARCH 31, 1999 AND 1998
NET REVENUE. Net revenue for 1999 was $9,452,432, up from $712,581
(1,227%) from 1998. This increase in revenue was due to the fact that the
Company derived a full year's benefit of revenue from its three C-band networks
as compared to only 41 days of revenue in the fiscal year ended March 31, 1998.
The Company's revenues from TeN were minimal (approximately 3.5% of total
revenue) for this fiscal year due to limited carriage and launch incentives
(free initial months of carriage) provided to MSOs/DBS providers. The Company
expects to see an increase in Cable/DBS revenues as the launch incentive periods
expire for current MSOs/DBS providers and additional carriage is added during
the next fiscal year. Currently, the Company's cable/DBS networks, TeN and
Pleasure, reach an estimated combined 5.8 million addressable television
households. The revenue derived from New Frontier Media's C-Band business is
expected to remain stable.
COST OF GOODS SOLD. Cost of goods sold includes the expenses associated
with playout, uplinking, satellite transponder space, program acquisition
amortization, and call center operations. Cost of goods sold increased to
$8,800,203 for the 1999 fiscal year from $1,041,925 (an increase of 745%) due to
the fact that the Company incurred a full year's of expenses associated with
operations as compared to only 41 days of activity in the fiscal year ended
March 31, 1998. Approximately 10% of the total cost of goods sold during the
fiscal year ended March 31, 1999 were related to TeN as opposed to the Company's
C-Band networks. Approximately 74% of the Company's cost of goods sold are fixed
in nature. The Company anticipates an increase in costs of goods sold of
approximately 23% for fiscal year 2000 related entirely to the launch of its new
network, Pleasure, as well as to the operation of TeN for a full fiscal year.
GROSS PROFIT. For the 1999 fiscal year, the Company generated a gross
profit of $652,229 compared with a negative gross profit of ($329,344) for the
prior year. This increase in gross profit is attributable to the fact that the
Company derived a full year's benefit of its operations from its C-band networks
as compared to only 41 days in the fiscal year ended March 31, 1998. As stated
above, since the majority of New Frontier Media's costs of goods sold are fixed
in nature, as the Company's revenue base continues to increase the gross profit
generated is expected to increase proportionately.
OCCUPANCY AND EQUIPMENT. Occupancy and equipment expense was $297,056
for the year ended March 31, 1999 compared to $116,122 for the year ended March
31, 1998, a $180,934 (156%) increase. Occupancy and equipment expenses relate
primarily to rent and depreciation expenses. The increase in these expenses is
attributable to the operation of the Company's business for a full year as
compared to 41 days in fiscal year 1998 as well as a full year's worth of
depreciation for the assets acquired from Fifth Dimension and additions to fixed
assets made during the fiscal year.
19
<PAGE>
LEGAL AND PROFESSIONAL. Legal and professional expenses was $504,961
for the year ended March 31, 1999 compared to $116,091 for the year ended March
31, 1998, a $388,870 (335%) increase. Legal and professional expenses relate to
legal and accounting/auditing fees. The increase during this fiscal year is due
to higher legal fees incurred as a result of the Company being publicly held and
the Company's policy to vigorously defend itself against all claims.
ADVERTISING AND PROMOTION. Advertising and promotion expenses were
$3,448,590 for the year ended March 31, 1999 compared to $416,537 for the year
ended March 31, 1998, a $3,032,053 (728%) increase. Advertising and promotion
expenses consist primarily of Barker costs for uplink, playout and transponder
space, print advertising, expenses incurred with respect to trade shows, travel,
and meals/entertainment expenses. The year-to-year increase is attributable to
incurring advertising for the Company's C-band business for a full year as
compared to 41 days in fiscal year 1998 and to the Company's aggressive
promotion of its new networks, TeN and Pleasure, including the attendance of
trade shows, sales related travel expenses, print advertising, and the
production of promotional materials for the networks.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits were
$1,413,959 for the year ended March 31, 1999 compared to $415,650 for the year
ended March 31, 1998, an increase of $998,309 (240%). This increase was
attributable to the hiring of approximately 35 additional employees to operate
the Company's business including the addition of a five-person sales force to
sell TeN and Pleasure, the addition of seven employees to operate the Company's
playout facility, and additional employees hired to provide interstitial
editing, broadband development, and other support roles.
COMMUNICATIONS. Communication expense was $158,352 for the year ended
March 31, 1999 compared to $16,505 for the year ended March 31, 1998, an
increase of $141,847 (859%). 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 telephone expenses is attributable to the operation of the
Company for a full year compared to 41 days of operations for the fiscal year
1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$827,794 for the year ended March 31, 1999 compared to $106,240 for the year
ended March 31, 1998, an increase of $721,554 (679%). General and administrative
expenses consist primarily of bank charges, insurance, outside services, office
supplies, postage, printing, and registration/filing fees. The increase in
general and administrative expenses is attributable to the operation of the
Company for a full year compared to 41 days of operations for the fiscal year
1998.
GOODWILL AMORTIZATION. Goodwill amortization was $636,657 for the year
ended March 31, 1999 compared to $73,226 for the year ended March 31, 1998, an
increase of $563,431 (769%). This increase is due to the amortization of
goodwill over 365 days compared to 41 days for fiscal year 1998. The goodwill
shown relates to the acquisition of the assets of Fifth Dimension in February
1998. This goodwill is being amortized over a period of 120 months.
CONSULTING. Consulting expenses were $420,977 for the year ended March
31, 1999 compared to $50,271 for the year ended March 31, 1998, an increase of
$370,706 (737%). Consulting expenses consist of payments made to outside
consultants in various capacities such as program content acquisition, broadcast
playout operations development, marketing, and sales. The increase in consulting
expenses is attributable to the Company's use of outside consultants to assist
it in the start-up of its playout facility, the start-up of its sales and
marketing departments, and the oversight of its program content acquisitions. As
New Frontier Media grows it expects to see its reliance on outside consultants
decrease as many of these functions are brought in-house.
OTHER EXPENSE. Net total other expenses were $208,061 for the year
ended March 31, 1999 compared to $159,454 for the year ended March 31, 1998, an
increase of $48,607 (30%). Net total other expenses consists of interest income,
loss on trading securities, and interest expense. The increase in net total
other expenses is due primarily to an increase in interest expense corresponding
to the increase in borrowings incurred by the Company during the year. As of
March 31, 1999, all debt financing of the Company had been paid off.
20
<PAGE>
LOSS FROM OPERATIONS OF DISCONTINUED SUBSIDIARIES. Loss from operations
of discontinued subsidiaries was $178,890 for the year ended March 31, 1999
compared to $999,853 for the year ended March 31, 1998. As of March 31, 1999,
the Company had discontinued the operations of its operating subsidiary, David.
David incurred a loss of $178,890 for the fiscal year 1999. As of March 31,
1998, New Frontier Media had formalized its plan to discontinue operations of
its operating subsidiaries, BIG and Fuzzy Entertainment, Inc. ("Fuzzy"). On June
26, 1998, the Company finalized the sale of its 70% interest in BIG to Quarto.
BIG, Fuzzy, and David incurred losses of $999,853 for the year ended March 31,
1998.
LOSS ON DISPOSAL OF DISCONTINUED SUBSIDIARIES. Loss on disposal of
discontinued subsidiaries was $138,056 for the year ended March 31, 1999
compared to $459,050 for the year ended March 31, 1998. For the fiscal year
1999, the Company incurred a loss on the disposal of David in the amount of
$204,818, a gain on the disposal of BIG in the amount of $64,166 and a gain on
the disposal of Fuzzy in the amount of $2,596. For the fiscal year 1998, the
Company accrued a loss on the discontinuance of BIG and Fuzzy in the amount of
$459,050.
NET LOSS. For the year ended March 31, 1999, the Company's net loss
from continuing operations widened to $7,264,178 from a total loss of $1,799,440
for the year ended March 31, 1998. The increase in year-to-year continuing net
losses was due to the following: 1) the increase in advertising, marketing,
sales and promotional expenses incurred in the launching of TeN (the Company
estimates it incurred approximately $2.5 million to launch TeN); 2) the increase
in employees necessary to adequately staff the Company's operations; 3) the
operation of the Company's business for 365 days as compared to 41 days in
fiscal year 1998; and 4) the increase in expenses to operate TeN without
corresponding revenue due to launch incentives and lack of revenue generating
carriage.
All of the Company's operations as of March 31, 1997, namely, BIG,
Fuzzy and David have now been discontinued leaving CSB, which commenced
operations on February 18, 1998, as the Company's only operating subsidiary and
business segment. Insofar as none of the Company's current operations existed as
of March 31, 1997 and all of the Company's operations which existed as of March
31, 1997 have been discontinued, the Company's results of operations for the
year ended March 31, 1997 have no relevance to the Company's current operations.
Thus, the above discussion of the Company's operations for the years ended March
31, 1999 and 1998 has not attempted to include any comparisons to the Company's
results for fiscal 1997 from such discontinued operations.
Management believes that the Company will become profitable within the
next two quarters based on the following: 1) the inclusion on DISH Network's
impulse PPV system should dramatically increase revenue for both Ten and
Pleasure; 2) an increase in carriage for TeN and Pleasure combined with the
expiration of several launch incentive programs; 3) a decrease in expenses
incurred for the start-up of TeN and Pleasure; and 4) the acquisition of
IGallery, ITN, and CTI which are collectively cash flow positive.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of
$2,736,186 compared to $503,123 at March 31, 1998, of which $250,000 was
restricted. This increase in cash was primarily the result of the Company's sale
of 2,610,000 shares of common stock in a private placement in March 1999 that
raised $5,220,000. The Company has applied $1,518,872 of the proceeds to pay
$1,485,000 of principal amount of indebtedness plus interest and intends to
apply the balance of the proceeds to working capital needs.
For the year ended March 31, 1999, cash used in operating activities of
$3,003,686 was primarily due to losses before depreciation and amortization of
$1,709,903, increases in deferred revenue and accounts payable, and increases in
prepaid distribution rights. The increase in deferred revenue and accounts
payable was due primarily to the operation of the Company's C-band business for
a full year as compared to only 41 days in fiscal year 1998. The increase in
prepaid distribution rights is related to the Company's acquisition of content
for the Extasy Networks as well as the addition of content for TeN and Pleasure.
For the year ended March 31, 1998, cash used in operating activities of
$2,042,464 relates primarily to the discontinued operations of BIG, David, and
Fuzzy.
21
<PAGE>
Cash used in investing activities was $662,521 for the year ended March
31, 1999. Capital expenditures for the year ended March 31, 1999 were $900,787
and have generally been comprised of broadcast playout equipment, editing
equipment, receiver/decoder equipment, and computer hardware and software. Cash
used in investing activities for the year ended March 31, 1998 was $4,151,844
and was comprised primarily of the acquisition of the Fifth Dimension assets
($4,281,284).
Cash provided by financing activities was $6,149,270 for the year ended
March 31, 1999 as compared to $6,338,044 for the year ended March 31, 1998, and
was due primarily to the issuance of common stock in the amount of $6,925,309
and $6,184,626, respectively.
The Company currently has no material commitments other than those
under its operating and capital lease agreements. The Company has experienced a
substantial increase in its capital expenditures and capital and operating lease
arrangements during the current fiscal year as a result of its increased
staffing requirements, the addition of the Boulder, Colorado playout facility,
and the addition of its TeN and Pleasure networks. New Frontier Media
anticipates that its capital expenditures will increase for the next fiscal year
as the Company expands its playout facility, purchases additional
receiver/decoder equipment as additional cable carriage is obtained for its TeN
and Pleasure networks, and relocates its Call Center to Boulder, Colorado.
The Company anticipates that its existing cash will be sufficient to
satisfy its operating requirements for its current operations for the next 12
months. New Frontier Media expects to receive as much as $9.75 million through
the exercise of its 1,500,000 publicly traded warrants, which are currently
in-the-money. In the event that the Company does not receive at least $5.0
million through the exercise of its public warrants, it will need to raise
additional funds to finance its future growth plans.
As of the date of this report the Company had secured a $2.0 million
line of credit from an unrelated party.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements of New Frontier Media, Inc. and
its subsidiaries, including the notes thereto and the report of independent
accountants thereon, commence at page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
22
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth the name, age and position with the
Company of each officer and director of the Company as of the date of this
Report.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------- ----- ----------
<S> <C> <C>
Mark H. Kreloff 37 Chairman of the Board, President, and Chief Executive Officer
Michael Weiner 58 Executive Vice President, Secretary-Treasurer and Director
Karyn L. Miller 33 Chief Financial Officer
Koung Y. Wong 46 Director
Edward J. Bonn 47 Director
</TABLE>
MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief
Executive Officer of New Frontier Media , Inc. since the Company's inception in
September, 1995. Mr. Kreloff has been actively involved in the cable television,
entertainment and computer software industries since 1977. Prior to founding the
Company and during the four years immediately preceding his employment with the
Company, he was the President of LaserDisc Entertainment, a video disc
distribution company; Elmfield IV, Inc., an entertainment production and
distribution company, and California Software Partners, L.P., a computer
software development and publishing company. Previously, Mr. Kreloff held the
title Vice President, Mergers and Acquisitions, with Kidder Peabody & Co. and
Drexel Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by
Butcher & Singer, Inc., a Philadelphia-based investment bank, in the Cable
Television and Broadcast Media Group. From 1977 through 1983, Mr. Kreloff held a
variety of positions, including Marketing Director, in his family's cable
television system based in New Jersey. Mr. Kreloff is an honors graduate of
Syracuse University and holds B.S. degrees in Finance and Public Communications.
MICHAEL WEINER. Mr. Weiner has been Executive Vice President and a
director of New Frontier Media, Inc. since the Company's inception. Prior to
founding the Company, Mr. Weiner was actively involved as a principal and
director in a variety of publishing businesses, including a fine art poster
company His background includes 20 years in real estate development and
syndication.
KARYN L. MILLER. Ms. Miller has ten years of accounting and finance
experience and is a licensed CPA in the state of Colorado. Ms. Miller joined New
Frontier Media on February 15, 1999 and began her career at Ernst & Young in
Atlanta, Georgia. Prior to joining the Company, Ms. Miller was the Corporate
Controller for Airbase Services, Inc. a leading aircraft repair and maintenance
company. Previous to that, she was the Finance Director for Community Medical
Services Organization and Controller for Summit Medical Group, P.L.L.C. Before
joining Summit Medical Group, P.L.L.C., Ms. Miller was a Treasury Analyst at
Clayton Homes, Inc., a $1 billion company traded on the NYSE. Ms. Miller
graduated with Honors with both a Bachelors of Science degree and a Masters in
Accounting from the University of Florida.
KOUNG Y. WONG. Mr. Wong was born in Canton, China in 1952 and
immigrated to the United States in 1969 with his family. He earned a Bachelor of
Arts degree from City College of San Francisco in 1975, and studied Architecture
at the University of California at Berkeley for one year. For the past 22 years,
Mr. Wong has been the president and sole shareholder of Wav Entertainment, Inc.,
a leading commerce electronics hardware and software distribution company based
in South San Francisco, California. Wav Entertainment, Inc., includes a 20,000
square-foot corporate headquarters and distribution center and an 8,500
square-foot retail superstore in San Francisco, California.
23
<PAGE>
EDWARD J. BONN. Mr. Bonn is the founder and President of ITN.
ITN is a leading Internet technology company that provides turn-key
e-commerce solutions, Internet software engineering, bandwith, merchant
account management and credit card processing systems. Mr. Bonn was formerly
the Chairman of the Board of Independent Entertainment Group, a
California-based, publicly traded, service bureau and information provider. He
was also a founder and President of ICOM Group, Inc., an audio text service
bureau that specialized in automated credit card processing and fraud control
procedures, and the founder and President of Media 800, Inc., a privately held
company offering a variety of 800/900 information and entertainment.
