<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
/X/ Quarterly report under section 13 or 15(d) of the Securities and Exchange
Act of 1934.
For the quarterly period ended September 30, 2000
/ / Transition Report under Section 13 or 15(d) of the Exchange Act.
For the transition period from __________________ to __________________
000-23697
(Commission file number)
NEW FRONTIER MEDIA, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Colorado 84-1084061
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
</TABLE>
5435 Airport Blvd., Suite 100, Boulder, Co 80301
(Address of principal executive offices)
(303) 444-0900
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 10, 2000: 20,784,920 shares of Common Stock
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
FORM 10-Q
NEW FRONTIER MEDIA, INC.
Index
<TABLE>
<CAPTION>
PAGE
NUMBER
--------------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for the periods ended March 31, 2000
and September 30, 2000 (Unaudited)................................ 3-4
Consolidated Statements of Operations for the three months and
six months ended September 30, 2000 and 1999 (Unaudited).......... 5
Consolidated Statements of Cash Flows for the six months ended
September 30, 2000 and 1999 (Unaudited)........................... 6
Notes to Consolidated Financial Statements (Unaudited)........... 7-13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 14-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders............... 28-29
Item 6. Exhibits and Reports on Form 8-K.................................. 29
SIGNATURES................................................................ 30
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000S)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 MARCH 31,
(UNAUDITED) 2000
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of
$1,380,275 and $684,665, respectively (Note 1).......... $ 4,910 $ 7,329
Accounts receivable........................................ 4,127 2,996
Prepaid distribution rights (Note 1)....................... 1,831 1,531
Prepaid expenses........................................... 1,355 975
Deferred tax asset......................................... 3,908 750
Due from related party..................................... 131 --
Other...................................................... 365 597
------- -------
TOTAL CURRENT ASSETS.................................. 16,627 14,178
------- -------
FURNITURE AND EQUIPMENT, at cost (Note 1).................... 16,881 12,832
Less: accumulated depreciation and amortization............ (5,359) (3,693)
------- -------
NET FURNITURE AND EQUIPMENT........................... 11,522 9,139
------- -------
OTHER ASSETS:
Prepaid distribution rights (Note 1)....................... 7,676 6,776
Goodwill, less accumulated amortization of $1,663,452 and
$1,345,404, respectively (Note 1)....................... 4,697 5,015
Deferred tax asset non-current............................. 4,103 --
Marketable securities -- available for sale (Note 1)....... 118 188
Other...................................................... 1,175 992
------- -------
TOTAL OTHER ASSETS.................................... 17,769 12,971
------- -------
TOTAL ASSETS................................................. $45,918 $36,288
======= =======
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN 000S)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 MARCH 31,
(UNAUDITED) 2000
------------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................. $ 1,631 $ 1,079
Current portion of obligations under capital lease........... 1,364 918
Deferred revenue (Note 1).................................... 4,049 3,999
Reserve for chargebacks/credits.............................. 465 452
Due to related party......................................... -- 12
Distribution payable to shareholders......................... 372 672
Reserve for legal settlement................................. 10,000 --
Other accrued liabilities.................................... 2,697 2,573
------- -------
TOTAL CURRENT LIABILITIES............................... 20,578 9,705
------- -------
LONG-TERM LIABILITIES:
Obligations under capital leases............................. 1,416 1,120
Note payable-related parties................................. -- 809
Series C redeemable preferred stock.......................... -- 4,073
Other........................................................ 57 74
------- -------
TOTAL LONG-TERM LIABILITIES............................. 1,473 6,076
------- -------
TOTAL LIABILITIES.................................... 22,051 15,781
------- -------
SHAREHOLDERS' EQUITY (Notes 1 and 3):
Common stock, $.0001 par value, 50,000,000 shares authorized,
20,784,920 and 20,524,636, respectively, shares issued and
outstanding............................................... 2 2
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................................... 41,503 35,336
Minority interest in subsidiary (Note 1)..................... (153) (56)
Other comprehensive income (loss) (Note 6)................... -- (438)
Accumulated deficit.......................................... (17,485) (14,337)
------- -------
TOTAL SHAREHOLDERS' EQUITY.............................. 23,867 20,507
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $45,918 $36,288
======= =======
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
4
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(IN 000S)
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
SALES, net............................................ $14,643 $11,948 $28,885 $22,657
COST OF SALES......................................... 7,817 8,199 15,577 15,692
------- ------- ------- -------
GROSS MARGIN.......................................... 6,826 3,749 13,308 6,965
------- ------- ------- -------
OPERATING EXPENSES:
Occupancy and equipment............................. 314 249 635 427
Legal and professional.............................. 1,582 414 2,243 609
Advertising and promotion........................... 1,351 810 2,606 2,120
Salaries, wages and benefits........................ 2,411 1,320 4,726 2,529
Communications...................................... 100 104 196 231
General and administrative.......................... 987 445 1,490 867
Goodwill amortization............................... 159 159 318 317
Consulting.......................................... 490 126 795 298
------- ------- ------- -------
TOTAL OPERATING EXPENSES....................... 7,394 3,627 13,009 7,398
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Income on trading securities........................ -- -- -- 6
Interest income..................................... 30 30 110 46
Interest expense.................................... (140) (133) (388) (207)
Legal settlement.................................... (10,000) -- (10,000) --
Loss on write-off of stock.......................... (507) -- (507) --
------- ------- ------- -------
TOTAL OTHER INCOME (EXPENSE)................... (10,617) (103) (10,785) (155)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS....... (11,185) 19 (10,486) (588)
------- ------- ------- -------
MINORITY INTEREST:
Minority interest in loss of subsidiary............. 53 6 97 10
------- ------- ------- -------
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES... (11,132) 25 (10,389) (578)
Benefit (provision) for income taxes................ 7,243 -- 7,241 (2)
------- ------- ------- -------
NET INCOME (LOSS)..................................... $(3,889) $ 25 $(3,148) $ (580)
======= ======= ======= =======
BASIC EARNINGS (LOSS) PER COMMON SHARE
(Note 1 and 2)...................................... $ (.19) $ .00 $ (.15) $ (.03)
======= ======= ======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE
(Note 1 and 2)...................................... $ (.19) $ .00 $ (.15) $ (.03)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
5
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30 (UNAUDITED)
(IN 000S)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $ (3,148) $ (580)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Conversion of interest to common stock......................... 179 --
Accretion of interest.......................................... 69 --
Warrants issued for services and legal settlement.............. 160 --
Write-off of marketable securities -- available for sale....... 507 --
Depreciation and amortization.................................. 2,943 1,839
Gain on securities............................................. -- (6)
Increase in accounts receivable................................ (1,131) (1,910)
Increase in prepaid distribution rights........................ (2,084) (907)
Increase in deferred tax asset................................. (7,261) --
(Increase) Decrease in other assets............................ (360) 137
(Increase) Decrease in deposits................................ (121) 53
Minority interest in loss of subsidiary........................ (97) (11)
Increase (Decrease) in accounts payable........................ 552 (880)
Increase in deferred revenue, net.............................. 50 173
Increase (Decrease) in reserve for chargebacks................. 13 (461)
Increase (Decrease) in accrued guaranteed payments............. 190 (241)
Decrease in royalties payable.................................. (16) (8)
(Decrease) Increase in other accrued liabilities............... (68) 182
Increase in reserve for legal settlement....................... 10,000 --
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................... 377 (2,620)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture................................. (2,697) (572)
Proceeds from trading securities.................................... -- 56
-------- --------
NET CASH USED IN INVESTING ACTIVITIES................................. (2,697) (516)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations............................... (608) (444)
Decrease in borrowings from related party notes..................... (952) (867)
Decrease in distribution payable.................................... (300) --
Proceeds on note payable............................................ -- 1,700
Capital contribution from shareholders.............................. 1,300 --
Exercise of warrants and stock options.............................. 309 3,940
Decrease in debt offering cost...................................... 152 --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ (99) 4,329
-------- --------
NET INCREASE (DECREASE) IN CASH....................................... (2,419) 1,193
CASH, beginning of period............................................. 7,329 4,020
-------- --------
CASH, end of period................................................... $ 4,910 $ 5,213
======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
6
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NOTE 1 -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying consolidated financial statements include the accounts of New
Frontier Media, Inc. ("the Company" or "New Frontier Media") and its wholly
owned subsidiaries Colorado Satellite Broadcasting, Inc. d/b/a The Erotic
Networks ("TEN"), Interactive Telecom Network, Inc. ("ITN"), Interactive
Gallery, Inc. ("IGI") and Card Transactions, Inc. ("CTI"). On October 27, 1999,
the Company completed its acquisition of 100% of ITN and IGI and 90% of CTI.
