10-Q 1 s15-2474_10q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10 -Q /X/ Quarterly report under section 13 or 15(d) of the Securities and Exchange Act of 1934. For the quarterly period ended September 30, 2001 / / Transition Report under Section 13 or 15(d) of the Exchange Act. For the transition period from __________________ to __________________ 000-23697 (Commission file number) NEW FRONTIER MEDIA, INC. (Exact name of small business issuer as specified in its charter) Colorado 84-1084061 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 5435 Airport Blvd., Suite 100, Boulder, Co 80301 (Address of principal executive offices) (303) 444-0900 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of November 8, 2001: 21,154,338 shares of Common Stock -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FORM 10-Q NEW FRONTIER MEDIA, INC. Index
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and March 31, 2001................................................ 3-4 Consolidated Statements of Operations for the quarter and six months ended September 30, 2001 and 2000 (Unaudited).............. 5 Consolidated Statements of Comprehensive Income for the quarter and six months ended September 30, 2001 and 2000 (Unaudited)...... 6 Consolidated Statements of Cash Flows for the six months ended September 30, 2001 and 2000 (Unaudited)........................... 7 Notes to Consolidated Financial Statements (Unaudited)............ 8-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 13-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 21 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............... 22-23 Item 6. Exhibits and Reports on Form 8-K.................................. 23 SIGNATURES................................................................ 24
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN 000S) ASSETS
SEPTEMBER 30, 2001 MARCH 31, (UNAUDITED) 2001 ------------- --------- CURRENT ASSETS: Cash and cash equivalents, including restricted cash of $400,000 and $324,016, respectively....................... $ 7,757 $ 8,667 Accounts receivable, net of allowance for doubtful accounts of $575,689 and $363,000, respectively.................... 5,049 5,747 Prepaid distribution rights.................................. 2,507 2,228 Prepaid expenses............................................. 1,096 2,118 Deferred tax asset........................................... 5,077 5,365 Due from related party....................................... 177 64 Other........................................................ 1,024 1,150 ------- ------- TOTAL CURRENT ASSETS.................................... 22,687 25,339 ------- ------- FURNITURE AND EQUIPMENT, at cost............................... 22,242 19,230 Less: accumulated depreciation and amortization.............. (9,521) (7,082) ------- ------- NET FURNITURE AND EQUIPMENT............................. 12,721 12,148 ------- ------- OTHER ASSETS: Prepaid distribution rights.................................. 9,705 8,869 Excess cost over fair value of net assets acquired, less accumulated amortization of $2,299,543 and $1,981,499, respectively.............................................. 4,061 4,379 Marketable securities -- available for sale.................. 38 25 Other........................................................ 2,627 1,846 ------- ------- TOTAL OTHER ASSETS...................................... 16,431 15,119 ------- ------- TOTAL ASSETS................................................... $51,839 $52,606 ======= =======
The accompanying notes are an integral part of the unaudited consolidated financial statements. 3 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN 000S) LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, 2001 MARCH 31, (UNAUDITED) 2001 ------------- --------- CURRENT LIABILITIES: Accounts payable............................................ $ 1,870 $ 1,632 Current portion of obligations under capital lease.......... 1,744 1,459 Deferred revenue............................................ 3,797 3,860 Reserve for chargebacks/credits............................. 289 443 Litigation reserve.......................................... 2,500 2,500 Other accrued liabilities................................... 2,284 2,981 --------- --------- TOTAL CURRENT LIABILITIES.............................. 12,484 12,875 --------- --------- LONG-TERM LIABILITIES: Obligations under capital leases, net of current portion.... 1,596 1,035 Note payable................................................ 4,000 6,000 Other....................................................... -- 41 --------- --------- TOTAL LONG-TERM LIABILITIES............................ 5,596 7,076 --------- --------- TOTAL LIABILITIES................................... 18,080 19,951 --------- --------- SHAREHOLDERS' EQUITY Common stock, $.0001 par value, 50,000,000 shares authorized, 21,132,280 and 20,938,420, respectively, shares issued and outstanding............................ 2 2 Preferred stock, $.10 par value, 5,000,000 shares authorized: Class A, no shares issued and outstanding................ -- -- Class B, no shares issued and outstanding................ -- -- Additional paid-in capital.................................. 44,509 43,929 Minority interest in subsidiary............................. (171) (171) Other comprehensive loss.................................... (80) (93) Accumulated deficit......................................... (10,501) (11,012) --------- --------- TOTAL SHAREHOLDERS' EQUITY............................. 33,759 32,655 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $ 51,839 $ 52,606 ========= =========
The accompanying notes are an integral part of the unaudited consolidated financial statements. 4 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN 000S)
(UNAUDITED) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 ------- ------- ------- ------- SALES, net......................................... $13,847 $14,061 $28,821 $27,544 COST OF SALES...................................... 6,740 7,279 14,020 14,312 ------- ------- ------- ------- GROSS MARGIN....................................... 7,107 6,782 14,801 13,232 ------- ------- ------- ------- OPERATING EXPENSES: Sales and marketing.............................. 2,227 1,858 4,438 3,604 General and administrative....................... 4,018 5,333 8,600 9,011 Goodwill amortization............................ 159 159 318 318 ------- ------- ------- ------- TOTAL OPERATING EXPENSES.................... 6,404 7,350 13,356 12,933 ------- ------- ------- ------- OPERATING INCOME (LOSS)..................... 703 (568) 1,445 299 ------- ------- ------- ------- OTHER INCOME (EXPENSE): Interest income.................................. 58 30 125 110 Interest expense................................. (313) (140) (714) (388) Loss on write-off of stock....................... -- (507) -- (507) Litigation reserve............................... -- (10,000) -- (10,000) ------- ------- ------- ------- TOTAL OTHER INCOME (EXPENSE)................ (255) (10,617) (589) (10,785) ------- ------- ------- ------- INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES............................................ 448 (11,185) 856 (10,486) ------- ------- ------- ------- Minority interest in loss of subsidiary.......... -- 53 -- 97 ------- ------- ------- ------- NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............................................ 448 (11,132) 856 (10,389) Provision for income taxes....................... (178) 7,243 (345) 7,241 ------- ------- ------- ------- NET INCOME (LOSS)........................... $ 270 $(3,889) $ 511 $(3,148) ======= ======= ======= ======= Basic/Diluted Earnings (Loss) per share............ $ .01 $ (.19) $ .02 $ (.15) ======= ======= ======= =======