No director or executive officer of the Company is related to any other
director or executive officer. None of the Company's officers or directors hold
any directorships in any other public company. There are currently two outside
directors on the Company's Board of Directors. The Company's compensation
committee is comprised of Messrs. Kreloff, Weiner, and Wong. The Company's audit
committee is comprised of Messrs. Kreloff, Bonn and Wong.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, and
the rules issued thereunder, the Company's directors and executive officers are
required to file with the Securities and Exchange commission and the National
Association of Securities Dealers, Inc. reports of ownership and changes in
ownership of Common Stock and other equity securities of the Company. Copies of
such reports are required to be furnished to the Company. Based solely on a
review of the copies of such reports furnished to the Company, or written
representations that no other reports were required, the Company believes that,
during the Company's fiscal year ended March 31, 1999, all of its executive
officers and directors complied with the requirements of Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the annual compensation paid to
executive officers of the Company for the fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
OTHER # OF
NAME AND YEAR ANNUAL COMPENSATION OPTIONS/ LTIP
PRINCIPAL POSITION COMPENSATION SALARY($) BONUS($) AWARDS SARS PAYOUTS ALL OTHER
- ------------------------- ------------ -------- --------- ------------ -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Mark H. Kreloff,
CEO, Pres., and
Chairman............. 1999 103,750 0 0 350,000 0 8,422
Michael Weiner,
Exec. V.P.,
Sec.-Treas. And 103,750
Director............. 1999 0 0 290,000 0 8,291
Karyn L. Miller,
CFO.................. 1999 10,308 0 0 35,000 0 0
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has an Employment Agreement with Mark Kreloff which ends on
December 31, 2001. The Agreement provides for the payment of an annual base
salary of $115,000 for calendar year 1999, $130,000 for calendar year 2000 and
$150,000 for calendar year 2001. The Agreement also provides for an annual
incentive bonus equal to: (a) 30% of his annual base salary if the Company's
annual earnings before income taxes, depreciation and amortization ("EBITDA") is
at least $1 million; (b) 50% of his annual base salary if the Company's EBITDA
is at least $2 million, or (c) 100% of his annual base salary if the Company's
EBITDA is at least $4 million. The Agreement provides for the one-time issuance
of 150,000 nonstatutory options to Mr. Kreloff at the fair market value of the
24
<PAGE>
common stock on the date of grant. The options are to vest over three years,
except upon a change of control of the Company, as defined in the Agreement, or
upon the death or disability of Mr. Kreloff, the discharge of Mr. Kreloff
without cause or the resignation of Mr. Kreloff for "good reason", as defined in
the Agreement. The Agreement further provides for the payment to Mr. Kreloff
upon the occurrence of any of the above events of a lump sum equal to his annual
base salary and bonus. In addition, if the terminating event occurs on or before
June 30, 2000, the Company is to pay to Mr. Kreloff an additional $100,000.
The Company has an Employment Agreement with Michael Weiner which ends
on December 31, 2001. The Agreement provides for the payment of an annual base
salary of $115,000 for calendar year 1999, $130,000 for calendar year 2000 and
$150,000 for calendar year 2001. The Agreement also provides for an annual
incentive bonus equal to: (a) 30% of his annual base salary if the Company's
EBITDA is at least $1 million; (b) 50% of his annual base salary if the
Company's EBITDA is at least $2 million, or (c) 100% of his annual base salary
if the Company's EBITDA is at least $4 million. The Agreement provides for the
one-time issuance of 150,000 nonstatutory options to Mr. Weiner at the fair
market value of the common stock on the date of grant. The options are to vest
over three years, except upon a change of control of the Company, as defined in
the Agreement, or upon the death or disability of Mr. Weiner, the discharge of
Mr. Weiner without cause or the resignation of Mr. Weiner for "good reason", as
defined in the Agreement. The Agreement further provides for the payment to Mr.
Weiner upon the occurrence of any of the above events of a lump sum equal to his
annual base salary and bonus. In addition, if the terminating event occurs on or
before June 30, 2000, the Company is to pay to Mr. Weiner an additional
$100,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the date of this Report, the
number and percentage of shares of outstanding Common Stock owned by each person
owning at least 5% of the Company's Common Stock, each officer and director
owning stock, and all officers and directors as a group:
<TABLE>
<CAPTION>
NAME OF NUMBER
BENEFICIAL OWNER SHARES BENEFICIALLY OWNED PERCENT
- --------------------- ------------------------- ---------
<S> <C> <C>
Mark H. Kreloff............................................... 1,014,000 8.09%
5435 Airport Blvd., Suite 100
Boulder, CO 80301
Michael Weiner................................................ 565,300 4.5%
5435 Airport Blvd., Suite 100
Boulder, CO 80301
Columbine Financial Solutions................................. 791,993 6.32%
3900 E. Mexico Avenue, Suite 502
Denver, CO 80210
Pleasure Licensing LLC ....................................... 700,000 5.58%
59 Lake Drive
Hightstown, NJ 08520
Koung Y. Wong................................................. 12,500 .01%
168 Beacon St.
South San Francisco, CA 94080
All officers and directors as a group
(3 persons)................................................... 1,591,800 12.69%
----------- ------
Total...................................................... 3,083,793 24.59%
=========== ======
</TABLE>
25
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 2, 1998, the Company loaned an entity owned by two major
shareholders of the Company $100,000 in the form of a promissory note
receivable. The note bore interest at 8% per annum. In March 1999, the note was
repaid.
The Company leased certain equipment and office space via entities
controlled by an officer and shareholder on a month to month basis. During the
years ended March 31, 1999 and 1998 the Company paid $52,425 and $87,033 to
these entities relating to these leases. The leases have since been terminated.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
3.01 Articles of Incorporation of Company, with Amendment (incorporated by
reference to Exhibit 3.01of the Company's Registration Statement on
Form SB-2 (File No. 333-35337) as amended (the "Registration
Statement").
3.02 First Amended Bylaws of Company (incorporated by reference to Exhibit
3.02 of the Company's Registration Statement).
4.01 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.01 of the Company's Registration Statement).
10.01 Asset Purchase Agreement Among the Company, CSB, Fifth Dimension
Communications (Barbados) Inc., and Merlin Sierra, Inc.(incorporated by
reference to Exhibit 10.01 of the Company's Registration Statement).
10.02 Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario
Inc.(incorporated by reference to Exhibit 10.02 of the Company's
Registration Statement).
10.03 Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario
Inc. (incorporated by reference to Exhibit 10.03 of the Company's
Registration Statement).
10.04 Revocable Line of Credit Agreement (incorporated by reference to
Exhibit 10.04 of the Company's Registration Statement).
10.05 Promissory Note (incorporated by reference to Exhibit 10.05 of the
Company's Registration Statement).
10.06 Call Center Interim Service Agreement between the Company and 1248663
Ontario Inc. (incorporated by reference to Exhibit 10.07 of the
Company's Registration Statement).
10.07 Settlement and Stock and Warrant Transfer Agreement, dated June 16,
1998, by and among the Company, BIG, Quarto Holdings, Inc., Old
Frontier Media, Inc., Mark Kreloff, Michael Weiner, Andrew Brandt and
Scott Wussow. (incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1998).
10.08 Office Lease Agreement, dated August 12, 1998, for premises at 5435
Airport Boulevard, Boulder, CO.
21.01 Subsidiaries of the Company.
27.01 Financial Data Schedule.
26
<PAGE>
REPORTS ON FORM 8-K
On February 17, 1999, the Company filed a Current Report on Form 8-K to
report that it had entered into a content license with Pleasure Productions
securing the broadcast and electronic distribution rights to Pleasure
Production's 4,000 title library.
On March 8, 1999, the Company filed a Current Report on Form 8-K to report
that it had raised approximately $5.0 million in equity financing through a
private placement of its common stock with institutional investors.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW FRONTIER MEDIA, INC.
/s/Mark H. Kreloff
------------------------------------
Mark H. Kreloff
Chairman of the Board of Directors,
President and Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report is signed
below by the following persons on behalf of the Registrant in the capacities and
on the dates indicated.
Name and Capacity Date
- ----------------------- -----
/s/Mark H. Kreloff June 25, 1999
....................................
Name: Mark H. Kreloff
Title: Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
/s/Michael Weiner June 25, 1999
.....................................
Name: Michael Weiner
Title: Director, Executive Vice President,
Secretary and Treasurer
27
<PAGE>
/s/Karyn Miller June 25, 1999
.....................................
Name: Karyn Miller
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Edward Bonn June 25, 1999
.....................................
Name: Edward Bonn
Title: Director
/s/Koung Y. Wong June 25, 1999
.....................................
Name: Koung Y. Wong
Title: Director
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-20
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
New Frontier Media, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of New Frontier
Media, Inc. and Subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Frontier Media,
Inc. and Subsidiaries as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 11 to the financial statements, the Company is involved in
litigation. The ultimate outcome of this matter cannot presently be determined
until the court has ruled on the action.
SPICER, JEFFRIES & CO.
Denver, Colorado
June 9, 1999
F-2
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 4) $ 2 736 186 $253 123
Investment in certificates of deposit (Note 4) - 250 000
Accounts receivable 740 923 813 456
Inventories (Note 1) - 182 508
Prepaid distribution and film exhibition rights (Note 1) 1 352 161 721 062
Trading securities, at market value 50 150 193 350
Deposits 402 441 495 000
Notes receivable - related parties (Note 3) - 138 000
Other 623 490 243 148
----------- -----------
TOTAL CURRENT ASSETS 5 905 351 3 289 647
----------- -----------
FURNITURE AND EQUIPMENT, at cost (Note 1) 2 779 078 1 113 428
Less: accumulated depreciation and amortization (333 586) (62 209)
----------- -----------
NET FURNITURE AND EQUIPMENT 2 445 492 1 051 219
----------- -----------
OTHER ASSETS:
Prepaid distribution rights (Note 1) 2 157 442 -
Other 243 218 119 418
Goodwill, less accumulated amortization of $709,883
and $73,226 (Note 1) 5 651 008 6 287 665
----------- -----------
TOTAL OTHER ASSETS 8 051 668 6 407 083
----------- -----------
$16 402 511 $10 747 949
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1 846 873 $ 585 001
Note payable (Note 2) - 500 000
Notes payable - related parties (Note 3) - 106 465
Current portion of obligations under capital lease (Note 6) 232 843 6 041
Other accrued liabilities 660 603 172 410
Accrued disposal costs (Note 9) - 459 050
Deferred revenue (Note 1) 2 898 731 446 944
----------- -----------
TOTAL CURRENT LIABILITIES 5 639 050 2 275 911
LONG-TERM DEBT - Obligations under capital leases (Note 6) 474 430 6 716
----------- -----------
TOTAL LIABILITIES 6 113 480 2 282 627
----------- -----------
MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4) - 17 570
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
SHAREHOLDERS' EQUITY (Notes 1, 4 and 8):
Common stock, $.0001 par value, 50,000,000
shares authorized, 12,539,517 and 6,542,000,
shares issued and outstanding, respectively 1 254 654
Preferred stock, $.10 par value, 5,000,000 shares authorized:
Class A, no shares issued and outstanding - -
Class B, no shares issued and outstanding - -
Additional paid-in capital 20 565 974 12 265 249
Deficit (10 278 197) (3 818 151)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 10 289 031 8 447 752
----------- -----------
$16 402 511 $10 747 949
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
SALES, net $ 9 452 432 $ 712 581
COST OF SALES 8 800 203 1 041 925
------------ ------------
GROSS MARGIN 652 229 (329 344)
------------ ------------
OPERATING EXPENSES:
Occupancy and equipment 297 056 116 122
Legal and professional 504 961 116 091
Advertising and promotion 3 448 590 416 537
Salaries, wages and benefits 1 413 959 415 650
Communications 158 352 16 505
General and administrative 827 794 106 240
Goodwill amortization 636 657 73 226
Consulting 420 977 50 271
------------ ------------
TOTAL OPERATING EXPENSES 7 708 346 1 310 642
------------ ------------
OTHER INCOME (EXPENSE):
Loss on trading securities (4 934) (31 785)
Interest income 20 380 3 427
Interest expense (223 507) (131 096)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (208 061) (159 454)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (7 264 178) (1 799 440)
------------ ------------
DISCONTINUED OPERATIONS (Note 9):
Loss from operations of discontinued subsidiaries (178 890) (999 853)
Loss on disposal of discontinued subsidiaries,
including provision of $35,000
in 1998 for operating losses during the
phase out period (138 056) (459 050)
------------ ------------
(316 946) (1 458 903)
------------ ------------
NET LOSS $ (7 581 124) $ (3 258 343)
------------ ------------
------------ ------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM CONTINUING OPERATIONS (Note 1) $ (1.00) $ (.40)
------------ ------------
------------ ------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM DISCONTINUED OPERATIONS (Note 1) $ (.04) $ (.33)
------------ ------------
------------ ------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE
(Note 1) $ (1.04) $ (.73)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1) 7 288 453 4 460 744
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Class A Preferred Stock
------------------------- -----------------------
$0.0001 Par Value $0.10 Par Value
Shares Amount Shares Amount
--------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCES, March 31, 1997 4 189 000 $ 419 10 000 $1 000
Issuance of common stock for services 8 000 1 - -
Retirement and conversion of preferred stock to common stock 5 000 - (10 000) (1 000)
Issuance of common stock, less offering costs of $1,585,374 1 500 000 150 - -
Issuance of common stock for acquisition of assets 840 000 84 - -
Related party notes and accrued interest contributed as capital - - - -
Net loss - - - -
--------------- -------- ----------- ---------
BALANCES, March 31, 1998 6 542 000 654 - -
Conversion of debentures plus accrued interest into common
stock 2 474 184 247 - -
Exercise of warrants 135 000 14 - -
Issuance of common stock for license agreement 700 000 70 - -
Issuance of common stock for services 78 333 8 - -
Issuance of common stock in private placement, less offering
costs of $514,323 2 610 000 261 - -
Sale of discontinued subsidiary - - - -
Net loss - - - -
--------------- -------- ----------- ---------
BALANCES, March 31, 1999 12 539 517 $ 1 254 - $ -
--------------- -------- ----------- ---------
--------------- -------- ----------- ---------
<CAPTION>
Class B Preferred Stock
------------------------- Additional
$0.10 Par Value Paid-In
Shares Amount Capital Deficit
------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCES, March 31, 1997 5 000 $ 500 $ 1 768 661 $(559 808)
Issuance of common stock for services - - 39 999 -
Retirement and conversion of preferred stock to common stock (5 000) (500) 1 500 -
Issuance of common stock, less offering costs of $1,585,374 - - 6 184 476 -
Issuance of common stock for acquisition of assets - - 4 199 916 -
Related party notes and accrued interest contributed as capital - - 70 697 -
Net loss - - - (3 258 343)
------------- -------- ----------- -----------
BALANCES, March 31, 1998 - - 12 265 249 (3 818 151)
Conversion of debentures plus accrued interest into common - - - -
stock - - 1 825 972 -
Exercise of warrants - - 469 618 -
Issuance of common stock for license agreement - - 2 183 930 -
Issuance of common stock for services - - 236 867 -
Issuance of common stock in private placement, less offering
costs of $514,323 - - 4 705 416 -
Sale of discontinued subsidiary - - (1 121 078) 1 121 078
Net loss - - - (7 581 124)
------------- -------- ----------- ------------
BALANCES, March 31, 1999 - $ - $20 565 974 $(10 278 197)
------------- -------- ----------- ------------
------------- -------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (7 581 124) $ (3 258 343)
Adjustments to reconcile net loss to net cash used in
operating activities:
Conversion of interest to common stock 76 219 -
Gain on disposal of subsidiary (66 762) -
Depreciation and amortization 1 709 903 112 959
Loss on securities 4 934 31 785
Increase in accounts payable 1 291 795 459 073
Decrease (increase) in accounts receivable 72 533 (620 546)
Decrease in inventories 182 508 476 995
Decrease (increase) in prepaid distribution rights (1 369 421) 8 126
Decrease (increase) in other assets (366 107) 457 372
Increase in other accrued liabilities 488 193 126 994
Minority interest in loss of subsidiary - (287 873)
Decrease (increase) in deposits 92 559 (495 000)
Increase in accrued disposal costs - 459 050
Increase in deferred revenue, net 2 451 787 446 944
Stock issued for services 9 297 40 000
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3 003 686) (2 042 464)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (900 787) (77 210)
Decrease (increase) in notes receivable - related party 100 000 (100 000)
Sale of certificates of deposit - 500 000
Proceeds (purchase) in trading securities 138 266 (193 350)
Acquisition of Fifth Dimension assets - (4 281 284)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (662 521) (4 151 844)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (169 574) (5 308)
Payment of related party notes payable (106 465) -
Payments on line of credit - (341 274)
Proceeds (payments) on note payable (500 000) 500 000
Issuance of common stock, net of offering costs 6 925 309 6 184 626
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6 149 270 6 338 044
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
NET INCREASE IN CASH 2 483 063 143 736
CASH, beginning of year 253 123 109 387
---------- ----------
CASH, end of year $2 736 186 $ 253 123
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 147 288 $ 93 508
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment via capital lease obligation $ 851 333 $ -
---------- ----------
---------- ----------
Common stock issued for services $ 74 375 $ 40 000
---------- ----------
---------- ----------
Common stock issued for acquisition of
Fifth Dimension assets $ - $4 200 000
---------- ----------
---------- ----------
Related party notes payable and accrued interest
contributed as capital $ - $ 70 697
---------- ----------
---------- ----------
Reclassification of accrued interest payable to
related party notes payable $ - $ 21 465
---------- ----------
---------- ----------
Common stock issued for prepaid distribution right
license agreement $2 184 000 $ -
---------- ----------
---------- ----------
Accrued interest on debentures converted
into common stock $ 76 219 $ -
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS, AND CONSOLIDATION
The Company was originally incorporated in the state of Colorado on February 23,
1988. On September 15, 1995 the Company acquired New Frontier Media, Inc. in a
stock for stock exchange and changed the Company's name to New Frontier Media,
Inc. ("NFMI" or the "Company"). For a period of five years preceding this
acquisition the Company had not conducted any significant business operations.
