-----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, UgOnqINDHPaSE2U/s7saPFanFXhTbgOyCGGsGX9U210+1GmMFk4kBE4mVXLj09Ix zjPG20d9p8cg/5GIxbuPCw== 0001132072-02-000375.txt : 20021113 0001132072-02-000375.hdr.sgml : 20021113 20021113165703 ACCESSION NUMBER: 0001132072-02-000375 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23697 FILM NUMBER: 02820666 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: STRATEGIC ACQUISITIONS INC DATE OF NAME CHANGE: 19600201 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL SECURITIES HOLDING CORPORATION DATE OF NAME CHANGE: 19920703 10-Q 1 s15-3150_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, 2002 / / 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) 7007 Winchester Circle, Suite 200, 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 / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of November 13, 2002, 21,322,816 shares of Common Stock, par value $.0001, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-Q NEW FRONTIER MEDIA, INC. Index PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and March 31, 2002... 3 Condensed Consolidated Statements of Operations (Unaudited) for the quarter and six months ended September 30, 2002 and 2001......................... 5 Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the quarter and six months ended September 30, 2002 and 2001................... 6 Condensed Consolidated Statements of Cash Flows (Unaudited) for the quarter and six months ended September 30, 2002 and 2001......................... 7 Notes to Consolidated Financial Statements (Unaudited)......................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................... 27 Item 4. Controls and Procedures............................. 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................... 29 Item 4. Submission of Matters to a Vote of Security Holders............................................. 30 Item 6. Exhibits and Reports on Form 8-K.................... 31 SIGNATURES.................................................. 32 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN 000S) ASSETS
(UNAUDITED) SEPTEMBER 30, MARCH 31, 2002 2002 ------------- --------- CURRENT ASSETS: Cash and cash equivalents................................ $ 4,161 $ 5,798 Accounts receivable, net of allowance for doubtful accounts of $82 and $369, respectively................ 5,273 4,253 Prepaid distribution rights, net......................... 2,941 2,840 Prepaid expenses......................................... 743 754 Deferred tax asset....................................... 2,846 2,846 Due from related party................................... 43 47 Other.................................................... 466 1,037 ------- ------- TOTAL CURRENT ASSETS................................ 16,473 17,575 ------- ------- FURNITURE AND EQUIPMENT, net............................... 4,650 8,230 ------- ------- OTHER ASSETS: Prepaid distribution rights, net......................... 8,824 8,521 Excess cost over fair value of net assets acquired, less accumulated amortization of $2,618.................... 3,743 3,743 Deferred tax asset....................................... 2,405 2,405 Other identifiable intangible assets, net................ 2,221 3,218 Deposits................................................. 889 822 Other.................................................... 3,255 3,618 ------- ------- TOTAL OTHER ASSETS.................................. 21,337 22,327 ------- ------- TOTAL ASSETS............................................... $42,460 $48,132 ======= =======
The accompanying notes are an integral part of the unaudited consolidated financial statements. 3 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN 000S) LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED) SEPTEMBER 30, MARCH 31, 2002 2002 ------------- --------- CURRENT LIABILITIES: Accounts payable......................................... $ 2,496 $ 2,170 Current portion of obligations under capital leases...... 1,230 1,615 Deferred revenue......................................... 2,683 2,919 Reserve for chargebacks/credits.......................... 208 339 Current portion of notes payable......................... -- 3,000 Accrued restructuring expense............................ 1,953 1,851 Other accrued liabilities................................ 1,875 1,297 -------- -------- TOTAL CURRENT LIABILITIES........................... 10,445 13,191 -------- -------- LONG-TERM LIABILITIES: Obligations under capital leases, net of current portion............................................... 707 1,005 Other.................................................... -- 8 -------- -------- TOTAL LONG-TERM LIABILITIES......................... 707 1,013 -------- -------- TOTAL LIABILITIES................................ 11,152 14,204 -------- -------- CLASS A REDEEMABLE PREFERRED STOCK......................... 3,750 -- -------- -------- SHAREHOLDERS' EQUITY Common stock, $.0001 par value, 50,000,000 shares authorized, 21,322,816 and 21,246,916 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............................... 45,809 45,626 Accumulated other comprehensive loss..................... -- (106) Accumulated deficit...................................... (18,253) (11,594) -------- -------- TOTAL SHAREHOLDERS' EQUITY.......................... 27,558 33,928 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $ 42,460 $ 48,132 ======== ========
The accompanying notes are an integral part of the unaudited consolidated financial statements. 4 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN 000S)
(UNAUDITED) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- SALES, net.................................... $ 9,280 $13,847 $18,877 $28,821 COST OF SALES................................. 4,487 6,740 9,727 14,020 ------- ------- ------- ------- GROSS MARGIN.................................. 4,793 7,107 9,150 14,801 ------- ------- ------- ------- OPERATING EXPENSES: Sales and marketing......................... 1,667 2,227 3,311 4,438 General and administrative.................. 3,680 3,849 7,763 8,302 Restructuring expense....................... 142 -- 3,183 -- Impairment expense.......................... -- -- 535 -- Goodwill amortization....................... -- 159 -- 318 ------- ------- ------- ------- TOTAL OPERATING EXPENSES............... 5,489 6,235 14,792 13,058 ------- ------- ------- ------- OPERATING INCOME (LOSS)................ (696) 872 (5,642) 1,743 ------- ------- ------- ------- OTHER INCOME (EXPENSE): Interest income............................. 20 58 39 125 Interest expense............................ (343) (482) (938) (1,012) Loss on write-off of stock.................. -- -- (118) -- ------- ------- ------- ------- TOTAL OTHER EXPENSE.................... (323) (424) (1,017) (887) ------- ------- ------- ------- NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES....................................... (1,019) 448 (6,659) 856 Provision for income taxes.................. -- (178) -- (345) ------- ------- ------- ------- NET INCOME (LOSS)...................... $(1,019) $ 270 $(6,659) $ 511 ------- ------- ------- ------- Basic/Diluted earnings (loss) per share....... $ (.05) $ .01 $ (.31) $ .02 ======= ======= ======= ======= Basic weighted average number of common shares outstanding................................. 21,323 21,126 21,291 21,084 ======= ======= ======= ======= Diluted weighted average number of common shares outstanding.......................... 21,323 22,790 21,291 22,748 ======= ======= ======= =======
The accompanying notes are an integral part of the unaudited consolidated financial statements. 5 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) IN (000'S)
(UNAUDITED) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net income (loss)............................ $(1,019) $270 $(6,659) $511 Other comprehensive loss Unrealized loss on available-for-sale marketable securities, net of tax....... -- 18 -- 13 ------- ---- ------- ---- Total comprehensive income (loss)....... $(1,019) $288 $(6,659) $524 ======= ==== ======= ====
The accompanying notes are an integral part of the unaudited consolidated financial statements. 6 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000S)
(UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, ------------------------- 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $(6,659) $ 511 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Warrants issued/amortized for services and financing.... 534 404 Amortization of deferred debt offering costs............ 195 298 Depreciation and amortization........................... 3,880 4,214 Asset impairment related to restructuring charge........ 2,554 -- Asset impairment........................................ 535 -- Write-off of marketable securities available for sale... 118 -- (Increase) Decrease in operating assets Accounts receivable................................ (1,020) 698 Deferred tax asset................................. -- 288 Receivables and prepaid expenses................... 139 1,568 Prepaid distribution rights........................ (2,322) (2,518) Other assets....................................... 297 (628) Increase (Decrease) in operating liabilities Accounts payable................................... 326 237 Deferred revenue, net.............................. (236) (62) Reserve for chargebacks/credits.................... (131) (154) Accrued restructuring cost......................... 211 -- Other accrued liabilities.......................... 571 (735) ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................... (1,008) 4,121 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and furniture..................... (316) (1,497) Purchase of subscriber base............................. -- (500) ------- ------- NET CASH USED IN INVESTING ACTIVITIES.............. (316) (1,997) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations................... (952) (1,030) Payment (Borrowing) of related party notes payable/receivable..................................... 3 (113) Decrease in note payable................................ (2,000) (2,000) Increase in debt offering costs......................... (225) -- Issuance of common stock................................ 111 109 Issuance of redeemable Class A preferred stock.......... 2,750 -- ------- ------- NET CASH USED IN FINANCING ACTIVITIES.............. (313) (3,034) ------- ------- NET DECREASE IN CASH........................................ (1,637) (910) CASH AND CASH EQUIVALENTS, beginning of period.............. 5,798 8,667 ------- ------- CASH AND CASH EQUIVALENTS, end of period.................... $ 4,161 $ 7,757 ======= =======
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 financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments considered necessary for a fair presentation of financial position and results of operations. The financial statements included herein should be read in conjunction with the financial statements and notes included in the latest annual report on Form 10-K. The results of operations for the quarter and six months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year. Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. 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") and Interactive Gallery, Inc. ("IGI"). 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 XClips--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. In addition, IGI resells its aggregated content to third party web masters and resells its Internet traffic that does not convert into memberships. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates have been made by management in several areas, including, but not limited to, the realizability of accounts receivable, accrued restructuring expenses, the valuation of chargebacks and reserves, the valuation allowance associated with deferred income tax assets and the expected useful life and valuation of our prepaid distribution rights. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In April 2002, the Financial Accounting Standards Board ("FASB") adopted Statement of Financial Accounting Standards 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and amends FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications 8 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Statement No. 145 is effective for fiscal years beginning after May 15, 2002. The Company believes that this statement will not have a significant impact on its results of operations or financial position upon adoption. In July 2002, The Financial Accounting Standards Board ("FASB") Issued Statement 146 Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The principal difference between this Statement and Issue 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is still assessing this new standard but does not believe that it will have a material effect on its results of operations or financial condition upon adoption. NOTE 2 -- EARNINGS (LOSS) PER SHARE The components of basic and diluted earnings per share are as follows (in 000s):
QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ------------------------ 2002 2001 2002 2001 -------- -------- -------- -------- Net income (loss)............................. $(1,019) $ 270 $(6,659) $ 511 ======= ======= ======= ======= Average outstanding shares of common stock.... 21,323 21,126 21,291 21,084 Dilutive effect of Warrants/Employee Stock Options..................................... -- 1,664 -- 1,664 ------- ------- ------- ------- Common stock and common stock equivalents..... 21,323 22,790 21,291 22,748 ======= ======= ======= ======= Basic/Diluted earnings (loss) per share....... $ (.05) $ .01 $ (.31) $ .02 ======= ======= ======= =======
Approximately 563,000 and 596,000 options and warrants were excluded from the calculation of diluted earnings per share for the quarter and six months ended September 30, 2002, respectively. Inclusion of these options and warrants, due to the Company reporting a net loss during the period, would be antidilutive. NOTE 3 -- SHAREHOLDERS' EQUITY During the quarter and six months ended September 30, 2002, the Company issued 0 and 75,900 shares of common stock, respectively, upon the exercise of compensatory options. NOTE 4 -- STOCK OPTIONS AND WARRANTS As of September 30, 2002, the Company had granted 280,000 options from the 2001 Incentive Stock Option Plan, 2,969,500 options from the 2000 Millenium Stock Option Plan, 1,607,950 options from the 1999 Incentive Stock Option Plan and 843,000 options from the 1998 Stock Option Plan. 9 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company grants warrants to consultants for services provided allowing them to purchase common stock of New Frontier Media. During the quarter and six months ended September 30, 2002, 0 and 50,000 warrants valued at $0 and $72,000, respectively, were issued. NOTE 5 -- SEGMENT INFORMATION For internal reporting purposes, the Company has two reportable segments: 1) Subscription/Pay-Per-View TV and 2) Internet Group. The following tables represent unaudited financial information by reportable segment (in 000s):
QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- NET REVENUE Subscription/Pay-Per-View TV........ $ 7,063 $ 7,574 $14,094 $14,567 Internet Group...................... 2,217 6,242 4,783 14,192 Corporate Administration............ -- 31 -- 62 ------- ------- ------- ------- Total.......................... $ 9,280 $13,847 $18,877 $28,821 ======= ======= ======= ======= SEGMENT PROFIT (LOSS) Subscription/Pay-Per-View TV........ $ 1,373 $ 1,797 $ 2,981 $ 3,024 Internet Group...................... (72) 556 (4,210) 1,846 Corporate Administration............ (2,320) (1,905) (5,430) (4,014) ------- ------- ------- ------- Total.......................... $(1,019) $ 448 $(6,659) $ 856 ======= ======= ======= ======= INTEREST INCOME Subscription/Pay-Per-View TV........ -- $ 1 -- $ 2 Internet Group...................... -- 1 1 2 Corporate Administration............ 20 56 38 121 ------- ------- ------- ------- Total.......................... $ 20 $ 58 $ 39 $ 125 ======= ======= ======= ======= INTEREST EXPENSE Subscription/Pay-Per-View TV........ $ 32 $ 39 $ 68 $ 104 Internet Group...................... 46 100 118 214 Corporate Administration............ 265 343 752 694 ------- ------- ------- ------- Total.......................... $ 343 $ 482 $ 938 $ 1,012 ======= ======= ======= ======= DEPRECIATION AND AMORTIZATION Subscription/Pay-Per-View TV........ $ 1,431 $ 1,110 $ 2,791 $ 2,463 Internet Group...................... 299 882 1,081 1,742 Corporate Administration............ 4 6 8 9 ------- ------- ------- ------- Total.......................... $ 1,734 $ 1,998 $ 3,880 $ 4,214 ======= ======= ======= =======
(UNAUDITED) SEPTEMBER 30, MARCH 31, 2002 2002 ------------- ----------- IDENTIFIABLE ASSETS Subscription/Pay-Per-View TV.................. $28,694 $27,334 Internet Group................................ 6,083 11,029 Corporate Administration...................... 24,995 29,118 Eliminations.................................. (17,312) (19,349) ------- ------- Total.................................... $42,460 $48,132 ======= =======
10 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- MAJOR CUSTOMER The Company's major customer (revenues in excess of 10% of total sales) is EchoStar Communications Corporation ("EchoStar"). EchoStar is included in the Subscription/Pay-Per-View TV Segment. Revenue from EchoStar's DISH Network as a percentage of total revenue for the quarters ended September 30 is as follows:
2002 2001 ------------ ------------ EchoStar........................................... 36% 24%
At September 30, 2002 and March 31, 2002, accounts receivable from EchoStar was approximately $3,320,000 and $2,264,000, respectively. There were no other customers with receivable balances in excess of 10% of consolidated accounts receivable. The loss of its significant customer could have a materially adverse effect on the Company's business, operating results or financial condition. NOTE 7 -- RESTRUCTURING EXPENSES During the fourth quarter of fiscal 2002, the Company recorded restructuring expenses in connection with its decision to consolidate the Internet Group's engineering, web production, sales and marketing departments to the Company's Boulder, Colorado location and eliminate its customer service department due to the outsourcing of its credit card processing functions. During the quarter ended June 30, 2002, the Company adopted a restructuring plan with respect to the Internet Group's data center facility. The Company is closing the Internet Group's in-house data center in Sherman Oaks, California and moving the management of its servers, bandwidth and content delivery to its Boulder, Colorado facility. The Company believes that it is more cost effective to manage these functions as part of its technical infrastructure in Boulder. The Internet Group expects to have its technical infrastructure fully integrated into the Boulder facility by the end of the third quarter of its fiscal year ended March 31, 2003. Total restructuring charges of $3.0 million related to this plan were recorded during the quarter ended June 30, 2002, of which $28,000 related to the termination of 10 employees. Also included in this charge was $0.3 million related to the data center space in Sherman Oaks that the Company is attempting to sublet and $2.7 million of expenses related to excess computer equipment. During the quarter ended September 30, 2002, the Company recognized an additional $393,000 in restructuring charges related to the Sherman Oaks office space that the Company is attempting to sublet. Additionally, the Company lowered the accrued restructuring charges approximately $251,000 due to a change in estimate in employment and equipment contracts.