These acquisitions have been accounted for in the accompanying financial
statements as a pooling of interests. The accompanying financial statements for
2000 are based on the assumption that the companies were combined for the full
quarter.
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments, which, in the opinion of management are necessary for a fair
presentation of the results of operations for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or any future period.
These financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-KSB for the year ended March 31, 2000.
BUSINESS
New Frontier Media is a publicly traded holding company for the operating
subsidiaries.
TEN is a leading provider of adult programming to multi-channel television
providers and low powered direct-to-home C-Band households. Through its six
networks, Pleasure, TeN, ETC, Extasy, True Blue and GonzoX, TEN is able to
provide a variety of editing styles and programming mixes that appeal to a broad
range of adult consumers.
IGI is a leading aggregator and reseller of adult content via the Internet. IGI
aggregates adult-recorded video, live-feed video and still photography from
adult content studios and distributes it via its membership websites and
Pay-Per-View feeds. In addition, IGI resells its aggregated content to
third-party web masters and resells its Internet traffic that does not convert
into memberships.
ITN serves as a single source for a comprehensive range of high-performance
Internet products and services, including Internet/Broadband Service Provider
services, transaction processing, dedicated access, web hosting, co- location,
e-commerce application development, streaming media, and bandwidth management.
CTI is currently in a developmental stage and has no operations. The Company
intends to develop CTI into an Internet Payment Services Provider ("PSP") for
various Internet billing options, including secure, fully automated credit card
payment processing.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of New
Frontier Media, Inc. and its majority owned subsidiaries (collectively
hereinafter referred to as New Frontier Media or the Company). All intercompany
accounts and transactions have been eliminated in consolidation.
7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale securities as defined
by Statement of Financial Accounting Standard (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. These securities are stated
at fair value and unrealized holding gains and losses are reflected as a net
amount as a separate component of shareholders' equity.
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 the straight-line method over the
estimated useful life of three to five years.
INCOME TAXES
The Company files a consolidated income tax return with its majority owned
subsidiaries.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are both readily
convertible to cash and have original maturities of three months or less at the
time of acquisition. The Company has several merchant accounts, which require
the Company to maintain reserve accounts. These reserve accounts are restricted
from the Company's daily operations.
PREPAID DISTRIBUTION RIGHTS
Prepaid distribution rights represent content license agreements. These rights
typically range from one to five years. The Company amortizes these rights on a
straight line basis over the respective terms of the agreements.
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. Revenue from
internet membership fees is recognized over the life of the membership. The
Company provides an allowance for refunds based on expected membership
cancellations, credits and chargebacks. Revenue from processing fees is recorded
in the period services are rendered. A significant portion of the Company's
Internet sales are from the United States.
8
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(CONTINUED)
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. 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, the excess of the purchase price of acquired businesses over the fair
value of net assets acquired, is amortized over a period of 120 months.
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.
The Company follows SFAS 123, Accounting for Stock-Based Compensation, for its
stock-based compensation issued to non-employees. This statement requires that
the fair value of the warrants at the grant date be recognized as compensation
cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash, accounts receivable, accounts payable, and accrued
expenses and other liabilities, the carrying amounts approximate fair value due
to their short maturities. The amounts shown for note payable - related party
and note receivable - related party also approximate fair value because current
interest rates offered to the Company for debt of similar maturities are
substantially the same.
EARNINGS (LOSS) PER COMMON SHARE
The Company adopted the provisions of SFAS 128, Earnings per Share. SFAS 128
simplifies the previous standards for computing earnings per share and requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures.
NOTE 2 -- EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of outstanding warrants and stock options using the "treasury stock"
method.
9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(CONTINUED)
The components of basic and diluted earnings (loss) per share are as follows:
EARNINGS (LOSS) PER SHARE
(IN 000S)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) available for common
shareholders..................................... $(3,889) $ 25 $(3,148) $ (580)
======= ======= ======= =======
Average outstanding shares of common stock....... 20,174 19,000 20,815 18,781
Dilutive effect of:
Warrants......................................... 1,198 268 1,338 289
Employee stock options........................... 306 -- 316 --
------- ------- ------- -------
Common stock and common stock equivalents........ 21,678 19,268 22,469 19,070
======= ======= ======= =======
Earnings (loss) per share:
Basic/Diluted.................................... $ (.19) $ .00 $ (.15) $ (.03)
</TABLE>
Common stock equivalents are not included in the loss per share calculation
since their effect would be anti-dilutive.
NOTE 3 -- SHAREHOLDERS' EQUITY
During the six months ended September 30, 2000, 159,000 shares of common stock
were issued for the exercise of compensatory warrants and options. No shares of
common stock were issued for the exercise of compensatory warrants and options
for the quarter ended September 30, 2000. In the quarter ended June 30, 2000,
four individuals of the Company's senior management, in compliance with the
NASDAQ settlement, made a capital contribution of $1.3 million and returned
589,136 shares of common stock. These shares were retired.
During the quarter and six months ended September 30, 2000, the Company issued
659,523 and 690,432 shares of common stock, respectively, for the complete
conversion of the Series C Convertible Redeemable Preferred Stock shares and
related interest.
NOTE 4 -- STOCK OPTIONS AND WARRANTS
The Company granted options and warrants to employees, consultants and unrelated
third parties for services provided and legal settlements allowing them to
purchase common stock of New Frontier Media. The following information describes
information relating to warrants issued during the six months:
<TABLE>
<CAPTION>
EXERCISE
EXPIRATION DATE WARRANTS PRICE
--------------- -------- --------
<S> <C> <C>
04/14/03........................................................... 16,500 $ 7.13
06/12/03........................................................... 100,000 $ 5.50
10/01/05........................................................... 40,000 $ 5.00
</TABLE>
As of September 30, 2000, the Company had granted 1,491,700 Options from the
1999 Incentive Stock Option Plan and 739,000 Options from the 1998 Incentive
Stock Option Plan.
During the quarter, the Company's shareholders approved the Millennium Incentive
Stock Option Plan which allows for the granting of 2.5 million options. No
options were issued from this Plan during the quarter.
10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(CONTINUED)
NOTE 5 -- SEGMENT INFORMATION
For internal reporting purposes, management segregates the Company into five
divisions: 1) Subscription/Pay-Per View TV, 2) Internet Content Provider,
3) Internet Service Provider, 4) Payment Service Provider and 5) Corporate
Administration.
The following tables represent financial information by reportable segment (in
thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUE
Subscription/Pay-Per-View TV.................. $ 5,856 $ 4,058 $ 11,354 $ 7,224
Internet Content Provider..................... 8,519 7,316 17,004 14,260
Internet Service Provider..................... 236 550 465 1,149
Payment Service Provider...................... -- -- -- --
Corporate Administration...................... 32 24 62 24
-------- -------- -------- --------
Total......................................... $ 14,643 $ 11,948 $ 28,885 $ 22,657
======== ======== ======== ========
INCOME (LOSS) FROM CONTINUING OPERATIONS
Subscription/Pay-Per-View TV.................. $ 395 $ (341) $ 550 $ (1,884)
Internet Content Provider..................... 2,123 637 4,490 2,049
Internet Service Provider..................... (941) 75 (1,502) (156)
Payment Service Provider...................... (529) (58) (974) (95)
Corporate Administration...................... (12,233) (294) (13,050) (502)
-------- -------- -------- --------
Total......................................... $(11,185) $ 19 $(10,486) $ (588)
======== ======== ======== ========
INTEREST INCOME
Subscription/Pay-Per-View TV.................. $ 4 $ 6 $ 9 $ 11
Internet Content Provider..................... -- 15 -- 16
Internet Service Provider..................... 8 6 15 6
Payment Service Provider...................... -- -- -- --
Corporate Administration...................... 18 3 86 13
-------- -------- -------- --------
Total......................................... $ 30 $ 30 $ 110 $ 46
======== ======== ======== ========
INTEREST EXPENSE
Subscription/Pay-Per-View TV.................. $ 30 $ 28 $ 62 $ 59
Internet Content Provider..................... 4 -- 22 34
Internet Service Provider..................... 80 54 138 62
Payment Service Provider...................... -- -- -- --
Corporate Administration...................... 26 51 166 52
-------- -------- -------- --------
Total......................................... $ 140 $ 133 $ 388 $ 207
======== ======== ======== ========
</TABLE>
11
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
DEPRECIATION AND AMORTIZATION
<S> <C> <C> <C> <C>
Subscription/Pay-Per-View TV.................. $ 461 $ 327 $ 905 $ 634
Internet Content Provider..................... 238 20 416 34
Internet Service Provider..................... 331 181 595 353
Payment Service Provider...................... -- -- -- --
Corporate Administration...................... 2 2 4 4
-------- -------- -------- --------
Total......................................... $ 1,032 $ 530 $ 1,920 $ 1,025
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
<S> <C> <C>
(UNAUDITED)
IDENTIFIABLE ASSETS
Subscription/Pay-Per-View TV....................................... $23,123 $21,305
Internet Content Provider.......................................... 8,291 5,594
Internet Service Provider.......................................... 4,451 3,857
Payment Service Provider........................................... 865 190
Corporate Administration........................................... 9,188 5,342
------- -------
Total.............................................................. $45,918 $36,288
======= =======
</TABLE>
The Company's revenue from a major customer (revenues in excess of 10% of total
sales) is from an entity involved in the satellite broadcast industry. The
revenue from this customer as a percentage of total revenues for each of the two
quarters ended September 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Customer A............................ 17% 6%
</TABLE>
At September 30, 2000 and March 31, 2000, accounts receivable from Customer A is
$1,803,561 and $785,575, respectively. There were no other customers with
receivable balances in excess of 10% of consolidated accounts receivable.