As of March 31, 1996 the Company had three wholly owned subsidiaries; Boulder
Interactive Group, Inc. ("BIG") (a developer and publisher of entertainment and
educational computer software on CD-ROM), David Entertainment, Inc. ("DVD")
(distributor of adult laserdisc and digital video disc format titles) and FUZZY
Entertainment, Inc. ("FUZZY") (developer and distributor of fine art posters and
decorative art posters).
As of March 31, 1999, the Company has discontinued the operations of BIG, DVD
and FUZZY (see Note 9).
On February 18, 1998 the Company purchased certain assets of Fifth Dimension
Communications (Barbados) Inc. and its related entities ("Fifth Dimension")
pursuant to an asset purchase agreement dated September 18, 1997. The Company
subsequently contributed these assets to its newly formed wholly owned
subsidiary Colorado Satellite Broadcasting, Inc. ("CSB"). The acquisition was
completed through the issuance of 840,000 shares of the Company's common stock
valued at $5.00 per share, warrants to purchase an additional 400,000 shares of
the Company's common stock at $5.00 per share and the payment of $4,281,284 in
cash. The acquisition was accounted for using the purchase method of accounting.
The excess of the cost of the acquisition over the fair value of the assets
acquired was recorded as goodwill. The acquisition was funded from the proceeds
of a public offering of the Company's common stock which also closed on February
18, 1998. The Company raised approximately $6,184,000 net of offering costs, by
selling 1,500,000 shares of the Company's common stock.
The Company, through its subsidiary CSB, and by reason of its consummation of
its Asset Purchase Agreements with Fifth Dimension, is a provider of
subscriber-based premium television channels ("premium channels" or "pay
television") and transaction-based television networks ("pay-per-view"). CSB is
a provider of unedited adult programming via direct to home ("DTH") C-band
satellite. CSB also provides its services through cable television and wireless
cable television multiple system operators. CSB currently owns, operates and
distributes three C-band adult programming networks: Extasy, True Blue, and
GonzoX.
During the year ending March 31, 1999, CSB launched TeN: the erotic network, a
new 24 hour adult network targeted specifically to cable television system
operators and medium to high powered DTH satellite providers ("DBS"). TeN's
adult movie features consist of partially edited adult programming.
The accompanying consolidated financial statements include the historical
accounts of NFMI, BIG, DVD and FUZZY for all periods presented and CSB since
inception. All intercompany accounts and transactions have been eliminated in
consolidation.
F-9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INVENTORIES
Inventories were stated at the lower of cost (first in, first out) or market.
These costs included acquisition, duplication, production and the physical
packaging of the products for distribution on a unit-specific basis and were
charged to cost of sales when revenue from the sale of the units was recognized.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. The cost of maintenance and repairs
is charged to operations as incurred; significant additions and betterments are
capitalized. Depreciation is computed using accelerated and straight-line
methods over the estimated useful life of five years.
INCOME TAXES
The Company files a consolidated income tax return with its majority owned
subsidiaries.
CASH FLOWS
For purposes of reporting cash flows, cash includes those investments which are
short-term in nature (three months or less to original maturity), are readily
convertible to cash, and represent insignificant risk of changes in value.
PREPAID DISTRIBUTION RIGHTS
Prepaid distribution rights represent content license agreements. These rights
typically range from one to five years. The Company amortizes these rights over
the respective terms of the agreements.
FILM EXHIBITION RIGHTS
Rights to exhibit films were recorded at cost and were amortized on a
straight-line basis over the period of the contract, which was normally
twenty-four months.
REVENUE RECOGNITION
Revenue from sales of movie subscriptions from one to twelve months is
recognized on a monthly basis over the term of the subscription.
F-10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, certificates of deposit, accounts receivable,
accounts payable and notes receivable and payable approximates fair value.
LONG-LIVED ASSETS
The Company adopted the provisions of SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in its financial
statements for the year ended March 31, 1998. The adoption of SFAS 121 had no
material affect on the Company's financial statements. The Company reviews its
long-lived assets for impairment to determine if the carrying amount of the
asset is recoverable.
GOODWILL
Goodwill, which resulted from the acquisition of assets from Fifth Dimension, as
described above, is being amortized over a period of 120 months.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK WARRANTS
The Company follows the intrinsic value based method of accounting as prescribed
by APB 25, Accounting for Stock Issued to Employees, for its stock-based
compensation. Under the Company's stock warrant issuances, the exercise price is
in excess of the fair value of the warrants at the grant date and no
compensation cost is recognized.
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.
F-11
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 2 - NOTE PAYABLE
The Company had a $500,000 note payable to an unrelated entity, dated August 29,
1997, bearing interest at 12% per annum and due on August 29, 1998. The note was
secured by all of the assets of the Company and the common stock of the Company
owned by the majority shareholders of the Company. This note was paid off in
March of 1999.
NOTE 3 - RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Notes payable to officers and shareholders bearing interest at 8.5%,
unsecured and due on demand anytime after December 31, 1996 $ - $ 99 981
Notes payable to entities, controlled by officers and shareholders, bearing
interest at 8.5%, unsecured and due on demand anytime
after December 31, 1996 - 6 484
------------- -------------
$ - $ 106 465
============= =============
</TABLE>
On March 31, 1998, in connection with the discontinuance of the Company's
subsidiary BIG, $54,573 of related party notes payable, plus accrued interest of
$16,124 were forgiven and credited to additional paid-in capital. In addition at
March 31, 1998, $21,465 of accrued interest on the remaining note balances of
$85,000 was credited to the notes.
On March 2, 1998, the Company loaned an entity owned by two major shareholders
of the Company $100,000 in the form of a promissory note receivable. The note
bore interest at 8% per annum, was due on demand after April 30, 1998 and was
secured by common stock of the Company. During the year ended March 31, 1999,
the loan was paid off plus accrued interest of $8,000.
The Company had an agreement with an entity related to a major shareholder to
sell, package, handle, replicate and ship adult video disc titles at the
Company's expense for a management fee of $40,000 per month through July 1,
1997. As of July 1, 1997 this agreement was terminated and the Company assumed
all responsibilities associated with the titles. During the year ended March 31,
1998 this related entity withheld from sales of $353,293, replicating costs of
$286,361 and management fees of $120,000. Included in accounts payable at March
31, 1998 is $22,332 due to the related entity.
F-12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 3 - RELATED PARTY TRANSACTIONS (continued)
The Company issued a three year note receivable to one of its officers in the
amount of $38,000. The note required interest only payments at a rate of 6.1%,
payable on a quarterly basis with the principal due on August 31, 1998. Interest
earned on this note for the year ended March 31, 1998 was $2,318. This note was
assumed by Quarto in connection with the sale of BIG (see Note 9).
The Company leased certain equipment and office space via entities controlled by
an officer and shareholder on a month to month basis (see Note 6). During the
years ended March 31, 1999 and 1998 the Company paid $52,425 and $87,033 to
these entities relating to these leases. These leases were terminated in October
of 1998.
NOTE 4 - SHAREHOLDERS' EQUITY
COMMON STOCK
On February 18, 1998, the Company issued 1,500,000 units (one share of common
stock and one warrant to purchase one share of common stock at an exercise price
of $6.50 expiring February 18, 2003) in a public offering for cash of $7,770,000
less offering costs of $1,585,374. The warrants are subject to redemption by the
Company at $0.05 per warrant, on thirty days prior written notice, if the common
stock has traded at or above $8.00 per share for ten consecutive trading days. A
portion of these proceeds along with the issuance of 840,000 shares of common
stock valued at $5.00 per share were used to acquire certain assets of Fifth
Dimension (see Note 1). In connection with the public offering, 150,000 warrants
to purchase one share of common stock at an exercise price of $6.75 expiring
February 18, 2003 were issued to the underwriter.
On June 3, 1998, the Company sold $1,750,000 of 8% convertible debentures,
interest due quarterly and due on June 3, 2000. The debentures were convertible
into shares of common stock of the Company at a conversion price for each share
of common stock equal to the lesser of: (a) 125% of the closing price or (b) 90%
of the market price on the conversion date. During the year ended March 31,
1999, these debentures plus accrued interest of $76,219 were converted into
2,474,184 shares of the Company's common stock. In addition, the debenture
holders received 175,000 common stock purchase warrants exercisable at $3.47875
per share expiring in July, 2001. In March of 1999, 135,000 of these warrants
were exercised.
In March of 1999, the Company issued 2,610,000 common shares at $2.00 per share
pursuant to a private placement less offering costs of $514,323.
In addition, in February of 1999, the Company issued 700,000 shares of its
common stock to an unrelated entity at $2.12 per share for consideration in
obtaining a license agreement for the rights to distribute approximately 4,000
adult motion pictures (see Note 7). In addition, the Company issued a five year
common stock purchase warrant valued at $1.00 per share to purchase 700,000
shares of the Company's common stock at an exercise price of $1.12 per share.
F-13
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 4 - SHAREHOLDERS' EQUITY (CONTINUED)
CONSULTANT STOCK PLAN
During the year ended March 31, 1999, the Company formalized a consultant stock
plan which provides for the issuance of shares, or options to purchase shares,
to persons providing bona-fide services to the Company. Under the plan the
Company reserved 500,000 shares of common stock for issuance. In connection with
the plan, in February of 1999, the Company issued 35,000 shares of its common
stock valued at $2.13 per share to a consultant under a 12 month consulting
agreement. In addition, in March of 1999, the Company issued 43,333 shares of
common stock valued at $3.75 per share to a consultant in connection with the
private placement as mentioned above. The Company also issued 410,000 consultant
stock options pursuant to this plan (see Note 8).
PREFERRED STOCK
In February of 1997, the Company issued 5,000 shares of Series B, 8% cumulative,
convertible preferred stock at $4.00 per share. Each Series B preferred share is
convertible into one share of the Company's common stock subject to certain
conditions.
As of September 30, 1997, each share of Class A preferred stock was given back
to the Company and the shares were retired. In addition the Class B preferred
stock was converted into 5,000 shares of common stock. The dividends in arrears
on both the Class A and B preferred stock were forgiven in the above
transactions.
SUBSIDIARY SALE OF STOCK
On September 20, 1996 Quarto Holdings, Inc., a Delaware Corporation, purchased
30% of newly issued common stock of BIG for $1,250,000 in cash and rights to
develop and exploit digital material owned by Quarto. The Company placed a $-0-
value on the rights received from Quarto. The Company recorded 70% of the
$1,250,000 in proceeds as equity on a consolidated basis and 30% of this amount
as a minority interest.
In connection with the purchase, NFMI entered into a stockholder agreement with
Quarto whereby at least 75% of stockholder approval was necessary to approve
certain actions taken on behalf of BIG, including that the funding proceeds can
only be used to fund BIG's development and commercialization of CD-ROM titles.
Therefore, cash and certificates of deposit of $250,000 at March 31, 1998 was
restricted to BIG's operations and could not be used for the operations of NFMI
or its affiliates.
In connection with the above transaction, Quarto purchased a warrant from NFMI
for $400 cash which allows the right to purchase up to 400,000 common shares of
NFMI at an exercise price of $6.00 per share expiring on September 20, 2001. As
mentioned in Note 9 the above warrants were retired.
NOTE 5 - INCOME TAXES
The Company has an unused net operating loss carryforward of approximately
$7,600,000 for income tax purposes, of which approximately $240,000 expires in
2012, $1,800,000 expires in 2013 and the remainder in
F-14
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 5 - INCOME TAXES (continued)
2019. This net operating loss carryforward may result in future income tax
benefits; however, because realization is uncertain at this time, a valuation
reserve in the same amount has been established. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax liabilities $ - $ -
================ ================
Deferred tax assets:
Net operating loss carryforwards $ 2 850 000 $ 765 000
Deferred revenue 1 130 000 167 000
Other temporary differences - 200 000
---------------- ----------------
TOTAL DEFERRED TAX ASSETS 3 980 000 1 132 000
Valuation allowance for deferred tax assets (3 980 000) (1 132 000)
---------------- ----------------
$ - $ -
================ ================
</TABLE>
The valuation allowance for deferred tax assets was increased by $2,848,000 and
$1,053,456 during 1999 and 1998, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company has leases for office space and equipment under various operating
and capital leases. Included in furniture and equipment at March 31, 1999 and
1998 is $851,333 and $19,310 of equipment under capital lease and accumulated
depreciation relating to these leases of $42,051 and $11,586. In addition, CSB
has entered into sub-lease agreements with Fifth Dimension for the use of
transponders to broadcast CSB's channels on satellites.
Future minimum lease payments under these leases as of March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Year ended Principal Due
March 31, Operating Capital Capital Lease
- ---------- --------------------- ---------------------- ------------------
<S> <C> <C> <C>
2000 $ 5 670 000 $ 327 620 $ 232 843
2001 5 240 000 320 127 264 940
2002 4 355 000 225 923 209 490
2003 1 130 000 - -
2004 5 000 - -
--------------------- ---------------------- ------------------
$ 16 400 000 873 670 $ 707 273
===================== ==================
Less amount representing interest 166 397
----------------------
Present value of net minimum lease payments $ 707 273
======================
</TABLE>
Total rent expense for the years ended March 31, 1999 and 1998 was $6,039,067
and $810,602, which includes
F-15
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued)
transponder payments, respectively. In connection with the asset purchase
agreement with Fifth Dimension (see Note 1), CSB has entered into a three year
uplink service agreement requiring monthly payments of $80,000. The agreement
can be terminated upon 30 days written notice for a termination fee of $21,800
for each calendar month remaining in the contract. The payment due is one half
of the termination fee or $200,000, whichever is greater, at the date of
termination.
NOTE 7 - LICENSE AGREEMENT
In March of 1999, the Company entered into a licensing agreement with an
unrelated entity. Pursuant to the agreement, the Company obtained the rights to
distribute the entity's current library of approximately 4,000 adult pictures
and three new adult pictures produced by the entity or its affiliated companies
per month for a period of five years at a predetermined price per new release.
NOTE 8 - STOCK OPTIONS AND WARRANTS
During the year ending March 31, 1999, the Company formalized an employee
incentive stock option plan. Under the plan, a total of 750,000 shares of common
stock has been reserved. The options granted pursuant to these plans are 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 Company has also granted warrants to officers and employees allowing them to
purchase common stock of the Company at a price in excess of the market value of
the stock at date of grant.