SEVERANCE AND ASSET EXCESS TERMINATION WIND (IN 000S) IMPAIRMENT OFFICE SPACE BENEFITS DOWN TOTALS --------- ---------- ------------ ------------- ---- ------ Fiscal Year 2002 Provision........... $1,087 $1,235 $822 $ 14 $3,158 Fiscal Year 2002 Provision Activity............................. (1,087) -- (207) (13) (1,307) ------ ------ ---- ----- ------ Balance at March 31, 2002............ -- 1,235 615 1 1,851 Fiscal Year 2003 Provision........... 2,662 331 28 20 3,041 Fiscal Year 2002 Provision Adjustment........................... -- 286 (142) -- 144 Fiscal Year 2003 Provision Adjustment........................... (109) 108 -- -- (1) Fiscal Year 2002 Provision Activity............................. -- (301) (176) (1) (478) Fiscal Year 2003 Provision Activity............................. (2,553) (41) (4) (6) (2,604) ------ ------ ---- ----- ------ Balance at September 30, 2002........ $ -- $1,618 $321 $ 14 $1,953 ====== ====== ==== ===== ======
11 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- CLASS A REDEEMABLE PREFERRED STOCK As of June 30, 2002, the Company authorized a series of shares of 2 million Class A Redeemable Preferred Stock, par value $2 per share, of which 1.875 million shares are outstanding. The outstanding preferred stock was issued in May and June of 2002 the proceeds of which were used to satisfy outstanding notes payable of approximately $3,000,000 owed by the Company at March 31, 2002 and for working capital purposes. Holders of the Class A Redeemable Preferred Stock are entitled to receive cumulative cash dividends at a rate of 15.5% per annum per share payable in quarterly or monthly installments. Such dividends have preference over all other dividends of stock issued by the Company. The dividends have been reported as interest expense. Shares are subject to mandatory redemption on or before January 2, 2004 at a redemption price of face value plus accrued dividends. Prior to such date and so long as such mandatory redemption obligations have not been discharged in full, no dividends may be paid or declared upon the Common Stock, or on any other capital stock ranking junior to or in parity with such Class A Redeemable Preferred Stock. Under certain circumstances, the Company may redeem the stock, in whole or in part, prior to the mandatory redemption date. The Company is not entitled to issue any class of stock that will in effect reduce the value or security of the Class A Preferred. Each share of preferred shall have the right to vote together with the holders of the Company's Common stock on a one vote per share basis (and not as a separate class) on all matters presented to the holders of the Common Stock. The Company recorded the Class A Redeemable Preferred Stock at its redemption value of $3.75 million. The preferred stock is subject to full or partial early redemption at the option of the holder if the Company experiences a change in control as defined as (i) a replacement of more than one-half of the members of the Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date of the issuance of the preferred (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date of the issuance of the preferred), (ii) the merger of the Company with or into another entity that is not wholly owned by the Company, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, or (iii) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in (i) or (ii). NOTE 9 -- RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement requires that goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, not be amortized. Effective in the first quarter of the current year, goodwill and intangible assets with indefinite lives are no longer being amortized, but are being tested for impairment using the guidance for measuring impairment set forth in this statement. This statement has been adopted by the Company and had no impact on the financial statements. 12 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following presents a comparison of net (loss) earnings and (loss) earnings per share for the three and six months ended September 30, 2002 to the respective adjusted amounts for the three and six months ended September 30, 2001 that would have been reported had SFAS No. 142 been in effect during the prior year (in 000s).
(UNAUDITED) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Reported net (loss) earnings........... $(1,019) $ 270 (6,659) 511 Goodwill amortization.................. -- 159 -- 318 ------- ------- ------- ------- Adjusted net (loss) earnings........... $(1,019) $ 429 $(6,659) $ 829 ======= ======= ======= ======= Net (loss) earnings per share--basic/diluted Reported net (loss) earnings......... $ (.05) $ .01 $ (.31) $ .02 Goodwill amortization................ -- .01 -- .01 ------- ------- ------- ------- Adjusted net (loss) earnings per share--basic/diluted............ $ (.05) $ .02 $ (.31) $ .03 ======= ======= ======= =======
The components of other intangible assets are as follows (in 000s):
SEPTEMBER 30, 2002 (UNAUDITED) MARCH 31, 2002 ----------------------------- ----------------------------- GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION --------------------------- -------------- ------------ -------------- ------------ URLs............................ 3,581 1,949 4,713 2,138 Other........................... 750 161 750 107
Amortization expense for intangible assets subject to amortization in each of the next five fiscal years is estimated to be approximately $796,000 in 2004, $663,000 in 2005, $161,000 in 2006, $109,000 in 2007 and $107,000 in 2008. In August 2001, the FASB issued Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. Statement 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. Statement 144 supersedes Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 also amends ARB 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This statement has been adopted by the Company and had no impact on the financial statements. NOTE 10 -- ASSET IMPAIRMENT CHARGES During the six months of fiscal year 2003, the Company recognized impairment losses on certain URLs of approximately $535,000 in connection with the Internet Group. Management identified certain conditions including a declining gross margin due to the availability of free adult content on the Internet and decreased traffic to certain of the Company's URLs as indicators of asset impairment. These conditions led to operating results and forecasted future results that were substantially less than had been anticipated at the time of the Company's acquisition of IGI, ITN, and CTI. The Company revised its projections and determined that the projected results would not fully support the future 13 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amortization of the URLs associated with IGI, ITN, and CTI. In accordance with the Company's policy, management assessed the recoverability of the URLs using a cash flow projection based on the remaining amortization period of four years. Based on this projection, the undiscounted sum of the estimated cash flow over the remaining amortization period was insufficient to fully recover the intangible asset balance. The Corporation follows the provisions of Statement of Accounting Standards (SFAS) 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting standards for the impairment of long-lived assets and certain identifiable intangibles. The Corporation reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the assets, the Corporation recognizes an impairment loss. Impairment losses are measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. When fair values are not available, the Corporation estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the assets. NOTE 11 -- LEGAL PROCEEDINGS On March 20, 2002, Mr. Edward Bonn and Bradley A. Weber attempted to remove Mark Kreloff as CEO and appoint a special committee headed by Mr. Bonn to operate the Company while a search was conducted for a new CEO. The Company's Board rejected Messrs. Bonn's and Weber's proposal and instead, on March 29, 2002, established the Special Committee to investigate, among other things, the activities of Messrs. Bonn and Weber relating to their prior management of Interactive Gallery, Inc. ("IGallery"), the Company's Internet subsidiary, and whether, by their actions, Messrs. Bonn and Weber triggered the Company's Rights Plan (also known as a poison pill). On May 28, 2002, following a two-month investigation by the Special Committee, the Company filed a 13-Count Complaint in the Superior Court of the State of California for the County of Los Angeles against: (i) Mr. Bonn and Mr. Weber; (ii) Jerry D. Howard, the former Chief Financial Officer of IGallery, Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI"); (iii) Response Telemedia, Inc. ("RTI"), a California corporation owned by Mr. Bonn; and (iv) BEF LLC and Beacon Ocean LLC, Messrs. Bonn's and Weber's family trusts, respectively. The Complaint's allegations arise, in part, out of the Company's purchase of 100 percent of the issued and outstanding shares of IGallery and ITN and 90 percent of the issued and outstanding shares of CTI from defendants Bonn, Weber, and Howard on October 27, 1999. The Complaint alleges that, from early 1999 to the date of the closing, defendants Bonn, Weber, and Howard knowingly made material misrepresentations or omissions regarding IGallery's business and business practices, financial results and prospects, its average customer subscription rates, the amount of its payments to webmasters, its use of overseas "aggressive" credit card processors and the significant deficiencies in its computerized payment-tracking system for the purpose of inducing the Company to purchase the defendants' stock holdings of IGallery, ITN and CTI. The Complaint also alleges that, subsequent to the Company's purchase of IGallery, ITN and CTI on October 27, 1999, Messrs. Bonn, Weber and Howard (as directors and/or officers) each breached their fiduciary duties owed to the Company, IGallery, ITN and CTI. Specifically, the Complaint alleges that Messrs. Bonn, Weber and Howard grossly mismanaged IGallery, ITN and CTI and concealed marketing, operational and financial information that would have allowed the Company to detect such mismanagement, including IGallery's difficulty in attracting new customers at the full membership 14 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) rate, IGallery's substantial payments to its top webmasters, which significantly exceeded the revenues generated by such payments, and IGallery's failure to implement basic management controls to trace revenue streams or to document the profitability of webmaster relationships. The Complaint also alleges that Messrs. Bonn, Weber and Howard engaged in self-dealing transactions that benefited themselves and Mr. Bonn's company, RTI, at the expense of the Company. In July 2001, when Messrs. Bonn, Weber and Howard resigned from their positions at IGallery, ITN and CTI, the Company was able to gain access to the books and records of IGallery, ITN and CTI and began to uncover the facts underlying the allegations of the Complaint. The Company had previously been unable to gain access to the books and records of IGallery, ITN and CTI because, in connection with their acquisition, the Company had contractually agreed to allow Messrs. Bonn and Weber to manage these subsidiaries and Messrs. Bonn, Weber and Howard consistently used their positions as senior management of these subsidiaries to thwart the Company's efforts to gain access to the subsidiaries' books and records. The impact of Messrs. Bonn's, Weber's and Howard's alleged behavior was such that, had the Company been aware of the defendants' alleged misrepresentations and omissions regarding IGallery, the Company would not have acquired IGallery, ITN and CTI in October of 1999. In addition, the defendants' actions are alleged to have resulted in a waste of Company assets because, among other things, millions of dollars were spent on unprofitable webmaster relationships and Company funds were diverted to entities controlled by Mr. Bonn which had no relationship to the Company. Accordingly, the Complaint seeks rescission of the purchase of IGallery, ITN and CTI as well as monetary damages in an amount to be proven at trial. Mr. Bonn, Mr. Weber and Mr. Howard have filed answers denying the allegations contained in the Complaint and cross-complaints against the Company seeking that the Company indemnify them against the claims alleged in the Complaint. The cross-complaints also seek unspecified monetary damages from the Company, alleging that the Company breached its employment agreements with Messrs. Bonn, Weber and Howard by terminating their employment on May 28, 2002, and in the case of Mr. Weber, that the Company wrongfully terminated his stock options. In August 2002, the Company filed an Amended Reply in New Frontier Media, Inc., et al. vs. Edward J. Bonn, et al. (Superior Court of the State of California for the County of Los Angeles, Case No. BC 274573) disclosing that the Company had recently discovered additional evidence of alleged fraud committed by Defendants Edward J. Bonn and Bradley A. Weber based on transfers of IGI's common stock. NOTE 12 -- COMMITMENTS EMPLOYMENT CONTRACTS In August 2002, the company entered into employment contracts with the Company's Chief Financial Officer and TEN's President. The employment contracts expire in March 2004 and March 2003, respectively. Commitments under these obligations are as follows: YEAR ENDED MARCH 31, - -------------------- 2003 $363,000 2004 $157,800
For the President, if certain financial criteria are met, an additional $250,000 in bonus could be paid in fiscal year 2003. For the Chief Financial Officer, the bonus is discretionary. If the Company experiences a change in control (as defined in Note 8), the executives may terminate their employment, or if the executives are terminated without cause within six months of the change 15 NEW FRONTIER MEDIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in control, the executives are entitled to: (i) all accrued obligations; (ii) all base salary for the duration of the employment period or for one year, whichever is less; and (iii) for the Chief Financial Officer, the amount of bonus, if any, paid to the Chief Financial Officer for the fiscal year preceding the change of control; and for the President, the bonus of $250,000. 16 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 percentages 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/ DBS competitor; 3) our ability to compete effectively with our Internet competitors; 4) our ability to retain our major customer which accounts for 36% of our total revenue; and 5) our ability to retain our key executives. The following table reflects the Company's results of operations for the quarters and six months ended September 30, 2002 and 2001. RESULTS OF OPERATIONS
(IN MILLIONS) (IN MILLIONS) QUARTER ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- NET REVENUE Subscription/Pay-Per-View TV Cable/DBS................................ 5.2 5.2 10.2 9.7 C-Band................................... 1.9 2.4 3.9 4.9 Internet Group Net Membership........................... 1.5 4.2 3.2 9.5 Sale of Content.......................... 0.3 0.5 0.7 1.1 Sale of Traffic.......................... 0.4 1.4 0.9 3.3 Other.................................... 0.0 0.2 0.0 0.3 ----- ----- ----- ----- TOTAL.................................... 9.3 13.9 18.9 28.8 ===== ===== ===== ===== COST OF SALES Subscription/Pay-Per-View TV.................. 3.5 3.3 6.9 6.5 Internet Group................................ 1.0 3.4 2.8 7.5 ----- ----- ----- ----- TOTAL.................................... 4.5 6.7 9.7 14.0 ===== ===== ===== ===== OPERATING INCOME (LOSS) Subscription/Pay-Per-View TV.................. 1.4 1.8 3.0 3.1 Internet Group................................ 0.1 0.6 (0.4) 2.0 Restructuring Expense......................... (0.1) 0.0 (3.1) 0.0 Asset Impairment Expense...................... 0.0 0.0 (0.5) 0.0 Corporate Administration...................... (2.1) (1.5) (4.6) (3.4) ----- ----- ----- ----- TOTAL.................................... (0.7) 0.9 (5.6) 1.7 ===== ===== ===== =====
NET REVENUE Net revenue for the Company was $9.3 million and $18.9 million for the quarter and six months ended September 30, 2002, respectively, as compared to $13.9 million and $28.8 million for the quarter and six months ended September 30, 2001, respectively, representing decreases of 33% and 34%. 17 The decline in net revenue for the quarter ended September 30, 2002 is due to a 65% decrease in net revenue generated by the Internet Group and a 7% decrease in net revenue generated by the Subscription/PPV TV Group. Net revenue for the Internet Group declined from $6.3 million for the quarter ended September 30, 2001 to $2.2 million for the quarter ended September 30, 2002. Revenue from the Subscription/PPV TV Group declined from $7.6 million for the quarter ended September 30, 2001 to $7.1 million for the quarter ended September 30, 2002 as a result of a $0.5 million decrease in its C-Band revenue. Revenue generated by the Internet Group declined from 45% of total net revenue for the quarter to 24% of total net revenue for the quarter. The decline in net revenue for the six months ended September 30, 2002 is a result of a 66% decrease in revenue generated by the Internet Group and a 3% decrease in revenue generated by the Subscription/PPV TV Group. Net revenue for the Internet Group declined from $14.2 million for the six months ended September 30, 2001 to $4.8 million for the six months ended September 30, 2002. Net revenue for the Subscription/PPV TV Group declined from $14.6 million for the six months ended September 30, 2001 to $14.1 million for the six months ended September 30, 2002 due to a decrease of $1.0 million in its C-Band revenue. OPERATING INCOME (LOSS) Operating income (loss) for the Company decreased to a loss of $0.7 million for the quarter ended September 30, 2002 from operating income of $0.9 million for the quarter ended September 30, 2001. Operating income (loss) for the Company decreased to a loss of $5.6 million for the six months ended September 30, 2002 from income of $1.7 million for the six months ended September 30, 2001. The decrease in operating income for the Company is due to a decrease in operating income generated by the Internet Group, a $3.1 million restructuring charge taken during the quarter ended June 30, 2002 related to closing the Internet Group's Los Angeles based data center facility, a $0.5 asset impairment charge for the write down of certain Internet Group URLs incurred during the quarter ended June 30, 2002, and an increase in operating expenses at the Corporate Administration level related to legal fees incurred with respect to the Company's proxy fight and the lawsuit with Edward Bonn, Bradley Weber, Jerry Howard and Response Telemedia Inc. The Internet Group's operating income declined from income of $0.6 million and $2.0 million for the quarter and six months ended September 30, 2001, to operating income of $0.1 million and an operating loss of $0.4 million for the quarter and six months ended September 30, 2002. 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 2002 2001 % CHANGE ------- ------------------- ------------- ------------- --------- Pleasure Cable/DBS 7,600 15,700 -52% TeN Cable/DBS 9,400 7,400 27% ETC Cable/DBS 4,800 3,300 45% Video On Demand Cable 3,000 400 650% Extasy C-band/Cable/DBS 8,300 7,300 14%(1) True Blue C-band 700 900 -22%(1) XClips (2) C-band 700 900 -22%(1) TOTAL ADDRESSABLE SUBSCRIBERS 34,500 35,900