Customer A is included in the Subscription/Pay-Per-View TV Segment.
The loss of its significant customer could have a materially adverse effect on
the Company's business, operating results or financial condition. To limit the
Company's credit risk, management performs ongoing credit evaluations of its
customers and maintains allowances for potentially uncollectable accounts.
NOTE 6 -- COMPREHENSIVE INCOME (LOSS)
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income. SFAS 130 requires that the Company disclose comprehensive income in
addition to net income (loss). Comprehensive income is a more inclusive
financial reporting methodology that encompasses net income (loss) and all other
nonshareholder changes in equity (other comprehensive income or loss).
Accumulated other comprehensive loss consisted of the unrealized losses on
available-for-sale securities. The Company received 250,000 shares of Metro's
common stock in exchange for services to be provided to Metro by TEN over a
five-year period. Management believes there has been a permanent impairment to
the value of this stock and wrote-off $507,500 during the quarter.
12
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(CONTINUED)
NOTE 7 -- CONTINGENCIES
The Company was a defendant in a lawsuit filed on January 25, 1999, in which the
plaintiff sought to enforce an alleged agreement by the Company to convey to the
plaintiff a 70% equity interest in the Company. The lawsuit went to trial on
August 14, 2000. On September 1, 2000, the jury entered a verdict in favor of
the plaintiff, finding that he was entitled to $10 million in liquidated damages
for breach of contract and breach of covenant of good faith and fair dealing,
and, in the alternative, $1 million actual damages and $1 million punitive
damages on his claim for fraud in the inducement and fraud in the concealment.
The plaintiff has not elected his remedies as between the contract and fraud
claims, and, as a result, the court has not entered any judgment to date.
Notwithstanding that the Company intends to appeal any judgment which may be
entered against it, the Company has established a $10 million reserve on its
books as a result of the jury verdict.
13
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10Q includes forward-looking statements. These are
subject to certain risks and uncertainties, including those identified below,
which could cause actual results to differ materially from such statements. The
words "believe", "expect", "anticipate", "optimistic", "intend", "will", and
similar expressions, and those statements under the "Future Outlook" section
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. The Company undertakes no obligation to update or revise
any forward-looking statements. Factors that could cause actual results to
differ materially from the forward-looking statements include, but are not
limited to: 1) our ability to compete effectively for quality content with our
Subscription/PPV TV Group's primary competitor who has significantly greater
resources than us; 2) our ability to compete effectively with our primary
Internet competitors and to increase our membership revenues both domestically
and internationally; 3) our ability to retain our key executives; 4) our ability
to successfully manage our credit card chargeback and credit percentage in order
to maintain our ability to accept credit cards as a form of payment for our
products and services; 5) our ability to generate compelling website content for
resale; 6) our ability to attract market support for our stock and 7) our
ability to prevail in our post-trial motions and appeal in the Lipson Lawsuit.
OVERVIEW
On February 18, 1998, the Company consummated an underwritten public offering of
1,500,000 units, each consisting of one share of common stock and one redeemable
common stock warrant, raising $7,087,000 in net proceeds after underwriting
fees. Simultaneous with the public offering, New Frontier Media acquired the
adult satellite television assets of Fifth Dimension. As a result of the Fifth
Dimension acquisition, the Company, through its wholly owned subsidiary Colorado
Satellite Broadcasting, Inc. (d/b/a "The Erotic Networks" or "TEN"), became a
leading provider of adult programming to C-Band households through its networks,
Extasy, True Blue, and GonzoX.
In August 1998, New Frontier Media launched TeN as its first adult network
targeted specifically to Cable multiple system operators ("MSO's") and Direct
Broadcast Satellite ("DBS") providers. 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. Pleasure
competes directly with Playboy's adult network services (Playboy TV, Spice and
Spice 2) in the most-edited adult programming category.
The Company launched Erotic Television Clips or ETC in May 2000 as its second,
partially-edited 24-hour per day adult network. The Company has organized its
partially-edited content library into 60 different thematic categories. Through
proprietary database technology, approximately eight scenes are organized
thematically and programmed in one 90-minute ETC block in order to encourage
appointment viewing by the PPV adult consumer. ETC delivers 240 unique thematic
blocks with over 500 different adult film scenes during a typical month.
On October 27, 1999, the Company completed its acquisition of Interactive
Telecom Network, Inc. ("ITN"), Interactive Gallery, Inc. ("IGallery") and 90% of
Card Transactions, Inc. ("CTI"). Under the terms of the acquisition, which was
accounted for in the accompanying financial statements as a
14
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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
pooling of interests, the Company exchanged 6,000,000 shares of restricted
common stock for all of the outstanding stock in ITN and IGallery and 90% of
CTI.
ITN is a leading Internet technology and e-commerce company that provides
turnkey Internet software engineering and bandwidth management. ITN provides the
following Internet technology functions to IGallery: dedicated Internet access,
web hosting, co-location services, systems and network integration, web site
management, web development, and streaming media products.
IGallery is a leading aggregator and reseller of adult content via the Internet.
IGallery aggregates adult-recorded video, live feed video and still photography
from adult content studios and distributes to consumers via its membership
websites and Pay-Pay-View feeds. In addition, IGallery resells its aggregated
content to web master affiliates ("content" revenue) and resells its Internet
traffic ("sale of traffic" revenue).
CTI has no operations at this time. The Company intends to develop CTI into an
Internet Payment Services Provider ("PSP") for various Internet billing options,
including secure, fully automated credit card payment processing.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
NET REVENUE
Subscription/Pay-Per-View TV
Cable/DBS.................. 3.3 1.3 6.3 1.8
C-Band..................... 2.6 2.7 5.1 5.4
Internet Content Provider
Membership................. 5.3 5.7 10.9 11.4
Content/Sale of Traffic.... 3.2 1.4 6.1 2.5
Internet Pay-Per-View...... 0.0 0.2 0.0 0.4
Internet Service Provider....... 0.2 0.6 0.5 1.1
----- ----- ----- -----
Total...................... 14.6 11.9 28.9 22.6
===== ===== ===== =====
COST OF SALES
Subscription/Pay-Per-View TV.... 2.8 2.6 5.6 5.3
Internet Content Provider....... 4.7 5.4 9.4 9.6
Internet Service Provider....... 0.3 0.2 0.6 0.8
----- ----- ----- -----
Total...................... 7.8 8.2 15.6 15.7
===== ===== ===== =====
INCOME (LOSS) FROM CONTINUING
OPERATIONS
Subscription/Pay-Per-View TV.... 0.4 (0.3) 0.6 (1.8)
Internet Content Provider....... 2.1 0.6 4.5 2.0
Internet Service Provider....... (0.9) 0.1 (1.5) (0.2)
Payment Service Provider........ (0.5) (0.1) (1.0) (0.1)
Corporate Administration........ (12.2) (0.3) (13.0) (0.5)
----- ----- ----- -----
Total...................... (11.1) 0.0 (10.4) (0.6)
===== ===== ===== =====
</TABLE>
15
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
Note that the information provided above for the period ended September 30, 1999
has been restated to give effect to the pooling of interests of ITN, IGallery,
and CTI for the entire period.
Income (loss) from continuing operations includes two nonrecurring items of $10
million and $.6 million for the quarter and six months ended September 30, 2000.
