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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10 -QSB
/X/ Quarterly report under section 13 or 15(d) of the Securities and Exchange
Act of 1934.
For the quarterly period ended December 31, 1999
/ / Transition Report under Section 13 or 15(d) of the Exchange Act.
For the transition period from __________________ to __________________
000-23697
(Commission file number)
NEW FRONTIER MEDIA, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1084061
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
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 December 31, 1999: 19,684,698 shares of Common Stock
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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<PAGE>
FORM 10-QSB
NEW FRONTIER MEDIA, INC.
Index
<TABLE>
<CAPTION>
PAGE
NUMBER
--------------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at December 31, 1999.................. 3-4
Consolidated Statements of Operations for the three and nine
months ended December 31, 1999 and December 31, 1998........... 5
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1999 and December 31, 1998........................ 6
Notes to Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation......... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.............. 20
Item 6. Exhibits and Reports on Form 8-K................................. 21
SIGNATURES................................................................ 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(IN 000S)
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash....................................................... $ 5,711
Accounts receivable........................................ 3,089
Prepaid distribution rights................................ 1,434
Prepaid expenses........................................... 889
Other...................................................... 486
-------
Total current assets.................................. 11,609
-------
FURNITURE AND EQUIPMENT
Furniture and equipment, cost.............................. 11,374
Less: Accumulated depreciation............................. (3,133)
-------
Net Furniture and equipment........................... 8,241
OTHER ASSETS
Goodwill, net of accumulated amortization of $1,186........ 5,175
Prepaid distribution rights................................ 6,485
Other...................................................... 694
Available for Sale Securities.............................. 107
-------
Total other assets.................................... 12,461
-------
TOTAL ASSETS................................................. $32,311
=======
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
3
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1999
(IN 000S)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES
Accounts payable.......................................... $ 1,345
Current Portion of capital lease obligations.............. 825
Deferred revenue.......................................... 4,060
Other accrued liabilities................................. 1,973
Reserve for chargebacks/credits........................... 183
--------
Total current liabilities............................ 8,386
--------
Obligations under capital leases.......................... 1,090
Due to related parties.................................... 822
Note to related party..................................... 809
Series C Preferred Stock.................................. 6,000
Other..................................................... 62
--------
Total liabilities.................................... 17,169
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value
5,000,000 shares authorized
0 shares issued and outstanding...................... --
Common stock, $.0001 par value
50,000,000 shares authorized
19,684,698 shares issued and outstanding............. 2
Additional paid-in capital................................ 31,613
Other Comprehensive Income................................ (518)
Minority Interest......................................... (27)
Accumulated deficit....................................... (15,928)
--------
Total stockholders' equity........................... 15,142
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 32,311
========
</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 NINE MONTHS
ENDED DECEMBER 31, 1999 AND 1998
(IN 000S EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
DECEMBER 31 DECEMBER 31
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
SALES, NET.................................. $12,240 $ 9,350 $34,108 $21,782
COST OF SALES............................... 6,287 5,752 18,910 14,668
------- ------- ------- -------
GROSS MARGIN................................ 5,953 3,598 15,198 7,114
------- ------- ------- -------
OPERATING EXPENSES
Occupancy and equipment................ 576 332 1,440 911
Legal and Professional................. 681 238 1,337 392
Advertising and promotion.............. 1,810 1,466 4,850 4,258
Salaries, wages and benefits........... 1,790 1,026 4,882 2,562
Communications......................... 105 64 311 174
General and administrative............. 456 299 1,373 799
Goodwill amortization.................. 159 159 476 477
Consulting............................. 193 200 688 419
------- ------- ------- -------
TOTAL OPERATING EXPENSES............... 5,770 3,784 15,357 9,992
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Gain (Loss) on trading securities...... -- -- 6 (31)
Interest Income........................ 68 8 117 16
Interest Expense....................... (190) (103) (487) (273)
------- ------- ------- -------
TOTAL OTHER INCOME (EXPENSE)........... (122) (95) (364) (288)
------- ------- ------- -------
LOSS FROM CONTINUING OPERATIONS........ 61 (281) (523) (3,166)
------- ------- ------- -------
DISCONTINUED OPERATIONS
Loss from operations of discontinued
subsidiaries........................... -- (3) -- (129)
------- ------- ------- -------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST.................................. 61 (284) (523) (3,295)
Minority interest in loss of
subsidiary............................. 4 -- 16 --
------- ------- ------- -------
NET INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES.............................. 65 (284) (507) (3,295)
Provision for income taxes............. (3) 10 -- 12
------- ------- ------- -------
NET INCOME (LOSS)........................... $ 68 $ (294) $ (507) $(3,307)
======= ======= ======= =======
BASIC LOSS PER SHARE........................ $ 0.00 $ (0.02) $ (0.03) $ (0.26)
======= ======= ======= =======
DILUTED LOSS PER SHARE...................... $ 0.00 $ (0.02) $ (0.03) $ (0.26)
======= ======= ======= =======
</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 NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN 000S)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss............................................................. $ (507) $(3,307)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and Amortization................................ 2,936 1,433
Increase (decrease) in accounts payable...................... (1,154) 826
(Increase) decrease in accounts receivable................... (2,044) (272)
(Gain) Loss on sale of trading securities.................... (6) 31
(Increase) decrease in prepaid distribution rights........... (1,763) (981)
Increase (decrease) in deferred revenue...................... (208) 1,498
Increase (decrease) in other accrued liabilities............. 590 576
Increase (decrease) in reserve for chargebacks............... (515) 329