In addition, common stock warrants have been issued in connection with the
acquisition of Fifth Dimension assets, the Company's February 1998 public
offering, the acquisition of the license agreement and the Company's private
placement of debentures in June of 1998. The following information describes
certain information relating to these warrants.
<TABLE>
<CAPTION>
Expiration Date Warrants Exercise Price
----------------- -------------- --------------
<S> <C> <C>
September, 2004 400 000 5.00
February, 2003 1 500 000 6.50
February, 2003 150 000 6.75
February, 2004 700 000 1.12
July, 2001 40 000 3.48
--------------
2 790 000
</TABLE>
The following table describes certain information related to the Company's
compensatory stock option and warrant activity for the year ending March 31,
1999 and 1998.
F-16
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
<TABLE>
<CAPTION>
Long-term Other Weighted-Average
Incentive Warrants and Exercise Exercise
Plan Options Total Price Range Price
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1997 - 146 666 146 666 $ 6.00 $ 6.00
Granted - - - - -
------------- ------------- ------------- ------------- -------------
Balances at March 31, 1998 - 146 666 146 666 $ 6.00 $ 6.00
Granted 735 500 2 030 000 2 765 500 $ 1.00-8.50 $ 1.88
------------- ------------- ------------- ------------- -------------
Balances at March 31, 1999 735 500 2 176 666 2 912 166 $ 1.00-8.50 $ 2.09
============= ============= ============= ============= =============
Number of options and warrants
exercisable at March 31, 1998 - 146 666 146 666 $ 6.00 $ 6.00
============= ============= ============= ============= =============
Number of options and warrants
exercisable at March 31, 1999 - 1 031 666 1 031 666 $ 1.00-6.00 $ 4.13
============= ============= ============= ============= =============
</TABLE>
At March 31, 1999, 14,500 share options were available for future grant under
the Incentive Plan and 11,667 common shares or options were available for future
grant under the Consultant Stock Plan (see Note 4).
The following table summarizes additional information regarding all stock
options and warrants outstanding at March 31, 1999.
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Outstanding
------------------------------------------------------------ ---------------------------------------
Number Weighted Average Number
Outstanding at Remaining Weighted Average Exercisable at Weighted Average
Exercise Prices March 31, 1999 Contractual Life Exercise Price March 31, 1999 Exercise Price
- --------------- ----------------- -------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
$1.00-$2.00 1 413 332 4.0 years $ 1.25 1 330 000 $ 1.25
$2.01-$3.00 1 196 668 4.4 years 2.43 205 000 2.59
$3.01-$5.00 530 000 1.8 years 4.70 490 000 4.72
$5.01-$8.50 1 826 666 3.6 years 6.49 1 796 666 6.48
$1.00-$2.24 735 500 10.0 years 1.03 - -
----------------- -----------------
5 702 166 3 821 666
================= =================
</TABLE>
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-based
Compensation" which recommends, but does not require, measuring compensation
cost for stock options based on the fair value of the options at the grant date.
The Company has elected not to adopt SFAS 123 but continues to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
the Plan and other stock option activity.
F-17
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
Had the Company measured compensation cost based on the fair value of the
options at the grant date for 1999 consistent with the method prescribed by SFAS
123, the Company's net loss and loss per common share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999
-----------------
<S> <C> <C>
Net loss attributable As reported $ (7 581 124)
to common stock Pro forma $ (10 550 941)
Basic and diluted loss As reported $ (1.04)
per common share Pro forma $ (1.45)
</TABLE>
There were no options or warrants issued during the year ending March 31, 1998.
The fair value of each option grant was estimated at the date of the grant using
the Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.81%; no dividend yield; expected life of 3 to 10 years; and
volatility of 115%.
During the initial phase-in period of applying SFAS 123 for pro forma disclosure
purposes, the results may not be representative of the effects on reported net
income for future years because options vest over several years and additional
grants generally are made each year.
NOTE 9 - DISCONTINUED OPERATIONS
As of March 31, 1998, the Company formalized its plan to discontinue the
operations of BIG and FUZZY. On June 26, 1998, the Company finalized the sale of
its 70% interest in BIG to Quarto. In connection with the sale of BIG to Quarto,
Quarto's warrants to purchase 400,000 shares of common stock of the Company was
returned to the Company for cancellation. As of March 31, 1998, Management
accrued a loss on the disposition of these subsidiaries of $459,050. For the
year ended March 31, 1998, the estimated costs for the discontinuance of BIG and
FUZZY was overstated by $66,762; therefore included in loss on disposal of
discontinued subsidiaries at March 31, 1999 is $66,762 of gain.
As of March 31, 1999, the Company discontinued the operations of DVD. In
connection with the discontinuance of DVD the Company incurred a loss of
$383,708.
The consolidated financial statements for the year ended March 31, 1998 have
been reclassified to report the operations of DVD in discontinued operations.
Operating results of discontinued operations are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
Revenues $ 201 265 $ 1 407 605
Loss before minority interest (178 890) (1 287 726)
Minority interest - 287 873
Net loss (178 890) (999 853)
</TABLE>
F-18
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Continued)
NOTE 9 - DISCONTINUED OPERATIONS (continued)
Assets and liabilities of discontinued operations are as follows at March 31:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Current assets $ - $ 651 614
Noncurrent assets - 161 940
----------------- ----------------
$ - $ 813 554
================= ================
Current liabilities $ - $ 180 841
Long-term debt - 6 716
----------------- ----------------
$ - $ 187 557
================= ================
</TABLE>
NOTE 10 - SEGMENT INFORMATION
The Financial Accounting Standards Board has released statement #131
"Disclosures about Segments of an Enterprise and Related Information" which will
be effective for all financial reporting periods subsequent to December 15,
1997. This statement requires the reporting of certain information about
operating segments. Due to the discontinuance of BIG, FUZZY and DVD, as
mentioned in Note 9, the Company has only one operating segment, CSB. The March
31, 1998 statement of operations has been reclassified to reflect only the
operations of CSB.
NOTE 11 - RISKS AND UNCERTAINTIES
CSB, as sublessee of the transponders under the transponder agreements, is
subject to arbitrary refusal of service by the service provider if that service
provider determines that the content being transmitted by the Company is harmful
to the service provider's name or business. Any such service disruption would
substantially and adversely affect the financial condition of the Company (see
Notes 1 and 6).
In addition, the Company bears the risk that the access of their networks to
transponders may be restricted or denied if a governmental authority commences
an investigation concerning the content of the transmissions. Also, certain
cable operators may be reluctant to carry less edited or partially edited adult
programming on their systems. This could adversely affect the Company's business
if either of the above occurs.
The Company has deposits in a bank in excess of the FDIC insured amounts of
$100,000. The amount in excess of the $100,000 is subject to loss should the
bank cease business.
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
large and/or unspecified damages. The Company disputes that there exists a
binding and enforceable agreement to transfer any equity interest in NFMI 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.
F-19
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
(Concluded)
NOTE 11 - RISKS AND UNCERTAINTIES (continued)
A material portion of the Company's transactions are processed by external
counterparties. The Company is in the process of contacting these external
counterparties, as well as other suppliers, to assess their compliance and
remediation efforts with respect to the so-called "Year 2000" problem and the
Company's exposure to them. The ultimate success or failure of the corrective
plan and the extent of such success or failure cannot presently be determined.
NOTE 12 - FOURTH QUARTER ADJUSTMENTS
As of December 31, 1998, the Company miscalculated the amount of deferred
revenue by approximately $698,000. In addition, the aggregate effect of year-end
adjustments amounted to approximately $356,000. The effect of the above items
increased the net loss for the year ending March 31, 1999 by approximately
$1,054,000.
F-20
LEASE AGREEMENT
OFFICE AND INDUSTRIAL SPACE
This Lease Agreement is made and entered into as of the day of August, 1998, by
and between LakeCentre Plaza, Ltd., LLLP ("Landlord"), whose address is 4875
Pearl East Cr. #300, Boulder, CO 80301, and New Frontier Media, Inc. ("Tenant"),
whose address is 5445 Airport Blvd., Suite 100, Boulder, Colorado 80301.
In consideration of the covenants, terms, conditions, agreements and payments as
herein set forth, the Landlord and Tenant hereby enter into the following Lease:
1. Definitions. Whenever the following words or phrases are used in this Lease,
said words or phrases shall have the following meaning:
A. "Area" shall mean the parcel of land depicted on Exhibit "A"
attached hereto and commonly known and referred to as Airport Plaza One,
Boulder, Colorado. The Area includes the Leased Premises and one or more
buildings. The Area may include Common Areas.
B. "Building" shall mean a building located in the Area.
C. "Common Areas" shall mean all entrances, exits, driveways, curbs,
walkways, hallways, parking areas, landscaped areas, restrooms, loading and
service areas, and like areas or facilities which are located in the Area and
which are designated by the Landlord as areas or facilities available for the
nonexclusive use in common by persons designated by the Landlord.
D. "Leased Premises" shall mean the premises herein leased to the
Tenant by the Landlord.
E. "Rentable Area" shall mean:
(1) For a Single Tenant Floor. With respect to a single tenant
floor, Rentable Area will mean the sum of (i) the floor area (in square feet)
excluding standard openings in the floor slab used, for example, for Building
stairs, elevator and other shafts and vertical ducts (collectively, the
"Excluded Spaces"), and (ii) an allocation of the floor area of Common Areas
located in or serving the Building.
(2) For a Multiple Tenant Floor. With respect to a multiple
tenant floor, Rentable Area will mean the sum of (i) the floor area (in square
feet) less any Excluded Spaces located within the Rentable Area, and (ii) an
allocation of the floor area of the Common Areas and Services Areas on such
floor, and (iii) an allocation of the floor area of Common Areas located in or
serving the Building.
(3) Columns and Non-Standard Openings. No deductions will be
made in either Paragraph 1.E.(1) or Paragraph 1.E.(2) for (i) columns and
projections necessary to the structural support of the Building or (ii) for
openings in the floor slab which were made at the request of Tenant or to
accommodate items installed at the request of Tenant.
(4) Tenant's Rentable Area may change from time to time as the
total rentable area in all Buildings located in the Area is increased or
decreased.
F. "Tenant's Prorata Share" The Tenant's Prorata Share shall mean an
amount (expressed as a percentage ) equal to the rentable area included in the
Leased Premises divided by the total rentable area included in all Buildings
located in the Area. The Tenant's Prorata Share for Common Areas may change from
time to time as the rentable area in all Buildings located in the Area is
increased or decreased. Tenant's current prorata share of the Area is 19.44 %.
2. Leased Premises. The Landlord hereby leases unto the Tenant, and the Tenant
hereby leases from the Landlord, the following described premises:
Space 5445 in Building "A" consisting of 8,497 square feet of rentable
area, all as depicted on Exhibit "B" attached hereto.
3. Base Term. The term of this Lease shall commence at 12:00 noon on October 1,
1998, and, unless sooner terminated as herein provided for, shall end at 12:00
noon on October 1, 2003 ("Lease Term"). Except as specifically provided to the
contrary herein, the Leased Premises shall, upon the termination of this Lease,
by virtue of the expiration of the Lease Term or otherwise, be returned to the
Landlord by the Tenant in as good or better condition than when entered upon by
the Tenant, ordinary wear and tear excepted.
4. Rent. Tenant shall pay the following rent for the Leased Premises:
A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and
without setoff, at the address of Landlord as herein set forth, the following
Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in
advance on the first day of each month during the term hereof. In the event that
this Lease commences on a date other than the first day of a month, the Base
Monthly Rent for the first month of the Lease Term shall be prorated for said
partial month. Below is a schedule of Base Monthly Rental payments as agreed
upon:
During Lease Term
<TABLE>
<CAPTION>
For Period To Period A Base Monthly
Starting Ending Rent of
<S> <C> <C>
October 1, 1998 October 1, 1999 $8,143.00
October 1, 1999 October 1, 2003 $8,143.00 plus any cost of living
Adjustment per Paragraph 4C below.
</TABLE>
B. Lease Term Adjustment. If, for any reason, other than delays caused
by the Tenant, the Leased Premises are not ready for Tenant's occupancy on
October 1, 1998, the Tenant's rental obligation and other monetary expenses
(i.e. taxes, utilities, etc.) shall be abated in direct proportion to the number
of days of delay. It is hereby agreed that the premises shall be deemed ready
for occupancy on the day the Landlord receives a T.C.O. or C.O. from the
appropriate authority, or on the day the Landlord gives Tenant the keys to the
Leased Premises if a building permit has not been applied for and/or is not
required by the appropriate authority. If the premises are not ready for
occupancy by October 15, 1998, so long delays are not caused by Tenant, Landlord
will be responsible for paying Tenant the additional rent of $210.00 per day
this is charged for holding over in the Tenant's current space at 1050 Walnut
Street. The total amount due from Landlord will be credited against Tenant's
rent obligation when the Tenant occupies the space. If Landlord is unable to
receive a Certificate of Occupancy and deliver the space to the Tenant by
November 15, 1998, Tenant will have the option to terminate this Lease Agreement
upon written notice to Landlord by November 20, 1998.
C. Cost of Living Adjustment. The Base Monthly Rental specified in
paragraph 4A above shall be recalculated for each Lease Year as defined
hereinafter following the first Lease Year of this Lease Agreement. The
recalculated Base Monthly Rental shall be hereinafter referred to as the
"Adjusted Monthly Rental". The Adjusted Monthly Rental for each Lease Year after
the first Lease Year shall be an amount calculated by the rent adjustment
formula set forth below. In applying the rent adjustment formula, the following
definitions shall apply:
(1) "Lease Year" shall mean a period of twelve (12) consecutive full
calendar months with the first Lease Year commencing on the date of the
commencement of the term of this Lease and each succeeding Lease Year commencing
upon the anniversary date of the first Lease Year; however, if this Lease does
not commence on the first day of a month, then, the first Lease Year and each
succeeding Lease Year shall commence on the first day of the first month
following each anniversary date of this Lease;
(2) "Bureau" shall mean the Bureau of Labor Statistics of the United
States Department of Labor or any successor agency that shall issue the Price
Index referred to in this Lease Agreement.
(3) "Price Index" shall mean the "Consumer Price Index-All Urban
Consumers-All Items (CPI-U) U.S. City Average (1982-84=100)" issued from time to
time by the Bureau. In the event the Price Index shall hereafter be converted to
a different standard reference base or otherwise revised, the determination of
the increase in the Price Index shall be made with the use of such conversion
factor, formula or table as may be published by Prentice-Hall, Inc. or failing
such publication, by another nationally recognized publisher of similar
statistical information. In the event the Price Index shall cease to be
published, then, for the purposes of this paragraph 4C there shall be
substituted for the Price Index such other index as the Landlord and the Tenant
shall agree upon, and if they are unable to agree within sixty (60) days after
the Price Index ceases to be published, such matter shall be determined by
arbitration in accordance with the Rules of the American Arbitration
Association.
(4) "Base Price Index" shall mean the Price Index released to the
public during the second calendar month preceding the commencement of this Lease
Agreement.
(5) "Revised Price Index" shall mean the Price Index released to the
public during the second calendar month preceding the Lease Year for which the
Base Annual Rental is to be adjusted;
(6) "Basic Monthly Rental" shall mean the Basic Monthly Rental set
forth in subparagraph 4A above. The rent adjustment formula used to calculate
the Adjusted Monthly Rental is as follows:
Adjusted Monthly = Revised Price Index X Base Monthly Rental
Rental -----------------------------------------
Base Price Index
Not withstanding the above formula, the Adjusted Monthly Rental shall not be
less than 102.5% or greater than 105.5% of the previous year's Adjusted Monthly
Rental, or the Basic Monthly Rental if such adjustment is for the Second Lease
Year. The Adjusted Monthly Rental as herein above provided shall continue to be
payable monthly as required in paragraph 4A above without necessity of any
further notice by the Landlord to the Tenant.