Excluding these two nonrecurring items, income (loss) from continuing operations
would be a loss of $.5 million for the quarter ended September 30, 2000 and
income of $.2 million for the six months ended September 30, 2000.
NET REVENUE
Net revenue for the Company was $14.6 million and $28.9 million for the quarter
and six months ended September 30, 2000, an increase of 23% and 28%,
respectively, from $11.9 million and $22.6 million for the quarter and six
months ended September 30, 1999. This improvement is due to increases in net
revenue for both the Subscription/PPV TV and Internet Content Provider Groups.
Revenue for the Subscription/PPV TV Group increased to $5.9 million and $11.4
million for the quarter and six months ended September 30, 2000, an increase of
48% and 58%, respectively, from $4.0 million and $7.2 million for the quarter
and six months ended September 30, 1999. Revenue for the Internet Content
Provider Group increased to $8.5 million and $17 million for the quarter and six
months ended September 30, 2000, a 16% and 19% increase respectively, from $7.3
million and $14.3 million for the quarter and six months ended September 30,
1999.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Loss from continuing operations for the Company increased from $0 as of the
quarter ended September 30, 1999 to a loss of $11.1 million for the quarter
ended September 30, 2000. Loss from continuing operations for the Company
increased from a loss of $0.6 million as of the six months ended September 30,
1999 to a loss of $10.4 million as of the six months ended September 30, 2000.
The loss from continuing operations for the quarter and six months ended
September 30, 2000 reflects the inclusion of two material nonrecurring items in
the Corporate Administration segment: 1) a $10 million reserve as a result of
the jury verdict issued in Lipson v. New Frontier Media, Inc. et al. ("J.P.
Lipson Lawsuit"), and 2) a $507,500 loss for the write down to market of the
Metro Global Media, Inc. stock held by the Company due to the impairment in
value of this asset. The income/loss from continuing operations for the Company
without giving effect to the two nonrecurring items would be a loss from
continuing operations of $.5 million for the quarter ended September 30, 2000
and income from continuing operations of $.2 million for the six months ended
September 30, 2000.
Income/loss from continuing operations for the Subscription/PPV TV Group
increased from a loss from continuing operations of $.3 million and $1.8 million
for the quarter and six months ended September 30, 1999, respectively, to income
from continuing operations of $.4 million and $.6 million for the quarter and
six months ended September 30, 2000. Income from continuing operations for the
Internet Content Provider Group increased from $.6 million and $2 million as of
the quarter and six months ended September 30, 1999, respectively, to $2.1
million and $4.5 million as of the quarter and six months ended September 30,
2000.
The Corporate Administration segment includes $1 million and $1.2 million for
legal expenses related to the J.P. Lipson Lawsuit for the quarter and six months
ended September 30, 2000, respectively.
16
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
SUBSCRIPTION/PAY-PER-VIEW (PPV) TV GROUP
The following table outlines the current distribution environment and
addressable households for each network:
<TABLE>
<CAPTION>
ESTIMATED ADDRESSABLE HOUSEHOLDS
---------------------------------------------
(IN THOUSANDS)
AS OF AS OF
SEPTEMBER 30, SEPTEMBER 30,
NETWORK DISTRIBUTION METHOD 2000 1999 % CHANGE
------------------ ----------------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Pleasure Cable/DBS 13,300 3,000 343%
TeN Cable/DBS 5,500 3,600 53%
ETC Cable/DBS 1,200 n/a n/a
Extasy C-band/Cable/DBS 3,100 1,800 72%(1)
True Blue C-band/DBS 1,800 1,700 6%(1)
GonzoX C-band 1,300 1,700 -24%(1)
</TABLE>
Note: "n/a" indicates that network was not launched at that time
(1) % change reflects a 24% decline in C-band market addressable households.
C-band total addressable households declined from 1.7 million as of September
30, 1999 to 1.3 million as of September 30, 2000.
NET REVENUE
Total net revenue for the Subscription/PPV TV Group was $5.9 million for the
quarter ended September 30, 2000 representing a 48% increase from $4.0 million
for the quarter ended September 30, 1999. Of total net revenue, C-Band net
revenue was $2.6 million for the quarter ended September 30, 2000 compared to
$2.7 million for the quarter ended September 30, 1999, a decrease of 4%. Revenue
from the Group's Cable/DBS products for the quarter ended September 30, 2000 was
$3.3 million compared to $1.3 million for the quarter ended September 30, 1999,
an increase of 154%. Revenue from the Group's Cable/DBS products is responsible
for approximately 56% of the Group's total net revenue for the quarter ended
September 30, 2000 as compared to 33% for the quarter ended September 30, 1999.
Total net revenue for the Subscription/PPV TV Group was $11.4 million for the
six months ended September 30, 2000, representing a 58% increase from the $7.2
million for the six months ended September 30, 1999. Of total net revenue,
C-Band net revenue was $5.1 million for the six months ended September 30, 2000
as compared to $5.4 million for the six months ended September 30, 1999, a
decrease of 6%. Revenue from the Group's Cable/DBS products for the six months
ended September 30, 2000 was $6.3 million as compared to $1.8 million for the
six months ended September 30, 1999, an increase of 250%. Revenue from the
Group's Cable/DBS products is responsible for approximately 55% of the Group's
total net revenue for the six months ended September 30, 2000 compared to 25%
for the six months ended September 30, 1999.
The decrease in C-Band revenue for both the quarter and six months ended
September 30, 2000 is due to a decrease in the number of total subscriptions to
the Group's three C-Band networks (Extasy, True Blue and GonzoX). Total C-Band
subscriptions to the Group's networks have declined 8% from 156,333 as of
September 30, 1999 to 144,538 as of September 30, 2000. In addition, the Group
has seen a 24% decline in the total C-Band market from 1.7 million addressable
households to 1.3 million addressable households during the same period as the
consumer's trend towards converting C-Band "big dish" analog satellite systems
to smaller, 18-inch digital DBS satellite systems has continued.
The increase in the Subscription/PPV TV Group's Cable/DBS revenue for both the
quarter and six months ended September 30, 2000 are a result of the following
factors as discussed further below: 1) an increase in distribution of TeN; 2)
adding TeN as a pay-per-view ("PPV") service on Echostar Communications
Corporation's DISH network ("DISH") in addition to its availability on a monthly
17
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
and yearly subscription basis; 3) the successful launch of Pleasure; and 4) the
successful launch of Extasy as a Cable/DBS product.
As of September 30, 2000, TeN was available to 5.5 million addressable Cable and
DBS households, up from 3.6 million households as of September 30, 1999, an
increase of 53% as a result of both the launch of new Cable and DBS systems,
including Bell Canada's Express Vu ("Express Vu"), and on-line growth of
existing affiliates. In addition, TeN is available on a monthly and annual
subscription basis to DBS households via DISH. As of September 30, 2000, TeN had
approximately 66,000 monthly DISH subscribers compared to 75,000 monthly
subscribers as of September 30, 1999, a 12% decrease. The Group had expected to
experience a decline in monthly DISH subscribers once TeN was offered as a PPV
service.
TeN launched on DISH in September 1998 and was initially available to DISH
households only on a monthly and annual subscription basis. In September 1999,
TeN was made available to DISH households on both a subscription and PPV basis,
resulting in an increase in the Group's Cable/DBS revenue. In addition, the
price of a monthly subscription was increased $5.00 to $19.99. Due to the fact
that TeN is now offered on a PPV basis by DISH, the Group is experiencing a
decline in the number of monthly subscribers.
The Company expects that TeN will experience a decline in the number of its
addressable households in October 2000 because of a programming decision by
Express Vu to replace TeN with an adult service that they intend to program
themselves. Due to Canadian regulations, Express Vu was unable to offer TeN as a
six-hour block of programming, and they felt that this was inhibiting their
adult category buy rates. The Group has an excellent relationship with Express
Vu, and Express Vu will continue to carry its Extasy and True Blue networks.
TeN is offered by Cable MSO's/DBS providers on a PPV basis with retail rates
ranging from $5.95 to $8.99 per block. A block of programming, depending upon
the MSO/DBS provider, can range from 90 minutes to 6 hours. TeN's monthly buy
rates, which depend upon customer demographics and the number of total adult
networks provided by the multi-channel distributor, average 7%-15% per month.
Pleasure was launched on June 1, 1999 and was available to 3.0 million
addressable households as of September 30, 1999. Pleasure has grown to a total
of 13.3 million addressable households as of September 30, 2000, an increase of
343%, as a result of both the launch of new Cable and DBS systems and on-line
growth of existing affiliates.