Increase (decrease) in royalties payable..................... (4) 8
(Increase) decrease in accrued guaranteed payments........... (1) 151
(Increase) decrease in other assets.......................... 320 (386)
(Increase) decrease in accrued disposal costs................ -- (427)
Minority interest in loss of subsidiary...................... (15) --
Stock issued for services.................................... 23 --
------- -------
Net cash used in operating activities........................ (2,348) (521)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture & equipment................................... (4,410) (664)
Repayment of note receivable -- related party........................ -- 38
Proceeds from sale of trading securities............................. 56 153
Purchase of trading securities....................................... -- (88)
Redemption of certificates of deposit................................ -- 250
Other................................................................ -- (72)
------- -------
Net cash used in investing activities........................ (4,354) (383)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations................................ (628) (287)
Increase (decrease) in borrowings from related parties............... 85 527
Distribution to shareholders......................................... (836) (2,208)
(Increase) decrease in debt offering costs........................... (168) --
Increase in notes payable............................................ -- 675
Issuance of convertible debentures, net of offering costs............ -- 1,647
Issuance of Series C Preferred Stock................................. 6,000 --
Issuance of common stock............................................. 3,940 --
------- -------
Net cash provided by financing activities.................... 8,393 354
------- -------
Net increase (decrease) in cash......................... 1,691 (550)
Cash, beginning of period.............................................. 4,020 1,946
------- -------
Cash, end of period.................................................... $ 5,711 $ 1,396
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ITEMS:
Interest Paid.......................................................... $ 297 $ 94
Income Taxes Paid...................................................... -- $ 13
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of Equipment via capital lease obligations.................... $ 736 $ 313
Common stock issued for prepaid distribution right license agreement... $ 3,938 --
Receipt of available for sale securities in exchange for services to be
provided over a five year period..................................... $ 625 --
Common stock issued in legal settlement................................ $ 23 --
</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
(UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements reflect all
adjustments, which, in the opinion of management are necessary for a fair
presentation of the results of operations for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or any future period.
These financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-KSB, as amended on August 10, 1999, for the year ended March 31,
1999.
ORGANIZATION, CONSOLIDATION AND BUSINESS
The accompanying unaudited consolidated financial statements include the
accounts of New Frontier Media, Inc. ("the Company" or "New Frontier Media") and
its wholly owned subsidiaries Colorado Satellite Broadcasting, Inc. ("CSB"),
Boulder Interactive Group ("BIG"), Fuzzy Entertainment, Inc. ("Fuzzy"), David
Entertainment, Inc. ("David"), Interactive Telecom Network, Inc. ("ITN"),
Interactive Gallery, Inc. ("IGI") and 90% of Card Transactions, Inc. ("CTI").
The Company sold its 70% interest in BIG in June 1998, discontinued the
operations of Fuzzy during the year ended March 31, 1998, and discontinued the
operations of David during the year ended March 31, 1999. In addition, 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.
In June 1999, New Frontier Media, through its subsidiary CSB, launched Pleasure,
a new 24-hour adult network that incorporates the most edited standard available
in the category. Pleasure is available to direct broadcast satellite providers
and multiple system cable operators. Pleasure competes directly with Playboy
Enterprises, Inc.'s ("Playboy") adult network services (Playboy TV, Spice and
Spice 2) in the most edited adult programming category.
EARNINGS PER SHARE
Basic earnings 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 and the effect of convertible preferred stock using the "if-converted"
method.
7
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
3 MONTHS ENDED 9 MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- --------------------
1999 1998 1999 1998
------- ------ ------- -------
Net income available for common
shareholders................................. $ 68 $ (294) $ (507) $(3,307)
======= ====== ======= =======
Average outstanding shares of common stock... 17,904 12,575 14,486 12,553
Dilutive effect of:
Warrants................................ 1,243 -- -- --
Employee Stock Options.................. 439 -- -- --
Convertible preferred stock............. -- -- -- --
------- ------ ------- -------
Common stock and common stock equivalents.... 19,586 12,575 14,486 12,553
======= ====== ======= =======
Earnings per share:
Basic................................... $ 0.00 $(0.02) $ (0.03) $ (0.26)
======= ====== ======= =======
Diluted................................. $ 0.00 $(0.02) $ (0.03) $ (0.26)
======= ====== ======= =======
</TABLE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2 -- SHAREHOLDERS' EQUITY
In May of 1999, the remaining 40,000 warrants of a total of 175,000 warrants to
purchase common stock in the Company at $3.4785 per share were exercised by
previous debenture holders.
In July 1999, New Frontier Media issued 500,000 shares of its common stock to
Metro Global Media, Inc. ("Metro") at $7.875 per share as consideration in
obtaining a license agreement for the rights to distribute the entity's 3,000
title adult film and video library and multi-million still image archive. In
addition, the Company issued 100,000 warrants to purchase its common stock at an
exercise price equal to the market value of the stock on the date the warrants
were issued.
In August 1999, the Company raised $3,901,177 less redemption costs of $43,749
through the exercise of 600,181 of its 1,500,000 publicly traded warrants to
purchase common stock. These warrants had been called by the Company in June
1999 with a redemption date of August 13, 1999. The remaining 886,619 warrants
were redeemed at $.05 per share.
On October 27, 1999, the Company completed its acquisition of ITN and IGI and
90% of CTI. Under the terms of the Stock Purchase Agreement, New Frontier Media
issued 6,000,000 shares of the Company's restricted common stock to the Sellers
of the companies. This acquisition has been accounted for as a pooling of
interests.
In October 1999, the Company issued 5,000 shares of its common stock as part of
a settlement of a lawsuit to which it was a party.
NOTE 3 -- LICENSE AGREEMENT
As discussed above in Note 2, New Frontier Media executed a definitive license
agreement to acquire exclusive rights to Metro's 3,000 title adult film and
video library and multi-million still image archive for a period of seven years
with renewal provisions. In addition, the Company entered into a multi-
8
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
year production agreement with Metro which calls for the delivery of at least
three new adult feature titles per month over the next five years.