D. Total Net Lease. The Tenant understands and agrees that this Lease
is a total net lease (a "net, net, net lease"), whereby the Tenant has the
obligation to reimburse the Landlord for a share of all costs and expenses
(taxes, assessments, other charges, insurance, trash removal, Common Area
operation and maintenance and like costs and expenses), incurred by the Landlord
as a result of the Landlord's ownership and operation of the Area.
5. Security Deposit. Landlord acknowledges receipt from the Tenant of
the sum of Eight Thousand One Hundred Forty Three Dollars ($8,143.00) to be
retained by Landlord without responsibility for payment of interest thereon, as
security for performance of all the terms and conditions of this Lease Agreement
to be performed by Tenant, including payment of all rent due under the terms
hereof. Upon written notice for Landlord, deductions may be made by Landlord
from the amount so retained for the reasonable cost of repairs to the Leased
Premises (ordinary wear and tear excepted), for any rent delinquent under the
terms hereof and/or for any sum used in any manner to cure any default of Tenant
under the terms of this Lease. In the event deductions are so made, the Tenant
shall, upon notice from the Landlord, redeposit with the Landlord such amounts
so expended so as to maintain the deposit in the amount as herein provided for,
and failure to so redeposit shall be deemed a failure to pay rent under the
terms hereof. Nothing herein contained shall limit the liability of Tenant as to
any damage to the Leased Premises, and Tenant shall be responsible for the total
amount of any damage and/or loss occasioned by actions of Tenant. Landlord may
deliver the funds deposited hereunder by Tenant to any purchaser of Landlord's
interest in the Leased Premises in the event such interest shall be sold, and
thereupon Landlord shall be discharged from any further liability with respect
to such deposit.
6. Use of Premises. Tenant shall use the Leased Premises only for
business office and research and development and for no other purpose whatsoever
except with the written consent of Landlord. Tenant shall not allow any
accumulation of trash or debris on the Leased Premises or within any portion of
the Area. All receiving and delivery of goods and merchandise and all removal of
garbage and refuse shall be made only by way of the rear and/or other service
door provided therefore. In the event the Leased Premises shall have no such
door, then these matters shall be handled in a manner satisfactory to Landlord.
No storage of any material outside of the Leased Premises shall be allowed
unless first approved by Landlord in writing, and then in only such areas as are
designated by Landlord. Tenant shall not commit or suffer any waste on the
Leased Premises nor shall Tenant permit any nuisance to be maintained on the
Leased Premises or permit any disorderly conduct or other activity having a
tendency to annoy or disturb any occupants of any part of the Area and/or any
adjoining property.
7. Laws and Regulations. -- Tenant Responsibility. The Tenant shall, at
its sole cost and expense, comply with all laws and regulations of any
governmental entity, board, commission or agency having jurisdiction over the
Leased Premises. Tenant agrees not to install any electrical equipment that
overloads any electrical paneling, circuitry or wiring and further agrees to
comply with the requirements of the insurance underwriter or any governmental
authorities having jurisdiction thereof.
8. Landlord's Rules and Regulations. Landlord reserves the right to
adopt and promulgate rules and regulations applicable to the Leased Premises and
from time to time amend or supplement said rules or regulations. Notice of such
rules and regulations and amendments and supplements thereto shall be given to
Tenant, and Tenant agrees to comply with and observe such rules and regulations
and amendments and supplements thereto provided that the same apply uniformly to
all Tenants of the Landlord in the Area. Such rules and regulations shall not
materially impede Tenant's ability to conduct business at set forth herein.
9. Parking. If the Landlord provides off street parking for the common
use of Tenants, employees and customers of the Area, the Tenant shall park all
vehicles of whatever type used by Tenant and/or Tenant's employees only in such
areas thereof as are designated by Landlord for this purpose, and Tenant accepts
the responsibility of seeing that Tenant's employees park only in the areas so
designated. Tenant shall, upon the request of the Landlord, provide to the
Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's
employees. Landlord shall maintain current level of parking throughout Tenants
lease term.
10. Control of Common Areas. -- Exclusive control of the Landlord. All
Common Areas shall at all times be subject to the exclusive control and
management of Landlord, notwithstanding that Tenant and/or Tenant's employees
and/or customers may have a nonexclusive right to the use thereof. Landlord
shall have the right from time to time to establish, modify and enforce rules
and regulations with respect to the use of said facilities and Common Areas.
11. Taxes.
A. Real Property Taxes and Assessments. Once the Leased
Premises are deemed ready for occupancy, and Tenant is paying rent, the Tenant
shall pay to the Landlord on the first day of each month, as additional rent,
the Tenant's Prorata Share of all real estate taxes and special assessments
levied and assessed against the Building in which the Leased Premises are
located and the Common Areas. If the first and last years of the Lease Term are
not calendar years, the obligations of the Tenant hereunder shall be prorated
for the number of days during the calendar year that this Lease is in effect.
The monthly payments for such taxes and assessments shall be $956.00 until the
Landlord receives the first tax statement for the referred to properties.
Thereafter, the monthly payments shall be based upon 1/12th of the prior year's
taxes and assessments. Once each year the Landlord shall determine the actual
Tenant's Prorata Share of taxes and assessments for the prior year and if the
Tenant has paid less than the Tenant's Prorata Share for the prior year the
Tenant shall pay the deficiency to the Landlord with the next payment of Base
Monthly Rent, or, if the Tenant has paid in excess of the Tenant's Prorata Share
for the prior year the Landlord shall forthwith refund said excess to the
Tenant.
B. Personal Property Taxes. Tenant shall be responsible for,
and shall pay promptly when due, any and all taxes and/or assessments levied
and/or assessed against any furniture, fixtures, equipment and items of a
similar nature installed and/or located in or about the Leased Premises by
Tenant.
C. Rent Tax. If a special tax, charge or assessment is imposed
or levied upon the rents paid or payable hereunder or upon the right of the
Landlord to receive rents hereunder (other than to the extent that such rents
are included as a part of the Landlord's income for the purpose of an income
tax), the Tenant shall reimburse the Landlord for the amount of such tax within
fifteen (15) days after demand therefore is made upon the Tenant by the
Landlord.
D. Other Taxes, Fees and Charges. Once Tenant has occupied and
is paying rent for the space, Tenant shall pay to Landlord, on the first day of
each month, as additional rent, Tenant's Pro Rata Share of any "Other Charges"
(as hereinafter defined) levied, assessed, charged or imposed against the Area,
as a whole. Unless paid directly by Tenant to the authority levying, assessing,
charging or imposing same, Tenant shall also pay to Landlord, on the first day
of the month following payment of same by Landlord, the entire costs of any such
"Other Charges" levied, assessed, charged or imposed against the Leased
Premises, Tenant's use of same, or Tenant's conduct of business thereon. For
purposes of this provision, "Other Charges" shall mean and refer to any and all
taxes, assessments, impositions, user fees, impact fees, utility fees,
transportation fees, infrastructure fees, system fees, license fees, and any
other charge or assessment imposed by any governmental authority or applicable
subdivision on the Area, the Leased Premises or the ownership or use of the Area
or Leased Premises, or the business conducted thereon, whether or not formally
denominated as a tax, assessment, charge or other nominal description, whether
now in effect or hereafter enacted or imposed (excluding, however, Landlord's
income taxes).
E. Should Landlord protest and win a reduction in the real
estate taxes for the Building and Area, Tenant shall be obligated to pay its
Prorata Share of the cost of such protest, if the protest is handled by a party
other than the Landlord.
12. Insurance.
A. Landlord's Insurance. The Landlord shall procure and
maintain such fire and casualty, loss of rents and liability insurance as it,
from time to time, deems proper and appropriate in reference to the Building in
which the Leased Premises are located and the Common Areas. Such insurance shall
not be required to cover any of the Tenant's property and the Tenant shall have
no interest in any of the proceeds of such insurance.
B. Tenant's Insurance. Tenant shall, at its sole cost and
expense, insure on a full replacement cost basis, Tenant's inventory, fixtures,
leasehold improvements and betterments located on the Leased Premises against
loss resulting from fire or other casualty. Tenant shall procure, pay for and
maintain, comprehensive public liability insurance providing coverage from and
against any loss or damage occasioned by an accident or casualty on, about or
adjacent to the Leased Premises. Said liability policy shall be written on an
"occurrence basis" with limits of not less than $1,000,000 combined single limit
coverage. Certificates for such insurance shall be delivered to Landlord and
shall provide that said insurance shall not be changed, modified, reduced or
canceled without thirty (30) days prior written notice thereof being given to
Landlord.
C. Tenant's High Pressure Steam Boiler Insurance. If Tenant
makes use of any kind of steam or other high pressure boiler or other apparatus
which presents a risk of damage to the Leased Premises or to the Building or
other improvements of which the Leased Premises are a part or to the life or
limb of persons within such premises, Tenant shall secure and maintain
appropriate boiler insurance in an amount satisfactory to Landlord. The Landlord
shall be named insured in any such policy or policies. Certificates for such
insurance shall be delivered to Landlord and shall provide that said insurance
shall not be changed, modified, reduced or canceled without thirty (30) days
prior written notice thereof being given to Landlord.
D. Tenant's Share of Landlord Insurance. Tenant shall pay the
Landlord as additional rent Tenant's Prorata Share of the insurance secured by
the Landlord pursuant to "12A" above. Payment shall be made on the first day of
each month as additional rent. The monthly payments for such insurance shall be
$50.00 until changed by Landlord as a result of an increase or decrease in the
cost of such insurance.
E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant
to each other, on behalf of any insurer providing fire and extended coverage to
either of them covering the Leased Premises, Buildings or other improvements
thereon or contents thereof, a waiver of any right of subrogation any such
insurer of one party may acquire against the other or as against the Landlord or
Tenant by virtue of payments of any loss under such insurance. Such a waiver
shall be effective so long as the Landlord and Tenant are empowered to grant
such waiver under the terms of their respective insurance policy or policies and
such waiver shall stand mutually terminated as of the date either Landlord or
Tenant gives notice to the other that the power to grant such waiver has been so
terminated.
13. Utilities.
A. Tenant shall be solely responsible for and promptly pay all
charges (as part of the amount paid per Paragraph 16 below) for heat, water,
gas, electric, sewer service and any other utility service used or consumed on
the Leased Premises. In no event shall Landlord be liable for any interruption
or failure in the supply of any such utility to the Leased Premises.
In the event the utility company supplying water and/or sewer
to the Leased Premises determines that an additional service fee, impact fee,
and/or assessment, or any other type of payment or penalty is necessary due to
Tenant's use and occupancy of the Building, nature of operation and/or
consumption of utilities, said expense shall be borne solely by the Tenant. Said
expense shall be paid promptly and any repairs requested by the utility company
shall be performed by Tenant immediately and without any delay.
B. Landlord Controls Selection. Landlord has advised Tenant
that presently Public Service Company of Colorado ("Utility Service Provider")
is the utility company selected by Landlord to provide electricity and gas
service for the Building. Notwithstanding the foregoing, if permitted by Law,
Landlord shall have the right at any time and from time to time during the Lease
Term to either contract for service from a different company or companies
providing electricity and/or gas service (each such company shall hereinafter be
referred to as an("Alternative Service Provider") or continue to contract for
service from the Utility Service Provider.
C. Tenant Shall Give Landlord Access. Tenant shall cooperate
with Landlord, Utility Service Provider, and any Alternative Service Provider at
all times and, as reasonably necessary, shall allow Landlord, Utility Service
Provider, and any Alternative Service Provider reasonable access to the
Building's electric lines, feeders, risers, wiring, gas lines, and any other
machinery within the Premises.
D. Landlord Not Responsible for Interruption of Service.
Unless caused by Landlord negligence, Landlord shall in no way be liable or
responsible for any loss, damage, or expense that Tenant may sustain or incur by
reason of any change, failure, interference, disruption, or defect in the supply
or character of the electrical and/or gas energy furnished to the Premises, or
if the quantity or character of the electric and/or gas energy supplied by the
Utility Service Provider or any Alternate Service Provider is no longer
available or suitable for Tenant's requirements, and no such change, failure,
defect, unavailability, or unsuitability shall constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent, or relieve Tenant from any of its obligations under the
Lease.
14. Maintenance Obligations of Landlord. Except as herein otherwise
specifically provided for, Landlord shall keep and maintain the roof and
exterior of the Building of which the Leased Premises are a part in good repair
and condition. Tenant shall repair and pay for any damage to roof, foundation
and external walls caused by Tenant's action, negligence or fault.
15. Maintenance Obligations of the Tenant. Subject only to the
maintenance obligations of the Landlord as herein provided for, the Tenant
shall, during the entire Lease Term, including all extensions thereof, at the
Tenant's sole cost and expense, keep and maintain the Leased Premises in good
condition and repair, including specifically the following:
A. Electrical Systems. Tenant agrees to maintain in good
working order and to make all required repairs and replacements to the
electrical systems for the Leased Premises if such repairs are necessitated by
the actions or inactions of Tenant.
B. Plumbing Systems. Tenant agrees to maintain in good working
order and to make all required repairs or replacements to the plumbing systems
for the Leased Premises if such repairs are necessitated by the actions or
inactions of Tenant.
C. Inspections and Service. Upon termination of Lease
Agreement, Tenant agrees, before vacating premises, to employ at Tenant's sole
cost and expense, a licensed contractor to inspect, service and write a written
report on the systems referred to in "A" and "B" of this Paragraph. Landlord
shall have the right to order such an inspection if Tenant fails to provide
evidence of such inspection, and, to follow the recommendations of such reports
and to charge the expense thereof to the Tenant.
D. Tenant's Responsibility for Building and Area Repairs.
Tenant shall be responsible for any repairs required for any part of the
Building or Area of which the Leased Premises are a part if such repairs are
necessitated by the actions or inactions of Tenant.
E. Cutting Roof. Tenant must obtain in writing the Landlord's
approval prior to making any roof penetrations. Failure by Tenant to obtain
written permission to penetrate a roof shall relieve Landlord of any roof repair
obligations as set forth in Paragraph "14" hereof. Tenant further agrees to
repair, at its sole cost and expense, all roof penetrations made by the Tenant
and to use, if so requested by Landlord, a licensed contractor selected by the
Landlord to make such penetrations and repairs.
F. Glass and Doors. The repair and replacement of all glass
and doors on the Leased Premises shall be the responsibility of the Tenant. Any
such replacements or repairs shall be promptly completed at the expense of the
Tenant.
G. Liability for Overload. Tenant shall be responsible for the
repair or replacement of any damage to the Leased Premises, the Building or the
Area which result from the Tenant's movement of heavy articles therein or
thereon. Tenant shall not overload the floors of any part of the Leased
Premises.
H. Liability for Overuse and Overload of Operating Systems.
Tenant shall be responsible for the repair, upgrade, modification, and/or
replacement of any operating systems servicing the Leased Premises and/or all or
part of the Building which is necessitated by Tenant's change or increase in use
of or non-disclosed use of all or a part of the Leased Premises. Operating
systems include, but are not limited to, electrical systems; plumbing systems
(both water and natural gas); heating, ventilating, and air conditioning
systems; telecommunications systems; computer and network systems; lighting
systems, fire sprinkler systems; security systems; and building control systems,
if any.
I. Inspection of Leased Premises-"As Is" Conditions. Tenant
has inspected the Leased Premises and accepts the Leased Premises in the
condition that they exist as of the date of this Lease, including, but not
limited to, all mechanical, plumbing and electrical systems and the conditions
of the interior except:
.
J. Failure of Tenant to Maintain Premises. Should Tenant
neglect to keep and maintain the Leased Premises as required herein, the
Landlord shall have the right, but not the obligation, to have the work done and
any reasonable costs plus a ten percent (10%) overhead charge therefore shall be
charged to Tenant as additional rental and shall become payable by Tenant with
the payment of the rental next due.
