-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DqT12wGtoJnpuMl/EHeGH6DUFggmWJ/HK6n9JAbCds9xr0W5FCD/MsW4cBCEsCEP 4AdKvdJhWpjgOIGpsuH+zA== 0000890163-99-000191.txt : 19990629 0000890163-99-000191.hdr.sgml : 19990629 ACCESSION NUMBER: 0000890163-99-000191 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW FRONTIER MEDIA INC /CO/ CENTRAL INDEX KEY: 0000847383 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE DISTRIBUTION [7822] IRS NUMBER: 841084061 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-23697 FILM NUMBER: 99654008 BUSINESS ADDRESS: STREET 1: 5435 AIRPORT BLVD STREET 2: SUITE 100 CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034440632 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL SECURITIES HOLDING CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STRATEGIC ACQUISITIONS INC DATE OF NAME CHANGE: 19600201 10KSB40 1 FORM 10KSB SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------------- FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended March 31, 1999 Commission File Number: 33-27494-FW NEW FRONTIER MEDIA, INC. ---------------------------------------------------- (Exact name of small business issuer in its charter) Colorado 84-1084061 ------------------------------------------------------ (State of Incorporation) (I.R.S. Employer I.D. Number) 5435 Airport Boulevard, Suite 100, Boulder, CO 80301 --------------------------------------------------- (Address of principal executive offices and Zip Code) (303) 444-0632 -------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None. Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: [X] YES [ ] NO Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB: [X] Registrant's revenues for its most recent fiscal year (ended March 31, 1999): $9,452,432 Aggregate market value of voting stock held by non-affiliates: $88,271,442 based on 10,947,717 shares at June 23, 1999 held by non-affiliates and the closing price on the Nasdaq SmallCap Market on that date which was $8.03. Indicate the number of shares outstanding of each of the registrant's classes of common stock: 12,539,517 common shares were outstanding as of March 31, 1999. Documents Incorporated by Reference: Not Applicable FORM 10-KSB Form 10-KSB for the Fiscal Year ended March 31, 1999
Table of Contents PAGE PART I Item 1 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 4 Submission of Matters to a Vote of Securities Holders. . . . . . . . . . . . . . 17 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 7 Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . 22 Item 8 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 PART III Item 9 Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . 23 Item 10 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Item 11 Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . 25 Item 12 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . 26 Item 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . 26 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2 PART I. ITEM 1. DESCRIPTION OF BUSINESS. HISTORY OF THE COMPANY New Frontier Media, Inc. ("New Frontier Media" or "the Company") was originally incorporated in the State of Colorado on February 23, 1988. On September 15, 1995, the Company consummated the acquisition of New Frontier Media, Inc. in a stock-for-stock exchange. The Company first effected a 2,034.66:1 reverse split of all 569,706,000 shares of its common stock then issued and outstanding, resulting in 280,000 shares of Common Stock being issued and outstanding prior to the New Frontier Media, Inc. acquisition. The Company also approved a change of the Company's name to New Frontier Media, Inc. The Company became engaged in reference CD-ROM publishing through a 70%-owned subsidiary, Boulder Interactive Group, Inc. d/b/a Inroads Interactive ("Inroads" or "BIG"), and in the distribution of adult feature films in the digital disc format through a wholly owned subsidiary, David Entertainment, Inc. ("David"). On February 18, 1998, the Company consummated an underwritten public offering of 1,500,000 units, each consisting of one share of common stock and one redeemable common stock purchase warrant, raising $7,087,000 in net proceeds after underwriting fees (excluding related offering expenses). Simultaneous with the public offering, New Frontier Media acquired the adult satellite television assets of Fifth Dimension Communications (Barbados), Inc. and its related entities ("Fifth Dimension"). As a result of the Fifth Dimension acquisition, New Frontier Media through its wholly owned subsidiary, Colorado Satellite Broadcasting, Inc. ("CSB") became a leading provider of adult programming to low-powered ("C-Band") direct-to-home ("DTH") households. In August 1998, New Frontier Media launched TeN: the erotic network ("TeN") as a new adult network targeted specifically to cable television system operators and medium-to-high powered DTH satellite service providers (Direct Broadcast Satellite, or "DBS"). Unlike New Frontier Media's C-Band networks, TeN offers partially-edited adult programming which is intended to appeal to cable operators and DBS providers while delivering more of the editing style adult network subscribers expect to receive. On June 1, 1999, New Frontier Media launched Pleasure, a 24-hour adult network that incorporates the most edited standard available in the category, on EchoStar Communications Corporation's DISH Network and on cable television systems owned by a leading multiple cable television system operator ("MSO"). Pleasure competes directly with Playboy Enterprises, Inc.'s ("Playboy") adult network services (Playboy TV, Spice and Spice 2) in the most-edited adult programming category. As of June 1, 1999, New Frontier Media received additional launch commitments for Pleasure which bring its total addressable subscriber universe to an estimated 3.0 million cable television and DBS subscribers. On March 23, 1999, New Frontier Media announced that it had signed a Letter of Intent to acquire Interactive Gallery, Inc. ("IGallery"), one of the largest aggregators and distributors of adult content via the Internet. On May 24, 1999, New Frontier Media announced that it had expanded its Letter of Intent with IGallery to include its Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI") affiliates. Through these proposed acquisitions, New Frontier Media intends to position itself as the leading provider of adult content on the Internet as well as a leading Internet technology and e-commerce provider. The Company's executive offices are located at 5435 Airport Blvd., Suite 100, Boulder, Colorado 80301. The telephone number is (303) 444-0632. 3 CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-KSB and the information incorporated by reference may include "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company intends the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements regarding the Company's expected financial position and operating results, its business strategy, its financing plans and the outcome of any contingencies are forward-looking statements. The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward looking statements. INDUSTRY OVERVIEW ADULT ENTERTAINMENT DISTRIBUTION VIA ELECTRONIC MEDIA New Frontier Media, through its wholly owned subsidiary CSB, is solely focused on the distribution of adult entertainment programming through electronic technologies including cable television and C-band/DBS satellite. Adult entertainment content distribution has evolved over the past twenty-five years from home video platforms (video cassette) to cable television systems and DBS providers, and most recently to the Internet. In the early 1980's, cable television operators began offering subscription and pay-per-view ("PPV") availability of adult programming from network providers such as Playboy. In the 1990's, adult programming became widely available with nearly every cable MSO and DBS provider in the U.S. offering subscription or PPV availability. Paul Kagan Associates ("Kagan"), a leading media research organization, estimates that adult PPV and subscription revenue will grow from $263 million in 1998 to $349 million in 2000. Datamonitor Plc, a leading technology based research organization, estimates that adult programming via the Internet represented $1.0 billion in revenue in 1998 and that it will grow to $3.0 billion by the year 2003. PPV television enables a cable television or satellite delivered television subscriber with an addressable television set-top receiver to purchase a block of programming, an individual movie, or an event for a set fee. PPV also permits subscribers to purchase the Company's programming on a monthly, quarterly, semiannual and annual basis and view programming according to their own schedule. PPV allows subscribers to control the availability of the programming within their households. In addition, PPV programming competes well with other forms of entertainment because of its relatively low point price. PPV programming is delivered through any number of delivery methods, including: (a) cable television; (b) DTH to households with large satellite dishes receiving a C-band low-power analog or digital signal or with small dishes receiving a Ku-band medium or high-power digital signal (such as those currently offered by EchoStar and DirecTV); (c) wireless cable systems; and (d) low speed (dial-up) or broadband (cable modem) Internet connections. In the past year, New Frontier Media has added a significant number of viewers through the DBS market, which is the fastest-growing segment of the PPV/subscription television business. As of June 15, 1999, New Frontier Media's cable/DBS networks, Pleasure and TeN, were available to approximately 5.8 million cable/DBS addressable households. As of June 15, 1999, the Company had arrangements with six of the eleven largest domestic MSO/DBS providers (based on pending acquisitions). These six multi-channel providers, through their affiliated cable or DBS distribution systems ("Affiliates"), control access to approximately 34.6 million, or 48.1%, of the estimated 72 million total U.S. multi-channel households. Once arrangements are made with an MSO or DBS provider, the Company is able to negotiate channel space for TeN and Pleasure with the Affiliates owned, operated or otherwise controlled by that MSO or DBS provider. Acceptance by Affiliates provides the basis for expanding the Company's access to individual multi-channel households. The performance of TeN and Pleasure in individual multi-channel television environments varies based principally on the PPV ordering technology and the quantity and quality of marketing done by the Affiliates. Individual Affiliates determine the retail price of the PPV service and determine the retail price of the monthly subscription service. 4 The distribution of adult entertainment via electronic media has continued to grow as technological advances allow easier and more private access to programming. Most major hotel chains, including Marriott, Hyatt, and Hilton, offer in-room adult programming through services such as On Command. The Internet represents the fastest growing distribution means for adult programming. It is estimated that over thirty-thousand web sites presently exist of which 10% provide adult content through subscriptions or memberships. The tremendous growth of the Internet, including web sites dedicated to adult entertainment, has resulted in millions of customers accessing such sites through their computers. Management believes that the adult entertainment industry in general, and the electronic distribution of adult programming via cable, satellite and the Internet, specifically, will continue to grow. In particular, as advances in technology such as broadband (high speed) Internet access and Video-On-Demand programming are made, it will enable adult content viewers complete flexibility in terms of start times and movie selection. The distribution of adult entertainment via electronic media is highly competitive. In the multi-channel subscription and PPV markets, the Company competes with Playboy (Playboy TV, Spice and Spice 2), Califa Entertainment, (The Hot Network) and Emerald Media, Inc. (SXTV). BUSINESS SUBSCRIPTION AND PPV TELEVISION DISTRIBUTION Growth in the PPV market is expected to result in part from cable system upgrades utilizing fiber-optic, compression technologies or other bandwidth expansion methods that provide cable operators additional channel capacity. When implemented, compression technology is expected to increase MSOs' channel capacity. Industry analysts expect a large percentage of this additional channel capacity to be dedicated to PPV programming. The timing and extent of these developments and their impact on the Company cannot yet be determined. LOW-POWERED SATELLITE DTH (C-BAND) New Frontier Media is a leading provider of subscriber-based and PPV premium television networks to C-band DTH households. The Company currently owns, operates, and distributes three leading adult programming networks: Extasy, True Blue, and GonzoX (collectively referred to as the "Extasy Networks"). C-band DTH subscribers receive the Extasy Networks through a satellite television receiver/decoder box. Subscribers have the option of subscribing to programming on a monthly, quarterly, semi-annual or annual basis or purchasing single movies or events on a PPV basis. As of June 15, 1999, the Extasy Networks were available to an estimated 2.0 million C-band DTH subscribers. The Company maintains distribution agreements with nearly every major distributor of C-band satellite programming in the United States. New Frontier Media aggressively promotes its networks with bold logotypes and high-quality interstitial programming between feature films. Extasy, True Blue, and GonzoX each feature 50 movie titles per month on average, with at least 15 first-time broadcasts ("premieres") and four network specials per month with no cross-over programming between channels. All channels are available 24-hours per day, presenting a mix of adult programming including feature films. Staggered movie start times allow for maximum viewing flexibility. Currently, the Extasy Networks deliver the least edited adult programming available to satellite and cable television households. CABLE TELEVISION OPERATORS AND DBS PROVIDERS (KU-BAND) The Company provides two 24-hour adult programming networks which are edited to meet the standards of cable television operators and DBS providers. As of June 15, 1999, the networks, TeN and Pleasure reached an estimated combined 5.8 million addressable television households. 5 As of June 15, 1999, the Company had arrangements with six of the eleven largest domestic MSO/DBS providers (based on pending acquisitions). These six multi-channel providers, through their Affiliates, control access to approximately 34.633 million or 48.1%, of the estimated 72 million total U.S. multichannel households. Once arrangements are made with an MSO or DBS provider, the Company is able to negotiate channel space for TeN and Pleasure with the Affiliates owned, managed, or otherwise controlled by that MSO or DBS provider. Acceptance by Affiliates provides the basis for expanding the Company's access to individual multi-channel households. The performance of TeN and Pleasure in individual multi-channel television environments varies based principally on the PPV ordering technology and the quantity and quality of marketing done by the Affiliates. Individual Affiliates determine the retail price of the PPV service and determine the retail price of the monthly subscription service. The DBS market is the fastest-growing segment of New Frontier Media's network programming distribution, with the Company's DBS revenues exceeding its cable revenues. As of June 1, 1999, New Frontier Media's adult networks were available on a PPV and/or monthly subscription basis to approximately 5.0 million DBS households in the U.S. New Frontier Media's cable/DBS networks (TeN and Pleasure) are carried by EchoStar Communications Corporation's DISH Network, the second largest high-powered DTH provider (DBS) in the U.S. This service provides exceptional improvements in program delivery and consumer interface to households equipped with digital satellite system receiving units, consisting of an 18-inch satellite antenna, a digital receiver box and a remote control. NETWORKS DESCRIPTION The Company provides five 24-hour adult programming networks: TeN: the erotic network, Pleasure, Extasy, True Blue and GonzoX. The following table outlines the editing standard for the adult programming category and the current distribution environment for each service:
TABLE 1 ------- SUMMARY OF NETWORKS ESTIMATED ADDRESSABLE NETWORK LAUNCHED/ EDITING SUBSCRIBER UNIVERSE AS OF JUNE 15, 1999 ACQUIRED STANDARD DISTRIBUTION JUNE 15, 1999 ------------- -------- -------- ------------ ------------- TeN 8/15/98 Partially Cable/DBS 3.0 million Pleasure 6/1/99 Most Cable/DBS 3.0 million Extasy 2/18/98 Least Cable/DBS/C-band 2.0 million True Blue 2/18/98 Least C-band 2.0 million Gonzo X 2/18/98 Least C-band 2.0 million
TEN: THE EROTIC NETWORK (TEN) On August 15, 1998, the Company launched TeN, a 24-hour adult network which incorporates a partial editing standard targeted to cable television system operators and DBS providers. The Company has programmed TeN as a feature driven network that incorporates less editing than traditional adult premium networks such as those offered by Playboy (Playboy TV, Spice and Spice 2). As of June 15, 1999, TeN reached an estimated 3.0 million addressable multi-channel households. TeN offers a diverse programming mix within the adult genre, with movies and specials that appeal to a wide variety of tastes and interests. TeN's programming is partially edited and, as such, incorporates more editing than the editing standard available in the adult home video markets. TeN offers subscription and PPV households 18 premiere adult movies and four network specials per month and a minimum of 60 adult movies per month. TeN was developed to capitalize on the quality and number of cable operators/DBS providers now willing to carry partially-edited adult network services and the momentum toward broader market acceptance of partially edited adult programming by their subscribers. New Frontier Media believes the growing market acceptance of partially edited programming is due, in large part, to the higher subscriber buy rates (the theoretical percentage of addressable households ordering one PPV movie, program or event in a month) achieved for cable system operators/DBS providers as compared to network programming that incorporates the most edited adult programming. Since its launch on August 15, 1998, TeN has averaged a monthly buy rate of approximately 12% compared to most edited adult network programming (such as those services offered by Playboy) averaging monthly buy rates of approximately 3% to 7%. 6 PLEASURE On June 1, 1999, the Company launched Pleasure, a 24-hour adult network that incorporates the most edited standard available in the category, which is targeted to cable television operators and DBS providers. Pleasure is a feature driven adult network service and is programmed to deliver subscription and PPV households 21 premiere adult movies and four network specials per month with a total of 60 adult movies per month. As of June 1, 1999, Pleasure reached an estimated 3.0 million addressable multi-channel households. Pleasure was developed as a competitive service to Playboy (Playboy TV, Spice and Spice 2) and offers a highly favorable revenue split for a cable television operator or DBS provider. Pleasure was specifically designed to provide adult content programming to operators that have not yet embraced a partially-edited programming philosophy and for those operators that wish to use the service to "upsell" subscription or PPV households to a less edited network such as TeN. EXTASY Extasy was acquired from Fifth Dimension on February 18, 1998. Extasy is a feature driven adult network service that is programmed with 15 premiere adult movies per month and a total of approximately 50 adult movies per month. Extasy is the least-edited programming service available to multi-channel households and is principally distributed via the C-band DTH market and, to a lesser extent, cable television operators and DBS providers. Extasy's editing standard is similar to the editing standard employed in the home video markets. As of June 15, 1999, Extasy had 54,026 active subscriptions. Extasy offers a diverse programming mix within the adult genre, with movies and specials that appeal to a wide variety of tastes and interests. Extasy is available on a PPV basis as well as on a monthly, quarterly, semiannual and annual subscription basis. TRUE BLUE True Blue was acquired from Fifth Dimension on February 18, 1998. True Blue incorporates the same editing standard as Extasy and is programmed with adult movies that feature "no-name" or "amateur" talent. True Blue is programmed to deliver 50 amateur adult movies per month. True Blue is presently only distributed via the C-band DTH market. As of June 15, 1999, True Blue had 48,355 active subscriptions. True Blue is available on a PPV basis as well as on a monthly, quarterly, semiannual and annual subscription basis. GONZOX GonzoX, formerly Exotica, was acquired from Fifth Dimension on February 18, 1998. GonzoX incorporates the same editing standard as Extasy and is programmed with the "best of" scenes from adult feature films. GonzoX is programmed to deliver 50 "best of" adult features per month. GonzoX is presently only distributed via the C-band DTH market. As of June 15, 1999, GonzoX had 44,033 active subscriptions. GonzoX is available on a PPV basis as well as on a monthly, quarterly, semiannual and annual subscription basis. INTERNET DISTRIBUTION On March 23, 1999, the Company entered into a Letter of Intent to acquire IGallery, one of the largest aggregators/distributors of adult content via the Internet. On May 24, 1999, New Frontier Media announced that it had expanded its proposed acquisition of IGallery to include its affiliates, ITN and CTI. ITN, CTI and IGallery (collectively the "acquisition entities") together provide the technological infrastructure, content acquisition and organization, consumer level and web-master level marketing, merchant account management and electronic credit card transaction processing necessary to provide adult content via the Internet. The acquisition entities accomplish this through the sale of subscriptions or memberships to consumers and the sale of turn-key content and/or financial processing to adult web-masters. The acquisition is expected to be effected as a "pooling of interests" transaction and will be affected through a stock for stock exchange by and between the Company and the "acquisition entities". The Company has not yet entered into a definitive purchase agreement with respect to this proposed transaction. 7 INTERACTIVE TELECOM NETWORK, INC. ITN is a leading Internet technology and e-commerce solutions company that provides turn-key Internet software engineering, bandwidth, merchant account management, and credit card processing systems. ITN is based in Sherman Oaks, California and employs approximately 50 people. ITN provides a variety of connectivity solutions, including dedicated Internet access, hardware and software implementation, and system and security consulting that provide businesses high-speed continuous access to the Internet. ITN provides shared server web hosting and offers a variety of shared server web hosting services that enable its customers to efficiently, reliably and cost-effectively establish a sophisticated web presence and distribute information over the Internet without purchasing, configuring, maintaining and administering the necessary Internet hardware and software. ITN's dedicated server web hosting solutions are provided to larger customers that require substantially more server and network capacity than provided under the shared hosting plans. The dedicated web hosting solutions provide the customer with an NT or UNIX-based dedicated server that is owned and maintained by ITN within its Internet data center facility. This solution enables customers to host complex web sites and applications without the need to incur significant infrastructure and overhead costs. ITN offers dedicated server service at various price levels, depending on customers' hardware, data transfer and service requirements. ITN offers co-location services for customers who prefer to own and have physical access to their servers, but require the high performance, reliability and security of an Internet data center. Co-location customers are typically larger enterprises employing more sophisticated Internet hardware and software, and having the expertise to maintain their web sites and related equipment. ITN's Internet data center facility features uninterruptable power supplies with a back-up generator, a fire suppression system, fault tolerant environmental controls, 24 X 7 monitoring and high levels of security. ITN provides integration services including local and wide-area network configuration, web and database server integration and application-specific software solutions. ITN utilizes its expertise across multiple platforms utilizing leading networking hardware, high-end web and database servers and computer software to more effectively address its customers' diverse systems and network integration needs. ITN's system administration and web site management solutions support its customers' Internet operations by providing the customer with detailed monitoring, reporting and management systems to control their Internet-related hardware, software and network applications. Implementation of these scalable solutions is often delivered in phases to allow customers to outsource an increasing amount of their Internet operations. ITN's comprehensive system administration and web management solutions enable it to identify and begin to resolve hardware, software, network and application problems almost immediately. Web site development and implementation services range from basic informational sites to complex interactive sites featuring sophisticated graphics, animation, sound and other multimedia content. ITN works with content providers, end users and production companies to provide technical, design and production services. Commerce-enabling solutions for its web-hosting and co-location customers include a "shopping cart" program for customers looking to sell products, where, as in a retail store, their clients browse through several products and choose to put some in their "shopping cart" for purchase. This database driven technology is very flexible, allowing ITN's customers to change products and prices easily and cost-effectively. Credit card authorization and processing solutions is a key service enabling customers to accept payment directly over the Internet. The development of streaming media products from companies such as RealNetworks and Microsoft enables the simultaneous transmission and playback of continuous streams of audio and video content over the Internet. ITN has emerged as one of the leading providers of streaming media services, offering complete integrated, in-house services, including production, encoding, and hosting of live or pre-recorded events. ITN believes that it is one of the few providers which offers expertise in all three components of streaming media technology, combined with an established customer base for Internet products and services and access to low cost, scalable, bandwidth. 