(1) % change gives effect to a 33% decline in the C-band market's total addressable households. Total addressable C-Band households declined from 0.9 million as of September 30, 2001 to 0.6 million as of September 30, 2002. (2) This network was formerly known as X-Cubed. The network was renamed XClips in August 2002. 18 NET REVENUE Total net revenue for the Subscription/PPV TV Group was $7.1 million for the quarter ended September 30, 2002, representing a 7% decrease from $7.6 million for the quarter ended September 30, 2001. Of total net revenue, C-Band net revenue was $1.9 million for the quarter ended September 30, 2002 as compared to $2.4 million for the quarter ended September 30, 2001, representing a decrease of 21%. Revenue from the Group's Cable/DBS services for both quarters ended September 30, 2002 and 2001 was $5.2 million. Revenue from the Group's Cable/DBS services is responsible for 73% of the Group's total net revenue for the quarter ended September 30, 2002, as compared to 68% for the quarter ended September 30, 2001. Total net revenue for the Subscription/PPV TV Group was $14.1 million for the six months ended September 30, 2002, representing a 3% decrease from $14.6 million for the six months ended September 30, 2001. Of total net revenue, C-Band net revenue was $3.9 million for the six months ended September 30, 2002 as compared to $4.9 million for the six months ended September 30, 2001, representing a decrease of 20%. Revenue from the Group's Cable/DBS services for the six months ended September 30, 2002 was $10.2 million as compared to $9.7 million for the six months ended September 30, 2001, representing an increase of 5%. Revenue from the Group's Cable/DBS services is responsible for 72% of the Group's total net revenue for the six months ended September 30, 2002, as compared to 66% for the six months ended September 30, 2001. The decrease in C-Band revenue for the quarter and six months ended September 30, 2002 is due to the continued decline of the C-Band market as consumers convert from C-Band "big dish" analog satellite systems to smaller, 18-inch digital DBS satellite systems. The C-Band market has decreased 33% since September 30, 2001, from 0.9 million addressable subscribers to 0.6 million addressable subscribers as of September 30, 2002. The Subscription/PPV TV Group experienced a corresponding decrease in subscriptions to its three C-Band networks of 22% during this same period. In addition, the Subscription/PPV TV Group terminated its third party C-Band distributor contracts during the past year because the contracts were no longer favorable to the Group. During the quarter ended September 30, 2002, the Subscription/PPV TV Group reformatted and renamed its X-Cubed C-Band network. The new network, named XClips, is a least-edited "clip" formatted network, similar to the Group's ETC network. This change in format allows the Group to use its library content to program the network instead of licensing new content and provides the C-Band consumer with a uniquely formatted programming option on the platform. Cable/DBS revenue for the quarter and six months ended September 30, 2001 included revenue from the Company's website, www.ten.com. Revenue from this site was included in the Subscription/PPV TV Group's segment at that time because the website was originally created by this Group and was an extension of the broadcast networks. In January 2002, the Company reformatted this website and launched it as the flagship site for the Internet Group. The revenue from this site is now included in the Internet Group's membership revenue. Revenue from the Group's Cable/DBS services would have increased 6% and 11% for the quarter and six months ended September 30, 2002, respectively, had the revenue from www.ten.com been excluded for the comparative time periods. The increase in Cable/DBS revenue for the quarter and six months ended September 30, 2002 (excluding revenue from www.ten.com) is a result of the following changes in product mix as described in more detail below: 1) an increase in revenue from the Extasy network, 2) a decrease in revenue from the Pleasure network which was offset by an increase in revenue from the Group's Video-on-Demand ("VOD") services, 3) a decrease in revenue from the TeN network, and 4) the addition of a new revenue stream from product advertising on the Group's networks. As of September 30, 2002, Extasy was available to 7.7 million Cable/DBS addressable subscribers up from 6.4 million addressable subscribers as of September 30, 2001, an increase of 20%. The majority of this increase is due to EchoStar Communication Corporation's DISH network ("DISH") moving the Extasy network from its satellite at 110 degrees, where it has resided since its launch on DISH, to 19 its satellite at 119 degrees. DISH's satellite at 119 degrees is viewed by significantly more addressable subscribers than its satellite at 110 degrees. This change in satellite location, coupled with an increase in the retail price for PPV and subscription transactions that was implemented by DISH in September 2001, increased revenue from the Extasy network by 13% quarter over quarter and 28% year over year. Pleasure was available to 7.6 million addressable subscribers as of September 30, 2002, representing a 52% decline from 15.7 million subscribers as of September 30, 2001. This decrease in addressable subscribers is a result of disaffiliations by DISH and Hughes Electronic Corporation's DirecTV ("DirecTV") that occurred during the prior fiscal year when both companies decided to increase the number of partially edited services on their platforms and decrease the number of "most edited" services. The decrease in revenue from the Pleasure network was offset by an increase in revenue from the Subscription/PPV TV Group's VOD services which are provided to cable operators in both its Pleasure and TeN editing formats. The Group is currently the exclusive provider of adult content for Time Warner Cable's ("Time Warner") VOD service and added new VOD distribution with Charter Communication, Inc. ("Charter") during the quarter ended June 30, 2002. As of September 30, 2002, the Group's VOD service was available to 3.0 million Time Warner and Charter addressable households, up from 0.4 million as of September 30, 2001. In June 2002, the Subscription/PPV TV Group signed a VOD agreement with TVN Entertainment ("TVN") to utilize TVN's wide-range delivery platform to distribute and manage its VOD titles for cable MSOs. TVN is a leading digital content transport company that currently serves cable systems reaching over 60 million subscribers. This agreement is expected to increase the Group's reach to new VOD enabled households with many of the top cable MSOs. The Subscription/PPV TV Group signed a multi-year VOD agreement with Comcast Corporation ("Comcast") in October 2002. The Group expects to add an additional 1.0 million VOD enabled households during the current fiscal year as a result of this agreement. Revenue from the Group's TeN network has declined due to a 30% year over year decrease in the number of monthly and annual DISH subscribers. This decline in subscribers has been ongoing since DISH converted TeN to a PPV service in 1999. In addition, PPV buys for TeN on the DISH platform have declined 19% year over year due to the addition of a competing network of the same editing standard that was added to the DISH platform in September 2001. The Subscription/PPV TV Group added a new revenue stream during the fourth quarter of its fiscal year ended March 31, 2002, related to the advertising of adult lifestyle products on its networks and the selling of traditional "spot" advertising. The Group partners with third parties for the sale and fulfillment of these adult lifestyle products and shares in any revenue generated by the advertisement of the product on its networks. This revenue stream accounts for 8% of the Subscription/PPV TV Group's total quarterly Cable/DBS revenue and 7% of the total Cable/DBS revenue for the six months ended September 30, 2002. The Subscription/PPV TV Group signed a deal with the National Cable Television Cooperative ("NCTC") in October 2002. The NCTC is a cooperative that negotiates programming contracts for its more than 1,000 member multiple system operators ("MSOs") representing 14 million subscribers. Under the terms of the agreement, NCTC member systems will have the opportunity to launch the Group's networks without being burdened by the process of completing a license agreement of their own with the Group. The Subscription/PPV TV Group is the only adult entertainment provider to be a part of the NCTC. The Subscription/PPV TV Group will be re-branding its family of networks around the TeN "umbrella" brand and launching two new 24-hour partially edited services in January 2002. The new channel launches are expected to address the increasing demand for the Group's partially edited services. The Group currently has launch commitments from three MSO's, representing 750,000 20 addressable subscribers, for the new partially edited networks. The networks are expected to launch on January 1st. The two new networks will be named TeN Blue and TeN Blox. TeN Blue will be a partially edited service offering amateur, ethnic and urban oriented feature programming. TeN Blox will be the "clip" sister service to TeN Blue (i.e., the same "clip" format as ETC and XClips). The Subscription/PPV TV Group will be renaming its services as follows: Pleasure to remain Pleasure, TeN to remain TeN, ETC to be renamed TeN Clips, Extasy to be renamed TeN Xtsy, XClips to be renamed TeN Max, and True Blue to be renamed TeN Blue+. COST OF SALES Cost of sales for the Subscription/PPV TV Group was $3.5 million, or 49% of revenue, for the quarter ended September 30, 2002, as compared to $3.3 million, or 43% of revenue, for the quarter ended September 30, 2001, an increase of 6%. Cost of sales for the Subscription/PPV TV Group was $6.9 million or 49% of revenue for the six months ended September 30, 2002, as compared to $6.5 million or 45% of revenue for the six months ended September 30, 2001, an increase of 6%. Cost of sales consists of expenses associated with broadcast playout, satellite uplinking, satellite transponder leases, programming acquisition costs, amortization of content licenses, and the Subscription/PPV TV Group's in-house call center operations for its C-Band business. The increase in cost of sales for the quarter and six months is due to: a) an increase in the amortization of the Group's content licenses and b) an increase in costs associated with the digital broadcast center as the Group has added additional functionalities and redundancies. These increases were offset by declines in the Group's transponder and call center operation costs as well as by the decrease in costs associated with the Company's www.ten.com website being moved to the Internet Group's operations. OPERATING INCOME Operating income for the Subscription/PPV TV Group for the quarter ended September 30, 2002 was $1.4 million as compared to operating income of $1.8 million for the quarter ended September 30, 2001, representing a decrease of 22%. Operating income for the Subscription/PPV TV Group for the six months ended September 30, 2002 was $3.0 million as compared to operating income of $3.1 million for the six months ended September 30, 2001, representing a decrease of 3%. The 22% decrease in operating income for the quarter ended September 30, 2002 is due to a decline in gross margin from 57% to 51% quarter over quarter. This decline in gross margin was slightly offset by a decrease in operating expenses as a percentage of revenue. Operating expenses as a percentage of revenue declined from 33% as of the quarter ended September 30, 2001 to 30% for the quarter ended September 30, 2002. The 3% decrease in operating income for the six months ended September 30, 2002 is due to a decline in gross margin from 55% to 51% year over year. This decline in gross margin was slightly offset by a decrease in operating expenses as a percentage of revenue. Operating expenses as a percentage of revenue declined from 34% as of the six months ended September 30, 2001 to 29% for the six months ended September 30, 2002. The decrease in operating expenses for the quarter and six months ended September 30, 2002 is due to a decline in advertising and trade show costs as compared to a year ago, as well as to a decrease in bad debt expense related to the C-Band distributor contracts. In addition, due to an accounting pronouncement change, goodwill and intangible assets with indefinite lives are no longer required to be amortized and are, instead, tested for impairment on an annual basis using the guidance for measuring impairment as set forth in SFAS 142, "Goodwill and Other Intangible Assets". Goodwill amortization was $159,000 and $318,000 for the quarter and six months ended September 30, 2001, respectively. 21 INTERNET GROUP NET REVENUE Total net revenue for the Internet Group was $2.2 million for the quarter ended September 30, 2002, as compared to $6.3 million for the quarter ended September 30, 2001, representing a decrease of 65%. Total net revenue for the Internet Group was $4.8 million for the six months ended September 30, 2002 as compared to $14.2 million for the six months ended September 30, 2001, representing a decrease of 66%. The Internet Group's revenue is comprised of membership revenue from its consumer-based web sites, revenue from the sale of its content feeds, and revenue from the sale of exit traffic. Net membership revenue for the Internet Group was $1.5 million for the quarter ended September 30, 2002, as compared to net membership revenue of $4.2 million for the quarter ended September 30, 2001, representing a decrease of 64%. Net membership revenue for the Internet Group was $3.2 million for the six months ended September 30, 2002, as compared to net membership revenue of $9.5 million for the six months ended September 30, 2001, representing a decrease of 66%. The Internet Group has seen a decline in its net membership revenue for the quarter and six months 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, 2002 is due to the elimination of almost all traffic acquisition costs. The Internet Group ceased purchasing traffic for its web sites during the current fiscal year and has, instead, depended solely upon its 1,500 adult domain names to generate traffic for its sites. Marketing efforts to generate traffic to its websites are focused on cross selling the Internet Group's flagship website, www.ten.com, on the Subscription/PPV TV Group's networks, search engine optimization techniques, and revenue sharing agreements with portals and third party gatekeepers in order to gain direct access to consumers in search of adult entertainment. This effort to create partnerships with portals and third party gatekeepers is essentially a duplication of the Subscription/PPV TV Group's model for the Internet. The Internet Group executed its first such revenue sharing agreement with On Command Corporation ("On Command") whereby it will become the exclusive provider of adult content for On Command's TV Internet Service. The Internet Group will be providing a customized version of its www.ten.com broadband product for delivery through On Command's TV Internet Service in hotel rooms nationwide. The Internet Group began the initial distribution of this product through On Command systems during October 2002 and expects to be fully distributed on the On Command systems by the end of the fiscal year. The decline in membership revenue is also attributable to the Internet Group decreasing the monthly retail price of its flagship web site, www.ten.com, from $29.95 to $14.74 during the quarter ended December 31, 2001. The Internet Group plans to increase the monthly retail price of this site during its third fiscal quarter because the price decrease did not have the expected effect of increasing conversion rates or retention for this site. In addition, the Internet Group will be eliminating all low cost trials memberships to its sites because it believes that these trials do not improve conversion rates. The Internet Group has also decreased the number of consumer web sites that it markets from 30 to 10. The decrease in the number of web sites marketed allows the Internet Group to ensure that the web sites are always updated with new content on a daily/weekly basis while increasing the depth, breadth and relevance of the content included in each site. Revenue from the Internet Group's sale of content was $0.3 million for the quarter ended September 30, 2002, as compared to $0.5 million for the quarter ended September 30, 2001, representing a decrease of 40%. Revenue from the Internet Group's sale of content was $0.7 million for the six months ended September 30, 2002, as compared to $1.1 million for the six months ended September 30, 2001, representing a decrease of 36%. The decrease in revenue from the sale of content is due to a softening in the demand for content by third-party webmasters and a lack of focus on creating new content products to sell. The Internet Group has begun to focus more effort on this revenue stream by 22 hiring a new sales team, establishing a fixed matrix of retail pricing for its products, creating new content products to market, and by establishing a billing and collections process that ensures pre-payment for products. The Internet Group recently launched two new content products and has plans to launch a new product every fourteen days. Revenue is earned from traffic sales by forwarding exit traffic and traffic from selected vanity domains to affiliate webmaster marketing programs, monetizing foreign traffic via international dialer companies, marketing affiliated webmaster sites through the Internet Group's double opt-in email list, and by