NOTE 4 -- STOCK OPTIONS AND WARRANTS
The Company granted options and warrants to employees, consultants and unrelated
third parties for services provided allowing them to purchase common stock of
New Frontier Media at a price equal to or in excess of the current market price
of the Company's common stock on the date of grant. The following information
describes certain information relating to these warrants:
<TABLE>
<CAPTION>
EXERCISE
EXPIRATION DATE WARRANTS PRICE
---------------------------------------------------- -------- ---------
<S> <C> <C>
April 2002.......................................... 75,000 4.75
May 2002............................................ 1,309 6.875
May 2002............................................ 1,333 9.00
May 2002............................................ 100,000 6.30
June 2002........................................... 10,000 9.50
July 2004........................................... 100,000 7.875
September 2002...................................... 100,000 6.00
September 2002...................................... 75,000 8.00
September 2004...................................... 360,000 7.87
October 2002........................................ 25,000 7.87
October 2009........................................ 30,000 6.90
October 2009........................................ 50,000 5.85
October 2009........................................ 25,000 7.31
October 2002........................................ 25,000 5.00
October 2009........................................ 12,000 5.00
November 2002....................................... 50,000 6.50
December 2002....................................... 50,000 4.50
</TABLE>
Additionally, the Company's shareholders voted to approve the Company's 1999
Incentive Stock Option Plan. This plan reserves 1,500,000 shares of the
Company's common stock for Options to be awarded to employees, officers and
directors of the Company. The exercise price of options granted under the plan
may not be less than 100% of the fair market value of the shares on the date an
option is granted. As of December 31, 1999, the Company had granted 1,300,000
Options from the Plan.
NOTE 5 -- SERIES C CONVERTIBLE PREFERRED STOCK
On October 14, 1999, the Company issued 600 shares of 7% Series C Convertible
Preferred Stock at $10,000 per share to a single institutional investor.
The Preferred Stock is initially convertible into the Company's common stock at
a price of $7.87 per share which was equal to 140% of the market price of the
Company's stock at the closing date of the transaction. The Company has the
right to redeem the Preferred Stock at any time, in whole or in part, at a price
equal to the amount the investor would have received if the investor had then
converted its shares of Preferred Stock into common stock, or, if greater, 115%
of the amount paid by the investor for the Preferred Stock.
On the six-month anniversary of the date of closing, the conversion price will
be reset to 95% of the average of the five lowest daily volume-weighted average
prices for the Company's common stock during the ten trading days immediately
preceding such anniversary date, if such price is lower than
9
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$7.87. Until the Preferred Stock is converted or redeemed, the conversion price
will similarly reset on every following three-month anniversary.
In connection with this transaction, the Company also issued to its investor
60,000 warrants dated September 30, 1999, exercisable at $7.87 per share, to
purchase common stock of the Company for each $1 million invested with the
Company.
NOTE 6 -- COMPREHENSIVE INCOME/(LOSS)
The components of comprehensive income (loss), net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- --------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net Income/(Loss)............................ $ 68 $ (294) $ (507) $(3,307)
Unrealized loss on available-for-sale
securities................................... $ (518) $ -- $ (518) $ --
------- ------ ------- -------
Comprehensive net loss....................... $ (450) $ (294) $(1,025) $(3,307)
======= ====== ======= =======
</TABLE>
Accumulated other comprehensive loss consists of the unrealized losses on
available-for-sale securities, net of tax, as presented on the accompanying
consolidated balance sheets. The Company received 250,000 shares of Metro's
common stock in exchange for services to be provided to Metro by CSB over a
five-year period. At December 31, 1999, the unrealized loss included in
accumulated other comprehensive income is a result of a $517,500 decrease in the
market value of these shares.
NOTE 7 -- ACQUISITIONS
On October 27, 1999, the Company acquired ITN, IGI, and 90% of CTI. ITN is a
leading Internet technology and e-commerce company that provides turnkey
Internet software engineering, bandwidth, merchant account management, and
credit card processing. IGI is a leading aggregator and reseller of adult
content via the Internet. CTI does not currently have substantial business
operations but is intended to be developed over the next year into a merchant
account processing company marketed to Internet companies. Under the terms of
the acquisition, which was accounted for as a pooling of interests, the Company
exchanged 6,000,000 shares of restricted common stock for all of the outstanding
stock in ITN and IGI and 90% of the outstanding stock of CTI.
NOTE 8 -- RELATED PARTIES TRANSACTIONS
Amounts due to related parties for the period ended December 31, 1999 is
$821,828. This amount due is non-interest bearing. The related party note
payable for the period ended December 31, 1999, is $809,000. This note and
related interest is payable in 2001. Interest is calculated at prime rate.
NOTE 9 -- CONTINGENCIES
The Company is a defendant in a lawsuit filed on January 25, 1999, in which the
plaintiff seeks to enforce an alleged agreement by the Company to convey to the
plaintiff a 70% equity interest in the Company. The plaintiff is also seeking
$10 million in liquidated damages and/or unspecified damages. The Company
disputes that there exists a binding and enforceable agreement to transfer any
equity interest in New Frontier Media to the plaintiff and filed on February 10,
1999 a motion for partial summary judgement directed to this issue. To date, the
court has neither ruled on nor set the Company's motion for a hearing. The
Company will continue to vigorously defend itself against the plaintiff's
claims. The loss, if any, cannot be estimated at the present time.