8 The nature of business Internet traffic demands protection from unauthorized access. ITN designs and integrates customized security solutions which ensure network integrity while enabling users to perform business tasks in a secure, yet unhindered, environment. ITN's firewall solutions provide users with secure access to the Internet as well as segregate a customer's public servers from its internal network and restrict access between departments as well as track communications to ensure that these communications follow a customer's established security procedures. Domain Domain is the trade name for ITN's Web address registration service. ITN's site design and application architecture allows the fastest, easiest way to find and register a .com, .net and .org top-level domain name. Domain Domain is very focused on the Internet identity business and intends to be a leader and innovator as the market expands. ITN intends to expand its "dot com" suite of products and services, enhance its distribution channels to reach more customers and build brand awareness as the "dot com specialists". ITN further intends to continue to offer services that complement a Web address and help businesses build online identities. INTERACTIVE GALLERY, INC. IGallery is a leading aggregator and reseller of adult content via the Internet. IGallery maintains a consumer membership base of nearly 100,000 monthly revenue generating consumer subscribers to its owned and operated web sites. IGallery aggregates adult recorded video, live feed video and still photography all of which is licensed from adult content studios. The content is organized thematically and, if necessary, converted into digital media for Internet distribution. One-third of IGallery's revenue comes from the resale of aggregated content to third-party web masters on either a flat monthly-rate basis or a revenue sharing basis. IGallery has become one of the leading resellers of adult content to web masters and presently sells its aggregated content to a database of over 7,600 webmasters. IGallery designs, creates and implements company owned subscription/membership-based web sites for the adult Internet consumer markets. In addition, IGallery creates web sites that are targeted to the community of adult web-masters who resell IGallery's content to their own members or subscribers. Each month, IGallery publishes VaVoom, an Internet-based magazine filled with over 300 pages of adult-themed content. Internet commerce begins with the successful generation of Internet traffic to a web site. IGallery is actively engaged in the generation of Internet traffic to its consumer and webmaster sites. Internet traffic is generated through the purchase of traffic from third-party adult web sites or Internet domain owners and the purchase of banner advertisements or "key word" searches from search engines such as Yahoo or Lycos and through publicity for IGallery's web sites. As a result of these activities, IGallery receives over 700,000 to 800,000 unique Internet visitors each day to its consumer and webmaster sites, or over 23 million unique visits per month. IGallery typically achieves a conversion rate of better than 1 membership for each 400 unique visits. GOVERNMENT REGULATION In 1996, the United States Congress passed the Telecommunications Act of 1996 ("the Act"), a comprehensive overhaul of the Federal Communication Act of 1934. Section 641 of the Act requires full audio and video scrambling of channels which are primarily dedicated to "sexually explicit" programming. If a multi-channel video programming distributor, including a cable television operator, cannot comply with the full scrambling requirement, then the channel must be blocked during the hours when children are likely to be watching television, i.e., from 6:00 a.m. to 10:00 p.m. Programming providers offering the most edited adult services (such as Playboy) and programming providers offering partially-edited adult services (such as TeN), feature "sexually explicit" programming as contemplated by Section 641 of the Act. Although all adult programming companies fully scramble their signals for security purposes, several cable television MSO's lack the technical capability to fully scramble the audio portion of the signal. These cable systems are required to block adult broadcasts between 6:00 a.m. and 10:00 p.m. Section 641 of the Act affects the Company to the extent its programming is offered by cable television MSO's without such technical scrambling ability. 9 In February 1996, the leading adult network providers including Playboy challenged Section 505 of the Act which, among other things, regulates the cable transmission of adult programming such as New Frontier Media's domestic pay television networks. Enforcement of Section 505 of the Act commenced May 18,1997. The case was heard by the United States District Court in Wilmington, Delaware (the "Delaware District Court") in March 1998. In December 1998, the Delaware District Court unanimously declared Section 505 of the Act unconstitutional. Even though the defendants have appealed this judgment, the ruling gives cable systems the right to resume 24-hour broadcast of adult services as long as cable systems comply with, and consumers are made aware of, the "blocking on request" requirement of Section 504 of the Act . On June 22, 1999, the U.S. Supreme Court agreed to hear the defendants' appeal of this judgment. NETWORK PROGRAMMING All of the broadcast programming for each network is acquired from third party adult content studios. In most cases, New Frontier Media pays approximately $5,000 to $6,000 for a Premiere and $500 for a title that has previously been exhibited via satellite broadcast ("Encore") for unlimited broadcast rights in North America for a specified period of time (usually one to five years). The Company maintains relationships with eight of the top ten major adult movie studios, and purchases a wide variety of programming from each on a monthly basis. Dubbed copies of the programming are sent to playout facilities in Ottawa, Ontario (Canada) and Boulder, Colorado, where they are screened for quality control purposes and to comply with run time requirements. In February 1999, New Frontier Media acquired all of the broadcast and electronic distribution rights to 4,000 adult films under a Content License Agreement with Pleasure Productions LLC. The Company believes that as a result of this acquisition it is one of the largest owners of adult video content in the world. SATELLITE TRANSMISSION New Frontier Media delivers its video programming via satellite transmission. Satellite delivery of video programming is accomplished as follows: Video programming is played directly from a playout or uplink facility. The program signal is then scrambled (encrypted) so that the signal is unintelligible unless it is passed through the proper decoding devices. The signal is then transmitted (uplinked) by an earth station to a designated transponder on a communications satellite. The transponder receives the program signal uplinked by the earth station, amplifies the program signal and broadcasts (downlinks) it to satellite dishes located within the satellite's area of signal coverage. The signal coverage of the domestic satellite used by New Frontier Media is the continental United States, Hawaii, portions of the Caribbean, Mexico, and Canada. Each analog transponder can retransmit one complete analog color television video signal and two digital television video signals, together with associated audio and data sidebands. Programming is received by C-Band subscribers, cable operators and DBS providers. This programming is received in the form of a scrambled signal. In order for subscribers to receive the programming the signal must be unscrambled. C-Band subscribers purchase programming directly from the Company or its distributors. The satellite receivers of C-Band subscribers contain unscrambling equipment that is authorized to unscramble the Company's satellite services. Each set top box or satellite receiver must have an electronic "address". This "address" is activated for the requisite services purchased from either the Company or the distributor. 10 Cable system operators or DBS providers receive their programming in the same manner as a C-Band subscriber, however these customers provide the received programming to their captive subscriber audience. The equipment utilized by cable operators and DBS providers is similar to that utilized by C-Band subscribers but manufactured to an industrial grade specification. The cable system operators and DBS providers are able to remotely control each subscriber's set-top box or satellite receiver on their network, and cause it to unscramble the television signal for a specific period of time after the subscriber has made a purchase of a premium service or PPV movie or event. TRANSPONDER AGREEMENTS New Frontier Media maintains satellite transponder sub-lease agreements for four full-time analog transponders with Fifth Dimension. Prior to June 1, 1999, the Company maintained a non-cancelable sublease agreement with Fifth Dimension which provided usage of three analog transponders located on Loral Skynet's Telstar 5 satellite. These transponders provided the satellite transmission necessary to broadcast the Extasy Networks (Extasy, True Blue, GonzoX). As of June 1, 1999, the Company switched its three full-time analog transponders which were located on Loral Skynet's Telstar 5 to Loral Skynet's Telstar 4. The Company's 24-hour promotional channel ("Barker") is also broadcast on Loral Skynet's Telstar 4, which enables it to promote the Extasy Networks on the same satellite where most of its C-band competitors' services are offered. PLAYOUT FACILITY On April 1, 1999, the Company completed the installation, and began operation of, its Boulder, Colorado playout facility. The playout facility provides the broadcast playout for TeN, Pleasure and the C-Band Barker. This facility consists of state-of-the art digital encoding and automated playout equipment which the Company believes to be the only system of its kind in North America. Uplinking services for the Boulder, Colorado playout facility are managed by Williams Communications Vyvx Services ("Vyvx"). Playout and uplink services for the Extasy Networks are contracted to Fifth Dimension, whose facilities are located in Ottawa, Ontario (Canada). Fifth Dimension's uplink facility is equipped with satellite equipment, editing equipment, power supplies and other equipment necessary to provide 24-hour programming for the three C-Band networks. This equipment is owned by New Frontier Media. CALL SERVICE CENTER Fifth Dimension had maintained a call service center in Ottawa, Ontario. Following the Fifth Dimension acquisition, New Frontier Media contracted with TurnerVision, Inc. to provide these services and, as such, relocated its call center service function to the United States. The call service center receives incoming calls from customers wishing to order network programming, or having questions about service or billing. The call service center is accessible from anywhere in the U.S. or Canada via toll-free "800" numbers. It is equipped with approximately 30 workstations, each of which contain a networked computer workstation, Company-owned proprietary order processing software, and telephone equipment. These components are tied into a computer telephony integrated switch which routes incoming calls and enables orders to be processed and subscriber information to be updated "on-line." The call center functions currently contracted with Turnervision, Inc. are scheduled to be moved to Boulder, Colorado under the Company's management by August 1, 1999. The call service center is operational 24-hours per day, seven days a week, and staffed according to call traffic patterns, which take into account time of day, day of the week, seasonal variances, holidays, and special promotions. Customers pay for their order with credit cards, which are authorized and charged before the order is sent electronically to General Instrument's Access Control Center in San Diego, California for processing. General Instrument receives the subscriber order and the subscriber's identification information, and sends a signal to the appropriate satellite, which "unlocks" the service ordered for the applicable period of time. 11 COMPETITION New Frontier Media principally competes with Playboy in the subscription and PPV markets. Playboy has significantly greater financial, sales, marketing and other resources to devote to the development, promotion and sale of its cable programming products, as well as a longer operating history and broader name recognition than New Frontier Media. Playboy's size and market position makes it a more formidable competitor than if it did not have the resources and name recognition that it has. New Frontier Media competes directly with Playboy in editing standards of its programming, network performance in terms of subscriber buy rates and the license fees that New Frontier Media offers to cable and DBS providers. However, New Frontier Media cannot and does not compete with Playboy in the area of money spent on promoting its products. New Frontier Media believes that the quality of its programming, as well as the attractive revenue splits and subscriber buy rates for such programming, are the critical factors which will influence cable operators to choose its programming over Playboy's. On June 1, 1999, New Frontier Media launched Pleasure, a new 24-hour adult network which competes directly with Playboy in the most edited adult programming category. With the addition of Pleasure, New Frontier Media expects its overall performance in the cable and DBS markets to improve because of its unique ability to offer a full range of quality adult programming in all three current editing standards, namely the most edited (Pleasure), partially-edited (TeN) and least edited (Extasy Networks) formats. The Company competes with other adult networks in the multi-channel and PPV markets including Califa Entertainment (The Hot Network) and Emerald Media, Inc. (SXTV). The Company also faces general competition from other forms of non-adult entertainment, including sporting and cultural events, other television networks, feature films, and other programming. In addition, the Company will face competition in the adult entertainment arena from other providers of adult programming, adult video rentals and sales, newspaper and magazines aimed at adult consumers, telephone adult chat lines, and adult-oriented Internet services. MARKETING New Frontier Media markets its C-band networks primarily through an open-air, 24-hour Barker channel which promotes the programming featured on the Extasy Networks. This channel uses edited movie clips and interstitial programming to entice viewers who are "channel surfing" to subscribe to one of the Extasy Networks channels (periodic subscription), or to purchase the Company's programming on a PPV basis. To a lesser extent, New Frontier Media advertises in print publications such as satellite channel guides. New Frontier Media also aggressively markets its programming directly to satellite program packagers or distributors, through direct marketing campaigns, face-to-face meetings, trade show exhibits and industry gatherings. The Company's marketing department has developed numerous programs and promotions to support its networks. These have included the development of detailed monthly program guides, glossy promotional pieces, and celebrity appearances at industry trade shows. New Frontier Media also maintains a sales force of five full-time employees to promote carriage of its programming on cable television, DBS and alternative platform systems. The Company exhibits at three to four major industry trade shows per year, including the National Cable Television Association (NCTA) shows (Western and National) and the Satellite Broadcasting and Communications Association (SBCA) show. In addition, the Company attends a variety of other industry trade shows and conferences, including the Cable Television Advertising and Marketing (CTAM) and the DBS Summit. YEAR 2000 COMPLIANCE In response to the Year 2000 problem, New Frontier Media has identified and is implementing changes to its existing computerized business systems. New Frontier Media is addressing the issue through a combination of modifications to existing programs and conversions to Year 2000 compliant software. In addition, New Frontier Media has communicated with its vendors and other service providers to ensure that their products and business systems are or will be Year 2000 compliant. If modifications and conversions by New Frontier Media and those with which New Frontier Media conducts business are not made in a timely manner, the Year 2000 problem could have a material adverse effect on New Frontier Media's business, financial condition and results of operations. All of New Frontier Media's major systems have either been identified as Year 2000 compliant, or remediation has been completed to ensure Year 2000 compliance. These major systems include financial applications and key operating systems of the Company. New Frontier Media is currently evaluating less critical systems, such as desktop applications, with plans for all systems to be in compliance by September 30, 1999. New Frontier Media is also reviewing its non-information technology systems to determine the extent of any modifications and believe that there will be minimal changes necessary for compliance. Although New Frontier Media is still quantifying the impact, the current estimate of the total costs associated with the required modifications and conversions are expected to be slightly in excess of $35,000, of which approximately $15,000 was expensed in fiscal year 1999. New Frontier Media expenses these costs as it incurs them. 12 New Frontier Media believes that its technology systems will be ready for the year 2000 and, therefore, has not developed a comprehensive contingency plan. High-risk vendors will be examined throughout the year with contingency plans developed on a case-by-case basis where needed. Additionally, New Frontier Media is aware that it may experience other isolated incidences of non-compliance and plans to allocate internal resources and retain dedicated consultants and vendor representatives to be ready to take action if necessary. Although New Frontier Media values its established relationships with key vendors and other service providers, if some vendors are unable to perform on a timely basis due to their own Year 2000 issues, New Frontier Media believes that substitute products or services are available from other vendors. New Frontier Media also recognizes that it, like all other businesses, is at risk if other key suppliers in utilities, communications, transportation, banking and government are not ready for the year 2000. EMPLOYEES As of the date of this report, New Frontier Media and its subsidiaries had 43 full-time and 2 part-time employees. Five employees are employed in executive positions; three employees are employed in administrative and clerical positions; the remainder of New Frontier Media and its subsidiaries' employees are employed in sales or technical capacities. New Frontier Media employees are not members of a union, and New Frontier Media has never suffered a work stoppage. The Company believes that it maintains a satisfactory relationship with its employees. RISK FACTORS NEW FRONTIER MEDIA HAS INCURRED LOSSES FROM INCEPTION AND MAY NEVER GENERATE SUBSTANTIAL PROFITS. We were organized in July, 1995 and have incurred losses from inception. We may never generate substantial profits. We incurred a net loss of $7,581,124, or $1.04 per share, on revenues of $9,452,432 for the fiscal year ended March 31, 1999 and a net loss of $3,258,343, or $.73 per share, on revenues of $712,581 for the fiscal year ended March 31, 1998. As of March 31, 1999 we had an accumulated deficit of $10,278,197. Our ability to operate profitably is dependent upon successful execution of our business plan. LIMITS ON THE COMPANY'S ACCESS TO DISTRIBUTION CHANNELS COULD ADVERSELY AFFECT ITS BUSINESS. Our satellite uplink providers' services are critical to us. If our satellite uplink providers fail to provide the services contracted for with them, our satellite programming operations would in all likelihood be suspended, resulting in a loss of substantial revenues to the Company. If our satellite uplink providers improperly manage their uplink facilities, we could experience signal disruptions and other quality problems that, if not immediately addressed, could cause us to lose subscribers and subscriber revenues. 13 Our continued access to satellite transponders is critical to us. Our satellite programming operations require continued access to satellite transponders to transmit programming to our subscribers. We also use satellite transponders to transmit programming to cable operators. Material limitations to satellite transponder capacity could materially adversely affect our operating performance. Access to transponders may be restricted or denied if: * we or the satellite owner is indicted or otherwise charged as a defendant in a criminal proceeding; * the FCC issues an order initiating a proceeding to revoke the satellite owner's authorization to operate the satellite; * the satellite owner is ordered by a court or governmental authority to deny us access to the transponder; * we are deemed by a governmental authority to have violated any obscenity law; or * our satellite transponder provider determines that the content of our programming is harmful to its name or business. In addition to the above, the access of our networks to transponders may be restricted or denied if a governmental authority commences an investigation concerning the content of the transmissions. Our ability to convince cable operators to carry our programming is critical to us. The primary way for us to expand our cable subscriber base is to convince additional cable operators to carry our programming. We can give no assurance, however, that our efforts to increase our base of cable subscribers will be successful. THE COMPANY'S PRIMARY COMPETITOR HAS SIGNIFICANTLY GREATER RESOURCES THAN THE COMPANY. Our principal competitor, Playboy, has significantly greater financial, sales, marketing and other resources to devote to the development, promotion and sale of its cable programming products, as well as a longer operating history and broader name recognition, than we do. We compete with Playboy as to the editing standards of its programming, network performance in terms of subscriber buy rates and the license fees that we offer to cable and DBS system providers. THE COMPANY ALSO FACES GENERAL COMPETITION FROM OTHER FORMS OF ADULT AND NON-ADULT ENTERTAINMENT. The Company faces competition in the adult entertainment industry from other providers of adult programming, adult video rentals and sales, newspapers and magazines aimed at adult consumers, adult oriented telephone chat lines, and adult oriented Internet services. To a lesser extent, we also face general competition from other forms of non-adult entertainment, including sporting and cultural events, other television networks, feature films and other programming. NEW FRONTIER MEDIA MAY NOT BE ABLE TO RETAIN ITS KEY EXECUTIVES. As a small company with approximately 45 employees, our success depends upon the contributions of our executive officers and its other key technical personnel. The loss of the services of any of our executive officers or other key personnel could have a significant adverse effect on our business and operating results. We cannot assure that New Frontier Media will be successful in attracting and retaining such personnel. RAPID TECHNOLOGICAL CHANGE WILL CONTINUE TO OCCUR IN OUR INDUSTRY. We are engaged in a business that has experienced tremendous technological change over the past two years. As a result, we face all the risks inherent in businesses that are subject to rapid technological advancement, such as the possibility that a technology that we have invested in may become obsolete. In that event, we may be required to invest in new technology. Our inability to identify, fund the investment in, and commercially exploit such new technology could have an adverse impact on our financial condition. Our ability to implement our business plan and to achieve the results projected by management will be dependent upon management's ability to predict technological advances and implement strategies to take advantage of such changes. 14 GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS. Telecommunications Act of 1996. The Telecommunications Act of 1996 appears to have slowed growth in cable access for domestic pay television businesses. For example, Federal Communications Commission regulation, including the "going-forward rules," provides cable operators with incentives to add basic services. Competition for channel space has increased as cable operators have utilized available channel space to comply with "must-carry" provisions, mandated retransmission consent agreements and "leased access" provisions. In addition, we believe that growth will continue to be slow in the next two to three years as the cable television industry responds to the FCC's rules and subsequent modifications. We cannot assure you that the growth will not slow further in the future. Section 505 of the Telecommunications Act. Section 505 of the Telecommunications Act effectively requires each cable system that offers adult programming either to (1) install additional blocking technology in each household to prevent any momentary fragments of our content from accidentally becoming available to non-subscribing cable customers or (2) restrict the period during which adult programming is transmitted to the hours between 10:00 p.m. and 6:00 a.m. Although a United States District Court has unanimously declared this law unconstitutional and blocked its implementation, the decision has been appealed and accepted for review by the U.S. Supreme Court. The results of our operations could be adversely affected if Section 505 is found constitutional in a reversal of the court decision or if cable operators restrict the hours of transmission of our programming until all appeals have been exhausted. NEGATIVE PUBLICITY, LAWSUITS OR BOYCOTTS BY OPPONENTS OF ADULT CONTENT COULD ADVERSELY AFFECT OUR BUSINESS. We could become a target of negative publicity, lawsuits or boycotts by one or more advocacy groups who oppose the distribution of "adult entertainment." These groups have mounted negative publicity campaigns, filed lawsuits and encouraged boycotts against companies whose businesses involve adult entertainment. The costs of defending against any such negative publicity, lawsuits or boycotts could be significant, could hurt our finances and could discourage investors from investing in our publicly traded securities. To date, we have not been a target of any of these advocacy groups. As a leading provider of adult entertainment, we can not assure you that we may not become a target in the future. NEW FRONTIER MEDIA WILL NEED ADDITIONAL FUNDS TO FINANCE ITS FUTURE GROWTH. We anticipate that our capital resources will be sufficient to satisfy our capital requirements for our current operations for the next 12 months. We will need, however, additional funds to upgrade and expand our playout facility to incorporate the Extasy Networks at our Boulder, Colorado facility and to aggressively market TeN and our new Pleasure channel to increase carriage among the MSO community. We expect to receive as much as $9.75 million through the exercise of our 1,500,000 publicly traded warrants, which are currently "in-the-money". In the event that we do not receive at least $5.0 million through the exercise of our public warrants, we will need to raise additional funds. If we are unable to obtain additional funds in a timely manner or on acceptable terms, we may have to curtail or, as a last resort, suspend the planned expansion of our playout facility and the planned marketing effort for TeN and Pleasure, which could have a significant adverse effect on our business relationships, financial results and prospects, which in turn could lead to lower overall revenues. BECAUSE THE COMPANY IS INVOLVED IN THE ADULT PROGRAMMING BUSINESS, IT MAY BE MORE DIFFICULT FOR IT TO RAISE MONEY OR ATTRACT MARKET SUPPORT FOR OUR STOCK. Some investors, investment banking entities, market makers, lenders and others in the investment community may decide not to provide financing to us, or to participate in our public market or other activities due to the nature of our business, which, in turn, may hurt the value of our stock, and our ability to attract market support. IT MAY BE DIFFICULT TO EFFECT A CHANGE IN CONTROL OF NEW FRONTIER MEDIA. Issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of New Frontier Media. New Frontier Media's board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of such stock without further shareholder approval. The rights of the holders of common stock will be subjected to, and may also be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. 