16. Common Area Maintenance. Tenant shall be responsible for Tenant's
Prorata share of the total costs incurred for the operation, maintenance and
repair of the Common Areas actually paid for by Landlord, including, but not
limited to, the costs and expenses incurred for the operation, maintenance and
repair of parking areas (including restriping and repaving); removal of snow;
all utilities including water, gas, and electric for the building; janitorial
for common areas and tenant occupied space; normal HVAC maintenance and elevator
maintenance (if applicable); trash removal; security to protect and secure the
Area; common entrances, exits, and lobbies of the Building; all common
utilities, including water to maintain landscaping; replanting in order to
maintain a smart appearance of landscape areas; supplies; depreciation on the
machinery and equipment used in such operation, maintenance and repair; the cost
of personnel to implement such services; the cost of maintaining in good working
condition the HVAC system(s) for the Leased premises; the cost of maintaining in
good working condition the elevator(s) for the Leased Premises, if applicable;
and ten percent (10 %) of all such operational, maintenance and repair costs to
cover Landlord's administrative and overhead costs subject to Tenant not having
to pay a management fee. These costs shall be estimated on an annual basis by
the Landlord and shall be adjusted upwards or downwards depending on the actual
costs for the preceding twelve months. Tenant shall pay monthly, commencing with
the first month of the Lease Term, as additional rent due under the terms
hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said
twelve (12) month period, divided by 12. The estimated initial monthly costs are
$779.00. Once each year the Landlord shall determine the actual costs of the
foregoing expenses for the prior year and if the actual costs are greater than
the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the
difference between the estimated costs and the actual costs to the Landlord with
the next payment of Base Monthly Rent, or, if the actual costs are less than the
estimated costs, the Landlord shall forthwith refund the amount of the Tenant's
excess payment to the Tenant.
17. Inspection of and Right of Entry to Leased Premises--Regular,
Emergency, Reletting. Landlord and/or Landlord's agents and employees, shall
have the right to enter, upon reasonable notice from landlord, the Leased
Premises at all times during regular business hours and, at all times during
emergencies, without prior notice, to examine the Leased Premises, to make such
repairs, alterations, improvements or additions as Landlord deems necessary, and
Landlord shall be allowed to take all materials into and upon said Leased
Premises that may be required therefore without the same constituting an
eviction of Tenant in whole or in part, and the rent reserved shall in no way
abate while such repairs, alterations, improvements or additions are being made,
by reason of loss or interruption of business of Tenant or otherwise. During the
six months prior to the expiration of the term of this Lease or any renewal
thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or
purchasers and may place upon the Leased Premises the usual notices indicating
that the Leased Premises are for lease and/or sale.
18. Alteration-Changes and Additions-Responsibility. Unless the
Landlord's approval is first secured in writing, the Tenant shall not install or
erect inside partitions, add to existing electric power service, add telephone
outlets, add light fixtures, install additional heating and/or air conditioning
or make any other changes or alterations to the interior or exterior of the
Leased Premises. Any such changes or alterations shall be made at the sole cost
and expense of the Tenant. At the end of this Lease, all such fixtures,
equipment, additions, changes and/or alterations (except trade fixtures
installed by Tenant) shall be and remain the property of Landlord; provided,
however, Landlord shall have the option to require Tenant to remove any or all
such fixtures, equipment, additions and/or alterations and restore the Leased
Premises to the condition existing immediately prior to such change and/or
installation, normal wear and tear excepted, all at Tenant's cost and expense.
All such work shall be done in a good and workmanlike manner and shall consist
of new materials unless agreed to otherwise by Landlord. Any and all repairs,
changes and/or modifications thereto shall be the responsibility of, and at the
cost of, Tenant. Landlord may require adequate security from Tenant assuring no
mechanics' liens on account of work done on the Leased Premises by Tenant and
may post the Leased Premises, or take such other action as is then permitted by
law, to protect the Landlord and the Leased Premises against mechanics' liens.
Landlord may also require adequate security to assure Landlord that the Leased
Premises will be restored to their original condition upon termination of this
Lease. All equipment specific to Tenant's business operation, not paid for with
the Tenant Improvement Allowance, will not become a fixture to the building and
can be removed form the lease premises so long as Tenant make all repairs
necessary to restore the premises tot he condition existing immediately prior to
the installation of such equipment.
19. Sign Approval. Except for signs which are located inside of the
Leased Premises and which are not attached to any part of the Leased Premises,
the Landlord must approve in writing any sign to be placed in or on the interior
or exterior of the Leased Premises, regardless of size or value. Specifically,
signs attached to windows of the Leased Premises must be so approved by the
Landlord. As a condition to the granting of such approval, Landlord shall have
the right to require Tenant to furnish a bond or other security acceptable to
Landlord sufficient to insure completion of and payment for any such sign work
to be so performed. Tenant shall, during the entire Lease Term, maintain
Tenant's signs in good condition and repair at Tenant's sole cost and expense.
Tenant shall, remove all signs at the termination of this Lease, at Tenant's
sole risk and expense and shall in a workmanlike manner properly repair any
damage and close any holes caused by the installation and/or removal of Tenant's
signs. Tenant shall give Landlord prior notice of such removal so that a
representative of Landlord shall have the opportunity of being present when the
signage is removed, or shall pre-approve the manner and materials used to repair
damage and close the holes caused by removal.
20. Right of Landlord to Make Changes and Additions. So long as Tenant
business operations are not materially impaired and current parking rations are
not diminished, Landlord reserves the right at any time to make alterations or
additions to the Building or Area of which the Leased Premises are a part.
Landlord also reserves the right to construct other buildings and/or
improvements in the Area and to make alterations or additions thereto, all as
Landlord shall determine. Easements for light and air are not included in the
leasing of the Leased Premises to Tenant. Landlord further reserves the
exclusive right to the roof of the Building of which the Leased Premises are a
part. Landlord also reserves the right at any time to relocate, vary and adjust
the size of any of the improvements or Common Areas located in the Area,
provided, however, that all such changes shall be in compliance with the
requirements of governmental authorities having jurisdiction over the Area.
21. Damage or Destruction of Leased Premises. In the event the Leased
Premises and/or the Building of which the Leased Premises are a part shall be
totally destroyed by fire or other casualty or so badly damaged that, in the
opinion of Landlord, it is not feasible to repair or rebuild same, Landlord
shall have the right to terminate this Lease upon written notice to Tenant. If
the Leased Premises are partially damaged by fire or other casualty, except if
caused by Tenant's negligence, and said Leased Premises are not rendered
untenable thereby, as determined by Landlord, an appropriate reduction of the
rent shall be allowed for the unoccupied portion of the Leased Premises until
repair thereof shall be substantially completed. If the Landlord elects to
exercise the right herein vested in it to terminate this Lease as a result of
damage to or destruction of the Leased Premises or the Building in which the
Leased Premises are located, said election shall be made by giving notice
thereof to the Tenant within thirty (30) days after the date of said damage or
destruction.
22. Governmental Acquisition of Property. The parties agree that
Landlord shall have complete freedom of negotiation and settlement of all
matters pertaining to the acquisition of the Leased Premises, the Building, the
Area, or any part thereof, by any governmental body or other person or entity
via the exercise of the power of eminent domain, it being understood and agreed
that any financial settlement made or compensation paid respecting said land or
improvements to be so taken, whether resulting from negotiation and agreement or
legal proceedings, shall be the exclusive property of Landlord, there being no
sharing whatsoever between Landlord and Tenant of any sum so paid. In the event
of any such taking, Landlord shall have the right to terminate this Lease on the
date possession is delivered to the condemning person or authority. Such taking
of the property shall not be a breach of this Lease by Landlord nor give rise to
any claims in Tenant for damages or compensation from Landlord. Nothing herein
contained shall be construed as depriving the Tenant of the right to retain as
its sole property any compensation paid for any tangible personal property owned
by the Tenant which is taken in any such condemnation proceeding.
23. Assignment or Subletting. Except for wholly owned and or controlled
subsidiaries or affiliates, Tenant may not assign this Lease, or sublet the
Leased Premises or any part thereof, without the written consent of Landlord,
which consent shall not be unreasonably withheld. No such assignment or
subletting if approved by the Landlord shall relieve Tenant of any of its
obligations hereunder, and, the performance or nonperformance of any of the
covenants herein contained by subtenants shall be considered as the performance
or the nonperformance by the Tenant.
24. Warranty of Title. Subject to the provisions of the following three
(3) paragraphs hereof, Landlord covenants it has good right to lease the Leased
Premises in the manner described herein and that Tenant shall peaceably and
quietly have, hold, occupy and enjoy the Leased Premises during the term of the
Lease.
25. Access. Landlord shall provide Tenant nonexclusive access to the
Leased Premises through and across land and/or other improvements owned by
Landlord. Landlord shall have the right, during the term of this Lease, to
designate, and to change, such nonexclusive access.
26. Subordination. Tenant agrees that this Lease shall be subordinate
to any mortgages, trust deeds or ground leases that may now exist or which may
hereafter be placed upon said Leased Premises and to any and all advances to be
made thereunder, and to the interest thereon, and all renewals, replacements and
extensions thereof. Tenant shall execute and deliver whatever instruments may be
required for the above purposes, and failing to do so within ten (10) days after
demand in writing, does hereby make, constitute and irrevocably appoint Landlord
as its attorney-in-fact and in its name, place and stead so to do. Tenant shall
in the event of the sale or assignment of Landlord's interest in the Area or in
the Building of which the Leased Premises form a part, or in the event of any
proceedings brought for the foreclosure of or in the event of exercise of the
power of sale under any mortgage made by Landlord covering the Leased Premises,
attorn to the purchaser and recognize such purchaser as Landlord under this
Lease.
27. Easements. The Landlord shall have the right to grant any easement
on, over, under and above the Area for such purposes as Landlord determines,
provided that such easements do not materially interfere with Tenant's occupancy
and use of the Leased Premises.
28. Indemnification and Waiver Except in the case of a breach or
default in the performance of any obligation under this Lease, each party shall
indemnify, defend and hold harmless the other party and nothing in this Lease
shall be construed as imposing any liability on them for any loss, costs,
expense (including reasonable attorney's fees), or any claims, suits, actions or
damages arising from the ownership, use, control or occupancy of any portion of
the Project including the Building, Common Areas and Premises unless such loss,
cost, expense, claim, suit or action is a result of or caused by the negligent
acts or omissions of such other party or its agents, servants, employees,
contractors, or invitees.
Tenant shall not indemnify Landlord for acts or failure to observe or comply
with any of the rules by any other Tenant or occupant of the Building or Project
that adversely affect Tenant's use and occupancy in which Landlord has been put
on notice of such adverse impact to Tenant.
29. Acts or Omission of Others. The Landlord, or its employees or
agents, or any of them, shall not be responsible or liable to the Tenant or to
the Tenant's guests, invitees, employees, agents or any other person or entity,
for any loss or damage that may be caused by the acts or omissions of other
tenants, their guests or invitees, occupying any other part of the Area or by
persons who are trespassers on or in the Area, or for any loss or damage caused
or resulting from the bursting, stoppage, backing up or leaking of water, gas,
electricity or sewers or caused in any other manner whatsoever, unless such loss
or damage is caused by or results from the negligent acts of the Landlord, its
agents or contractors.
30. Interest on Past Due Obligations. Any amount due to Landlord not
paid when due shall bear interest at one and one half (1 1/2%) percent per month
from due date until paid. Payment of such interest shall not excuse or cure any
default by Tenant under this Lease.
31. Holding Over-One and One Half Times Last Month's Rent. If Tenant
shall remain in possession of the Leased Premises after the termination of this
Lease, whether by expiration of the Lease Term or otherwise, without a written
agreement as to such possession, then Tenant shall be deemed a month-to-month
Tenant. The rent rate during such holdover tenancy shall be equivalent to one
and one half (1 1/2) times the monthly rent paid for the last full month of
tenancy under this Lease, excluding any free rent concessions which may have
been made for the last full month of the Lease. No holding over by Tenant shall
operate to renew or extend this Lease without the written consent of Landlord to
such renewal or extension having been first obtained. Tenant shall indemnify
Landlord against loss or liability resulting from the delay by Tenant in
surrendering possession of the Leased Premises including, without limitation,
any claims made with regard to any succeeding occupancy bounded by such holdover
period.
32. Modification or Extensions. No modification or extension of this
Lease shall be binding upon the parties hereto unless in writing and unless
signed by the parties hereto.
33. Notice Procedure. All notices, demands and requests which may be or
are required to be given by either party to the other shall be in writing and
such that are to be given to Tenant shall be deemed to have been properly given
if served on Tenant or an employee of Tenant or sent to Tenant by United States
registered or certified mail, return receipt requested, properly sealed, stamped
and addressed to Tenant at see page one or at such other place as Tenant may
from time to time designate in a written notice to Landlord; and, such as are to
be given to Landlord shall be deemed to have been properly given if personally
served on Landlord or if sent to Landlord, United States registered or certified
mail, return receipt requested, properly sealed, stamped and addressed to
Landlord at 4875 Pearl East Cr. #300, Boulder, CO 80301 or at such other place
as Landlord may from time to time designate in a written notice to Tenant. Any
notice given by mailing shall be effective as of the date of mailing.
34. Memorandum of Lease-Notice to Mortgagee. The Landlord and Tenant
agree not to place this Lease of record, but upon the request of either party to
execute and acknowledge so the same may be recorded a short form lease
indicating the names and respective addresses of the Landlord and Tenant, the
Leased Premises, the Lease Term, the dates of the commencement and termination
of the Lease Term and options for renewal, if any, but omitting rent and other
terms of this Lease. Tenant agrees to an assignment by Landlord of rents and of
the Landlord's interest in this Lease to a mortgagee, if the same be made by
Landlord. Tenant further agrees if requested to do so by the Landlord that it
will give to said mortgagee a copy of any request for performance by Landlord or
notice of default by Landlord; and in the event Landlord fails to cure such
default, the Tenant will give said mortgagee a sixty (60) day period in which to
cure the same. Said period shall begin with the last day on which Landlord could
cure such default before Tenant has the right to exercise any remedy by reason
of such default. All notices to the mortgagee shall be sent by United States
registered or certified mail, postage prepaid, return receipt requested.
35. Controlling Law. The Lease, and all terms hereunder shall be
construed consistent with the laws of the State of Colorado. Any dispute
resulting in litigation hereunder shall be resolved in court proceedings
instituted in Boulder County and in no other jurisdiction.
36. Landlord Not a Partner With the Tenant. Nothing contained in this
Lease shall be deemed, held or construed as creating Landlord as a partner,
agent, associate of or in joint venture with Tenant in the conduct of Tenant's
business, it being expressly understood and agreed that the relationship between
the parties hereto is and shall at all times remain that of Landlord and Tenant.
37. Partial Invalidity. If any term, covenant or condition of this
Lease or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease or the
application of such term, covenant or condition to persons and circumstances
other than those to which it has been held invalid or unenforceable, shall not
be affected thereby, and each term, covenant and condition of this Lease shall
be valid and shall be enforced to the fullest extent permitted by law.
38. Default-Remedies of Landlord.
A. The occurrence of any of the following events shall
constitute a default by Tenant under this Lease:
(1) Failure to make due and punctual payment of rent
or any other charges, assessments or amounts due or payable or required to be
paid under this Lease with three (3) days written notice form Landlord; or
(2) Neglect or failure by Tenant to perform or
observe, or any other breach of, any other term, covenant or condition of this
Lease with ten (10) days written notice from landlord; or
(3) Adjudication of Tenant as bankrupt or insolvent,
or filing by or against Tenant of any petition in bankruptcy or for
reorganization or for the adoption of any arrangement under the Bankruptcy Code;
application is made for the appointment of receiver or conservator for Tenant's
business or property; or assignment by Tenant is made of its property for the
benefit of its creditors; or Tenant's interest in this Lease or any substantial
amount of Tenant's other real or personal property is levied or executed upon by
process of law; or
(4) Petition or other proceeding is made by or
against Tenant for its dissolution or liquidation; or voluntary dissolution or
liquidation of Tenant; or
(5) Abandonment of the Leased Premises, or any part
thereof, by Tenant for a period of time in excess of thirty (30) consecutive
days.