10
<PAGE>
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SEGMENT INFORMATION
The following tables represent financial information by reportable segment (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
NET REVENUE
Subscription/Pay-Per-View TV................ 4,619 3,456 11,844 7,533
Internet.................................... 7,431 5,791 21,567 14,033
Processing.................................. 168 103 653 196
Corporate................................... 22 -- 44 20
------- ------- ------- ------
Total.................................. 12,240 9,350 34,108 21,782
======= ======= ======= ======
INCOME (LOSS) FROM CONTINUING OPERATIONS
Subscription/Pay-Per-View TV................ (295) (505) (2,179) (3,558)
Internet.................................... 1,475 422 3,206 676
Processing.................................. (294) 70 (114) 294
Corporate................................... (825) (268) (1,436) (578)
------- ------- ------- ------
Total.................................. 61 (281) (523) (3,166)
======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
<S> <C> <C>
IDENTIFIABLE ASSETS
Subscription/Pay-Per-View TV................. 20,266 15,746
Internet..................................... 8,134 3,836
Processing................................... 4,208 3,980
Corporate.................................... 23,423 10,546
Eliminations................................. (23,720) (13,344)
-------- -------
Total................................... 32,311 20,764
======== =======
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS QUARTERLY REPORT ON FORM 10QSB AND THE INFORMATION INCORPORATED BY
REFERENCE MAY INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY
INTENDS THE FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR
PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE
COMPANY'S EXPECTED FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS
STRATEGY, ITS FINANCING PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-
LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS.
OVERVIEW
New Frontier Media was originally incorporated in the State of Colorado on
February 23, 1988. The Company was engaged in the reference CD-ROM publishing
business through its 70% ownership of BIG and in the distribution of adult
feature films in the digital versatile disc ("DVD") format through its wholly
owned subsidiary David. New Frontier sold its 70% interest in BIG in June 1998.
In addition, the Company discontinued the operations of David during its fiscal
year ended March 31, 1999.
On February 18, 1998, the Company consummated an underwritten public offering of
1,500,000 units, each consisting of one share of common stock and one redeemable
common stock warrant, raising $7,087,000 in net proceeds after underwriting
fees. Simultaneous with the public offering, New Frontier Media acquired the
adult satellite television assets of Fifth Dimension Communications (Barbados),
Inc. and its related entities ("Fifth Dimension"). As a result of the Fifth
Dimension acquisition, the Company through its wholly owned subsidiary CSB,
became a leading provider of adult programming to low-powered ("C-Band")
direct-to-home ("DTH") households. As of December 31, 1999, the Company had the
following number of subscriptions to its three C-Band networks: Extasy 57,232,
True Blue 52,675, and GonzoX 47,272.
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 content elements adult
video consumers expect to receive. As of December 31, 1999, TeN was available to
approximately 4.4 million cable/ DBS households.
On June 1, 1999, New Frontier Media launched Pleasure, a 24-hour adult network
that incorporates the most edited standard available in the category, on
EchoStar Communications Corporation's DISH Network and on Time Warner's West
Valley Region Cable Systems. 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 December 31, 1999,
Pleasure was available to approximately 3.5 million cable/DBS households.
On October 27, 1999, the Company completed its acquisition of ITN, IGI and 90%
of CTI. Under the terms of the acquisition, which was accounted for in the
accompanying financial statements as a pooling of interests, the Company
exchanged 6,000,000 shares of restricted common stock for all of the outstanding
stock in ITN and IGI and 90% of CTI.
ITN is a leading Internet technology and e-commerce company that provides
turnkey Internet software engineering, bandwidth, merchant account management,
and credit card processing. ITN provides the following Internet technology
functions: dedicated Internet access, web hosting,
12
<PAGE>
co-location services, systems and network integration, web site management, web
development, and streaming media products.
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
third-party adult content studios and distributes via its subscriber membership
websites and Internet Pay-Per-View feeds. In addition, IGI resells its
aggregated content to third-party web masters ("flat rate feed" revenue) and
resells its Internet traffic that does not convert into memberships ("sale of
traffic" revenue). IGI maintains a consumer membership base of over 100,000
monthly revenue generating consumer subscribers to its owned and operated
websites.
CTI has no substantial business operations at this time. The Company intends to
develop CTI into a merchant account processing company marketed to Internet
companies.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
(IN MILLIONS) (IN MILLIONS)
QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------- ------------------
1999 1998 1999 1998
------ ----- ------ ------
<S> <C> <C> <C> <C>
NET REVENUE
Subscription/Pay-Per-View TV:
Cable/DBS..................................... 2.0 0.2 3.8 0.2
C-Band........................................ 2.6 3.3* 8.0 7.3
Internet
Subscriber Membership......................... 5.5 4.7 16.8 10.7
Flat Rate Feeds/Sale of Traffic............... 1.8 0.5 4.3 1.4
Internet Pay-Per-View......................... 0.1 0.5 0.5 2.0
Processing......................................... 0.2 0.1 0.7 0.2
Corporate.......................................... -- -- -- --
------ ----- ------ ------
Total......................................... 12.2 9.3 34.1 21.8
====== ===== ====== ======
COST OF SALES
Subscription/Pay-Per-View TV....................... 2.7 2.1 7.8 6.0
Internet........................................... 3.6 3.6 11.1 8.7
Processing......................................... -- -- -- --
Corporate.......................................... -- -- -- --
------ ----- ------ ------
Total......................................... 6.3 5.7 18.9 14.7
====== ===== ====== ======
INCOME (LOSS) FROM CONTINUING OPERATIONS
Subscription/Pay-Per-View TV....................... (0.3) (0.5) (2.2) (3.6)
Internet........................................... 1.5 0.4 3.2 0.7
Processing......................................... (0.3) 0.1 (0.1) 0.3
Corporate.......................................... (0.8) (0.3) (1.4) (0.6)
------ ----- ------ ------
Total......................................... 0.1 (0.3) (0.5) (3.2)
====== ===== ====== ======
</TABLE>
* Should be decreased by $.7 million for audit adjustment to deferred revenue --
See MD&A -- Net Revenue discussion.