15 FUTURE SALES OF COMMON STOCK MAY CAUSE THE MARKET PRICE OF THE COMMON STOCK TO DROP. Future sales of shares of common stock by New Frontier Media and/or its stockholders could cause the market price of the common stock to drop. There are currently 5,377,433 restricted shares and 7,162,084 shares of common stock which are freely tradable or eligible to have the restrictive legend removed pursuant to Rule 144(k) promulgated under the Securities Act. Of the 5,377,433 restricted shares, 1,988,800 of such shares are currently eligible for resale under Rule 144. Sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could have a significant adverse effect on the market price of the common stock. THE COMPANY IS SUBJECT TO A COUNTER-CLAIM FOR UNSPECIFIED DAMAGES IN A SUIT WITH A FORMER FINANCIAL ADVISOR. On October 3, 1997, we filed a complaint in District Court in Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers & Co. Ltd. alleging breach by Sands Brothers of the terms of a financial consulting agreement with us. We also alleged fraud in the inducement, and are seeking return of our initial payment of $25,000 to Sands Brothers and rescission of the agreement. Sands Brothers has filed an answer and counter-claim to our complaint seeking unspecified damages, and we have filed an answer to the Sands Brothers counter-claim. We intend to vigorously pursue our claim against, and defend the counter-claim from, Sands Brothers. THE COMPANY HAS BEEN SUED BY A PROSPECTIVE INVESTOR SEEKING TO ENFORCE AN ALLEGED AGREEMENT TO CONVEY A 70% EQUITY INTEREST IN NEW FRONTIER MEDIA. In a January 25, 1999 amended complaint (Case No. 99CV30), J.P. Lipson seeks to enforce an alleged agreement by New Frontier Media to convey to Lipson a 70% equity interest in New Frontier Media. Lipson is also seeking large and/or unspecified damages. We dispute that there exists a binding and enforceable agreement to transfer any equity interest in New Frontier Media to Lipson and filed on February 10, 1999 a motion for partial summary judgement directed to this issue. To date the Court has neither ruled on nor set our motion for a hearing. We will continue to vigorously defend against Lipson's claims. THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS. We recognize that we, like all other businesses, are at risk if key suppliers in utilities, communications, transportation, banking and government are not ready for the year 2000. It is also possible that our computer software applications, internal accounting, customer billing and other business systems, working either alone or in conjunction with those of third parties who do business with us, will not accept input of, store, manipulate and output dates in the year 2000 or after without error. If any of this were to happen, we may suffer business interruptions or shutdown, reputational harm or legal liability and, as a result, material financial loss. THE COMPANY RECEIVED A NOTICE FROM NASDAQ IN EARLY 1999 STATING THAT IT MAY BE DELISTED FROM NASDAQ. Delisting of New Frontier Media's common stock from The Nasdaq SmallCap Market would cause the price of the common stock to drop and impair the ability of holders to sell their shares. In addition, in order to be relisted on Nasdaq, we would be required to comply with the initial listing requirements, which are substantially more onerous than the maintenance standards. In the event the Company's securities are delisted from Nasdaq, such delisting would also be likely to have an adverse effect on our ability to raise additional financing. In early 1999, we received a notice from The Nasdaq Stock Market that we failed to meet Nasdaq's $2 million in net tangible assets standard for continued listing on the Nasdaq Small Cap Market. We attended a hearing to review that determination on April 9, 1999. We have not yet heard any decision from Nasdaq. At and before the hearing, we presented financial information to establish that we exceeded Nasdaq's net tangible assets standard. We also discussed Nasdaq's concerns regarding the written consent process used by us, upon the advice of our counsel, to obtain shareholder approval for the issuance of more than 20% of our outstanding shares under their corporate governance rules. 16 THE LIABILITY OF OUR DIRECTORS IS LIMITED. Our Bylaws substantially limit the liability of our directors to us and our shareholders for breach of fiduciary or other duties. THE PRICE OF THE COMMON STOCK MAY CONTINUE TO BE HIGHLY VOLATILE. The trading price for the common stock has been highly volatile and could continue to be subject to significant fluctuations in response to variations in our quarterly operating results, general conditions in the adult entertainment industry or the general economy, and other factors. In addition, the stock market is subject to price and volume fluctuations affecting the market price for public companies generally, or within broad industry groups, which fluctuations may be unrelated to the operating results or other circumstances of a particular company. Such fluctuations may adversely affect the liquidity of the common stock, as well as the price that holders may achieve for their shares upon any future sale. ITEM 2. DESCRIPTION OF PROPERTY. The Company does not own any real property. The Company leases approximately 11,744 square feet of office space at its headquarters located at 5435 Airport Blvd., Suite 100, Boulder, Colorado 80301. The Company's lease on this office space runs through October 2003 at a rate of approximately $11,800 per month with a five-year optional renewal period. The lease also requires that the Company pay its pro-rata portion of real estate taxes and operating expenses. New Frontier Media also leases approximately 1,500 square feet of office space at 20061 Saticoy Street, Suite 203, Winnetka, California at a base rate of $1,663.75 per month for its content acquisition and programming operations. This lease expires on August 31, 2000. ITEM 3. LEGAL PROCEEDINGS. On October 3, 1997, New Frontier Media filed a complaint in District Court in Boulder, Colorado (Case No. 97 CV 1428) against Sands Brothers & Co., Ltd. alleging breach by Sands Brothers of the terms of a financial consulting agreement with us. New Frontier Media also alleged fraud in the inducement, and is seeking return of its initial payment of $25,000 to Sands Brothers and rescission of the agreement. Sands Brothers has filed an answer and counter-claim to New Frontier Media's complaint seeking unspecified damages, and New Frontier Media has filed an answer to the Sands Brothers counter-claim. New Frontier Media intends to vigorously pursue its claim against, and defend the counter-claim from, Sands Brothers. In a January 25, 1999 amended complaint (Case No. 99CV30), J.P. Lipson seeks to enforce an alleged agreement by New Frontier Media to convey to Lipson a 70% equity interest in New Frontier Media. Lipson is also seeking large and/or unspecified damages. New Frontier Media disputes that there exists a binding and enforceable agreement to transfer any equity interest in New Frontier Media to Lipson and filed on February 10, 1999 a motion for partial summary judgment directed to this issue. To date the Court has neither ruled on nor set the motion for a hearing. New Frontier Media will continue to vigorously defend against Lipson's claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted for a formal vote of the shareholders during the fourth quarter of the fiscal year covered by this Report. 17 PART II. ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION. Prior to February 11, 1998, a limited public market for New Frontier Media's Common Stock existed on the NASDAQ Bulletin Board under the symbol NOOF. Commencing on February 11, 1998, New Frontier Media's Common Stock and Units (each consisting of one share of Common Stock and one redeemable common stock purchase warrant) were quoted on the Nasdaq Small Cap Market under the symbols NOOF and NOOFU, respectively. As of the close of business on May 18, 1998, New Frontier Media split the Units into their component parts. Commencing on May 19, 1998, New Frontier Media's warrants were quoted on the Nasdaq Small Cap Market. The following table sets forth the range of high and low closing prices for the Company's Common Stock for each quarterly period indicated, as reported by brokers and dealers making a market in the capital stock. Such quotations reflect inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions:
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW ------- ------ ------ ------- June 30, 1997......... 5-3/8 5 June 30, 1998 4-1/4 2-3/4 September 30, 1997.... 5-1/2 5 September 30, 1998 3-11/16 1-9/32 December 31, 1997..... 5-3/4 4-3/4 December 31, 1998 1-5/8 13/16 March 31, 1998........ 5-1/4 2-7/8 March 31, 1999 5-3/8 14/16
As of March 31, 1999, there were approximately 340 record holders of New Frontier Media's Common Stock. New Frontier Media has not paid any cash or other dividends on its Common Stock since its inception and does not anticipate paying any such dividends in the foreseeable future. New Frontier Media intends to retain any earnings for use in New Frontier Media operations and to finance the expansion of its business. In March 1999, New Frontier Media issued 2,610,000 common shares at $2.00 per share pursuant to a private placement less offering costs of $514,323. The net proceeds from this issuance were used to repay approximately $1.5 million of short-term debt. The balance will be used to fund working capital requirements. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this document. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. 18 SELECTED FINANCIAL DATA The following table sets forth selected operating data for the periods and upon the basis indicated:
Year Ended March 31, 1999 1998 --------------------------------- Sales, net........................................... $ 9,452,432 $ 712,581 Cost of Sales........................................ 8,800,203 1,041,925 ----------- ------------- Gross Profit......................................... 652,229 329,344 Total Operating Expenses............................. 7,708,346 1,310,642 Other Income (Expense)............................... (208,061) (159,454) ----------- ------------ Loss from continuing operations...................... (7,264,178) (1,799,440) Discontinued Operations.............................. (316,946) (1,458,903) ----------- ------------- Net Income (Loss).................................... $(7,581,124) $ (3,258,343) =========== =============
COMPARISON OF YEARS ENDED MARCH 31, 1999 AND 1998 NET REVENUE. Net revenue for 1999 was $9,452,432, up from $712,581 (1,227%) from 1998. This increase in revenue was due to the fact that the Company derived a full year's benefit of revenue from its three C-band networks as compared to only 41 days of revenue in the fiscal year ended March 31, 1998. The Company's revenues from TeN were minimal (approximately 3.5% of total revenue) for this fiscal year due to limited carriage and launch incentives (free initial months of carriage) provided to MSOs/DBS providers. The Company expects to see an increase in Cable/DBS revenues as the launch incentive periods expire for current MSOs/DBS providers and additional carriage is added during the next fiscal year. Currently, the Company's cable/DBS networks, TeN and Pleasure, reach an estimated combined 5.8 million addressable television households. The revenue derived from New Frontier Media's C-Band business is expected to remain stable. COST OF GOODS SOLD. Cost of goods sold includes the expenses associated with playout, uplinking, satellite transponder space, program acquisition amortization, and call center operations. Cost of goods sold increased to $8,800,203 for the 1999 fiscal year from $1,041,925 (an increase of 745%) due to the fact that the Company incurred a full year's of expenses associated with operations as compared to only 41 days of activity in the fiscal year ended March 31, 1998. Approximately 10% of the total cost of goods sold during the fiscal year ended March 31, 1999 were related to TeN as opposed to the Company's C-Band networks. Approximately 74% of the Company's cost of goods sold are fixed in nature. The Company anticipates an increase in costs of goods sold of approximately 23% for fiscal year 2000 related entirely to the launch of its new network, Pleasure, as well as to the operation of TeN for a full fiscal year. GROSS PROFIT. For the 1999 fiscal year, the Company generated a gross profit of $652,229 compared with a negative gross profit of ($329,344) for the prior year. This increase in gross profit is attributable to the fact that the Company derived a full year's benefit of its operations from its C-band networks as compared to only 41 days in the fiscal year ended March 31, 1998. As stated above, since the majority of New Frontier Media's costs of goods sold are fixed in nature, as the Company's revenue base continues to increase the gross profit generated is expected to increase proportionately. OCCUPANCY AND EQUIPMENT. Occupancy and equipment expense was $297,056 for the year ended March 31, 1999 compared to $116,122 for the year ended March 31, 1998, a $180,934 (156%) increase. Occupancy and equipment expenses relate primarily to rent and depreciation expenses. The increase in these expenses is attributable to the operation of the Company's business for a full year as compared to 41 days in fiscal year 1998 as well as a full year's worth of depreciation for the assets acquired from Fifth Dimension and additions to fixed assets made during the fiscal year. 19 LEGAL AND PROFESSIONAL. Legal and professional expenses was $504,961 for the year ended March 31, 1999 compared to $116,091 for the year ended March 31, 1998, a $388,870 (335%) increase. Legal and professional expenses relate to legal and accounting/auditing fees. The increase during this fiscal year is due to higher legal fees incurred as a result of the Company being publicly held and the Company's policy to vigorously defend itself against all claims. ADVERTISING AND PROMOTION. Advertising and promotion expenses were $3,448,590 for the year ended March 31, 1999 compared to $416,537 for the year ended March 31, 1998, a $3,032,053 (728%) increase. Advertising and promotion expenses consist primarily of Barker costs for uplink, playout and transponder space, print advertising, expenses incurred with respect to trade shows, travel, and meals/entertainment expenses. The year-to-year increase is attributable to incurring advertising for the Company's C-band business for a full year as compared to 41 days in fiscal year 1998 and to the Company's aggressive promotion of its new networks, TeN and Pleasure, including the attendance of trade shows, sales related travel expenses, print advertising, and the production of promotional materials for the networks. SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits were $1,413,959 for the year ended March 31, 1999 compared to $415,650 for the year ended March 31, 1998, an increase of $998,309 (240%). This increase was attributable to the hiring of approximately 35 additional employees to operate the Company's business including the addition of a five-person sales force to sell TeN and Pleasure, the addition of seven employees to operate the Company's playout facility, and additional employees hired to provide interstitial editing, broadband development, and other support roles. COMMUNICATIONS. Communication expense was $158,352 for the year ended March 31, 1999 compared to $16,505 for the year ended March 31, 1998, an increase of $141,847 (859%). Communication expense relates primarily to telephone expenses incurred for the call center operations, wide area network services, Internet service providers, and long distance and local phone service. The increase in telephone expenses is attributable to the operation of the Company for a full year compared to 41 days of operations for the fiscal year 1998. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $827,794 for the year ended March 31, 1999 compared to $106,240 for the year ended March 31, 1998, an increase of $721,554 (679%). General and administrative expenses consist primarily of bank charges, insurance, outside services, office supplies, postage, printing, and registration/filing fees. The increase in general and administrative expenses is attributable to the operation of the Company for a full year compared to 41 days of operations for the fiscal year 1998. GOODWILL AMORTIZATION. Goodwill amortization was $636,657 for the year ended March 31, 1999 compared to $73,226 for the year ended March 31, 1998, an increase of $563,431 (769%). This increase is due to the amortization of goodwill over 365 days compared to 41 days for fiscal year 1998. The goodwill shown relates to the acquisition of the assets of Fifth Dimension in February 1998. This goodwill is being amortized over a period of 120 months. CONSULTING. Consulting expenses were $420,977 for the year ended March 31, 1999 compared to $50,271 for the year ended March 31, 1998, an increase of $370,706 (737%). Consulting expenses consist of payments made to outside consultants in various capacities such as program content acquisition, broadcast playout operations development, marketing, and sales. The increase in consulting expenses is attributable to the Company's use of outside consultants to assist it in the start-up of its playout facility, the start-up of its sales and marketing departments, and the oversight of its program content acquisitions. As New Frontier Media grows it expects to see its reliance on outside consultants decrease as many of these functions are brought in-house. OTHER EXPENSE. Net total other expenses were $208,061 for the year ended March 31, 1999 compared to $159,454 for the year ended March 31, 1998, an increase of $48,607 (30%). Net total other expenses consists of interest income, loss on trading securities, and interest expense. The increase in net total other expenses is due primarily to an increase in interest expense corresponding to the increase in borrowings incurred by the Company during the year. As of March 31, 1999, all debt financing of the Company had been paid off. 20 LOSS FROM OPERATIONS OF DISCONTINUED SUBSIDIARIES. Loss from operations of discontinued subsidiaries was $178,890 for the year ended March 31, 1999 compared to $999,853 for the year ended March 31, 1998. As of March 31, 1999, the Company had discontinued the operations of its operating subsidiary, David. David incurred a loss of $178,890 for the fiscal year 1999. As of March 31, 1998, New Frontier Media had formalized its plan to discontinue operations of its operating subsidiaries, BIG and Fuzzy Entertainment, Inc. ("Fuzzy"). On June 26, 1998, the Company finalized the sale of its 70% interest in BIG to Quarto. BIG, Fuzzy, and David incurred losses of $999,853 for the year ended March 31, 1998. LOSS ON DISPOSAL OF DISCONTINUED SUBSIDIARIES. Loss on disposal of discontinued subsidiaries was $138,056 for the year ended March 31, 1999 compared to $459,050 for the year ended March 31, 1998. For the fiscal year 1999, the Company incurred a loss on the disposal of David in the amount of $204,818, a gain on the disposal of BIG in the amount of $64,166 and a gain on the disposal of Fuzzy in the amount of $2,596. For the fiscal year 1998, the Company accrued a loss on the discontinuance of BIG and Fuzzy in the amount of $459,050. NET LOSS. For the year ended March 31, 1999, the Company's net loss from continuing operations widened to $7,264,178 from a total loss of $1,799,440 for the year ended March 31, 1998. The increase in year-to-year continuing net losses was due to the following: 1) the increase in advertising, marketing, sales and promotional expenses incurred in the launching of TeN (the Company estimates it incurred approximately $2.5 million to launch TeN); 2) the increase in employees necessary to adequately staff the Company's operations; 3) the operation of the Company's business for 365 days as compared to 41 days in fiscal year 1998; and 4) the increase in expenses to operate TeN without corresponding revenue due to launch incentives and lack of revenue generating carriage. All of the Company's operations as of March 31, 1997, namely, BIG, Fuzzy and David have now been discontinued leaving CSB, which commenced operations on February 18, 1998, as the Company's only operating subsidiary and business segment. Insofar as none of the Company's current operations existed as of March 31, 1997 and all of the Company's operations which existed as of March 31, 1997 have been discontinued, the Company's results of operations for the year ended March 31, 1997 have no relevance to the Company's current operations. Thus, the above discussion of the Company's operations for the years ended March 31, 1999 and 1998 has not attempted to include any comparisons to the Company's results for fiscal 1997 from such discontinued operations. Management believes that the Company will become profitable within the next two quarters based on the following: 1) the inclusion on DISH Network's impulse PPV system should dramatically increase revenue for both Ten and Pleasure; 2) an increase in carriage for TeN and Pleasure combined with the expiration of several launch incentive programs; 3) a decrease in expenses incurred for the start-up of TeN and Pleasure; and 4) the acquisition of IGallery, ITN, and CTI which are collectively cash flow positive. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company had cash and cash equivalents of $2,736,186 compared to $503,123 at March 31, 1998, of which $250,000 was restricted. This increase in cash was primarily the result of the Company's sale of 2,610,000 shares of common stock in a private placement in March 1999 that raised $5,220,000. The Company has applied $1,518,872 of the proceeds to pay $1,485,000 of principal amount of indebtedness plus interest and intends to apply the balance of the proceeds to working capital needs. For the year ended March 31, 1999, cash used in operating activities of $3,003,686 was primarily due to losses before depreciation and amortization of $1,709,903, increases in deferred revenue and accounts payable, and increases in prepaid distribution rights. The increase in deferred revenue and accounts payable was due primarily to the operation of the Company's C-band business for a full year as compared to only 41 days in fiscal year 1998. The increase in prepaid distribution rights is related to the Company's acquisition of content for the Extasy Networks as well as the addition of content for TeN and Pleasure. For the year ended March 31, 1998, cash used in operating activities of $2,042,464 relates primarily to the discontinued operations of BIG, David, and Fuzzy. 21 Cash used in investing activities was $662,521 for the year ended March 31, 1999. Capital expenditures for the year ended March 31, 1999 were $900,787 and have generally been comprised of broadcast playout equipment, editing equipment, receiver/decoder equipment, and computer hardware and software. Cash used in investing activities for the year ended March 31, 1998 was $4,151,844 and was comprised primarily of the acquisition of the Fifth Dimension assets ($4,281,284). Cash provided by financing activities was $6,149,270 for the year ended March 31, 1999 as compared to $6,338,044 for the year ended March 31, 1998, and was due primarily to the issuance of common stock in the amount of $6,925,309 and $6,184,626, respectively. The Company currently has no material commitments other than those under its operating and capital lease agreements. The Company has experienced a substantial increase in its capital expenditures and capital and operating lease arrangements during the current fiscal year as a result of its increased staffing requirements, the addition of the Boulder, Colorado playout facility, and the addition of its TeN and Pleasure networks. New Frontier Media anticipates that its capital expenditures will increase for the next fiscal year as the Company expands its playout facility, purchases additional receiver/decoder equipment as additional cable carriage is obtained for its TeN and Pleasure networks, and relocates its Call Center to Boulder, Colorado. The Company anticipates that its existing cash will be sufficient to satisfy its operating requirements for its current operations for the next 12 months. New Frontier Media expects to receive as much as $9.75 million through the exercise of its 1,500,000 publicly traded warrants, which are currently in-the-money. In the event that the Company does not receive at least $5.0 million through the exercise of its public warrants, it will need to raise additional funds to finance its future growth plans. As of the date of this report the Company had secured a $2.0 million line of credit from an unrelated party. ITEM 7. FINANCIAL STATEMENTS. The consolidated financial statements of New Frontier Media, Inc. and its subsidiaries, including the notes thereto and the report of independent accountants thereon, commence at page F-1 of this Report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. None. 22 PART III. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. The following table sets forth the name, age and position with the Company of each officer and director of the Company as of the date of this Report.
