- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 December 31, 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)
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 February 13, 2001: 20,913,420 shares of Common Stock
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
NEW FRONTIER MEDIA, INC.
Index
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets for the periods ended
March 31, 2000 and December 31, 2000 (Unaudited).... 3-4
Consolidated Statements of Operations for the three
months and nine months ended December 31, 2000 and
1999 (Unaudited).................................... 5
Consolidated Statements of Cash Flows for the nine
months ended December 31, 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................. 14-25
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 25-26
Item 6. Exhibits and Reports on Form 8-K.................... 26
SIGNATURES................................................... 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000s)
ASSETS
DECEMBER 31,
2000 MARCH 31,
(UNAUDITED) 2000
------------ ---------
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of
$939,706 and $684,665, respectively (Note 1)........... $ 8,839 $ 7,329
Accounts receivable....................................... 5,011 2,996
Prepaid distribution rights (Note 1)...................... 2,032 1,531
Prepaid expenses.......................................... 1,596 975
Deferred tax asset........................................ 5,323 750
Due from related party.................................... 141 --
Other..................................................... 921 597
------- -------
TOTAL CURRENT ASSETS................................. 23,863 14,178
------- -------
FURNITURE AND EQUIPMENT, at cost (Note 1)................... 17,837 12,832
Less: accumulated depreciation and amortization........... (6,290) (3,693)
------- -------
NET FURNITURE AND EQUIPMENT.......................... 11,547 9,139
------- -------
OTHER ASSETS:
Prepaid distribution rights (Note 1)...................... 8,279 6,776
Goodwill, less accumulated amortization of $1,822,475 and
$1,345,404, respectively (Note 1)...................... 4,538 5,015
Deferred tax asset non-current............................ 3,223 --
Marketable securities -- available for sale (Note 1)...... 25 188
Other..................................................... 1,809 992
------- -------
TOTAL OTHER ASSETS................................... 17,874 12,971
------- -------
TOTAL ASSETS................................................ $53,284 $36,288
======= =======
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
3
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN 000s)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
2000 MARCH 31,
(UNAUDITED) 2000
------------ ---------
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,863 $ 1,079
Current portion of obligations under capital lease........ 1,400 918
Deferred revenue (Note 1)................................. 4,054 3,999
Reserve for chargebacks/credits........................... 477 452
Due to related party...................................... -- 12
Distribution payable to shareholders...................... 172 672
Income taxes payable...................................... 17 --
Reserve for legal settlement.............................. 10,000 --
Other accrued liabilities................................. 2,950 2,573
------- -------
TOTAL CURRENT LIABILITIES............................ 20,933 9,705
------- -------
LONG-TERM LIABILITIES:
Obligations under capital leases.......................... 1,129 1,120
Note payable (Note 7)..................................... 5,000 --
Note payable -- related party............................. -- 809
Series C redeemable preferred stock....................... -- 4,073
Other..................................................... 57 74
------- -------
TOTAL LONG-TERM LIABILITIES.......................... 6,186 6,076
------- -------
TOTAL LIABILITIES................................. 27,119 15,781
------- -------
SHAREHOLDERS' EQUITY (Notes 1 and 3):
Common stock, $.0001 par value, 50,000,000 shares
authorized, 20,792,420 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................................ 42,913 35,336
Minority interest in subsidiary (Note 1).................. (168) (56)
Other comprehensive loss (Note 6)......................... (93) (438)
Accumulated deficit....................................... (16,489) (14,337)
------- -------
TOTAL SHAREHOLDERS' EQUITY........................... 26,165 20,507
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $53,284 $36,288
======= =======
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
4
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS
ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
(IN 000s)
3 MONTHS ENDED 9 MONTHS ENDED
DECEMBER 31 DECEMBER 31
------------------ -------------------
2000 1999 2000 1999
------- ------- -------- -------
SALES, net........................................... $15,214 $11,777 $ 42,757 $32,405
COST OF SALES........................................ 7,341 6,987 21,653 19,598
------- ------- -------- -------
GROSS PROFIT......................................... 7,873 4,790 21,104 12,807
------- ------- -------- -------
OPERATING EXPENSES:
Occupancy and equipment............................ 345 246 984 728
Legal and professional............................. 604 593 2,847 1,288
Advertising and promotion.......................... 1,486 1,007 4,092 3,215
Salaries, wages and benefits....................... 2,585 1,853 7,331 5,091
Communications..................................... 95 102 291 303
General and administrative......................... 1,632 525 3,021 1,479
Goodwill amortization.............................. 159 159 477 477
Consulting......................................... 268 123 1,062 440
------- ------- -------- -------
TOTAL OPERATING EXPENSES...................... 7,174 4,608 20,105 13,021
------- ------- -------- -------
OPERATING INCOME (LOSS).............................. 699 182 999 (214)
------- ------- -------- -------
OTHER INCOME (EXPENSE):
Income on trading securities....................... -- -- -- 6
Interest income.................................... 31 68 142 108
Interest expense................................... (145) (189) (533) (423)
Reserve for legal settlement....................... -- -- (10,000) --
Loss on write-off of stock......................... -- -- (508) --
------- ------- -------- -------
TOTAL OTHER INCOME (EXPENSE).................. (114) (121) (10,899) (309)
------- ------- -------- -------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
INCOME TAXES............................... 585 61 (9,900) (523)
------- ------- -------- -------
MINORITY INTEREST:
Minority interest in loss of subsidiary............ 15 4 112 16
------- ------- -------- -------
NET INCOME (LOSS) BEFORE INCOME TAXES................ 600 65 (9,788) (507)
Benefit for income taxes........................... 396 3 7,636 --
------- ------- -------- -------
NET INCOME (LOSS).................................... $ 996 $ 68 $ (2,152) $ (507)
======= ======= ======== =======
BASIC EARNINGS (LOSS) PER COMMON SHARE
(Note 1 and 2)..................................... $ 0.05 $ 0.00 $ (0.10) $ (0.03)
======= ======= ======== =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE
(Note 1 and 2)..................................... $ 0.05 $ 0.00 $ (0.10) $ (0.03)
======= ======= ======== =======
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
5
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31 (UNAUDITED)
(IN 000s)
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (2,152) $ (507)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Conversion of interest to common stock............... 187 --
Accretion of interest................................ 69 --
Stock/Warrants issued for services and legal
settlement......................................... 177 23
Write-off of marketable securities -- available for
sale............................................... 508 --
Depreciation and amortization........................ 4,576 2,936
Gain on securities................................... -- (6)
Tax effect of exercised options/warrants............. 118 --
Increase in deferred tax asset....................... (7,796) --
Increase in income tax payable....................... 17 --
Minority interest in loss of subsidiary.............. (112) (15)
Increase in legal reserve............................ 10,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable................... (2,016) (2,044)
Increase in prepaid distribution rights........... (3,409) (1,763)
Increase in other assets.......................... (247) (136)
(Decrease) Increase in deposits................... (246) 456
Increase (Decrease) in accounts payable........... 784 (1,154)
Increase (Decrease) in deferred revenue, net...... 55 (208)
Increase (Decrease) in reserve for chargebacks.... 25 (515)
Increase (Decrease) in accrued guaranteed
payments........................................ 116 (1)
Decrease in royalties payable..................... (33) (4)
Increase in other accrued liabilities............. 95 590
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 716 (2,348)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture....................... (3,594) (4,410)
Proceeds from trading securities.......................... -- 56
-------- --------
NET CASH USED IN INVESTING ACTIVITIES....................... (3,594) (4,354)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations..................... (919) (628)
Increase in note payable.................................. 5,000 --
(Decrease) Increase in borrowings from related party
notes.................................................. (962) 85
Decrease in distribution payable.......................... (500) (836)
Increase (Decrease) in debt offering costs................ 152 (168)
Issuance of Series C Preferred Stock...................... -- 6,000
Issuance of Common Stock.................................. 1,617 3,940
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 4,388 8,393
-------- --------
NET INCREASE IN CASH........................................ 1,510 1,691
CASH, beginning of period................................... 7,329 4,020
-------- --------
CASH, end of period......................................... $ 8,839 $ 5,711
======== ========
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
6
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 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.
ITN's services primarily support IGI's business.
CTI is an Internet Payment Services Provider ("PSP") for various Internet
billing options, including secure, fully automated credit card payment
processing. CTI's services primarily support IGI's business.
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
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 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 against revenue 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.
After giving consideration to guidance provided by SEC Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, the Company changed
certain revenue recognition policies affecting the Internet Group. These changes
affected the reporting of sales for membership
8
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
revenue, net of credits and chargebacks. These changes reduced sales and cost of
goods sold by $0.7 million, $0.6 million, $2.1 million, and $2.5 million for the
quarters ended December 31, 2000 and 1999 and the nine months ended December 31,
2000 and 1999, respectively. The change has no effect on net income (loss).
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
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
The components of basic and diluted earnings (loss) per share are as follows:
EARNINGS (LOSS) PER SHARE
(IN 000S)
QUARTERS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
Net income (loss) available for common
shareholders..................................... $ 996 $ 68 $(2,152) $ (507)
======= ======= ======= =======
Average outstanding shares of common stock....... 20,864 17,904 21,004 14,486
Dilutive effect of:
Warrants......................................... 869 1,243 1,780 1,050
Employee stock options........................... 282 439 485 408
------- ------- ------- -------
Common stock and common stock equivalents........ 22,015 19,586 23,269 15,944
======= ======= ======= =======
Earnings (loss) per share:
Basic/Diluted.................................... $ .05 $ .00 $ (.10) $ (.03)
Common stock equivalents are not included in the loss per share calculation
since their effect would be anti-dilutive.
NOTE 3 -- SHAREHOLDERS' EQUITY
For the quarter ended December 31, 2000, 7,500 shares of common stock were
issued for the exercise of compensatory warrants and options. During the nine
months ended December 31, 2000, 166,500 shares of common stock were issued for
the exercise of compensatory warrants and options.
During the nine months ended December 31, 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 nine months ended December 31, 2000, the Company issued 690,420
shares of common stock 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, legal settlements, and financing allowing
them to purchase common stock of New Frontier Media. The following information
describes information relating to warrants issued during the quarter ended
December 31, 2000:
EXERCISE
EXPIRATION DATE WARRANTS PRICE
--------------- -------- --------
11/15/03.................................................... 125,000 $4.25
11/27/03.................................................... 177,936 $2.81
12/18/03.................................................... 655,872 $2.25
12/20/03.................................................... 75,000 $4.25
12/20/03.................................................... 75,000 $4.50
12/20/03.................................................... 5,000 $5.00
12/20/03.................................................... 5,000 $6.00
12/26/03.................................................... 31,250 $2.26
12/19/05.................................................... 25,000 $3.00
10
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
As of December 31, 2000, the Company had granted 2,233,500 Options from the
Millennium Incentive Stock Option Plan, 1,423,000 Options from the 1999
Incentive Stock Option Plan and 749,000 Options from the 1998 Incentive Stock
Option Plan.
NOTE 5 -- SEGMENT INFORMATION
For internal reporting purposes, management segregates the Company into four
divisions: 1) Subscription/Pay-Per View TV, 2) Internet Group, 3) Payment
Service Provider and 4) Corporate Administration.