13
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW
NET REVENUE
Net revenue for the Company was $12.2 million for the quarter ended
December 31, 1999, a 31% increase from $9.3 million for the quarter ended
December 31, 1998. The improvement is due to Subscription/PPV TV revenue
increasing to $4.6 million from $3.5 million for the quarter ended December 31,
1999, a 31% increase. Additionally, Internet revenue increased to $7.4 million
for the quarter ended December 31, 1999 compared to $5.7 million for the quarter
ended December 31, 1998, an increase of 30%.
Net revenue for the Company was $34.1 million for the nine months ended
December 31, 1999, a 56% increase from $21.8 million for the nine months ended
December 31, 1998. The improvement is due to both the increases in total net
revenue for Subscription/PPV TV and Internet net revenue. Subscription/PPV TV
net revenue increased to $11.8 million for the nine months ended 1999, compared
to $7.5 million for the nine months ended 1998, an increase of $4.3 million.
Internet net revenue increased to $21.6 million for the nine months ended 1999,
compared to $14.1 million, an increase of $7.5 million.
OPERATING INCOME/(LOSS)
Operating income for the Company for the quarter ended December 31, 1999 was $.1
million compared to an operating loss of $.3 million for the quarter ended
December 31, 1998. Operating loss for the Company for the nine months ended
December 31, 1999 was $.5 million compared to $3.2 million for the nine months
ended December 31, 1998. The improvement in operating income and loss for both
the quarter and nine months ended December 31, 1999, is primarily due to the
increase in revenue combined with an increase in gross profit margin in both
periods for Subscription/PPV TV and Internet.
SUBSCRIPTION/PAY-PER-VIEW (PPV) TV GROUP
NET REVENUE
Net revenue for the Subscription/PPV TV Group was $4.6 million for the quarter
ended December 31, 1999, a 31% increase from $3.5 million for the quarter ended
December 31, 1998. C-Band net revenue was $2.6 million for the quarter ended
December 31, 1999 compared to $2.6 million (adjusted for a non-recurring audit
adjustment of $.7 million with respect to a miscalculation of deferred revenue)
for the quarter ended December 31, 1998. Revenue from Cable/DBS for the quarter
ended December 31, 1999 was $2.0 million compared to $.2 million for the quarter
ended December 31, 1998. Revenue from the Company's Cable/DBS products is
responsible for approximately 43% of total net subscription revenue for the
quarter ended December 31, 1999 compared to 6% for the quarter ended
December 31, 1998.
Net revenue for the Subscription/PPV TV Group for the nine months ended
December 31, 1999 was $11.8 million, a 57% increase from $7.5 million for the
nine months ended December 31, 1998. C-Band net revenue was $8.0 million for the
nine months ended December 31, 1999 compared to $7.3 million for the nine months
ended December 31, 1998, an increase of 10%. Additionally, revenue from the
Company's Cable/DBS networks, TeN, Pleasure, and Extasy was $3.8 million for the
nine months ended December 31, 1999, up from $.2 million for the nine months
ended December 31, 1998.
C-Band revenue increases for both the quarter and nine months ended
December 31, 1999 were due to an increase in the number of total subscriptions.
Total C-Band subscriptions as of December 31, 1999 were 157,179 compared to
128,997 as of December 31, 1998.
Due to the declining number of total addressable C-Band direct-to-home
subscribers (currently estimated at approximately 1.8 million), the Company
expects very little, if any, growth in its C-Band revenue in future periods.
14
<PAGE>
Increases in the Company's Cable/DBS revenue for both the quarter and nine
months ended December 31, 1999 are a result of the launch of its TeN and
Pleasure networks as well as the result of marketing its Extasy network to
Cable/DBS providers. As of December 31, 1999, TeN, Pleasure and Extasy were
available to approximately 8.0 million addressable Cable and DBS households, up
from 1.9 million addressable households as of December 31, 1998. In addition TeN
is available on a monthly and annual subscription basis to DBS households via
Echostar Communications Corporation's DISH Network ("DISH"). As of December 31,
1999, TeN had approximately 76,000 DISH subscribers.
The Company has experienced several positive changes with respect to its
distribution of TeN and Pleasure on DISH. With its initial launch on DISH in
June 1999, due to technical limitations, Pleasure was only available on a
pay-per-view ("PPV") basis to approximately 40,000 addressable DISH households.
In late July 1999, these technical limitations were overcome and Pleasure is now
available to all addressable DISH households (approximately 3.4 million as of
December 31, 1999). At the time, this change resulted in an approximately 200%
increase in monthly revenue for Pleasure.
Since its initial launch, TeN has only been available to DISH households on a
monthly and annual subscription basis. As of September 1999, TeN is now
available to DISH households on both a subscription and PPV basis. In addition,
the price of a monthly subscription was increased by $5.00. At the time, these
two changes resulted in an approximately 110% increase in monthly revenue to
TeN.
Management expects that its Cable/DBS revenue will continue to increase and the
number of addressable households will continue to increase in future periods as
it aggressively promotes TeN, Pleasure and Extasy to additional multiple system
operators ("MSO") and DBS providers. The Company recently announced that it has
secured a corporate carriage commitment for Pleasure with Time Warner, Inc. and
anticipates a minimum of 1.0 million additional addressable households for this
network during the Company's fourth quarter. In addition, the Company expects
revenue from Extasy to increase due to the launch of this network on DISH in
January 2000. Extasy will be offered by DISH on both a subscription and PPV
basis.
COST OF SALES
Cost of Sales for the Subscription/PPV TV Group was $2.7 million, or 59% of
revenue, for the quarter ended December 31, 1999 as compared to $2.1 million, or
60% of revenue, for the quarter ended December 31, 1998, an increase of 29%.