directing traffic to its pay-per-click ("PPC") search engine, www.sexfiles.com. Revenue from sale of traffic was $0.4 million and $0.9 million for the quarter and six months ended September 30, 2002, respectively, as compared to $1.4 million and $3.3 million for the quarter and six months ended September 30, 2001, respectively, representing decreases of 71% and 73%. The Internet Group's revenue from sale of traffic has decreased because of a decline in traffic to its web sites as a result of the elimination of its traffic acquisition programs. The decline in traffic to the Internet Group's web sites results in less traffic available to sell both domestically and internationally and less traffic to direct through its PPC search engine. The Internet Group has changed its methodology for monetizing the exit traffic from its sites (i.e., traffic that comes through its web sites and does not convert into a paying member) during the current fiscal year. Instead of selling its traffic to affiliated webmasters it now directs most of these exiting consumers to its own PPC search engine. The PPC search engine allows the Internet Group to monetize its exit traffic by auctioning off keyword searches to advertisers that prepay for placement within the search engine. This results in a pure market model for the advertiser. The more the advertiser bids for the keyword, the higher their site is shown in the list of search results returned to the consumer. The result for the advertiser is qualified traffic that is more likely to convert into a paying member, while the consumer gets immediate access to relevant results. The Internet Group entered into an agreement with Fast Search & Transfer ("FAST"), a leading developer of search and real-time alert technologies, in October 2002. Under the terms of the agreement, FAST will include Sexfiles.com search listings on a 24-hour basis within its FAST PartnerSite product. FAST PartnerSite is an integrated marketing tool that drives highly qualified and targeted search traffic to web sites desiring to be more visible to their target audience with guaranteed 24-hour web site index inclusion through FAST's network of global portal partners. Through the FAST PartnerSite product, Sexfiles.com search listings will be included in FAST Web Search, one of the world's largest search indexes, serving over 100 million monthly unique users worldwide and utilized by some of the world's most trafficked search engines, portals, and destination sites, including AlltheWeb.com. The Internet Group will begin testing with FAST during November 2002. In addition to revenue from its PPC search engine, the Internet Group's sale of traffic revenue includes revenues from the marketing of its double opt-in email program. The Internet Group has hired a sales and marketing team that is dedicated to this revenue stream. Revenue is earned by selling email campaigns to customers that are marketed to the Group's 1.4 million opt-in email users. Email campaigns can be sold on a cost-per-click or cost-per-acquisition basis with customers purchasing a dedicated emailer where only their sites are included or a composite emailer where their sites are included with others. COST OF SALES Cost of sales for the Internet Group was $1.0 million, or 45% of revenue, for the quarter ended September 30, 2002, as compared to $3.4 million, or 54% of revenue, for the quarter ended September 30, 2001, representing a decrease of 71%. Cost of sales for the Internet Group was $2.8 million, or 58% of revenue, for the six months ended September 30, 2002, as compared to $7.5 million, or 53% of revenue, for the six months ended September 30, 2001, representing a decrease of 63%. Cost of sales consists of expenses associated with credit card fees, merchant banking fees, bandwidth, membership acquisition costs (purchase of traffic), web site content costs, and depreciation of assets. 23 More than 70% of the traffic to the Internet Group's web sites used to be acquired through affiliate programs marketed to webmasters. These programs compensated webmasters for traffic referrals to the Internet Group's web sites. A webmaster would be paid a fee of $25 - $45 per referral that resulted in a monthly membership to one of the Internet Group's web sites. The Internet Group no longer actively markets any traffic acquisition programs. The Internet Group's traffic acquisition costs also included payments made to affiliated webmasters for the acquisition of email addresses as part of its opt-in email program. The Internet Group discontinued paying for the acquisition of email addresses during the quarter ended June 30, 2002. As a result of these changes, the Internet Group's traffic acquisition costs were $0 and $0.2 million for the quarter and six months ended September 30, 2002, as compared to $1.3 million and $3.2 million for the quarter and six months ended September 30, 2001. Bandwidth costs have declined from $0.4 million and $0.9 million as of the quarter and six months ended September 30, 2001, respectively, to $0.3 million and $0.6 million as of the quarter and six months ended September 30, 2002, representing decreases of 25% and 33%. These decreases are a result of the renegotiation of bandwidth contracts with each of the Internet Group's providers and a decrease in the amount of bandwidth used as a result of the decline in traffic to the Group's sites. Merchant banking fees, including fees for credits and chargebacks, were 13% of net membership revenue for both the quarter and six months ended September 30, 2002 as compared to 14% and 13% of net revenue for the quarter and six months ended September 30, 2001. The Internet Group outsourced all of its credit card processing and customer service functions to a third party in December 2001. Although its merchant banking fees increased due to the outsourcing of these functions (which was offset by a decline in payroll costs associated with the termination of its in-house customer service function) merchant banking fees as a percentage of revenue remained the same year to year because the Internet Group did not incur fines or penalties during the current fiscal year. The Internet Group incurred a Visa fine during the quarter ended September 30, 2001, which was ultimately overturned in a subsequent quarter. Operational expenses, the majority of which relates to depreciation and amortization of Internet equipment, were $0.4 million and $1.3 million for the quarter and six months ended September 30, 2002, respectively, as compared to $0.9 million and $1.7 million for the quarter and six months ended September 30, 2001, respectively, representing decreases of 56% and 24%. The decrease in operational expenses for the quarter and six months ended September 30, 2002 is attributable to the write-off of excess equipment during the first quarter related to the relocation of the Internet Group's data center from Los Angeles to Boulder, and impaired assets written off during the first quarter (see "Restructuring Expenses" and "Asset Impairment Charges" below). OPERATING INCOME (LOSS) Operating income for the Internet Group was $0.1 million for the quarter ended September 30, 2002, as compared to $0.6 million for the quarter ended September 30, 2001, representing a decrease of 83%. Operating income (loss) for the Internet Group was an operating loss of $0.4 million for the six months ended September 30, 2002, as compared to operating income of $2.0 million for the six months ended September 30, 2001, representing a decrease of 120%. The decrease in operating income for the quarter and six months ended September 30, 2002 is a result of a decrease in revenue of 65% and 66% for each period respectively. Gross margin increased from 46% to 55% for the quarter ended September 30, 2002 as a direct result of the restructuring completed during the first quarter of the current fiscal year. Operating expenses were 50% and 37% of net revenue for the quarters ended September 30, 2002 and 2001, respectively, and 50% and 33% of net revenue for the six months ended September 30, 2002 and 2001, respectively. Total operating expenses decreased 52% and 49% from the quarter and six months ended September 30, 2001. 24 The decrease in operating expenses for the quarter and six months ended September 30, 2002 is due to a decrease in payroll, benefit, and facility costs as a result of the restructuring of the customer service, marketing, sales and engineering operations concluded during the fourth quarter of the fiscal year ended March 31, 2002, a decrease in trade show and advertising costs, and a decrease in legal costs. As part of its lawsuit filed against Edward Bonn, Bradley Weber, Jerry Howard, and Response Telemedia, Inc. (see "Legal Proceedings") the Company is seeking rescission of the acquisition of the Internet Group and the return of the 6 million shares of the Company's common stock issued as consideration in the acquisition. Should the Company be successful in the rescission of this deal, it does not expect that the rescission would have a material effect on its results from operations since the Internet Group's revenue is currently generated from products created since the acquisition, including its flagship web site www.ten.com, the PPC engine, new content packages, and the opt-in email marketing program. RESTRUCTURING EXPENSES During the quarter ended June 30, 2002, the Company adopted a restructuring plan with respect to the Internet Group's data center facility. The Company is closing the Internet Group's in-house data center in Sherman Oaks, California and moving its servers, bandwidth and content delivery to the same location as the Subscription/PPV TV Group's digital broadcast facility in Boulder, Colorado. The Internet Group had been expecting to outsource these functions to a third party provider. However, after several months of in-depth analysis, it was determined that these functions could be done more efficiently and effectively if they were integrated into the digital broadcast facility's plant. The integration will be completed by the end of the Company's third fiscal quarter. As a result of this restructuring, the Company expects to save approximately $1.8 million on an annualized basis, which will be reflected in its cost of sales. Costs of sales decreased 47% from the first fiscal quarter to the second fiscal quarter of this year due to this restructuring. Total restructuring charges of $3.1 million related to this plan were recorded during the six months ended September 30, 2002, of which $28,000 related to the termination of 10 employees. Also included in this charge was $0.4 million related to the data center space in Sherman Oaks that the Company is attempting to sublet and $2.6 million of expenses related to excess equipment. During the current quarter, the Internet Group increased the amount of its restructuring expense accrued during the fourth quarter of the prior fiscal year by $0.3 million due to an adjustment to the estimate used in computing the expense related to its excess space. The change in the estimate was related to an extension of the time necessary to sublet the space. Future adjustments to this accrual may be required if the space is not sublet when expected. In addition, the restructuring expense for this same period was decreased by $0.1 million during the current fiscal quarter for a change in the amount estimated for certain payroll related expenses. ASSET IMPAIRMENT CHARGES During the first quarter of fiscal year 2003, the Company recognized impairment losses on certain URLs of approximately $535,000 in connection with the Internet Division. Management identified certain conditions including a declining gross margin due to the availability of free adult content on the Internet and decreased traffic to the Company's URLs as indicators of asset impairment. These conditions led to operating results and forecasted future results that were substantially less than had been anticipated at the time of the Company's acquisition of IGI, ITN, and CTI. The Company revised its projections and determined that the projected results would not fully support the future amortization of the URLs associated with IGI, ITN, and CTI. In accordance with the Company's policy, management assessed the recoverability of the URLs using a cash flow projection based on the remaining amortization period of four years. Based on this projection, the cumulative cash flow over the remaining amortization period was insufficient to fully recover the intangible asset balance. 25 CORPORATE ADMINISTRATION Expenses related to corporate administration include all costs associated with the operation of the public holding company, New Frontier Media, Inc., that are not directly allocable to the Subscription/ PPV TV and Internet operating segments. 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. Corporate administration expenses were $2.1 million and $1.5 million for the quarters ended September 30, 2002 and 2001, respectively, representing an increase of 40%. Corporate administration expenses were $4.6 million and $3.4 million for the six months ended September 30, 2002 and 2001, respectively, representing an increase of 35%. The increase in corporate administration expenses for the quarter and six months ended September 30, 2002 is due to the following items: a) an increase in legal fees related to the Company's proxy fight and its lawsuit filed against Edward Bonn, Bradley Weber, Jerry Howard, and Response Telemedia, Inc.; b) a $0.2 million non-cash consulting expense incurred for warrants to purchase Company stock which were granted to outside consultants; c) an increase in accounting, printing, postage and investor relation fees related to the proxy fight and the Company's lawsuit referenced in item (a); and d) an increase in insurance and facility expenses. OTHER EXPENSE Other expense increased from $0.9 million for the six months ended September 30, 2001 to $1.0 million for the six months September 30, 2002, representing an increase of 11%. This increase is due to an $117,500 write down in value of the Company's investment in Metro Global Media, Inc. ("Metro") stock and the write-off of $187,000 in non-cash debt offering costs related to the early repayment of the Company's debt obligations during the quarter ended June 30, 2002. 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 Metro was delisted from the NASDAQ. During the quarter ended September 30, 2000, the Company wrote the Metro stock down to a value of $117,500. At that time, Metro was still thinly traded on NASDAQ's over-the-counter market at $0.47 per share. During the quarter ended June 30, 2002, the Metro stock ceased trading and the Company wrote off the remaining value of $117,500. LIQUIDITY AND CAPITAL RESOURCES For the six months ended September 30, 2002, cash used in operating activities was $1.0 million and was primarily associated with a net loss of $6.7 million, an increase in accounts receivable of $1.0 million related to the Subscription/PPV TV Group and a $2.3 million increase in prepaid distribution rights related to the Company's licensing of content. This use of cash was offset by a $2.6 million restructuring charge related to closing the Internet Group's Los Angeles based data center facility, $3.8 million in depreciation and amortization, $0.5 million related to non-cash expenses from warrants issued to consultants for services and issued as offering costs related to debt obligations repaid during the period, and a $0.9 million increase in accounts payable and accrued liabilities. 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 $4.2 million, a $0.7 million decrease in accounts receivable, and a decrease of $1.6 million in other receivables and prepaid expenses. This cash provided by operations was offset by a $2.5 million increase in content licensing costs and a $0.7 million decrease in accrued liabilities. Cash used in investing activities was $0.3 million for the six months ended September 30, 2002 compared to cash used in investing activities of $2.0 million for the six months ended September 30, 2001. Cash used in investing activities for the six months ended September 30, 2002 was primarily related to the purchase of software licenses, minor equipment upgrades to the Subscription/PPV TV 26 Group's digital broadcast facility and the purchase of encrypting equipment for new cable launches. Cash used in investing activities for the six months ended September 30, 2001 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 office space for the Internet Group, the data center facility and the Boulder, Colorado headquarters. Cash used in financing activities was $0.3 million for the six months ended September 30, 2002, compared to cash used in financing activities of $3.0 million for the six months ended September 30, 2001. Cash used in financing activities for the six months ended September 30, 2002 was related to $1.0 million paid on the Company's capital lease obligations. This use of cash was offset by the issuance of 1.4 million shares of Class A Redeemable Preferred Stock at $2.00 per share. The proceeds from this offering were used to repay $2.0 million of the Company's outstanding notes payable. An additional $1.0 million in debt was converted to 0.5 million shares of Class A Redeemable Preferred Stock during the six months ended September 30, 2002. The preferred stock pays dividends at 15.5% on a monthly and quarterly basis and is redeemable anytime at the Company's option until January 2004, by which time it must be redeemed. Cash used in financing activities of $3.0 million for the six months ended September 20, 2001 was related to the repayment of $2.0 million in principal on the Company's outstanding debt obligations and $1.0 million in payments made on the Company's capital lease obligations. The Company expects to fund the dividends due on the preferred stock from its cash flows from operations. The Company anticipates funding the redemption of the preferred stock in 2004 from its cash flows from operations or a refinancing of the obligation prior to the redemption. If New Frontier Media were to lose its major customer that accounts for 36% of its revenue, its ability to finance its operating requirements would be severely impaired. 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, 2002, 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. Furthermore, the Company's borrowings are at fixed interest rates, limiting the Company's exposure to interest rate risk. Foreign Currency Exchange Risk. The Company does not have any foreign currency exposure because it currently does not transact business in foreign currencies. ITEM 4. CONTROLS AND PROCEDURES As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing of this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective. There were no significant changes to our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in 27 the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. 