The accompanying notes are an integral part of the unaudited consolidated financial statements. 5 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) IN (000'S)
(UNAUDITED) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Net income (loss).......................... $ 270 $(3,889) $ 511 $(3,148) Other comprehensive income (loss) Unrealized income (loss) on available-for-sale marketable securities............................ 18 3 13 (70) ------- ------- ------- ------- Total comprehensive income (loss)..... $ 288 $(3,886) $ 524 $(3,218) ======= ======= ======= =======
The accompanying notes are an integral part of the unaudited consolidated financial statements. 6 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000S)
(UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................... $ 511 $(3,148) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Conversion of interest to common stock......................... -- 179 Accretion of interest.......................................... -- 69 Stock/warrants issued for services and legal settlement........ 145 160 Depreciation and amortization.................................. 4,511 2,943 Increase in legal reserve...................................... -- 10,000 Write-off of marketable securities available for sale.......... -- 507 Minority interest in loss of subsidiary........................ -- (97) (Increase) Decrease in operating assets Accounts receivable..................................... 698 (1,131) Deferred tax asset...................................... 288 (7,261) Receivables and prepaid expenses........................ 1,022 (361) Prepaid distribution rights............................. (2,518) (2,084) Other assets............................................ 104 (120) Increase (Decrease) operating liabilities Accounts payable........................................ 237 552 Deferred revenue, net................................... (62) 50 Reserve for chargebacks/credits......................... (154) 13 Other accrued liabilities............................... (661) 106 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES............ 4,121 377 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and furniture............................ (1,497) (2,697) Purchase of subscriber base.................................... (500) -- ------- ------- NET CASH USED IN INVESTING ACTIVITIES..................... (1,997) (2,697) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations.......................... (1,030) (608) Payment of related party notes payable......................... (113) (952) Payment on note payable........................................ (2,000) -- Issuance of common stock....................................... 109 309 Payment on distribution payable................................ -- (300) Decrease in debt offering cost................................. -- 152 Capital contribution from shareholders......................... -- 1,300 ------- ------- NET CASH USED IN FINANCING ACTIVITIES..................... (3,034) (99) ------- ------- NET DECREASE IN CASH................................................ (910) (2,419) CASH, beginning of period........................................... 8,667 7,329 ------- ------- CASH, end of period................................................. $ 7,757 $ 4,910 ======= =======
The accompanying notes are an integral part of the unaudited consolidated financial statements. 7 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The accompanying consolidated financial statements include the accounts of New Frontier Media, Inc. ("the Company" or "New Frontier Media") and its wholly owned subsidiaries Colorado Satellite Broadcasting, Inc. d/b/a The Erotic Networks ("CSB" or "TEN"), Interactive Gallery, Inc. ("IGI") and Card Transactions, Inc. ("CTI"). BUSINESS New Frontier Media is a publicly traded holding company for its operating subsidiaries. TEN is a leading provider of adult programming to multi-channel television providers and low powered direct-to-home C-Band households. Through its six networks, Pleasure, TeN, ETC, Extasy, True Blue and X-Cubed, TEN is able to provide a variety of editing styles and programming mixes that appeal to a broad range of adult customers. IGI is a leading aggregator and reseller of adult content via the Internet. IGI aggregates adult-recorded video, live-feed video and still photography from adult content studios and distributes it via its membership websites and Pay-Per-View feeds. In addition, IGI resells its aggregated content to third-party web masters and resells its Internet traffic that does not convert into memberships. CTI is a provider of various Internet billing options including secure, fully automated credit card payment processing to IGI. BASIS OF PRESENTATION The financial information included in these financial statements is unaudited but, in the opinion of management, reflects all normal recurring adjustments necessary for a fair presentation of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows for the entire year. These financial statements should be read in conjunction with the financial statements and notes to the financial statements contained in the Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (the "2001 Form 10-K") of New Frontier Media, Inc. and its subsidiaries (the "Company"). Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." Management believes this statement will not have a material impact on the Company's financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Management believes this statement will not have a material impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement is not applicable to the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Management believes this statement will not have a material impact, if any, on the Company's financial statements. 8 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- FURNITURE AND FIXTURES Property and equipment consisted of the following: (in 000s)
UNAUDITED SEPTEMBER AUDITED 30, MARCH 31, 2001 2001 ----------- ----------- Furniture, fixtures and equipment....................... $ 871 $ 690 Software................................................ 297 274 Computer equipment...................................... 8,076 7,315 Capitalized leased equipment............................ 7,228 5,225 Capitalized URLs........................................ 4,774 4,748 Leasehold improvements.................................. 996 321 Assets in the course of construction.................... -- 657 ----------- ----------- 22,242 19,230 Less accumulated depreciation and amortization.......... (9,521) (7,082) ----------- ----------- TOTAL................................................... $ 12,721 $ 12,148 =========== ===========
NOTE 3 -- EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding warrants and stock options using the "treasury stock" method. The components of basic and diluted earnings per share are as follows: EARNINGS (LOSS) PER SHARE (IN 000S)
QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2001 2000 2001 2000 ------- ------- ------- ------- Net income (loss) available for common shareholders....................................... $ 270 $(3,889) $ 511 $(3,148) ======= ======= ======= ======= Average outstanding shares of common stock........... 21,126 20,174 21,084 20,815 Dilutive effect of: Warrants/Employee Stock Options...................... 1,664 1,504 1,664 1,654 ------- ------- ------- ------- Common stock and common stock equivalents............ 22,790 21,678 22,748 22,469 ======= ======= ======= ======= Earnings (loss) per share: Basic/Diluted........................................ $ .01 $ (.19) $ .02 $ (.15)
NOTE 4 -- SHAREHOLDERS' EQUITY During the quarter and six months, respectively, the Company issued 30,000 and 81,100 shares of common stock upon the exercise of compensatory warrants and options. During the quarter and six months, respectively, the Company issued 15,000 and 26,023 shares of common stock in lieu of interest. During the quarter, the Company repurchased 7,400 shares of common stock. The Company plans to retire these shares. 9 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the six months, the Company issued 94,137 shares of common stock for the purchase of a subscriber base. NOTE 5 -- STOCK OPTIONS AND WARRANTS The Company granted warrants to consultants for services provided allowing them to purchase common stock of New Frontier Media. The following information describes information relating to warrants issued during the quarter:
EXPIRATION DATE WARRANTS PRICE ------------------------------------------------------ -------- ----- 06/01/04.............................................. 40,000 $4.61
As of September 30, 2001, the Company had granted 2,454,500 Options from the 2000 Millenium Stock Option Plan, 1,557,950 Options from the 1999 Incentive Stock Option Plan and 843,000 Options from the 1998 Stock Option Plan. NOTE 6 -- SEGMENT INFORMATION For internal reporting purposes, management segregates the Company into three divisions: 1) Subscription/Pay-Per View TV, 2) Internet Group and 3) Corporate Administration. The following tables represent unaudited financial information by reportable segment (in thousands):
QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 ------- -------- ------- -------- NET REVENUE Subscription/Pay-Per-View TV................. $ 7,574 $ 5,856 $14,567 $ 11,354 Internet Group............................... 6,242 8,173 14,192 16,128 Corporate Administration..................... 31 32 62 62 ------- -------- ------- -------- Total................................... $13,847 $ 14,061 $28,821 $ 27,544 ======= ======== ======= ======== INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES Subscription/Pay-Per-View TV................. $ 1,797 $ 576 $ 3,024 $ 1,012 Internet Group............................... 556 556 1,846 2,014 Corporate Administration..................... (1,905) (12,317) (4,014) (13,512) ------- -------- ------- -------- Total................................... $ 448 $(11,185) $ 856 $(10,486) ======= ======== ======= ======== INTEREST INCOME Subscription/Pay-Per-View TV................. $ 1 $ 4 $ 2 $ 9 Internet Group............................... 1 8 2 15 Corporate Administration..................... 56 18 121 86 ------- -------- ------- -------- Total................................... $ 58 $ 30 $ 125 $ 110 ======= ======== ======= ======== INTEREST EXPENSE Subscription/Pay-Per-View TV................. $ 39 $ 30 $ 104 $ 62 Internet Group............................... 100 84 214 160 Corporate Administration..................... 174 26 396 166 ------- -------- ------- -------- Total................................... $ 313 $ 140 $ 714 $ 388 ======= ======== ======= ========
10 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 ------- -------- ------- -------- DEPRECIATION AND AMORTIZATION Subscription/Pay-Per-View TV................. $ 1,231 $ 949 $ 2,463 $ 1,865 Internet Group............................... 899 569 1,759 1,011 Corporate Administration..................... 174 139 306 156 ------- -------- ------- -------- Total................................... $ 2,304 $ 1,657 $ 4,528 $ 3,032 ======= ======== ======= ========
UNAUDITED AUDITED SEPTEMBER MARCH 30, 31, 2001 2001 ------- -------- IDENTIFIABLE ASSETS Subscription/Pay-Per-View TV................. $25,936 $ 25,268 Internet Group............................... 16,564 18,248 Corporate Administration..................... 32,278 35,610 Eliminations................................. (22,939) (26,520) ------- -------- Total................................... $51,839 $ 52,606 ======= ========
NOTE 7 -- MAJOR CUSTOMER The Company's revenue from a major customer (revenues in excess of 10% of total sales) is from an entity involved in the satellite broadcast industry. The revenue from such customer as a percentage of total revenues for the quarters ended September 30 are as follows:
2001 2000 ---- ---- Customer A............................................ 24% 18%
At September 30, 2001 and March 31, 2001, accounts receivable from Customer A is $2,545,700 and $2,887,734, respectively. There were no other customers with receivable balances in excess of 10% of consolidated accounts receivable. Customer A is included in the Subscription/Pay-Per-View TV Segment. The loss of its significant customer could have a materially adverse effect on the Company's business, operating results or financial condition. To limit the Company's credit risk, management performs ongoing credit evaluations of its customers and maintains allowances for potentially uncollectable accounts. NOTE 8 -- NOTES PAYABLE Notes payable at September 30 consisted of the following:
2001 2000 ---------- ---------- Unsecured note payable bearing interest at 15% per annum. The principal is payable in cash on January 16, 2003. Interest is payable at the option of the Holder in cash or stock on a quarterly basis, in arrears, commencing May 1, 2001...... $ 250,000 $ -- Unsecured note payable bearing interest at 15% per annum. The principal is payable in cash on January 30, 2003. Interest is payable at the option of the Holder in cash or stock on a quarterly basis, in arrears, commencing May 1, 2001...... 250,000 --
11 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unsecured note payable bearing interest at 15% per annum. The principal is payable in cash on February 2, 2003. Interest is payable at the option of the Holder in cash or stock on a quarterly basis, in arrears, commencing May 1, 2001...... $ 500,000 $ -- Unsecured note payable bearing interest at 12% per annum. The principal is payable in cash on or before December 17, 2002. Interest will be paid on the outstanding principal amount on a monthly basis on or before the fifth day of each month................................................. 3,000,000 ---------- ---------- 4,000,000 -- ---------- ---------- Less current portion.......................................... -- -- ---------- ---------- LONG-TERM PORTION..................................... $4,000,000 $ -- ========== ==========
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD LOOKING STATEMENTS This quarterly report on Form 10-Q includes forward-looking statements. These statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from such statements. The words "believe", "expect", "anticipate", "optimistic", "intend", "will", and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update or revise any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully manage our credit card chargeback and credit percentage in order to maintain our ability to accept credit cards as a form of payment for our products and services; 2) our ability to compete effectively with our primary Cable/ DSB competitor; 3) our ability to compete effectively with our Internet competitors; 4) our ability to attract traffic to our web sites; 5) our ability to increase the conversion and retention rates of our web sites; and 6) our ability to retain our key executives. The following table reflects the Company's results of operations for the quarter and six months ended September 30, 2001 and 2000. RESULTS OF OPERATIONS