Cost of sales for the nine months ended December 31, 1999 was $7.8 million, or
66% of revenue, as compared to $6.0 million, or 80% of revenue, for the nine
months ended December 31, 1998, an increase of 30%. Cost of sales consists of
expenses associated with broadcast playout, satellite uplinking, satellite
transponder space, program acquisition amortization, and call center operations.
The increase in cost of sales for both the quarter and nine months ended
December 31, 1999 is primarily due to the increase in program acquisition costs,
satellite uplinking, broadcast playout, and transponder space costs associated
with the addition of TeN and Pleasure. Because approximately 70% of the
Company's cost of sales are fixed in nature, management does not anticipate any
significant increase in cost of sales in future periods with respect to its
existing networks.
OPERATING INCOME/(LOSS)
Operating loss for the Subscription/PPV TV Group for the quarter ended
December 31, 1999 was $.3 million compared to $.5 million for the quarter ended
December 31, 1998, an improvement of 40%. Operating loss for the nine months
ended December 31, 1999 was $2.2 million compared to an operating loss of $3.6
million for the nine months ended December 31, 1998, an improvement of 39%. This
improvement in operating loss for both the quarter and nine months ended
December 31, 1999, is primarily due to the increase in revenue combined with an
increase in gross profit margin for both periods. Operating expenses increased
approximately 23% for both the quarter and nine months ended December 31, 1999
compared to December 31, 1998, primarily due to an increase in payroll costs
associated with increased hiring as the Company has continued to build the
infrastructure
15
<PAGE>
necessary for this group and an increase in advertising costs necessary to
promote the Company's networks.
The Company anticipates that its operating loss will continue to decrease in
future periods as its Cable/DBS revenue increases. The Company is aggressively
promoting TeN, Pleasure and Extasy and anticipates additional launch commitments
in future periods. The Company expects that operating costs will increase in
future periods as its expands its marketing efforts and continues the
development of its new broadband product, Ten.com.
INTERNET GROUP
NET REVENUE
Net Revenue for the Internet Group was $7.4 million for the quarter ended
December 31, 1999, a 30% increase from $5.7 million for the quarter ended
December 31, 1998. Net revenue for the Internet Group for the nine months ended
December 31, 1999 was $21.6 million, a 53% increase from $14.1 million for the
nine months ended December 31, 1998.
Subscriber membership revenue was $5.5 million for the quarter ended
December 31, 1999, a 17% increase from $4.7 million for the quarter ended
December 31, 1998. Revenue growth was slowed due to the implementation of more
stringent fraud controls to reduce credits and chargebacks. Subscriber
memberships increased to 110,000 at December 31, 1999 from 70,000 at
December 31, 1998.
Subscriber membership revenue was $16.8 million for the nine months ended
December 31, 1999, a 57% increase from $10.7 million for the nine months ended
December 31, 1998. Revenue growth was due to new marketing programs and the
addition of a direct sales staff in December 1998.
Revenue from flat rate feeds and the sale of traffic was $1.8 million for the
quarter ended December 31, 1999, a 260% increase from $.5 million for the
quarter ended December 31, 1998. Revenue from flat rate feeds and the sale of
traffic was $4.3 million for the nine months ended December 31, 1999, a 207%
increase from $1.4 million for the nine months ended December 31, 1998. Revenue
growth for both the quarter and nine months ended December 31, 1999, was the
result of focused marketing programs concentrating on promoting the division's
website content and reporting systems and the addition of a direct sales staff
in December 1998.
The Internet Pay-Per-View revenue was $.1 million for the quarter ended
December 31, 1999 compared to $.5 million for the quarter ended December 31,
1998, an 80% decrease. The Internet Pay-Per-View revenue was $.5 million for the
nine months ended December 31, 1999, a 75% decrease from $2.0 million for the
nine months ended December 31, 1998. This decrease for the quarter and nine
months ended December 31, 1999 was expected as the Internet Pay-Per-View
subscribers switched to the group's subscriber membership products.
Management expects a slower growth in subscriber membership revenue in the
future due to the continued emphasis on fraud control to reduce the level of
chargebacks and credits. Revenue from flat rate feeds and sale of traffic should
continue to increase in future periods.
COST OF SALES
Cost of Sales for the Internet Group was $3.6 million for the quarter ended
December 31, 1999 as compared to $3.6 million for the quarter ended
December 31, 1998. Cost of sales for the nine months ended December 31, 1999 was
$11.1 million as compared to $8.7 million for the nine months ended
December 31, 1998, an increase of 28%. Cost of sales consists of variable
expenses associated with credit card chargebacks, credits, and merchant banking
fees; transport; membership acquisition costs and website content. Cost of sales
was 49% of revenue for the quarter ended December 31, 1999 and 51% for the nine
months ended December 31, 1999. Cost of sales was 62% of revenue for both the
quarter and nine months ended December 31, 1998. The cost of sales percentage
improved in 1999 due to a reduction in communications, bandwidth and merchant
banking fees. In addition, credit card chargebacks and credits decreased during
the quarter ended December 31, 1999 due to the implementation of tighter fraud
controls. Management believes that chargebacks and merchant
16
<PAGE>
banking fees may increase in future periods; however, cost of sales as a
percentage of revenue is not expected to increase significantly.
OPERATING INCOME
Operating Income for the Internet Group for the quarter ended December 31, 1999
was $1.5 million compared to $.4 million for the quarter ended December 31,
1998, an increase of 275%. Operating income for the nine months ended
December 31, 1999 was $3.2 million compared to $.7 million for the nine months
ended December 31, 1998, an increase of 357%. This increase in operating income
for both the quarter and nine months ended December 31, 1999, is primarily due
to an increase in revenue combined with an increase in gross profit margin for
both periods. Operating expenses increased approximately 16% for the quarter
ended December 31, 1999 compared to December 31, 1998 and approximately 52% for
the nine months ended December 31, 1999 compared to the nine months ended
December 31, 1998. These increases were primarily associated with increased
payroll and office facilities costs, an increase in advertising costs necessary
to promote the division's websites and, for the nine months ended December 31,
1999, $.4 million of non-recurring costs associated with the sale of the
Internet Group to New Frontier Media.