The following tables represent financial information by reportable segment (in
thousands):
QUARTERS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET REVENUE
Subscription/Pay-Per-View TV.................. $ 6,210 $ 4,618 $ 17,565 $ 11,844
Internet Group................................ 8,969 7,137 25,094 20,517
Payment Service Provider...................... 153 -- 153 --
Corporate Administration...................... 31 22 94 44
Elimination................................... (149) -- (149) --
-------- -------- -------- --------
Total......................................... $ 15,214 $ 11,777 $ 42,757 $ 32,405
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS
Subscription/Pay-Per-View TV.................. $ 452 $ (266) $ 1,056 $ (2,102)
Internet Group................................ 1,097 1,243 4,232 3,247
Payment Service Provider...................... (148) (45) (1,121) (156)
Corporate Administration...................... (702) (750) (3,168) (1,203)
-------- -------- -------- --------
Total......................................... $ 699 $ 182 $ 999 $ (214)
======== ======== ======== ========
INTEREST INCOME
Subscription/Pay-Per-View TV.................. $ 6 $ 3 $ 14 $ 14
Internet Group................................ 8 -- 23 16
Payment Service Provider...................... -- -- -- --
Corporate Administration...................... 17 65 105 78
-------- -------- -------- --------
Total......................................... $ 31 $ 68 $ 142 $ 108
======== ======== ======== ========
INTEREST EXPENSE
Subscription/Pay-Per-View TV.................. $ 33 $ 44 $ 97 $ 103
Internet Group................................ 83 55 242 177
Payment Service Provider...................... -- -- -- --
Corporate Administration...................... 29 90 194 143
-------- -------- -------- --------
Total......................................... $ 145 $ 189 $ 533 $ 423
======== ======== ======== ========
11
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
QUARTERS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
DEPRECIATION AND AMORTIZATION
Subscription/Pay-Per-View TV.................. $ 419 $ 341 $ 1,377 $ 975
Internet Group................................ 604 279 1,616 665
Payment Service Provider...................... 12 -- 12 --
Corporate Administration...................... 24 14 179 28
-------- -------- -------- --------
Total......................................... $ 1,059 $ 634 $ 3,184 $ 1,668
======== ======== ======== ========
DECEMBER 31, MARCH 31,
2000 2000
------------ ---------
(UNAUDITED)
IDENTIFIABLE ASSETS
Subscription/Pay-Per-View TV................................ $ 23,463 $ 21,347
Internet Group.............................................. 15,663 16,185
Payment Service Provider.................................... 1,447 184
Corporate Administration.................................... 37,795 24,946
Eliminations................................................ (25,084) (26,374)
-------- --------
Total....................................................... $ 53,284 $ 36,288
======== ========
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 December 31 are as follows:
2000 1999
---- ----
Customer A............................ 17% 15%
At December 31, 2000 and March 31, 2000, accounts receivable from Customer A is
$1,688,912 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).
12
NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
The components of comprehensive income (loss) are as follows (in thousands):
QUARTERS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------- ---------------------
2000 1999 2000 1999
---- ----- ------- -------
Net income (loss)..................................... $996 $ 68 $(2,152) $ (507)
Unrealized loss on available-for-sale securities...... (93) (330) (93) (518)
---- ----- ------- -------
Comprehensive net..................................... $903 $(262) $(2,245) $(1,025)
==== ===== ======= =======
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 year.
NOTE 7 -- NOTE PAYABLE
During the quarter ended December 31, 2000, the Company entered into a loan of
$5,000,000 with a third party. This loan matures in December 2002 and pays 1%
interest monthly.
NOTE 8 -- CONTINGENCIES
The Company was a defendant in the Lipson Lawsuit filed on January 25, 1999 in
which J.P. Lipson sought damages related to 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
awarding damages to the plaintiff on his damages claim. On December 5, 2000, the
Court entered judgment awarding Mr. Lipson $10 million against the Company for
breach of contract and $1 million in punitive damages. On December 20, 2000, the
Court ordered that the execution of the judgment be stayed upon the Company's
posting a bond of $1.2 million. The Company posted this bond with the District
Court in the form of a letter of credit provided by a third party.
Notwithstanding that the Company has made several motions to set aside the
verdict and intends to appeal the judgment if necessary, the Company has
established a $10 million reserve on its books for the jury verdict.
NOTE 9 -- RELATED PARTY TRANSACTION
During the three months ended December 31, 2000, the Company entered into an
office lease agreement, which is personally guaranteed by the President of the
Company and his wife ("guarantors"). As an inducement to the guarantors, they
were granted a security interest in certain domain names, with an original
purchase price of approximately $1,600,000.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements. These
statements 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 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
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; 2) our ability to generate compelling website content for
resale; 3) our ability to add non-affiliated merchant processing customers; 4)
our ability to enter into strategic relationships with other companies in order
to offer alternative billing products; 5) our ability to generate future taxable
income; 6) our ability to generate cash flows from operations and enter into
equipment leases in order to fund our capital requirements; 7) our ability to
retain our key executives; and 8) 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 programming consumers 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.
In May 2000, the Company launched Erotic Television Clips or ETC as its second,
partially-edited 24-hour per day adult network. To launch ETC, the Company
organized its partially-edited content library into 60 different thematic
categories. ETC is programmed 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
pay-per-view ("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 100% of
Interactive Telecom Network, Inc. ("ITN"), 100% of 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 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.
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
14
aggregated content to web master affiliates ("Content Revenue") and resells its
Internet traffic ("Sale of Traffic Revenue").
CTI is an Internet Payment Services Provider ("PSP") for various Internet
billing options, including secure, fully automated credit card payment
processing. CTI provides its services primarily to IGallery.
RESULTS OF OPERATIONS
NINE MONTHS
QUARTERS ENDED ENDED
DECEMBER 31, DECEMBER 31,
----------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
(IN MILLIONS) (IN MILLIONS)
NET REVENUE
Subscription/Pay-Per-View TV
Cable/DBS..................................... 3.7 2.0 10.0 3.8
C-Band........................................ 2.5 2.6 7.6 8.0
Internet Group
Net Membership................................ 5.0 5.0 14.5 14.5
Content/Sale of Traffic....................... 3.8 1.8 9.9 4.3
Internet Pay-Per-View......................... -- 0.1 -- 0.4
Other......................................... 0.2 0.2 0.7 1.4
Payment Services Provider Group.................... 0.2 -- 0.2 --
Intercompany Eliminations.......................... (0.2) -- (0.2) --
---- ---- ---- ----
TOTAL......................................... 15.2 11.7 42.7 32.4
==== ==== ==== ====
COST OF SALES
Subscription/Pay-Per-View TV....................... 2.9 2.8 8.5 8.1
Internet Group..................................... 4.6 4.2 13.3 11.5
Intercompany Eliminations.......................... (0.2) -- (0.2) --
---- ---- ---- ----
TOTAL......................................... 7.3 7.0 21.6 19.6
==== ==== ==== ====
OPERATING INCOME (LOSS)
Subscription/Pay-Per-View TV....................... 0.5 (0.3) 1.0 (2.1)
Internet Group..................................... 1.0 1.2 4.3 3.2
Payment Services Provider Group.................... (0.1) -- (1.1) (0.1)
Corporate Administration........................... (0.7) (0.8) (3.2) (1.2)
---- ---- ---- ----
TOTAL......................................... 0.7 0.1 1.0 (0.2)
==== ==== ==== ====
Note that the information provided above for the period ended December 31, 1999
has been restated to give effect to the pooling of interests of ITN, IGallery,
and CTI for the entire period.