(IN MILLIONS) (IN MILLIONS) QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ----------------- 2001 2000 2001 2000 ----- ----- ----- ----- NET REVENUE Subscription/Pay-Per-View TV Cable/DBS.............................. 5.2 3.3 9.7 6.3 C-Band................................. 2.4 2.6 4.9 5.1 Internet Group Net Membership......................... 4.2 4.8 9.5 9.6 Sale of Content........................ 0.5 0.9 1.1 1.9 Sale of Traffic........................ 1.4 2.2 3.3 4.1 Other.................................. 0.2 0.3 0.3 0.5 ----- ----- ----- ----- TOTAL.................................. 13.9 14.1 28.8 27.5 ===== ===== ===== ===== COST OF SALES Subscription/Pay-Per-View TV................ 3.3 2.8 6.5 5.6 Internet Group.............................. 3.4 4.5 7.5 8.7 ----- ----- ----- ----- TOTAL.................................. 6.7 7.3 14.0 14.3 ===== ===== ===== ===== OPERATING INCOME (LOSS) Subscription/Pay-Per-View TV................ 1.8 0.6 3.1 1.1 Internet Group.............................. 0.6 0.8 2.0 2.4 Corporate Administration.................... (1.7) (2.0) (3.7) (3.2) ----- ----- ----- ----- TOTAL.................................. 0.7 (0.6) 1.4 0.3 ===== ===== ===== =====
NET REVENUE Net revenue for the Company was $13.9 million for the quarter ended September 30, 2001, as compared to $14.1 million for the quarter ended September 30, 2000, representing a decrease of 1%. Net revenue for the Company was $28.8 million for the six months ended September 30, 2001, as compared to $27.5 million for the six months ended September 30, 2000, representing an increase of 5%. 13 The decrease in net revenue for the quarter is due to a 23% decrease in net revenue generated by the Internet Group that was offset by a 29% increase in net revenue generated by the Subscription/PPV TV Group. Net revenue for the Subscription/PPV TV Group increased to $7.6 million for the quarter ended September 30, 2001, from $5.9 million as of the quarter ended September 30, 2000. Net revenue for the Internet Group declined from $8.2 million as of the quarter ended September 30, 2000 to $6.3 million for the quarter ended September 30, 2001. The increase in net revenue for the six months ended September 30, 2001 is due to a 28% increase in net revenue generated by the Subscription/PPV TV Group that was offset by a 12% decrease in net revenue generated by the Internet Group. Net revenue for the Subscription/PPV TV Group increased to $14.6 million for the six months ended September 30, 2001 from $11.4 million for the six months ended September 30, 2000. Net revenue for the Internet Group declined from $16.1 million as of the six months ended September 30, 2000 to $14.2 million as of the six months ended September 30, 2001. OPERATING INCOME Operating income for the Company increased to $0.7 million and $1.4 million for the quarter and six months ended September 30, 2001, respectively, from an operating loss of $0.6 million and operating income of $0.3 million for the quarter and six months ended September 30, 2000, respectively. The increase in operating income for the quarter and six months ended September 30, 2001 is due to an increase in operating income generated by the Subscription/PPV TV Group. Operating income generated by the Subscription/PPV TV Group was $1.8 million and $3.1 million for the quarter and six months ended September 30, 2001, respectively, as compared to $0.6 million and $1.1 million for the quarter and six months ended September 30, 2000, respectively. This increase in operating income was offset by a decline in operating income generated by the Internet Group. The Internet Group's operating income declined from $0.8 million and $2.4 million for the quarter and six months ended September 30, 2000 to $0.6 million and $2.0 million for the quarter and six months ended September 30, 2001. The operating loss generated by the Corporate Administration segment declined from a loss of $2.0 million as of the quarter ended September 30, 2000 to $1.7 million as of the quarter ended September 30, 2001 largely as a result of lower legal fees. The operating loss generated by the Corporate Administration segment increased for the six months ended September 30, 2001 to $3.7 million from $3.2 million as of the six months ended September 30, 2000. SUBSCRIPTION/PAY-PER-VIEW (PPV) TV GROUP The following table outlines the current distribution environment and addressable households for each network:
ESTIMATED ADDRESSABLE HOUSEHOLDS -------------------------------------------- (IN THOUSANDS) AS OF AS OF SEPTEMBER 30, SEPTEMBER 30, NETWORK DISTRIBUTION METHOD 2001 2000 % CHANGE ------------------ ----------------------- ------------- ------------- --------- Pleasure Cable/DBS 16,100 13,300 21% TeN Cable/DBS 7,400 5,500 35% ETC Cable/DBS 3,300 1,200 175% Extasy C-band/Cable/DBS 7,300 3,100 135%(1) True Blue C-band 900 1,800 -50%(1) X-Cubed (2) C-band 900 1,300 -31%(1) TOTAL ADDRESSABLE SUBSCRIBERS 35,900 26,200
(1) % change includes a 31% decline in C-band market addressable households. Total addressable C-Band households declined from 1.3 million as of September 30, 2000 to 0.9 million as of September 30, 2001. (2) This network was formerly known as GonzoX. The network was renamed X-Cubed in May 2001. 14 NET REVENUE Total net revenue for the Subscription/PPV TV Group was $7.6 million for the quarter ended September 30, 2001, representing a 29% increase from $5.9 million for the quarter ended September 30, 2000. Of total net revenue, C-Band net revenue was $2.4 million for the quarter ended September 30, 2001, as compared to $2.6 million for the quarter ended September 30, 2000, representing a decrease of 8%. Revenue from the Group's Cable/DBS services for the quarter ended September 30, 2001, was $5.2 million as compared to $3.3 million for the quarter ended September 30, 2000, an increase of 58%. Revenue from the Group's Cable/DBS services is responsible for approximately 68% of the Group's total net revenue for the quarter ended September 30, 2001, as compared to 56% for the quarter ended September 30, 2000. Total net revenue for the Subscription/PPV TV Group was $14.6 million for the six months ended September 30, 2001, representing a 28% increase from $11.4 million for the six months ended September 30, 2000. Of total net revenue, C-Band net revenue was $4.9 million for the six months ended September 30, 2001, as compared to $5.1 million for the six months ended September 30, 2000, representing a decrease of 4%. Revenue from the Group's Cable/DBS services for the six months ended September 30, 2001, was $9.7 million as compared to $6.3 million for the six months ended September 30, 2000, an increase of 54%. Revenue from the Group's Cable/ DBS services is responsible for approximately 66% of the Group's total net revenue for the six months ended September 30, 2001, as compared to 55% for the six months ended September 30, 2000. The decrease in C-Band revenue for both the quarter and six months ended September 30, 2001, is due to the declining C-Band market as the consumer's trend towards converting C-Band "big dish" analog satellite systems to smaller, 18-inch digital DBS satellite systems