PROCESSING GROUP
NET REVENUE
Net revenue for the Processing Group was $.2 million for the quarter ended
December 31, 1999, a 100% increase from $.1 million for the quarter ended
December 31, 1998. Net revenue was $.7 million for the nine months ended
December 31, 1999, a 250% increase from $.2 million for the nine months ended
December 31, 1998.
Revenue for the Processing Group includes Internet Service Provider ("ISP")
charges for website hosting, sale of bandwidth, and merchant processing. Revenue
for website hosting and for the sale of bandwidth is expected to increase in
future periods as the group completes the upgrade of its ISP facility to a level
one data center and adds sales staff to market the ISP capabilities.
OPERATING INCOME/LOSS
Operating loss for the Processing Group for the quarter ended December 31, 1999
was $.3 million, a decrease of 400% from the operating profit of $.1 million for
the quarter ended December 31, 1998. Operating loss for the nine months ended
December 31, 1999 was $.1 million, a decrease of 133% from the operating income
of $.3 million for the nine months ended December 31, 1998.
The operating losses for the quarter and nine months ended December 31, 1999 are
a result of the upgrades in process at the ISP facility. These expenses, related
primarily to payroll and consulting costs, resulted in additional expenses of
$.4 million for the quarter ended December 31, 1999 and $.5 million for the nine
months ended December 31, 1999.
Management expects that the Processing Group will continue to have an operating
loss at approximately the same rate as that in the quarter ended December 31,
1999 in future periods until the ISP marketing plan is fully implemented.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 the Company had cash and cash equivalents of $5.7
million. The Company has primarily financed its operations for the nine months
ended December 31, 1999 through the issuance of $6.0 million in convertible
preferred stock and the exercise of its publicly traded warrants.
For the nine months ended December 31, 1999 and 1998 cash used in operating
activities was $2.3 million and $.5 million respectively. The increase in cash
used in operating activities is due to an increase in accounts receivable of
$2.0 million related primarily to an increase in the Company's Cable/DBS
revenue, an increase in prepaid distribution rights of $1.8 million related to
the purchase of the Company's license agreements for its Cable/DBS content, and
a decrease in accounts payable of $1.2 million related to a decrease in days in
accounts payable.
17
<PAGE>
Cash used in investing activities was $4.4 million for the nine months ended
December 31, 1999 compared to $.4 million for the nine months ended
December 31, 1998. This use of cash for the nine months ended December 31, 1999
is primarily due to an increase in capital expenditures related to purchases of
furniture, computers, improvements made to the trade show booth, purchases of
receiver/ decoder equipment, purchase of broadcast equipment, and the purchase
of Internet domain Universal Resource Locators (URL's).
For the nine months ended December 31, 1999 and 1998, net cash provided by
financing activities was $8.4 million and $.4 million, respectively. This
increase in net cash from financing activities is due primarily to the Company's
issuance of $6.0 million of convertible preferred stock as well as to the net
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 and the repayment of its related party
obligations. The Company believes that its existing cash balances together with
funds generated from operations will be sufficient to satisfy these obligations.
The Company anticipates that capital expenditures will increase during future
periods with respect to the following planned investments: 1) the Company will
complete the purchase of equipment that was necessary for the expansion of its
Colorado-based Broadcast Playout Operations facility, at an estimated remaining
cost of $.5 million; 2) the Company will purchase approximately $400,000 of
receiver/decoder equipment as additional cable carriage is obtained for its TeN,
Pleasure and Extasy networks during the next 12 months; 3) the Company continues
to acquire certain Internet domain URL's; and 4) the Company will upgrade its
ISP facility to a level one data center at an estimated cost of $2.0 million.
The Company anticipates funding this $2.0 million upgrade to its ISP facility
through a lease line commitment.
As discussed above, the Company issued 600 shares of 7% Series C Convertible
Preferred Stock at $10,000 per share to a single institutional investor as of
October 14, 1999. The dividends due on this stock are payable in either shares
of the Company's common stock or cash. The Company anticipates paying these
dividends with shares of its common stock.
Under the terms of the agreement, the Preferred Stock may be redeemed in cash by
the Holder upon the occurrence of the following triggering events: 1) failure of
an underlying shares registration statement to be declared effective by the
Commission on or prior to the 180th day after the issue date; 2) lapsing of the
effectiveness of the underlying shares registration statement for more than
three trading days; 3) failure of the Company's Common Stock to be listed for
trading on the NASDAQ or on a subsequent market or the suspension of the Common
Stock from trading on the NASDAQ or on a subsequent market for more than three
trading days; 4) failure of the Company to deliver certificates representing the
underlying shares issuable upon a conversion within ten days of a Conversion
Date; 5) the Company is a party to any Change of Control transaction as defined
in the agreement; 6) failure to cure a breach of any material term of the
agreement within the time frame specified in the agreement; 7) failure to pay in
full the amount of cash due pursuant to a Buy-In within seven days after notice
is delivered; 8) the Company fails to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue upon a conversion;
9) the Company fails to obtain shareholder approval of the IGallery Companies
acquisition; and 10) failure of the Company to execute a lock-up agreement with
each recipient of the shares of Common Stock received as consideration for the
IGallery Companies acquisition.
New Frontier Media believes that its existing cash and cash generated from
operations will be sufficient to satisfy its short term and long term operating
requirements.
The Company, however, may not be able to fund the cash necessary to redeem the
Series C Preferred Stock if a triggering event were to occur.