NET REVENUE
Net revenue for the Company was $15.2 million and $42.7 million for the quarter
and nine months ended December 31, 2000, an increase of 30% and 32%,
respectively, from $11.7 million and $32.4 million for the quarter and nine
months ended December 31, 1999. This improvement is due to an increase in net
revenue for both the Subscription/PPV TV and Internet Groups. Revenue for the
Subscription/PPV TV Group increased to $6.2 million and $17.6 million for the
quarter and nine months ended December 31, 2000, an increase of 35% and 49%,
respectively, from $4.6 million and $11.8 million for the quarter and nine
months ended December 31, 1999. Revenue for the Internet Group increased to $9.0
million and $25.1 million for the quarter and nine months ended December
15
31, 2000, a 27% and 22% increase respectively, from $7.1 million and $20.6
million for the quarter and nine months ended December 31, 1999.
OPERATING INCOME (LOSS)
Operating income for the Company increased from $0.1 million as of the quarter
ended December 31, 1999 to $0.7 million for the quarter ended December 31, 2000,
an increase of 600%. Operating income (loss) for the Company increased from a
loss of $0.2 million as of the nine months ended December 31, 1999 to income of
$1.0 million as of the nine months ended December 31, 2000.
Operating income (loss) for the Subscription/PPV TV Group increased from a loss
of $0.3 million and $2.1 million for the quarter and nine months ended December
31, 1999, to income of $0.5 million and $1.0 million for the quarter and nine
months ended December 31, 2000. Operating income for the Internet Group
decreased from $1.2 million as of the quarter ended December 31, 1999, to $1.0
million as of the quarter ended December 31, 2000. Operating income for the
Internet Group increased from $3.2 million as of the nine months ended December
31, 1999, to $4.3 million as of the nine months ended December 31, 2000, an
increase of 34%.
SUBSCRIPTION/PAY-PER-VIEW (PPV) TV GROUP
The following table outlines the current distribution environment and
addressable households for each network:
ESTIMATED ADDRESSABLE HOUSEHOLDS
-----------------------------------------
(IN THOUSANDS)
AS OF AS OF
DECEMBER 31, DECEMBER 31,
NETWORK DISTRIBUTION METHOD 2000 1999 % CHANGE
------- ------------------- ------------- ------------- ---------
Pleasure Cable/DBS 14,200 3,500 306%
TeN Cable/DBS 5,600 4,300 30%
ETC Cable/DBS 2,300 n/a n/a
Extasy C-band/Cable/DBS 3,800 1,750 117%(1)
True Blue C-band/DBS 1,700 1,650 3%(1)
GonzoX C-band 1,200 1,650 -27%(1)
Note: "n/a" indicates that network was not launched at that time
(1) % change reflects a 27% decline in C-band market addressable households.
C-band total addressable households declined from 1,650,000 as of December 31,
1999 to 1,200,000 as of December 31, 2000.
NET REVENUE
Total net revenue for the Subscription/PPV TV Group was $6.2 million for the
quarter ended December 31, 2000, representing a 35% increase from $4.6 million
for the quarter ended December 31, 1999. Of total net revenue, C-Band net
revenue was $2.5 million for the quarter ended December 31, 2000, as compared to
$2.6 million for the quarter ended December 31, 1999, a decrease of 4%. Revenue
from the Group's Cable/DBS services for the quarter ended December 31, 2000, was
$3.7 million as compared to $2.0 million for the quarter ended December 31,
1999, an increase of 85%. Revenue from the Group's Cable/DBS services is
responsible for approximately 60% of the Group's total net revenue for the
quarter ended December 31, 2000, as compared to 44% for the quarter ended
December 31, 1999.
Total net revenue for the Subscription/PPV TV Group was $17.6 million for the
nine months ended December 31, 2000, representing a 49% increase from $11.8
million for the nine months ended December 31, 1999. Of total net revenue,
C-Band net revenue was $7.6 million for the nine months ended December 31, 2000,
as compared to $8.0 million for the nine months ended December 31, 1999, a
decrease of 5%. Revenue from the Group's Cable/DBS services for the nine months
ended December 31, 2000, was $10.0 million as compared to $3.8 million for the
nine months ended December 31, 1999, an increase of 163%. Revenue from the
Group's Cable/DBS services is
16
responsible for approximately 57% of the Group's total net revenue for the nine
months ended December 31, 2000, as compared to 32% for the nine months ended
December 31, 1999.
The decrease in C-Band revenue for both the quarter and nine months ended
December 31, 2000, is due to the declining C-Band market 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 C-Band market has
decreased 27% since December 31, 1999, from 1,650,000 addressable subscribers to
1,200,000 households as of December 31, 2000. Total C-Band subscriptions to the
Group's networks (Extasy, True Blue, and GonzoX) have declined 10% from 157,179
as of December 31, 1999 to 142,349 as of December 31, 2000.
The increase in the Subscription/PPV TV Group's Cable/DBS revenue for both the
quarter and nine months ended December 31, 2000 are the result of the following
factors as discussed further below: 1) an increase in distribution of TeN; 2)
adding TeN as a PPV service on Echostar Communications Corporation's DISH
network ("DISH") in addition to its availability on a monthly and yearly
subscription basis; 3) the increase in the distribution of Pleasure; and 4) the
successful launch of Extasy as a Cable/DBS product.