In January 2000, New Frontier Media announced that it had signed a corporate
carriage agreement with Time Warner Cable for the distribution of Pleasure on
its systems. As of September 30, 2000, the Group had added a total of 1.0
million analog and 540,000 digital Time Warner Cable households, including
78,000 Video-on-Demand households.
The Group signed a contract with Hughes Electronic Corporation's DirecTV
("DirecTV") for carriage beginning August 1, 2000 of a daily six-hour feed of
Pleasure called "Pleasure Island". Pleasure Island airs each night on DirecTV
from 10:00 p.m. to 4:00 a.m. EST and is sold to DirecTV's 7.2 million
addressable household base as two, three-hour blocks of programming for $6.99
per block.
Pleasure is offered by Cable MSO's/DBS providers on a PPV basis with retail
rates ranging from $4.95 to $7.95 per block. Pleasure's buy rates, which depend
upon customer demographics and the number of total adult networks provided by
the multi-channel distributor, average approximately 5% per month.
The Subscription/PPV TV Group began to market Extasy on a limited basis to Cable
MSO's and DBS providers during the fiscal year ended March 31, 2000. In January
2000, DISH launched Extasy on its newest satellite at 110 degrees and made it
available to its DISH 500 ("DISH 500") customers. DISH markets Extasy as both a
subscription and PPV service, as well as offering a monthly combination
subscription to both Extasy and TeN.
18
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
As of September 30, 2000, Extasy was available to approximately 1.8 million
Cable/DBS addressable households, including DISH 500 and Express Vu households,
up from 105,000 addressable households as of September 30, 1999. In addition, as
of September 30, 2000, Extasy had 14,000 monthly DISH subscribers at a retail
rate of $24.99 plus 5,200 monthly DISH subscribers to the Extasy/TeN combination
package at a retail rate of $34.99.
Extasy is offered by Cable MSO's/DBS providers on a PPV basis with retail prices
ranging from $7.95 to $9.99 per block. Extasy's buy rates, which depend upon
customer demographics and the number of total adult networks provided by the
multi-channel distributor, average approximately 10% - 12% per month.
ETC was launched to 1.2 million DISH 500 households on both a PPV and
subscription basis in July 2000 and has launched to 20,000 Cable households on a
PPV basis during the quarter ended September 30, 2000.
COST OF SALES
Cost of sales for the Subscription/PPV TV Group was $2.8 million, or 47% of
revenue, for the quarter ended September 30, 2000 as compared to $2.6 million,
or 65% of revenue, for the quarter ended September 30, 1999, an increase of 8%.
Cost of sales for the Subscription/PPV TV Group was $5.6 million, or 49% of
revenue, for the six months ended September 30, 2000 as compared to $5.3
million, or 74% of revenue, for the six months ended September 30, 1999, an
increase of 6%. Cost of sales consists of expenses associated with broadcast
playout, satellite uplinking, satellite transponder leases, programming
acquisition costs, amortization of content licenses, and call center operations.
Cost of sales as a percentage of revenue has declined for the quarter and six
months ended September 30, 2000 due to the fact that approximately 70% of the
Group's cost of sales are fixed in nature.
The increase in absolute dollars for cost of sales for both the quarter and six
months ended is primarily due to the following: a) an increase in programming
acquisition costs related to the editing of additional content for its networks
and development costs associated with ETC's launch; and b) an increase in
payroll, depreciation and maintenance costs for the operation of the broadcast
playout facility in Boulder, Colorado resulting from the expansion of the
facility in January 2000 and the increase in the number of signals originating
from this site. The Group has also seen a 25% decrease in its call center costs
since September 30, 1999. The call center's operations were moved in-house to
Boulder, Colorado in August 1999. The Group's transponder, uplinking, and
content amortization costs have remained relatively unchanged quarter to
quarter.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations for the Subscription/PPV TV Group for the
quarter ended September 30, 2000 was $.4 million compared to a loss of $.3
million for the quarter ended September 30, 1999. Income from continuing
operations for the Subscription/PPV TV Group for the six months ended September
30, 2000 was $.6 million compared to a loss of $1.8 million for the six months
ended September 30, 1999. This increase in income from continuing operations is
primarily due to a 48% and 58% increase in revenue for the quarter and six
months ended September 30, 2000, respectively. In addition, the Group
experienced a 117% and 196% increase in gross profit for the quarter and six
months ended September 30, 2000 as compared to the quarter and six months ended
September 30, 1999.
Total operating expenses for the quarter and six months ended September 30, 2000
increased 57% and 38%, respectively, over the quarter and six months ended
September 30, 1999. Operating expenses increased as a percentage of revenue from
36% as of the quarter ended September 30, 1999 to 39% as of the quarter ended
September 30, 2000, and decreased as a percentage of revenue from 46% as of the
six months ended September 30, 1999 to 39% as of the six months ended September
30, 2000.
19
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
The increase in total operating expenses during the quarter and six months ended
September 30, 2000 was due to an increase in payroll and employee benefit costs
associated with hiring additional personnel in the marketing and creative
departments, increased advertising costs for the launch of ETC and transponder
channel moves which occurred this quarter, increased commission expenses paid to
the Group's sales department as additional addressable households are added,
expenses associated with the Group's broadband group and development of its
TeN.com product, an increase in travel and entertainment costs necessary to
promote the Group's networks, and increased consulting expenses related to the
outside advertising firm hired to assist in the branding and imaging of the
Group's networks.
INTERNET CONTENT PROVIDER (ICP) GROUP
NET REVENUE
Total net revenue for the ICP Group was $8.5 million for the quarter ended
September 30, 2000, a 16% increase from $7.3 million for the quarter ended
September 30, 1999. Total net revenue for the ICP Group was $17.0 million for
the six months ended September 30, 2000, a 19% increase from $14.3 million for
the six months ended September 30, 1999.
Membership revenue was $5.3 million for the quarter ended September 30, 2000, a
7% decrease from $5.7 million for the quarter ended September 30, 1999.
Membership revenue was $10.9 million for the six months ended September 30,
2000, a 4% decrease from $11.4 million for the six months ended September 30,
1999. Membership revenue growth for both the quarter and six months ended
September 30, 2000 was slowed due to the implementation of more stringent fraud
controls, including the reduction of sign-ups from international credit card
users due to a lack of effective verification procedures.
Group owned websites totaled 29 at September 30, 2000 compared to 17 as of
September 30, 1999. These websites hosted a daily average of 2.2 million
visitors at September 30, 2000, an increase of 69% from the daily average of 1.3
million at September 30, 1999. While the daily average visits to the Group's
websites have increased from period to period, the rate at which this traffic is
converted into new memberships ("conversion rate") has decreased due to
management's continued emphasis on fraud control programs to reduce the level of
chargebacks and credits.
Membership revenue from international credit cards was a major contributor to
the Group's chargebacks and credits. The fraud control programs implemented by
the Group have resulted in reducing international credit card revenue to 9% of
total membership revenue for the quarter ended September 30, 2000, compared to
24% for the quarter ended September 30, 1999. Membership revenue from
international credit cards was 11% of total membership revenue for the six
months ended September 30, 2000, compared to 27% for the six months ended
September 30, 1999. The international revenue earned during the quarter and six
months ended September 30, 2000 is from renewal memberships only.
The standard one-month membership prices averaged $20 to $30 for both periods,
three-day trial memberships varied from $3.00 to $6.00 at September 30, 2000,
and from $2.00 to $3.00 at September 30, 1999.
Revenue from content sales and the sale of traffic was $3.2 million for the
quarter ended September 30, 2000, an 129% increase from $1.4 million for the
quarter ended September 30, 1999. Revenue from content sales and the sale of
traffic was $6.1 million for the six months ended September 30, 2000, an 144%
increase from $2.5 million for the six months ended September 30, 1999. Revenue
growth for the quarter and six months ended September 30, 2000 was the result of
focused marketing programs concentrating on promoting the Group's website
content and an increase in traffic sales to affiliate marketing programs.
20
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
Content sales were $1.0 million for the quarter ended September 30, 2000, a 25%
increase from $.8 million for the quarter ended September 30, 1999. Content
sales were $1.9 million for the six months ended September 30, 2000, a 27%
increase from $1.5 million for the six months ended September 30, 1999.
Content was sold to 290 webmasters at September 30, 2000, a 26% increase from
230 webmasters at September 30, 1999. The emphasis by the ICP Group on creating
quality content contributed to the increase in sales to webmasters, although
competition has caused the average content price to decrease. The average price
collected for each product was $355 at September 30, 2000, a 47% decrease from
$670 at September 30, 1999. Customers purchased an average of three products at
both September 30, 2000 and September 30, 1999.