As previously reported, the Company's continued NASDAQ listing was considered
and maintained by the NASDAQ Listing Qualifications Council in July, 1999. In
accordance with the advice of counsel, the Company had consummated two
transactions that were found not to have received advance shareholder approval,
as required by the NASD's rules. The Listing Qualifications Panel decision
18
<PAGE>
approving continued listing has been under review since then; the Company has
made detailed submissions to the NASD Staff and has retained outside experts to
assist it in ensuring compliance with these advance shareholder approval
requirements. In addition, the Company made full disclosure of these
circumstances to its shareholders and received the ratification of over 90% of
its shareholders for the two transactions. In the interim, the Company continues
to function as a public company, takes every precaution to satisfy NASD
regulatory requirements, and believes that it is approaching this issue
appropriately. The Company is unable to predict when the NASD may render a
decision in this matter, or what that decision will be, but the Company believes
that its continued listing is appropriate, and has so advised the NASD.
In the event the Company's shares of common stock were to be delisted from the
NASDAQ SmallCap Market, the Company's liquidity and capital resources would be
materially and adversely affected as the Company's future access to the capital
markets would be significantly impaired. In addition, upon any such delisting,
the holder of the Company's 7% Series C convertible preferred stock would have
the right to require the redemption of its $6 million investment in the Company.
The Company is a defendant in a lawsuit filed on January 25, 1999, in which the
plaintiff seeks to enforce an alleged agreement by the Company to convey to the
plaintiff a 70% equity interest in the Company. The plaintiff is also seeking
$10 million in liquidated damages and/or unspecified damages. The Company
disputes that there exists a binding and enforceable agreement to transfer any
equity interest in New Frontier Media to the plaintiff and filed on February 10,
1999 a motion for partial summary judgement directed to this issue. To date, the
court has neither ruled on nor set the Company's motion for a hearing. The
Company will continue to vigorously defend itself against the plaintiff's
claims. The loss, if any, cannot be estimated at the present time.
19
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company previously reported the legal proceeding in process with Scott
Wussow as part of its filing of Form 10QSB for the period ended June 30, 1999,
and as such it is incorporated herein by reference.
The Company previously reported the legal proceedings in process with Pleasure
Licensing L.L.C., Generation Capital Associates, EBI Securities, and Image
Entertainment, Inc. as part of its filing of Form 10QSB for the period ended
September 30, 1999, and as such these legal proceedings are incorporated herein
by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(1) The Company held an annual meeting of its shareholders on October 27, 1999
(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 and
Edward J. Bonn. Following the Annual Meeting, and upon the consummation of
the ITN, IGI and CTI acquisition, Bradley Weber and Alan Issacman were
appointed directors to serve until the next Annual Meeting.
(3) Five matters were voted on at the Annual Meeting, as follows:
(1) The election of nominees Mark H. Kreloff, Michael Weiner, Koung Y. Wong
and Edward J. Bonn 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........... 10,740,118 363,300 11,970 N/A N/A
Michael Weiner............ 10,740,118 363,300 11,970 N/A N/A
Koung Y. Wong............. 10,740,118 363,300 11,970 N/A N/A
Edward J. Bonn............ 10,740,118 363,300 11,970 N/A N/A
</TABLE>
Each nominee was elected a Director of the Company.
(2) To approve the 1999 Incentive Stock Option Plan which authorizes the grant
of options to purchase up to an aggregate of 1,500,000 shares of the
Company's common stock. The votes were cast for this matter as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN WITHHELD NON-VOTE
- --------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
6,154,743 424,182 10,075 N/A N/A
</TABLE>
This matter was passed by the required majority of votes cast.
(3) To approve the stock purchase agreement with the owners of Interactive
Gallery, Inc., Interactive Telecom Network, Inc. and Card Transactions, Inc.
and the issuance of 6,000,000 restricted shares of the Company's common
stock in connection therewith. The votes were cast for this matter as
follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN WITHHELD NON-VOTE
- --------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
6,581,264 6,961 775 N/A N/A
</TABLE>
This matter was passed by the required majority of votes cast.
(4) The ratification of the appointment of Spicer, Jeffries & Co. as the
Company's independent auditors for the fiscal year ending March 31, 2000.
The votes were cast for this matter as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN WITHHELD NON-VOTE
- --------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
10,734,158 376,855 4,375 N/A N/A
</TABLE>
20
<PAGE>
This matter was passed by the required majority of votes cast.
(5) The ratification of two transactions involving the issuance and sale of
securities authorized by the Company's Board of Directors at prices less
than market value and each exceeding 20% of the Company's outstanding shares
prior to the issuance and sale. The votes were cast for this matter as
follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN WITHHELD NON-VOTE
- --------- ------- ------ -------- ---------
<S> <C> <C> <C> <C>
5,957,014 380,820 251,166 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. Financial Data Schedule
(B) REPORTS ON FORM 8-K
1) On October 20, 1999, the Company filed a Form 8K to announce that it had
received $6.0 million in equity financing through the private sale of 7% Series
C Convertible Preferred Stock to one institutional investor.
2) On November 5, 1999, the Company filed a Form 8K to announce the closing of
its acquisition of ITN, IGI, and CTI.
21
<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)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,711
<SECURITIES> 0
<RECEIVABLES> 3,089
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,609
<PP&E> 11,374
<DEPRECIATION> (3,133)
<TOTAL-ASSETS> 32,311
<CURRENT-LIABILITIES> 8,386
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 15,140
<TOTAL-LIABILITY-AND-EQUITY> 32,311
<SALES> 34,108
<TOTAL-REVENUES> 34,108
<CGS> 18,910
<TOTAL-COSTS> 15,357
<OTHER-EXPENSES> (364)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 487
<INCOME-PRETAX> (523)
<INCOME-TAX> 0
<INCOME-CONTINUING> (523)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