continues. The C-Band market has decreased 31% since September 30, 2000, from 1.3 million addressable subscribers to 0.9 million addressable subscribers as of September 30, 2001. The Subscription/PPV TV Group acquired the C-Band subscriber base of Emerald Media, Inc. ("EMI") in April 2001 for a total of $750,000 in stock and cash. EMI was formerly the Group's largest competitor in the adult C-Band market, operating two competing networks, which were shut down after this acquisition. The effect of this acquisition has been to support the Group's C-Band revenue stream in a quickly eroding market place. Although the C-Band market continues to decline, the number of subscribers to the Subscription/PPV TV Group's networks remains relatively stable quarter to quarter as does its average revenue earned per sale. The increase in the Subscription/PPV TV Group's Cable/DBS revenue for the quarter and six months ended September 30, 2001 is a result of the following factors as discussed further below: 1) An increase in Pleasure's addressable subscriber base; 2) the launch of Erotic Television Clips ("ETC") and 3) the continued success of Extasy. Pleasure is available to 16.1 million addressable subscribers as of September 30, 2001, representing an increase of 21% from 13.3 million as of September 30, 2000. The increase in addressable subscribers is a result of the addition of new affiliates and on-line growth of existing affiliates. The Subscription/PPV TV Group has signed corporate carriage agreements with AOL Time Warner, Inc. ("Time Warner") and Comcast Corporation ("Comcast") for the distribution of Pleasure on all of their digital systems. In addition, many analog systems of these multiple system operators ("MSOs") have chosen to carry Pleasure. Time Warner replaced a competing analog service with Pleasure on its largest system in New York City's borough of Manhattan in September 2001. The Subscription/PPV TV Group also has an agreement with Hughes Electronic Corporation's DirecTV ("DirecTV") for carriage of a daily six-hour feed of Pleasure called "Pleasure Island". Pleasure Island airs each night on DirecTV from 10:00 p.m. to 4:00 a.m. EST. During the quarter ended September 30, 2001, EchoStar Communication Corporation's DISH Network ("DISH") terminated the distribution of Pleasure on its platform. The Subscription/PPV TV Group does not expect a material change in its revenue due to this disaffiliation. As discussed below, 15 the movement of Extasy from DISH's satellite at 110 degrees to its satellite at 119 degrees is expected to offset the revenue decrease anticipated from this disaffiliation. The Subscription/PPV TV Group launched ETC in July 2000. As of September 30, 2001, ETC was available to 3.3 million Cable and DBS addressable subscribers. As of September 30, 2001, Extasy was available to 6.4 million Cable/DBS addressable subscribers up from 1.8 million addressable subscribers as of September 30, 2000, an increase of 256%. In August 2001, DISH moved Extasy from its satellite at 110 degrees, where it has resided since its launch on DISH, to its satellite at 119 degrees. DISH's satellite at 119 degrees is viewed by nearly double the addressable subscribers than its satellite at 110 degrees. COST OF SALES Cost of sales for the Subscription/PPV TV Group was $3.3 million, or 43% of revenue, for the quarter ended September 30, 2001, as compared to $2.8 million, or 47% of revenue, for the quarter ended September 30, 2000, an increase of 18%. Cost of sales for the Subscription/PPV TV Group was $6.5 million or 45% of revenue, for the six months ended September 30, 2001, as compared to $5.6 million, or 49% of revenue, as of the six months ended September 30, 2000, an increase of 16%. Cost of sales consists of expenses associated with broadcast playout, satellite uplinking, satellite transponder leases, programming acquisition costs, amortization of content licenses, TeN.com internet costs, and call center operations. The increase in cost of sales is due to the following: a) an increase in programming acquisition costs for screening, quality control and editing of the Group's content as it has expanded the number of movies offered on each of its networks; b) an increase in amortization expense related to the purchase of additional content as the Group has expanded the number of movies airing on its networks each month; and c) in increase in webmaster marketing costs related to the Group's TeN.com broadband product. OPERATING INCOME Operating income for the Subscription/PPV TV Group for the quarter ended September 30, 2001 was $1.8 million as compared to operating income of $0.6 million for the quarter ended September 30, 2000, an increase of 200%. Operating income for the Subscription/PPV TV Group for the six months ended September 30, 2001 was $3.1 million as compared to operating income of $1.1 million for the six months ended September 30, 2000, an increase of 182%. The increase in operating income for the quarter and six months ended September 30, 2001, as compared to the quarter and six months ended September 30, 2000, is due to a 29% and 28% increase in revenue for the quarter and six months ended September 30, 2001, respectively. Additionally, the Subscription/PPV TV Group's gross margin percentage increased from 53% as of the quarter ended September 30, 2000 to 57% as of the quarter ended September 30, 2001, and increased from 51% as of the six months ended September 30, 2000 to 55% as of the six months ended September 30, 2001. Operating expenses as a percentage of revenue were 32% and 34% for the quarter and six months ended September 30, 2001, respectively, as compared to 41% and 40% for the quarter and six months ended September 30, 2000, respectively. The decrease in operating expenses as a percentage of revenue is a result of the Subscription/PPV TV Group's operating expenses such as advertising, payroll, trade show expenses, and consulting remaining fairly flat as revenue increased. Operating expenses were $2.4 million for both quarters ended September 30, 2001 and 2000. Operating expenses were $4.9 million and $4.6 million for the six months ended September 30, 2001 and 2000, respectively, representing an increase of 7%. 16 INTERNET GROUP NET REVENUE Total net revenue for the Internet Group was $6.3 million for the quarter ended September 30, 2001, as compared to $8.2 million for the quarter ended September 30, 2000, which represents a decrease of 23%. Total net revenue for the Internet Group was $14.2 million for the six months ended September 30, 2001, as compared to $16.1 million for six months ended September 30, 2000, which represents a decrease of 12%. The Internet Group's revenue is comprised of membership revenue from its consumer-based web sites, revenue from the sale of its content feeds, revenue from the sale of exit traffic, and revenue from its Internet Service Provider ("ISP") services. Net membership revenue for the Internet Group was $4.2 million for the quarter ended September 30, 2001 as compared to net membership revenue of $4.8 million for the quarter ended September 30, 2000, which represents a decrease of 13%. Net membership revenue for the Internet Group was $9.5 million for the six months ended September 30, 2001, as compared to $9.6 million for the six months ended September 30, 2000, which represents a decrease of 1%. The Internet Group's chargebacks and credits were $0.6 million, or 14% of gross membership revenue for the quarter ended September 30, 2001, as compared to $0.6 million, or 13% of gross membership