Revenue is earned from traffic sales by forwarding exit traffic and traffic from
selected vanity domains to other affiliate marketing programs. Due to the
increase in traffic to the ICP Group's websites, management has been able to
increase exit traffic sales to other affiliate marketing programs at similar
rates paid by the ICP Group for its purchased traffic. Revenue from the sale of
traffic was $2.2 million for the quarter ended September 30, 2000, a 267%
increase from $.6 million for the quarter ended September 30, 1999. Revenue from
the sale of traffic was $4.2 million for the six months ended September 30,
2000, a 320% increase from $1.0 million for the six months ended September 30,
1999.
The ICP's Internet Pay-Per-View revenue was replaced with newer product
offerings and video memberships, and therefore there were no sales for the
quarter ended September 30, 2000 compared to $.2 million for the quarter ended
September 30, 1999. The ICP's Internet Pay-Per-View service had no sales for the
six months ended September 30, 2000 compared to $.4 million for the six months
ended September 30, 1999. This decrease for the quarter and six months ended
September 30, 2000 was expected as Internet Pay-Per-View subscribers switched to
the Group's subscriber membership products.
COST OF SALES
Cost of sales for the ICP Group was $4.7 million for the quarter ended September
30, 2000, as compared to $5.4 million for the quarter ended September 30, 1999,
a decrease of 13%. Cost of sales for the ICP Group was $9.4 million for the six
months ended September 30, 2000, as compared to $9.6 million for the six months
ended September 30, 1999, a decrease of 2%. Cost of sales consists of variable
expenses associated with credit card chargebacks, credits, and merchant banking
fees; transport; membership acquisition costs and website content costs. Cost of
sales was 55% of revenue for the quarter ended September 30, 2000 compared to
73% of revenue for the quarter ended September 30, 1999. Cost of sales was 55%
of revenue for the six months ended September 30, 2000 compared to 67% of
revenue for the six months ended September 30, 1999. The cost of sales
percentage continues to improve due to a reduction in communications, bandwidth,
and merchant banking fees. In addition, credit card chargebacks and credits
decreased during the quarter and six months ended September 30, 2000 due to the
implementation of tighter fraud controls.
Due to increased competition for traffic, the Group has experienced a 33%
increase in its membership acquisition costs for "purchased traffic". However,
the Group's overall membership and traffic acquisition costs as a percentage of
total revenue (i.e., a blended cost of both "typed-in" and "purchased" traffic)
showed very little change, increasing from 26% of total revenue for the quarter
ended September 30, 1999 to 27% of total revenue for the quarter ended September
30, 2000, and increasing from 23% as of the six months ended September 30, 1999
to 27% as of the six months ended September 30, 2000. The Group's vanity domain
name acquisition strategy has contributed to an increase in new members via
"typed-in" traffic and results in no direct acquisition costs, allowing the
Group's blended membership acquisition cost as a percentage of revenue to remain
relatively unchanged. However, the amortization costs of the purchased domain
names did increase the cost of sales by $.2 million for the quarter ended
September 30, 2000 and $.4 million for the six months ended
21
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
September 30, 2000. The domain names are amortized over a three to five year
period. Three vanity domain names were acquired in the quarter ended September
30, 2000 at a cost of $.1 million. Nine vanity domains were acquired in the six
months ended September 30, 2000 at a cost of $1.6 million.
Credit card chargebacks and credits decreased from $.9 million, or 15.2% of
membership revenue, as of the quarter ended September 30, 1999 to $.8 million or
14.2% of membership revenue, as of the quarter ended September 30, 2000. Credit
card chargebacks and credits decreased from $2.0 million, or 18% of membership
revenue, as of the six months ended September 30, 1999, to $1.7 million, or 16%
of membership revenue, as of the six months ended September 30, 2000. The
decrease for the quarter and six months ended September 30, 2000 was due to the
implementation of tighter fraud controls by management in response to Visa and
MasterCard organizations' efforts to target chargeback activities of certain
industries, including Direct Marketing, Travel Agencies, Outbound Telemarketing
Merchants and Videotext (Internet) Merchants. Part of the effect of this effort
by Visa and MasterCard has been the elimination of warning periods by these
organizations (i.e., fees are assessed without any warning periods) and
increased review fees and chargeback fees when chargebacks exceed the chargeback
parameters.
Merchant banking and processing fees decreased from $1.2 million, or 21.2% of
membership revenue, as of the quarter ended September 30, 1999 to $.5 million,
or 8.9% of membership revenue as of the quarter ended September 30, 2000.
Merchant banking and processing fees decreased from $2.0 million, or 17% of
membership revenue, as of the six months ended September 30, 1999 to $1.0
million, or 9% of membership revenue, as of the six months ended September 30,
2000. The decrease for both the quarter and six months ended September 30, 2000
is due to lower negotiated check debit fees and to moving the Group's credit
card business to processors with lower merchant fees.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for the ICP Group for the quarter ended
September 30, 2000 was $2.1 million compared to $.6 million for the quarter
ended September 30, 1999, an increase of 250%. Income from continuing operations
for the ICP Group for the six months ended September 30, 2000 was $4.5 million
compared to $2.0 million for the six months ended September 30, 1999, an
increase of 125%. This increase in income from continuing operations for the
quarter and six months ended September 30, 2000 is due to an increase in sale of
content and sale of traffic revenue combined with an increase in gross profit
margin. Gross profit margin for the Group increased from 27% and 33% for the
quarter and six months ended September 30, 1999 to 45% for the quarter and six
months ended September 30, 2000, due to a decline in credit card chargebacks and
credits, banking fees and bandwidth costs as a percentage of revenue.
Operating expenses were $1.7 million for the quarter ended September 30, 2000, a
31% increase from $1.3 million for the quarter ended September 30, 1999.
Operating expenses were $3.1 million for the six months ended September 30,
2000, a 19% increase from the $2.6 million for the six months ended September
30, 1999. Operating expenses were 20% of revenue for the quarter ended September
30, 2000, compared to 18% of revenue for the quarter ended September 30, 1999.
Operating expenses were 18% of revenue for both the six months ended September
30, 2000 and 1999.
The increase in operating expenses for the quarter and six months ended
September 30, 2000 was primarily due to an increase in personnel costs.
Personnel costs increased 71% for the quarter and 59% for the six months ended
September 30, 2000. Operating expenses for 1999 included $.2 million in the
quarter ended September 30, 1999 and $.3 million for the six months ended
September 30, 1999 of non-recurring costs associated with the sale of the ICP
Group to New Frontier Media.
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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
INTERNET SERVICE PROVIDER (ISP) GROUP
NET REVENUE
Net revenue for the ISP Group after the elimination of intercompany sales was
$.2 million for the quarter ended September 30, 2000, a 67% decrease from $.6
million for the quarter ended September 30, 1999. Net revenue for the ISP Group
after the elimination of intercompany sales was $.5 million for the six months
ended September 30, 2000, a 55% decrease from $1.1 million for the six months
ended September 30, 1999. The decrease in net sales (after elimination of
intercompany sales) for the quarter and six months ended September 30, 2000 was
the result of reduced processing for a non-affiliated audio text customer.
COST OF SALES
Cost of sales for the ISP Group was $.3 million for the quarter ended September
30, 2000, as compared to $.2 million for the quarter ended September 30, 1999.
Cost of sales for the ISP Group was $.6 million for the six months ended
September 30, 2000, as compared to $.8 million for the six months ended
September 30, 1999. Cost of sales consists of expenses for bandwidth and
communications, equipment depreciation and amortization. The decrease in cost of
sales for the six months ended September 30, 2000 relates to the decrease in
revenue from the non-affiliated audio text customer.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations for the ISP Group for the quarter ended
September 30, 2000 was $.9 million as compared to income from continuing
operations of $.1 million for the quarter ended September 30, 1999. Loss from
continuing operations for the ISP Group for the six months ended September 30,
2000 was $1.5 million, compared to a loss from continuing operations of $.2
million for the six months ended September 30, 1999. The increase in operating
loss for the quarter and six months ended September 30, 2000 is a result of the
additional expenses incurred for upgrades in-process at the ISP facility. These
expenses relate primarily to payroll, consulting costs, communication upgrades,
equipment depreciation and amortization.
RECLASSIFICATIONS
Management has changed its reporting of certain intercompany transactions for
the ISP Group for the quarter ended September 30, 2000. This change in reporting
required reclassifications for the quarter ended September 30, 1999 for
comparison purposes. Management believes the change in reporting more
appropriately reflects its financial position and will continue to report in
this manner in future periods. The reclassifications had no effect on net income
for both the quarter and six months ended September 30, 2000 and September 30,
1999.