As of December 31, 2000, TeN was available to 5.6 million addressable Cable and
DBS households, up from 4.3 million households as of December 31, 1999, an
increase of 30% as a result of the launch of new Cable systems 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 December 31, 2000,
TeN had approximately 62,000 monthly DISH subscribers compared to 76,000 monthly
subscribers as of December 31, 1999, an 18% 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.
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 3.5 million
addressable households as of December 31, 1999. Pleasure has grown to a total of
14.2 million addressable households as of December 31, 2000, an increase of
306%, as a result of both new Cable and DBS system launches 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 December 31, 2000, the Group had added a total of 1.0 million
analog and 1.0 million digital Time Warner Cable households, including 225,000
Video-on-Demand ("VOD") 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.
17
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.
As of December 31, 2000, Extasy was available to approximately 2.6 million
Cable/DBS addressable households, including DISH 500 and Express Vu households,
up from 106,000 addressable households as of December 31, 1999. In addition, as
of December 31, 2000, Extasy had 19,000 monthly DISH subscribers at a retail
rate of $24.99 plus 7,300 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.
The Subscription/PPV TV Group has also seen modest revenue gains from the launch
of ETC, the launch of its TeN.com broadband website, and its Pleasure VOD
service on three Time Warner systems. Combined these products account for 10%
and 6% of total Cable/DBS revenue for the quarter and nine months ended December
31, 2000, respectively. ETC has grown from 1.2 million addressable households in
July 2000 to 2.3 million addressable households as of December 31, 2000. Time
Warner VOD addressable subscribers total 225,000 as of December 31, 2000. Time
Warner is projecting a total of 1.0 million VOD capable households to be in
service by the end of calendar year 2001.
COST OF SALES
Cost of sales for the Subscription/PPV TV Group was $2.9 million, or 47% of
revenue, for the quarter ended December 31, 2000 as compared to $2.8 million, or
61% of revenue, for the quarter ended December 31, 1999, an increase of 4%. Cost
of sales for the Subscription/PPV TV Group was $8.5 million, or 48% of revenue,
for the nine months ended December 31, 2000 as compared to $8.1 million, or 69%
of revenue, for the nine months ended December 31, 1999, an increase of 5%. Cost
of sales consists of expenses associated with broadcast playout, satellite
uplinking, satellite transponder leases, programming acquisition costs,
amortization of content licenses, Ten.com internet costs, and call center
operations. Cost of sales as a percentage of revenue has declined for the
quarter and nine months ended December 31, 2000 due to the fact that
approximately 70% of the Group's cost of sales are fixed in nature.
OPERATING INCOME (LOSS)
Operating income for the Subscription/PPV TV Group for the quarter ended
December 31, 2000, was $.5 million as compared to an operating loss of $.3
million for the quarter ended December 31, 1999. Operating income for the
Subscription/PPV TV Group for the nine months ended December 31, 2000, was $1.0
million as compared to an operating loss of $2.1 million for the nine months
ended December 31, 1999.
The increase in operating income for the quarter ended December 31, 2000, as
compared to the quarter ended December 31, 1999, is due to a 35% increase in
revenue. Additionally, cost of sales remained relatively flat for the quarter,
resulting in an increase in the Group's gross margin percentage to 54% from 40%
for the quarter ended December 31, 1999. Operating expenses as a percentage of
revenue were 47% for the quarter ended December 31, 2000, as compared to 45% for
the quarter ended December 31, 1999.
The increase in operating income for the nine months ended December 31, 2000, as
compared to the nine months ended December 31, 1999, is due to a 49% increase in
revenue. Additionally, cost of sales remained relatively flat year to year,
resulting in an increase in the Group's gross margin percentage to 52% from 32%
for the nine months ended December 31, 1999. Operating expenses as a percentage
of revenue declined to 46% as of December 31, 2000, from 49% as of December 31,
1999.
18
Total operating expenses increased 33% and 40% for the quarter and nine months
ended December 31, 2000, respectively, as compared to the quarter and nine
months ended December 31, 1999. The increase in total operating expenses for
both the quarter and nine months ended December 31, 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, increased commission expenses paid to the Group's sales
department as additional addressable households have been added, expenses
associated with the Group's broadband group and development of its TeN.com
product, an increase in travel, entertainment, and trade show 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 GROUP
During the quarter ended December 31, 2000, the Company completed the
integration of its Internet Service Provider Group with its Internet Content
Provider Group. The new entity is now called the Internet Group for purposes of
this Management, Discussion & Analysis.
NET REVENUE
Total net revenue for the Internet Group was $9.0 million for the quarter ended
December 31, 2000, a 27% increase from $7.1 for the quarter ended December 31,
1999. Total net revenue for the Internet Group was $25.1 million for the nine
months ended December 31, 2000, a 22% increase from $20.6 million for the nine
months ended December 31, 1999.
Gross membership revenue was $5.7 million for the quarter ended December 31,
2000, a 2% increase from $5.6 million for the quarter ended December 31, 1999.
Gross membership revenue was $16.6 million for the nine months ended December
31, 2000, a 2% decrease from $17.0 million for the nine months ended December
31, 1999. Growth in gross membership revenue for both the quarter and nine
months ended December 31, 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.
Management reclassified its credit card chargebacks and credits from its cost of
sales to net against its membership revenue this quarter in order to comply with
the guidance provided by the SEC Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. All comparative information
provided reflects this reclassification. Credits and chargebacks were $.7
million for the quarter ended December 31, 2000, a 17% increase from $.6 million
for the quarter ended December 31, 1999. Credits and chargebacks were $2.1
million for the nine months ended December 31, 2000, a 16% decrease from $2.5
million for the nine months ended December 31, 1999.
Credit card chargebacks and credits increased approximately 2% as a percentage
of gross membership revenue for the quarter ended December 31, 2000, as compared
to the quarter ended December 31, 1999. Credit card chargebacks and credits
decreased approximately 2% as a percentage of gross membership revenue for the
nine months ended December 31, 2000, as compared to the nine months ended
December 31, 1999. The decrease for the nine months ended December 31, 2000 was
due to the implementation of tighter fraud controls by management in response to
credit card companies' (Visa and Mastercard) efforts to target chargeback
activities of certain industries, including Direct Marketing, Travel Agencies,
Outbound Telemarketing Merchants and Videotext (Internet) Merchants. 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 chargebacks fees when chargebacks exceed
the chargeback parameters.