revenue for the quarter ended September 30, 2000. The Internet Group's chargebacks and credits were $1.3 million, or 14% of gross membership revenue for the six months ended September 30, 2001, as compared to $1.4 million, or 15% of gross membership revenue for the six months ended September 30, 2000. The Internet Group has continued to manage its credit card revenue closely in order to ensure that it is meeting the necessary chargeback parameters required by the major credit card companies. The Internet Group has seen a decline in its membership revenue as a result of a decrease in traffic to its sites. This decrease in traffic to the Internet Group's sites during the quarter and six months ended September 30, 2001 is due to changes made to the Internet Group's webmaster payout model. The Internet Group changed its payout model during fiscal 2002 to compensate a webmaster only upon the conversion of a referral into a paying monthly member. This change resulted in a 43% and 27% decline in webmaster payouts for the quarter and six months ended September 30, 2001, while net membership revenue declined only 13% and 1% for the quarter and six months ended September 30, 2001. Revenue from the Internet Group's sale of content was $0.5 million for the quarter ended September 30, 2001, as compared to $0.9 million for the quarter ended September 30, 2000, representing a decrease of 44%. Revenue from the Internet Group's sale of content was $1.1 million for the six months ended September 30, 2001, as compared to $1.9 million for the six months ended September 30, 2000, which represents a decrease of 42%. This decrease in revenue from the sale of content is due to continued competition forcing prices for content lower. Revenue is earned from traffic sales by forwarding exit traffic and traffic from selected vanity domains to affiliate webmaster marketing programs. Revenue from the sale of traffic was $1.4 million for the quarter ended September 30, 2001, as compared to $2.2 million for the quarter ended September 30, 2000, which represents a decrease of 36%. Revenue from the sale of traffic was $3.3 million for the six months ended September 30, 2001, as compared to $4.1 million for the six months ended September 30, 2000, which represents a decrease of 20%. The Internet Group's revenue from sale of traffic has decreased for the quarter and six months ended September 30, 2001 because of a decline in overall traffic purchased by the Internet Group under its new webmaster payout model. The decline in traffic to the Internet Group's web sites results in less traffic available to sell. The Internet Group is experiencing a decline in its revenue from international exit traffic due to stricter billing parameters in the local (non-U.S.) jurisdictions and to non-U.S. consumers' movement to alternative billing methods. In order to offset this decline, the Group is exploring alternate means of international billing that will insure stable, recurring revenues from certain foreign countries while at the same time improving its own foreign IP look up/routing technology. 17 The Internet Group's other revenue was earned from the sale of services such as hosting, co-location, and bandwidth management ("ISP" services) to non-affiliated companies. The Group's other revenue was $0.2 million for the quarter ended September 30, 2001, as compared to $0.3 million for the quarter ended September 30, 2000, representing a decrease of 33%. The Internet Group's other revenue was $0.3 million for the six months ended September 30, 2001, as compared to $0.5 million for the six months ended September 30, 2000, representing a decrease of 40%. This decrease in other revenue for the quarter and six months ended September 30, 2001 was due to the Group's major non- affiliated customer changing service providers. COST OF SALES Cost of sales for the Internet Group was $3.4 million for the quarter ended September 30, 2001, as compared to $4.5 million for the quarter ended September 30, 2000, representing a decrease of 24%. Cost of sales for the Internet Group was $7.5 million for the six months ended September 30, 2001, as compared to $8.7 million for the six months ended September 30, 2000, which represents a decrease of 14%. Cost of sales consists of expenses associated with credit card fees, merchant banking fees, bandwidth, membership acquisition costs, web site content costs, and depreciation of assets. Cost of sales was 54% and 53% of total net revenue for the quarter and six months ended September 30, 2001, respectively, as compared to 55% and 54% of net revenue for the quarter and six months ended September 30, 2000, respectively. More than 70% of the traffic to the Internet Group's web sites is acquired through affiliate programs that it markets to webmasters. These programs compensate webmasters for traffic referrals to the Internet Group's web sites. A webmaster will be paid a fee of $25 - $45 per referral that results in a monthly membership to one of the Internet Group's web sites. Any traffic referred that does not result in a membership to the Internet Group's web sites will be sold by the Internet Group to other webmasters via affiliate programs to which it belongs, resulting in revenue from traffic sales. The Internet Group's traffic acquisition costs were $1.3 million, or 21% of net revenue, as of the quarter ended September 30, 2001, as compared to $2.3 million, or 28% of net revenue, for the quarter ended September 30, 2000, representing a decrease of 43%. The Internet Group's traffic acquisition costs were $3.2 million, or 23% of net revenue, for the six months ended September 30, 2001, as compared to $4.4 million, or 27% of net revenue, for the six months ended September 30, 2000, which represents a decrease of 27%. This decrease is due to the implementation of new traffic acquisition programs that focused on decreasing customer acquisition costs. The Internet Group is focusing its efforts on further refining its customer acquisition programs in order to balance these costs with the revenue generated. The Group expects to see incremental increases in its customer acquisition costs in future periods in order to generate additional traffic to its sites. Merchant banking fees, including fees for credits and chargebacks, increased from 11% of gross membership revenue as of the quarter and six months ended September 30, 2000, to 12% and 10% of gross membership revenue as of the quarter and six months ended September 30, 2001, respectively. This increase in merchant banking fees as a percentage of gross membership revenue is due to a Visa fine incurred during the quarter ended September 30, 2001. The Internet Group is currently contesting this Visa fine as it believes that it was assessed incorrectly. Depreciation and amortization was 14% and 9% of net revenue for the quarters ended September 30, 2001 and September 30, 2000, respectively. Depreciation and amortization was 13% and 8% of net revenue for the six months ended September 30, 2001 and September 30, 2000, respectively. This increase in depreciation and amortization expense is due to the purchase of Internet equipment such as routers, servers and load balancers necessary to support the daily traffic to the Internet Group's web sites. OPERATING INCOME Operating income for the Internet Group was $0.6 million for the quarter ended September 30, 2001 as compared to $0.8 million for the quarter ended September 30, 2000, representing a decrease of 18 25%. Operating income for the Internet Group was $2.0 million for