For the quarter ended September 30, 1999, the reclassification resulted in
increasing the ISP Group's revenue by $.3 million (prior to intercompany
elimination), increasing the ICP Group's cost of sales by $.1 million and
increasing the ICP Group's operating expenses by $.2 million. For the six months
ended September 30, 1999, the reclassification resulted in increasing the ISP
Group's revenue by $1.4 million (prior to intercompany elimination), increasing
the ICP Group's cost of sales by $.3 million and increasing the ICP Group's
operating expenses by $1.1 million. These reclassifications, which related
solely to the ISP Group's intercompany accounting with the ICP Group, were
subsequently eliminated in consolidation.
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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
PAYMENT SERVICE PROVIDER (PSP) GROUP
LOSS FROM CONTINUING OPERATIONS
The loss from continuing operations for the PSP Group for the quarter ended
September 30, 2000 was $.5 million, an increase of 400% from the loss from
continuing operations of $.1 million for the quarter ended September 30, 1999.
The loss from continuing operations for the six months ended September 30, 2000
was $1.0 million, an increase of 900% from the loss from continuing operations
of $.1 million for the six months ended September 30, 1999.
The increase in operating losses for the quarter and six months ended September
30, 2000 are the result of the addition of personnel to initiate the planning
and initial implementation of the payment processing organization. To further
compliment its management team, the PSP Group added several banking industry
professionals that combined bring over 40 years of banking related experience to
the organization.
With over 10 years of experience in on-line credit card processing, the PSP
Group has developed effective and sophisticated fraud control techniques,
customer profiling and risk scoring technologies. The PSP team's experience in
risk management and fraud control have allowed it to effectively maintain
merchant chargebacks below the thresholds required by banks and credit card
associations.
The PSP Group has finalized an agreement with a leading e-commerce merchant bank
to be an Independent Sales Organization ("ISO") and Member Services Provider
("MSP") for that bank. This strategic alliance provides the PSP Group with a
strong merchant bank to support the acquisition of significant merchant account
growth.
In conjunction with this ISO/MSP arrangement, the PSP Group has completed the
certification stage of its Internet Payment Gateway, Card.com. This payment
processing link enables the PSP Group to process credit card payment activity
online, in real-time, with its processor First Data Merchant Services on their
Omaha and South Platforms.
Currently, the PSP Group has merchant banking relationships in the United
States, Caribbean and Europe.
CORPORATE ADMINISTRATION
The Corporate Administration segment includes all costs associated with the
operation of the public holding company, New Frontier Media, Inc. These costs
include legal and accounting expenses, registration and filing fees with NASDAQ
and the SEC, investor relations costs, and printing costs associated with the
Company's public filings.
The loss from continuing operations for this segment increased from $0.3 million
for the quarter ended September 30, 1999 to $12.2 million for the quarter ended
September 30, 2000. The loss from continuing operations for this segment
increased from $0.5 million for the six months ended September 30, 1999 to $13.0
million for the six months ended September 30, 2000. The loss from continuing
operations for the quarter and six months ended September 30, 2000 includes two
nonrecurring items: 1) a $10 million reserve for the jury verdict issued in the
J.P. Lipson Lawsuit, and 2) a $507,500 loss for the write down of Metro Global
Media, Inc. ("Metro") stock (see below for additional details on both
transactions).
Excluding these two nonrecurring items, the loss from continuing operations for
this segment increased from $0.3 million for the quarter ended September 30,
1999 to $1.6 million for the quarter ended September 30, 2000. The loss from
continuing operations for this segment increased from $0.5 million for the six
months ended September 30, 1999 to $2.4 million for the six months ended
September 30, 2000, excluding these two nonrecurring items.
The increase in loss from continuing operations, without respect to the two
nonrecurring items, for both the quarter and six months ended September 30, 2000
is primarily related to an increase in legal
24
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NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
costs related to the Company's defense in the Lipson Lawsuit, an increase in
payroll costs related to the addition of an in-house investor relations person
and the allocation of CEO and CFO salaries to this segment, an increase in
interest expense related to the Company's Series C convertible preferred stock,
offering costs related to the convertible preferred stock that were written off
after the final conversion into common stock this quarter, and consulting costs
for the development of a new public imaging campaign, logo, and corporate
website. The Company also incurred legal fees of approximately $1 million and
$1.2 million during the quarter ended and six months ended September 30, 2000,
respectively, for the defense of the Lipson Lawsuit.
As previously disclosed, the Company was a defendant in the Lipson Lawsuit filed
on January 25, 1999 in which J.P. Lipson sought to enforce an alleged agreement
by the Company to convey to Mr. Lipson a 70% equity interest in the Company. The
lawsuit went to trial on August 14, 2000. On September 1, 2000, the jury entered
a verdict in favor of Mr. Lipson, finding that he was entitled to $10 million in
liquidated damages for breach of contract and breach of the covenant of good
faith and fair dealing, and, in the alternative, $1 million actual damages and
$1 million punitive damages on his claim for fraud in the inducement and fraud
in the concealment. Mr. Lipson has currently not elected his remedies as between
the contract and fraud claims, and, as a result, the court has not entered any
judgment to date. Notwithstanding that the Company intends to appeal any
judgment which may be entered against it, the Company has established a $10
million reserve on its books as a result of the jury verdict.
In July 1999, the Company entered into an agreement with Metro in which it
received 250,000 shares of Metro common stock. The market value of this stock on
the date of the transaction was $2.47 per share. Subsequent to this agreement
the stock was delisted from the NASDAQ, is now thinly traded on the
over-the-counter market, and its value has declined to $0.47 per share. Due to
the permanent impairment in the value of this stock, the Company wrote the stock
down to $117,500 on its books and took a write off against income of $507,500.
DEFERRED TAX ASSET
SFAS 109, "Accounting for Income Taxes" requires, among other things, the
separate recognition, measured at currently enacted tax rates, of deferred tax
assets and deferred tax liabilities for the tax effect of temporary differences
between the financial reporting and tax reporting bases of assets and
liabilities, and net operating loss and tax credit carryforwards for tax
purposes. A valuation allowance must be established for deferred tax assets if
it is "more likely than not" that all or a portion will not be realized.
As of September 30, 2000, the Company estimates that it has $19 million in net
operating loss carryfowards, including the $10 million reserve for the jury
verdict issued in connection with the J.P. Lipson Lawsuit, which expire from
2012 through 2021. The Company has concluded that it is "more likely than not"
that the full benefit of its deferred tax assets will be realized. Accordingly a
valuation allowance is not required for the $8.0 million of deferred tax assets.
The Company expects to realize its deferred tax assets through the generation of
future taxable income. The amount of future income required based on currently
enacted tax rates applied to the deferred tax asset amount is approximately $21
million. Due to the fact that the Company has recorded several quarters of
profitability the Company has concluded that a valuation allowance is not
necessary for its net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended September 30, 2000, cash provided by operating
activities of $.4 million was primarily associated with a $10 million increase
in the Company's reserve for legal settlement related to the jury verdict in the
J.P. Lipson Lawsuit, depreciation and amortization of $2.9 million, $.5 million
for the write down of the Company's investment in Metro, and a $.5 million
increase in
25
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
accounts payable. The cash provided by operations was offset by a net loss of
$3.1 million, an increase in the Company's deferred tax asset of $7.2 million,
an increase in accounts receivable of $1.1 million primarily related to
receivables from the Subscription/PPV TV Group's DBS providers, and an increase
in the Subscription/PPV TV Group's prepaid distribution rights for its content
licensing.
For the six months ended September 30, 1999, cash used in operating activities
of $2.6 million was primarily associated with a net loss of $.6 million, an
increase in accounts receivable of $1.9 million, an increase in prepaid
distribution rights of $.9 million, and a decrease in accounts payable of $.9
million. This use of cash was offset by depreciation and amortization of $1.8
million.
Cash used in investing activities was $2.7 million for the six months ended
September 30, 2000. This use of cash was primarily associated with the purchase
of nine domain names for the ICP Group in the amount of $1.7 million and
equipment for the broadcast and Internet service provider facilities. Cash used
in investing activities for the six months ended September 30, 1999 was $.6
million and was primarily comprised of capital expenditures related to broadcast
equipment, trade show booth improvements, and computer equipment.