NAME AGE POSITION - ------- ----- ---------- Mark H. Kreloff 37 Chairman of the Board, President, and Chief Executive Officer Michael Weiner 58 Executive Vice President, Secretary-Treasurer and Director Karyn L. Miller 33 Chief Financial Officer Koung Y. Wong 46 Director Edward J. Bonn 47 Director
MARK H. KRELOFF. Mr. Kreloff has held the title Chairman and Chief Executive Officer of New Frontier Media , Inc. since the Company's inception in September, 1995. Mr. Kreloff has been actively involved in the cable television, entertainment and computer software industries since 1977. Prior to founding the Company and during the four years immediately preceding his employment with the Company, he was the President of LaserDisc Entertainment, a video disc distribution company; Elmfield IV, Inc., an entertainment production and distribution company, and California Software Partners, L.P., a computer software development and publishing company. Previously, Mr. Kreloff held the title Vice President, Mergers and Acquisitions, with Kidder Peabody & Co. and Drexel Burnham Lambert. From 1983 through 1986, Mr. Kreloff was employed by Butcher & Singer, Inc., a Philadelphia-based investment bank, in the Cable Television and Broadcast Media Group. From 1977 through 1983, Mr. Kreloff held a variety of positions, including Marketing Director, in his family's cable television system based in New Jersey. Mr. Kreloff is an honors graduate of Syracuse University and holds B.S. degrees in Finance and Public Communications. MICHAEL WEINER. Mr. Weiner has been Executive Vice President and a director of New Frontier Media, Inc. since the Company's inception. Prior to founding the Company, Mr. Weiner was actively involved as a principal and director in a variety of publishing businesses, including a fine art poster company His background includes 20 years in real estate development and syndication. KARYN L. MILLER. Ms. Miller has ten years of accounting and finance experience and is a licensed CPA in the state of Colorado. Ms. Miller joined New Frontier Media on February 15, 1999 and began her career at Ernst & Young in Atlanta, Georgia. Prior to joining the Company, Ms. Miller was the Corporate Controller for Airbase Services, Inc. a leading aircraft repair and maintenance company. Previous to that, she was the Finance Director for Community Medical Services Organization and Controller for Summit Medical Group, P.L.L.C. Before joining Summit Medical Group, P.L.L.C., Ms. Miller was a Treasury Analyst at Clayton Homes, Inc., a $1 billion company traded on the NYSE. Ms. Miller graduated with Honors with both a Bachelors of Science degree and a Masters in Accounting from the University of Florida. KOUNG Y. WONG. Mr. Wong was born in Canton, China in 1952 and immigrated to the United States in 1969 with his family. He earned a Bachelor of Arts degree from City College of San Francisco in 1975, and studied Architecture at the University of California at Berkeley for one year. For the past 22 years, Mr. Wong has been the president and sole shareholder of Wav Entertainment, Inc., a leading commerce electronics hardware and software distribution company based in South San Francisco, California. Wav Entertainment, Inc., includes a 20,000 square-foot corporate headquarters and distribution center and an 8,500 square-foot retail superstore in San Francisco, California. 23 EDWARD J. BONN. Mr. Bonn is the founder and President of ITN. ITN is a leading Internet technology company that provides turn-key e-commerce solutions, Internet software engineering, bandwith, merchant account management and credit card processing systems. Mr. Bonn was formerly the Chairman of the Board of Independent Entertainment Group, a California-based, publicly traded, service bureau and information provider. He was also a founder and President of ICOM Group, Inc., an audio text service bureau that specialized in automated credit card processing and fraud control procedures, and the founder and President of Media 800, Inc., a privately held company offering a variety of 800/900 information and entertainment. No director or executive officer of the Company is related to any other director or executive officer. None of the Company's officers or directors hold any directorships in any other public company. There are currently two outside directors on the Company's Board of Directors. The Company's compensation committee is comprised of Messrs. Kreloff, Weiner, and Wong. The Company's audit committee is comprised of Messrs. Kreloff, Bonn and Wong. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Pursuant to Section 16(a) of the Securities Exchange Act of 1934, and the rules issued thereunder, the Company's directors and executive officers are required to file with the Securities and Exchange commission and the National Association of Securities Dealers, Inc. reports of ownership and changes in ownership of Common Stock and other equity securities of the Company. Copies of such reports are required to be furnished to the Company. Based solely on a review of the copies of such reports furnished to the Company, or written representations that no other reports were required, the Company believes that, during the Company's fiscal year ended March 31, 1999, all of its executive officers and directors complied with the requirements of Section 16(a). ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth the annual compensation paid to executive officers of the Company for the fiscal year ended March 31, 1999.
OTHER # OF NAME AND YEAR ANNUAL COMPENSATION OPTIONS/ LTIP PRINCIPAL POSITION COMPENSATION SALARY($) BONUS($) AWARDS SARS PAYOUTS ALL OTHER - ------------------------- ------------ -------- --------- ------------ -------- ------- --------- Mark H. Kreloff, CEO, Pres., and Chairman............. 1999 103,750 0 0 350,000 0 8,422 Michael Weiner, Exec. V.P., Sec.-Treas. And 103,750 Director............. 1999 0 0 290,000 0 8,291 Karyn L. Miller, CFO.................. 1999 10,308 0 0 35,000 0 0
EMPLOYMENT AGREEMENTS The Company has an Employment Agreement with Mark Kreloff which ends on December 31, 2001. The Agreement provides for the payment of an annual base salary of $115,000 for calendar year 1999, $130,000 for calendar year 2000 and $150,000 for calendar year 2001. The Agreement also provides for an annual incentive bonus equal to: (a) 30% of his annual base salary if the Company's annual earnings before income taxes, depreciation and amortization ("EBITDA") is at least $1 million; (b) 50% of his annual base salary if the Company's EBITDA is at least $2 million, or (c) 100% of his annual base salary if the Company's EBITDA is at least $4 million. The Agreement provides for the one-time issuance of 150,000 nonstatutory options to Mr. Kreloff at the fair market value of the 24 common stock on the date of grant. The options are to vest over three years, except upon a change of control of the Company, as defined in the Agreement, or upon the death or disability of Mr. Kreloff, the discharge of Mr. Kreloff without cause or the resignation of Mr. Kreloff for "good reason", as defined in the Agreement. The Agreement further provides for the payment to Mr. Kreloff upon the occurrence of any of the above events of a lump sum equal to his annual base salary and bonus. In addition, if the terminating event occurs on or before June 30, 2000, the Company is to pay to Mr. Kreloff an additional $100,000. The Company has an Employment Agreement with Michael Weiner which ends on December 31, 2001. The Agreement provides for the payment of an annual base salary of $115,000 for calendar year 1999, $130,000 for calendar year 2000 and $150,000 for calendar year 2001. The Agreement also provides for an annual incentive bonus equal to: (a) 30% of his annual base salary if the Company's EBITDA is at least $1 million; (b) 50% of his annual base salary if the Company's EBITDA is at least $2 million, or (c) 100% of his annual base salary if the Company's EBITDA is at least $4 million. The Agreement provides for the one-time issuance of 150,000 nonstatutory options to Mr. Weiner at the fair market value of the common stock on the date of grant. The options are to vest over three years, except upon a change of control of the Company, as defined in the Agreement, or upon the death or disability of Mr. Weiner, the discharge of Mr. Weiner without cause or the resignation of Mr. Weiner for "good reason", as defined in the Agreement. The Agreement further provides for the payment to Mr. Weiner upon the occurrence of any of the above events of a lump sum equal to his annual base salary and bonus. In addition, if the terminating event occurs on or before June 30, 2000, the Company is to pay to Mr. Weiner an additional $100,000. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of the date of this Report, the number and percentage of shares of outstanding Common Stock owned by each person owning at least 5% of the Company's Common Stock, each officer and director owning stock, and all officers and directors as a group:
NAME OF NUMBER BENEFICIAL OWNER SHARES BENEFICIALLY OWNED PERCENT - --------------------- ------------------------- --------- Mark H. Kreloff............................................... 1,014,000 8.09% 5435 Airport Blvd., Suite 100 Boulder, CO 80301 Michael Weiner................................................ 565,300 4.5% 5435 Airport Blvd., Suite 100 Boulder, CO 80301 Columbine Financial Solutions................................. 791,993 6.32% 3900 E. Mexico Avenue, Suite 502 Denver, CO 80210 Pleasure Licensing LLC ....................................... 700,000 5.58% 59 Lake Drive Hightstown, NJ 08520 Koung Y. Wong................................................. 12,500 .01% 168 Beacon St. South San Francisco, CA 94080 All officers and directors as a group (3 persons)................................................... 1,591,800 12.69% ----------- ------ Total...................................................... 3,083,793 24.59% =========== ======
25 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On March 2, 1998, the Company loaned an entity owned by two major shareholders of the Company $100,000 in the form of a promissory note receivable. The note bore interest at 8% per annum. In March 1999, the note was repaid. The Company leased certain equipment and office space via entities controlled by an officer and shareholder on a month to month basis. During the years ended March 31, 1999 and 1998 the Company paid $52,425 and $87,033 to these entities relating to these leases. The leases have since been terminated. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBITS 3.01 Articles of Incorporation of Company, with Amendment (incorporated by reference to Exhibit 3.01of the Company's Registration Statement on Form SB-2 (File No. 333-35337) as amended (the "Registration Statement"). 3.02 First Amended Bylaws of Company (incorporated by reference to Exhibit 3.02 of the Company's Registration Statement). 4.01 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.01 of the Company's Registration Statement). 10.01 Asset Purchase Agreement Among the Company, CSB, Fifth Dimension Communications (Barbados) Inc., and Merlin Sierra, Inc.(incorporated by reference to Exhibit 10.01 of the Company's Registration Statement). 10.02 Asset Purchase Agreement Among the Company, CSB, and 1043133 Ontario Inc.(incorporated by reference to Exhibit 10.02 of the Company's Registration Statement). 10.03 Asset Purchase Agreement Among the Company, CSB, and 1248663 Ontario Inc. (incorporated by reference to Exhibit 10.03 of the Company's Registration Statement). 10.04 Revocable Line of Credit Agreement (incorporated by reference to Exhibit 10.04 of the Company's Registration Statement). 10.05 Promissory Note (incorporated by reference to Exhibit 10.05 of the Company's Registration Statement). 10.06 Call Center Interim Service Agreement between the Company and 1248663 Ontario Inc. (incorporated by reference to Exhibit 10.07 of the Company's Registration Statement). 10.07 Settlement and Stock and Warrant Transfer Agreement, dated June 16, 1998, by and among the Company, BIG, Quarto Holdings, Inc., Old Frontier Media, Inc., Mark Kreloff, Michael Weiner, Andrew Brandt and Scott Wussow. (incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended March 31, 1998). 10.08 Office Lease Agreement, dated August 12, 1998, for premises at 5435 Airport Boulevard, Boulder, CO. 21.01 Subsidiaries of the Company. 27.01 Financial Data Schedule. 26 REPORTS ON FORM 8-K On February 17, 1999, the Company filed a Current Report on Form 8-K to report that it had entered into a content license with Pleasure Productions securing the broadcast and electronic distribution rights to Pleasure Production's 4,000 title library. On March 8, 1999, the Company filed a Current Report on Form 8-K to report that it had raised approximately $5.0 million in equity financing through a private placement of its common stock with institutional investors. SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEW FRONTIER MEDIA, INC. /s/Mark H. Kreloff ------------------------------------ Mark H. Kreloff Chairman of the Board of Directors, President and Chief Executive Officer In accordance with the requirements of the Exchange Act, this report is signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name and Capacity Date - ----------------------- ----- /s/Mark H. Kreloff June 25, 1999 .................................... Name: Mark H. Kreloff Title: Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) /s/Michael Weiner June 25, 1999 ..................................... Name: Michael Weiner Title: Director, Executive Vice President, Secretary and Treasurer 27 /s/Karyn Miller June 25, 1999 ..................................... Name: Karyn Miller Title: Chief Financial Officer (Principal Financial and Accounting Officer) /s/Edward Bonn June 25, 1999 ..................................... Name: Edward Bonn Title: Director /s/Koung Y. Wong June 25, 1999 ..................................... Name: Koung Y. Wong Title: Director NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page Independent Auditors' Report F-2 Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 - F-8 Notes to Consolidated Financial Statements F-9 - F-20 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors New Frontier Media, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of New Frontier Media, Inc. and Subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Frontier Media, Inc. and Subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 11 to the financial statements, the Company is involved in litigation. The ultimate outcome of this matter cannot presently be determined until the court has ruled on the action. SPICER, JEFFRIES & CO. Denver, Colorado June 9, 1999 F-2 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND 1998 ASSETS
1999 1998 ----------- ----------- CURRENT ASSETS: Cash (Note 4) $ 2 736 186 $253 123 Investment in certificates of deposit (Note 4) - 250 000 Accounts receivable 740 923 813 456 Inventories (Note 1) - 182 508 Prepaid distribution and film exhibition rights (Note 1) 1 352 161 721 062 Trading securities, at market value 50 150 193 350 Deposits 402 441 495 000 Notes receivable - related parties (Note 3) - 138 000 Other 623 490 243 148 ----------- ----------- TOTAL CURRENT ASSETS 5 905 351 3 289 647 ----------- ----------- FURNITURE AND EQUIPMENT, at cost (Note 1) 2 779 078 1 113 428 Less: accumulated depreciation and amortization (333 586) (62 209) ----------- ----------- NET FURNITURE AND EQUIPMENT 2 445 492 1 051 219 ----------- ----------- OTHER ASSETS: Prepaid distribution rights (Note 1) 2 157 442 - Other 243 218 119 418 Goodwill, less accumulated amortization of $709,883 and $73,226 (Note 1) 5 651 008 6 287 665 ----------- ----------- TOTAL OTHER ASSETS 8 051 668 6 407 083 ----------- ----------- $16 402 511 $10 747 949 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-3 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND 1998 LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998 ----------- ----------- CURRENT LIABILITIES: Accounts payable $1 846 873 $ 585 001 Note payable (Note 2) - 500 000 Notes payable - related parties (Note 3) - 106 465 Current portion of obligations under capital lease (Note 6) 232 843 6 041 Other accrued liabilities 660 603 172 410 Accrued disposal costs (Note 9) - 459 050 Deferred revenue (Note 1) 2 898 731 446 944 ----------- ----------- TOTAL CURRENT LIABILITIES 5 639 050 2 275 911 LONG-TERM DEBT - Obligations under capital leases (Note 6) 474 430 6 716 ----------- ----------- TOTAL LIABILITIES 6 113 480 2 282 627 ----------- ----------- MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 4) - 17 570 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 6 and 11) SHAREHOLDERS' EQUITY (Notes 1, 4 and 8): Common stock, $.0001 par value, 50,000,000 shares authorized, 12,539,517 and 6,542,000, shares issued and outstanding, respectively 1 254 654 Preferred stock, $.10 par value, 5,000,000 shares authorized: Class A, no shares issued and outstanding - - Class B, no shares issued and outstanding - - Additional paid-in capital 20 565 974 12 265 249 Deficit (10 278 197) (3 818 151) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 10 289 031 8 447 752 ----------- ----------- $16 402 511 $10 747 949 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-4 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31, -------------------------------- 1999 1998 ------------ ------------ SALES, net $ 9 452 432 $ 712 581 COST OF SALES 8 800 203 1 041 925 ------------ ------------ GROSS MARGIN 652 229 (329 344) ------------ ------------ OPERATING EXPENSES: Occupancy and equipment 297 056 116 122 Legal and professional 504 961 116 091 Advertising and promotion 3 448 590 416 537 Salaries, wages and benefits 1 413 959 415 650 Communications 158 352 16 505 General and administrative 827 794 106 240 Goodwill amortization 636 657 73 226 Consulting 420 977 50 271 ------------ ------------ TOTAL OPERATING EXPENSES 7 708 346 1 310 642 ------------ ------------ OTHER INCOME (EXPENSE): Loss on trading securities (4 934) (31 785) Interest income 20 380 3 427 Interest expense (223 507) (131 096) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (208 061) (159 454) ------------ ------------ LOSS FROM CONTINUING OPERATIONS (7 264 178) (1 799 440) ------------ ------------ DISCONTINUED OPERATIONS (Note 9): Loss from operations of discontinued subsidiaries (178 890) (999 853) Loss on disposal of discontinued subsidiaries, including provision of $35,000 in 1998 for operating losses during the phase out period (138 056) (459 050) ------------ ------------ (316 946) (1 458 903) ------------ ------------ NET LOSS $ (7 581 124) $ (3 258 343) ------------ ------------ ------------ ------------ BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS (Note 1) $ (1.00) $ (.40) ------------ ------------ ------------ ------------ BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM DISCONTINUED OPERATIONS (Note 1) $ (.04) $ (.33) ------------ ------------ ------------ ------------ BASIC AND DILUTED NET LOSS PER COMMON SHARE (Note 1) $ (1.04) $ (.73) ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1) 7 288 453 4 460 744 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-5 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1999 AND 1998
Common Stock Class A Preferred Stock ------------------------- ----------------------- $0.0001 Par Value $0.10 Par Value Shares Amount Shares Amount --------------- -------- ----------- --------- BALANCES, March 31, 1997 4 189 000 $ 419 10 000 $1 000 Issuance of common stock for services 8 000 1 - - Retirement and conversion of preferred stock to common stock 5 000 - (10 000) (1 000) Issuance of common stock, less offering costs of $1,585,374 1 500 000 150 - - Issuance of common stock for acquisition of assets 840 000 84 - - Related party notes and accrued interest contributed as capital - - - - Net loss - - - - --------------- -------- ----------- --------- BALANCES, March 31, 1998 6 542 000 654 - - Conversion of debentures plus accrued interest into common stock 2 474 184 247 - - Exercise of warrants 135 000 14 - - Issuance of common stock for license agreement 700 000 70 - - Issuance of common stock for services 78 333 8 - - Issuance of common stock in private placement, less offering costs of $514,323 2 610 000 261 - - Sale of discontinued subsidiary - - - - Net loss - - - - --------------- -------- ----------- --------- BALANCES, March 31, 1999 12 539 517 $ 1 254 - $ - --------------- -------- ----------- --------- --------------- -------- ----------- --------- Class B Preferred Stock ------------------------- Additional $0.10 Par Value Paid-In Shares Amount Capital Deficit ------------- -------- ----------- ----------- BALANCES, March 31, 1997 5 000 $ 500 $ 1 768 661 $(559 808) Issuance of common stock for services - - 39 999 - Retirement and conversion of preferred stock to common stock (5 000) (500) 1 500 - Issuance of common stock, less offering costs of $1,585,374 - - 6 184 476 - Issuance of common stock for acquisition of assets - - 4 199 916 - Related party notes and accrued interest contributed as capital - - 70 697 - Net loss - - - (3 258 343) ------------- -------- ----------- ----------- BALANCES, March 31, 1998 - - 12 265 249 (3 818 151) Conversion of debentures plus accrued interest into common - - - - stock - - 1 825 972 - Exercise of warrants - - 469 618 - Issuance of common stock for license agreement - - 2 183 930 - Issuance of common stock for services - - 236 867 - Issuance of common stock in private placement, less offering costs of $514,323 - - 4 705 416 - Sale of discontinued subsidiary - - (1 121 078) 1 121 078 Net loss - - - (7 581 124) ------------- -------- ----------- ------------ BALANCES, March 31, 1999 - $ - $20 565 974 $(10 278 197) ------------- -------- ----------- ------------ ------------- -------- ----------- ------------
See accompanying notes to consolidated financial statements. F-6 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31, ----------------------------- 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7 581 124) $ (3 258 343) Adjustments to reconcile net loss to net cash used in operating activities: Conversion of interest to common stock 76 219 - Gain on disposal of subsidiary (66 762) - Depreciation and amortization 1 709 903 112 959 Loss on securities 4 934 31 785 Increase in accounts payable 1 291 795 459 073 Decrease (increase) in accounts receivable 72 533 (620 546) Decrease in inventories 182 508 476 995 Decrease (increase) in prepaid distribution rights (1 369 421) 8 126 Decrease (increase) in other assets (366 107) 457 372 Increase in other accrued liabilities 488 193 126 994 Minority interest in loss of subsidiary - (287 873) Decrease (increase) in deposits 92 559 (495 000) Increase in accrued disposal costs - 459 050 Increase in deferred revenue, net 2 451 787 446 944 Stock issued for services 9 297 40 000 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (3 003 686) (2 042 464) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and furniture (900 787) (77 210) Decrease (increase) in notes receivable - related party 100 000 (100 000) Sale of certificates of deposit - 500 000 Proceeds (purchase) in trading securities 138 266 (193 350) Acquisition of Fifth Dimension assets - (4 281 284) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (662 521) (4 151 844) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligation (169 574) (5 308) Payment of related party notes payable (106 465) - Payments on line of credit - (341 274) Proceeds (payments) on note payable (500 000) 500 000 Issuance of common stock, net of offering costs 6 925 309 6 184 626 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 6 149 270 6 338 044 ------------ ------------
See accompanying notes to consolidated financial statements. F-7 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Year ended March 31, ------------------------- 1999 1998 ---------- ---------- NET INCREASE IN CASH 2 483 063 143 736 CASH, beginning of year 253 123 109 387 ---------- ---------- CASH, end of year $2 736 186 $ 253 123 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Interest paid $ 147 288 $ 93 508 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of equipment via capital lease obligation $ 851 333 $ - ---------- ---------- ---------- ---------- Common stock issued for services $ 74 375 $ 40 000 ---------- ---------- ---------- ---------- Common stock issued for acquisition of Fifth Dimension assets $ - $4 200 000 ---------- ---------- ---------- ---------- Related party notes payable and accrued interest contributed as capital $ - $ 70 697 ---------- ---------- ---------- ---------- Reclassification of accrued interest payable to related party notes payable $ - $ 21 465 ---------- ---------- ---------- ---------- Common stock issued for prepaid distribution right license agreement $2 184 000 $ - ---------- ---------- ---------- ---------- Accrued interest on debentures converted into common stock $ 76 219 $ - ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. F-8 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, BUSINESS, AND CONSOLIDATION The Company was originally incorporated in the state of Colorado on February 23, 1988. On September 15, 1995 the Company acquired New Frontier Media, Inc. in a stock for stock exchange and changed the Company's name to New Frontier Media, Inc. ("NFMI" or the "Company"). For a period of five years preceding this acquisition the Company had not conducted any significant business operations. As of March 31, 1996 the Company had three wholly owned subsidiaries; Boulder Interactive Group, Inc. ("BIG") (a developer and publisher of entertainment and educational computer software on CD-ROM), David Entertainment, Inc. ("DVD") (distributor of adult laserdisc and digital video disc format titles) and FUZZY Entertainment, Inc. ("FUZZY") (developer and distributor of fine art posters and decorative art posters). As of March 31, 1999, the Company has discontinued the operations of BIG, DVD and FUZZY (see Note 9). On February 18, 1998 the Company purchased certain assets of Fifth Dimension Communications (Barbados) Inc. and its related entities ("Fifth Dimension") pursuant to an asset purchase agreement dated September 18, 1997. The Company subsequently contributed these assets to its newly formed wholly owned subsidiary Colorado Satellite Broadcasting, Inc. ("CSB"). The acquisition was completed through the issuance of 840,000 shares of the Company's common stock valued at $5.00 per share, warrants to purchase an additional 400,000 shares of the Company's common stock at $5.00 per share and the payment of $4,281,284 in cash. The acquisition was accounted for using the purchase method of accounting. The excess of the cost of the acquisition over the fair value of the assets acquired was recorded as goodwill. The acquisition was funded from the proceeds of a public offering of the Company's common stock which also closed on February 18, 1998. The Company raised approximately $6,184,000 net of offering costs, by selling 1,500,000 shares of the Company's common stock. The Company, through its subsidiary CSB, and by reason of its consummation of its Asset Purchase Agreements with Fifth Dimension, is a provider of subscriber-based premium television channels ("premium channels" or "pay television") and transaction-based television networks ("pay-per-view"). CSB is a provider of unedited adult programming via direct to home ("DTH") C-band satellite. CSB also provides its services through cable television and wireless cable television multiple system operators. CSB currently owns, operates and distributes three C-band adult programming networks: Extasy, True Blue, and GonzoX. During the year ending March 31, 1999, CSB launched TeN: the erotic network, a new 24 hour adult network targeted specifically to cable television system operators and medium to high powered DTH satellite providers ("DBS"). TeN's adult movie features consist of partially edited adult programming. The accompanying consolidated financial statements include the historical accounts of NFMI, BIG, DVD and FUZZY for all periods presented and CSB since inception. All intercompany accounts and transactions have been eliminated in consolidation. F-9 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INVENTORIES Inventories were stated at the lower of cost (first in, first out) or market. These costs included acquisition, duplication, production and the physical packaging of the products for distribution on a unit-specific basis and were charged to cost of sales when revenue from the sale of the units was recognized. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost. The cost of maintenance and repairs is charged to operations as incurred; significant additions and betterments are capitalized. Depreciation is computed using accelerated and straight-line methods over the estimated useful life of five years. INCOME TAXES The Company files a consolidated income tax return with its majority owned subsidiaries. CASH FLOWS For purposes of reporting cash flows, cash includes those investments which are short-term in nature (three months or less to original maturity), are readily convertible to cash, and represent insignificant risk of changes in value. PREPAID DISTRIBUTION RIGHTS Prepaid distribution rights represent content license agreements. These rights typically range from one to five years. The Company amortizes these rights over the respective terms of the agreements. FILM EXHIBITION RIGHTS Rights to exhibit films were recorded at cost and were amortized on a straight-line basis over the period of the contract, which was normally twenty-four months. REVENUE RECOGNITION Revenue from sales of movie subscriptions from one to twelve months is recognized on a monthly basis over the term of the subscription. F-10 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, certificates of deposit, accounts receivable, accounts payable and notes receivable and payable approximates fair value. LONG-LIVED ASSETS The Company adopted the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in its financial statements for the year ended March 31, 1998. The adoption of SFAS 121 had no material affect on the Company's financial statements. The Company reviews its long-lived assets for impairment to determine if the carrying amount of the asset is recoverable. GOODWILL Goodwill, which resulted from the acquisition of assets from Fifth Dimension, as described above, is being amortized over a period of 120 months. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STOCK WARRANTS The Company follows the intrinsic value based method of accounting as prescribed by APB 25, Accounting for Stock Issued to Employees, for its stock-based compensation. Under the Company's stock warrant issuances, the exercise price is in excess of the fair value of the warrants at the grant date and no compensation cost is recognized. NET LOSS PER SHARE OF COMMON STOCK Net loss per share of common stock is based on the weighted average number of shares of common stock outstanding. Common stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive. F-11 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 - NOTE PAYABLE The Company had a $500,000 note payable to an unrelated entity, dated August 29, 1997, bearing interest at 12% per annum and due on August 29, 1998. The note was secured by all of the assets of the Company and the common stock of the Company owned by the majority shareholders of the Company. This note was paid off in March of 1999. NOTE 3 - RELATED PARTY TRANSACTIONS