B. If Tenant shall default in the payment of rent or in the
keeping of any of the terms, covenants or conditions of this Lease to be kept
and/or performed by Tenant or shall otherwise commit any event of default as
defined above, Landlord may upon the expiration of any applicable cure,
immediately, or at any time thereafter, reenter the Leased Premises, remove all
persons and property therefrom, without being liable to indictment, prosecution
for damage therefore, or for forcible entry and detainer and repossess and enjoy
the Leased Premises, together with all additions thereto or alterations and
improvements thereof. Landlord may, at its option, at any time and from time to
time thereafter, relet the Leased Premises or any part thereof for the account
of Tenant or otherwise, and receive and collect the rents therefore and apply
the same first to the payment of such expenses as Landlord may have incurred in
recovering possession and for putting the same in good order and condition for
rerental, and expense, commissions and charges paid by Landlord in reletting the
Leased Premises. Any such reletting may be for the remainder of the term of this
Lease or for a longer or shorter period. In lieu of reletting such Leased
Premises, Landlord may occupy the same or cause the same to be occupied by
others. Whether or not the Leased Premises or any part thereof be relet, Tenant
shall pay the Landlord the rent and all other charges required to be paid by
Tenant up to the time of the expiration of this Lease or such recovered
possession, as the case may be and thereafter, Tenant, if required by Landlord,
shall pay to Landlord until the end of the term of this Lease, the equivalent of
the amount of all rent reserved herein and all other charges required to be paid
by Tenant, less the net amount received by Landlord for such reletting, if any,
unless waived by written notice from Landlord to Tenant. No action by Landlord
to obtain possession of the Leased Premises and/or to recover any amount due to
Landlord hereunder shall be taken as a waiver of Landlord's right to require
full and complete performance by Tenant of all terms hereof, including payment
of all amounts due hereunder or as an election on the part of Landlord to
terminate this Lease Agreement. If the Leased Premises shall be reoccupied by
Landlord, then, from and after the date of repossession, Tenant shall be
discharged of any obligations to Landlord under the provisions hereof for the
payment of rent. If the Leased Premises are reoccupied by the Landlord pursuant
hereto, and regardless of whether the Leased Premises shall be relet or
possessed by Landlord, all fixtures, additions, furniture, and the like then on
the Leased Premises may be retained by Landlord. In the event Tenant is in
default under the terms hereof and, by the sole determination of Landlord, has
abandoned the Leased Premises, Landlord shall have the right to remove all the
Tenant's property from the Leased Premises and dispose of said property in such
a manner as determined best by Landlord, at the sole cost and expense of Tenant
and without liability of Landlord for the actions so taken and without liability
on the part of Landlord for any action so taken.
C. In the event an assignment of Tenant's business or property
shall be made for the benefit of creditors, or, if the Tenant's leasehold
interest under the terms of this Lease Agreement shall be levied upon by
execution or seized by virtue of any writ of any court of law, or, if
application be made for the appointment of a receiver for the business or
property of Tenant, or, if a petition in bankruptcy shall be filed by or against
Tenant, then and in any such case, at Landlord's option, with or without notice,
Landlord may terminate this Lease and immediately retake possession of the
Leased Premises without the same working any forfeiture of the obligations of
Tenant hereunder.
D. Tenant hereby grants to the Landlord a security interest in
and to any and all of Tenant's property located in, on or adjacent to the Leased
Premises as security for Tenant's full and complete performance of the terms and
conditions of this Lease, which security interest is enforceable by Landlord as
provided by the laws of the State of Colorado.
E. In addition to all rights and remedies granted to Landlord
by the terms hereof, Landlord shall have available any and all rights and
remedies available at law or in equity, or under the statutes of the State of
Colorado. No remedy herein or otherwise conferred upon or reserved to Landlord
shall be considered exclusive of any other remedy but shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute. Further, all powers and remedies
given by this Lease to Landlord may be exercised, from time to time, and as
often as occasion may arise or as may be deemed expedient. No delay or omission
of Landlord to exercise any right or power arising from any default shall impair
any such right or power or shall be considered to be a waiver of any such
default or acquiescence thereof. The acceptance of rent by Landlord shall not be
deemed to be a waiver of any breach of any of the covenants herein contained or
of any of the rights of Landlord to any remedies herein given.
39. Legal Proceedings-Responsibilities. In the event of proceeding at
law or in equity by either party hereto, the non-prevailing party shall pay all
costs and expenses, including all reasonable attorney's fees incurred by the
prevailing party in pursuing such remedy, if such prevailing party is awarded
substantially the relief requested.
40. Administrative Charges. In the event any check, bank draft or
negotiable instrument given for any money payment hereunder shall be dishonored
at any time and from time to time, for any reason whatsoever not attributable to
Landlord, Landlord shall be entitled, in addition to any other remedy that may
be available, (1) to make an administrative charge of $100.00 or three times the
face value of the check, bank draft or negotiable instrument, whichever is
smaller, and (2) at Landlord's sole option, to require Tenant to make all future
rental payments in cash or cashiers check.
41. Hazardous Materials and Environmental Considerations.
A. Tenant covenants and agrees that Tenant and its agents,
employees, contractors and invitees shall comply with all Hazardous Materials
Laws (as hereinafter defined). Without limiting the foregoing, Tenant covenants
and agrees that it will not use, generate, store or dispose of, nor permit the
use, generation, storage or disposal of Hazardous Materials (as hereinafter
defined) on, under or about the Leased Premises, nor will it transport or permit
the transportation of Hazardous Materials to or from the Leased Premises, except
in full compliance with any applicable Hazardous Materials Laws. Any Hazardous
Materials located on the Leased Premises shall be handled in an appropriately
controlled environment which shall include the use of such equipment (at
Tenant's expense) as is necessary to meet or exceed standards imposed by any
Hazardous Materials Laws and in such a way as not to interfere with any other
tenant's use of its premises. Upon breach of any covenant contained herein,
Tenant shall, at Tenant's sole expense, cure such breach by taking all action
prescribed by any applicable Hazardous Materials Laws or by any governmental
authority with jurisdiction over such matters.
B. Tenant shall inform Landlord at any time of (I) any
Hazardous Materials it intends to use, generate, handle, store or dispose of, on
or about or transport from, the Leased Premises and (ii) of Tenant's discovery
of any event or condition which constitutes a violation of any applicable
Hazardous Materials Laws. Tenant shall provide to Landlord copies of all
communications to or from any governmental authority or any other party relating
to Hazardous Materials affecting the Leased Premises.
C. Tenant shall indemnify and hold Landlord harmless from any
and all claims, judgments, damages, penalties, fines, costs, liabilities,
expenses or losses (including, without limitation, diminution on value of the
Leased Premises, damages for loss or restriction on use of all or part of the
Leased Premises, sums paid in settlement of claims, investigation of site
conditions, or any cleanup, removal or restoration work required by any federal,
state or local governmental agency, attorney's fees, consultant fees, and expert
fees) which arise as a result of or in connection with any breach of the
foregoing covenants or any other violation of any Hazardous Materials laws by
Tenant. The indemnification contained herein shall also accrue to the benefit of
the employees, agents, officers, directors and/or partners of Landlord.
D. Upon termination of this Lease and/or vacation of the
Leased Premises, Tenant shall properly remove all Hazardous Materials and shall
then provide to Landlord an environmental audit report, prepared by a
professional consultant satisfactory to Landlord and at Tenant's sole expense,
certifying that the Leased Premises have not been subjected to environmental
harm caused by Tenant's use and occupancy of the Leased Premises. Landlord shall
grant to Tenant and its agents or contractors such access to the Leased Premises
as is necessary to accomplish such removal and prepare such report.
E. "Hazardous Materials" shall mean (a) any chemical,
material, substance or pollutant which poses a hazard to the Leased Premises or
to persons on or about the Leased Premises or would cause a violation of or is
regulated by any Hazardous Materials Laws, and (b) any chemical, material or
substance defined as or included in the definitions of "hazardous substances",
"hazardous wastes", "extremely hazardous waste", "restricted hazardous waste",
"toxic substances", "regulated substance", or words of similar import under any
applicable federal, state or local law or under the regulations adopted or
publications promulgated pursuant thereto, including, but not limited to, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation
Act, as amended, 49 U.S.C. Sec. 1801, et seq.; the Resource Conservation and
Recovery Act as amended, 42 U.S.C. Sec 6901, et seq.; the Solid Waste Disposal
Act, 42 U.S.C. Sec. 6991 et seq.; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. Sec. 1251, et seq.; and Sections 25-15-101, et seq.,
25-16-101, et seq., 25-7-101, et seq., and 25-8-101, et seq., of the Colorado
Revised Statutes. "Hazardous Materials Laws" shall mean any federal state or
local laws, ordinances, rules, regulations, or policies (including, but not
limited to, those laws specified above) relating to the environment, health and
safety or the use, handling, transportation, production, disposal, discharge or
storage of Hazardous Materials, or to industrial hygiene or the environmental
conditions on, under or about the Leased Premises. Said term shall be deemed to
include all such laws as are now in effect or as hereafter amended and all other
such laws as may hereafter be enacted or adopted during the term of this Lease.
F. All outstanding obligations of Tenant under this paragraph
41 shall survive and continue after the expiration of this Lease or its earlier
termination for any reason.
G. Tenant further covenants and agrees that it shall not
install any storage tank (whether above or below the ground) on the Leased
Premises without obtaining the prior written consent of the Landlord, which
consent may be conditioned upon further requirements imposed by Landlord with
respect to, among other things, compliance by Tenant with any applicable laws,
rules, regulations or ordinances and safety measures or financial responsibility
requirements.
H. Should any local governmental entity having jurisdiction
over the Leased Premises require any type of environmental audit or report, due
to Tenant's occupancy during the occupancy of the Leased Premises by the Tenant,
such cost of the audit or report shall be the sole responsibility of the Tenant.
42. Entire Agreement. It is expressly understood and agree by and
between the parties hereto that this Lease sets forth all the promises,
agreements, conditions, and understandings between Landlord and/or its agents
and Tenant relative to the Leased Premises and that there are no promises,
agreements, conditions, or understandings either oral or written, between them
other than that are herein set forth.
43. Guarantee and Financial Statements. This lease and Tenant's
performance hereunder, shall be personally guaranteed by Mark Kreloff, by the
execution of the Guarantee Agreement set forth herein. A current financial
statement of Tenant and of any parties so guaranteeing this Lease shall be
provided to Landlord upon execution hereof and annually thereafter, if so
requested by Landlord.
44. Estoppel Certificates. Within no more than 5 days after receipt of
written request, the Tenant shall furnish to the owner a certificate, duly
acknowledged, certifying, to the extent true:
A. That this Lease is in full force and effect.
B. That the Tenant knows of no default hereunder on the part of the
owner, or if it has reason to believe that such a default exists,
the nature thereof in reasonable detail.
C. The amount of the rent being paid and the last date to which rent
has been paid.
D. That this Lease has not been modified, or if it has been modified,
the terms and dates of such modifications.
E. That the term of this Lease has commenced.
F. The commencement and expiration dates.
G. Whether all work to be performed by the owner has been completed.
H. Whether the renewal term option has been exercised if applicable.
I. Whether there exist any claims or deductions from, or defenses to,
the payment of rent.
J. Such other matters as may be reasonably requested by owner.
If the Tenant fails to execute and deliver to the owner a completed certificate
as required under this section, the Tenant hereby appoints the owner as its
Attorney-In-Fact to execute and deliver such certificate for and on behalf of
the Tenant.
45. Financial Statements. As requested by the Landlord, Tenant shall
provide copies of its most recent financial statements and shall also provide
Landlord with up to three (3) prior years of financial statements, if so
requested.
46. Brokers. Tenant represents and warrants that it has dealt only with
Andrew Freeman and Neil Littmann of The Colorado Group (the "Broker") in the
negotiation of this Lease. Landlord shall make payment of the commission
according to the terms of a separate agreement with the Broker. Tenant hereby
agrees to indemnify and hold Landlord harmless of an from any and all loss,
costs, damages or expenses (including, without limitation, all attorney's fees
and disbursements) by reason of any claim of, or liability to, any other broker
or person claiming through Tenant and arising out of this Lease. Additionally,
Tenant acknowledges and agrees that Landlord shall have no obligation for
payment of any brokerage fee or similar compensation to any person with whom
Tenant has dealt or may deal with in the future with respect to leasing of any
additional or expansion space in the Building or any renewals or extensions of
this Lease unless specifically provided for by separate written agreement with
Landlord. In the event any claim shall be made against Landlord by any other
broker who shall claim to have negotiated this Lease on behalf of Tenant or to
have introduced Tenant to the Building or to Landlord, Tenant hereby indemnifies
Landlord, and Tenant shall be liable for the payment of all reasonable
attorney's fees, costs, and expenses incurred by Landlord in defending against
the same, and in the event such broker shall be successful in any such action,
Tenant shall, upon demand, make payment to such broker.
47. Lease Exhibits Attached. This Lease includes the following Lease
Exhibits which are incorporated herein and made a part of this Lease Agreement:
Exhibit "A" - Site Plan Depicting Area
Exhibit "B" - Interior Space Plan
Exhibit "C" - Landlord and Tenant's Construction Obligations
Exhibit "D" -
Exhibit "E" - Additional Terms and Conditions
Exhibit "F" - Option to Extend
48. Miscellaneous. All marginal notations and paragraph headings are
for purposes of reference and shall not affect the true meaning and intent of
the terms hereof. Throughout this Lease, wherever the words "Landlord" and
"Tenant" are used they shall include and imply to the singular, plural, persons
both male and female, companies, partnerships and corporations, and in reading
said Lease, the necessary grammatical changes required to make the provisions
hereof mean and apply as aforesaid shall be made in the same manner as though
originally included in said Lease.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof.
LANDLORD: LakeCentre Plaza, Ltd., LLLP
By:
William W. Reynolds
TENANT: New Frontier Media, Inc.
By:
Mark Kreloff
<PAGE>
Exhibit "A"
Site Plan Depicting Area
<PAGE>
Exhibit "B"
Interior Space Plan
See Attached
<PAGE>
Exhibit "C"
Landlord and Tenant's Construction Obligations
1. Landlord shall complete the Leased Premises per Exhibit "B" and per the
attached set of "Standard Lease Space Specifications". Said standard landlord
tenant finish improvements will be strictly adhered to by Landlord. Should
Tenant deviate from these standard specifications, ownership reserves the right
to reduce the aforesaid referenced Tenant Finish Allowance as necessary to
compensate for the non-standard build out.
2. Landlord shall provide Tenant with $18.00 per square foot Tenant Finish
Allowance toward the completion of such Tenant Improvements.
3. All other improvements to the Leased Premises shall be at the sole cost and
expense of the Tenant.
4. Prior to the start of Tenant Finish, Landlord shall provide Tenant a budget
outlining the cost of the Tenant Finish Construction.
<PAGE>
STANDARD LEASE SPACE SPECIFICATIONS
OFFICE/INDUSTRIAL BUILDINGS
The following are standard specifications for the Leased Premises herein
defined.
GENERAL
A. The leased space design/layout will conform to the Architectural drawings.
B. All work performed to complete the Leased Premises will be in accordance with
all applicable codes and regulations.
C. Demising, corridor and partition walls separating offices from warehouse
space to be 3-5/8" metal studs at 24" o.c. with 5/8" gypsum wallboard on each
side. Partitions to extend from floor to underside of structure above.
Partitions to have acoustical sealant at joints and sound attenuation batting
between studs from floor to structure above. partitions to receive typical
partition finish.
D. 1) Building interior space may be divided into fire containment areas. It is
the responsibility of the Tenant to conform to all applicable regulations and
fire codes, including, but not limited to, maintaining egress requirements
during the term of occupancy.
2) Fire containment walls to be 3-5/8" metal studs at 24" o.c. with 5/8"
gypsum wallboard on each side. Walls to extend from floor to underside of
structure above. Doors in fire containment walls to be twenty minute fire rated,
solid core oak veneer with closer and metal jambs.
E. Tenant will be responsible for identifying any equipment or areas requiring
additional or special ventilation, lighting or electrical service prior to space
planning.