28 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is involved in two material legal proceedings. On May 28, 2002, the Company filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles (New Frontier Media, Inc., et al. vs. Edward J. Bonn, et al., case no. BC274573) against: (i) directors and former officers Edward J. Bonn and Bradley A. Weber; (ii) Jerry D. Howard, the former Chief Financial Officer of its subsidiaries Interactive Gallery, Inc. ("IGI"), Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI"); and (iii) Response Telemedia, Inc., a California corporation owned by Mr. Bonn. The Complaint's allegations arise, in part, out of the Company's purchase of 100 percent of the issued and outstanding shares of IGI and ITN and 90 percent of the issued and outstanding shares of CTI from the individual defendants on October 27, 1999. The Complaint alleges that, from early 1999 to the date of the closing, defendants Bonn, Weber, and Howard knowingly made material misrepresentations or omissions regarding IGI's business and financial results and prospects for the purpose of inducing the Company to purchase the defendants' stock holdings of IGI, ITN and CTI. The Complaint further alleges that, subsequent to the Company's purchase of IGI, ITN and CTI on October 27, 1999, Messrs. Bonn, Weber and Howard (as directors and/or officers) each breached their fiduciary duties owed to the Company, IGI, ITN and CTI. Specifically, the Complaint alleges that Messrs. Bonn, Weber and Howard grossly mismanaged IGI, ITN and CTI and concealed marketing, operational and financial information that would have allowed the Company to detect such mismanagement. The Complaint also alleges that Messrs. Bonn, Weber and Howard engaged in self-dealing transactions that benefited themselves and Mr. Bonn's company, RTI, at the expense of the Company. The Complaint seeks rescission of the purchase of IGI, ITN, and CTI, as well as monetary damages in an amount to be proven at trial. Mr. Bonn, Mr. Weber and Mr. Howard have filed answers denying the allegations contained in the Complaint and cross-complaints against the Company seeking that the Company indemnify them against the claims alleged in the Complaint. The cross-complaints also seek unspecified monetary damages from the Company, alleging that the Company breached its employment agreements with Messrs. Bonn, Weber and Howard by terminating their employment on May 28, 2002, and in the case of Mr. Weber, that the Company wrongfully terminated his stock options. In August 2002, the Company filed an Amended Reply in New Frontier Media, Inc., et al. vs. Edward J. Bonn, et al. (Superior Court of the State of California for the County of Los Angeles, Case No. BC 274573) disclosing that the Company had recently discovered additional evidence of alleged fraud committed by Defendants Edward J. Bonn and Bradley A. Weber based on transfers of IGI's common stock. The Company entered into a settlement agreement with Mr. Weber on November 8, 2002 contemplating the dismissal with prejudice of the Company's causes of action against Mr. Weber and Mr. Weber's cross-complaints against the Company. Although the ultimate outcome of Mr. Bonn's and Mr. Howard's cross-complaints, and the liability, if any, arising from such cross-complaints cannot be determined, management, after consultation and review with counsel, believes that the facts do not support their cross-complaints and that the Company has meritorious defenses. In the opinion of management, resolution of Mr. Bonn's and Mr. Howard's cross-complaints is not expected to have a material adverse effect on the financial position of the Company. On August 3, 1999, the Company filed a lawsuit in District Court for the city and county of Denver (Colorado Satellite Broadcasting, Inc., et al. vs. Pleasure Licensing LLC, et al., case no 99CV4652) against Pleasure Licensing LLC and Pleasure Productions, Inc. (collectively "Pleasure") alleging 29 breach of contract, breach of express warranties, breach of implied warranty of fitness for a particular purpose, and rescission, seeking the return of 700,000 shares of New Frontier Media stock and warrants for an additional 700,000 New Frontier Media shares which were issued to Pleasure in connection with a motion picture licensing agreement. Pleasure removed the District Court action to Federal District Court in Colorado and filed counterclaims related to the Company's refusal to permit Pleasure to sell the securities issued to Pleasure. Pleasure's counterclaims allege breach of contract, copyright and trademark infringement, and fraud. The counterclaims seek a declaratory judgment and monetary damages. The case has been set for trial in March 2003. Although the ultimate outcome of Pleasure's counterclaims, and the liability, if any, arising from such counterclaims cannot be determined, management, after consultation and review with counsel, believes that the facts do not support Pleasure's counterclaims and that the Company has meritorious defenses. In the opinion of management, resolution of Pleasure's counterclaims is not expected to have a material adverse effect on the financial position of the Company. In the event of an unfavorable resolution of this matter, however, the Company's earnings and financial condition in one or more periods could be materially and adversely affected. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held an annual meeting of its shareholders on August 20, 2002 (the "Annual Meeting"). (b) The Annual Meeting involved the election of directors. The directors elected at the meeting were Mark H. Kreloff, Michael Weiner, Alan L. Isaacman, Hiram J. Woo, Koung Y. Wong, Melissa Hubbard and Dr. Skender Fani. (c) Two matters were voted on at the Annual Meeting, as follows: (i) The election of seven directors to the Board of Directors for the following year and until their successors are elected. The votes were cast for this matter as follows:
BROKER FOR AGAINST ABSTAIN WITHHELD NON-VOTE ---------- ---------- ---------- ---------- ---------- Mark. H. Kreloff 12,093,925 91,910 Michael Weiner 12,104,125 81,710 Alan L. Isaacman 12,105,405 80,430 Hiram J. Woo 12,100,425 85,410 Kuong Y. Wong 12,105,925 79,910 Melissa Hubbard 12,105,925 79,910 Dr. Skender Fani 12,105,925 79,910 Edward J. Bonn 6,583,613 111,700 John B. Burns III 6,584,413 110,900 Carlton R. Jennings 6,584,413 110,900 Gerard A. Maglio 6,584,413 110,900 Andrew H. Orgel 6,572,513 122,800 Stephen Peary 6,584,413 110,900 Bernard Stolar 6,584,413 110,900
(ii) The ratification of the appointment of Grant Thornton LLP as the Company's independent auditors for the fiscal year ending March 31, 2003. The votes were cast for this matter as follows:
BROKER FOR AGAINST ABSTAIN WITHHELD NON-VOTE ---------- ---------- ---------- ---------- ---------- 18,694,964 45,072 141,112
30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.1 Employment agreement between Ken Boenish and New Frontier Media, Inc. 10.2 Amendment IV to Teleport Services Agreement between Colorado Satellite Broadcasting, Inc. and Williams Vyvx Services 10.3 Amendment Number Two to the Agreement Between Colorado Satellite Broadcasting, Inc. and Loral Skynet Concerning Skynet Space Segment Service 99.1 Certification by CEO Mark Kreloff pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act Act of 2002 99.2 Certification by CFO Karyn Miller pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act Act of 2002 b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended September 30, 2002 31 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) Dated: November 13, 2002 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of New Frontier Media, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark Kreloff, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Mark Kreloff - ------------------------------------ Mark Kreloff Chief Executive Officer November 13, 2002 33 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of New Frontier Media, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Karyn L. Miller, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Karyn L. Miller - ------------------------------------ Karyn L. Miller Chief Financial Officer November 13, 2002 34 EX-10 3 s15-3150_101.txt EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of August 21, 2002 between KEN BOENISH, an individual with a residence at 4463 Pali Way, Boulder, CO 80301 (the "Executive"), and NEW FRONTIER MEDIA, INC. ("New Frontier"), a Colorado corporation with a principal office at 7007 Winchester Circle, Suite 200, Boulder, Colorado, recites and provides as follows: WHEREAS, New Frontier desires to retain the services of the Executive on the terms and conditions set forth herein; and WHEREAS, the Executive desires to remain employed with New Frontier on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, New Frontier and the Executive agree as follows: 1. EMPLOYMENT PERIOD. New Frontier hereby agrees to employ the Executive, and the Executive hereby agrees to accept employment by New Frontier, in accordance with the terms and provisions of this Agreement, for the one year period commencing on April 1, 2002 (the "Effective Date") and ending at midnight on March 31, 2003 (the "Employment Period"). 2. TERMS OF EMPLOYMENT. (A) POSITION AND DUTIES. (i) During the Employment Period, the Executive shall serve as President of The Erotic Networks, Inc., which includes New Frontier's Subscription/Pay TV Group and New Frontier's Internet Group. The Executive shall have such authority and perform such executive duties as are commensurate with that position. The Executive's services shall be performed at New Frontier's headquarters in Boulder, Colorado, and at such other locations as may be required by New Frontier. (ii) During the Employment Period, and excluding any periods of vacation and leave to which the Executive is entitled, the Executive agrees to devote his full attention to the business and affairs of New Frontier and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable efforts to perform faithfully such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to: (a) serve on corporate, civic, charitable, and professional association boards or committees; (b) deliver lectures or fulfill speaking engagements; and (c) manage personal investments, so long as such activities do not materially interfere with the performance of the Executive's responsibilities as an employee of New Frontier in accordance with this Agreement. The Executive's employment under this Agreement shall be the Executive's exclusive employment during the term of the Employment Period. (B) COMPENSATION. (i) Base Salary. During the Employment Period, the Executive shall receive a base salary ("Base Salary"), which shall be paid in equal installments on a bi-weekly basis, at the annual rate of not less than Two Hundred and Fifty Thousand Dollars ($250,000) per year. The Base Salary shall not be reduced. (ii) The Subscription/Pay TV Group Incentive Bonus. In addition to the Base Salary, the Executive shall participate in an incentive bonus plan, whereby the Executive will have the opportunity to earn a bonus of up to $125,000 for the full Employment Period based on the satisfaction of EBITDA performance criteria of New Frontier's Subscription/Pay TV Group ("TEN"). The Executive shall earn, and be paid, the full $125,000 bonus (the "Annual TEN Bonus") if TEN's EBITDA for New Frontier's fiscal year ending March 31, 2003 meets or exceeds New Frontier's Fiscal 2003 formal corporate budget for TEN, expected to be set forth in writing in May 2002 (the "Annual TEN Budget"). A portion of the Annual TEN Bonus may be advanced in two installments to the Executive in the event that certain quarterly EBITDA measures are met by TEN following the close of New Frontier's second fiscal quarter and following the close of New Frontier's third fiscal quarter. Specifically, the Annual TEN Budget shall be divided by four (each resultant figure, a "Quarterly TEN Budget"), and advances against the Annual TEN Bonus shall be made to the Executive under the following circumstances: (a) The Second Quarter Advance of Annual TEN Bonus. $25,000 of the Annual TEN Bonus (the "Second Quarter TEN Bonus") shall be advanced to the Executive within 45 days of the close of New Frontier's second fiscal quarter if the combined quarterly EBITDA of TEN for both the first fiscal quarter and the second fiscal quarter equals or exceeds the combined Quarterly TEN Budgets for both the first quarter and the second fiscal quarter; (b) The Third Quarter Advance of Annual TEN Bonus. $12,500 of the Annual TEN Bonus (the "Third Quarter TEN Bonus") shall be advanced to the Executive within 45 days of the close of New Frontier's third fiscal quarter if the EBITDA of TEN for the third fiscal quarter equals or exceeds the Quarterly TEN Budget for the third fiscal quarter; (c) The Cumulative TEN Bonus. If the Second Quarter TEN Bonus is not earned by the Executive in accordance with Section 2(B)(ii)(a) above, but TEN's combined EBITDA for the first, second and third fiscal quarters does meet or exceed the combined Quarterly TEN Budgets for New Frontier's first, second and third fiscal quarters, then the Executive shall be advanced both the Second Quarter TEN Bonus and the Third Quarter TEN Bonus within 45 days of the close of New Frontier's third fiscal quarter; and (d) The Annual TEN Bonus. the remaining amount of the Annual TEN Bonus shall be paid to the Executive within 60 days of the close of New Frontier's fiscal year-end if the EBITDA of TEN for fiscal 2003 equals or exceeds the Budgeted EBITDA for fiscal 2003, provided, however, that all paid Quarterly TEN Bonuses, if any, shall be deducted from the Annual TEN Bonus (e) TEN Bonuses. All bonuses paid to Executive shall not be subject to repayment if the Annual bonus target is not met. (iii) The Internet Group Incentive Bonus. In addition to the Base Salary and the Annual TEN Bonus, if any, the Executive shall participate in an additional incentive bonus plan, whereby the Executive will have the opportunity to earn a bonus of up to $125,000 for the full Employment Period based on the satisfaction of EBITDA performance criteria of New Frontier's Interactive Gallery, Inc. Group ("IGallery"). The Executive shall earn, and be paid, the full $125,000 bonus (the "Annual IGallery Bonus") if IGallery's EBITDA for New Frontier's fiscal year ending March 31, 2003 meets or exceeds New Frontier's Fiscal 2003 formal corporate budget for IGallery, expected to be set forth in writing in May 2002 (the "Annual IGallery Budget"). A portion of the Annual IGallery Bonus may be advanced in two installments to the Executive in the event that certain quarterly EBITDA measures are met by IGallery following the close of New Frontier's second fiscal quarter and following the close of New Frontier's third fiscal quarter. Specifically, the Annual IGallery Budget shall be divided by four (each resultant figure, a "Quarterly IGallery Budget"), and advances against the Annual IGallery Bonus shall be made to the Executive under the following circumstances: (a) The Second Quarter Advance of Annual IGallery Bonus. $25,000 of the Annual IGallery Bonus (the "Second Quarter IGallery Bonus") shall be advanced to the Executive within 45 days of the close of New Frontier's second fiscal quarter if the combined quarterly EBITDA of IGallery for both the first fiscal quarter and the second fiscal quarter equals or exceeds the combined Quarterly IGallery Budgets for both the first quarter and the second fiscal quarters; (b) The Third Quarter Advance of Annual IGallery Bonus. $12,500 of the Annual IGallery Bonus (the "Third Quarter IGallery Bonus") shall be advanced to the Executive within 45 days of the close of New Frontier's third fiscal quarter if the EBITDA of IGallery for the third fiscal quarter equals or exceeds the Quarterly IGallery Budget for the third fiscal quarter; (c) The Cumulative IGallery Bonus. if the Second Quarter IGallery Bonus is not earned by the Executive in accordance with Section 2(B)(iii)(a), but IGallery's combined EBITDA for the first, second and third fiscal quarters does meet or exceed the combined Quarterly IGallery Budgets for New Frontier's first, second and third fiscal quarters, then the Executive shall be advanced both the Second Quarter IGallery Bonus and the Third Quarter IGallery Bonus within 45 days of the close of New Frontier's third fiscal quarter; and (d) The Annual IGallery Bonus. The remaining amount of the Annual IGallery Bonus shall be paid to the Executive within 60 days of the close of New Frontier's fiscal year-end if the EBITDA of IGallery for Fiscal 2003 equals or exceeds the Budgeted EBITDA for Fiscal 2003, provided, however, that all paid Quarterly IGallery Bonuses, if any, shall be deducted from the Annual IGallery Bonus. (e) IGallery Bonuses. All bonuses paid to Executive shall not be subject to repayment if the Annual bonus target is not met. (iv) Incentive Stock Options. The Executive shall be granted 100,000 options to purchase 100,000 shares of New Frontier's common stock, par value $.001, all exercisable at 110% of the closing sale price for New Frontier's common stock on April 1, 2002, as reported on the NASDAQ Stock Market. The stock options shall vest according to the following; (i) 75,000 options shall vest immediately upon execution of this agreement. (ii) 25,000 options shall vest on October 1, 2002. These grants shall be subject to all legal and regulatory requirements, as well as the requirements of the applicable New Frontier stock option plan(s). (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all employment-related expenses incurred by the Executive in accordance with the policies, practices and procedures of New Frontier as in effect generally from time to time after the Effective Date with respect to other peer executives of New Frontier. (vi) Vacation. During the Employment Period, the Executive shall be entitled to four weeks paid vacation, which may be used in accordance with the policies, programs and practices of New Frontier, which are in effect generally from time to time after the Effective Date with respect to other peer executives of New Frontier. (vii) Sick Leave. During the Employment Period, the Executive shall be entitled to paid sick leave in accordance with the policies, programs and practices of New Frontier, which are in effect generally from time to time after the Effective Date with respect to other peer executives of New Frontier. (viii) Car Allowance. During the Employment Period, the Executive shall be entitled to a $650 per month car allowance, in accordance with New Frontier's car allowance policy, in lieu of expenses associated with the operation of his automobile. (ix) Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all savings and retirement plans to the extent applicable generally to other executives of New Frontier, including any 401(k) plan maintained by New Frontier. (x) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family and dependents, as the case may be, shall be eligible for participation in and shall receive all benefits under all welfare benefit plans provided by New Frontier (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, and accidental death and travel accident insurance plans) to the extent applicable generally to other peer executives of New Frontier. (xi) Relationship Subsequent to this Agreement. If the parties do not execute a new written agreement upon expiration of this Agreement, but the parties are negotiating a new agreement in good-faith, Executive shall be paid the base salary as outlined within this agreement in regular bi-weekly installments. If the executive is terminated while the parties are negotiating a new contract in good-faith, New Frontier shall pay to the Executive, in a one-time lump sum payment in cash, an amount equal to Executive's Base Salary for a six month period. Such payment immediately upon termination. 