Group owned websites totaled 30 at December 31, 2000, compared to 24 as of
December 31, 1999. These websites hosted a daily average of 2.5 million visitors
at December 31, 2000, an increase of 47% from the daily average of 1.7 million
visitors at December 31, 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 emphasis on fraud control programs to reduce the level of
chargebacks and credits.
19
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 7% of
gross membership revenue for the quarter ended December 31, 2000, compared to
24% for the quarter ended December 31, 1999. Membership revenue from
international credit cards was 9% of gross membership revenue for the nine
months ended December 31, 2000, compared to 27% for the nine months ended
December 31, 1999. The international revenue earned during the quarter and nine
months ended December 31, 2000, is primarily from renewal memberships.
The standard one-month membership prices to the Group's websites averaged $20 to
$30 for both periods, three-day trial memberships varied from $3.00 to $6.00 at
December 31, 2000, and from $1.00 to $3.00 at December 31, 1999.
Revenue from content sales and the sale of traffic was $3.8 million for the
quarter ended December 31, 2000, a 111% increase from $1.8 million for the
quarter ended December 31, 1999. Revenue from content sales and the sale of
traffic was $9.9 million for the nine months ended December 31, 2000, a 130%
increase from $4.3 million for the nine months ended December 31, 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 Internet Group's websites, management has increased
exit traffic sales to other affiliate marketing programs at similar rates paid
by the Internet Group for its purchased traffic. Revenue from the sale of
traffic was $2.8 million for the quarter ended December 31, 2000, a 211%
increase from the $.9 million for the quarter ended December 31, 1999. Revenue
from the sale of traffic was $6.9 million for the nine months ended December 31,
2000, a 263% increase from the $1.9 million for the nine months ended December
31, 1999.
Revenue from the sale of content was $1.0 million for the quarter ended December
31, 2000, an 11% increase from $.9 million for the quarter ended December 31,
1999. Revenue from the sale of content was $3.0 million for the nine months
ended December 31, 2000, a 25% increase from $2.4 million for the nine months
ended December 31, 1999.
Content was sold to 303 webmasters at December 31, 2000, a 12% increase from 270
webmasters at December 31, 1999. The emphasis by the Internet 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 $429 at December 31, 2000, a 14% decrease from
$496 at December 31, 1999. Management expects that increased price competition
and the effect of more restrictive credit card policies may further reduce the
average price for content and will cause a slower growth in revenue from content
sales in future periods. Management continues to offer additional, high-quality
content through new websites to offset this risk.
The Group's Internet Pay-Per-View service was replaced with newer product
offerings and video memberships and, therefore, there were no sales for the
quarter ended December 31, 2000, compared to $.1 million for the quarter ended
December 31, 1999. The Group's Pay-Per-View service had no sales for the nine
months ended December 31, 2000, compared to $.4 million for the nine months
ended December 31, 1999. This decrease in revenue for the quarter and nine
months ended December 31, 2000 was expected as the Internet Pay-Per-View
subscribers switched to the Group's membership products.
The Group's other revenue was earned from the sale of its Internet Service
Provider (ISP) services such as hosting, co-location, and bandwidth management
to non-affiliated companies. The Group's other revenue was $.2 million for both
quarters ended December 31, 2000 and 1999. The Group's other revenue was $.7
million for the nine months ended December 31, 2000, a decrease of 50% from $1.4
million for the nine months ended December 31, 1999. This decrease in other
revenue was due to the Group's major non-affiliated customer changing service
providers. The Group does not anticipate revenue growth in this area as it
continues to focus its ISP on its internal needs.
20
COST OF SALES
Cost of sales for the Internet Group was $4.6 million for the quarter ended
December 31, 2000, as compared to $4.2 million for the quarter ended December
31, 1999, an increase of 10%. Cost of sales for the Internet Group was $13.3
million for the nine months ended December 31, 2000, as compared to $11.5
million for the nine months ended December 31, 1999, an increase of 16%. Cost of
sales consists of variable expenses associated with credit card fees, merchant
banking fees, bandwidth, membership acquisition costs, and website content
costs. Cost of sales was 51% of total net revenue for the quarter ended December
31, 2000, as compared to 59% of net revenue for the quarter ended December 31,
1999. Cost of sales was 53% of net revenue for the nine months ended December
31, 2000, as compared to 56% of net revenue for the nine months ended December
31, 1999. The cost of sales percentage continues to improve due to continued
reductions in the Group's bandwidth and merchant banking costs.
Due to increased competition for traffic, the Group has experienced a 23% and
29% increase in its membership acquisition costs for "purchased traffic" during
the quarter and nine months ended December 31, 2000, respectively. However, the
Group's overall membership and traffic acquisition costs as a percentage of net
revenue (i.e., a blended cost of both "typed-in" and "purchased traffic")
remained at 31% for both quarters ended December 31, 2000 and 1999, and
increased from 27% to 29% for the nine months ended December 31, 2000. The
Group's domain name acquisition strategy, which it began during the quarter
ended December 31, 1999, has allowed it to increase its new members via
"typed-in" traffic without incurring additional acquisition costs. This has
allowed the Group's blended membership acquisition cost as a percentage of net
revenue to remain relatively unchanged during a period of increased competition
for traffic.
The Group has purchased new domain names during the nine months ended December
31, 2000 in the amount of $1.6 million. During the nine months ended December
31, 1999, the Group purchased domains in the amount of $2.7 million. The
purchase price for these domain names is capitalized and amortized over a three
to five year period of time. Historically, the Group has experienced a return of
capital on these acquisitions within 12 - 18 months.
Merchant banking fees decreased from $0.8 million, or 12% of net revenue, as of
the quarter ended December 31, 1999, to $0.6 million, or 7% of net revenue, as
of the quarter ended December 31, 2000. Merchant banking fees decreased from
$2.5 million, or 12% of net revenue, as of the nine months ended December 31,
1999, to $1.6 million, or 7% of net revenue, as of the nine months ended
December 31, 2000. The decrease for both the quarter and nine months ended
December 31, 2000 is due to lower negotiated check debit fees and to moving the
Group's credit card processing to companies with lower merchant fees.