OFFICE AREAS
A. INTERIOR PARTITIONS.
1. 3-5/8" metal studs at 24" o.c. from floor to underside of ceiling
with 5/8" gypsum wallboard on each side. 2. All concrete block walls in
office area to be furred and sheathed as interior partitions above
unless otherwise noted on Architectural drawings.
B. PARTITION FINISH
All interior partitions, not prefinished, will receive paint. Paint to
be Landlord's standard, two finish coats over one primer coat. Color to
be selected by Tenant from among choices pre-selected by Landlord.
C. CEILING
To be suspended acoustical 2X4 ceiling tile. Tile and metal grid to be
white.
D. FLOOR COVERING
1. Carpet to be Landlord's standard (Cambridge--Oxford 28 oz. nylon
textured loop. Installation to be glue down. Color to be selected by
Tenant from among choices pre-selected by Landlord. Base at carpet to
be 2-1/2" high solid oak, finish to match doors. 2. Resilient flooring
to be Landlord's standard. 12"x12"x1/8". Color to be selected by Tenant
from among choices pre-selected by Landlord. Base at resilient flooring
to be Roppe 2-1/2" rubber cove.
E. INTERIOR DOORS
All interior doors to be solid core flush panel oak veneer with 3 coats
natural color lacquer finish. Frames to be Timely Metal Frames. Door
sizes to be 3'-0" x 7'-0" x 1-3/4" unless otherwise noted on
architectural drawings.
F. DOOR HARDWARE
To be sargent 6 line Orbital series, 26D brushed chrome or equal. All
entry doors to have keyed cylinder lock sets. All office, conference,
and storage room doors to have passage lock set. Restrooms to have
privacy lock. All doors to have 1-1/2 pair 4" hinges and 1 Ives concave
wall stop #407 1/2, or equal, stainless steel finish.
G. LIGHTING
To be 2'x4' 4 lamp, recessed, fluorescent with prismatic lens light
fixtures.
H. ELECTRICAL/PHONE
outlet locations as shown or Architectural drawings. All outlets,
outlet covers, switches and switch plate covers to be white.
I. COMPUTER/TELEPHONE OUTLETS
Outlets to consist of empty junction box with 1/2" conduit stubbed
above ceiling.
J. TELEPHONE/COMPUTER LINES AND CABLING
Wiring and installation to be provided by Tenant. 3/4" plywood
phone board to be provided and installed by Landlord for telephone
installation.
RESTROOMS/IF INSIDE THE TENANT'S SPACE
A. CONSTRUCTION AND FINISHES
To be as per office area specifications except as follows:
1) Partitions and ceiling to receive 5/8" water resistant gypsum
wallboard.
2) Walls to have 2 coats of epoxy paint from floor to 4'-0" above
floor. Remaining wall surface and ceiling to have 2 finish coasts of
semi-gloss acrylic over one primer coat. Color to be white.
3)Ceiling structure to be metal stud joists bearing on partition wall.
Ceiling structure to support unit water heater for restroom. Ceiling
height to be maximum allowable.
4)Counter tops to have plastic laminate finish with color to be
selected by Tenant from among choices pre-selected by Landlord.
B. PLUMBING FIXTURES
1) Toilet -- Armitage Shanks, white, model #109 or equal.
2) Lavatory -- Armitage Shanks model #308, white, 19" self rimming
china lavatory with Price Pfister #H43-121 faucet or equal.
3) Lavatory -- American Standard wall hung Royalyn Vitreous China 3
hole #1024.131 (20" x 18") with Delta handle faucet #2520 or equal.
4) Urinal -- Kohler model #402, white with Zorn flush valve or equal.
C. ACCESSORIES
1) Mirror -- Full HGT and with mirror with metal edge trim as shown on
Architectural Drawings.
2) Mirror -- Bobrick stainless steel channel frame mirror #B-165-1830
(18" x 30") or equal.
3) Paper Towel Dispenser/Disposal -- Bobrick B-369 recessed, stainless
steel satin finish or equal.
4) Toilet Tissue Dispenser -- Bobrick B-388 recessed, stainless steel
satin finish or equal.
5) Utility Hook -- Bobrick #B-670 polished stainless steel or equal
mounted interior side of toilet and shower stall doors (if applicable)
66" above finished floor.
6) Grab Bars -- Bobrick #b-490, stainless steel satin finish or equal.
D. LIGHTING
One surface mounted 2 tube fluorescent fixture with acrylic lens in
drywall light valance over lavatory. Ceiling fixture, if called for in
Architectural drawings, to be 2 tube fluorescent with acrylic wrap
lens.
E. ELECTRICAL
one GFI electric outlet adjacent to lavatory. One exhaust fan in any
toilet room.
MECHANICAL/ELECTRICAL
A. HEATING AND COOLING
The interior premises are heated and cooled by one or more roof-mounted
mechanical units. The sizing of the mechanical units are designed to
provide one (1) ton of cooling for every three hundred and eighty-three
(383) square feet of floor area; provided that the internal load does
not exceed three (3) watts per square foot. Individual thermostat
control shall be centrally controlled allowing for automatic setback
capabilities with external dial-in monitoring provided for the interior
premises, with control areas not to exceed two thousand (2,000) square
feet in size. Based upon the above, the system shall maintain a minimum
temperature of 65 degrees Fahrenheit and a maximum temperature of 75
degrees fahrenheit in the separate rooms within the Leased Premises, so
long as the minimum exterior temperature shall not be below zero
degrees fahrenheit and the maximum exterior temperature shall not be in
excess of 100 degrees fahrenheit.
B. ELECTRICAL
Standard electrical service provided to the building to be 120/208
volt, three phase, four wire. No additional service to be provided for
Tenant equipment unless otherwise noted. One (1) light switch per
office is provided. Circuitry design is normally laid out to allocate 6
to 8 duplex outlets per 20 amp circuit.
C. ELECTRICAL OUTLETS
Restrooms to have one duplex electrical outlet. See Architectural
drawings for outlet locations in other areas.
D. LIGHTING
Finished rooms, other than restrooms and storage areas will be lighted
with 2'x4' recessed, 4 lamp, fluorescent fixtures. All fixtures to be
provided initially with lamps. Lights and switch locations will be as
shown on Architectural drawings.
SUPPLEMENTAL ITEMS
See Architectural drawings for additional notes and locations if the items below
are included in the tenant finish.
A. COFFEE BAR
1) Base and upper cabinets to be Merrillat brand with style to be
chosen by Landlord.
2) Countertop and splash to be plastic laminate finish with color to be
selected by Tenant from among choices pre-selected by Landlord.
3) Kitchen sink, Dayton Kingsford #K-11515 single compartment sink with
Delta #2171 faucet or equal.
B. SHOWER STALL
Universal Rundle #6852, 36" unit fiberglass shower stall with glass
shower door or equal. When shower stalls are provided substitute a 30 gallon hot
water heater for the standard 6 gallon hot water heater.
C. PARTIAL HEIGHT PARTITIONS
Partial height partitions to be 3-5/8" metal studs with 5/8" gypsum
wallboard on each side and 1x oak cap. Finish to match full height partitions
and oak base. See Architectural drawings for detail. Vertical posts will be
provided as necessary for stability.
D. REAR 10' X 10' OPENINGS
Any of the following shall be included as part of the tenant finish:
1) Changing out an overhead door to glass
2) Changing out glass to an overhead door
3) As part of initial tenant finish on a new building filling an
opening with either glass or an overhead door.
<PAGE>
Exhibit "E"
Additional Terms and Conditions
1. None.
<PAGE>
Exhibit "F"
Option To Extend
1. Option to Extend. The Tenant shall have the option to extend this Lease
Agreement from 12:00 noon on October 1, 2003, to 12:00 noon on October 1, 2008.
In the event the Tenant desires to exercise said option, Tenant shall give
written notice of such exercise to Landlord not before November 1, 2002, nor
later than November 31, 2002.
See below for Option Term Rent. In the event of such exercise, this Lease
Agreement shall be automatically extended for the additional term.
Notwithstanding the foregoing, this option shall be void and of no force or
effect if the Tenant is in default hereunder either as of the date of the
Tenant's exercise of said option or as of the date of the commencement of the
option or additional term.
2. Rent. Tenant shall pay the following rent for the Leased Premises:
<TABLE>
<CAPTION>
During Option Term
<S> <C> <C>
For Period To Period A Base Monthly
Starting Ending Rent of
October 1, 2003 October 1, 2008 see below*
</TABLE>
* Landlord and Tenant will attempt to agree upon a Fair Market Rental Value of
the Leased Premises (expressed on a dollar per square foot basis) as determined
by comparison to parcels of similar size located in shopping center in or near
the City of Boulder, Colorado, having comparable development, use and density
capability and such other characteristics as may be deemed relevant by a subject
appraiser whose selection is outlined herein.
Landlord shall select an independent MAI real estate appraiser with at least ten
(10) years' experience in appraising commercial real property in the City of
Boulder, Colorado (a "Qualified Appraiser"). The Qualified Appraiser selected by
the Landlord shall be referred to as the "Landlords Appraiser". Within thirty
(30) days of being selected by the Landlord, the Landlord's appraiser shall
determine the Fair Market Rental Value of the leased Premises in accordance with
the appraisal standards set forth above and shall immediately give the Landlord
and the Tenant written notification of his determination.
If the Tenant agrees with the Landlord's Appraiser's determination by
multiplying the Fair Market Rental Value, then the Base Monthly Rent shall be
determined by multiplying the Fair Market Rental Value by 8,497 and the new Base
Monthly Rental shall become effective beginning with the first month of the
Option Term. If the Tenant does not agree with the Landlord's Appraiser's
determination of Fair Market Rental Value, the Tenant shall have the right to
select its own Qualified Appraiser its own Qualified Appraiser to determine the
Fair Market Rental Value. If the Tenant does elect to appoint a Qualified
Appraiser, (the Tenant's Appraiser"), the Tenant shall select the Tenant's
Appraiser within thirty (30) business days after receiving the Landlord's
Appraiser's Determination of Fair Market Rental Value. The Tenant's Appraiser
shall make his own determination if the Fair Market Rental Value in accordance
with the provisions set forth above, within thirty (30) business days of being
selected by the Tenant and shall immediately give the Landlord and the Tenant
written notice of his determination.
If the Fair Market Rental Value as determined by the Landlord's Appraiser and
the Tenant's Appraiser, respectively, differ by an amount which is equal to or
less than five percent (5%) of the Fair Market Rental Value determined by the
Landlord's Appraiser, then the arithmetic mean of the two Fair Market Rental
Values shall constitute the fair Market Rental Value used to calculate the new
Base Monthly Rental which will be in effect for the Option Term. If the Fair
Market Rental Value determined by the Landlord's Appraiser and the Tenant's
Appraiser's determination of the Fair Market Rental Value differ by more than
five percent (5%), the Landlord's Appraiser and the Tenant's Appraiser shall
agree upon and select a third Qualified appraiser who shall be independent of
and have no prior or existing affiliation or relationship with either the
Landlord or the Tenant (the "Independent Appraiser"). Within ten (10) business
days of being appointed, the Independent Appraiser shall, after exercising his
best professional judgement, choose either the Landlord's Appraiser's or the
Tenant's Appraiser's determination of the Fair Market Rental Value which the
judgement, best represents the Fair Market Rental Value at that point in time.
Upon making such a selection, the Independent Appraiser shall immediately give
the Landlord and the Tenant written notice of this selection of the Fair Market
Rental Value. The Fair Market Rental Value selected by the Independent Appraiser
shall be used to calculate the new Base Monthly Rental which will be in effect
during the Extension Option, and such selection by the Independent appraiser
shall be binding and conclusive upon the Landlord and the Tenant.
All Appraisal fees required hereunder shall be shared equally by the Landlord
and Tenant.
<PAGE>
LEASE MODIFICATION AGREEMENT
LANDLORD: LakeCentre Plaza, Ltd., LLLP
TENANT: New Frontier Media, Inc.
LEASE: That certain Lease Agreement between Landlord and Tenant, dated August
12, 1998 for the premises known as 5435 Airport Blvd., Suite 100, Boulder,
Colorado 80301.
LEASE EXPIRATION: October 1, 2003
ADDITIONAL LEASED PREMISES: Tenant agrees to lease an additional 3,247 square
feet immediately adjacent to current lease premises in 5435 Airport Blvd.
Premises is referred to in Exhibit "A" attached to this Lease Modification
Agreement.
MODIFIED SQUARE FOOTAGE:
8,497 Existing Lease Premises Square Footage
+ 3,247 Additional Leased Premises Square Footage
------
11,744 NEW TOTAL SQUARE FOOTAGE
NEW BASE MONTHLY RENT DURING LEASE TERM:
<TABLE>
<CAPTION>
For Period Starting: To Period Ending: A Base Monthly rent of:
<S> <C> <C>
April 1, 1999 October 1, 1999 $11,800.00
October 1, 1999 October 1, 2003 $11,800.00 Plus any cost of living
adjustment per the above referenced
Lease Modification Agreement.
</TABLE>
REAL ESTATE TAXES: New total Real Estate Tax charges for the modified Leased
Premises shall be $1,321.00 until modified per paragraph 11 of the Lease
Agreement.
INSURANCE: New total Insurance charges for the modified Leased Premises shall be
$70.00 until modified per paragraph 12 of the Lease Agreement.
COMMON AREA MAINTENANCE: New total Common Area Maintenance charges for the
modified Leased Premises shall be $1,077.00 until modified per paragraph 16 of
the Lease Agreement.
LANDLORD TENANT CONSTRUCTION OBLIGATIONS:
1. Landlord shall complete the Leased Premises per Exhibit "A" and per the
attached set of "Standard Lease Space Specifications". Said standard landlord
tenant finish improvements will be strictly adhered to by Landlord. Should
Tenant deviate from these standard specifications, ownership reserves the right
to reduce the aforesaid referenced Tenant Finish Allowance as necessary to
compensate for the non-standard build out.
2. Landlord shall provide Tenant with $26.00 per square foot Tenant Finish
Allowance toward the completion of such Tenant Improvements in the Additional
Lease Premises of 3,247 square feet.
3. All other improvements to the Leased Premises shall be at the sole cost and
expense of the Tenant.
4. Prior to the start of Tenant Finish, Landlord shall provide Tenant a budget
outlining the cost of the Tenant Finish Construction.
ADDITIONAL SECURITY DEPOSIT: Tenant shall pay an additional Security Deposit in
the amount of $3,657.00. Upon payment of such additional security Deposit,
Tenant's total Security deposit held by Landlord shall be $11,800.00.
OTHER TERMS AND CONDITIONS: All other terms and conditions of the above
referenced Lease Agreement between Landlord and Tenant, dated August 12, 1998
for the premises known as 5435 Airport Blvd., Suite 100, Boulder, Colorado
80301, shall remain the same except as modified herein.
TERMINATION DATE OF MODIFICATION OFFER: This offer expires January 8, 1999 if
not executed by Tenant and delivered to this office by such date.
LANDLORD: TENANT:
LAKECENTRE PLAZA, LTD., LLLP NEW FRONTIER MEDIA, INC.
/s/William W. Reynolds, partner /s/ Mark Kreloff
Dated this day of , 1999.
EXHIBIT 21.01
NAME JURISDICTION
Colorado Satellite Broadcasting, Inc. Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statement of New Frontier Media, Inc. included in the Company's Form
10-KSB for the period ended March 31, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> MAR-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,736,186
<SECURITIES> 0
<RECEIVABLES> 740,923
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,905,351
<PP&E> 2,779,078
<DEPRECIATION> 333,586
<TOTAL-ASSETS> 16,402,511
<CURRENT-LIABILITIES> 5,639,050
<BONDS> 0
0
0
<COMMON> 1,254
<OTHER-SE> 10,287,777
<TOTAL-LIABILITY-AND-EQUITY> 16,402,511
<SALES> 9,452,432
<TOTAL-REVENUES> 9,452,432
<CGS> 8,800,203
<TOTAL-COSTS> 7,708,346
<OTHER-EXPENSES> 208,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,507
<INCOME-PRETAX> (7,264,178)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,264,178)
<DISCONTINUED> (316,946)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,581,124)
<EPS-BASIC> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