3. EARLY TERMINATION OF EMPLOYMENT BY NEW FRONTIER. (A) FOR CAUSE. New Frontier may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) the conviction of the Executive for committing an act of fraud, embezzlement, theft or other act constituting a felony or the guilty or nolo contendere plea of the Executive to such a crime; (ii) the conviction of fraudulent conduct or an act of dishonesty or breach of trust on the part of the Executive in connection with New Frontier's business; (iii) violation of any New Frontier policy; (iv) failure, neglect, or refusal by the Executive properly to discharge, perform or observe any or all of the Executive's job duties; (v) failure by the Executive to engage in diligent efforts to perform the Executive's job duties; (vi) breach of the confidentiality or non-competition provisions of this Agreement. (B) WITHOUT CAUSE. New Frontier may terminate the Executive's employment at anytime without cause. (C) UPON EMPLOYEE'S DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death or upon a good faith determination by New Frontier that the Executive is disabled. New Frontier will deem the Executive disabled if and when, in the good faith judgment of New Frontier, the Executive is unable to perform the material functions of his job, even with reasonable accommodation, for a total of 90 days out of any six month period 4. TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may terminate his employment with New Frontier for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, in the absence of the consent of New Frontier Media, a reasonable determination by the Executive that any of the following has occurred: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including titles and reporting requirements, authority, duties or responsibilities as contemplated by Section 2(A) of this Agreement), or any other action by New Frontier which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated and insubstantial action not taken in bad faith and which is remedied by New Frontier promptly after receipt of notice thereof given by the Executive; or (ii) any failure by New Frontier to comply with any of the provisions of this Agreement applicable to it, other than any isolated and insubstantial failure not occurring in bad faith and which is remedied promptly after notice thereof from the Executive. 5. OBLIGATIONS OF NEW FRONTIER UPON EARLY TERMINATION. (A) TERMINATION FOR CAUSE. If the Executive's employment shall be terminated for Cause, this Agreement shall terminate without any further obligation to the Executive whatsoever, other than any obligation which may be required by law. (B) TERMINATION BY NEW FRONTIER WITHOUT CAUSE. In the event New Frontier terminates the Executive's employment during the Employment Period without cause, then New Frontier shall pay or provide to the Executive the following: (i) New Frontier shall pay to the Executive, within 30 days after the Date of Termination, as defined in Section 7, any accrued Base Salary, vacation pay, expense reimbursement and any other entitlements accrued by the Executive under Section 2(B), to the extent not theretofore paid (the sum of these amounts shall be hereinafter referred to as the "Accrued Obligations"). (ii) New Frontier shall pay to the Executive, in a one-time lump sum payment in cash an amount equal to Executive's Base Salary for a one year period plus the entire bonus as outlined in this agreement. (iii) New Frontier shall continue to provide benefits to the Executive and/or the Executive's family and dependents at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies which are generally applicable to peer executives, for one year from the date of termination. If the Executive commences employment with another employer and is eligible to receive medical or other welfare benefits under another employer-provider plan, the medical and other welfare benefits to be provided by New Frontier as described herein shall terminate. (C) UPON DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligation to the Executive's legal representatives under this Agreement, other than for payment of any Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination, as defined Section 6) and the timely payment or provision of all welfare benefit plans. (D) UPON DISABILITY. If the Executive's employment shall be terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for payment of any Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination, as defined in Section 6) and the timely payment or provision of all welfare benefit plans. 6. RIGHTS AND OBLIGATIONS UPON CHANGE IN CONTROL. In the event of a "Change in Control" (as defined in this Section 6) of New Frontier during the Employment Period, the Executive may terminate his employment with New Frontier by giving 30 days' notice thereof within six months after the occurrence of such Change in Control. If the Executive terminates his employment in accordance with this Section 6, or is terminated without cause within six months after a Change in Control, New Frontier shall pay the Executive an amount equal to: (i) all Accrued Obligations; (ii) New Frontier shall pay to the Executive, in a one-time lump sum payment in cash an amount equal to Executive's Base Salary for a one year period plus the entire bonus as outlined in this agreement. Such payment shall be made in a lump sum payable on the date of termination or resignation. In addition, New Frontier shall continue for such period to permit the Executive to receive or participate in all fringe benefits available to him pursuant to Section 2 above for a period of one year after the termination of his employment, provided, however, in no event shall the amount paid to the Executive pursuant to this Section 6 exceed the maximum payment permitted by Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or then applicable law, and to the extent any "excess parachute payment," as that phrase is defined in Section 280G(b) of the Code or then applicable law, would result from the provisions of this Section 6, then the amount the Executive would otherwise receive shall be reduced so that no "excess parachute payment" is made by New Frontier or received by the Executive; A "Change in Control" of New Frontier shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have occurred: (A) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), becomes the "beneficial owner" (as defined in Rule 13-d under the Act), directly or indirectly, of securities representing more than fifty percent (50%) of the total voting power represented by New Frontier's then outstanding voting securities; (B) A change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (a) are directors of New Frontier as of the date hereof, or (b) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of New Frontier); or (C) New Frontier merges or consolidates with any other corporation after which a majority of the shares of the resulting entity are not held by the shareholders of New Frontier prior to the merger, or New Frontier adopts, and the stockholders approve, if necessary, a plan of complete liquidation of New Frontier, or New Frontier sells or disposes of substantially all of its assets. 7. NOTICE AND DATE OF TERMINATION. Any termination shall be communicated by a written Notice of Termination to the other party, and may be sent via registered or certified mail, return receipt requested, postage prepaid, facsimile transmission, or by electronic mail or hand delivery. "Date of Termination" shall mean: (i) the date of transmission of the Notice of Termination by facsimile, e-mail or personal delivery; (ii) three calendar days after the date of mailing by first class mail; or (iii) if Executive's employment is terminated by reason of the Executive's death, the Date of Termination shall be the date of the Executive's death. 8. CONFIDENTIAL INFORMATION. (A) CONFIDENTIAL INFORMATION. As used in this Agreement "Confidential Information" includes information not generally known or available to those outside the company, without limitation, design information, manufacturing information, business, financial, and technical information that is unique and specific to New Frontier Media, sales and unique processing information, product information, , software, computer disks or files, or any other electronic information of any kind, Rolodex cards or other lists of names, addresses or telephone numbers, financial information forecasts, plans, contracts, releases, and other documents, materials or writings that belong to New Frontier, including those which are prepared or created by the Executive or come into the possession of the Executive by any means or manner and which relate directly or indirectly to New Frontier, and each of its owners, predecessors, successors, subsidiaries, affiliates, and all of its shareholders, directors and officers (all of the above collectively referred to as "Confidential Information"). Confidential Information includes information developed by the Executive in the course of the Executive's services for New Frontier for the benefit of New Frontier, as well as other Confidential Information to which the Executive may have access in connection with the Executive's services. Confidential Information also includes the confidential information of other individuals or entities with which New Frontier has a business relationship. (B) DUTY OF CONFIDENTIALITY. The Executive will maintain in confidence and will not, directly or indirectly, disclose or use (or allow others working with Executive to disclose or use), either during or for a period of one year after the term of this Agreement, any Confidential Information belonging to New Frontier, whether in oral, written, electronic or permanent form, except solely to the extent necessary to perform services on behalf of New Frontier. Upon termination of this Agreement, or the request of New Frontier prior to its termination, the Executive shall deliver forthwith to New Frontier all original Confidential Information (and all copies thereof) in the Executive's possession or control belonging to New Frontier and all tangible items embodying or containing Confidential Information. (C) DOCUMENTS, RECORDS, ETC. All documents, records, data, equipment and other physical property, whether or not pertaining to Confidential Information, which are furnished to the Executive by New Frontier or produced by the Executive in connection with the Executive's services will be and remain the sole property of New Frontier. The Executive will return to New Frontier forthwith all such materials and property upon the termination of this Agreement or sooner if requested by New Frontier. (D) ASSIGNMENT OF RIGHTS. The Executive shall make full and prompt disclosure to New Frontier of any and all designs, intellectual property, software, inventions, discoveries, or improvements (individually and collectively, "Inventions") made by the Executive as a result or product of his employment relationship with New Frontier. The Executive hereby assigns to New Frontier without additional compensation the entire worldwide right, title and interest in and to such Inventions, and related intellectual property rights and without limitation all copyrights, copyright renewals or reversions, trademarks, trade names, trade dress rights, industrial design, industrial model, inventions, priority rights, patent rights, patent applications, patents, design patents and any other rights or protections in connection therewith or related thereto, for exploitation in any form or medium, of any kind or nature whatsoever, whether now known or hereafter devised. To the extent that any work created by the Executive can be a work for hire pursuant to U.S. Copyright Law, the parties deem such work a work for hire and the Executive should be considered the author thereof. The Executive shall, at the request of New Frontier, without additional compensation, from time to time execute, acknowledge and deliver to New Frontier such instruments and documents as New Frontier may require to perfect, transfer and vest in New Frontier the entire rights, title and interest in and to such inventions. In the event that the Executive does not timely perform such obligations, the Executive hereby makes New Frontier and its officers his attorney in fact and gives them the power of attorney to perform such obligations and to execute such documents on the Executive's behalf. The Executive shall cooperate with New Frontier upon New Frontier's request and at New Frontier's cost but without additional compensation in the preparation and prosecution of patent, trademark, industrial design and model, and copyright applications worldwide for protection of rights to any Inventions. (E) INJUNCTIVE RELIEF. The parties acknowledge that a violation or attempted violation by the parties of any agreement in this Section 7 may cause damage to either Party, and accordingly, the Parties agrees that damaged party shall be entitled as a manner of right to an injunction from any court of competent jurisdiction restraining any violation or further violation of such agreement by violating Party; such right to an injunction, however, shall be cumulative and in addition to whatever other remedies that the damaged Party may have. Terms and agreements set forth in this Section 7 shall survive the expiration of the term of this Agreement. The existence of any claim of one Party against the other, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by either party of the covenants contained in this Agreement. (F) DISCLOSURE OF INFORMATION TO OTHERS. The Executive shall not divulge any Confidential Information to anyone outside New Frontier without obtaining both New Frontier's prior written consent and the disclosee's signed written confidentiality agreement as approved by New Frontier. 9. NON-COMPETE; NON-SOLICITATION. (A) NON-COMPETE. Except as is set forth below, for a period commencing on the Effective Date hereof and ending one year after date the Executive ceases to be employed by New Frontier (the "Non-Competition Period"), the Executive shall not, directly or indirectly, either for himself or any other person, own, manage, control, materially participate in, invest in, permit his name to be used by, act as consultant or advisor to, render material services for (alone or in association with any person, firm, corporation or other business organization) or otherwise assist in any manner any business which is currently a provider of adult pay-per-view television services in the US. of a substantial portion of New Frontier's business at the date the Executive ceases to be employed by New Frontier (collectively, a "Competitor"); provided, however, that the restrictions set forth above shall immediately terminate and shall be of no further force or effect (i) in the event of a default by New Frontier of the performance of any of the obligations hereunder, which default is not cured within ten (10) days after notice thereof, or (ii) if the Executive's employment has been terminated by New Frontier without Cause, (iii) The Executive has been terminated or ceases to be employed after a Change In Control. Nothing herein shall prohibit the Executive from being a passive owner of not more than five percent (5%) of the equity securities of an enterprise which is a competitor of a substantial portion of New Frontier's business which is publicly traded, so long as she has no active participation in the business of such enterprise. (B) NON-SOLICITATION. During the Non-Competition Period, the Executive shall not, directly or indirectly, (i) induce or attempt to induce or aid others in inducing an employee of New Frontier to leave the employ of New Frontier, or in any way interfere with the relationship between New Frontier and an employee of New Frontier except in the proper exercise of the Executive's authority, or (ii) in any way interfere with the relationship between New Frontier and any customer, supplier, licensee or other business relation of New Frontier. (C) SCOPE. If, at the time of enforcement of this Section 8, a court shall hold that the duration, scope, area or other restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope, area or other restrictions reasonable under such circumstances shall be substituted for the stated duration, scope, area or other restrictions. (D) INDEPENDENT AGREEMENT. The covenants made in this Section 8 shall be construed as an agreement independent of any other provisions of this Agreement, and shall survive the termination of this Agreement. Moreover, the existence of any claim or cause of action of the Executive against New Frontier or any of its affiliates, whether or not predicated upon the terms of this Agreement, shall not constitute a defense to the enforcement of these covenants. 