the six months ended September 30, 2001 as compared to $2.4 million for the six months ended September 30, 2000, which represents a decrease of 17%. Operating expenses were 35% and 33% of net revenue for the quarter and six months ended September 30, 2001, respectively, as compared to 34% and 31% of net revenue for the quarter and six months ended September 30, 2000, respectively. Total operating expenses decreased 21% and 6% from the quarter and six months ended September 30, 2000. Expenses related to the Internet Group's billing department declined 59% and 53% from the quarter and six months ended September 30, 2000. This decrease in expenses is related to the Company's decision to focus the billing department's services on the Internet Group only. Operating expenses unrelated to the billing department decreased 13% from the quarter ended September 30, 2000 and increased 5% from the six months ended September 30, 2000. The decrease in expenses from quarter to quarter is a result of decreases in trade show, salary, consulting, and legal expenses. The increase in operating expenses unrelated to the billing department from year to year was related to an increase in trade show expenses, legal fees, and expenses related to the Internet Group's move to its new building which occurred in June 2001. CORPORATE ADMINISTRATION The Corporate Administration segment includes all costs associated with the operation of the public holding company, New Frontier Media, Inc. These costs include, but are not limited to, legal and accounting expenses, insurance, registration and filing fees with NASDAQ and the SEC, investor relations costs, and printing costs associated with the Company's public filings. The operating loss for this segment decreased from $2.0 million for the quarter ended September 30, 2000, to an operating loss of $1.7 million for the quarter ended September 30, 2001, a decrease of 15%. The operating loss for this segment increased from a loss of $3.2 million as of the six months ended September 30, 2000 to a loss of $3.7 million as of the six months ended September 30, 2001, an increase of 16%. The decrease in operating loss for this segment for the quarter ended September 30, 2001 is primarily related to a 57% decrease in legal expenses offset by increases in consulting, payroll, and travel costs. The decrease in legal expenses relates to the non-recurring legal expenses incurred during the quarter ended September 30, 2000 with respect to the Lipson lawsuit (see below). The increase in the operating loss for this segment for the six months ended September 30, 2001 is due to an increase in consulting expenses related to the hiring of an investment advisory firm, an increase in amortization related to debt offering costs, an increase in payroll expenses, an increase in travel related to more frequent travel to the Internet Group location in Los Angeles, and an increase in insurance premium expenses. OTHER EXPENSE Other expense decreased from $10.6 and $10.8 million for the quarter and six months ended September 30, 2000, respectively, to $0.3 million and $0.6 million for the quarter and six months ended September 30, 2001, respectively. The quarter and six months ended September 30, 2000, includes two nonrecurring items: 1) a $10 million reserve for the jury verdict issued in the Lipson lawsuit, and 2) a $507,500 loss for the write down of Metro Global Media, Inc. ("Metro") stock. The Company was a defendant in a lawsuit ("Lipson lawsuit") filed on January 25, 1999 in which J.P. Lipson sought to enforce an alleged agreement with the Company. The lawsuit went to trial on August 14, 2000. On September 1, 2000, the jury entered a verdict awarding to the plaintiff $10 million in liquidated damages and, in the alternative, $1 million in actual damages and $1 million in punitive damages. The Company established a $10 million reserve on its books during the quarter ended September 30, 2000 as a result of the jury verdict. 19 Subsequent to September 30, 2000, the Company filed a motion for judgment notwithstanding the verdict, a motion for a new trial, and a motion for vacating the judgment. On February 20, 2001, the Boulder District Court entered an order granting the Company's motion to reduce the actual damages against the Company from $10 million to $1 million, thereby reducing Mr. Lipson's total award, exclusive of interest, against the Company and two officers to $2.5 million. The Company thereafter reduced the $10 million reserve on its books to $2.5 million. In July 1999, the Company entered into an agreement with Metro in which it received 250,000 shares of Metro common stock. The market value of this stock on the date of the transaction was $2.47 per share. Subsequent to this agreement the stock was delisted from the NASDAQ, is now thinly traded on the over-the-counter market, and its value as of September 30, 2000 had declined to $0.47 per share. Due to the permanent impairment in the value of this stock, the Company wrote the stock down to $117,500 on its books during the quarter ended September 30, 2000 and took a write off against income of $507,500. DEFERRED TAX ASSET SFAS 109, "Accounting for Income Taxes" requires, among other things, the separate recognition, measured at currently enacted tax rates, of deferred tax assets and deferred tax liabilities for the tax effect of temporary differences between the financial reporting and tax reporting bases of assets and liabilities, and net operating loss and tax credit carryforwards for tax purposes. A valuation allowance must be established for deferred tax assets if it is "more likely than not" that all or a portion will not be realized. As of September 30, 2000, the Company estimated that it had $19.0 million in net operating loss carryfowards, including the $10 million reserve for the jury verdict issued in connection with the Lipson lawsuit, which expire from 2012 through 2021. Based on the recent history of operating profits and the expected profitability of the Company in future periods, the Company concluded that it is "more likely than not" that the full benefit of its deferred tax assets would be realized in future years. The Company expects to realize its deferred tax assets through the generation of future taxable income. The amount of future income required based on currently enacted tax rates applied to the deferred tax asset amount as of September 30, 2000, is approximately $21 million. Due to the fact that the Company had recorded several quarters of operating profitability the Company concluded during the quarter ended September 30, 2000 that a valuation allowance was not necessary for its net deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES For the six months ended September 30, 2001, cash provided by operating activities of $4.1 million was primarily associated with net income of $0.5 million, depreciation and amortization expense of $4.5 million, a decrease in receivables and prepaid expenses of $1.0 million, and a decrease in accounts receivable of $0.7 million. This cash provided by operations was offset by a $2.5 million increase in distribution rights related to the Company's licensing of content and a $0.7 million decrease in other accrued liabilities. For the six months ended September 30, 2000, cash provided by operating activities of $0.4 million was primarily associated with a $10.0 million increase in the Company's reserve for legal settlement related to the jury verdict in the Lipson lawsuit, depreciation and amortization of $2.9 million, $0.5 million for the write down of the Company's investment in Metro, and a $0.5 million increase in accounts payable. The cash provided by operations was offset by a net loss of $3.1 million, an increase in the Company's deferred tax asset of $7.2 million, an increase in accounts receivable of $1.1 million primarily related to receivables from the Subscription/PPV TV Group's DBS providers, and a $2.0 million increase in the Subscription/PPV TV Group's prepaid distribution rights for its content licensing. 