OPERATING INCOME
Operating income for the Internet Group for the quarter ended December 31, 2000
was $1 million, a decrease of 16% from operating income of $1.2 million for the
quarter ended December 31, 1999. Operating income for the Internet Group was
$4.3 million for the nine months ended December 31, 2000, as compared to $3.2
million for the nine months ended December 31, 1999, an increase of 34%.
The decline in operating income for the quarter ended December 31, 2000, was
primarily due to a $.8 million provision for bad debts established by the Group.
Operating income increased for the nine months ended December 31, 2000 due to a
22% increase in revenue. In addition, the Group's gross margin increased from
44% to 48% during this period and operating expenses were 30% of net revenue as
compared to 28% of net revenue for the nine months ended December 31, 1999.
Operating expenses were $3.3 million for the quarter ended December 31, 2000, a
94% increase from $1.7 million for the quarter ended December 31, 1999.
Operating expenses were $7.6 million for the nine months ended December 31,
2000, a 31% increase from $5.8 million for the quarter ended December 31, 1999.
Operating expenses were 36% of net revenue for the quarter ended December 31,
2000, as compared to 24% of net revenue for the quarter ended December 31, 1999.
Operating
21
expenses were 30% of net revenue for the nine months ended December 31, 2000, as
compared to 28% of net revenue for the nine months ended December 31, 1999.
The increase in operating expenses for the quarter and nine months ended
December 31, 2000, was attributable to increases in personnel costs; advertising
and promotion costs; and the establishment of a reserve for bad debts.
Personnel costs increased 30% for the quarter ended December 31, 2000 and 25%
for the nine months ended December 31, 2000, as compared to the same periods
ended December 31,1999. This increase in personnel costs is a result of adding
new positions to support the Group's infrastructure, as well as to the increase
in wages of certain positions necessary to remain competitive in the environment
in which the Group is operating. Advertising and promotion costs increased 36%
for the quarter and 18% for the nine months ended December 31, 2000 as compared
to December 31, 1999, due primarily to the increase in commissions paid for
content and traffic sales. Operating expenses for the quarter and nine months
ended December 31, 2000 included $0.8 million in bad debt expense. Operating
expenses included $.1 million in the quarter ended December 31, 1999 and $.4
million for the nine months ended December 31, 1999, of non-recurring costs
associated with the sale of the Internet Group to New Frontier Media.
PAYMENT SERVICE PROVIDER (PSP) GROUP
NET REVENUE
Net revenue for the quarter and nine months ended December 31, 2000 was $.2
million as compared to $0 for the quarter and nine months ended December 31,
1999. This revenue is from the merchant account processing services provided to
the Internet Group and is eliminated in consolidation.
OPERATING LOSS
The operating loss for the quarter ended December 31, 2000 was $0.1 million as
compared to an operating loss of $0 for the quarter ended December 31, 1999. The
operating loss for the nine months ended December 31, 2000 was $1.1 million as
compared to an operating loss of $0.1 million for the nine months ended December
31, 1999. The operating losses for the quarter and nine months ended December
31, 2000 include $.2 million in revenue from the Internet Group which is
eliminated in consolidation.
The operating losses for the quarter and nine months ended December 31, 2000,
are the result of the addition of personnel and consultants required in order to
initiate the planning and implementation of the payment processing organization.
Management expects that the PSP Group will continue to have operating losses in
future periods until it acquires additional non-affiliated processing business
or until the processing needs of the Internet Group grow substantially.
The PSP Group specializes in Internet fraud prevention, global payment
processing and billing management services. The company is positioning itself to
be a leading international provider of real-time, or on demand, e-commerce and
mail order/telephone order transaction processing.
The PSP Group develops effective and sophisticated fraud control techniques,
customer profiling and risk scoring technologies. The Group's extensive
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. As a result, the PSP Group has effectively minimized
fraud-related losses for its merchants.
During the quarter ended December 31, 2000, the PSP Group expanded upon its
relationship as an Independent Sales Organization and Member Services Provider
by adding merchant account processing for a new non-affiliated customer.
The PSP Group has completed the integration of the industry's leading online
transaction processing engine with its Internet Payment Gateway, Card.com. This
engine provides a variety of hosting and merchant capabilities for the PSP Group
and enterprise customers who need highly reliable, scalable,
22
online transaction processing. New merchant processing using this online engine
is scheduled to commence in February 2001.
Currently, the PSP Group has merchant banking relationships in the United
States, Caribbean, Latin America, and Europe. In addition, the Group is planning
on entering into strategic relationships with other companies that offer
alternative billing systems that would compliment its current product offerings.
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, but are not limited to, legal and accounting expenses, insurance,
registration and filing fees with NASDAQ and the SEC, investor relations costs,
officers salaries, and printing costs associated with the Company's public
filings.
The operating loss for this segment decreased from $0.8 million for the quarter
ended December 31, 1999, to an operating loss of $.7 million for the quarter
ended December 31, 2000, a decrease of 12.5%. The operating loss for this
segment increased from $1.2 million for the nine months ended December 31, 1999,
to an operating loss of $3.2 million for the nine months ended December 31,
2000, an increase of 167%.
The increase in operating loss for the nine months ended December 31, 2000, is
primarily related to an increase in legal 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 officers' salaries
to this segment, and consulting costs for the development of a new public
imaging campaign, logo, and corporate website. The Company has incurred legal
fees of approximately $1.3 million during the nine months ended December 31,
2000, related to the Lipson Lawsuit.
OTHER INCOME (EXPENSE)
Other income (expense) for the nine months ended December 31, 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.
As previously disclosed, the Company was a defendant in the Lipson Lawsuit filed
on January 25, 1999 in which J.P. Lipson sought damages related to 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 awarding damages to the plaintiff on his damages claim.
On December 5, 2000, the Court entered judgment awarding Mr. Lipson $10 million
against the Company for breach of contract and $1 million in punitive damages.