10. ARBITRATION. No dispute between New Frontier (or any of its officers, directors, employees, subsidiaries or affiliates) and the Executive, which is in any way related to the employment of Executive (including but not limited to claims of wrongful termination; racial, sexual or other discrimination or harassment; defamation; and other employment-related claims or allegations) shall be the subject of a lawsuit filed in state or federal court. Instead, any such dispute shall be submitted to arbitration before the American Arbitration Association (AAA) or any other individual or organization on which the parties agree or which a court may appoint1. It is understood that both sides are hereby waiving the right to a jury trial. In order to commence an arbitration proceeding, the claimant shall file with the AAA (or other agreed or appointed arbitrator) and serve on the other party a complaint in accordance with the laws of the State of Colorado; the other party shall file and serve a response in accordance with the laws of that state. The arbitration shall be initiated in Boulder, Colorado. The arbitration must be filed within six months of the act or omission which gives rise to the claim. Each party shall be entitled to take deposition: Each party shall be entitled to discovery and depositions as per the Colorado Rules of Civil Procedure. Delete the clause that follows and to take any other discovery as is permitted by the arbitrator and to take any other discovery as is permitted by the Arbitrator. In determining the extent of discovery, the Arbitrator shall exercise discretion, but shall consider the expense of the desired discovery and the importance of the discovery to a just adjudication. The Arbitrator shall hear motions pertaining to the pleadings, discovery or summary judgment or adjudication, in accordance with the law as it would be applied by a court of the State of Colorado. The Arbitrator shall render a decision which conforms to the facts, supported by competent evidence (expect that the Arbitrator may accept written declarations under penalty of perjury, in addition to live testimony), and the law as it would be applied by a court sitting in the state in which the arbitration is brought. The Arbitrator shall not impose any requirement of "just cause," not otherwise imposed by law. At the conclusion of the arbitration, the Arbitrator shall make written findings of fact, and state the evidentiary basis for each such finding. The Arbitrator shall also issue a ruling and explain how the findings of fact justify his or his ruling. - -------- 1 Notwithstanding the above, either New Frontier or the Executive may file with an appropriate state or federal court a claim for injunctive relief in any case where the filing party seeks provisional injunctive relief or where permanent injunctive relief is not available in arbitration. The filing of a claim for injunctive relief in state or federal court shall not allow either party to raise any other claim outside of arbitration. Any party may apply to a court of competent jurisdiction for entry of judgment on the arbitration award. The court shall review the arbitration award, including the ruling and findings of fact, and shall determine whether they are supported by competent evidence and by a proper application of law to the facts. If the court finds that the award is properly supported by the facts and law, then it shall enter judgment on the award; if the court finds that the award is not supported by the facts or the law, then the court may enter a different judgment (if such is compelled by the uncontradicted evidence) or may direct the parties to return to arbitration for further proceedings consistent with the order of the court NO CONFLICTING OBLIGATIONS OF THE EXECUTIVE. The Executive represents and warrants that she is not subject to any duties or restrictions under any prior agreement with any previous employer or other person, and that he has no rights or obligations except as previously disclosed to New Frontier which may conflict with the interests of New Frontier or with the performance of the Executive's duties and obligations under this Agreement. The Executive agrees to notify New Frontier immediately if any such conflicts occur in the future. 11. SUCCESSORS. (A) This Agreement is personal to the Executive and shall not be assignable by the Executive. (B) Subject to section 6,This Agreement shall inure to the benefit of New Frontier and its successors and assigns. New Frontier may assign this Agreement to any successor or affiliated entity, subsidiary, sibling, or parent company. 12. MISCELLANEOUS. (A) This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement contains the full and complete understanding between the parties hereto and supersedes all prior understandings, whether written or oral pertaining to the subject matter hereof. This Agreement may not be amended or modified otherwise than by a written agreement executed by the Executive and by the President or Executive Vice President of New Frontier. (B) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile, or by electronic mail, or by hand delivery to such address as either party shall have furnished to the other in writing in accordance herewith. Notice to New Frontier also must be given to: Hank Gracin, Esq. Lehman & Eilen LLP 50 Charles Lindbergh Boulevard Suite 505 Uniondale, New York 11553 Facsimile (516) 222-0948 hgracin@lemaneilen.com (C) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (D) New Frontier may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (E) New Frontier's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right New Frontier may have hereunder, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (F) New Frontier agrees, to defend and indemnify Executive against all claims for actions and /or inactions Executive performed within the scope of his duties. (G) New Frontier agrees to maintain D&O insurance which covers Executive for all actions and/or inactions of the Executive. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from the Executive Committee of its Board of Directors, New Frontier has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. NEW FRONTIER MEDIA, INC. EXECUTIVE: By: /s/ Michael Weiner /s/ Ken Boenish --------------------------- -------------------------- Michael Weiner Ken Boenish Executive Vice President EX-10 4 s15-3150_102.txt EXHIBIT 10.2 Amendment IV THIS AMENDMENT IV ("Amendment") is made this 30th day of September, 2002, by and between Williams Communications, LLC ("Williams Communications") and Colorado Satellite Broadcasting, a division of New Frontier Media, Inc. ("Customer"). WHEREAS, Williams Communications and Customer are parties to that certain Teleport Services Agreement, effective the first day of April, 1999, as amended (the "Agreement"); and WHEREAS, Williams Communications and Customer desire to further amend the Agreement; NOW, THEREFORE, in consideration of the foregoing premises and mutual promises and covenants of the parties hereto, the receipt and sufficiency of which is hereby acknowledged, Williams Communications and Customer agree to amend the Agreement as follows: 1. Section 1 (A) of the Agreement shall be deleted in its entirety and replaced with the following: A. A 45Mb microwave link to provide Customer with tertiary backup to Customer's DS-3 circuits from Customer's premises in Boulder, Colorado ("Customer's Premises") to Williams Communications Teleport Denver (the "Teleport") (hereinafter referred to as the "Microwave Link"). 2. Section 3 (b) of the Agreement shall be deleted in its entirety and replace with the following: b. Redundant Signal Delivery to Teleport. It is the intent of the parties that Customer's Terrestrial DS-3 Circuits shall be the primary and redundant transmission paths, and that the Microwave Link provided by Williams Communications shall be the tertiary backup transmission path. In this regard, the output of the MPEG-2 Compression System will be split to be transmitted via Customer's DS-3 Circuits and the Microwave Link for the purposes of redundancy. The Microwave Link provided by Williams Communications is "single thread" and does not have any redundant features. The Customer's redundant DS-3 signals are received at the Teleport and are connected to the decoding MPEG-2 equipment. The Microwave Link signal is received at the Teleport and will be manually patched in as required. 3. Exhibit "A," attached hereto and incorporated by reference, shall be added to, and become part of, the Agreement. 4. Exhibit "A" shall supersede and replace the following portions of the Agreement in their entirety: Section 1 (B), (C) and (D); Section 2; Section 3 with the exception of 3 (b) which is amended pursuant to Section 2 herein; and Section 4; Amendments I, II, and III, except as set forth in Section 5 below. 5. Section 9, "Commitment," as set forth in Section 3 of Amendment III, shall remain in full force and effect throughout the Original Term of the Agreement, as "Original Term" is defined in Section 6 of the Agreement 6. Effective Date. The Effective Date of this Amendment IV shall be the later of 90 days from the date this Amendment IV is fully executed or 30 days from the date of installation of the TV-1 circuits as described in and subject to Section 1.2(d) of Exhibit "A." Further, to implement the Service within this timeframe, Williams Communications requires access to Customer's Premise, as defined in Exhibit "A," at its request as needed. Customer shall provide Maintenance Windows, as defined in Exhibit "A," as requested by Williams Communications, in order to migrate services from the existing system to the new service design. Williams Communications will notify Customer of any failure on the part of Customer to provide Williams Communications with access to Customer's Premise or to provide Williams Communications' requested Maintenance Windows and Customer understands that such failure may result in implementation delays. Williams Communications shall not be responsible for delays caused by the failure of Customer to comply with these terms. 7. Except as specifically amended herein, all terms, conditions and provisions contained in the Agreement shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment IV on the 30th day of September 2002. Williams Communications, LLC Colorado Satellite Broadcasting, a division of New Frontier Media, Inc. By : /s/ Michael Schlesier By: /s/ Ken Boenish Name: Michael Schlesier Name: Ken Boenish Title: Vice President Title: President Date: 10/04/02 Date: 09/30/02 Exhibit "A" This Exhibit "A" sets forth the responsibilities of Williams Communications and Customer pertaining to the encryption and transmission of Customer's content to Customer-provided satellite space on the Loral Telstar 4 and Telstar 7 satellites pursuant to the terms and conditions of the Agreement. For the purposes of the Agreement, the Teleport is defined as Williams Communications Teleport Denver located at 9174 South Jamaica Street, Englewood, CO 80112. For the purposes of this Agreement, the Customer Premise is defined as 5435 Airport Boulevard, Suite 100, Boulder, Colorado, 80301. Section 1. Teleport Service 1.1 Service Overview. Williams Communications shall, subject to the terms and conditions of the Agreement, provide to Customer, the use of the Teleport for full-time dedicated transmissions, based on the terms contained herein, to uplink Customer's signal(s) from the Teleport to Customer-provided space segment on the Loral Telstar 4 C-band satellite located at 89 degrees West Longitude, and the Loral Telstar 7 C-band satellite located at 129 degrees West Longitude and to furnish equipment and collocation as described herein in relation to Customer's programming as set forth in Table 1 below ("Customer's Programming"), and to provide TV-1 Local Loops between Customer Premise and the Teleport (the "Service"). Customer shall supply Williams Communications with collocation space and environmentally controlled facilities suitable for operation of Williams Communications provided Digicipher equipment. Table 1 Customer's Programming Channel Satellite Satellite Gonzo X Analog Telstar 4-1 Exxtasy Analog Telstar 4-4 True Blue Analog Telstar 4-5 Barker Analog Telstar 4-7 Pleasure Digital Telstar 7-24 TeN Digital Telstar 7-24 ETC Digital Telstar 7-24 1.2 Williams Communications' Responsibilities: a. Description of Services. Williams Communications will (i) collocate Digicipher equipment at Customer Premise; (ii) for Customer's digital Telstar 7 services, receive Customer provided signal(s) for introduction into Williams Communications provided Digicipher equipment; (iii) handoff to Customer a Digicipher encoded DS-3 MCPC signal for introduction into Customer Provided Terrestrial DS-3 Connectivity between Customers Premise and the Teleport; (iv) receive Customer transported Digicipher signal(s) for introduction into Williams Communications provided RF Chain; (v) transmit Digicipher encoded services to Telstar 7; (vi) for Customer's Analog Videocipher II + Telstar 4 services, receive Customer provided signal(s) for introduction into Williams Communications provided TV-1 local loops; (vii) receive Customer content from analog TV-1s; (viii) provide connectivity between local loop demarcation and Customer Provided VideoCipher II + equipment; (xi) provide rack space at the Teleport for collocation of Customer provided Videocipher II + equipment; (xii) receive four (4) analog Videocipher II + signals from Customer; (viii) introduce Customer's Videocipher II + signals into Williams Communications provided RF Chain for transmission to Telstar 4; and (xiii) provide a DS-3 Microwave Link, as provided for in Section 3 (b) of the Agreement, as amended, as a tertiary backup to Customer's Terrestrial DS-3 Fiber Connectivity transporting Digicipher encoded Customer content. Customer understands and agrees that turn-up time for the Telstar 7 services is estimated at fourteen (14) business days from Williams Communications' receipt of this signed amendment. b. Monitoring of Customer's Programming. Customer shall be solely responsible for all video and audio monitoring of the satellite returned signal. Williams Communications will monitor only the satellite RF (radio frequency) representation of the Service. Williams Communications shall include audible and visual alarms on its monitoring of the RF carriers. Customer shall notify Williams Communications immediately by telephone when an Interruption of the Service begins and when the Service is restored. c. Program Origination. At no time shall Williams Communications be responsible to provide programming origination or tape playback services for Customer. Customer shall be permitted to provide tape playback from the Teleport in the event of a catastrophic fiber failure. DVD playout capability shall be part of the service restoral responsibilities of Williams Communications. d. Terrestrial Connectivity. For Telstar-4 analog Videocipher II + services, Williams Communications shall be responsible for transport of Customer's signals, via Williams Communications provided TV-1s from Customer Premise to the Teleport. Demarcation point is the video and audio input connectors to Williams Communications provided TV-1s. Williams Communications will handoff to Customer, at the Teleport, analog video and audio for introduction into Customer Provided VideoCipher II + encoding equipment, with the demarcation point being the video and audio input connectors of Customer Provided VideoCipher II+ encoders. Customer will hand off to Williams Communications a 70 MHz signal suitable for introduction into Williams Communications provided RF chain with the demarcation point being the 70 MHz output connector of Customer Provided VideoCipher II+ equipment. Williams Communications will order TV-1 connectivity upon receipt of the signed Amendment IV. Turn up time for TV-1 connectivity is estimated at one hundred twenty (120) days from receipt of the signed Amendment IV. Williams Communications' provision of TV-1 connectivity to Customer is subject to Williams Communications' contracts with third parties through which it has obtained any portion of the rights made available to Customer under this Agreement. Customer shall have no greater rights or remedies against or with respect to Williams Communications under this Agreement than Williams Communications has against such third parties under those contracts. In addition, Customer understands and agrees that any special construction costs associated with provision of the TV-1 circuits will be due to Customer's requirements and specifications. Therefore, Customer agrees to be responsible for any and all special construction costs in excess of $4,576. Further, Customer understands and agrees that any special construction may affect the estimated turn up time for installation of the TV-1 circuits. Williams Communications will provide a breakdown of special construction costs to Customer when such information becomes available. However, Customer shall be responsible for charges as set forth above. Failure of Customer to accept charges in excess of the anticipated installation charges of $4,576 may result in cancellation of TV-1 installation orders. Williams Communications and Customer understand and agree that total charges for installation of the TV-1 circuits will not be known until such time as an order is placed and appropriate surveys are completed by the vendor. Any cancellation costs shall be borne by Customer. 1.3 Customer's Responsibilities: a. Collocation -- Williams Communications' Equipment. (i) Collocation at Customer Premise. At no charge to Williams Communications, Customer will supply rack space at Customer's premise located at 5435 Airport Boulevard, Suite 100, Boulder, Colorado, 80301, sufficient for Williams Communications to locate equipment required to perform the Services described herein, including but not limited to two (2) Motorola Digicipher frames with associated power supplies, MicroVax system controller, UPS system, and one 19" Digicipher equipment rack. Utility power will be supplied at 120vac and 208vac, two phase with single isolated ground. Customer shall provide power via an automatic transfer switch fed by both standby generator and public utility to support the Williams Communications owned UPS system. UPS battery operation may not exceed five (5) minutes. Customer will supply an environmentally controlled facility for Williams Communications' Equipment, and maintain a temperature no higher than 68 degrees +/- 5 degrees Fahrenheit, and humidity no higher than 65 % non-condensing. Failure to provide such environmental conditions may result in failure of Williams Communications' Equipment. Williams Communications is not responsible for any failure of Williams Communications' Equipment or Services due to insufficient environmental control. Any such failure will not be used in the calculation of outage credits nor will such failure constitute a breach on the part of Williams Communications. Further, Customer shall be responsible for repair of Williams Communications' Equipment that fails under the aforementioned conditions. An inventory of Williams Communications' Equipment is listed below in Table 2.