20 Cash used in investing activities was $2.0 million for the six months ended September 30, 2001. This use of cash was primarily related to $0.5 million paid for the acquisition of the subscriber base of Emerald Media, Inc. by the Subscription/PPV TV Group and $1.3 million related to the build out of space for the Internet Group, the ISP facility and the Boulder, Colorado headquarters. Cash used in investing activities for the six months ended September 30, 2000 was $2.7 million and was primarily associated with the purchase of domain names for the Internet Group in the amount of $1.7 million and equipment for the broadcast and Internet service provider facilities. Cash used in financing activities was $3.0 million for the six months ended September 30, 2001, compared to cash used in financing activities of $0.1 million for the six months ended September 30, 2000. Cash used in financing activities for the six months ended September 30, 2001 was related to the repayment of $2.0 million in principal on the Company's notes payable and $1.0 million in payments made on the Company's capital leases. Cash used in financing activities of $0.1 million for the six months ended September 30, 2000 was attributable to $0.3 million distributed to the previous shareholders of the Internet Group, $0.6 million paid on the Company's capital leases and $1.0 million paid to related parties. This cash used in financing activities was offset by a $1.3 million contribution of capital made by the senior management group as part of the agreement reached with NASDAQ to maintain the Company's listing. The Company completed the build out of new space for the Internet Group's sales, marketing, and administrative personnel in June 2001. During the third quarter of the current fiscal year, the Company will complete the build out of new space for its Boulder headquarters at an estimated cost of $1.2 million and will complete the build out of new space for its Internet Service Provider facility at a total estimated cost of $1.2 million. The Company expects to fund these two projects from cash flow from operations and lease financing. The Company has $4.0 million in notes payable outstanding. The notes bear interest at 12 - 15% per annum and the principal is due in 2002 and 2003. The Company expects to pay the interest due in common stock where possible and out of cash flow from operations in all other instances. In addition, the Company expects to pay the principal due in 2002 and 2003 out of cash flows from operations or through a refinancing of the notes at the time of maturity. The Company is seeking to raise up to $10 million of subordinated debt during its current fiscal year in order to fund expansion and consolidation opportunities in the Internet market. There can be no assurances provided that the Company will be successful in its ability to complete this financing. The Company believes that its existing cash balances and cash generated from operations will be sufficient to satisfy its operating requirements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk. The Company's exposure to market risk is principally confined to cash in the bank, money market accounts, and notes payable, which have short maturities and, therefore, minimal and immaterial market risk. Interest Rate Sensitivity. As of September 30, 2001, the Company had cash in checking and money market accounts. Because of the short maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of these assets. Foreign Currency Exchange Risk. The Company does not have any foreign currency exposure because it currently does not transact business in foreign currencies. 21 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (1) The Company held an annual meeting of its shareholders on September 11, 2001 (the "Annual Meeting"). (2) The Annual Meeting involved the election of directors. The directors elected at the meeting were Mark H. Kreloff, Michael Weiner, Edward J. Bonn, Alan L. Isaacman, Hiram J. Woo, Koung Y. Wong and Bradley A. Weber. (3) Five matters were voted on at the Annual Meeting, as follows: (1) The election of nominees Mark H. Kreloff, Michael Weiner, Edward J. Bonn, Alan Isaacman, Hiram J. Woo, Koung Y. Wong and Bradley A. Weber as Directors of the Company until the next annual meeting. The votes were cast for this matter as follows:
BROKER FOR AGAINST ABSTAIN WITHHELD NON-VOTE ---------- -------- -------- --------- --------- Mark. H. Kreloff....... 17,953,194 15,063 50,058 N/A N/A Michael Weiner......... 17,953,194 15,063 50,058 N/A N/A Edward J. Bonn......... 17,953,194 15,063 50,058 N/A N/A Alan L. Isaacman....... 17,953,194 15,063 50,058 N/A N/A Hiram J. Woo........... 17,953,194 15,063 50,058 N/A N/A Koung Y. Wong.......... 17,953,194 15,063 50,058 N/A N/A Bradley A. Weber....... 17,166,171 802,086 50,058 N/A N/A
Each nominee was elected a Director of the Company. (2) To approve the Company's 2001 Incentive Stock Option Plan which authorizes the grant of options to purchase up to an aggregate of 500,000 shares of the Company's common stock. The votes were cast for this matter as follows:
BROKER FOR AGAINST ABSTAIN WITHHELD NON-VOTE ---------- --------- -------- --------- --------- 15,365,916 2,630,686 21,713 N/A N/A
This matter was passed by the required majority of votes represented at the meeting. (3) Approval of the Company's reincorporation in Delaware. The votes were cast for this matter as follows:
BROKER FOR AGAINST ABSTAIN WITHHELD NON-VOTE ---------- --------- -------- --------- --------- 9,358,426 2,080,788 9,789 N/A 6,569,312
This matter did not pass by the required two-thirds of the Company's outstanding shares of Common Stock. (4) Approval of a provision for a classified Board of Directors in the Company's proposed Delaware Certificate of Incorporation. The votes were cast for this matter as follows:
BROKER FOR AGAINST ABSTAIN WITHHELD NON-VOTE ---------- --------- -------- --------- --------- 8,959,696 2,472,160 17,147 N/A 6,569,312
This matter did not pass by the required two-thirds of the Company's outstanding shares of Common Stock. 22 (5) The ratification of the appointment of Singer Lewak Greenbaum & Goldstein LLP as the Company's independent auditors for the fiscal year ending March 31, 2002. The votes were cast for this matter as follows:
BROKER FOR AGAINST ABSTAIN WITHHELD NON-VOTE ---------- --------- -------- --------- --------- 17,923,829 81,077 13,409 N/A N/A
This matter was passed by the required majority of votes represented at the meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.27 Revised Employment Agreement between Interactive Telecom Network, Inc. and Bradley Weber 10.28 Amendment to Executive Employment Agreement between Interactive Gallery, Inc. and Scott Schalin b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended September 30, 2001. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. NEW FRONTIER MEDIA, INC. /s/ Karyn L. Miller -------------------------------------- Karyn L. Miller Chief Financial Officer (Principal Accounting Officer) 24