1999 1998 ------------- ------------- Notes payable to officers and shareholders bearing interest at 8.5%, unsecured and due on demand anytime after December 31, 1996 $ - $ 99 981 Notes payable to entities, controlled by officers and shareholders, bearing interest at 8.5%, unsecured and due on demand anytime after December 31, 1996 - 6 484 ------------- ------------- $ - $ 106 465 ============= =============
On March 31, 1998, in connection with the discontinuance of the Company's subsidiary BIG, $54,573 of related party notes payable, plus accrued interest of $16,124 were forgiven and credited to additional paid-in capital. In addition at March 31, 1998, $21,465 of accrued interest on the remaining note balances of $85,000 was credited to the notes. On March 2, 1998, the Company loaned an entity owned by two major shareholders of the Company $100,000 in the form of a promissory note receivable. The note bore interest at 8% per annum, was due on demand after April 30, 1998 and was secured by common stock of the Company. During the year ended March 31, 1999, the loan was paid off plus accrued interest of $8,000. The Company had an agreement with an entity related to a major shareholder to sell, package, handle, replicate and ship adult video disc titles at the Company's expense for a management fee of $40,000 per month through July 1, 1997. As of July 1, 1997 this agreement was terminated and the Company assumed all responsibilities associated with the titles. During the year ended March 31, 1998 this related entity withheld from sales of $353,293, replicating costs of $286,361 and management fees of $120,000. Included in accounts payable at March 31, 1998 is $22,332 due to the related entity. F-12 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 3 - RELATED PARTY TRANSACTIONS (continued) The Company issued a three year note receivable to one of its officers in the amount of $38,000. The note required interest only payments at a rate of 6.1%, payable on a quarterly basis with the principal due on August 31, 1998. Interest earned on this note for the year ended March 31, 1998 was $2,318. This note was assumed by Quarto in connection with the sale of BIG (see Note 9). The Company leased certain equipment and office space via entities controlled by an officer and shareholder on a month to month basis (see Note 6). During the years ended March 31, 1999 and 1998 the Company paid $52,425 and $87,033 to these entities relating to these leases. These leases were terminated in October of 1998. NOTE 4 - SHAREHOLDERS' EQUITY COMMON STOCK On February 18, 1998, the Company issued 1,500,000 units (one share of common stock and one warrant to purchase one share of common stock at an exercise price of $6.50 expiring February 18, 2003) in a public offering for cash of $7,770,000 less offering costs of $1,585,374. The warrants are subject to redemption by the Company at $0.05 per warrant, on thirty days prior written notice, if the common stock has traded at or above $8.00 per share for ten consecutive trading days. A portion of these proceeds along with the issuance of 840,000 shares of common stock valued at $5.00 per share were used to acquire certain assets of Fifth Dimension (see Note 1). In connection with the public offering, 150,000 warrants to purchase one share of common stock at an exercise price of $6.75 expiring February 18, 2003 were issued to the underwriter. On June 3, 1998, the Company sold $1,750,000 of 8% convertible debentures, interest due quarterly and due on June 3, 2000. The debentures were convertible into shares of common stock of the Company at a conversion price for each share of common stock equal to the lesser of: (a) 125% of the closing price or (b) 90% of the market price on the conversion date. During the year ended March 31, 1999, these debentures plus accrued interest of $76,219 were converted into 2,474,184 shares of the Company's common stock. In addition, the debenture holders received 175,000 common stock purchase warrants exercisable at $3.47875 per share expiring in July, 2001. In March of 1999, 135,000 of these warrants were exercised. In March of 1999, the Company issued 2,610,000 common shares at $2.00 per share pursuant to a private placement less offering costs of $514,323. In addition, in February of 1999, the Company issued 700,000 shares of its common stock to an unrelated entity at $2.12 per share for consideration in obtaining a license agreement for the rights to distribute approximately 4,000 adult motion pictures (see Note 7). In addition, the Company issued a five year common stock purchase warrant valued at $1.00 per share to purchase 700,000 shares of the Company's common stock at an exercise price of $1.12 per share. F-13 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 4 - SHAREHOLDERS' EQUITY (CONTINUED) CONSULTANT STOCK PLAN During the year ended March 31, 1999, the Company formalized a consultant stock plan which provides for the issuance of shares, or options to purchase shares, to persons providing bona-fide services to the Company. Under the plan the Company reserved 500,000 shares of common stock for issuance. In connection with the plan, in February of 1999, the Company issued 35,000 shares of its common stock valued at $2.13 per share to a consultant under a 12 month consulting agreement. In addition, in March of 1999, the Company issued 43,333 shares of common stock valued at $3.75 per share to a consultant in connection with the private placement as mentioned above. The Company also issued 410,000 consultant stock options pursuant to this plan (see Note 8). PREFERRED STOCK In February of 1997, the Company issued 5,000 shares of Series B, 8% cumulative, convertible preferred stock at $4.00 per share. Each Series B preferred share is convertible into one share of the Company's common stock subject to certain conditions. As of September 30, 1997, each share of Class A preferred stock was given back to the Company and the shares were retired. In addition the Class B preferred stock was converted into 5,000 shares of common stock. The dividends in arrears on both the Class A and B preferred stock were forgiven in the above transactions. SUBSIDIARY SALE OF STOCK On September 20, 1996 Quarto Holdings, Inc., a Delaware Corporation, purchased 30% of newly issued common stock of BIG for $1,250,000 in cash and rights to develop and exploit digital material owned by Quarto. The Company placed a $-0- value on the rights received from Quarto. The Company recorded 70% of the $1,250,000 in proceeds as equity on a consolidated basis and 30% of this amount as a minority interest. In connection with the purchase, NFMI entered into a stockholder agreement with Quarto whereby at least 75% of stockholder approval was necessary to approve certain actions taken on behalf of BIG, including that the funding proceeds can only be used to fund BIG's development and commercialization of CD-ROM titles. Therefore, cash and certificates of deposit of $250,000 at March 31, 1998 was restricted to BIG's operations and could not be used for the operations of NFMI or its affiliates. In connection with the above transaction, Quarto purchased a warrant from NFMI for $400 cash which allows the right to purchase up to 400,000 common shares of NFMI at an exercise price of $6.00 per share expiring on September 20, 2001. As mentioned in Note 9 the above warrants were retired. NOTE 5 - INCOME TAXES The Company has an unused net operating loss carryforward of approximately $7,600,000 for income tax purposes, of which approximately $240,000 expires in 2012, $1,800,000 expires in 2013 and the remainder in F-14 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 5 - INCOME TAXES (continued) 2019. This net operating loss carryforward may result in future income tax benefits; however, because realization is uncertain at this time, a valuation reserve in the same amount has been established. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of March 31, 1999 and 1998 are as follows:
1999 1998 ---------------- ---------------- Deferred tax liabilities $ - $ - ================ ================ Deferred tax assets: Net operating loss carryforwards $ 2 850 000 $ 765 000 Deferred revenue 1 130 000 167 000 Other temporary differences - 200 000 ---------------- ---------------- TOTAL DEFERRED TAX ASSETS 3 980 000 1 132 000 Valuation allowance for deferred tax assets (3 980 000) (1 132 000) ---------------- ---------------- $ - $ - ================ ================
The valuation allowance for deferred tax assets was increased by $2,848,000 and $1,053,456 during 1999 and 1998, respectively. NOTE 6 - COMMITMENTS AND CONTINGENCIES The Company has leases for office space and equipment under various operating and capital leases. Included in furniture and equipment at March 31, 1999 and 1998 is $851,333 and $19,310 of equipment under capital lease and accumulated depreciation relating to these leases of $42,051 and $11,586. In addition, CSB has entered into sub-lease agreements with Fifth Dimension for the use of transponders to broadcast CSB's channels on satellites. Future minimum lease payments under these leases as of March 31, 1999 are as follows:
Year ended Principal Due March 31, Operating Capital Capital Lease - ---------- --------------------- ---------------------- ------------------ 2000 $ 5 670 000 $ 327 620 $ 232 843 2001 5 240 000 320 127 264 940 2002 4 355 000 225 923 209 490 2003 1 130 000 - - 2004 5 000 - - --------------------- ---------------------- ------------------ $ 16 400 000 873 670 $ 707 273 ===================== ================== Less amount representing interest 166 397 ---------------------- Present value of net minimum lease payments $ 707 273 ======================
Total rent expense for the years ended March 31, 1999 and 1998 was $6,039,067 and $810,602, which includes F-15 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued) transponder payments, respectively. In connection with the asset purchase agreement with Fifth Dimension (see Note 1), CSB has entered into a three year uplink service agreement requiring monthly payments of $80,000. The agreement can be terminated upon 30 days written notice for a termination fee of $21,800 for each calendar month remaining in the contract. The payment due is one half of the termination fee or $200,000, whichever is greater, at the date of termination. NOTE 7 - LICENSE AGREEMENT In March of 1999, the Company entered into a licensing agreement with an unrelated entity. Pursuant to the agreement, the Company obtained the rights to distribute the entity's current library of approximately 4,000 adult pictures and three new adult pictures produced by the entity or its affiliated companies per month for a period of five years at a predetermined price per new release. NOTE 8 - STOCK OPTIONS AND WARRANTS During the year ending March 31, 1999, the Company formalized an employee incentive stock option plan. Under the plan, a total of 750,000 shares of common stock has been reserved. The options granted pursuant to these plans are at a price equal to or in excess of the current market price of the Company's common stock on the date of grant. The Company has also granted warrants to officers and employees allowing them to purchase common stock of the Company at a price in excess of the market value of the stock at date of grant. In addition, common stock warrants have been issued in connection with the acquisition of Fifth Dimension assets, the Company's February 1998 public offering, the acquisition of the license agreement and the Company's private placement of debentures in June of 1998. The following information describes certain information relating to these warrants.
Expiration Date Warrants Exercise Price ----------------- -------------- -------------- September, 2004 400 000 5.00 February, 2003 1 500 000 6.50 February, 2003 150 000 6.75 February, 2004 700 000 1.12 July, 2001 40 000 3.48 -------------- 2 790 000
The following table describes certain information related to the Company's compensatory stock option and warrant activity for the year ending March 31, 1999 and 1998. F-16 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 8 - STOCK OPTIONS AND WARRANTS (continued)
Long-term Other Weighted-Average Incentive Warrants and Exercise Exercise Plan Options Total Price Range Price ------------- ------------- ------------- ------------- ------------- Balances at March 31, 1997 - 146 666 146 666 $ 6.00 $ 6.00 Granted - - - - - ------------- ------------- ------------- ------------- ------------- Balances at March 31, 1998 - 146 666 146 666 $ 6.00 $ 6.00 Granted 735 500 2 030 000 2 765 500 $ 1.00-8.50 $ 1.88 ------------- ------------- ------------- ------------- ------------- Balances at March 31, 1999 735 500 2 176 666 2 912 166 $ 1.00-8.50 $ 2.09 ============= ============= ============= ============= ============= Number of options and warrants exercisable at March 31, 1998 - 146 666 146 666 $ 6.00 $ 6.00 ============= ============= ============= ============= ============= Number of options and warrants exercisable at March 31, 1999 - 1 031 666 1 031 666 $ 1.00-6.00 $ 4.13 ============= ============= ============= ============= =============
At March 31, 1999, 14,500 share options were available for future grant under the Incentive Plan and 11,667 common shares or options were available for future grant under the Consultant Stock Plan (see Note 4). The following table summarizes additional information regarding all stock options and warrants outstanding at March 31, 1999.
Options and Warrants Outstanding Options and Warrants Outstanding ------------------------------------------------------------ --------------------------------------- Number Weighted Average Number Outstanding at Remaining Weighted Average Exercisable at Weighted Average Exercise Prices March 31, 1999 Contractual Life Exercise Price March 31, 1999 Exercise Price - --------------- ----------------- -------------------- -------------------- ----------------- ------------------- $1.00-$2.00 1 413 332 4.0 years $ 1.25 1 330 000 $ 1.25 $2.01-$3.00 1 196 668 4.4 years 2.43 205 000 2.59 $3.01-$5.00 530 000 1.8 years 4.70 490 000 4.72 $5.01-$8.50 1 826 666 3.6 years 6.49 1 796 666 6.48 $1.00-$2.24 735 500 10.0 years 1.03 - - ----------------- ----------------- 5 702 166 3 821 666 ================= =================
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-based Compensation" which recommends, but does not require, measuring compensation cost for stock options based on the fair value of the options at the grant date. The Company has elected not to adopt SFAS 123 but continues to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the Plan and other stock option activity. F-17 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 8 - STOCK OPTIONS AND WARRANTS (continued) Had the Company measured compensation cost based on the fair value of the options at the grant date for 1999 consistent with the method prescribed by SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below:
1999 ----------------- Net loss attributable As reported $ (7 581 124) to common stock Pro forma $ (10 550 941) Basic and diluted loss As reported $ (1.04) per common share Pro forma $ (1.45)
There were no options or warrants issued during the year ending March 31, 1998. The fair value of each option grant was estimated at the date of the grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.81%; no dividend yield; expected life of 3 to 10 years; and volatility of 115%. During the initial phase-in period of applying SFAS 123 for pro forma disclosure purposes, the results may not be representative of the effects on reported net income for future years because options vest over several years and additional grants generally are made each year. NOTE 9 - DISCONTINUED OPERATIONS As of March 31, 1998, the Company formalized its plan to discontinue the operations of BIG and FUZZY. On June 26, 1998, the Company finalized the sale of its 70% interest in BIG to Quarto. In connection with the sale of BIG to Quarto, Quarto's warrants to purchase 400,000 shares of common stock of the Company was returned to the Company for cancellation. As of March 31, 1998, Management accrued a loss on the disposition of these subsidiaries of $459,050. For the year ended March 31, 1998, the estimated costs for the discontinuance of BIG and FUZZY was overstated by $66,762; therefore included in loss on disposal of discontinued subsidiaries at March 31, 1999 is $66,762 of gain. As of March 31, 1999, the Company discontinued the operations of DVD. In connection with the discontinuance of DVD the Company incurred a loss of $383,708. The consolidated financial statements for the year ended March 31, 1998 have been reclassified to report the operations of DVD in discontinued operations. Operating results of discontinued operations are as follows:
1999 1998 ----------- ------------- Revenues $ 201 265 $ 1 407 605 Loss before minority interest (178 890) (1 287 726) Minority interest - 287 873 Net loss (178 890) (999 853)
F-18 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Continued) NOTE 9 - DISCONTINUED OPERATIONS (continued) Assets and liabilities of discontinued operations are as follows at March 31:
1999 1998 ----------------- ---------------- Current assets $ - $ 651 614 Noncurrent assets - 161 940 ----------------- ---------------- $ - $ 813 554 ================= ================ Current liabilities $ - $ 180 841 Long-term debt - 6 716 ----------------- ---------------- $ - $ 187 557 ================= ================
NOTE 10 - SEGMENT INFORMATION The Financial Accounting Standards Board has released statement #131 "Disclosures about Segments of an Enterprise and Related Information" which will be effective for all financial reporting periods subsequent to December 15, 1997. This statement requires the reporting of certain information about operating segments. Due to the discontinuance of BIG, FUZZY and DVD, as mentioned in Note 9, the Company has only one operating segment, CSB. The March 31, 1998 statement of operations has been reclassified to reflect only the operations of CSB. NOTE 11 - RISKS AND UNCERTAINTIES CSB, as sublessee of the transponders under the transponder agreements, is subject to arbitrary refusal of service by the service provider if that service provider determines that the content being transmitted by the Company is harmful to the service provider's name or business. Any such service disruption would substantially and adversely affect the financial condition of the Company (see Notes 1 and 6). In addition, the Company bears the risk that the access of their networks to transponders may be restricted or denied if a governmental authority commences an investigation concerning the content of the transmissions. Also, certain cable operators may be reluctant to carry less edited or partially edited adult programming on their systems. This could adversely affect the Company's business if either of the above occurs. The Company has deposits in a bank in excess of the FDIC insured amounts of $100,000. The amount in excess of the $100,000 is subject to loss should the bank cease business. The Company is a defendant in a lawsuit filed on January 25, 1999, in which the plaintiff seeks to enforce an alleged agreement by the Company to convey to the plaintiff a 70% equity interest in the Company. The plaintiff is also seeking large and/or unspecified damages. The Company disputes that there exists a binding and enforceable agreement to transfer any equity interest in NFMI to the plaintiff and filed on February 10, 1999 a motion for partial summary judgement directed to this issue. To date, the court has neither ruled on nor set the Company's motion for a hearing. The Company will continue vigorously to defend itself against the plaintiff's claims. F-19 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999 AND 1998 (Concluded) NOTE 11 - RISKS AND UNCERTAINTIES (continued) A material portion of the Company's transactions are processed by external counterparties. The Company is in the process of contacting these external counterparties, as well as other suppliers, to assess their compliance and remediation efforts with respect to the so-called "Year 2000" problem and the Company's exposure to them. The ultimate success or failure of the corrective plan and the extent of such success or failure cannot presently be determined. NOTE 12 - FOURTH QUARTER ADJUSTMENTS As of December 31, 1998, the Company miscalculated the amount of deferred revenue by approximately $698,000. In addition, the aggregate effect of year-end adjustments amounted to approximately $356,000. The effect of the above items increased the net loss for the year ending March 31, 1999 by approximately $1,054,000. F-20 EX-10 2 MATERIAL CONTRACTS LEASE AGREEMENT OFFICE AND INDUSTRIAL SPACE This Lease Agreement is made and entered into as of the day of August, 1998, by and between LakeCentre Plaza, Ltd., LLLP ("Landlord"), whose address is 4875 Pearl East Cr. #300, Boulder, CO 80301, and New Frontier Media, Inc. ("Tenant"), whose address is 5445 Airport Blvd., Suite 100, Boulder, Colorado 80301. In consideration of the covenants, terms, conditions, agreements and payments as herein set forth, the Landlord and Tenant hereby enter into the following Lease: 1. Definitions. Whenever the following words or phrases are used in this Lease, said words or phrases shall have the following meaning: A. "Area" shall mean the parcel of land depicted on Exhibit "A" attached hereto and commonly known and referred to as Airport Plaza One, Boulder, Colorado. The Area includes the Leased Premises and one or more buildings. The Area may include Common Areas. B. "Building" shall mean a building located in the Area. C. "Common Areas" shall mean all entrances, exits, driveways, curbs, walkways, hallways, parking areas, landscaped areas, restrooms, loading and service areas, and like areas or facilities which are located in the Area and which are designated by the Landlord as areas or facilities available for the nonexclusive use in common by persons designated by the Landlord. D. "Leased Premises" shall mean the premises herein leased to the Tenant by the Landlord. E. "Rentable Area" shall mean: (1) For a Single Tenant Floor. With respect to a single tenant floor, Rentable Area will mean the sum of (i) the floor area (in square feet) excluding standard openings in the floor slab used, for example, for Building stairs, elevator and other shafts and vertical ducts (collectively, the "Excluded Spaces"), and (ii) an allocation of the floor area of Common Areas located in or serving the Building. (2) For a Multiple Tenant Floor. With respect to a multiple tenant floor, Rentable Area will mean the sum of (i) the floor area (in square feet) less any Excluded Spaces located within the Rentable Area, and (ii) an allocation of the floor area of the Common Areas and Services Areas on such floor, and (iii) an allocation of the floor area of Common Areas located in or serving the Building. (3) Columns and Non-Standard Openings. No deductions will be made in either Paragraph 1.E.(1) or Paragraph 1.E.(2) for (i) columns and projections necessary to the structural support of the Building or (ii) for openings in the floor slab which were made at the request of Tenant or to accommodate items installed at the request of Tenant. (4) Tenant's Rentable Area may change from time to time as the total rentable area in all Buildings located in the Area is increased or decreased. F. "Tenant's Prorata Share" The Tenant's Prorata Share shall mean an amount (expressed as a percentage ) equal to the rentable area included in the Leased Premises divided by the total rentable area included in all Buildings located in the Area. The Tenant's Prorata Share for Common Areas may change from time to time as the rentable area in all Buildings located in the Area is increased or decreased. Tenant's current prorata share of the Area is 19.44 %. 2. Leased Premises. The Landlord hereby leases unto the Tenant, and the Tenant hereby leases from the Landlord, the following described premises: Space 5445 in Building "A" consisting of 8,497 square feet of rentable area, all as depicted on Exhibit "B" attached hereto. 3. Base Term. The term of this Lease shall commence at 12:00 noon on October 1, 1998, and, unless sooner terminated as herein provided for, shall end at 12:00 noon on October 1, 2003 ("Lease Term"). Except as specifically provided to the contrary herein, the Leased Premises shall, upon the termination of this Lease, by virtue of the expiration of the Lease Term or otherwise, be returned to the Landlord by the Tenant in as good or better condition than when entered upon by the Tenant, ordinary wear and tear excepted. 4. Rent. Tenant shall pay the following rent for the Leased Premises: A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and without setoff, at the address of Landlord as herein set forth, the following Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in advance on the first day of each month during the term hereof. In the event that this Lease commences on a date other than the first day of a month, the Base Monthly Rent for the first month of the Lease Term shall be prorated for said partial month. Below is a schedule of Base Monthly Rental payments as agreed upon: During Lease Term
For Period To Period A Base Monthly Starting Ending Rent of October 1, 1998 October 1, 1999 $8,143.00 October 1, 1999 October 1, 2003 $8,143.00 plus any cost of living Adjustment per Paragraph 4C below.