Table 2 - ----------------------------------------------------------------------------------------------------------- Williams Communications' Equipment - ----------------------------------------------------------------------------------------------------------- Note: This is an inventory only and is subject to change by Williams Communications - ----------------------------------------------------------------------------------------------------------- Equipment Description Quantity Serial Number - ----------------------------------------------------------------------------------------------------------- DEC Tape Drive 1 CX61809760 - ----------------------------------------------------------------------------------------------------------- Digicipher 2 Frames 2 00078 and 00051 - ----------------------------------------------------------------------------------------------------------- GI Power supply mods 3 a) 30714-7 b) 23637-14 c) 23637-15 - ----------------------------------------------------------------------------------------------------------- Microvax 3800/ Digital/ 1 AY61728453 - ----------------------------------------------------------------------------------------------------------- Powerware UPS system S/N to be determined. - ----------------------------------------------------------------------------------------------------------- DC 2 boards as follows: - ----------------------------------------------------------------------------------------------------------- Packet Multiplexer: 2 a) 00690 b) 00027 - ----------------------------------------------------------------------------------------------------------- Digital Video Compressor 3 a) 00075 b) 00037 c) 00151 - ----------------------------------------------------------------------------------------------------------- Digital Service Encoder 3 a) 00183 b) 00387 c) 00257 - -----------------------------------------------------------------------------------------------------------
(ii) Access to Customer Premise. Customer shall provide Williams Communications with 24 hour per day 7 day a week access for emergency maintenance or repair of Williams Communications' Equipment. Customer will provide contact information sufficient for Williams Communications' personnel to gain access to Customer's premise at 5435 Airport Boulevard, Suite 100, Boulder, Colorado, 80301. Failure of Customer, at any time and for any reason, to provide said access relieves Williams Communications from all responsibility for Outages during which Williams Communications was denied access. b. Signal Delivery. Customer shall be solely responsible for delivery of its signal(s) to the demarcation point, as set forth in Section 2 herein. Customer shall deliver NTSC CCIR-601 standard signal(s), as defined by the International Radio Consultative Committee, for Telstar-7 Digicipher service(s). Customer shall deliver analog Videocipher II+ signal(s), as defined by Motorola, for Telstar-4 Videocipher services. Customer acknowledges and agrees that Williams Communications' ability to provide uninterrupted Service to Customer pursuant to the technical standards set forth in this Exhibit "A" is dependent upon Williams Communications' receipt of a valid signal handed off from Customer that conforms to the technical standards set forth herein. c. Compliance with Technical Specifications. Customer shall comply with Technical Specifications including, but not limited to, the following - NTSC CCIR-601 signal as defined by the International Radio Consultative Committee. Videocipher II+ signal as defined by Motorola. NTSC analog video as defined by National Television System Committee. DS-3 as defined by the American National Standards Institute. All signals referenced in this document shall conform to the appropriate standard(s). d. Customer Provided Equipment - Sparing and Maintenance. Customer shall be responsible for providing all equipment necessary for provision of the Service which is not provided by Williams Communications, including but not limited to the Customer Provided Equipment as set forth in Table 3 below. Customer is responsible for all sparing, maintenance, and technical support for all Customer Provided Equipment including all Videocipher II Equipment. However, Williams Communications will provide one (1) Videocipher II encoder to act as a spare to Customer Provided Videocipher II encoders ("Spare VC II Encoder"). The Spare VC II Encoder is supplied "as is," and Customer shall be responsible for all operation, maintenance and repair of the SpareVC II Encoder. In the event that the Spare VC II Encoder is placed into service, Customer shall be responsible for repair or replacement of failed Customer Provided Videocipher II Equipment, and in no event shall Williams Communications provide additional spare Videocipher II encoders beyond the initial Spare VC II Encoder, nor shall Williams Communications be responsible for any outages due to the failure of either Customer Provided Equipment or the Spare VC II Encoder. However, in the event of a failure of a Customer Provided Videocipher II encoder, Williams Communications will work with Customer to install the Spare VC II Encoder for the purpose of restoring Service. Customer agrees that Interruptions to the Services during and directly related to the installation of the Spare VC II Encoder shall not be considered in Outage Credit calculations.
Table 3 Customer Provided Equipment EQUIPMENT MODEL # SERIAL # ------------------------------------------------------------------------------------------------------ Digital MicroVAX II 630QZ-A2 WF90822070 ------------------------------------------------------------------------------------------------------ Digital MicroVAX II 630QZ-A2 WF72111725 ------------------------------------------------------------------------------------------------------ Digital MicroVAX II 630QZ-A2 WF72312050 ------------------------------------------------------------------------------------------------------ Echostar Receiver 4900 RDECTK02506G ------------------------------------------------------------------------------------------------------ Echostar Receiver 4900 RDECTK03156M ------------------------------------------------------------------------------------------------------ Genesis 6000 Series ------------------------------------------------------------------------------------------------------ Pioneer DVD Player DVD V7400 UFEA003332CC ------------------------------------------------------------------------------------------------------ Sony DVD Player DVP-S560D 982609 ------------------------------------------------------------------------------------------------------ Sony DVD Player DVP-S560D 982778 ------------------------------------------------------------------------------------------------------ Sony DVD Player DVP-S560D 982620 ------------------------------------------------------------------------------------------------------ Sony DVD Player DVP-S560D 982621 ------------------------------------------------------------------------------------------------------ VideoCipher 2 Plus 75471-1 S20000016 ------------------------------------------------------------------------------------------------------ VideoCipher 2 Plus 75507-1 SP2000082 ------------------------------------------------------------------------------------------------------ VideoCipher 2 Plus 75507-1 SP2000028 ------------------------------------------------------------------------------------------------------
e. Terrestrial Fiber Connectivity. Customer shall provide all DS-3 fiber connectivity required to transport Customer's signal from Customers Premise to the Teleport ("Customer Provided Terrestrial Connectivity") for transmission to Telstar 7. Customer is responsible for all outages of Customer Provided Terrestrial Connectivity. Williams Communications has no responsibility for outages resulting from interruptions affecting Customer Provided Terrestrial Connectivity. Customer shall be solely responsible for all DS-3 Circuits, including payment to and all interaction with Customer's vendor. f. Transponder. Customer shall be solely responsible for obtaining all transponders required to provide the Services at Customer's sole expense. Customer shall provide Williams Communications with sufficient information regarding the transponder(s) to be able to provide the Services. Williams Communications understands that changes to satellites and transponders may be required due to failures in such equipment or due to Customer's reasonable business needs. Williams Communications will make reasonable efforts to accommodate changes to Customer provided transponders and satellites. However, while Williams Communications intends to attempt to accommodate all such reasonable requests, Customer understands and agrees that changes to Customer provided transponder(s) and/or satellites will require review by Williams Communications' engineering and operations staff. Examples of requests which may be deemed unreasonable include but are not limited to i) changes to transponder(s) which would require the use of additional RF chains beyond the two (2) RF chains contemplated in this Agreement and, ii) changes to transponder(s) requiring equipment that is unavailable. See Table 1, Customer's Programming, for satellite and transponder information. g. Throughput. Customer shall be responsible for the function and throughput of all Customer Provided Equipment. Williams Communications will provide environmentally controlled facilities suitable for operation of Customer Provided Equipment which is located at Williams Communications' premises. Williams shall provide reasonable assistance in restoral of Customer-Provided Equipment at the Teleport. h. Downlink Equipment. Customer shall be solely responsible for receiving the satellite signals from the transponder(s), including all downlink equipment necessary for reception of the satellite signals. i. Digicipher Authorizations. Customer has chosen to encrypt the Pleasure, TeN, and ETC Programming with a GI Digicipher system. Williams Communications has purchased the GI Digicipher MPEG-2 encoding system with "Conditional Access," for use in providing the Services to Customer. Customer shall be responsible for the authorization of commercial decoders in Customer's network, so that the correct end user receives the correct programming. j. Service Charge. The monthly charge for the Services, as defined herein, shall be $xxx throughout the Original Term (the "Service Charge"). The Service Charge shall be invoiced monthly in advance and shall be paid by Customer in U. S. Dollars 10 days before the first day of the month in which Services are to be provided. Payment shall be made via Automated Clearinghouse ("ACH") or wire transfer made to Williams Communications in care of Bank of Oklahoma, Tulsa, OK, ABA #103900036, Account No. 010649443, or such other bank or account as Williams Communications may in writing direct Customer to remit payment pursuant to the notice provisions of this Agreement. Customer has previously deposited $xxx which represents one month's Service Charge for all Services provided pursuant to that certain Teleport Services Agreement dated July 13, 2000, as amended three times, to be held by Williams Communications as a deposit (the "Deposit") throughout the Original Term of the Agreement. At Williams Communications' sole discretion, the Deposit shall be applied as payment to Customer's account either i) during the Original Term after Customer's payment history has been established or ii) as payment for the last month of the Original Term. k. Single Source of Contact. Customer shall be the single point of contact for Customer's customers regarding the Services provided hereunder. Under no circumstances shall Customer distribute contact information for the Teleport or Williams Communications to Customer's customers. Section 2. Baseband Demarcation 2.1 Telstar-7 Services. Customer is responsible for providing CCIR 601 compliant signal(s) to the input BNC connector of Williams Communications provided Digicipher encoder(s) located at Customer's Premise. Williams Communications is responsible for the signal within the Digicipher chassis, which encodes the Customer's CCIR-601 signal into Motorola Digicipher format. Williams Communications will hand the signal responsibility back to Customer in DS-3 MCPC format at the output BNC connector of the Motorola Digicipher chassis. Customer is responsible for transport of the DS-3 signal from the Digicipher chassis output BNC connector to the Teleport. Williams Communications will accept responsibility of the DS-3 signal from the output BNC connector of the terrestrial transport system. 2.2 Telstar-4 Services. Customer is responsible for encoding of all signals for Telstar-4 delivery. Demarcation is the output BNC connector of the Customer owned Motorola Videocipher II+ encoder(s) located at the Teleport. 2.3 Transmission System Design. A diagram of the "Transmission System Design" is attached hereto as Attachment I. Section 3. Maintenance Windows In order to maintain system integrity and reduce service outages, Williams Communications requires, at a minimum, a one (1) hour on air maintenance window, the "Maintenance Window," each month (30 days) in order to perform maintenance on Williams Communications' Provided Equipment at Customer's Premise located at 5435 Airport Boulevard, Suite 100, Boulder, Colorado, 80301. This monthly Maintenance Window will be scheduled with Customer in advance, and barring extreme circumstances, the monthly Maintenance Window schedule will be adhered to. Failure of Customer to adhere to this schedule shall relieve Williams Communications of all responsibilities for Outages until such time as the Maintenance Window has been completed. However, a Maintenance Window which releases the primary or backup path will be accommodated only as long as the Customer's services remain on-air through the alternate path. Williams Communications will be responsible to advise Customer's Broadcast Group that the services will not have redundancy during the times specified. Customer will support the current semi-annual 4 hour off-air Maintenance Windows as required. Attachment I Transmission System Design [GRAPHIC OMITTED] Transmission Equipment for CSB EX-10 5 s15-3150_ex103.txt EXHIBIT 10.3 Colorado Satellite Broadcasting Inc. - T70112100-02 Amendment Number Two 10-17-02 Page 1 of 1 T70112100 - 02 AMENDMENT NUMBER TWO TO THE AGREEMENT BETWEEN COLORADO SATELLITE BROADCASTING INC. AND LORAL SKYNET(R)1 CONCERNING SKYNET SPACE SEGMENT SERVICE On this 17th day of October, 2002, this amendment number two ("Amendment Number Two") is made between Colorado Satellite Broadcasting Inc., a corporation organized and existing under the laws of the State of Colorado and having its place of business at 7007 Winchester Circle, Suite 200, Boulder, CO 80301 (hereinafter referred to as "CUSTOMER", which expression shall include its successors and permitted assigns), and Loral Skynet, a division of Loral SpaceCom Corporation, a corporation organized and existing under the laws of the State of Delaware, and having a place of business at 500 Hills Drive, Bedminster, New Jersey 07921 (hereinafter referred to as "SKYNET", which expression shall include its successors and permitted assigns). WITNESSETH: WHEREAS, on January 24, 2002 CUSTOMER and SKYNET entered into an Agreement for SKYNET C-Band space segment service on the Telstar 7 satellite; WHEREAS, on February 7, 2002, SKYNET and CUSTOMER amended the aforementioned Agreement for space segment capacity on the Telstar 7 satellite; and WHEREAS, CUSTOMER and SKYNET now desire to further amend the aforementioned Agreement; NOW, THEREFORE, CUSTOMER and SKYNET, in consideration of the mutual covenants expressed herein, agree as follows: - ------------------------------------------------------------------ 1 SKYNET(R)and its logo are registered trademarks of Loral SpaceCom Corporation LORAL SKYNET PROPRIETARY 1. Section 1.1 of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(a) SKYNET offers and CUSTOMER hereby orders satellite space segment service from February 1, 2002 through and including December 31, 2002. Such service consists of Non-Preemptible, C-Band satellite space segment capacity, consisting of 9.5 MHz of power equivalent bandwidth ("PEB") on a full-time basis via the Telstar 7 satellite (the "Serving Satellite"), located at 129(Degree) W.L., along with Telemetry, Tracking and Control ("TT&C"), and maintenance of the satellite used to provide the space segment capacity (collectively, the "Service" or "Services"). 1.1(b)SKYNET offers and CUSTOMER hereby orders satellite space segment service from January 1, 2003 through and including December 31, 2005. Such service consists of Non-Preemptible, C-Band satellite space segment capacity, consisting of 20.5 MHz of power equivalent bandwidth ("PEB") on a full-time basis via the Telstar 7 satellite (the "Serving Satellite"), located at 129(Degree) W.L., along with Telemetry, Tracking and Control ("TT&C"), and maintenance of the satellite used to provide the space segment capacity (collectively, the "Service" or "Services"). 2. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: 2. RATE AND TERM OF SERVICE CUSTOMER shall pay a monthly rate for the Service as set forth in the following table:
Monthly Rate Per Quantity Service Satellite Term Space Segment -------------------------------------------------------------------------------------- 1 (one) 9.5 MHz Telstar 7 2-1-02- 12-31-02 $ C-24 Non-Preemptible Transitioning to 1 (one) 20.5 MHz Telstar 7 1-1-03- 12-31-05* $ C-24 Non-Preemptible
* Subject to availability, CUSTOMER has the option to extend their Service as described in Section 1 ("SKYNET SERVICES") and at the then effective rate described in Section 2 ("RATE AND TERM OF SERVICE") for not more than two (2) years. CUSTOMER may exercise such option by giving SKYNET written notice of CUSTOMER's intention to extend their Service no later than June 30, 2005. LORAL SKYNET PROPRIETARY Except as specifically amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties hereto have entered into this Amendment Number Two as of the day and year first above written, and agree to the terms and conditions set forth herein. COLORADO SATELLITE LORAL SKYNET, A DIVISION OF BROADCASTING INC. LORAL SPACECOM CORPORATION By /s/ Larry Harmon By: /s/ R.J. De Martini - ---------------------- ---------------------------- Print: Larry Harmon Print: R.J. DeMartini Title VP Technology Title: Director, Contracts - ---------------------- ---------------------------- Date: October 28, 2002 Date: October 28, 2002 LORAL SKYNET PROPRIETARY EX-99 6 s15-3150_ex991.txt EXHIBIT 99.1 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Mark H. Kreloff, Chairman and Chief Executive Officer of New Frontier Media, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of New Frontier Media, Inc. (the "Registrant"); 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this Quarterly Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 13, 2002 /s/ Mark H. Kreloff ------------------------------------ Chairman and Chief Executive Officer (Principal Executive Officer) EX-99 7 s15-3150_ex992.txt EXHIBIT 99.2 CHIEF FINANCIAL OFFICER CERTIFICATION I, Karyn L. Miller, Chief Financial Officer of New Frontier Media, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of New Frontier Media, Inc. (the "Registrant"); 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this Quarterly Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 13, 2002 /s/ Karyn L. Miller -------------------------- Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----