Cash used in financing activities was $.1 million for the six months ended
September 30, 2000, compared to cash provided by financing activities of $4.3
million for the six months ended September 30, 1999. Cash provided by financing
activities for the six months ended September 30, 2000 was attributable to the
contribution of $1.3 million by the senior management group as part of the
agreement reached with NASDAQ to maintain its listing. This cash from financing
activities was offset by $.3 million distributed to the previous shareholders of
the ISP/ICP/PSP Groups, $.6 million paid on capital lease obligations, and $1.0
million paid to related parties. The $4.3 million provided by financing during
the six months ended September 30, 1999 was primarily related to the Company's
use of $1.7 million on a line of credit and $3.9 million in proceeds received
from the exercise of its publicly traded warrants.
The Company's material commitments include the payments required under its
operating and capital lease agreements. The Company believes that its existing
cash balances together with funds generated from operations will be sufficient
to satisfy these obligations.
The Company anticipates the following capital expenditures during the current
fiscal year: 1) The Company will purchase additional broadcast equipment
estimated at $1.6 million in order to ensure complete redundancy of its Boulder,
Colorado facility as well as to increase storage capacity and improve the
broadcast quality of its networks; 2) the Company will purchase approximately
$.3 million of receiver/decoder equipment as additional cable carriage is
obtained for its TeN, Pleasure, ETC, and Extasy networks during the next 12
months; and 3) the Company anticipates capital expenditures for editing
equipment and additional computer and communication equipment of approximately
$2.0 million.
The Company will continue to pursue its strategy to purchase additional vanity
domain names based on its available cash balances. Based on the availability of
cash the Company anticipates spending $1.5 million to $10 million on domain name
acquisitions. The Company estimates a return of capital on these purchases
within 18-24 months.
The Company believes that its existing cash and cash generated from operations
will be sufficient to satisfy its short term and long term operating
requirements.
The Company was a defendant in the Lipson Lawsuit filed on January 25, 1999. The
plaintiff in the Lipson Lawsuit sought to enforce an alleged agreement by the
Company to convey to the plaintiff a 70% equity interest in the Company. The
lawsuit went to trial on August 14, 2000. On September 1, 2000, the jury entered
a verdict in favor of the plaintiff, finding that he was entitled to $10 million
in liquidated damages for breach of contract and breach of covenant of good
faith and fair dealing, and, in the alternative, $1 million actual damages and
$1 million punitive damages on his claim for fraud in the inducement and fraud
in the concealment.
26
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
Because the amounts awarded on various of the plaintiff's claims are alternative
rather than cumulative remedies, the Company believes that the plaintiff will be
required to elect between recovery on the fraud claim or recovery on the
contract claim. The plaintiff has not yet made such an election.
The Court has not yet entered a judgment in the case. Colorado law provides for
a 15-day automatic stay once judgment is entered and the Court has the
discretion to impose a further stay.
The Company has booked a $10 million reserve for the jury verdict. The Company
is also exploring various financing alternatives to fulfill the terms of the
verdict should it become necessary.
FUTURE OUTLOOK
The Subscription/PPV TV Group expects to see an increase in the cost of its
content licenses due to an increase in competition for quality content. Due to
the amortization periods of the Group's content, this increase in licensing
costs is not expected to have a maternal effect on the Group's gross margins.
However, it will impact its cash flows from operations.
The Internet Content Provider Group does not expect the decline in its
membership revenue to continue. Management believes that its continued emphasis
on fraud control and the reduction in the level of chargebacks and credits will
provide for a more stable membership base, which should result in increasing
membership revenue in future periods. The ICP Group will accelerate its efforts
to establish webmaster programs in the faster growing international markets as
well, in order to increase its membership revenue.
Additionally, the ICP Group expects that increased price competition and the
effect of more restrictive credit card policies may further reduce the average
price for its content sales, resulting in slower revenue growth in this area.
The ICP Group intends to offer additional content through new websites in order
to offset this risk.
The Internet Service Provider Group, after extensive due diligence during the
current quarter, has determined that market conditions are not optimal for the
continuation of its expansion plans to become an Internet service provider
marketed to non-affiliated customers. The Group's due diligence found that the
Internet service provider market will become saturated by larger, better
capitalized companies and that the market will soon have excess capacity in this
area, forcing prices for these services to decline. The Group did not want to
operate in a commodity priced marketplace.
Based on this research, the ISP Group has made the decision to refocus its
operations to primarily support the ICP Group and to discontinue the expansion
of its data center. The ISP Group recently completed a restructuring of its
operations that will ultimately enable it to save $70,000 per month in
personnel, consulting and other operating expenses. Except for expenses related
to the few non-affiliated accounts that the Group currently services, the
operating expenses associated with the ISP Group will be allocated directly to
the ICP Group in order to accurately reflect the costs necessary to operate the
Group's websites. Therefore, in future periods it is expected that the ISP
segment will be merged into the ICP Group for reporting purposes.
In addition to refocusing the operations of the ISP Group, New Frontier Media
has also made the decision this quarter to focus the PSP Group's operations
primarily on the ICP Group's merchant account processing and to slow the
marketing of the PSP Group's services to non-affiliated customers.
Through the changes described above with respect to the ISP and PSP Groups, New
Frontier Media has refocused its operations entirely on content distribution.
The Company believes that by focusing on its core competency of content
distribution through cable, satellite, and the Internet both domestically and
internationally, and by positioning itself for the future convergence
opportunities of these distribution outlets, it will create more value for its
shareholders.
27
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company's exposure to market risk is principally confined to
cash in bank, money market accounts, and notes payable, which have short
maturities and therefore minimal and immaterial market risk.
INTEREST RATE SENSITIVITY. As of September 30, 2000, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair value of these assets.
FOREIGN CURRENCY EXCHANGE RISK. The Company does not have any foreign currency
exposure because it currently does not transact business in foreign currencies.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, the Company was a defendant in the Lipson Lawsuit filed
on January 25, 1999 in which J.P. Lipson sought to enforce an alleged agreement
by the Company to convey to Mr. Lipson a 70% equity interest in the Company. The
lawsuit went to trial on August 14, 2000. On September 1, 2000, the jury entered
a verdict in favor of Mr. Lipson, finding that he was entitled to $10 million in
liquidated damages for breach of contract and breach of the covenant of good
faith and fair dealing, and, in the alternative, $1 million actual damages and
$1 million punitive damages on his claim for fraud in the inducement and fraud
in the concealment. Mr. Lipson has currently not elected his remedies as between
the contract and fraud claims, and, as a result, the court has not entered any
judgment to date.
Notwithstanding that the Company intends to appeal any judgment which may be
entered against it, the Company has established a reserve on its books as a
result of the jury verdict.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(1) The Company held an annual meeting of its shareholders on September 26, 2000
(the "Annual Meeting").
(2) The Annual Meeting involved the election of directors. The directors elected
at the meeting included Mark H. Kreloff, Michael Weiner, Koung Y. Wong,
Edward J. Bonn, Alan L. Isaacman and Bradley A. Weber.
(3) Three matters were voted on at the Annual Meeting, as follows:
(1) The election of nominees Mark H. Kreloff, Michael Weiner, Koung Y. Wong,
Edward J. Bonn, Alan Isaacman, and Bradley A. Weber as Directors of the
Company until the next annual meeting.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN WITHHELD NON-VOTE
---------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Mark. H. Kreloff 17,361,060 0 30,882 N/A N/A
Michael Weiner 17,361,060 0 30,882 N/A N/A
Koung Y. Wong 17,361,060 0 30,882 N/A N/A
Edward J. Bonn 17,361,060 0 30,882 N/A N/A
Alan L. Isaacman 17,361,060 0 30,882 N/A N/A
Bradley A. Weber 17,361,060 0 30,882 N/A N/A
</TABLE>
Each nominee was elected a Director of the Company.
(2) To approve the Company's Millennium Incentive Stock Option Plan which
authorizes the grant of options to purchase up to an aggregate of
2,500,000 shares of the Company's common stock. The votes were cast for
this matter as follows:
28
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN WITHHELD NON-VOTE
---------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
8,921,310 511,254 10,413 N/A N/A
</TABLE>
This matter was passed by the required majority of votes cast.
(3) The ratification of the appointment of Spicer, Jeffries & Co. as the
Company's independent auditors for the fiscal year ending March 31,
2001.
The votes were cast for this matter as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN WITHHELD NON-VOTE
---------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
17,363,869 19,053 9,020 N/A N/A
</TABLE>
This matter was passed by the required majority of votes cast.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.01 Financial Data Schedule
b) Reports on Form 8K
The Company did not file any Form 8-K Reports during the quarter.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
NEW FRONTIER MEDIA, INC.
/s/ Karyn L. Miller
--------------------------------------
Karyn L. Miller
Chief Financial Officer
(Principal Accounting Officer)
30