B. Lease Term Adjustment. If, for any reason, other than delays caused by the Tenant, the Leased Premises are not ready for Tenant's occupancy on October 1, 1998, the Tenant's rental obligation and other monetary expenses (i.e. taxes, utilities, etc.) shall be abated in direct proportion to the number of days of delay. It is hereby agreed that the premises shall be deemed ready for occupancy on the day the Landlord receives a T.C.O. or C.O. from the appropriate authority, or on the day the Landlord gives Tenant the keys to the Leased Premises if a building permit has not been applied for and/or is not required by the appropriate authority. If the premises are not ready for occupancy by October 15, 1998, so long delays are not caused by Tenant, Landlord will be responsible for paying Tenant the additional rent of $210.00 per day this is charged for holding over in the Tenant's current space at 1050 Walnut Street. The total amount due from Landlord will be credited against Tenant's rent obligation when the Tenant occupies the space. If Landlord is unable to receive a Certificate of Occupancy and deliver the space to the Tenant by November 15, 1998, Tenant will have the option to terminate this Lease Agreement upon written notice to Landlord by November 20, 1998. C. Cost of Living Adjustment. The Base Monthly Rental specified in paragraph 4A above shall be recalculated for each Lease Year as defined hereinafter following the first Lease Year of this Lease Agreement. The recalculated Base Monthly Rental shall be hereinafter referred to as the "Adjusted Monthly Rental". The Adjusted Monthly Rental for each Lease Year after the first Lease Year shall be an amount calculated by the rent adjustment formula set forth below. In applying the rent adjustment formula, the following definitions shall apply: (1) "Lease Year" shall mean a period of twelve (12) consecutive full calendar months with the first Lease Year commencing on the date of the commencement of the term of this Lease and each succeeding Lease Year commencing upon the anniversary date of the first Lease Year; however, if this Lease does not commence on the first day of a month, then, the first Lease Year and each succeeding Lease Year shall commence on the first day of the first month following each anniversary date of this Lease; (2) "Bureau" shall mean the Bureau of Labor Statistics of the United States Department of Labor or any successor agency that shall issue the Price Index referred to in this Lease Agreement. (3) "Price Index" shall mean the "Consumer Price Index-All Urban Consumers-All Items (CPI-U) U.S. City Average (1982-84=100)" issued from time to time by the Bureau. In the event the Price Index shall hereafter be converted to a different standard reference base or otherwise revised, the determination of the increase in the Price Index shall be made with the use of such conversion factor, formula or table as may be published by Prentice-Hall, Inc. or failing such publication, by another nationally recognized publisher of similar statistical information. In the event the Price Index shall cease to be published, then, for the purposes of this paragraph 4C there shall be substituted for the Price Index such other index as the Landlord and the Tenant shall agree upon, and if they are unable to agree within sixty (60) days after the Price Index ceases to be published, such matter shall be determined by arbitration in accordance with the Rules of the American Arbitration Association. (4) "Base Price Index" shall mean the Price Index released to the public during the second calendar month preceding the commencement of this Lease Agreement. (5) "Revised Price Index" shall mean the Price Index released to the public during the second calendar month preceding the Lease Year for which the Base Annual Rental is to be adjusted; (6) "Basic Monthly Rental" shall mean the Basic Monthly Rental set forth in subparagraph 4A above. The rent adjustment formula used to calculate the Adjusted Monthly Rental is as follows: Adjusted Monthly = Revised Price Index X Base Monthly Rental Rental ----------------------------------------- Base Price Index Not withstanding the above formula, the Adjusted Monthly Rental shall not be less than 102.5% or greater than 105.5% of the previous year's Adjusted Monthly Rental, or the Basic Monthly Rental if such adjustment is for the Second Lease Year. The Adjusted Monthly Rental as herein above provided shall continue to be payable monthly as required in paragraph 4A above without necessity of any further notice by the Landlord to the Tenant. D. Total Net Lease. The Tenant understands and agrees that this Lease is a total net lease (a "net, net, net lease"), whereby the Tenant has the obligation to reimburse the Landlord for a share of all costs and expenses (taxes, assessments, other charges, insurance, trash removal, Common Area operation and maintenance and like costs and expenses), incurred by the Landlord as a result of the Landlord's ownership and operation of the Area. 5. Security Deposit. Landlord acknowledges receipt from the Tenant of the sum of Eight Thousand One Hundred Forty Three Dollars ($8,143.00) to be retained by Landlord without responsibility for payment of interest thereon, as security for performance of all the terms and conditions of this Lease Agreement to be performed by Tenant, including payment of all rent due under the terms hereof. Upon written notice for Landlord, deductions may be made by Landlord from the amount so retained for the reasonable cost of repairs to the Leased Premises (ordinary wear and tear excepted), for any rent delinquent under the terms hereof and/or for any sum used in any manner to cure any default of Tenant under the terms of this Lease. In the event deductions are so made, the Tenant shall, upon notice from the Landlord, redeposit with the Landlord such amounts so expended so as to maintain the deposit in the amount as herein provided for, and failure to so redeposit shall be deemed a failure to pay rent under the terms hereof. Nothing herein contained shall limit the liability of Tenant as to any damage to the Leased Premises, and Tenant shall be responsible for the total amount of any damage and/or loss occasioned by actions of Tenant. Landlord may deliver the funds deposited hereunder by Tenant to any purchaser of Landlord's interest in the Leased Premises in the event such interest shall be sold, and thereupon Landlord shall be discharged from any further liability with respect to such deposit. 6. Use of Premises. Tenant shall use the Leased Premises only for business office and research and development and for no other purpose whatsoever except with the written consent of Landlord. Tenant shall not allow any accumulation of trash or debris on the Leased Premises or within any portion of the Area. All receiving and delivery of goods and merchandise and all removal of garbage and refuse shall be made only by way of the rear and/or other service door provided therefore. In the event the Leased Premises shall have no such door, then these matters shall be handled in a manner satisfactory to Landlord. No storage of any material outside of the Leased Premises shall be allowed unless first approved by Landlord in writing, and then in only such areas as are designated by Landlord. Tenant shall not commit or suffer any waste on the Leased Premises nor shall Tenant permit any nuisance to be maintained on the Leased Premises or permit any disorderly conduct or other activity having a tendency to annoy or disturb any occupants of any part of the Area and/or any adjoining property. 7. Laws and Regulations. -- Tenant Responsibility. The Tenant shall, at its sole cost and expense, comply with all laws and regulations of any governmental entity, board, commission or agency having jurisdiction over the Leased Premises. Tenant agrees not to install any electrical equipment that overloads any electrical paneling, circuitry or wiring and further agrees to comply with the requirements of the insurance underwriter or any governmental authorities having jurisdiction thereof. 8. Landlord's Rules and Regulations. Landlord reserves the right to adopt and promulgate rules and regulations applicable to the Leased Premises and from time to time amend or supplement said rules or regulations. Notice of such rules and regulations and amendments and supplements thereto shall be given to Tenant, and Tenant agrees to comply with and observe such rules and regulations and amendments and supplements thereto provided that the same apply uniformly to all Tenants of the Landlord in the Area. Such rules and regulations shall not materially impede Tenant's ability to conduct business at set forth herein. 9. Parking. If the Landlord provides off street parking for the common use of Tenants, employees and customers of the Area, the Tenant shall park all vehicles of whatever type used by Tenant and/or Tenant's employees only in such areas thereof as are designated by Landlord for this purpose, and Tenant accepts the responsibility of seeing that Tenant's employees park only in the areas so designated. Tenant shall, upon the request of the Landlord, provide to the Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's employees. Landlord shall maintain current level of parking throughout Tenants lease term. 10. Control of Common Areas. -- Exclusive control of the Landlord. All Common Areas shall at all times be subject to the exclusive control and management of Landlord, notwithstanding that Tenant and/or Tenant's employees and/or customers may have a nonexclusive right to the use thereof. Landlord shall have the right from time to time to establish, modify and enforce rules and regulations with respect to the use of said facilities and Common Areas. 11. Taxes. A. Real Property Taxes and Assessments. Once the Leased Premises are deemed ready for occupancy, and Tenant is paying rent, the Tenant shall pay to the Landlord on the first day of each month, as additional rent, the Tenant's Prorata Share of all real estate taxes and special assessments levied and assessed against the Building in which the Leased Premises are located and the Common Areas. If the first and last years of the Lease Term are not calendar years, the obligations of the Tenant hereunder shall be prorated for the number of days during the calendar year that this Lease is in effect. The monthly payments for such taxes and assessments shall be $956.00 until the Landlord receives the first tax statement for the referred to properties. Thereafter, the monthly payments shall be based upon 1/12th of the prior year's taxes and assessments. Once each year the Landlord shall determine the actual Tenant's Prorata Share of taxes and assessments for the prior year and if the Tenant has paid less than the Tenant's Prorata Share for the prior year the Tenant shall pay the deficiency to the Landlord with the next payment of Base Monthly Rent, or, if the Tenant has paid in excess of the Tenant's Prorata Share for the prior year the Landlord shall forthwith refund said excess to the Tenant. B. Personal Property Taxes. Tenant shall be responsible for, and shall pay promptly when due, any and all taxes and/or assessments levied and/or assessed against any furniture, fixtures, equipment and items of a similar nature installed and/or located in or about the Leased Premises by Tenant. C. Rent Tax. If a special tax, charge or assessment is imposed or levied upon the rents paid or payable hereunder or upon the right of the Landlord to receive rents hereunder (other than to the extent that such rents are included as a part of the Landlord's income for the purpose of an income tax), the Tenant shall reimburse the Landlord for the amount of such tax within fifteen (15) days after demand therefore is made upon the Tenant by the Landlord. D. Other Taxes, Fees and Charges. Once Tenant has occupied and is paying rent for the space, Tenant shall pay to Landlord, on the first day of each month, as additional rent, Tenant's Pro Rata Share of any "Other Charges" (as hereinafter defined) levied, assessed, charged or imposed against the Area, as a whole. Unless paid directly by Tenant to the authority levying, assessing, charging or imposing same, Tenant shall also pay to Landlord, on the first day of the month following payment of same by Landlord, the entire costs of any such "Other Charges" levied, assessed, charged or imposed against the Leased Premises, Tenant's use of same, or Tenant's conduct of business thereon. For purposes of this provision, "Other Charges" shall mean and refer to any and all taxes, assessments, impositions, user fees, impact fees, utility fees, transportation fees, infrastructure fees, system fees, license fees, and any other charge or assessment imposed by any governmental authority or applicable subdivision on the Area, the Leased Premises or the ownership or use of the Area or Leased Premises, or the business conducted thereon, whether or not formally denominated as a tax, assessment, charge or other nominal description, whether now in effect or hereafter enacted or imposed (excluding, however, Landlord's income taxes). E. Should Landlord protest and win a reduction in the real estate taxes for the Building and Area, Tenant shall be obligated to pay its Prorata Share of the cost of such protest, if the protest is handled by a party other than the Landlord. 12. Insurance. A. Landlord's Insurance. The Landlord shall procure and maintain such fire and casualty, loss of rents and liability insurance as it, from time to time, deems proper and appropriate in reference to the Building in which the Leased Premises are located and the Common Areas. Such insurance shall not be required to cover any of the Tenant's property and the Tenant shall have no interest in any of the proceeds of such insurance. B. Tenant's Insurance. Tenant shall, at its sole cost and expense, insure on a full replacement cost basis, Tenant's inventory, fixtures, leasehold improvements and betterments located on the Leased Premises against loss resulting from fire or other casualty. Tenant shall procure, pay for and maintain, comprehensive public liability insurance providing coverage from and against any loss or damage occasioned by an accident or casualty on, about or adjacent to the Leased Premises. Said liability policy shall be written on an "occurrence basis" with limits of not less than $1,000,000 combined single limit coverage. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or canceled without thirty (30) days prior written notice thereof being given to Landlord. C. Tenant's High Pressure Steam Boiler Insurance. If Tenant makes use of any kind of steam or other high pressure boiler or other apparatus which presents a risk of damage to the Leased Premises or to the Building or other improvements of which the Leased Premises are a part or to the life or limb of persons within such premises, Tenant shall secure and maintain appropriate boiler insurance in an amount satisfactory to Landlord. The Landlord shall be named insured in any such policy or policies. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or canceled without thirty (30) days prior written notice thereof being given to Landlord. D. Tenant's Share of Landlord Insurance. Tenant shall pay the Landlord as additional rent Tenant's Prorata Share of the insurance secured by the Landlord pursuant to "12A" above. Payment shall be made on the first day of each month as additional rent. The monthly payments for such insurance shall be $50.00 until changed by Landlord as a result of an increase or decrease in the cost of such insurance. E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant to each other, on behalf of any insurer providing fire and extended coverage to either of them covering the Leased Premises, Buildings or other improvements thereon or contents thereof, a waiver of any right of subrogation any such insurer of one party may acquire against the other or as against the Landlord or Tenant by virtue of payments of any loss under such insurance. Such a waiver shall be effective so long as the Landlord and Tenant are empowered to grant such waiver under the terms of their respective insurance policy or policies and such waiver shall stand mutually terminated as of the date either Landlord or Tenant gives notice to the other that the power to grant such waiver has been so terminated. 13. Utilities. A. Tenant shall be solely responsible for and promptly pay all charges (as part of the amount paid per Paragraph 16 below) for heat, water, gas, electric, sewer service and any other utility service used or consumed on the Leased Premises. In no event shall Landlord be liable for any interruption or failure in the supply of any such utility to the Leased Premises. In the event the utility company supplying water and/or sewer to the Leased Premises determines that an additional service fee, impact fee, and/or assessment, or any other type of payment or penalty is necessary due to Tenant's use and occupancy of the Building, nature of operation and/or consumption of utilities, said expense shall be borne solely by the Tenant. Said expense shall be paid promptly and any repairs requested by the utility company shall be performed by Tenant immediately and without any delay. B. Landlord Controls Selection. Landlord has advised Tenant that presently Public Service Company of Colorado ("Utility Service Provider") is the utility company selected by Landlord to provide electricity and gas service for the Building. Notwithstanding the foregoing, if permitted by Law, Landlord shall have the right at any time and from time to time during the Lease Term to either contract for service from a different company or companies providing electricity and/or gas service (each such company shall hereinafter be referred to as an("Alternative Service Provider") or continue to contract for service from the Utility Service Provider. C. Tenant Shall Give Landlord Access. Tenant shall cooperate with Landlord, Utility Service Provider, and any Alternative Service Provider at all times and, as reasonably necessary, shall allow Landlord, Utility Service Provider, and any Alternative Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, gas lines, and any other machinery within the Premises. D. Landlord Not Responsible for Interruption of Service. Unless caused by Landlord negligence, Landlord shall in no way be liable or responsible for any loss, damage, or expense that Tenant may sustain or incur by reason of any change, failure, interference, disruption, or defect in the supply or character of the electrical and/or gas energy furnished to the Premises, or if the quantity or character of the electric and/or gas energy supplied by the Utility Service Provider or any Alternate Service Provider is no longer available or suitable for Tenant's requirements, and no such change, failure, defect, unavailability, or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under the Lease. 14. Maintenance Obligations of Landlord. Except as herein otherwise specifically provided for, Landlord shall keep and maintain the roof and exterior of the Building of which the Leased Premises are a part in good repair and condition. Tenant shall repair and pay for any damage to roof, foundation and external walls caused by Tenant's action, negligence or fault. 15. Maintenance Obligations of the Tenant. Subject only to the maintenance obligations of the Landlord as herein provided for, the Tenant shall, during the entire Lease Term, including all extensions thereof, at the Tenant's sole cost and expense, keep and maintain the Leased Premises in good condition and repair, including specifically the following: A. Electrical Systems. Tenant agrees to maintain in good working order and to make all required repairs and replacements to the electrical systems for the Leased Premises if such repairs are necessitated by the actions or inactions of Tenant. B. Plumbing Systems. Tenant agrees to maintain in good working order and to make all required repairs or replacements to the plumbing systems for the Leased Premises if such repairs are necessitated by the actions or inactions of Tenant. C. Inspections and Service. Upon termination of Lease Agreement, Tenant agrees, before vacating premises, to employ at Tenant's sole cost and expense, a licensed contractor to inspect, service and write a written report on the systems referred to in "A" and "B" of this Paragraph. Landlord shall have the right to order such an inspection if Tenant fails to provide evidence of such inspection, and, to follow the recommendations of such reports and to charge the expense thereof to the Tenant. D. Tenant's Responsibility for Building and Area Repairs. Tenant shall be responsible for any repairs required for any part of the Building or Area of which the Leased Premises are a part if such repairs are necessitated by the actions or inactions of Tenant. E. Cutting Roof. Tenant must obtain in writing the Landlord's approval prior to making any roof penetrations. Failure by Tenant to obtain written permission to penetrate a roof shall relieve Landlord of any roof repair obligations as set forth in Paragraph "14" hereof. Tenant further agrees to repair, at its sole cost and expense, all roof penetrations made by the Tenant and to use, if so requested by Landlord, a licensed contractor selected by the Landlord to make such penetrations and repairs. F. Glass and Doors. The repair and replacement of all glass and doors on the Leased Premises shall be the responsibility of the Tenant. Any such replacements or repairs shall be promptly completed at the expense of the Tenant. G. Liability for Overload. Tenant shall be responsible for the repair or replacement of any damage to the Leased Premises, the Building or the Area which result from the Tenant's movement of heavy articles therein or thereon. Tenant shall not overload the floors of any part of the Leased Premises. H. Liability for Overuse and Overload of Operating Systems. Tenant shall be responsible for the repair, upgrade, modification, and/or replacement of any operating systems servicing the Leased Premises and/or all or part of the Building which is necessitated by Tenant's change or increase in use of or non-disclosed use of all or a part of the Leased Premises. Operating systems include, but are not limited to, electrical systems; plumbing systems (both water and natural gas); heating, ventilating, and air conditioning systems; telecommunications systems; computer and network systems; lighting systems, fire sprinkler systems; security systems; and building control systems, if any. I. Inspection of Leased Premises-"As Is" Conditions. Tenant has inspected the Leased Premises and accepts the Leased Premises in the condition that they exist as of the date of this Lease, including, but not limited to, all mechanical, plumbing and electrical systems and the conditions of the interior except: . J. Failure of Tenant to Maintain Premises. Should Tenant neglect to keep and maintain the Leased Premises as required herein, the Landlord shall have the right, but not the obligation, to have the work done and any reasonable costs plus a ten percent (10%) overhead charge therefore shall be charged to Tenant as additional rental and shall become payable by Tenant with the payment of the rental next due. 16. Common Area Maintenance. Tenant shall be responsible for Tenant's Prorata share of the total costs incurred for the operation, maintenance and repair of the Common Areas actually paid for by Landlord, including, but not limited to, the costs and expenses incurred for the operation, maintenance and repair of parking areas (including restriping and repaving); removal of snow; all utilities including water, gas, and electric for the building; janitorial for common areas and tenant occupied space; normal HVAC maintenance and elevator maintenance (if applicable); trash removal; security to protect and secure the Area; common entrances, exits, and lobbies of the Building; all common utilities, including water to maintain landscaping; replanting in order to maintain a smart appearance of landscape areas; supplies; depreciation on the machinery and equipment used in such operation, maintenance and repair; the cost of personnel to implement such services; the cost of maintaining in good working condition the HVAC system(s) for the Leased premises; the cost of maintaining in good working condition the elevator(s) for the Leased Premises, if applicable; and ten percent (10 %) of all such operational, maintenance and repair costs to cover Landlord's administrative and overhead costs subject to Tenant not having to pay a management fee. These costs shall be estimated on an annual basis by the Landlord and shall be adjusted upwards or downwards depending on the actual costs for the preceding twelve months. Tenant shall pay monthly, commencing with the first month of the Lease Term, as additional rent due under the terms hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said twelve (12) month period, divided by 12. The estimated initial monthly costs are $779.00. Once each year the Landlord shall determine the actual costs of the foregoing expenses for the prior year and if the actual costs are greater than the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the difference between the estimated costs and the actual costs to the Landlord with the next payment of Base Monthly Rent, or, if the actual costs are less than the estimated costs, the Landlord shall forthwith refund the amount of the Tenant's excess payment to the Tenant. 