On December 20, 2000, the Court ordered that the execution of the judgment be
stayed upon the Company's posting a bond of $1.2 million. The Company posted
this bond with the District Court in the form of a letter of credit provided by
a third party.
Notwithstanding that the Company has made several motions to set aside the
verdict and intends to appeal the judgment if necessary, the Company has
established a $10 million reserve on its books for 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 as of September 30, 2000 had 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 during its second quarter
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
23
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 December 31, 2000, the Company estimates that it has $7.6 million in net
operating loss carryfowards 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 $8.5 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
$21.8 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 nine months ended December 31, 2000, cash provided by operating
activities of $.7 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 $4.6 million, $.5 million
for the write down of the Company's investment in Metro, and a $.8 million
increase in accounts payable. The cash provided by operations was offset by a
net loss of $2.1 million, an increase in the Company's deferred tax asset of
$7.7 million, an increase in accounts receivable of $2.0 million primarily
related to receivables from the Subscription/PPV TV Group's DBS providers and
receivables related to the Internet Group's sale of traffic and content revenue,
and a $3.4 million increase in the Subscription/PPV TV Group's prepaid
distribution rights for its content licensing.
For the nine months ended December 31, 1999, cash used in operating activities
of $2.3 million was primarily associated with a net loss of $.5 million, an
increase in accounts receivable of $2.0 million, an increase in prepaid
distribution rights of $1.8 million, and a decrease in accounts payable of $1.2
million. This use of cash was offset by depreciation and amortization of $2.9
million.
Cash used in investing activities was $3.6 million for the nine months ended
December 31, 2000. This use of cash was primarily related to the purchase of
domain names for the Internet Group in the amount of $1.6 million and equipment
for the broadcast and Internet service provider facilities. Cash used in
investing activities for the nine months ended December 31, 1999 was $4.4
million and was primarily comprised of capital expenditures related to broadcast
equipment, furniture and equipment, trade show booth improvements, and $2.7
million of domain names for the Internet Group.
Cash provided by financing activities was $4.4 million for the nine months ended
December 31, 2000, compared to cash provided by financing activities of $8.4
million for the nine months ended December 31, 1999. Cash provided by financing
activities for the nine months ended December 31, 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 and a note payable of $5.0
million. This cash from financing activities was offset by $.5 million
distributed to the previous shareholders of the Internet Group, $.9 million paid
on capital lease obligations, and $1.0 million paid to related parties.
The $8.4 million provided by financing during the nine months ended December 31,
1999, was primarily related to $3.9 million in proceeds received from the
exercise of the Company's publicly traded warrants and the issuance of $6
million of convertible preferred stock.
The Company anticipates capital expenditures over the next twelve months to be
$4 - 5 million related to capital needs of its broadcast and Internet service
provider facilities. In addition, the Company will be completing tenant
improvements over the next three to six months for new building space in both
its Boulder and Sherman Oaks locations estimated to be $1.5 million. The Company
expects its capital expenditure program to be funded by cash flows from
operations and lease financing.
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
24
million to $10 million on domain name acquisitions. The Company estimates a
return of capital on these purchases within 18-24 months.
The Company has $6.0 million in notes payable outstanding as of the date of this
filing. The notes bear interest at 12 - 15% per annum and the principal is due
in 2002 and 2003. The Company expects to pay the interest due in common stock
where possible and out of cash flow from operations in all other instances. In
addition, the Company expects to pay the principal due in 2002 and 2003 out of
cash flows from operations or through a refinancing of the notes at the time of
maturity. The Company expects to see an increase in its interest expense and
amortization of debt offering costs in future periods due to these notes
payable.
The Company believes that its existing cash balances and cash generated from
operations will be sufficient to satisfy its operating requirements.
The Company was a defendant in the Lipson Lawsuit filed on January 25, 1999. The
plaintiff in the Lipson Lawsuit sought damages related to 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 awarding damages to the plaintiff on his damages claim. On
December 5, 2000, the Court entered judgment awarding Mr. Lipson $10 million
against the Company for breach of contract and $1 million in punitive damages.
On December 20, 2000, the Court ordered that the execution of the judgment be
stayed upon the Company's posting a bond of $1.2 million. The Company posted
this bond with the District Court in the form of a letter of credit provided by
a third party.
The Company has since filed a motion for judgment notwithstanding the verdict, a
motion for a new trial, and a motion for vacating the judgment. At this time,
the Company is awaiting the Court's rulings on these motions.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company's exposure to market risk is principally confined to
cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.
INTEREST RATE SENSITIVITY. As of December 31, 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
In a June 2, 1999, complaint filed in District Court in Boulder, Colorado (Case
No. 99CV913) Scott Wussow, the Company's former chief financial officer, sought
to enforce an alleged oral agreement to increase his salary, bonus, and car
allowance, and issue to him warrants to purchase up to 300,0000 shares of New
Frontier Media common stock, following the Company's public offering of February
1998. The Company settled this complaint in December 2000 for $50,000 in lieu of
further litigation with Mr. Wussow.
The Company was a defendant in the Lipson Lawsuit filed on January 25, 1999. The
plaintiff in the Lipson Lawsuit sought damages related to 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 awarding damages to the plaintiff on his damages claim. On
December 5, 2000, the Court entered judgment awarding Mr. Lipson $10 million
against the Company for breach of contract and $1 million in punitive damages.
On December 20, 2000, the
25
Court ordered that execution of the judgment be stayed upon the Company's
posting a bond of $1.2 million. The Company posted this bond with the District
Court in the form of a letter of credit provided by a third party.
The Company has since filed a motion for judgment notwithstanding the verdict, a
motion for a new trial, and a motion for vacating the judgment. At this time,
the Company is awaiting the Court's rulings on these motions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.22 - Amendment to Employment Agreement, dated December 22, 2000, by and
between the Company and Mark Kreloff
10.23 - Amendment to Employment Agreement, dated December 22, 2000, by and
between the Company and Michael Weiner
b) Reports on Form 8-K
On December 28, 2000, the Company filed a Form 8-K to announce its change in
accountants from Spicer, Jeffries & Co. to Singer, Lewak, Greenbaum & Goldstein
LLP.
26
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)
27