17. Inspection of and Right of Entry to Leased Premises--Regular, Emergency, Reletting. Landlord and/or Landlord's agents and employees, shall have the right to enter, upon reasonable notice from landlord, the Leased Premises at all times during regular business hours and, at all times during emergencies, without prior notice, to examine the Leased Premises, to make such repairs, alterations, improvements or additions as Landlord deems necessary, and Landlord shall be allowed to take all materials into and upon said Leased Premises that may be required therefore without the same constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no way abate while such repairs, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant or otherwise. During the six months prior to the expiration of the term of this Lease or any renewal thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or purchasers and may place upon the Leased Premises the usual notices indicating that the Leased Premises are for lease and/or sale. 18. Alteration-Changes and Additions-Responsibility. Unless the Landlord's approval is first secured in writing, the Tenant shall not install or erect inside partitions, add to existing electric power service, add telephone outlets, add light fixtures, install additional heating and/or air conditioning or make any other changes or alterations to the interior or exterior of the Leased Premises. Any such changes or alterations shall be made at the sole cost and expense of the Tenant. At the end of this Lease, all such fixtures, equipment, additions, changes and/or alterations (except trade fixtures installed by Tenant) shall be and remain the property of Landlord; provided, however, Landlord shall have the option to require Tenant to remove any or all such fixtures, equipment, additions and/or alterations and restore the Leased Premises to the condition existing immediately prior to such change and/or installation, normal wear and tear excepted, all at Tenant's cost and expense. All such work shall be done in a good and workmanlike manner and shall consist of new materials unless agreed to otherwise by Landlord. Any and all repairs, changes and/or modifications thereto shall be the responsibility of, and at the cost of, Tenant. Landlord may require adequate security from Tenant assuring no mechanics' liens on account of work done on the Leased Premises by Tenant and may post the Leased Premises, or take such other action as is then permitted by law, to protect the Landlord and the Leased Premises against mechanics' liens. Landlord may also require adequate security to assure Landlord that the Leased Premises will be restored to their original condition upon termination of this Lease. All equipment specific to Tenant's business operation, not paid for with the Tenant Improvement Allowance, will not become a fixture to the building and can be removed form the lease premises so long as Tenant make all repairs necessary to restore the premises tot he condition existing immediately prior to the installation of such equipment. 19. Sign Approval. Except for signs which are located inside of the Leased Premises and which are not attached to any part of the Leased Premises, the Landlord must approve in writing any sign to be placed in or on the interior or exterior of the Leased Premises, regardless of size or value. Specifically, signs attached to windows of the Leased Premises must be so approved by the Landlord. As a condition to the granting of such approval, Landlord shall have the right to require Tenant to furnish a bond or other security acceptable to Landlord sufficient to insure completion of and payment for any such sign work to be so performed. Tenant shall, during the entire Lease Term, maintain Tenant's signs in good condition and repair at Tenant's sole cost and expense. Tenant shall, remove all signs at the termination of this Lease, at Tenant's sole risk and expense and shall in a workmanlike manner properly repair any damage and close any holes caused by the installation and/or removal of Tenant's signs. Tenant shall give Landlord prior notice of such removal so that a representative of Landlord shall have the opportunity of being present when the signage is removed, or shall pre-approve the manner and materials used to repair damage and close the holes caused by removal. 20. Right of Landlord to Make Changes and Additions. So long as Tenant business operations are not materially impaired and current parking rations are not diminished, Landlord reserves the right at any time to make alterations or additions to the Building or Area of which the Leased Premises are a part. Landlord also reserves the right to construct other buildings and/or improvements in the Area and to make alterations or additions thereto, all as Landlord shall determine. Easements for light and air are not included in the leasing of the Leased Premises to Tenant. Landlord further reserves the exclusive right to the roof of the Building of which the Leased Premises are a part. Landlord also reserves the right at any time to relocate, vary and adjust the size of any of the improvements or Common Areas located in the Area, provided, however, that all such changes shall be in compliance with the requirements of governmental authorities having jurisdiction over the Area. 21. Damage or Destruction of Leased Premises. In the event the Leased Premises and/or the Building of which the Leased Premises are a part shall be totally destroyed by fire or other casualty or so badly damaged that, in the opinion of Landlord, it is not feasible to repair or rebuild same, Landlord shall have the right to terminate this Lease upon written notice to Tenant. If the Leased Premises are partially damaged by fire or other casualty, except if caused by Tenant's negligence, and said Leased Premises are not rendered untenable thereby, as determined by Landlord, an appropriate reduction of the rent shall be allowed for the unoccupied portion of the Leased Premises until repair thereof shall be substantially completed. If the Landlord elects to exercise the right herein vested in it to terminate this Lease as a result of damage to or destruction of the Leased Premises or the Building in which the Leased Premises are located, said election shall be made by giving notice thereof to the Tenant within thirty (30) days after the date of said damage or destruction. 22. Governmental Acquisition of Property. The parties agree that Landlord shall have complete freedom of negotiation and settlement of all matters pertaining to the acquisition of the Leased Premises, the Building, the Area, or any part thereof, by any governmental body or other person or entity via the exercise of the power of eminent domain, it being understood and agreed that any financial settlement made or compensation paid respecting said land or improvements to be so taken, whether resulting from negotiation and agreement or legal proceedings, shall be the exclusive property of Landlord, there being no sharing whatsoever between Landlord and Tenant of any sum so paid. In the event of any such taking, Landlord shall have the right to terminate this Lease on the date possession is delivered to the condemning person or authority. Such taking of the property shall not be a breach of this Lease by Landlord nor give rise to any claims in Tenant for damages or compensation from Landlord. Nothing herein contained shall be construed as depriving the Tenant of the right to retain as its sole property any compensation paid for any tangible personal property owned by the Tenant which is taken in any such condemnation proceeding. 23. Assignment or Subletting. Except for wholly owned and or controlled subsidiaries or affiliates, Tenant may not assign this Lease, or sublet the Leased Premises or any part thereof, without the written consent of Landlord, which consent shall not be unreasonably withheld. No such assignment or subletting if approved by the Landlord shall relieve Tenant of any of its obligations hereunder, and, the performance or nonperformance of any of the covenants herein contained by subtenants shall be considered as the performance or the nonperformance by the Tenant. 24. Warranty of Title. Subject to the provisions of the following three (3) paragraphs hereof, Landlord covenants it has good right to lease the Leased Premises in the manner described herein and that Tenant shall peaceably and quietly have, hold, occupy and enjoy the Leased Premises during the term of the Lease. 25. Access. Landlord shall provide Tenant nonexclusive access to the Leased Premises through and across land and/or other improvements owned by Landlord. Landlord shall have the right, during the term of this Lease, to designate, and to change, such nonexclusive access. 26. Subordination. Tenant agrees that this Lease shall be subordinate to any mortgages, trust deeds or ground leases that may now exist or which may hereafter be placed upon said Leased Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof. Tenant shall execute and deliver whatever instruments may be required for the above purposes, and failing to do so within ten (10) days after demand in writing, does hereby make, constitute and irrevocably appoint Landlord as its attorney-in-fact and in its name, place and stead so to do. Tenant shall in the event of the sale or assignment of Landlord's interest in the Area or in the Building of which the Leased Premises form a part, or in the event of any proceedings brought for the foreclosure of or in the event of exercise of the power of sale under any mortgage made by Landlord covering the Leased Premises, attorn to the purchaser and recognize such purchaser as Landlord under this Lease. 27. Easements. The Landlord shall have the right to grant any easement on, over, under and above the Area for such purposes as Landlord determines, provided that such easements do not materially interfere with Tenant's occupancy and use of the Leased Premises. 28. Indemnification and Waiver Except in the case of a breach or default in the performance of any obligation under this Lease, each party shall indemnify, defend and hold harmless the other party and nothing in this Lease shall be construed as imposing any liability on them for any loss, costs, expense (including reasonable attorney's fees), or any claims, suits, actions or damages arising from the ownership, use, control or occupancy of any portion of the Project including the Building, Common Areas and Premises unless such loss, cost, expense, claim, suit or action is a result of or caused by the negligent acts or omissions of such other party or its agents, servants, employees, contractors, or invitees. Tenant shall not indemnify Landlord for acts or failure to observe or comply with any of the rules by any other Tenant or occupant of the Building or Project that adversely affect Tenant's use and occupancy in which Landlord has been put on notice of such adverse impact to Tenant. 29. Acts or Omission of Others. The Landlord, or its employees or agents, or any of them, shall not be responsible or liable to the Tenant or to the Tenant's guests, invitees, employees, agents or any other person or entity, for any loss or damage that may be caused by the acts or omissions of other tenants, their guests or invitees, occupying any other part of the Area or by persons who are trespassers on or in the Area, or for any loss or damage caused or resulting from the bursting, stoppage, backing up or leaking of water, gas, electricity or sewers or caused in any other manner whatsoever, unless such loss or damage is caused by or results from the negligent acts of the Landlord, its agents or contractors. 30. Interest on Past Due Obligations. Any amount due to Landlord not paid when due shall bear interest at one and one half (1 1/2%) percent per month from due date until paid. Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 31. Holding Over-One and One Half Times Last Month's Rent. If Tenant shall remain in possession of the Leased Premises after the termination of this Lease, whether by expiration of the Lease Term or otherwise, without a written agreement as to such possession, then Tenant shall be deemed a month-to-month Tenant. The rent rate during such holdover tenancy shall be equivalent to one and one half (1 1/2) times the monthly rent paid for the last full month of tenancy under this Lease, excluding any free rent concessions which may have been made for the last full month of the Lease. No holding over by Tenant shall operate to renew or extend this Lease without the written consent of Landlord to such renewal or extension having been first obtained. Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in surrendering possession of the Leased Premises including, without limitation, any claims made with regard to any succeeding occupancy bounded by such holdover period. 32. Modification or Extensions. No modification or extension of this Lease shall be binding upon the parties hereto unless in writing and unless signed by the parties hereto. 33. Notice Procedure. All notices, demands and requests which may be or are required to be given by either party to the other shall be in writing and such that are to be given to Tenant shall be deemed to have been properly given if served on Tenant or an employee of Tenant or sent to Tenant by United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Tenant at see page one or at such other place as Tenant may from time to time designate in a written notice to Landlord; and, such as are to be given to Landlord shall be deemed to have been properly given if personally served on Landlord or if sent to Landlord, United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Landlord at 4875 Pearl East Cr. #300, Boulder, CO 80301 or at such other place as Landlord may from time to time designate in a written notice to Tenant. Any notice given by mailing shall be effective as of the date of mailing. 34. Memorandum of Lease-Notice to Mortgagee. The Landlord and Tenant agree not to place this Lease of record, but upon the request of either party to execute and acknowledge so the same may be recorded a short form lease indicating the names and respective addresses of the Landlord and Tenant, the Leased Premises, the Lease Term, the dates of the commencement and termination of the Lease Term and options for renewal, if any, but omitting rent and other terms of this Lease. Tenant agrees to an assignment by Landlord of rents and of the Landlord's interest in this Lease to a mortgagee, if the same be made by Landlord. Tenant further agrees if requested to do so by the Landlord that it will give to said mortgagee a copy of any request for performance by Landlord or notice of default by Landlord; and in the event Landlord fails to cure such default, the Tenant will give said mortgagee a sixty (60) day period in which to cure the same. Said period shall begin with the last day on which Landlord could cure such default before Tenant has the right to exercise any remedy by reason of such default. All notices to the mortgagee shall be sent by United States registered or certified mail, postage prepaid, return receipt requested. 35. Controlling Law. The Lease, and all terms hereunder shall be construed consistent with the laws of the State of Colorado. Any dispute resulting in litigation hereunder shall be resolved in court proceedings instituted in Boulder County and in no other jurisdiction. 36. Landlord Not a Partner With the Tenant. Nothing contained in this Lease shall be deemed, held or construed as creating Landlord as a partner, agent, associate of or in joint venture with Tenant in the conduct of Tenant's business, it being expressly understood and agreed that the relationship between the parties hereto is and shall at all times remain that of Landlord and Tenant. 37. Partial Invalidity. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons and circumstances other than those to which it has been held invalid or unenforceable, shall not be affected thereby, and each term, covenant and condition of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 38. Default-Remedies of Landlord. A. The occurrence of any of the following events shall constitute a default by Tenant under this Lease: (1) Failure to make due and punctual payment of rent or any other charges, assessments or amounts due or payable or required to be paid under this Lease with three (3) days written notice form Landlord; or (2) Neglect or failure by Tenant to perform or observe, or any other breach of, any other term, covenant or condition of this Lease with ten (10) days written notice from landlord; or (3) Adjudication of Tenant as bankrupt or insolvent, or filing by or against Tenant of any petition in bankruptcy or for reorganization or for the adoption of any arrangement under the Bankruptcy Code; application is made for the appointment of receiver or conservator for Tenant's business or property; or assignment by Tenant is made of its property for the benefit of its creditors; or Tenant's interest in this Lease or any substantial amount of Tenant's other real or personal property is levied or executed upon by process of law; or (4) Petition or other proceeding is made by or against Tenant for its dissolution or liquidation; or voluntary dissolution or liquidation of Tenant; or (5) Abandonment of the Leased Premises, or any part thereof, by Tenant for a period of time in excess of thirty (30) consecutive days. B. If Tenant shall default in the payment of rent or in the keeping of any of the terms, covenants or conditions of this Lease to be kept and/or performed by Tenant or shall otherwise commit any event of default as defined above, Landlord may upon the expiration of any applicable cure, immediately, or at any time thereafter, reenter the Leased Premises, remove all persons and property therefrom, without being liable to indictment, prosecution for damage therefore, or for forcible entry and detainer and repossess and enjoy the Leased Premises, together with all additions thereto or alterations and improvements thereof. Landlord may, at its option, at any time and from time to time thereafter, relet the Leased Premises or any part thereof for the account of Tenant or otherwise, and receive and collect the rents therefore and apply the same first to the payment of such expenses as Landlord may have incurred in recovering possession and for putting the same in good order and condition for rerental, and expense, commissions and charges paid by Landlord in reletting the Leased Premises. Any such reletting may be for the remainder of the term of this Lease or for a longer or shorter period. In lieu of reletting such Leased Premises, Landlord may occupy the same or cause the same to be occupied by others. Whether or not the Leased Premises or any part thereof be relet, Tenant shall pay the Landlord the rent and all other charges required to be paid by Tenant up to the time of the expiration of this Lease or such recovered possession, as the case may be and thereafter, Tenant, if required by Landlord, shall pay to Landlord until the end of the term of this Lease, the equivalent of the amount of all rent reserved herein and all other charges required to be paid by Tenant, less the net amount received by Landlord for such reletting, if any, unless waived by written notice from Landlord to Tenant. No action by Landlord to obtain possession of the Leased Premises and/or to recover any amount due to Landlord hereunder shall be taken as a waiver of Landlord's right to require full and complete performance by Tenant of all terms hereof, including payment of all amounts due hereunder or as an election on the part of Landlord to terminate this Lease Agreement. If the Leased Premises shall be reoccupied by Landlord, then, from and after the date of repossession, Tenant shall be discharged of any obligations to Landlord under the provisions hereof for the payment of rent. If the Leased Premises are reoccupied by the Landlord pursuant hereto, and regardless of whether the Leased Premises shall be relet or possessed by Landlord, all fixtures, additions, furniture, and the like then on the Leased Premises may be retained by Landlord. In the event Tenant is in default under the terms hereof and, by the sole determination of Landlord, has abandoned the Leased Premises, Landlord shall have the right to remove all the Tenant's property from the Leased Premises and dispose of said property in such a manner as determined best by Landlord, at the sole cost and expense of Tenant and without liability of Landlord for the actions so taken and without liability on the part of Landlord for any action so taken. C. In the event an assignment of Tenant's business or property shall be made for the benefit of creditors, or, if the Tenant's leasehold interest under the terms of this Lease Agreement shall be levied upon by execution or seized by virtue of any writ of any court of law, or, if application be made for the appointment of a receiver for the business or property of Tenant, or, if a petition in bankruptcy shall be filed by or against Tenant, then and in any such case, at Landlord's option, with or without notice, Landlord may terminate this Lease and immediately retake possession of the Leased Premises without the same working any forfeiture of the obligations of Tenant hereunder. D. Tenant hereby grants to the Landlord a security interest in and to any and all of Tenant's property located in, on or adjacent to the Leased Premises as security for Tenant's full and complete performance of the terms and conditions of this Lease, which security interest is enforceable by Landlord as provided by the laws of the State of Colorado. E. In addition to all rights and remedies granted to Landlord by the terms hereof, Landlord shall have available any and all rights and remedies available at law or in equity, or under the statutes of the State of Colorado. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered exclusive of any other remedy but shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Further, all powers and remedies given by this Lease to Landlord may be exercised, from time to time, and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be considered to be a waiver of any such default or acquiescence thereof. The acceptance of rent by Landlord shall not be deemed to be a waiver of any breach of any of the covenants herein contained or of any of the rights of Landlord to any remedies herein given. 39. Legal Proceedings-Responsibilities. In the event of proceeding at law or in equity by either party hereto, the non-prevailing party shall pay all costs and expenses, including all reasonable attorney's fees incurred by the prevailing party in pursuing such remedy, if such prevailing party is awarded substantially the relief requested. 40. Administrative Charges. In the event any check, bank draft or negotiable instrument given for any money payment hereunder shall be dishonored at any time and from time to time, for any reason whatsoever not attributable to Landlord, Landlord shall be entitled, in addition to any other remedy that may be available, (1) to make an administrative charge of $100.00 or three times the face value of the check, bank draft or negotiable instrument, whichever is smaller, and (2) at Landlord's sole option, to require Tenant to make all future rental payments in cash or cashiers check. 41. Hazardous Materials and Environmental Considerations. A. Tenant covenants and agrees that Tenant and its agents, employees, contractors and invitees shall comply with all Hazardous Materials Laws (as hereinafter defined). Without limiting the foregoing, Tenant covenants and agrees that it will not use, generate, store or dispose of, nor permit the use, generation, storage or disposal of Hazardous Materials (as hereinafter defined) on, under or about the Leased Premises, nor will it transport or permit the transportation of Hazardous Materials to or from the Leased Premises, except in full compliance with any applicable Hazardous Materials Laws. Any Hazardous Materials located on the Leased Premises shall be handled in an appropriately controlled environment which shall include the use of such equipment (at Tenant's expense) as is necessary to meet or exceed standards imposed by any Hazardous Materials Laws and in such a way as not to interfere with any other tenant's use of its premises. Upon breach of any covenant contained herein, Tenant shall, at Tenant's sole expense, cure such breach by taking all action prescribed by any applicable Hazardous Materials Laws or by any governmental authority with jurisdiction over such matters. B. Tenant shall inform Landlord at any time of (I) any Hazardous Materials it intends to use, generate, handle, store or dispose of, on or about or transport from, the Leased Premises and (ii) of Tenant's discovery of any event or condition which constitutes a violation of any applicable Hazardous Materials Laws. Tenant shall provide to Landlord copies of all communications to or from any governmental authority or any other party relating to Hazardous Materials affecting the Leased Premises. C. Tenant shall indemnify and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, expenses or losses (including, without limitation, diminution on value of the Leased Premises, damages for loss or restriction on use of all or part of the Leased Premises, sums paid in settlement of claims, investigation of site conditions, or any cleanup, removal or restoration work required by any federal, state or local governmental agency, attorney's fees, consultant fees, and expert fees) which arise as a result of or in connection with any breach of the foregoing covenants or any other violation of any Hazardous Materials laws by Tenant. The indemnification contained herein shall also accrue to the benefit of the employees, agents, officers, directors and/or partners of Landlord. D. Upon termination of this Lease and/or vacation of the Leased Premises, Tenant shall properly remove all Hazardous Materials and shall then provide to Landlord an environmental audit report, prepared by a professional consultant satisfactory to Landlord and at Tenant's sole expense, certifying that the Leased Premises have not been subjected to environmental harm caused by Tenant's use and occupancy of the Leased Premises. Landlord shall grant to Tenant and its agents or contractors such access to the Leased Premises as is necessary to accomplish such removal and prepare such report. E. "Hazardous Materials" shall mean (a) any chemical, material, substance or pollutant which poses a hazard to the Leased Premises or to persons on or about the Leased Premises or would cause a violation of or is regulated by any Hazardous Materials Laws, and (b) any chemical, material or substance defined as or included in the definitions of "hazardous substances", "hazardous wastes", "extremely hazardous waste", "restricted hazardous waste", "toxic substances", "regulated substance", or words of similar import under any applicable federal, state or local law or under the regulations adopted or publications promulgated pursuant thereto, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sec. 1801, et seq.; the Resource Conservation and Recovery Act as amended, 42 U.S.C. Sec 6901, et seq.; the Solid Waste Disposal Act, 42 U.S.C. Sec. 6991 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251, et seq.; and Sections 25-15-101, et seq., 25-16-101, et seq., 25-7-101, et seq., and 25-8-101, et seq., of the Colorado Revised Statutes. "Hazardous Materials Laws" shall mean any federal state or local laws, ordinances, rules, regulations, or policies (including, but not limited to, those laws specified above) relating to the environment, health and safety or the use, handling, transportation, production, disposal, discharge or storage of Hazardous Materials, or to industrial hygiene or the environmental conditions on, under or about the Leased Premises. Said term shall be deemed to include all such laws as are now in effect or as hereafter amended and all other such laws as may hereafter be enacted or adopted during the term of this Lease. F. All outstanding obligations of Tenant under this paragraph 41 shall survive and continue after the expiration of this Lease or its earlier termination for any reason. G. Tenant further covenants and agrees that it shall not install any storage tank (whether above or below the ground) on the Leased Premises without obtaining the prior written consent of the Landlord, which consent may be conditioned upon further requirements imposed by Landlord with respect to, among other things, compliance by Tenant with any applicable laws, rules, regulations or ordinances and safety measures or financial responsibility requirements. H. Should any local governmental entity having jurisdiction over the Leased Premises require any type of environmental audit or report, due to Tenant's occupancy during the occupancy of the Leased Premises by the Tenant, such cost of the audit or report shall be the sole responsibility of the Tenant. 42. Entire Agreement. It is expressly understood and agree by and between the parties hereto that this Lease sets forth all the promises, agreements, conditions, and understandings between Landlord and/or its agents and Tenant relative to the Leased Premises and that there are no promises, agreements, conditions, or understandings either oral or written, between them other than that are herein set forth. 43. Guarantee and Financial Statements. This lease and Tenant's performance hereunder, shall be personally guaranteed by Mark Kreloff, by the execution of the Guarantee Agreement set forth herein. A current financial statement of Tenant and of any parties so guaranteeing this Lease shall be provided to Landlord upon execution hereof and annually thereafter, if so requested by Landlord. 44. Estoppel Certificates. Within no more than 5 days after receipt of written request, the Tenant shall furnish to the owner a certificate, duly acknowledged, certifying, to the extent true: A. That this Lease is in full force and effect. B. That the Tenant knows of no default hereunder on the part of the owner, or if it has reason to believe that such a default exists, the nature thereof in reasonable detail. C. The amount of the rent being paid and the last date to which rent has been paid. D. That this Lease has not been modified, or if it has been modified, the terms and dates of such modifications. E. That the term of this Lease has commenced. F. The commencement and expiration dates. G. Whether all work to be performed by the owner has been completed. H. Whether the renewal term option has been exercised if applicable. I. Whether there exist any claims or deductions from, or defenses to, the payment of rent. J. Such other matters as may be reasonably requested by owner. If the Tenant fails to execute and deliver to the owner a completed certificate as required under this section, the Tenant hereby appoints the owner as its Attorney-In-Fact to execute and deliver such certificate for and on behalf of the Tenant. 45. Financial Statements. As requested by the Landlord, Tenant shall provide copies of its most recent financial statements and shall also provide Landlord with up to three (3) prior years of financial statements, if so requested. 46. Brokers. Tenant represents and warrants that it has dealt only with Andrew Freeman and Neil Littmann of The Colorado Group (the "Broker") in the negotiation of this Lease. Landlord shall make payment of the commission according to the terms of a separate agreement with the Broker. Tenant hereby agrees to indemnify and hold Landlord harmless of an from any and all loss, costs, damages or expenses (including, without limitation, all attorney's fees and disbursements) by reason of any claim of, or liability to, any other broker or person claiming through Tenant and arising out of this Lease. Additionally, Tenant acknowledges and agrees that Landlord shall have no obligation for payment of any brokerage fee or similar compensation to any person with whom Tenant has dealt or may deal with in the future with respect to leasing of any additional or expansion space in the Building or any renewals or extensions of this Lease unless specifically provided for by separate written agreement with Landlord. In the event any claim shall be made against Landlord by any other broker who shall claim to have negotiated this Lease on behalf of Tenant or to have introduced Tenant to the Building or to Landlord, Tenant hereby indemnifies Landlord, and Tenant shall be liable for the payment of all reasonable attorney's fees, costs, and expenses incurred by Landlord in defending against the same, and in the event such broker shall be successful in any such action, Tenant shall, upon demand, make payment to such broker. 47. Lease Exhibits Attached. This Lease includes the following Lease Exhibits which are incorporated herein and made a part of this Lease Agreement: Exhibit "A" - Site Plan Depicting Area Exhibit "B" - Interior Space Plan Exhibit "C" - Landlord and Tenant's Construction Obligations Exhibit "D" - Exhibit "E" - Additional Terms and Conditions Exhibit "F" - Option to Extend 48. Miscellaneous. All marginal notations and paragraph headings are for purposes of reference and shall not affect the true meaning and intent of the terms hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant" are used they shall include and imply to the singular, plural, persons both male and female, companies, partnerships and corporations, and in reading said Lease, the necessary grammatical changes required to make the provisions hereof mean and apply as aforesaid shall be made in the same manner as though originally included in said Lease. IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof. LANDLORD: LakeCentre Plaza, Ltd., LLLP By: William W. Reynolds TENANT: New Frontier Media, Inc. By: Mark Kreloff Exhibit "A" Site Plan Depicting Area Exhibit "B" Interior Space Plan See Attached Exhibit "C" Landlord and Tenant's Construction Obligations 1. Landlord shall complete the Leased Premises per Exhibit "B" and per the attached set of "Standard Lease Space Specifications". Said standard landlord tenant finish improvements will be strictly adhered to by Landlord. Should Tenant deviate from these standard specifications, ownership reserves the right to reduce the aforesaid referenced Tenant Finish Allowance as necessary to compensate for the non-standard build out. 2. Landlord shall provide Tenant with $18.00 per square foot Tenant Finish Allowance toward the completion of such Tenant Improvements. 3. All other improvements to the Leased Premises shall be at the sole cost and expense of the Tenant. 4. Prior to the start of Tenant Finish, Landlord shall provide Tenant a budget outlining the cost of the Tenant Finish Construction. STANDARD LEASE SPACE SPECIFICATIONS OFFICE/INDUSTRIAL BUILDINGS The following are standard specifications for the Leased Premises herein defined. GENERAL A. The leased space design/layout will conform to the Architectural drawings. B. All work performed to complete the Leased Premises will be in accordance with all applicable codes and regulations. C. Demising, corridor and partition walls separating offices from warehouse space to be 3-5/8" metal studs at 24" o.c. with 5/8" gypsum wallboard on each side. Partitions to extend from floor to underside of structure above. Partitions to have acoustical sealant at joints and sound attenuation batting between studs from floor to structure above. partitions to receive typical partition finish. D. 1) Building interior space may be divided into fire containment areas. It is the responsibility of the Tenant to conform to all applicable regulations and fire codes, including, but not limited to, maintaining egress requirements during the term of occupancy. 2) Fire containment walls to be 3-5/8" metal studs at 24" o.c. with 5/8" gypsum wallboard on each side. Walls to extend from floor to underside of structure above. Doors in fire containment walls to be twenty minute fire rated, solid core oak veneer with closer and metal jambs. E. Tenant will be responsible for identifying any equipment or areas requiring additional or special ventilation, lighting or electrical service prior to space planning. OFFICE AREAS A. INTERIOR PARTITIONS. 1. 3-5/8" metal studs at 24" o.c. from floor to underside of ceiling with 5/8" gypsum wallboard on each side. 2. All concrete block walls in office area to be furred and sheathed as interior partitions above unless otherwise noted on Architectural drawings. B. PARTITION FINISH All interior partitions, not prefinished, will receive paint. Paint to be Landlord's standard, two finish coats over one primer coat. Color to be selected by Tenant from among choices pre-selected by Landlord. C. CEILING To be suspended acoustical 2X4 ceiling tile. Tile and metal grid to be white. D. FLOOR COVERING 1. Carpet to be Landlord's standard (Cambridge--Oxford 28 oz. nylon textured loop. Installation to be glue down. Color to be selected by Tenant from among choices pre-selected by Landlord. Base at carpet to be 2-1/2" high solid oak, finish to match doors. 2. Resilient flooring to be Landlord's standard. 12"x12"x1/8". Color to be selected by Tenant from among choices pre-selected by Landlord. Base at resilient flooring to be Roppe 2-1/2" rubber cove. E. INTERIOR DOORS All interior doors to be solid core flush panel oak veneer with 3 coats natural color lacquer finish. Frames to be Timely Metal Frames. Door sizes to be 3'-0" x 7'-0" x 1-3/4" unless otherwise noted on architectural drawings. F. DOOR HARDWARE To be sargent 6 line Orbital series, 26D brushed chrome or equal. All entry doors to have keyed cylinder lock sets. All office, conference, and storage room doors to have passage lock set. Restrooms to have privacy lock. All doors to have 1-1/2 pair 4" hinges and 1 Ives concave wall stop #407 1/2, or equal, stainless steel finish. G. LIGHTING To be 2'x4' 4 lamp, recessed, fluorescent with prismatic lens light fixtures. H. ELECTRICAL/PHONE outlet locations as shown or Architectural drawings. All outlets, outlet covers, switches and switch plate covers to be white. I. COMPUTER/TELEPHONE OUTLETS Outlets to consist of empty junction box with 1/2" conduit stubbed above ceiling. J. TELEPHONE/COMPUTER LINES AND CABLING Wiring and installation to be provided by Tenant. 3/4" plywood phone board to be provided and installed by Landlord for telephone installation. RESTROOMS/IF INSIDE THE TENANT'S SPACE A. CONSTRUCTION AND FINISHES To be as per office area specifications except as follows: 1) Partitions and ceiling to receive 5/8" water resistant gypsum wallboard. 2) Walls to have 2 coats of epoxy paint from floor to 4'-0" above floor. Remaining wall surface and ceiling to have 2 finish coasts of semi-gloss acrylic over one primer coat. Color to be white. 3)Ceiling structure to be metal stud joists bearing on partition wall. Ceiling structure to support unit water heater for restroom. Ceiling height to be maximum allowable. 4)Counter tops to have plastic laminate finish with color to be selected by Tenant from among choices pre-selected by Landlord. B. PLUMBING FIXTURES 1) Toilet -- Armitage Shanks, white, model #109 or equal. 2) Lavatory -- Armitage Shanks model #308, white, 19" self rimming china lavatory with Price Pfister #H43-121 faucet or equal. 3) Lavatory -- American Standard wall hung Royalyn Vitreous China 3 hole #1024.131 (20" x 18") with Delta handle faucet #2520 or equal. 4) Urinal -- Kohler model #402, white with Zorn flush valve or equal. C. ACCESSORIES 1) Mirror -- Full HGT and with mirror with metal edge trim as shown on Architectural Drawings. 2) Mirror -- Bobrick stainless steel channel frame mirror #B-165-1830 (18" x 30") or equal. 3) Paper Towel Dispenser/Disposal -- Bobrick B-369 recessed, stainless steel satin finish or equal. 4) Toilet Tissue Dispenser -- Bobrick B-388 recessed, stainless steel satin finish or equal. 5) Utility Hook -- Bobrick #B-670 polished stainless steel or equal mounted interior side of toilet and shower stall doors (if applicable) 66" above finished floor. 6) Grab Bars -- Bobrick #b-490, stainless steel satin finish or equal. D. LIGHTING One surface mounted 2 tube fluorescent fixture with acrylic lens in drywall light valance over lavatory. Ceiling fixture, if called for in Architectural drawings, to be 2 tube fluorescent with acrylic wrap lens. E. ELECTRICAL one GFI electric outlet adjacent to lavatory. One exhaust fan in any toilet room. MECHANICAL/ELECTRICAL A. HEATING AND COOLING The interior premises are heated and cooled by one or more roof-mounted mechanical units. The sizing of the mechanical units are designed to provide one (1) ton of cooling for every three hundred and eighty-three (383) square feet of floor area; provided that the internal load does not exceed three (3) watts per square foot. Individual thermostat control shall be centrally controlled allowing for automatic setback capabilities with external dial-in monitoring provided for the interior premises, with control areas not to exceed two thousand (2,000) square feet in size. Based upon the above, the system shall maintain a minimum temperature of 65 degrees Fahrenheit and a maximum temperature of 75 degrees fahrenheit in the separate rooms within the Leased Premises, so long as the minimum exterior temperature shall not be below zero degrees fahrenheit and the maximum exterior temperature shall not be in excess of 100 degrees fahrenheit. B. ELECTRICAL Standard electrical service provided to the building to be 120/208 volt, three phase, four wire. No additional service to be provided for Tenant equipment unless otherwise noted. One (1) light switch per office is provided. Circuitry design is normally laid out to allocate 6 to 8 duplex outlets per 20 amp circuit. C. ELECTRICAL OUTLETS Restrooms to have one duplex electrical outlet. See Architectural drawings for outlet locations in other areas. D. LIGHTING Finished rooms, other than restrooms and storage areas will be lighted with 2'x4' recessed, 4 lamp, fluorescent fixtures. All fixtures to be provided initially with lamps. Lights and switch locations will be as shown on Architectural drawings. SUPPLEMENTAL ITEMS See Architectural drawings for additional notes and locations if the items below are included in the tenant finish. A. COFFEE BAR 1) Base and upper cabinets to be Merrillat brand with style to be chosen by Landlord. 2) Countertop and splash to be plastic laminate finish with color to be selected by Tenant from among choices pre-selected by Landlord. 3) Kitchen sink, Dayton Kingsford #K-11515 single compartment sink with Delta #2171 faucet or equal. B. SHOWER STALL Universal Rundle #6852, 36" unit fiberglass shower stall with glass shower door or equal. When shower stalls are provided substitute a 30 gallon hot water heater for the standard 6 gallon hot water heater. C. PARTIAL HEIGHT PARTITIONS Partial height partitions to be 3-5/8" metal studs with 5/8" gypsum wallboard on each side and 1x oak cap. Finish to match full height partitions and oak base. See Architectural drawings for detail. Vertical posts will be provided as necessary for stability. D. REAR 10' X 10' OPENINGS Any of the following shall be included as part of the tenant finish: 1) Changing out an overhead door to glass 2) Changing out glass to an overhead door 3) As part of initial tenant finish on a new building filling an opening with either glass or an overhead door. Exhibit "E" Additional Terms and Conditions 1. None. Exhibit "F" Option To Extend 1. Option to Extend. The Tenant shall have the option to extend this Lease Agreement from 12:00 noon on October 1, 2003, to 12:00 noon on October 1, 2008. In the event the Tenant desires to exercise said option, Tenant shall give written notice of such exercise to Landlord not before November 1, 2002, nor later than November 31, 2002. See below for Option Term Rent. In the event of such exercise, this Lease Agreement shall be automatically extended for the additional term. Notwithstanding the foregoing, this option shall be void and of no force or effect if the Tenant is in default hereunder either as of the date of the Tenant's exercise of said option or as of the date of the commencement of the option or additional term. 2. Rent. Tenant shall pay the following rent for the Leased Premises:
During Option Term For Period To Period A Base Monthly Starting Ending Rent of October 1, 2003 October 1, 2008 see below*
* Landlord and Tenant will attempt to agree upon a Fair Market Rental Value of the Leased Premises (expressed on a dollar per square foot basis) as determined by comparison to parcels of similar size located in shopping center in or near the City of Boulder, Colorado, having comparable development, use and density capability and such other characteristics as may be deemed relevant by a subject appraiser whose selection is outlined herein. Landlord shall select an independent MAI real estate appraiser with at least ten (10) years' experience in appraising commercial real property in the City of Boulder, Colorado (a "Qualified Appraiser"). The Qualified Appraiser selected by the Landlord shall be referred to as the "Landlords Appraiser". Within thirty (30) days of being selected by the Landlord, the Landlord's appraiser shall determine the Fair Market Rental Value of the leased Premises in accordance with the appraisal standards set forth above and shall immediately give the Landlord and the Tenant written notification of his determination. If the Tenant agrees with the Landlord's Appraiser's determination by multiplying the Fair Market Rental Value, then the Base Monthly Rent shall be determined by multiplying the Fair Market Rental Value by 8,497 and the new Base Monthly Rental shall become effective beginning with the first month of the Option Term. If the Tenant does not agree with the Landlord's Appraiser's determination of Fair Market Rental Value, the Tenant shall have the right to select its own Qualified Appraiser its own Qualified Appraiser to determine the Fair Market Rental Value. If the Tenant does elect to appoint a Qualified Appraiser, (the Tenant's Appraiser"), the Tenant shall select the Tenant's Appraiser within thirty (30) business days after receiving the Landlord's Appraiser's Determination of Fair Market Rental Value. The Tenant's Appraiser shall make his own determination if the Fair Market Rental Value in accordance with the provisions set forth above, within thirty (30) business days of being selected by the Tenant and shall immediately give the Landlord and the Tenant written notice of his determination. If the Fair Market Rental Value as determined by the Landlord's Appraiser and the Tenant's Appraiser, respectively, differ by an amount which is equal to or less than five percent (5%) of the Fair Market Rental Value determined by the Landlord's Appraiser, then the arithmetic mean of the two Fair Market Rental Values shall constitute the fair Market Rental Value used to calculate the new Base Monthly Rental which will be in effect for the Option Term. If the Fair Market Rental Value determined by the Landlord's Appraiser and the Tenant's Appraiser's determination of the Fair Market Rental Value differ by more than five percent (5%), the Landlord's Appraiser and the Tenant's Appraiser shall agree upon and select a third Qualified appraiser who shall be independent of and have no prior or existing affiliation or relationship with either the Landlord or the Tenant (the "Independent Appraiser"). Within ten (10) business days of being appointed, the Independent Appraiser shall, after exercising his best professional judgement, choose either the Landlord's Appraiser's or the Tenant's Appraiser's determination of the Fair Market Rental Value which the judgement, best represents the Fair Market Rental Value at that point in time. Upon making such a selection, the Independent Appraiser shall immediately give the Landlord and the Tenant written notice of this selection of the Fair Market Rental Value. The Fair Market Rental Value selected by the Independent Appraiser shall be used to calculate the new Base Monthly Rental which will be in effect during the Extension Option, and such selection by the Independent appraiser shall be binding and conclusive upon the Landlord and the Tenant. All Appraisal fees required hereunder shall be shared equally by the Landlord and Tenant. LEASE MODIFICATION AGREEMENT LANDLORD: LakeCentre Plaza, Ltd., LLLP TENANT: New Frontier Media, Inc. LEASE: That certain Lease Agreement between Landlord and Tenant, dated August 12, 1998 for the premises known as 5435 Airport Blvd., Suite 100, Boulder, Colorado 80301. LEASE EXPIRATION: October 1, 2003 ADDITIONAL LEASED PREMISES: Tenant agrees to lease an additional 3,247 square feet immediately adjacent to current lease premises in 5435 Airport Blvd. Premises is referred to in Exhibit "A" attached to this Lease Modification Agreement. MODIFIED SQUARE FOOTAGE: 8,497 Existing Lease Premises Square Footage + 3,247 Additional Leased Premises Square Footage ------ 11,744 NEW TOTAL SQUARE FOOTAGE NEW BASE MONTHLY RENT DURING LEASE TERM:
For Period Starting: To Period Ending: A Base Monthly rent of: April 1, 1999 October 1, 1999 $11,800.00 October 1, 1999 October 1, 2003 $11,800.00 Plus any cost of living adjustment per the above referenced Lease Modification Agreement.
REAL ESTATE TAXES: New total Real Estate Tax charges for the modified Leased Premises shall be $1,321.00 until modified per paragraph 11 of the Lease Agreement. INSURANCE: New total Insurance charges for the modified Leased Premises shall be $70.00 until modified per paragraph 12 of the Lease Agreement. COMMON AREA MAINTENANCE: New total Common Area Maintenance charges for the modified Leased Premises shall be $1,077.00 until modified per paragraph 16 of the Lease Agreement. LANDLORD TENANT CONSTRUCTION OBLIGATIONS: 1. Landlord shall complete the Leased Premises per Exhibit "A" and per the attached set of "Standard Lease Space Specifications". Said standard landlord tenant finish improvements will be strictly adhered to by Landlord. Should Tenant deviate from these standard specifications, ownership reserves the right to reduce the aforesaid referenced Tenant Finish Allowance as necessary to compensate for the non-standard build out. 2. Landlord shall provide Tenant with $26.00 per square foot Tenant Finish Allowance toward the completion of such Tenant Improvements in the Additional Lease Premises of 3,247 square feet. 3. All other improvements to the Leased Premises shall be at the sole cost and expense of the Tenant. 4. Prior to the start of Tenant Finish, Landlord shall provide Tenant a budget outlining the cost of the Tenant Finish Construction. ADDITIONAL SECURITY DEPOSIT: Tenant shall pay an additional Security Deposit in the amount of $3,657.00. Upon payment of such additional security Deposit, Tenant's total Security deposit held by Landlord shall be $11,800.00. OTHER TERMS AND CONDITIONS: All other terms and conditions of the above referenced Lease Agreement between Landlord and Tenant, dated August 12, 1998 for the premises known as 5435 Airport Blvd., Suite 100, Boulder, Colorado 80301, shall remain the same except as modified herein. TERMINATION DATE OF MODIFICATION OFFER: This offer expires January 8, 1999 if not executed by Tenant and delivered to this office by such date. LANDLORD: TENANT: LAKECENTRE PLAZA, LTD., LLLP NEW FRONTIER MEDIA, INC. /s/William W. Reynolds, partner /s/ Mark Kreloff Dated this day of , 1999. EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.01 NAME JURISDICTION Colorado Satellite Broadcasting, Inc. Colorado EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statement of New Frontier Media, Inc. included in the Company's Form 10-KSB for the period ended March 31, 1999, and is qualified in its entirety by reference to such financial statements. 12-MOS MAR-31-1999 MAR-31-1998 MAR-31-1999 2,736,186 0 740,923 0 0 5,905,351 2,779,078 333,586 16,402,511 5,639,050 0 0 0 1,254 10,287,777 16,402,511 9,452,432 9,452,432 8,800,203 7,708,346 208,061 0 223,507 (7,264,178) 0 (7,264,178) (316,946) 0 0 (7,581,124) (1.04) (1.04)
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